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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2020
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 |
Commission file number: 001-37673
WORKHORSE GROUP INC.
(Exact name of registrant as specified in its charter)
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Nevada | | 26-1394771 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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100 Commerce Drive | | |
Loveland, Ohio 45140 | | (513) 360-4704 |
(Address of principal executive offices) | | (Registrant’s telephone number) |
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
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Title of each Class: | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $0.001 par value per share | | WKHS | | The NASDAQ Capital Market |
Securities Registered Pursuant to Section 12(g) of the Exchange Act: None.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the 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 x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ¨
Indicate by check mark whether the registrant is a 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.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☒ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2020, the last business day of the Registrant’s most recently completed second fiscal quarter, the market value of our common stock held by non-affiliates was $1,129,851,463.
The number of shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of February 15, 2021, was 123,506,483.
TABLE OF CONTENTS
Forward-Looking Statements
The discussions in this Annual Report contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. 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 and our ability to raise capital under acceptable terms. 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-K that refer to the “Company”, “Workhorse Group”, “Workhorse”, “we,” “us” or “our” are to Workhorse Group Inc. and unless otherwise differentiated, its wholly-owned subsidiaries.
PART I
ITEM 1. BUSINESS
Overview
We are a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. As an American manufacturer, we create all-electric delivery trucks and drone systems, including the technology that optimizes the way these mechanisms operate. We are last-mile delivery’s first purpose-built electric mobility solution and we are currently focused on our core competency of bringing the C-Series electric delivery trucks to market and fulfilling our existing backlog of orders.
Automotive
We are an Original Equipment Manufacturer (“OEM”) with goals to have a product line that satisfies the Class 2-6 commercial-grade, medium-duty truck market. They will be marketed under the Workhorse® brand. All Workhorse last-mile delivery trucks are assembled in the Union City facility.
We believe our all-electric commercial vehicles offer fleet operators significant benefits, which include:
•Lower total cost-of-ownership as compared to conventional gas/diesel vehicles;
•Improved profitability through lower maintenance costs and reduced fuel expenses;
•Increased package deliveries per day through use of more efficient delivery methods;
•Decreased vehicle emissions and reduction in carbon footprint; and
•Improved vehicle safety and driver experience.
The Company sells its vehicles to fleet customers through its distributors, Hitachi Capital America (“Hitachi”), Ryder System, Inc. (“Ryder”) and Pritchard Companies (“Pritchard”). Both Ryder and Pritchard are maintenance providers for Workhorse, which provides fleet operators access to their maintenance facilities.
Delivery Trucks for Last-Mile Delivery and Commercial Work Use
Workhorse delivery trucks are used by our customers on daily routes across the United States. To date, we have built and delivered approximately 370 electric and range-extended medium-duty delivery trucks to our customers. To our knowledge, we are the only American commercial electric vehicle OEM to achieve such a milestone. Our customers include companies such as Alpha Baking, FedEx Express, Fluid Market, Inc., Pride Group Enterprises, Pritchard, Ryder, United Parcel Service (“UPS”), and W.B. Mason.
In addition to improved fuel economy, we anticipate the performance of our vehicles will reduce long-term vehicle maintenance expense by approximately 60% as compared to fossil-fueled trucks. Over a 20-year vehicle life, we estimate our C-Series delivery trucks will save over $170,000 in fuel and maintenance savings. We expect that fleet operators will be able to achieve a three-year or better total cost of ownership break-even without government incentives.
C-Series Electric Delivery Truck
Workhorse announced the development of its C-Series electric delivery truck in 2017, which leverages the existing ultra-low floor, and long-life commercial delivery vehicle platform, as well as our extensive customer experience gained from working with our E-GEN and E-100 customers. The C-Series incorporates lightweight materials, best in class turning radius, 360° cameras, collision avoidance systems and an optional roof mounted HorseFly delivery drone.
The C-Series electric delivery truck platform is available in 650 and 1,000 cubic feet configurations. We also have plans for a high-ceiling class 2 van, which competes with conventional market leaders including the Mercedes Sprinter, Ford Transit and Dodge ProMaster gasoline/diesel vans for both last-mile delivery and other service-oriented applications such as telecommunications. Based on lab testing, we expect these vehicles to achieve a fuel economy of approximately 40 miles per
gallon equivalent (“MPGe”) and offer fleet operators the most favorable total cost-of-ownership of any comparable conventional truck utilizing an internal combustion engine that is available today.
U.S. Post Office Replenishment Program / Next Generation Delivery Vehicle Project
Workhorse was one of the five participants that the United States Postal Service (“USPS”) selected to build prototype vehicles for the USPS Next Generation Delivery Vehicle (“NGDV”) project. The USPS has publicly stated that approximately 165,000 vehicles are to be replaced. Workhorse delivered six vehicles for prototype testing under the NGDV Acquisition Program in compliance with the terms set forth in their USPS prototype contract. On February 23, 2021, the USPS announced it awarded a contract to Oshkosh Defense to assemble 50,000 to 165,000 vehicles over the next ten years.
Technology
HorseFly™
Our HorseFly Unmanned Aerial System (“UAS”) is a custom-designed, purpose-built, all-electric drone system that is incorporated into our trucks and safely and efficiently delivers packages. HorseFly is designed with a maximum gross weight of 30 lbs., a 10 lb. payload and a maximum air speed of 50 mph. Our first aircraft can deliver a meaningful payload up to 10 miles, automatically lowering packages safely from 50 feet above the delivery point via our proprietary winch system. It is designed and built to be rugged and consisting of redundant systems to further meet the FAA’s required rules and regulations. Workhorse was granted a patent on our UAS, and though initially designed as a complimentary system delivering packages from our electric trucks, the latest iteration of our UAS supports package delivery point-to-point, enabling deliveries to and from almost anywhere, allowing it to serve a broader customer base. As part of the divestiture of SureFly, the Company formed a 50/50 joint venture to which we contributed our HorseFly technology.
Our HorseFly system includes an aircraft, Ground Control Station (“GCS”) and the supporting takeoff, landing and cargo handling systems. Our rugged components are designed to support the high volumes, long duty days and ease of maintenance demanded by the commercial package delivery industry. When properly equipped and certificated, the system allows Remote Pilots in Command (“RPIC”) to control more than one aircraft simultaneously.
Our GCS enables safe, simple flight planning, precise control of the aircraft, and it includes an elegant and friendly customer interface. When a customer opts in for our delivery service, they can “drop a pin” and choose where we deliver on their property. We text customers when our aircraft are inbound to their address. If they cannot accept delivery for some reason, the system allows them to decline that delivery. Our aircraft returns to its launch point, and the customer can reschedule the delivery to a more convenient time.
In 2020, Workhorse began the Federal Aviation Administration’s (“FAA”) Type Certification process for our Horsefly UAS. Type certification will be a major point of differentiation in the delivery drone marketplace. Safety, reliability and capability are the primary points of value in a commercial UAS. Presently, the FAA allows some exceptions for commercial operations to use non-certificated drone systems. As the industry matures, we expect the FAA will require certificated aircraft in most commercial operations.
In tests and demonstrations over the past three years, Workhorse has flown thousands of missions in the National Airspace System, demonstrating package deliveries for large multi-national companies including UPS in Ohio, Michigan, Florida and California. Our aircraft has proven to be safe, reliable, and capable of delivering packages.
Metron
Additionally, we have developed a cloud-based, remote management system to manage and track the performance of all of the vehicles we deploy in order to provide a real-time solution for fleet managers.
The telematics system and associated hardware installed in the Workhorse vehicles is designed to monitor the controller area network traffic for specific signals. These signals are uploaded along with GPS data to a Workhorse server facility where the data signals are tracked at ten second intervals while driving and during the electricity generating process and at sixty seconds during a plug-in charge. The real-time data is stored in a database as it arrives and delivers updates to clients connected through a web interface. We are moving to a ".Net" platform for more robust back-end tools and web support.
As a parameter-based system, we can set route-specific parameters to better manage the battery-provided power with the additional power generated through the regenerative braking process. In an upcoming release, we will add the ability to
integrate Metron Telematics with the client’s internal telematics system and automatically update the parameters each day with information about the route. This enhancement will result in a “SMART-GEN” vehicle that will maximize efficiency by automating the process to determine the ideal times and locations to use the C-Series to add electricity to the batteries.
In-House Software Development
Our powertrain encompasses the complete motor assemblies, computers, and software required for vehicle electrification. We use off-the-shelf components and combine them with our proprietary software.
Locations and Facilities
Our company headquarters and research and development facility is located at 100 Commerce Drive, Loveland, Ohio. We also lease office and warehouse space at 119 Northeast Drive, Loveland, Ohio.
Our truck assembly facility is located in Union City, Indiana. This facility consists of three buildings with 250,000 square feet of manufacturing and office space.
Marketing
There are over 350,000 last-mile delivery trucks replaced annually and is the fastest growing vehicle market in an $18.0 billion market space. Our sales team is focused on securing purchase orders from commercial transportation companies and developing a dealer network through our relationships with Hitachi, Ryder and Pritchard.
We have established the commercial delivery truck as our core business and intend to be the best choice for a vehicle in this segment. Our sales plan is to meet with the top potential customers and obtain purchase orders for new electric vehicles to be manufactured in our production facility.
As the last-mile delivery service space expands and non-traditional customers enter, Workhorse is reaching out to those potential new customers to gain product acceptance as their last-mile delivery partner. This market is comprised of a higher quantity of smaller delivery vehicles, such as the Workhorse C650, a 650-cubic feet platform or a high-ceiling class 2 van.
Finally, we believe that our competitive advantage in the marketplace is our ability to provide purpose-built solutions to customers that have unique requirements at relatively low volume.
Strategic Relationships
Hitachi: The Company engaged Hitachi for an operations assessment study focused on the evaluation of the strategies to increase our production output. In addition, Hitachi is working as a sales force on behalf of Workhorse and approaching their dealer relationships to drive orders of Workhorse trucks. Hitachi can provide inventory financing for these dealers as well as bundled financing, infrastructure support and service products.
Ryder: The Company has an agreement with Ryder to serve as a distributor. Ryder also serves as a provider of certain repair services and distributor of certain vehicle parts in the United States, Canada and Mexico.
Duke Energy Corp.: Workhorse continues working in partnership with Duke Energy Corp ("Duke") in creating an innovative battery leasing program designed to provide customers a cost competitive electric vehicle product alternative. Duke intends to explore further development of eFleet solutions to Workhorse customers which may include single-point management and financing of all the Behind the Meter infrastructure necessary to support depot wide electrification, vehicle/battery leasing and distributed energy resources. Duke and Workhorse believe a seamless/integrated solution will help reduce the overall costs of converting fleets to electric power enabling faster adoption of electric vehicles into commercial fleets.
Moog: The Company and Moog entered into a joint venture agreement for the development of the Company's Horsefly truck based electrically powered unmanned aerial systems (the "Horsefly Assets") and the related business (the “Horsefly Agreement”). Under the Horsefly Agreement, the Company contributed the Horsefly Assets and Moog contributed certain complementary assets to Certus Unmanned Aerial Systems LLC, (“Certus”) that is 50% owned by both the Company and Moog. Certus will license the Horsefly Assets to the Company and Moog so that each party may use the Horsefly Assets in their respective businesses. Through Certus, teams from Workhorse and Moog are improving HorseFly’s components and sub-systems with the goal of bringing the highest quality, most capable UAS to market. We believe combining the capabilities of the two companies brings significant value to the UAS marketplace, particularly in the area of high-reliability, safety-sensitive, certificated systems that require the highest levels of government approval for operations.
Research and Development
The majority of our research and development is conducted in-house at our facilities near Cincinnati, Ohio. Additionally, we contract with engineering firms to assist with validation and certification requirements as well as specific vehicle integration tasks. Our research and development activity has focused on improving the new model year C-Series, including enhancements needed to support production assembly efficiency, material component availability, cost reduction and customer feedback. These new revisions incorporate an aluminum skateboard chassis, which improves the options we have to expand our production capabilities and our sales growth through expanded channels that include specialty body builders and other third party up-fitters.
Competition
Traditional OEMs
Most, if not all, traditional OEM's have made announcements about their electrification efforts, which have primarily been highly focused on consumer-based vehicles, although due to a shift in consumer behavior stemming from the pandemic, there has been an increased focus on the commercial space in 2020. So far, the plans have primarily been focused on the lighter and smaller, last mile vehicles, such as Ford with their Transit Connect and eventually larger Transit models, or General Motors with their recent unveiling of the EV600. All of these vehicles have 600 cubic feet or less of cargo capacity. Workhorse is focused on the 650 - 1200 cubic feet categories. Our market research and direct customer engagements have led us to provide value to some of the largest and most efficient last mile delivery companies in North America. In this larger size category, customers would normally go to Freightliner, who has started providing a stripped chassis with an electric drive-train, built by a third-party similar to the Workhorse chassis produced until 2018. To our knowledge, Ford, another OEM producing such stripped chassis, has yet to announce any electrification plans within this segment, leaving Workhorse with little current competition from traditional OEMs.
Non-Traditional OEMs
As a result of the COVID pandemic, there has been a rapid global shift towards home delivery with multiple companies seeking to provide delivery solutions aimed at a sub 600 cubic feet cargo area. It is our expectation that the non-traditional OEMs will compete head-to-head with the likes of GM, Daimler and Ford, while the 650 - 1200 cubic feet cargo capacity space is left largely ignored. We believe one of the main reasons for this race towards smaller vehicles is to get to a sub 10,000 pound gross vehicle weight (“GVW”) as vehicles above 10,000 pound GVW require a more expensive but also more professional driver pool.
Regulatory
Our electric vehicles are designed to comply with required government regulations and industry standards. Government regulations regarding the manufacture, sale and implementation of products and systems similar to our electric vehicles are subject to future change. We cannot predict what impact, if any, such changes may have on our business.
Emission and fuel economy standards
Government regulation related to climate change is in effect at the U.S. federal and state levels. The U.S. Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (“NHTSA”) issued a final rule for greenhouse gas emissions and fuel economy requirements for trucks and heavy-duty engines on August 9, 2011, which is applicable for model years 2018 through 2020. EPA and NHTSA also issued a final rule on August 16, 2016 increasing the stringency of these standards for model years 2021 through 2027.
The rules provide emission standards for CO2 and fuel consumption standards for three main categories of vehicles: (i) combination tractors; (ii) heavy-duty pickup trucks and vans; and (iii) vocational vehicles. We believe Workhorse vehicles would be considered “vocational vehicles” and “heavy-duty pickup trucks and vans” under the rules. According to the EPA and NHTSA, vocational vehicles consist of a wide variety of truck and bus types, including delivery, refuse, utility, dump, cement, transit bus, shuttle bus, school bus, emergency vehicles, motor homes and tow trucks, and are characterized by a complex build process, with an incomplete chassis often built with an engine and transmission purchased from other manufacturers, then sold to a body manufacturer.
The EPA and NHTSA rule also establishes multiple flexibility and incentive programs for manufacturers of alternatively fueled vehicles, such as the Workhorse vehicles, including an engine Averaging, Banking and Trading (“ABT”) program, a vehicle
ABT program and additional credit programs for early adoption of standards or deployment of advanced or innovative technologies. The ABT programs will allow for emission and/or fuel consumption credits to be averaged, banked or traded within defined groupings of the regulatory subcategories. The additional credit programs will allow manufacturers of engines and vehicles to be eligible to generate credits if they demonstrate improvements in excess of the standards established in the rule prior to the model year the standards become effective or if they introduce advanced or innovative technology engines or vehicles.
The Clean Air Act requires that we obtain a Certificate of Conformity (“CoC”) issued by the EPA and a California Executive Order issued by the California Air Resource Board (“CARB”) with respect to emissions and mileage requirements for our vehicles. Workhorse received its CoC from the EPA for both model year (“MY”) 2020 and MY2021 C-Series. The CoC is required for vehicles sold in states covered by the Clean Air Act’s standards and the Executive Order is required for vehicles sold in states that have sought and received a waiver from the EPA to utilize California standards. The California standards for emissions control for certain regulated pollutants for new vehicles and engines sold in California are set by CARB. States that have adopted the California standards as approved by EPA also recognize the Executive Order for sales of vehicles. Workhorse received Executive Order A-445-0003 for MY2020 vehicles and Executive Order A-445-0004 for MY2021 vehicles.
Vehicle safety and testing
The National Traffic and Motor Vehicle Safety Act of 1966 (the “Safety Act”) regulates motor vehicles and motor vehicle equipment in the United States in two primary ways. First, the Safety Act prohibits the sale in the United States of any new vehicle or equipment that does not conform to applicable motor vehicle safety standards established by NHTSA. Meeting or exceeding many safety standards is costly, in part because the standards tend to conflict with the need to reduce vehicle weight in order to meet emissions and fuel economy standards. Second, the Safety Act requires defects related to motor vehicle safety be remedied through safety recall campaigns. A manufacturer is obligated to recall vehicles if it determines the vehicles do not comply with a safety standard. Should we or NHTSA determine either a safety defect or noncompliance exists with respect to any of our vehicles, the cost of such recall campaigns could be substantial.
In the United States, the Federal Aviation Administration (FAA) regulates almost everything any customer can do with our aerospace vehicles. Those regulations govern two important areas: operating rules and aircraft certification rules. The FAA’s operating rules govern all operations of all aerial vehicles in the National Airspace System (NAS) of the United States. The FAA’s certification rules help define the safety and reliability requirements of certain aircraft and systems. Not every aircraft and system are required to be FAA certificated, though typically certification is required for commercial operations like package delivery.
Workhorse is applying for FAA Type Certification for its small unmanned aerial system, the HorseFly. We believe it is important to achieve FAA certification of our products. Though we believe our design and execution comply with FAA requirements for certification, should we or the FAA determine either a safety defect or noncompliance exist with respect to our aircraft or its systems, it could add substantially to the time and expense of certification. Should the FAA change its rules for either certification or operations, it could render our designs non-competitive in the marketplace.
Vehicle dealer and distribution regulation
Certain state and city laws require motor vehicle manufacturers and dealers to be licensed in such locations to conduct manufacturing and sales activities. To date, we are registered as a motor vehicle manufacturer in Indiana and Ohio and as a dealer in California, New York, Iowa and Chicago. We have not yet sought formal clarification of our ability to manufacture or sell our vehicles in any other states or cities.
Available Information
We file or furnish periodic reports and amendments thereto, including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission (“SEC”). In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically. Our website is located at www.workhorse.com, and our reports, amendments thereto, proxy statements and other information are also made available on our investor relations website, free of charge, at ir.workhorse.com as soon as reasonably practicable after we electronically file or furnish such information with the SEC.
Intellectual Property
We have five pending trademark applications and fourteen issued trademark registrations (US and foreign). We also intend to pursue additional trademark registrations. We have nineteen pending (seven non-provisional, six design, two provisional and four PCT) U.S. and foreign patent applications, and eight existing patents, two of which are design patents. We also plan to pursue appropriate foreign patent protection on those inventions, if available, as well pursue additional inventions. The following is a summary of our patents:
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Country | | Serial Number | | Application Date | | Patent Number | | Issue/Grant Date | | Expiration Date | | Title |
United States | | 13/283,663 | | 10/28/2011 | | 8,541,915 | | 9/24/2013 | | 12/16/2031 | | Drive module and manifold for electric motor drive assembly |
Canada | | 2523653 | | 10/17/2005 | | 2523653 | | 12/22/2009 | | 10/17/2025 | | Vehicle chassis assembly |
United States | | 11/252,220 | | 10/17/2005 | | 7,717,464 | | 5/18/2010 | | 9/6/2026 | | Vehicle chassis assembly |
United States | | 11/252,219 | | 10/17/2005 | | 7,559,578 | | 7/14/2009 | | 9/6/2026 | | Vehicle chassis assembly |
United States | | 29/243,074 | | 11/18/2005 | | D561,078 | | 2/5/2008 | | 2/5/2022 | | Vehicle header |
United States | | 29/243,129 | | 11/18/2005 | | D561,079 | | 2/5/2008 | | 2/5/2022 | | Vehicle header |
United States | | 14/606,497 | | 1/27/2015 | | 9,481,256 | | 11/1/2016 | | 5/3/2035 | | Onboard generator drive system for electric vehicles |
United States | | 14/989,870 | | 1/7/2016 | | 9,915,956 | | 3/13/2018 | | 6/24/2036 | | Package delivery by means of an automated multicopter UAS/UAV dispatched from a conventional delivery vehicle |
United States | | 15/915,144 | | 3/8/2018 | | Currently under examination at the USPTO | | | | | | Package delivery by means of an automated multicopter UAS/UAV dispatched from a conventional delivery vehicle |
United States | | 29/719,591 | | 1/6/2020 | | | | | | | | Truck |
United States | | 63/005,652 | | 4/6/2020 | | | | | | | | Flying Vehicle Systems and Methods |
United States | | 63/038,456 | | 6/12/2020 | | | | | | | | UAV Delivery Control System For UAV Delivery of Packages |
Canada | | 19663 | | 7/3/2020 | | | | | | | | Truck |
European Union | | WIPO96104 | | 7/5/2020 | | | | | | | | Truck |
China | | 20203035494243 | | 7/6/2020 | | | | | | | | Truck |
Japan | | 2020-013722 | | 7/6/2020 | | | | | | | | Truck |
Mexico | | 50792 | | 7/6/2020 | | | | | | | | Truck |
United States | | 16/934,906 | | 7/21/2020 | | | | | | | | UAV Delivery Control System for UAV Delivery of Packages |
United States | | 17/142,766 | | 1/6/2021 | | | | | | | | Land Vehicles Incorporating Monocoques and Modular Mold Systems for Making the Same |
United States | | 17/142,785 | | 1/6/2021 | | | | | | | | Methods of Making Monocoques of Land Vehicles Using Modular Mold Systems |
United States | | 17/142,814 | | 1/6/2021 | | | | | | | | Land Vehicles Incorporating Removable Powertrain Units and Methods Thereof |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Country | | Serial Number | | Application Date | | Patent Number | | Issue/Grant Date | | Expiration Date | | Title |
Patent Cooperation Treaty | | US2021/12327 | | 1/6/2021 | | | | | | | | Land Vehicles Incorporating Monocoques and Modular Mold Systems for Making the Same |
Patent Cooperation Treaty | | US2021/12330 | | 1/6/2021 | | | | | | | | Methods of Making Monocoques of Land Vehicles Using Modular Mold Systems |
Patent Cooperation Treaty | | US2021/12332 | | 1/6/2021 | | | | | | | | Land Vehicles Incorporating Removable Powertrain Units and Methods Thereof |
Patent Cooperation Treaty | | US2021/12987 | | 1/11/2021 | | | | | | | | Electric Delivery Truck Control System for Electric Power Management |
United States | | 17/146,369 | | 1/11/2021 | | | | | | | | Electric Delivery Truck Control System for Electric Power Management |
Human Capital
As of December 31, 2020, we employed approximately 130 full-time people located in Loveland, Ohio and Union City, Indiana. Our headcount as of December 31, 2020 increased 63% from approximately 80 full-time employees as of December 31, 2019. None of our U.S. employees are represented by a labor organization or are party to any collective bargaining arrangement. We have never experienced a strike or similar work stoppage, and we consider our relations with our employees to be good. For the fiscal year ended December 31, 2020, employee compensation and benefits accounted for approximately 37% of our total operating expense.
We understand that our innovation leadership is ultimately rooted in people. Competition for qualified personnel in our space is intense, and our success depends in large part on our ability to recruit, develop and retain a productive and engaged workforce. Accordingly, investing in our employees and their well-being, offering competitive compensation and benefits, promoting diversity and inclusion, adopting progressive human capital management practices and community outreach constitute core elements of our corporate strategy.
Support Employee Well-being and Engagement. We support the overall well-being of our employees from a physical, emotional, financial, and social perspective. Our well-being program includes a long-standing practice of flexible paid time off, life planning benefits, wellness platforms and employee assistance programs.
Offer Competitive Compensation and Benefits. We strive to ensure that our employees receive competitive and fair compensation and innovative benefits offerings, tying incentive compensation to both business and individual performance, offering competitive maternal/paternal leave policies, providing meaningful retirement and health benefits, and maintaining an employee stock incentive plan.
Promote Sense of Belonging through Diversity and Inclusion Initiatives. We promote an inclusive and diverse workplace, where all individuals are respected and feel they belong regardless of their age, race, national origin, gender, religion, disability, sexual orientation, or gender identity.
Provide Programs for Employee Recognition. We also offer rewards and recognition programs to our employees, including awards to recognize employees who best exemplify our values and spot awards to recognize employee contributions. We believe that these recognition programs help drive strong employee performance. We conduct annual employee performance reviews, where each employee is evaluated by their personal manager and also conducts a self-assessment, a process which empowers our employees. Employee performance is assessed based on a variety of key performance metrics, including the achievement of objectives specific to the employee’s department or role.
Create Opportunities for Growth and Development. We focus on creating opportunities for employee growth, development, training, and education, including opportunities to cultivate talent and identify candidates for new roles from within the company and management and leadership development programs.
Response to the COVID-19 Pandemic. The health and safety of our colleagues and anyone who enters our workplace around the world is of paramount importance to Workhorse. We have remained open throughout Covid-19, but we have allowed employees at certain points during the pandemic to work from home. Additionally, in order to maximize the health and safety of our workforce, we provided periodic communication from senior leaders regarding the impacts of COVID-19 on the workforce and the Company while initiating new safety protocols across all sites.
ITEM 1A. RISK FACTORS
Operational Risks
We may elect to raise additional financing in 2021 and beyond, which may not be available to us on acceptable terms or at all.
We believe our existing capital resources, including proceeds received in connection with the $200.0 million senior secured convertible note issued in October 2020, will be sufficient to support our current and projected funding requirements through 2021. However, if the opportunity arises, we may elect to raise additional financing in 2021. However, unless and until we are able to generate a sufficient amount of revenue, reduce our costs and/or enter into a strategic relationship, we expect to finance future cash needs through our cash on hand. If we elect to or need to raise additional capital, we cannot be certain that additional financing will be available to us on favorable terms when required, or at all. In such circumstances, if we cannot raise additional capital, our financial condition, results of operations, business and prospects could be materially and adversely affected.
We may experience delays in launching and ramping up production to satisfy our existing backlog or we may be unable to control our manufacturing costs.
We have previously experienced and may in the future experience launch and production ramp-up delays in satisfying our existing backlog. In addition, we may introduce in the future new or unique manufacturing processes and design features for our products including enhancements under development relating to production assembly efficiency, material component availability, cost reduction and customer feedback. There is no guarantee we will be able to successfully and timely introduce and scale such processes or features including our current efforts underway. We have relatively limited experience to date in manufacturing the C-1000 at high volumes. To be successful, we will need to implement, maintain, and ramp-up efficient and cost-effective manufacturing capabilities, processes and supply chains and achieve the design tolerances, high quality and output rates planned at Union City. We also need to hire, train, and compensate skilled employees for operations. Bottlenecks and other unexpected challenges such as those experienced in the past may arise during our production ramps, and we must address them promptly while continuing to improve manufacturing processes and reducing costs. If we are not successful in achieving these goals, we could face delays in establishing and/or sustaining our C-1000 production ramp-ups or be unable to meet our related cost and profitability targets. Any delay or other complication in ramping up the production of our current products or the development, manufacture, launch and production ramp-ups of our future products, features and services, or in doing so cost-effectively and with high quality, may harm our brand, business, prospects, financial condition, and operating results.
Our results of operations have not resulted in profitability and we may not be able to achieve profitability going forward.
We have an accumulated deficit of $109.0 million as of December 31, 2020. Until 2020, we have had net losses every year since our inception. We may continue to incur net losses in 2021. We may incur significant losses in the future for a number of reasons, including the other risks described in "Risk Factors", and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability. Our management is developing plans to alleviate the negative trends and conditions described above and there is no guarantee such plans will be successfully implemented. Our business plan is focused on providing sustainable and cost-effective solutions to the commercial transportation sector but is still unproven. There is no assurance that even if we successfully implement our business plan, we will be able to curtail our losses or ever achieve profitable operations. If we incur additional significant operating losses, our stock price may significantly decline.
We have yet to achieve positive cash flow and, given our projected funding needs, our ability to generate positive cash flow is uncertain.
We have had negative cash flow from operating activities of $70.3 million and $36.9 million for the years ended December 31, 2020 and 2019, respectively. We may continue to have negative cash flow from operating and investing activities for 2021 as we expect to incur research and development, sales and marketing, and general and administrative expenses and make capital expenditures in our efforts to increase sales and ramp up operations at our Union City facility. Our business also will at times require significant amounts of working capital to support our growth of additional platforms. An inability to generate positive cash flow for the near term may adversely affect our ability to raise needed capital for our business on reasonable terms, diminish supplier or customer willingness to enter into transactions with us, and have other adverse effects that may decrease our long-term viability. There can be no assurance that the Company will achieve positive cash flow in the near future or at all.
The development of our business in the near future is contingent upon the manufacture and delivery of vehicles associated with orders from UPS, Pritchard Auto Company and other key customers for the purchase of Workhorse vehicles and if we are unable to perform under these orders, our business may fail.
On June 4, 2014, the Company entered into a Vehicle Purchase Agreement with United Parcel Service Inc. (“UPS”) which outlined the relationship by which the Company would sell vehicles to UPS. To date, we have received six separate orders totaling up to 1,405 vehicles from UPS. The sixth and most recent order is from the first quarter of 2018. In November 2020, we received a purchase order from Pritchard Auto Company. There is no guarantee that the Company will be able to perform under these orders and if it does perform, that our customers will find that our vehicles, including any enhancements currently under development, are acceptable for their use or that these customers will purchase additional vehicles from the Company. Also, there is no assurance that UPS, Pritchard, or other customers will continue its agreement with the Company pursuant to the termination provisions therein. Accordingly, despite the receipt of the orders from our customers, there is no assurance, that the Company will be able to deliver such vehicles or that it will receive additional orders whether from our customers.
If we are unable to perform under our orders with UPS, Pritchard and other key customers, the Company business will be negatively impacted.
The COVID-19 pandemic may disrupt our business and operations, which could materially adversely impact our business, financial condition, liquidity and results of operations.
Pandemics, epidemics, or disease outbreaks in the U.S. or globally may disrupt our business, which could materially affect our business, financial condition, liquidity, and results of operations as well as future expectations. The COVID-19 outbreak has caused significant disruption to the global economy, including the automotive industry, and has had a material impact on our business. However, the full extent to which the COVID-19 pandemic will impact our operations will depend on future developments, including the duration and severity of the outbreak, any subsequent outbreaks and the timing and efficacy of any available vaccines. Future developments are highly uncertain and cannot be predicted with confidence. In particular, if COVID-19 continues to spread or re-emerges resulting in a prolonged period of travel, commercial, social and other similar restrictions, we could experience among other things labor disruptions, an inability to manufacture, an inability to sell to our customers and an impaired ability to access credit and the capital markets. Further, we rely upon third-party manufacturers to provide certain parts incorporated into our vehicles. As a result of COVID-19 and the measures designed to contain the spread of the virus, our third-party manufacturers may not have the materials, capacity, or capability to manufacture such parts according to our schedule and specifications. Similarly, increased demand for personal electronics has created a shortfall of microchip supply, and it is yet unknown how we may be impacted. If our third-party manufacturers’ operations are curtailed, we may need to seek alternate manufacturing sources, which may be more expensive. Alternate sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. While the disruptions and restrictions on the ability to travel, quarantines, and temporary closures of the facilities of our third-party manufacturers and suppliers, as well as general limitations on movement in the region are expected to be temporary, the duration of the production and supply chain disruption, and related financial impact, cannot be estimated at this time. Should the production and distribution closures continue for an extended period of time, the impact on our supply chain in the United States, China and globally, this could have a material adverse effect on our results of operations and cash flows.
Our limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future performance.
As we have begun to implement our manufacturing capabilities, it is difficult, if not impossible, to forecast our future results based upon our historical data. Because of the uncertainties related to our lack of historical operations, we may be hindered in our ability to anticipate and adapt to increases or decreases in revenues or expenses. If we make poor budgetary decisions as a result of limited historical data, we could be less profitable or incur losses.
We do not receive progress payments on orders of our vehicles, and if a purchaser fails to pay upon delivery, we may not be able to recoup the costs we incurred in producing such vehicles.
Our arrangements with existing customers do not provide for progress payments as we begin to fulfill orders. Customers are only required to pay us upon delivery of vehicles. If a customer fails to take delivery of an ordered vehicle or fails to pay for such vehicle, we may not receive cash to offset the production expenses of such vehicle, which could adversely affect our cash flows.
Our business, prospects, financial condition and operating results will be adversely affected if we cannot reduce and adequately control the costs and expenses associated with operating our business, including our material and production costs.
We incur significant costs and expenses related to procuring the materials, components and services required to develop and produce our electric vehicles. We continually work on cost-down initiatives to reduce our cost structure so we may effectively compete. If we do not reduce our costs and expenses, our net losses will continue.
The demand for commercial electric vehicles depends, in part, on the continuation of current trends resulting from dependence on fossil fuels. Extended periods of low diesel or other petroleum-based fuel prices could adversely affect demand for our vehicles, which would adversely affect our business, prospects, financial condition, and operating results.
We believe that much of the present and projected demand for commercial electric vehicles results from concerns about volatility in the cost of petroleum-based fuel, the dependency of the United States on oil from unstable or hostile countries, government regulations and economic incentives promoting fuel efficiency and alternative forms of energy, as well as the belief that climate change results in part from the burning of fossil fuels. If the cost of petroleum-based fuel decreased significantly, the outlook for the long-term supply of oil to the United States improved, the government eliminated or modified its regulations or economic incentives related to fuel efficiency and alternative forms of energy, or if there is a change in the perception that the burning of fossil fuels negatively impacts the environment, the demand for commercial electric vehicles could be reduced, and our business and revenue may be harmed.
Diesel and other petroleum-based fuel prices have been extremely volatile, and we believe this continuing volatility will persist. Lower diesel or other petroleum-based fuel prices over extended periods of time may lower the perception in government and the private sector that cheaper, more readily available energy alternatives should be developed and produced. If diesel or other petroleum-based fuel prices remain at deflated levels for extended periods of time, the demand for commercial electric vehicles may decrease, which would have an adverse effect on our business, prospects, financial condition, and operating results.
Our future growth is dependent upon the willingness of operators of commercial vehicle fleets to adopt electric vehicles and on our ability to produce, sell and service vehicles that meet their needs. This often depends upon the cost for an operator adopting electric vehicle technology as compared to the cost of traditional internal combustion technology.
Our growth is dependent upon the adoption of electric vehicles by operators of commercial vehicle fleets and on our ability to produce, sell and service vehicles that meet their needs. The entry of commercial electric vehicles into the medium-duty commercial vehicle market is a relatively new development, particularly in the United States, and is characterized by rapidly changing technologies and evolving government regulation, industry standards and customer views of the merits of using electric vehicles in their businesses. This process has been slow as without including the impact of government or other subsidies and incentives, the purchase prices for our commercial electric vehicles currently is higher than the purchase prices for diesel-fueled vehicles. Our growth has also been negatively impacted by the relatively low price of oil over the last few years.
If the market for commercial electric vehicles does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition and operating results will be adversely affected.
As part of our sales efforts, we must educate fleet managers as to the economical savings we believe they will achieve over the life of the vehicle. As such, we believe that operators of commercial vehicle fleets should consider a number of factors when deciding whether to purchase our commercial electric vehicles (or commercial electric vehicles generally) or vehicles powered by internal combustion engines, particularly diesel-fueled or natural gas-fueled vehicles. We believe these factors include:
•the difference in the initial purchase prices of commercial electric vehicles and vehicles with comparable gross vehicle weight powered by internal combustion engines, both including and excluding the impact of government and other subsidies and incentives designed to promote the purchase of electric vehicles;
•the total cost of ownership of the vehicle over its expected life, which includes the initial purchase price and ongoing operating and maintenance costs;
•the availability and terms of financing options for purchases of vehicles and, for commercial electric vehicles, financing options for battery systems;
•the availability of tax and other governmental incentives to purchase and operate electric vehicles and future regulations requiring increased use of nonpolluting vehicles;
•government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
•fuel prices, including volatility in the cost of diesel;
•the cost and availability of other alternatives to diesel fueled vehicles, such as vehicles powered by natural gas;
•corporate sustainability initiatives;
•commercial electric vehicle quality, performance and safety (particularly with respect to lithium-ion battery packs);
•the quality and availability of service for the vehicle, including the availability of replacement parts;
•the range over which commercial electric vehicles may be driven on a single battery charge;
•access to charging stations and related infrastructure costs, and standardization of electric vehicle charging systems;
•electric grid capacity and reliability; and
•macroeconomic factors.
If, in weighing these factors, operators of commercial vehicle fleets determine there is not a compelling business justification for purchasing commercial electric vehicles, particularly those we produce and sell, then the market for commercial electric vehicles may not develop as we expect or may develop more slowly than we expect, which would adversely affect our business, prospects, financial condition and operating results.
We currently do not have long-term supply contracts with guaranteed pricing which exposes us to fluctuations in component, materials and equipment prices. Substantial increases in these prices would increase our operating costs and could adversely affect our business, prospects, financial condition and operating results.
Because we currently do not have long-term supply contracts with guaranteed pricing, we are subject to fluctuations in the prices of the raw materials, parts and components and equipment we use in the production of our vehicles. Substantial increases in the prices for such raw materials, components and equipment would increase our operating costs and could reduce our margins if we cannot recoup the increased costs through increased vehicle prices. Any attempts to increase the announced or expected prices of our vehicles in response to increased costs could be viewed negatively by our customers and could adversely affect our business, prospects, financial condition and operating results.
If we are unable to scale our operations at our Union City facility in an expedited manner from our limited low volume production to high volume production, our business, prospects, financial condition and operating results will be adversely affected.
We are assembling our orders at our Union City facility which has been acceptable for our historical orders. To satisfy increased demand, we will need to quickly scale operations in our Union City facility as well as scale our supply chain including access to batteries. Such a substantial and rapid increase in operations may strain our management capabilities. Our business, prospects, financial condition and operating results could be adversely affected if we experience disruptions in our supply chain, if we cannot obtain materials of sufficient quality at reasonable prices or if we are unable to scale our Union City facility.
We depend upon key personnel and need additional personnel. The loss of key personnel or the inability to attract additional personnel may adversely affect our business and results of operations.
Our success depends on the continuing services of our CEO, Duane Hughes and top management. On November 6, 2019, Mr. Hughes and the Company entered into an Amended and Restated Employment Agreement. Further, we entered into an amended and restated employment agreement with Mr. Robert Willison, our Chief Operating Officer. The loss of any of these individuals could have a material and adverse effect on our business operations. Additionally, the success of our operations will largely depend upon our ability to successfully attract and maintain other competent and qualified key management personnel. As with any company with limited resources, there can be no guarantee we will be able to attract such individuals or the
presence of such individuals will necessarily translate into profitability for our company. Our inability to attract and retain key personnel may materially and adversely affect our business operations. Any failure by our management to effectively anticipate, implement, and manage the changes required to sustain our growth would have a material adverse effect on our business, financial condition, and results of operations.
We face intense competition. Some of our competitors have substantially greater financial or other resources, longer operating histories and greater name recognition than we do and could use their greater resources and/or name recognition to gain market share at our expense or could make it very difficult for us to establish market share.
Companies currently competing in the fleet logistics market offering alternative fuel medium-duty trucks include General Motors, Ford Motor Company and Freightliner. There are also a number of new, well capitalized entrants into the market place. Ford and Freightliner are currently selling alternative fuel fleet vehicles including hybrids and General Motors has recently commenced development of a medium duty van. General Motors, Ford and Freightliner have substantially more financial resources, established market positions, long-standing relationships with customers and dealers, and have more significant name recognition, technical, marketing, sales, financial and other resources than we do. Although we believe that HorseFly, our unmanned aerial system (“UAS”), is unique in the marketplace in that it currently does not have any competitors when it comes to a UAS that works in combination with a truck, there are better-financed competitors in this emerging industry, including Google and Amazon. While we are seeking to partner with existing delivery companies to improve their efficiencies in the last mile of delivery, our competitors are seeking to redefine the delivery model using drones from a central location requiring extended flight patterns. Our competitors’ new aerial delivery model would essentially eliminate traditional package delivery companies. Our model is focused on coupling our delivery drone with delivery trucks supplementing the existing model and providing shorter-term flight patterns. Google and Amazon have more significant financial resources, established market positions, long-standing relationships with customers, more significant name recognition and a larger scope of resources including technical, marketing and sales than we do.
The resources available to our competitors to develop new products and introduce them into the marketplace exceed the resources currently available to us. As a result, our competitors may be able to compete more aggressively and sustain that competition over a longer period than we can. This intense competitive environment may require us to make changes in our products, pricing, licensing, services, distribution, or marketing to develop a market position. Each of these competitors has the potential to capture significant market share in our target markets, which could have an adverse effect on our position in our industry and on our business and operating results.
Our electric vehicles compete for market share with vehicles powered by other vehicle technologies that may prove to be more attractive than ours.
Our target market currently is serviced by manufacturers with existing customers and suppliers using proven and widely accepted fossil fuel technologies. Additionally, our competitors are working on developing technologies that may be introduced in our target market. If any of these alternative technology vehicles can provide lower fuel costs, greater efficiencies, greater reliability or otherwise benefit from other factors resulting in an overall lower total cost of ownership, this may negatively affect the commercial success of our vehicles or make our vehicles uncompetitive or obsolete.
We currently have a limited number of customers, with whom we do not have long-term agreements, and expect that a significant portion of our future sales will be from a limited number of customers. The loss of any of these customers could materially harm our business.
A significant portion of our projected future revenue is expected to be generated from a limited number of fleet customers. Additionally, much of our business model is focused on building relationships with a few large fleet customers. Currently, we have no contracts with customers that include long-term commitments or minimum volumes to ensure future sales of vehicles. As such, a customer may take actions that negatively affect us for reasons we cannot anticipate or control, such as a customer’s financial condition, changes in the customer’s business strategy or operations, or the perceived performance or cost-effectiveness of our vehicles. The loss of or a reduction in sales or anticipated sales to our most significant customers would have a material adverse effect on our business, prospects, financial condition and operating results.
Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity.
The modern electric vehicle industry is in its infancy and has experienced substantial change in the last few years. To date, although there has been a recent surge in the electric vehicle industry, demand for electric vehicles has been slower than forecasted by industry experts. As a result, growth in the electric vehicle industry depends on many factors outside our control, including, but not limited to:
•continued development of product technology, especially batteries;
•the environmental consciousness of customers;
•the ability of electric vehicles to successfully compete with vehicles powered by internal combustion engines; and
•whether future regulation and legislation requiring increased use of non-polluting vehicles is enacted.
We cannot assume that growth in the electric vehicle industry will continue. Our business will suffer if the electric vehicle industry does not grow or grows more slowly than it has in recent years or if we are unable to maintain the pace of industry demands.
The unavailability, reduction, elimination or adverse application of government subsidies, incentives and regulations could have an adverse effect on our business, prospects, financial condition and operating results.
We believe the availability of government subsidies and incentives, including those available in California and other areas, is an important factor considered by our customers when purchasing our vehicles, and our growth depends in part on the availability and amounts of these subsidies and incentives. Any reduction, elimination or discriminatory application of government subsidies and incentives because of budgetary challenges, policy changes, the reduced need for such subsidies and incentives due to the perceived success of electric vehicles or other reasons may result in the diminished price competitiveness of the alternative fuel vehicle industry.
We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position.
Our current products are designed for use with, and are dependent upon, existing electric vehicle technology. As technologies change, we plan to upgrade or adapt our products to continue to provide products with the latest technology. However, our products may become obsolete or our research and development efforts may not be sufficient to adapt to changes in or to create the necessary technology. Thus, our potential inability to adapt and develop the necessary technology may harm our competitive position.
The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business.
We have arrangements with various suppliers for critical components including our battery packs. However, we do not have definitive supply agreements. Further, we have in the past experienced a battery pack supply chain constraint as a result of our existing supplier's inability to keep up with volume requirements. We continue to work with our current supplier to overcome these supply constraints and have also begun collaborating with an additional supplier, subject to appropriate testing, to further expand our battery pack options. Further, a global shortage of microchips has been reported since early 2021, and the impact to us is yet unknown. If these suppliers including our battery pack suppliers become unwilling or unable to provide components, there are a limited number of alternative suppliers who could provide them and the price for them could be substantially higher. Changes in business conditions, pandemics, wars, governmental changes, and other factors beyond our control or which we do not presently anticipate could negatively affect our ability to receive components from our suppliers. Further, it could be difficult to find replacement components if our current suppliers fail to provide the parts needed for these products. A failure by our major suppliers to provide these components could severely restrict our ability to manufacture our products and prevent us from fulfilling customer orders in a timely fashion.
Product liability or other claims could have a material adverse effect on our business.
The risk of product liability claims, product recalls, and associated adverse publicity is inherent in the manufacturing, marketing, and sale of electrical vehicles. Although we have product liability insurance for our consumer and commercial products, that insurance may be inadequate to cover all potential product claims. Any product recall or lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our coverage, may have a material adverse effect on our business and financial condition. We may not be able to secure additional product liability insurance coverage on acceptable terms or at reasonable costs when needed. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of other future product candidates. We cannot provide assurance such claims and/or recalls will not be made in the future.
Regulatory requirements may have a negative impact upon our business.
While our vehicles are subject to substantial regulation under federal, state, and local laws, we believe our vehicles are in compliance with all applicable laws. However, to the extent the laws change, or if we introduce new vehicles in the future, some or all of our vehicles may not comply with applicable federal, state, or local laws. Further, certain federal, state, and local laws and industrial standards currently regulate electrical and electronics equipment. Although standards for electric vehicles are not yet generally available or accepted as industry standards, our products may become subject to federal, state, and local regulation in the future. Compliance with these regulations could be burdensome, time consuming, and expensive.
Our products are subject to environmental and safety compliance with various federal and state regulations, including regulations promulgated by the EPA, NHTSA, FAA and various state boards, and compliance certification is required for each new model year. The cost of these compliance activities and the delays and risks associated with obtaining approval can be substantial. The risks, delays, and expenses incurred in connection with such compliance could be substantial.
Our success may be dependent on protecting our intellectual property rights.
We rely on trade secret protections to protect our proprietary technology as well as several registered patents and patent applications. Our patents and patent applications relate to the vehicle chassis assembly, vehicle header and drive module, manifold for electric motor drive assembly, onboard generator drive system for electric vehicles and the delivery drone. Our success will, in part, depend on our ability to obtain additional trademarks and patents. We are working on registering additional patents and trademarks with the United States Patent and Trademark Office but have not finalized any as of this date. Although we have entered into confidentiality agreements with our employees and consultants, we cannot be certain others will not gain access to these trade secrets. Others may independently develop substantially equivalent proprietary information and technologies or otherwise gain access to our trade secrets. We do not maintain proprietary rights agreements with our employees, which agreements would further protect our intellectual property rights against claims by our employees. Therefore we may be subject to disputes with our employees over ownership of any new technologies or enhancements such employees help to develop.
Our business may be adversely affected by union activities.
Although none of our employees are currently represented by a labor union, it is common throughout the automotive industry for many employees at automotive companies to belong to a union, which can result in higher employee costs and increased risk of work stoppages. Our employees may join or seek recognition to form a labor union, or we may be required to become a union signatory. Our production facility in Union City, Indiana was purchased from Navistar. Prior employees of Navistar were union members and our future work force at this facility may be inclined to vote in favor of forming a labor union. Furthermore, we are directly or indirectly dependent upon companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a work stoppage occurs, it could delay the manufacture and sale of our trucks and have a material adverse effect on our business, prospects, operating results or financial condition. The mere fact our labor force could be unionized may harm our reputation in the eyes of some investors. Consequently, the unionization of our labor force could negatively impact our company.
We may be exposed to liability for infringing upon the intellectual property rights of other companies.
Our success will, in part, depend on our ability to operate without infringing on the proprietary rights of others. Although we have conducted searches and are not aware of any patents and trademarks which our products or their use might infringe, we cannot be certain that infringement has not or will not occur. We could incur substantial costs, in addition to the great amount of time lost, in defending any patent or trademark infringement suits or in asserting any patent or trademark rights, in a suit with another party.
Our electric vehicles make use of lithium-ion battery cells, which, if not appropriately managed and controlled, have occasionally been observed to catch fire or vent smoke and flames. If such events occur in our electric vehicles, we could face liability associated with our warranty, for damage or injury, adverse publicity and a potential safety recall, any of which would adversely affect our business, prospects, financial condition and operating results.
The battery packs in our electric vehicles use lithium-ion cells, which have been used for years in laptop computers and cell phones. On occasion, if not appropriately managed and controlled, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials. Highly publicized incidents of laptop computers and cell phones bursting into flames have focused consumer attention on the safety of these cells. These events also have raised
questions about the suitability of these lithium-ion cells for automotive applications. There can be no assurance that a field failure of our battery packs will not occur, which would damage the vehicle or lead to personal injury or death and may subject us to lawsuits. Furthermore, there is some risk of electrocution if individuals who attempt to repair battery packs on our vehicles do not follow applicable maintenance and repair protocols. Any such damage or injury would likely lead to adverse publicity and potentially a safety recall. Any such adverse publicity could adversely affect our business, prospects, financial condition and operating results.
We are subject to significant corporate regulation as a public company and failure to comply with all applicable regulations could subject us to liability or negatively affect our stock price.
As a publicly traded company, we are subject to a significant body of regulation, including the Sarbanes-Oxley Act of 2002. While we have developed and instituted a corporate compliance program based on what we believe are the current best practices in corporate governance and continue to update this program in response to newly implemented or changing regulatory requirements, we cannot provide assurance that we are or will be in compliance with all potentially applicable corporate regulations. If we fail to comply with any of these regulations, we could be subject to a range of regulatory actions, fines or other sanctions or litigation. If we disclose any material weakness in our internal control over financial reporting, our stock price could decline.
A change in fair value of our investment in Lordstown Motor Corp. could negatively impact our financial results.
Our investment in Lordstown Motor Corp. ("LMC") is recorded at fair value. On October 26, 2020, LMC shares of Class A Common Stock began trading on the Nasdaq Global Select market under the ticker symbol "RIDE." Therefore, the carrying value of our investment is equal to the quote market price of LMC's common stock. For the year ended December 31, 2020, the fair value of our investment is $330.6 million. If the price of LMC's common stock decreases, we would record a decrease in the value of our investment and a charge to earnings, which would negatively impact our financial position and results of operations.
Cyber-attacks could adversely affect the Company.
The Company faces a risk of cyber-attack. Cyber-attacks may include hacking, viruses, malware, denial of service attacks, ransomware or other data security breaches. The Company’s business requires the continued operation of information systems and network infrastructure. In the event of a cyber-attack that the Company was unable to defend against or mitigate, the Company could have its operations and the operations of its customers and others disrupted. The Company could also have their financial and other information systems and network infrastructure impaired, property damaged and customer and employee information stolen; experience substantial loss of revenues, response costs and other financial loss; and be subject to increased regulation, litigation, penalties and damage to their reputation. While we maintain cyber insurance providing coverages, such insurance may not cover all costs associated with the consequences of personal and confidential proprietary information being compromised. As a result, in the event of a material cyber security breach, our results of operations could be materially, adversely affected.
Risks Related to Owning Our Common Stock
Our stock price and trading volume may be volatile, which could result in substantial losses for our stockholders.
The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We have experienced significant volatility in the price of our stock. In addition, the stock markets in general can experience considerable price and volume fluctuations. Moreover, fluctuations in our stock price could have the effect of increasing our interest expense, through a change in fair value of our convertible notes, which may have a material and adverse effect on our financial results.
We have not paid cash dividends in the past and have no immediate plans to pay cash dividends.
We plan to reinvest all of our earnings, to the extent we have earnings, in order to develop our products, deliver on our orders and cover operating costs and to otherwise become and remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot assure common stockholders that we would, at any time, generate
sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend. Therefore, common stockholders should not expect to receive cash dividends on our common stock.
Stockholders may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that may not be the same as the price per share in our prior offerings. We may sell shares or other securities in any future offering at a price per share that is lower than the price per share paid by historical investors, which would result in those newly issued shares being dilutive. In addition, investors purchasing shares or other securities could have rights superior to existing stockholders, which could impair the value of existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by our historical investors.
Our charter documents and Nevada law may inhibit a takeover that stockholders consider favorable.
Provisions of our certificate of incorporation and bylaws and applicable provisions of Nevada law may delay or discourage transactions involving an actual or potential change in control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. The provisions in our certificate of incorporation and bylaws:
•limit who may call stockholder meetings;
•do not provide for cumulative voting rights; and
•provide that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.
There are limitations on director/officer liability.
As permitted by Nevada law, our certificate of incorporation limits the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of our charter provision and Nevada law, stockholders may have limited rights to recover against directors for breach of fiduciary duty. In addition, our certificate of incorporation provides that we shall indemnify our directors and officers to the fullest extent permitted by law.
Risks Related to Owning Our Convertible Note
In the event we do not redeem our debt in shares of common stock, servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our obligations under the 4.0% Senior Secured Convertible Note (the "Note").
Our ability to make scheduled payments of principal or to pay interest on or to refinance the Note depends on our future performance, which is subject to economic, financial, competitive and other factors, some of which are beyond our control. As of December 31, 2020, our outstanding indebtedness is approximately $200.0 million, and the terms of the Note requires us to repay or redeem the full principal amount of the Note at maturity or any other time. Our business may not generate cash flow from operations in the future sufficient to satisfy our obligations under the Note. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance the Note will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the Note.
Some significant restructuring transactions may not constitute a fundamental change as defined in the Note, in which case we would not be obligated to offer to purchase the Note.
Upon the occurrence of a fundamental change, note holders have the right to require us to purchase the Note. However, the fundamental change provisions will not afford protection to the holders of the Note in the event of other transactions that could adversely affect the Note. For example, transactions such as leveraged recapitalizations, refinancings, restructurings, or acquisitions initiated by us may not constitute a fundamental change requiring us to purchase the Note. In the event of any such transaction, the holders would not have the right to require us to purchase the Note, even though each of these transactions
could increase the amount of our indebtedness, or otherwise adversely affect our capital structure or any credit ratings, thereby adversely affecting the holder of the Note.
Conversion of the Note may dilute the ownership interest of existing stockholders or may otherwise depress the price of our common stock.
Conversion of the Note will dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of the Note. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Note may encourage short selling by market participants because the conversion of the Note could be used to satisfy short positions, or anticipated conversion of the Note into shares of our common stock could depress the price of our common stock.
Upon conversion of the Note, note holders may receive less valuable consideration than expected because the value of our common stock may decline after they exercise their conversion right but before we settle our conversion obligation.
Under the Note, a converting holder will be exposed to fluctuations in the value of our common stock during the period from the date such holder surrenders the Note for conversion until the date we settle our conversion obligation. We will deliver the consideration due in respect of conversion on the second business day immediately following the relevant conversion date. Accordingly, if the price of our common stock decreases during this period, the amount and/or value of consideration a note holder will receive will be adversely affected.
The fundamental change repurchase feature of the Note may delay or prevent an otherwise beneficial attempt to take over our Company.
The terms of the Note require us to repurchase the Note in the event of a fundamental change. A takeover of our Company would trigger an option of the holder of the Note to require us to repurchase the Note. This may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to investors in the Note.
The holder of the Note will not be entitled to certain rights with respect to our common stock, but will be subject to all changes made with respect to them.
The holder of the Notes will not be entitled to certain rights with respect to our common stock (including, without limitation, voting rights) but to the extent the conversion consideration includes shares of our common stock, the holder of the Note will be subject to all changes affecting our common stock.
We cannot assure that an active trading market will develop for the Note.
There has been no trading market for the Note, and we do not intend to apply to list the Note on any securities exchange or to arrange for quotation on any automated dealer quotation system. As a result, we cannot assure note holders that an active trading market will develop for the Note. If an active trading market does not develop or is not maintained, the market price and liquidity of the Note may be adversely affected. In that case note holders may not be able to sell the Note at a particular time or note holders may not be able to sell their Notes at a favorable price.
We are subject to certain covenants set forth in the Notes. Upon an event of default, including a breach of a covenant, we may not be able to make such accelerated payments under the Notes.
The Notes contains customary events of default, including for non-payment, misrepresentation, breach of covenants, defaults under other material indebtedness, material adverse change, bankruptcy, change of control and material judgments.
Upon an event of default, the outstanding principal amount of the loan plus any other amounts owed under the Note will become immediately due and payable and the holder of the Note could foreclose on our assets. A default would also likely significantly diminish the market price of our common stock.
Note holders may be subject to tax if we make or fail to make certain adjustments to the applicable conversion rate of the Note even though note holders did not receive a corresponding cash distribution.
The conversion rate is subject to adjustment in certain circumstances, including the payment of cash dividends. If the applicable conversion rate is adjusted as a result of a distribution that is taxable to our common stockholders, such as a cash dividend,
note holders may be deemed to have received a dividend subject to U.S. federal income tax without the receipt of any cash. In addition, a failure to adjust (or to adjust adequately) the applicable conversion rate after an event that increases a note holders' proportionate interest in us could be treated as a deemed taxable dividend to a note holder.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The following table sets forth the location, approximate size and primary use of our principal owned, leased and licensed facilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Location | | Approximate Size (Building) in Square Feet | | Primary Use | | Owned, Leased or Licensed | | Lease/License Expiration Date (if applicable) |
Union City, Indiana | | 250,000 | | | Manufacturing | | Owned | | N/A |
Loveland, Ohio | | 45,000 | | | Administration, Research and Development, Manufacturing | | Owned | | N/A |
Loveland, Ohio | | 88,200 | | | Warehousing | | Leased | | October 5, 2021 |
Loveland, Ohio | | 5,810 | | | Administration | | Leased | | Monthly |
We believe our facilities are in good operating condition and that our facilities are adequate for all present and near term uses.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in legal proceedings incidental to the conduct of our business. Material legal proceedings which arose, or in which there were material developments, during the twelve months ended December 31, 2020 are discussed below.
On July 18, 2019, All Cell Technologies, LLC and Illinois Institute of Technology filed a Complaint for Patent Infringement against the Company in the United States District Court for the Southern District of Indiana (Civil Action No. 1:19-cv-2975) claiming infringement of US Patent No. 6,468,689, 6,942,944 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 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) (the “Federal Court”), and on December 6, 2019, timely filed a motion to dismiss for lack of personal jurisdiction and failure to state a claim, advising the court and the Plaintiffs that the Company was not the manufacturer of the subject W-42 truck and had insufficient contacts with the state of Georgia to justify the exercise of jurisdiction in Georgia. The Plaintiffs responded to the motion to dismiss on December 26, 2019 and subsequently filed a motion for leave to amend their complaint to add Workhorse Trucks, Inc., Navistar, and Workhorse Custom Chassis, LLC. The Company opposed the motion for leave to amend 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. On September 30, 2020, the Federal Court entered an Order granting the Company’s Motion to Dismiss due to the lack of jurisdiction over the Company in the State of Georgia and as a result of the Plaintiff’s failure to establish that the Company committed a tortious act or omission, solicits business or owns, uses or possesses real property in the State of Georgia. Further, the Court granted the Plaintiff’s Motion for Leave to add unaffiliated entities Navistar, Inc. and Workhorse Custom Chassis, LLC, to the lawsuit and denied the Plaintiff’s Motion for Leave to add the Company’s wholly-owned subsidiary, Workhorse Motor Works Inc. On October 1, 2020, the Plaintiff filed a Motion for Discovery to take Jurisdictional Discovery. We timely filed a brief in response to the Motion for Discovery and are awaiting a ruling from the Court.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company's common stock is traded on the NASDAQ Capital Market under the symbol “WKHS”.
Holders of our Common Stock
As of February 15, 2021, there were approximately 200 stockholders of record of our common stock. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.
Dividends
The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.
Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or incorporated by reference into any filing of Workhorse under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph shows a comparison from January 1, 2015 through December 31, 2020, of the cumulative total return for our common stock, the NASDAQ Composite Index, and a peer group determined by us. Such returns are based on historical results and are not intended to suggest future performance. Data for The NASDAQ Composite Index and the peer group assumes an investment of $100 on January 1, 2015 and reinvestment of dividends. We have never declared or paid cash dividends on our capital stock nor do we anticipate paying any such cash dividends in the foreseeable future.
We do not believe that there is a single published industry or line of business index that is appropriate for comparing stockholder returns. As a result, we have selected a peer group comprised of companies that compete with us directly or
indirectly in the electric vehicle OEM market. Our current peer group, reference in the graph above, consists of Blink Charging Co., General Motors Co, Hyliion Holdings Corp., Navistar, Inc., Nikola Corp, NIO Inc., Paccar Inc, Plug Power Inc, Shyft Group, Inc., and Tesla, Inc. Our previous peer group, referenced in the graph above, consisted of Ballard Power Systems Inc., General Motors Co, Gevo, Inc., Green Plains Inc., Navistar, Inc., Oshkosh Corp, Paccar Inc, Plug Power Inc, Tata Motors LTD, and Toyota Motors Corp.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | |
Plan | | Number of Securities to be Issued upon Exercise of Outstanding Options and Rights | | Weighted Average Exercise Price of Outstanding Options | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in first column) |
| | | | | | |
Equity Compensation Plans approved by security holders - 2016 Stock Incentive Plan | | 102,500 | | | $ | 6.30 | | | — | |
| | | | | | |
Equity Compensation Plans approved by security holders - 2017 Stock Incentive Plan | | 1,475,625 | | | $ | 2.01 | | | 2,247,500 | |
| | | | | | |
Equity Compensation Plans approved by security holders - 2019 Stock Incentive Plan | | 773,115 | | | $ | 1.42 | | | 4,332,011 | |
| | 2,351,240 | | | | | 6,579,511 | |
Unregistered Sales of Equity Securities
The shares of common stock described below have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) and were issued and sold in reliance upon the exemption from registration contained in Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. Each of the parties is an accredited investor as defined by Rule 501 under the Securities Act.
Preferred Dividends
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 was entitled to annual dividends at a rate equal to 8.0% per annum on the Stated Value. Accrued dividends were payable quarterly in shares of common stock of the Company based on a fixed share price of $1.62. During the years ended December 31, 2020 and 2019, the Company issued approximately 0.9 million and 0.7 million shares of common stock to the holders of the Preferred Stock, respectively. There are currently no shares of preferred stock outstanding, following the redemption of all shares of Series B Preferred Stock on September 28, 2020.
Warrant Exercise
During the year ended December 31, 2020, the Company issued approximately 30.6 million shares of common stock in connection with the exercise of Common Stock Purchase Warrants in consideration of the payment of an aggregate exercise price of $53.8 million.
Marathon Warrants
Pursuant to the credit agreement entered between the Company and Marathon Asset Management, LP, on behalf of certain entities it manages (the “Marathon Lenders”), dated December 31, 2018, until December 31, 2020, the Company must issue additional warrants to the Marathon Lenders when the Company makes certain equity issuances, to ensure the Marathon Lenders maintain their equity interests, and on substantially the same terms and conditions of the initial warrants issued to the Marathon Lenders, 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.
Accordingly, during the year ended December 31, 2020, the Company issued the Marathon Lenders warrants to acquire 34,923 shares of common stock exercisable at a price of $1.782 per share on January 1, 2020, 34,923 shares of common stock exercisable at a price of $1.782 per share on April 1, 2020, 34,923 shares of common stock exercisable at a price of $1.782 per share on July 1, 2020, 409,356 shares of common stock exercisable at a price of $20.90 per share on July 16, 2020, 34,923 shares of common stock exercisable at a price of $1.782 per share on October 1, 2020, and 629,675 shares of common stock exercisable at a price of $38.82 on October 14, 2020.
During the year ended December 31, 2019, the Company issued the Marathon Lenders warrants to acquire 358,450 shares of common stock exercisable at a price of $1.039 per share on March 27, 2019, 1,481,825 shares of common stock exercisable at a price of $1.4863 per share on June 30, 2019, 11,274 shares of common stock exercisable at a price of $1.782 per share on July 1, 2019, 34,293 shares of common stock exercisable at a price of $1.782 per share on October 1, 2019, and 1,493,624 shares of common stock exercisable at a price of $3.355 per share on December 4, 2019.
Stock Incentives
On November 6, 2019, the Company entered into an amended and restated employment agreement (the “Hughes Employment Agreement”) with Duane Hughes, Chief Executive Officer, effective November 6, 2019. Pursuant to the Hughes Employment Agreement, among other compensation, the Company granted 239,044 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years commencing on January 1, 2020. The stock options to acquire 1,000,000 shares of common stock issued earlier in 2019 immediately vested on the effective date of the Hughes Employment Agreement.
On May 21, 2020, Mr. Hughes was granted 179,245 shares of restricted common stock under the Company's 2019 Stock Incentive Plan, which vest over three years.
The Company entered into an amended and restated employment agreement (the “Willison Employment Agreement”) with Mr. Robert Willison, Chief Operating Officer, effective November 6, 2019. Pursuant to the Willison Employment Agreement, Mr. Willison, among other compensation, was granted 119,522 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years commencing on January 1, 2020.
On May 21, 2020, Mr. Willison was granted 84,906 shares of restricted common stock under the Company's 2019 Stock Incentive Plan, which vest over three years.
The Company entered into an employment agreement (the “Furey Employment Agreement”) with Mr. Anthony Furey, Vice President of Finance, effective November 6, 2019. Pursuant to the Furey Employment Agreement, Mr. Furey, among other compensation, was granted 338,648 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years. In addition, for services in relation to the sale of Surefly during the year ended December 31, 2019, Mr. Furey was granted 34,496 shares of restricted common stock which vested on November 27, 2019.
On May 21, 2020, Mr. Furey was granted 42,453 shares of restricted common stock under the Company's 2019 Stock Incentive Plan, which vest over three years.
On November 6, 2019, the Company appointed Mr. Stephen M. Fleming as General Counsel and Vice President of the Company. In connection with the appointment of Mr. Fleming, the Company entered into an employment agreement (the “Fleming Employment Agreement”) with Mr. Fleming effective November 6, 2019. Pursuant to the Fleming Employment Agreement, among other compensation, Mr. Fleming was granted 517,928 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan, which vest over three years.
On May 21, 2020, Mr. Fleming was granted 84,906 shares of restricted common stock under the Company's 2019 Stock Incentive Plan, which vest over three years.
The Company entered into an employment agreement (the “Ackerson Employment Agreement”) with Mr. Gregory Ackerson, effective November 12, 2019. Pursuant to the Ackerson Employment Agreement, among other compensation, Mr. Ackerson was granted 104,166 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan, which vest over three years.
On May 21, 2020, Mr. Ackerson was granted 33,019 shares of restricted common stock under the Company's 2019 Stock Incentive Plan, which vest over three years.
The Company entered into an employment agreement (the “Schrader Employment Agreement”) with Mr. Steve Schrader effective December 19, 2019. Pursuant to the Schrader Employment Agreement, Mr. Schrader, among other compensation, was granted Mr. Schrader 84,877 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years commencing on July 1, 2020.
On May 21, 2020, Mr. Schrader was granted 77,830 shares of restricted common stock under the Company's 2019 Stock Incentive Plan, which vest over three years.
For director services for the year ended December 31, 2020, Raymond Chess, Chairman of the Board, was granted 26,415 shares of restricted common, which vested on November 21, 2020. In addition, Pamela Mader and Jacqueline Dedo were granted 11,939 shares of restricted common stock, which vested on November 1, 2020, and Michael Clark, Gerald Budde, Benjamin Samuels and Harry DeMott were granted 22,642 shares of restricted common stock, which vested on November 21, 2020. All stock grants were issued under the Company’s 2019 Stock Incentive Plan.
On November 6, 2019, the Company granted Mr. Chess 47,809 shares of restricted common stock for historical services rendered for which no director compensation was received. The restricted stock will vest over two years in semi-annual installments commencing May 6, 2020. In addition, for director services for the year ended December 31, 2019, Mr. Chess was granted 29,880 shares of common stock, which vested on May 6, 2020. In addition, Michael Clark, Gerald Budde, Benjamin Samuels and Harry DeMott were granted 47,809 shares of restricted common stock in consideration for historical services. The restricted stock will vest over two years in semi-annual installments commencing on May 6, 2020. In addition, for director services for the year ended December 31, 2019, Messrs. Clark, Budde, Samuels and DeMott were granted 23,904 shares of restricted common stock, which vested on May 6, 2020. All stock grants were issued under the Company’s 2019 Stock Incentive Plan.
ITEM 6. SELECTED FINANCIAL DATA
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YEARS ENDED DECEMBER 31, | | 2020 | | 2019 | | |
OPERATING SUMMARY | | | | | | |
Net sales | | $ | 1,392,519 | | | $ | 376,562 | | | |
Net income (loss) | | $ | 69,776,499 | | | $ | (37,162,827) | | | |
Net income (loss) attributable to common stockholders per share – basic | | $ | 0.75 | | | $ | (0.58) | | | |
Net income (loss) attributable to common stockholders per share - diluted | | $ | 0.70 | | | $ | (0.58) | | | |
Weighted average number of common shares outstanding - basic | | 92,871,936 | | | 64,314,756 | | | |
Weighted average number of common shares outstanding - diluted | | 99,949,868 | | | 64,314,756 | | | |
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FINANCIAL POSITION SUMMARY | | | | | | |
Total assets | | $ | 632,542,369 | | | $ | 50,673,829 | | | |
Investment in LMC | | $ | 330,556,744 | | | $ | 12,194,800 | | | |
Long-term debt and mandatorily redeemable Series B preferred stock | | $ | — | | | $ | 19,142,908 | | | |
Convertible notes, at fair value | | $ | 197,700,000 | | | $ | 39,020,000 | | | |
| | | | | | |
Cash dividends per common share | | $ | — | | | $ | — | | | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this Annual Report on Form 10-K.
Overview and 2020 Highlights
We are a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. As an American manufacturer, we create all-electric delivery trucks and drone systems, including the technology that optimizes the way these mechanisms operate. We are last-mile delivery’s first purpose-built electric mobility solution and we are currently focused on our core competency of bringing the C-Series electric delivery trucks to market and fulfilling our existing backlog of orders.
Workhorse electric delivery trucks are in use by our customers on daily routes across the United States. Our delivery customers include companies such as Alpha Baking, FedEx Express, Fluid Market, Inc., Pride Group Enterprises, Pritchard, Ryder, UPS 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 the performance of our vehicles will reduce long-term vehicle maintenance expense by approximately 60% as compared to fossil-fueled trucks. Over a 20-year vehicle life, we estimate our C-Series delivery trucks will save over $170,000 in fuel and maintenance savings. We expect fleet operators will be able to achieve a three-year or better total cost of ownership break-even without government incentives.
Our goal is to continue to increase sales and production, while executing on our cost-down strategy to a point that will enable us to achieve gross margin profitability of the last-mile delivery truck platform. As a key strategy, we have developed the Workhorse C-Series platform, which has been accelerated from our previous development efforts.
In December 2019, a novel coronavirus disease (“COVID-19”) was reported. On January 30, 2020, the World Health Organization (“WHO”) declared COVID-19 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 December 31, 2020, our locations and primary suppliers continue to operate. However, during the fourth quarter of 2020, the Company experienced an outbreak of COVID-19 cases amongst our employees. Approximately 40% of our production employees tested positive for COVID-19. Additionally, several of our suppliers experienced capacity constraints due to the pandemic, which has limited their shipment volumes. As a result, we experienced a significant reduction to our planned production volume in the fourth quarter of 2020.
The Workhorse C-Series electric delivery truck platform is available in 650 and 1,000 cubic feet configurations. 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 delivery truck, and early indications of fleet interest are significant.
Our HorseFly Unmanned Aerial System (“UAS”) is a custom-designed, purpose-built, all-electric drone system that is incorporated into our trucks and safely and efficiently delivers packages. HorseFly is designed with a maximum gross weight of 30 lbs., a 10 lb. payload and a maximum air speed of 50 mph. Our first aircraft can deliver a meaningful payload up to 10 miles, automatically lowering packages safely from 50 feet above the delivery point via our proprietary winch system. It is designed and built to be rugged and consisting of redundant systems to further meet the FAA’s required rules and regulations. Workhorse was granted a patent on our UAS, and though initially designed as a complimentary system delivering packages from our electric trucks, the latest iteration of our UAS supports package delivery point-to-point, enabling deliveries to and from almost anywhere, allowing it to serve a broader customer base. As part of the divestiture of SureFly, the Company formed a 50/50 joint venture to which we contributed our HorseFly technology.
SureFly
On November 27, 2019, the Company completed the sale of SureFly for $4.0 million.
Hackney
On October 31, 2019, the Company and ST Engineering Hackney, Inc. (“Hackney”) entered into an Asset Purchase Agreement to purchase certain assets and assume certain liabilities of Hackney. Upon execution of the agreement, the Company deposited $1.0 million in cash and shares of its common stock having a value of $6.6 million into an escrow account. The number of shares held in escrow is subject to adjustment if the value of the shares is less than $5.28 million or greater than $7.92 million on certain dates.
The purchase price for the acquired assets was $7.0 million, $1.0 million of which was released from the escrow account in January 2020 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 Company is required to make additional payments to Hackney 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 within 105 days of when the payment is due, Hackney may require that the Escrow Agent release the shares held in escrow with a value (based on the then-current market price of the shares) equal to $6.0 million in satisfaction of the Second Payment.
Investment in LMC
On November 7, 2019, the Company entered into a transaction with 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 in exchange for royalties, equity interests in LMC, and other consideration. The fair value of the LMC ownership interest received was approximately $12.2 million as of December 31, 2019.
On August 1, 2020, LMC entered into an Agreement and Plan of Merger with DiamondPeak Holdings Corporation in which LMC agreed to merge with and into a subsidiary of DiamondPeak (the “LMC Merger”). In connection with the LMC Merger, the Company and LMC entered into an Agreement on August 1, 2020, which confirmed that the Company will own 9.99% of DiamondPeak following the closing of the merger. The Agreement also defined the Royalty Advance as approximately $4.8 million, which is recorded in Other Income in the Consolidated Statements of Operations for the year ended December 31, 2020.
On October 23, 2020, DiamondPeak announced the completion of its merger with LMC and on October 26, 2020, the LMC shares of Class A Common Stock began trading on the Nasdaq Global Select market under the ticker symbol “RIDE.”
The Company obtained approximately 16.5 million shares of Class A Common Stock in connection with the LMC Merger, which were valued at $20.06 per share as of December 31, 2020. The change in fair value of the investment is recorded in Other Income on the Consolidated Statements of Operations for the year ended December 31, 2020. The Company will record an adjustment to the fair value of its investment in LMC each quarter based on the closing price per share as of the last day of each quarter.
Results of Operations
Our Consolidated Statements of Operations financial information is as follows:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 |
Net sales | $ | 1,392,519 | | | $ | 376,562 | |
| | | |
Cost of sales | 13,067,108 | | | 5,844,891 | |
| | | |
Gross loss | (11,674,589) | | | (5,468,329) | |
| | | |
Operating expenses | | | |
Selling, general and administrative | 20,157,658 | | | 10,199,534 | |
Research and development | 9,148,931 | | | 8,199,074 | |
Total operating expenses | 29,306,589 | | | 18,398,608 | |
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Other income | 323,111,944 | | | 15,849,800 | |
| | | |
Income (loss) from operations | 282,130,766 | | | (8,017,137) | |
| | | |
Interest expense, net | 190,520,337 | | | 29,145,690 | |
| | | |
Income (loss) before provision for income taxes | 91,610,429 | | | (37,162,827) | |
Provision for income taxes | 21,833,930 | | | — | |
| | | |
Net income (loss) | $ | 69,776,499 | | | $ | (37,162,827) | |
Revenue
Net sales for the years ended December 31, 2020 and 2019 were $1.4 million and $0.4 million, respectively. The increase in net sales was primarily due to an increase in volume related to our initial production of the C-Series electric delivery truck.
Cost of Sales
Cost of sales for the years ended December 31, 2020 and 2019 were $13.1 million and $5.8 million, respectively. The cost of sales increase was primarily due to an increase in volume of trucks as we started production of our C-Series platform in 2020. Included in cost of sales is warranty expense for the years ended December 31, 2020 and 2019 of $2.1 million and $0.1 million, respectively. The warranty expense in 2020 primarily relates to a change in estimate in the amount of labor required to maintain our current warranty program with our 2016 and 2017 E-Series trucks. The expense includes estimated costs for labor and transportation and excludes any contribution from vendors.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2020 were $20.2 million, an increase from $10.2 million for the year ended December 31, 2019. The increase was primarily due to higher compensation-related costs of approximately $5.0 million, higher consulting costs of approximately $3.5 million and $1.0 million of selling expense in 2020 related to the Hackney transaction.
Research and Development Expenses
Research and development (“R&D”) expenses for the year ended December 31, 2020 were $9.1 million, an increase from $8.2 million for the year ended December 31, 2019. The increase in R&D expenses is primarily due to the finalization of the design of the C-Series and the Horsefly delivery drone system.
Other Income
Other income for the years ended December 31, 2020 and 2019 was $323.1 million and $15.8 million, respectively. The increase was primarily due to an increase in the fair value of our Investment in LMC of approximately $317.5 million and receipt of the Royalty Advance of approximately $4.8 million.
Interest Expense, Net
Interest expense, net is comprised of the following:
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| Years Ended December 31, |
| 2020 | | 2019 |
Change in fair value of convertible notes and loss on conversion to common stock | $ | 160,749,118 | | | $ | 981,728 | |
Change in fair value of warrant liability | 12,176,690 | | | 15,369,253 | |
Amortization of discount and debt issuance costs | 7,696,671 | | | 1,922,164 | |
Contractual interest expense | 4,832,128 | | | 4,673,979 | |
Loss on extinguishment of mandatorily redeemable Series B preferred stock | 4,710,634 | | | — | |
Other | 355,096 | | | 119,566 | |
Loss on extinguishment of debt | — | | | 6,079,000 | |
Total interest expense, net | $ | 190,520,337 | | | $ | 29,145,690 | |
The increase of interest expense was driven primarily by a $159.8 million increase in the fair value of our convertible notes, offset by a $3.2 million decrease due to changes in the fair value of warrants.
Provision for Income Tax
For the years ended December 31, 2020 and 2019, the Company had taxable losses primarily due to operations and stock compensation related deductions and thus has no current tax expense recorded. The Company recorded a full valuation allowance on its deferred tax assets for the year ended December 31, 2019. As of December 31, 2020, the Company released a portion of the valuation allowance with the exception of certain tax credits and net operating losses determined to be unrealizable. The Company recorded deferred tax liabilities, with a corresponding deferred provision for federal and state income taxes.
Liquidity and Capital Resources
Cash Requirements
From inception, we have financed our operations primarily through sales of equity securities and issuance of debt. We have utilized this capital for research and development and to fund designing, building and delivering vehicles to customers and for working capital purposes.
As of December 31, 2020, we had approximately $46.8 million in cash and cash equivalents, compared to approximately $23.9 million as of December 31, 2019, an increase of $22.9 million. The increase in cash and cash equivalents was primarily attributable to the issuance of convertible notes during the year, offset by cash used in operations as the Company ramped up its production of its C Series.
Additionally, as of December 31, 2020 and 2019, the Company had restricted cash of $194.4 million and $1.0 million, respectively. The increase was due to the net proceeds from the convertible notes issued in October 2020 and held in escrow as of December 31, 2020. The net proceeds were released from escrow in January 2021.
Assuming we are able to monetize our position in LMC, we believe our existing capital resources will be sufficient to support our current and projected funding requirements for several years after which time additional funding will be required. However, if the opportunity arises, we may elect to raise additional financing in 2021.
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 can obtain may involve operating covenants that restrict our business.
Our future funding requirements will depend upon many factors, including, but not limited to:
•our ability to acquire or license other technologies that we may seek to pursue;
•our ability to manage our growth;
•competing technological and market developments;
•the costs and timing of obtaining, enforcing and defending our patent and other intellectual property rights; and
•expenses associated with any unforeseen litigation.
For the years ended December 31, 2020 and 2019, we maintained an investment in a bank money market fund. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation. Wherever possible, we seek to minimize the potential effects of concentration and degrees of risk. We will continue to monitor the impact of the changes in the conditions of the credit and financial markets to our investment portfolio and assess if future changes in our investment strategy are necessary.
Summary of Cash Flows
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| For the Years Ended December 31, |
| 2020 | | 2019 |
Net cash used in operating activities | $ | (70,278,949) | | | $ | (36,871,677) | |
Net cash (used in) provided by investing activities | (5,728,130) | | | 1,654,502 | |
Net cash provided by financing activities | 292,367,730 | | | 58,572,841 | |
Cash Flows from Operating Activities
Our cash flows from operating activities are affected by our cash investments to support the business in research and development, manufacturing, selling, general and administration. Our operating cash flows are also affected by our working capital needs to support fluctuations in inventory, personnel expenses, accounts payable and other current assets and liabilities.
During the years ended December 31, 2020 and 2019, cash used in operating activities was $70.3 million and $36.9 million, respectively. The increase in net cash used in operations in 2020 as compared to 2019 was primarily attributable to spend related to our ramp-up of the C-Series, including contract labor, employee-related costs, and inventory build.
Cash Flows from Investing Activities
During the years ended December 31, 2020 and 2019, cash (used in) provided by investing activities was $(5.7) million and $1.7 million, respectively. Capital expenditures for the Company increased by $3.7 million during the year, which was offset by net proceeds of approximately $3.7 million received in 2019 from the divestiture of SureFly.
Cash Flows from Financing Activities
During the years ended December 31, 2020 and 2019, net cash provided by financing activities was $292.4 million and $58.6 million, respectively.
The significant financing activities that occurred in 2020 and 2019 include:
2020
•Issuance of convertible notes with net proceeds of approximately $262.4 million.
•Exercise of stock options and warrants with net proceeds of approximately $53.6 million.
•$1.4 million of net proceeds from the Paycheck Protection Plan Term Note.
•$25.0 million for the redemption of the mandatorily redeemable Series B Preferred Stock.
2019
•Issuance of Convertible Note with net proceeds of $39.0 million.
•Issuance of Series B Preferred Stock with net proceeds of $25.0 million.
•Sale of common stock with net proceeds of $5.9 million.
•$5.8 million drawn on the Marathon Tranche Two loan, paid off at the end of 2019.
•$10.0 million for the redemption of the Marathon Tranche One loan.
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 and Estimates
The following accounting principles and practices of the Company are set forth to facilitate the understanding of data presented in the consolidated financial statements:
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Warranty liability
We generally offer warranty coverage for our products. We accrue warranty related costs under standard warranty terms and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers. As of December 31, 2020 and 2019 the warranty liability was $5.4 million and $6.0 million, respectively.
Provisions for estimated assurance warranties are recorded at the time of sale and are periodically adjusted to reflect actual experience. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring Company obligations under the warranty plans. Historically, the cost of fulfilling the Company’s warranty obligations has principally involved replacement parts, labor and sometimes travel for any field retrofit campaigns. The Company’s estimates are based on historical experience, the extent of pre-production testing, the number of units involved and the extent of features/components included in product models. Also, each quarter, the Company reviews actual warranty claims experience to determine if there are systemic defects that would require a field campaign.
Although we believe that the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed to increases or decreases in our warranty accrual that could be material.
Warrant liability
We account for certain outstanding common stock warrants as liabilities recorded at fair value which are marked-to-market at the end of each reporting period. As of December 31, 2020, there were no outstanding common stock warrants that were required to be marked-to-market. As of December 31, 2019 the warrant liability was $16.3 million. The warrant liability is remeasured at each balance sheet date until the warrants are exercised, expire or there is a change in their terms that changes their classification to an equity instrument. Any change in fair value is recognized as an adjustment to current period interest expense. The fair value of the warrants is measured using a Black-Scholes valuation model which includes various inputs, including the market price of our common stock on the balance sheet date and estimated volatility of our common stock. If factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be
materially different. Generally, as the market price of our common stock increases, the fair value of the warrant increases, and conversely, as the market price of our common stock decreases, the fair value of the warrant decreases. Also, a significant increase in the volatility of the market price of the Company’s common stock, in isolation, would result in a significantly higher fair value measurement; and a significant decrease in volatility would result in a significantly lower fair value measurement. Changes in the fair value of the warrants are reflected in the Consolidated Statements of Operations as Interest Expense.
Fair Value Option for Convertible Notes
As permitted under ASC 825, Financial Instruments, (“ASC 825”), the Company has elected the fair value option to account for its convertible notes. As of December 31, 2020 and December 31, 2019, the fair value of the convertible notes was $197.7 million and $39.0 million, respectively. In accordance with ASC 825, the Company records changes in fair value of the convertible notes in Interest Expense in the Consolidated Statement of Operations. The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the convertible notes (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives. The fair value is determined using a binomial lattice valuation model, which is widely used for valuing convertible notes. The significant assumptions used in the model are the credit spread and the volatility of the Company's common stock. If different assumptions are used, the fair value of the convertible notes and the change in estimated fair value could be materially different. Generally, as the credit spread increases, the fair value decreases, and conversely, as the credit spread decreases, the fair value of the convertible notes increases. Also, a significant increase in the volatility of the market price of the Company’s common stock, in isolation, would result in a significantly higher fair value; and a significant decrease in volatility would result in a significantly lower fair value.
Income taxes
The Company incurred net operating losses for the years ended December 31, 2020 and 2019 and, therefore, no current provision for federal or state income taxes has been recorded in the Consolidated Financial Statements. As of December 31, 2020, the Company recorded deferred tax liabilities of approximately $21.8 million, with a corresponding deferred provision for federal and state income taxes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities in which we invest may have market risk. This means that a change in prevailing interest rates may cause the fair value amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value amount of our investment will decline. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including money market funds and government and non-government debt securities and the maturities of each of these instruments is less than one year. In 2020, we maintained an investment portfolio primarily in money market funds. Due to the primarily short-term nature and low interest rate yields of these investments, we believe we do not have a material exposure to interest rate risk and market risk arising from our investments. Therefore, no quantitative tabular disclosure is provided.
We have operated primarily in the United States. Accordingly, we have not had any significant exposure to foreign currency rate fluctuations.
We currently hold shares of Class A Common Stock of Lordstown Motors Corp. which began trading on the Nasdaq Global Select market under the ticker symbol “RIDE” in October 2020. These shares are considered marketable securities and are subject to a wide variety of market-related risks that could substantially reduce or increase the fair value of our holdings. As of December 31, 2020, we did not hold non-marketable equity securities.
We record our marketable equity securities not accounted for under the equity method at fair value based on readily determinable market values, of which publicly traded stocks are subject to market price volatility, and represent approximately $330.6 million as of December 31, 2020. A hypothetical adverse price change of 30% on our December 31, 2020 balance, which could be experienced in the near term, would decrease the fair value of our marketable equity securities by approximately $99.2 million. From time to time, we may enter into derivatives to hedge the market price risk on certain of our marketable equity securities.
For further information about our equity investments, please refer to Note 3 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Workhorse Group Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Workhorse Group Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated March 1, 2021 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
March 1, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Workhorse Group Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Workhorse Group Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 1, 2021 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Convertible Notes Accounting
In October 2020, the Company issued $200.0 million in convertible notes as described in Note 6 and Note 9 of the consolidated financial statements. The Company elected to account for the convertible notes using the fair value option, which allows for valuing the Convertible Note (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives. The valuation of the Convertible Note at fair value utilizes inputs that are not observable directly. The fair value was determined using a binomial lattice valuation model, which is widely used for valuing convertible notes. The significant assumptions used in the model are the credit spread and volatility of the Company’s common stock. We identified the accounting for this convertible note transaction as a critical audit matter. The principal considerations for our determination that the accounting for the convertible note transaction is a critical audit matter are due to the complexity in assessing management’s accounting considerations of the numerous features of the notes, determining eligibility for electing the fair value option, and assessing management’s judgments in the determination of the fair value of the convertible notes. The fair value is sensitive to changes in the key inputs and assumptions, and therefore required judgement in evaluating their reasonableness. Significant assumptions used by management to estimate the fair value of the convertible notes included estimates of the redemption dates, credit spreads and the market price and volatility of the Company’s common stock.
Our audit procedures related to the critical audit matter included the following, among others. We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s initial convertible notes accounting process, including its controls over estimating the fair value of the convertible notes. To test the initial accounting for the convertible notes, our audit procedures included, among others, inspection of the convertible notes agreement and testing
management’s application of the relevant accounting guidance. We also involved our valuation specialists to evaluate the Company’s determination of the fair value of the convertible notes, including testing the appropriateness of the methodology and underlying assumptions used, evaluating the sensitivity of management’s key estimates, independent sourcing of key inputs and assumptions, and developing independent estimates. The significant assumptions used by management to estimate the fair value of the convertible notes included estimates of the redemption dates, credit spreads and the market price and volatility of the Company’s common stock.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2018.
Cincinnati, Ohio
March 1, 2021
Workhorse Group Inc.
Consolidated Balance Sheets
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents (Note 1) | $ | 46,817,825 | | | $ | 23,868,416 | |
Restricted cash held in escrow (Note 1) | 194,411,242 | | | 1,000,000 | |
Accounts receivable, less allowance for credit losses of $0 at December 31, 2020 and 2019 (Note 4) | 884,367 | | | 7,921 | |
Lease receivable, current | 153,099 | | | 33,100 | |
Inventory, net (Note 2) | 15,467,012 | | | 1,798,146 | |
Prepaid expenses | 32,759,216 | | | 4,812,088 | |
Total current assets | 290,492,761 | | | 31,519,671 | |
Property, plant and equipment, net (Note 5) | 11,398,166 | | | 6,830,181 | |
Investment in LMC (Note 3, Note 9) | 330,556,744 | | | 12,194,800 | |
Lease receivable, long-term | 94,698 | | | 129,177 | |
Total Assets | $ | 632,542,369 | | | $ | 50,673,829 | |
Liabilities | | | |
Current liabilities: | | | |
Accounts payable | $ | 4,790,763 | | | $ | 1,678,983 | |
Accrued liabilities (Note 1) | 5,995,302 | | | 3,408,184 | |
Warranty liability (Note 1) | 5,400,000 | | | 6,001,864 | |
Warrant liability (Note 9) | — | | | 16,335,000 | |
Current portion of convertible notes, at fair value (Note 6) | — | | | 19,620,000 | |
PPP Term Note (Note 6) | 1,411,000 | | | — | |
Total current liabilities | 17,597,065 | | | 47,044,031 | |
Other long-term liabilities | 207,040 | | | — | |
Deferred tax liability (Note 8) | 21,833,930 | | | — | |
Convertible notes, at fair value (Note 6, Note 9) | 197,700,000 | | | 19,400,000 | |
Mandatorily redeemable Series B preferred stock (Note 7) | — | | | 19,142,908 | |
Total Liabilities | 237,338,035 | | | 85,586,939 | |
Commitments and contingencies | | | |
Stockholders’ Equity (Deficit): | | | |
Series A preferred stock, par value of $0.001 per share 75,000,000 shares authorized, zero shares issued and outstanding at December 31, 2020 and 2019 (Note 12) | — | | | — | |
Common stock, par value of $0.001 per share 250,000,000 shares authorized, 121,922,532 shares issued and outstanding at December 31, 2020 and 67,105,000 shares issued and outstanding at December 31, 2019 (Note 12) | 121,923 | | | 67,105 | |
Additional paid-in capital | 504,112,442 | | | 143,826,315 | |
Accumulated deficit | (109,030,031) | | | (178,806,530) | |
Total stockholders' equity (deficit) | 395,204,334 | | | (34,913,110) | |
Total Liabilities and Stockholders' Equity (Deficit) | $ | 632,542,369 | | | $ | 50,673,829 | |
See accompanying notes to the consolidated financial statements.
F-5
Workhorse Group Inc.
Consolidated Statements of Operations
| | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 | | |
Net sales (Note 4) | $ | 1,392,519 | | | $ | 376,562 | | | |
| | | | | |
Cost of sales | 13,067,108 | | | 5,844,891 | | | |
| | | | | |
Gross loss | (11,674,589) | | | (5,468,329) | | | |
| | | | | |
Operating expenses | | | | | |
Selling, general and administrative | 20,157,658 | | | 10,199,534 | | | |
Research and development | 9,148,931 | | | 8,199,074 | | | |
Total operating expenses | 29,306,589 | | | 18,398,608 | | | |
| | | | | |
Other income (Note 3, Note 14) | 323,111,944 | | | 15,849,800 | | | |
| | | | | |
Income (loss) from operations | 282,130,766 | | | (8,017,137) | | | |
| | | | | |
Interest expense, net | 190,520,337 | | | 29,145,690 | | | |
| | | | | |
Income (loss) before provision for income taxes | 91,610,429 | | | (37,162,827) | | | |
Provision for income taxes (Note 8) | 21,833,930 | | | — | | | |
| | | | | |
Net income (loss) | $ | 69,776,499 | | | $ | (37,162,827) | | | |
| | | | | |
Net income (loss) attributable to common stockholders per share - basic | $ | 0.75 | | | $ | (0.58) | | | |
Net income (loss) attributable to common stockholders per share - diluted | $ | 0.70 | | | $ | (0.58) | | | |
| | | | | |
Weighted average number of common shares outstanding - basic | 92,871,936 | | | 64,314,756 | | | |
Weighted average number of common shares outstanding - diluted | 99,949,868 | | | 64,314,756 | | | |
See accompanying notes to the consolidated financial statements.
F-6
Workhorse Group Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
For the Years Ended December 31, 2020 and 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Series A Preferred Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Total Stockholders’ Equity (Deficit) |
| Number of Shares | | Amount | | Number of Shares | | Amount | | | |
Balance as of December 31, 2018 | 58,270,934 | | | $ | 58,271 | | | — | | | $ | — | | | $ | 126,076,782 | | | $ | (141,557,496) | | | $ | (15,422,443) | |
Issuance of common stock | 7,183,488 | | | 7,184 | | | — | | | — | | | 5,921,051 | | | — | | | 5,928,235 | |
Stock options and warrants exercised, and vesting of restricted shares | 630,141 | | | 630 | | | — | | | — | | | 34,676 | | | — | | | 35,306 | |
Reclassification of warrants to equity | — | | | — | | | — | | | — | | | 857,072 | | | — | | | 857,072 | |
Deemed dividend | 116,496 | | | 116 | | | — | | | — | | | 86,091 | | | (86,207) | | | — | |
Value of warrants issued with Series B Preferred Stock | — | | | — | | | — | | | — | | | 6,709,961 | | | — | | | 6,709,961 | |
Value of warrants issued with convertible notes | — | | | — | | | — | | | — | | | 430,000 | | | — | | | 430,000 | |
Common stock issued for preferred stock dividends | 718,755 | | | 719 | | | — | | | — | | | 1,166,052 | | | — | | | 1,166,771 | |
Conversion of convertible notes | 185,186 | | | 185 | | | — | | | — | | | 564,632 | | | — | | | 564,817 | |
Stock-based compensation | — | | | — | | | — | | | — | | | 1,979,998 | | | — | | | 1,979,998 | |
Net loss for the year ended December 31, 2019 | — | | | — | | | — | | | — | | | — | | | (37,162,827) | | | (37,162,827) | |
Balance as of December 31, 2019 | 67,105,000 | | | 67,105 | | | — | | | — | | | 143,826,315 | | | (178,806,530) | | | (34,913,110) | |
| | | | | | | | | | | | | |
Stock options and warrants exercised, and vesting of restricted shares | 33,932,827 | | | 33,933 | | | — | | | — | | | 82,059,699 | | | — | | | 82,093,632 | |
Common stock issued for preferred stock dividends | 920,901 | | | 922 | | | — | | | — | | | 1,490,938 | | | — | | | 1,491,860 | |
Conversion of convertible notes | 19,605,013 | | | 19,605 | | | — | | | — | | | 270,775,079 | | | — | | | 270,794,684 | |
Common stock issued for interest on convertible notes | 358,791 | | | 358 | | | — | | | — | | | 1,939,606 | | | — | | | 1,939,964 | |
Stock-based compensation | — | | | — | | | — | | | — | | | 4,020,805 | | | — | | | 4,020,805 | |
Net income for the year ended December 31, 2020 | — | | | — | | | — | | | — | | | — | | | 69,776,499 | | | 69,776,499 | |
| | | | | | | | | | | | | |
Balance as of December 31, 2020 | 121,922,532 | | | $ | 121,923 | | | — | | | $ | — | | | $ | 504,112,442 | | | $ | (109,030,031) | | | $ | 395,204,334 | |
See accompanying notes to the consolidated financial statements.
F-7
Workhorse Group Inc.
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2020 | | 2019 | | |
Cash flows from operating activities: | | | | | |
Net income (loss) | $ | 69,776,499 | | | $ | (37,162,827) | | | |
Adjustments to reconcile net income (loss) to net cash used in operations: | | | | | |
Depreciation | 809,645 | | | 388,401 | | | |
Tooling expense | 350,500 | | | — | | | |
Amortization of discount and debt issuance costs on convertible notes and long-term debt | 6,550,212 | | | 3,518,356 | | | |
| | | | | |
Amortization of discount and loss on redemption of mandatorily redeemable Series B preferred stock | 5,857,092 | | | 852,869 | | | |
Change in fair value of convertible notes and loss on conversion to common stock | 160,749,118 | | | 1,064,817 | | | |
Change in fair value of warrant liability | 12,176,690 | | | 15,369,253 | | | |
Change in fair value of investment in LMC and fair value of anti-dilution shares | (318,361,944) | | | — | | | |
Dividends for mandatorily redeemable Series B preferred stock paid in common stock | 1,491,860 | | | 1,166,771 | | | |
Interest on convertible notes paid in common stock | 1,939,964 | | | — | | | |
Stock-based compensation | 4,020,805 | | | 1,979,998 | | | |
Write down of inventory | — | | | 694,448 | | | |
Gain on divestiture | — | | | (3,655,000) | | | |
Investment received from license of intellectual property | — | | | (12,194,800) | | | |
Loss on sale of fixed assets | — | | | 19,367 | | | |
Effects of changes in operating assets and liabilities: | | | | | |
Accounts and lease receivable | (961,966) | | | 76,163 | | | |
Inventory | (13,668,866) | | | 41,022 | | | |
Prepaid expenses | (27,947,128) | | | (4,367,928) | | | |
Accounts payable and accrued liabilities | 5,499,464 | | | (3,605,682) | | | |
Warranty liability | (601,864) | | | (1,056,905) | | | |
Other long-term liabilities | 207,040 | | | — | | | |
Deferred tax liability | 21,833,930 | | | — | | | |
| | | | | |
| | | | | |
Net cash used in operating activities | (70,278,949) | | | (36,871,677) | | | |
Cash flows from investing activities: | | | | | |
Capital expenditures | (5,728,130) | | | (2,005,498) | | | |
Net proceeds received on divestiture | — | | | 3,655,000 | | | |
Proceeds from sale of fixed assets | — | | | 5,000 | | | |
Net cash (used in) provided by investing activities | (5,728,130) | | | 1,654,502 | | | |
Cash flows from financing activities: | | | | | |
Proceeds from notes payable | — | | | 5,854,140 | | | |
Payments on notes payable | — | | | (5,854,140) | | | |
(Redemption of), proceeds from issuance of mandatorily redeemable Series B preferred stock | (25,000,000) | | | 25,000,000 | | | |
Proceeds from issuance of convertible notes | 262,374,788 | | | 38,950,000 | | | |
Repayment of Duke financing obligation | — | | | (1,340,700) | | | |
Proceeds from PPP Term Note | 1,411,000 | | | — | | | |
| | | | | |
Payments on long-term debt | — | | | (10,000,000) | | | |
| | | | | |
Proceeds from issuance of common stock | — | | | 5,928,235 | | | |
Proceeds from exercise of warrants and options | 53,581,942 | | | 35,306 | | | |
Net cash provided by financing activities | 292,367,730 | | | 58,572,841 | | | |
Change in cash, cash equivalents and restricted cash | 216,360,651 | | | 23,355,666 | | | |
Cash, cash equivalents and restricted cash, beginning of the year | 24,868,416 | | | 1,512,750 | | | |
Cash, cash equivalents and restricted cash, end of the year | $ | 241,229,067 | | | $ | 24,868,416 | | | |
See accompanying notes to the consolidated financial statements.
F-8
During the year ended December 31, 2020, cash paid for interest was approximately $12.7 million, which consisted of $7.6 million of direct costs incurred in connection with the issuance of our convertible notes, $4.7 million loss on redemption of our Series B Preferred Stock, and $0.4 million of financing fees.
During the year ended December 31, 2019, cash paid for interest was approximately $7.2 million, which consisted primarily of contractual interest on long-term debt.
The following table provides a reconciliation of Cash and Cash Equivalents, and Restricted Cash Held in Escrow to the amounts reported within the Consolidated Balance Sheets:
| | | | | | | | | | | | | |
| December 31 |
| 2020 | | 2019 | | |
Cash and cash equivalents | $ | 46,817,825 | | | $ | 23,868,416 | | | |
Restricted cash held in escrow | 194,411,242 | | | 1,000,000 | | | |
Total cash, cash equivalents and restricted cash held in escrow | $ | 241,229,067 | | | $ | 24,868,416 | | | |
Supplemental disclosure of non-cash activities:
During the year ended December 31, 2020, the Company issued approximately 19.6 million shares of common stock in connection with the conversion of the Convertible Notes, which were valued at approximately $270.8 million. The Company recognized the conversion as an adjustment to Additional Paid-In Capital, with the offset as a reduction to the fair value of the Convertible Notes.
During the year ended December 31, 2019, the Company issued warrants to purchase common stock in connection with the issuance of our Series B Preferred Stock, which were valued at approximately $6.7 million. The Company recorded Additional Paid-In Capital, with the offset as a discount on the Series B Preferred Stock.
See accompanying notes to the consolidated financial statements.
F-9
Workhorse Group Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
Nature of operations and basis of presentation
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. As an American manufacturer, we create all-electric delivery trucks and drone systems, including the technology that optimizes the way these mechanisms operate. We are last-mile delivery’s first purpose-built electric mobility solution and we are currently focused on our core competency of bringing the C-Series electric delivery trucks to market and fulfilling our existing backlog of orders. The consolidated financial statements are prepared in conformity with U.S. GAAP.
Principles of consolidation
The 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.
Reclassifications
Certain reclassifications were made to the prior year consolidated financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or stockholders’ equity.
Cash and cash equivalents
Cash includes cash equivalents which are highly liquid investments that are readily convertible to cash. A cash equivalent is a highly liquid investment that at the time of acquisition has a maturity of three months or less.
Restricted cash
We maintain certain cash balances restricted as to withdrawal or use. Our restricted cash is comprised primarily of cash received through financing transactions that have not been released for use by us and cash held as collateral for certain payments. We record restricted cash in the Consolidated Balance Sheets and determine current or non-current classification based on the expected duration of the restriction.
Financial instruments
The carrying amounts of financial instruments including cash and cash equivalents, restricted cash, inventory, and accounts payable approximate fair value because of the relatively short maturity of these instruments.
Accounts receivable
Accounts receivable consists of collectible amounts for products and services rendered. The Company carries its accounts receivable at invoice amount less an allowance for credit losses. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for credit losses based on a history of past write-offs, collections, and current and future credit conditions.
Inventory, net
Inventory is stated at the lower of cost or net realizable value. Manufactured inventories are valued at standard cost, which approximates actual costs on a first-in, first-out basis. We record inventory reserves for excess or obsolete inventories based upon assumptions about our current and future demand forecasts.
Property, plant and equipment, net
Property, plant and equipment, net is stated at cost less accumulated depreciation. Major renewals and improvements are capitalized while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed as incurred. When property, plant and equipment is retired or otherwise disposed of, a gain or loss is realized for the
difference between the net book value of the asset and the proceeds realized thereon. Depreciation is calculated using the straight-line method, based upon the following estimated useful lives:
| | | | | |
Buildings and improvements | 15 - 39 years |
Land improvements | 15 years |
Equipment and vehicles | 3 - 6 years |
Tooling | 5 years |
Impairment of long-lived assets
Long-lived assets, such as property, plant, and equipment are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group.
Valuation of investment
In October of 2020, we began measuring our investment in Lordstown Motor Corp. (“LMC”) at fair value as permitted under Accounting Standards Codification (“ASC”) 820, Fair Value Measurement. On October 26, 2020, LMC shares of Class A Common Stock began trading on the Nasdaq Global Select market under the ticker symbol “RIDE.” Therefore, the carrying value of our investment is equal to the quote market price of LMC's common stock. If the price of LMC's common stock decreases, we would record a decrease in the value of our investment and a charge to earnings. We have classified the LMC investment as non-current within the accompanying Consolidated Balance Sheets due to our intention to hold this investment for purposes of continued affiliation and business advantage.
We previously elected the measurement alternative allowed under generally accepted accounting principles (“GAAP”) for our investment in LMC, which, prior to October 2020, did not have a readily determinable fair value. Under the measurement alternative, we measured 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.
Accrued Liabilities
Accrued liabilities consist of the following:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
Accrued payroll and taxes | | $ | 2,537,353 | | | $ | 954,225 | |
Loan interest payable | | 1,711,111 | | | 112,750 | |
Customer allowance accrual | | 1,412,500 | | | 1,412,500 | |
Other | | 334,338 | | | 928,709 | |
Total accrued liabilities | | $ | 5,995,302 | | | $ | 3,408,184 | |
Warranty
We generally offer warranty coverage for our products. We accrue warranty related costs under standard warranty terms and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers.
Provisions for estimated assurance warranties are recorded at the time of sale and are periodically adjusted to reflect actual experience. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring Company obligations under the warranty plans. Historically, the cost of fulfilling the Company’s warranty obligations has principally involved replacement parts, towing and transportation costs, labor and sometimes travel for any field retrofit campaigns. The Company’s estimates are based on historical experience, the extent of pre-production testing, the number of
units involved and the extent of features/components included in product models. The Company reviews actual warranty claims experience to determine if there are systemic defects that would require a field campaign.
Although we believe that the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed to increases or decreases in our warranty accrual that could be material.
Activity for the Company's warranty accrual is as follows:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Balance, beginning of year | $ | 6,001,864 | | | $ | 7,058,769 | |
Accrual for warranty (1) | 2,115,762 | | | 92,191 | |
Warranty costs incurred | (2,717,626) | | | (1,149,096) | |
Balance, end of year | $ | 5,400,000 | | | $ | 6,001,864 | |
(1) The increase to the warranty accrual in 2020 primarily relates to a change in estimate in the amount of labor required to maintain our current warranty program with our 2016 and 2017 E-Series trucks. The expense includes estimated costs for labor and transportation and excludes any contribution from vendors.
Fair value option
As permitted under ASC 825, Financial Instruments, the Company has elected the fair value option to account for its convertibles notes. In accordance with ASC 825, the Company records its convertible notes at fair value with changes in fair value recorded in Interest Expense in the Consolidated Statement of Operations. As a result of applying the fair value option, direct costs and fees related to the convertible notes were recognized in earnings as incurred and were not deferred.
Common stock
On May 3, 2019, the Company filed an amendment to its Articles of Incorporation to increase the authorized number of shares of common stock from 100,000,000 to 250,000,000.
Income taxes
We file a consolidated U.S. federal income tax return and separate state and local income tax returns. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carryforwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
We recognize the tax benefit from an uncertain tax position claimed or expected to be claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Research and development costs
The Company expenses research and development costs as they are incurred. Research and development costs consist primarily of personnel costs for engineering and research, prototyping costs, and contract and professional services.
Basic and diluted earnings (loss) per share
Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted earnings per share are calculated using the treasury stock method, on the basis of the weighted average number of shares outstanding plus the dilutive effect, if any, of stock options, unvested restricted stock and warrants. The if converted method is used for determining the impact of the convertible notes.
The following table shows the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 |
Net income (loss) | | $ | 69,776,499 | | | $ | (37,162,827) | |
Deemed dividends | | — | | | 86,207 | |
Net income (loss) attributable to common stockholders | | $ | 69,776,499 | | | $ | (37,249,034) | |
| | | | |
Basic weighted average shares outstanding | | 92,871,936 | | | 64,314,756 | |
Dilutive effect of options and warrants | | 1,410,605 | | | — | |
Dilutive effect of convertible notes | | 5,667,327 | | | — | |
Diluted weighted average shares outstanding | | 99,949,868 | | | 64,314,756 | |
| | | | |
Anti-dilutive options and warrants excluded from diluted average shares outstanding | | 1,041,531 | | | 36,021,502 | |
Approximately 13.3 million shares of common stock representing the conversion of the High Trail Convertible Note (as defined in Note 6) were excluded from basic and diluted weighted average shares outstanding in the table above for the year ended December 31, 2019. As the High Trail Convertible Note was fully converted during the year, the number of shares issued upon conversion is included in the basic weighted average shares outstanding for the year ended December 31, 2020.
Stock-based compensation
The Company recognizes in its Consolidated Statements of Operations the grant-date fair value of share-based awards issued to employees and non-employees over the awards' vesting period which equals the service period. Forfeitures are recognized as they occur. The fair value of restricted stock awards is the price of our common stock on the date of the award.
The fair value for stock options is estimated on the grant date using a Black-Scholes valuation model that uses the assumptions of expected volatility, expected term, and the expected risk-free rate of return. The expected volatility was estimated by management as 50% based on results from other public companies in our industry. The expected term of the awards granted was assumed to be the contract life of the option as determined in the specific arrangement. The risk-free rate of return was based on market yields in effect on the date of each grant for United States Treasury debt securities with a maturity equal to the expected term of the award.
Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to warranty liability, warrant liability, fair value of the convertible notes and litigation-related accruals. Actual results could differ from our estimates.
Impact of COVID-19 Pandemic
In December 2019, a novel coronavirus disease (“COVID-19”) was reported. On January 30, 2020, the World Health Organization (“WHO”) declared COVID-19 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 December 31, 2020, our locations and primary suppliers continue to operate. However, during the fourth quarter of 2020, the Company experienced an outbreak of COVID-19 cases amongst our employees. Approximately 40% of our production employees tested positive for COVID-19. Additionally, several of our suppliers experienced capacity constraints due to the pandemic, which has limited their shipment volumes. As a result, we experienced a significant reduction to our planned production volume in the fourth quarter of 2020. 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:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Raw materials | $ | 16,759,232 | | | $ | 3,741,097 | |
Work in process | 422,176 | | | 422,176 | |
Finished goods | 277,419 | | | — | |
| 17,458,827 | | | 4,163,273 | |
Less: inventory reserve | (1,991,815) | | | (2,365,127) | |
Inventory, net | $ | 15,467,012 | | | $ | 1,798,146 | |
3. INVESTMENT IN LMC
The Company has an approximate ten percent ownership interest in Lordstown Motors Corp. with a fair value of $330.6 million and $12.2 million as of December 31, 2020 and December 31, 2019, respectively.
The following table sets forth a reconciliation of the Investment in LMC:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
Balance, beginning of year | $ | 12,194,800 | | | $ | — | |
Initial fair value of ownership interest (1) | — | | | 12,194,800 | |
Change in fair value of investment (2) | 317,497,044 | | | — | |
Fair value of anti-dilution shares (3) | 864,900 | | | — | |
Balance, end of year | $ | 330,556,744 | | | $ | 12,194,800 | |
(1) Represents the Company's ownership interest in the common stock of LMC obtained pursuant to the LMC Transaction (as described below). The initial fair value of the LMC ownership interest received is recorded in Other Income on the Consolidated Statements of Operations for the year ended December 31, 2019.
(2) The Company obtained approximately 16.5 million shares of Class A Common Stock in connection with the LMC Merger (as described below), which were valued at $20.06 per share as of December 31, 2020. The change in fair value of the investment is recorded in Other Income on the Consolidated Statements of Operations for the year ended December 31, 2020.
(3) During the three months ended March 31, 2020, the Company received additional shares as part of its anti-dilution feature with LMC, which were valued at approximately $0.9 million. The change in fair value of the investment related to the anti-dilution shares is recorded in Other Income on the Consolidated Statements of Operations for the year ended December 31, 2020.
LMC Merger
On August 1, 2020, LMC entered into an Agreement and Plan of Merger (the “Merger Agreement”) with DiamondPeak Holdings Corp., in which LMC agreed to merge with and into a subsidiary of DiamondPeak (the “LMC Merger”). The stockholders of LMC in the aggregate received 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 in which DiamondPeak agreed to issue and sell an aggregate of 50.0 million shares of Class A Common Stock for $10.00 per share.
In connection with the LMC Merger, the Company and LMC entered into an Agreement on August 1, 2020, which confirmed that the Company will own 9.99% of DiamondPeak and no longer have anti-dilution rights or similar protections following the
closing of the merger. The Agreement also defined the Royalty Advance as approximately $4.8 million, which is recorded in Other Income in the Consolidated Statements of Operations for the year ended December 31, 2020. Further, DiamondPeak has agreed to register the Company’s shares of Class A Common Stock held in DiamondPeak. The Company has agreed, subject to certain exceptions, to not sell any of its shares of Class A Common Stock for a period of six months ending April 23, 2021, following the closing of the LMC Merger.
On October 23, 2020, DiamondPeak announced the completion of its merger with LMC and on October 26, 2020, the LMC shares of Class A Common Stock began trading on the Nasdaq Global Select market under the ticker symbol “RIDE.” Following the merger, the entity now operates under the name Lordstown Motors Corp.
LMC Transaction
On November 7, 2019, the Company entered into a transaction with LMC (the “LMC Transaction”). 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”). In connection with the LMC Transaction, 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:
•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 provided 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, 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 vehicle orders to LMC. LMC will pay a four percent commission on the gross sales price of any transferred orders fulfilled by LMC.
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 Royalty Advance. 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 owned 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 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 credit losses is based on an analysis of customer accounts, which considers history of past write-offs, collections, and current and future credit conditions.
As the majority of our contracts have a single performance obligation which 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:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2020 | | 2019 |
Automotive | $ | 1,285,327 | | | $ | 240,280 | |
Aviation | 71,830 | | | — | |
Other | 35,362 | | | 136,282 | |
Total revenues | $ | 1,392,519 | | | $ | 376,562 | |
Automotive – consists of sales of any of our truck platforms. We recognize revenue when control transfers upon shipment to the customer.