Investments in LMC
|9 Months Ended|
Sep. 30, 2020
|Investments, All Other Investments [Abstract]|
|Investments in LMC||INVESTMENT IN LMC
The Company has a ten percent ownership interest in Lordstown Motors Corp. (“LMC”) with a value of $13.1 million and $12.2 million as of September 30, 2020 and December 31, 2019, respectively. The investment was obtained pursuant to the transaction with LMC described below.
We have elected the measurement alternative allowed under generally accepted accounting principles (“GAAP”) for our investment in LMC, which did not have a readily determinable fair value as of September 30, 2020. Under the measurement alternative, we measure this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions in an identical or similar investment in LMC. During the nine months ended September 30, 2020, the Company received additional shares as part of its anti-dilution feature with LMC, which were valued at approximately $0.9 million. There were no transactions in identical or similar securities during the three months ended September 30, 2020.
At each reporting period, we evaluate our investment in LMC to determine if there are any events or circumstances that are likely to have a significant adverse effect on the fair value of the investment. Examples of such impairment indicators include, but are not limited to, a significant deterioration in earnings performance, recent financing rounds at reduced valuations, a significant adverse change in the regulatory, economic or technological environment of an investee or a significant doubt about an investee’s ability to continue as a going concern. If we identify an impairment indicator, we will estimate the fair value of the investment and compare it to its carrying value. Our estimation of fair value considers financial information related to the investee available to us, including valuations based on recent third-party equity investments in the investee. If the fair value of the investment is less than its carrying value, the investment is impaired and an impairment loss equal to the difference between the investment’s carrying value and its fair value is recognized under the measurement alternative.
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 shareholders of LMC will receive in the aggregate 58% of the issued and outstanding shares of Class A Common Stock of DiamondPeak as of the closing of the LMC Merger. Further, on August 1, 2020, DiamondPeak entered into subscription agreements with certain investors 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 order to further define the Company’s rights with respect to LMC, 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 LMC Merger
and the Royalty Advance was defined as $4.75 million. 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 following the closing of the LMC Merger.
On October 23, 2020, DiamondPeak completed 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.” Workhorse obtained approximately 16.5 million shares of Class A Common Stock in connection with the LMC Merger, which were valued at $13.05 per share as of October 30, 2020. The Company no longer has anti-dilution rights or similar protections following the merger.
As a result of the Merger, the Company's investment in LMC will no longer qualifty for the measurement alternative as the fair value will be readily determinable. As such, in future periods, the Company will hold its investment at fair value.
On November 7, 2019, the Company entered into a transaction with LMC (the "LMC Transaction") pursuant to which the Company granted LMC a perpetual and worldwide license to certain intellectual property relating to the Company’s W-15 electric pickup truck platform and its related technology (the “Licensed Intellectual Property”) for consideration as described below. LMC will endeavor to, among other things, raise sufficient third-party capital for the acquisition, retrofitting, and restart of the Lordstown Assembly Complex, and the ongoing operating costs, which amounts are expected to be significant (the “Capital Raise”).
•A ten percent ownership interest in the common stock of LMC in exchange for the Company’s obligations under the License Agreement.
•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. In accordance with the Agreement entered into on August 1, 2020, the Royalty Advance was defined as $4.75 million.
•A one percent royalty on the gross sales price of the first 200,000 vehicles sold, but only to the extent that the aggregate amount of such royalty fees exceeds the amount paid as the Royalty Advance.
•Upon completion of the Capital Raise, the Company intends to transfer approximately 6,000 existing vehicles orders to LMC. LMC will pay a four percent commission on the gross sales price of any transferred orders fulfilled by LMC.
The consideration includes a fixed and variable component:
•The fixed component consists of the ten percent ownership interest in LMC and any amounts received under the Minimum Royalty. The fair value of the LMC ownership interest received was $12.2 million on November 7, 2019.•The variable component consists of the four percent commission and the one percent royalty. Variable consideration will be recognized when each vehicle for which a royalty or commission is owed is sold.
The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group.
Reference 1: http://www.xbrl.org/2003/role/disclosureRef