Quarterly report pursuant to Section 13 or 15(d)

Commitment and Contingencies

v3.22.1
Commitment and Contingencies
3 Months Ended
Mar. 31, 2022
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies COMMITMENTS AND CONTINGENCIES
The Company is party to various negotiations and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.
Federal Motor Vehicle Safety Standards (“FMVSS”) Certification and Other Regulatory Matters

On September 22, 2021, we announced the Company decided to suspend deliveries of C-1000 vehicles and recall the vehicles we had already delivered to customers. The new leadership team determined additional testing and modifications to existing vehicles are required to bring the C-1000 vehicles into full compliance with FMVSS. The Company further announced we filed a report with the National Highway Traffic Safety Administration (“NHTSA”) regarding the need for additional testing and vehicle modifications to bring our C-1000 vehicles into full compliance with FMVSS. We indicated our previous statements related to the C-1000’s compliance with NHTSA standards cannot be relied upon and so notified the Securities and Exchange Commission. We also disclosed we identified a number of enhancements to our production process and the design of the C-1000 vehicles to address customer feedback, primarily related to payload capacity.

The certification testing was completed in February 2022. Upon completion of this review, the C-1000 platform was determined to be eligible for certification and reintroduction as a limited production vehicle with constrained cargo capacity. In addition, further modifications to the vehicles will be made during the required FMVSS remediation process, including a redesigned front suspension as well as supplier corrective action in certain components. We expect the entire fleet of currently manufactured C-1000s will have the required corrected actions applied during 2022, with the majority of the recalled vehicles returned to the customers.

Due to the uncertainties and many variables involved in NHTSA matters, we cannot estimate the ultimate resolution of this matter and whether it will have a material adverse effect on the Company's financial position, results of operations, cash flows or liquidity. We are cooperating with NHTSA with respect to the recall of the outstanding vehicles, however, we cannot assure that NHTSA or other government authorities will not attempt to impose potentially significant fines and penalties in response to the recall.

On October 19 and November 1, 2021, the Company received letters from the SEC requesting that it voluntarily provide information relating to (a) the events and trading in its securities leading up to the announcement of the award of a contract by the U.S. Postal Service (the “USPS”) for the manufacture of a postal service vehicle fleet and (b) recognition of revenue, if any, related to purchases of vehicles by certain of the Company’s customers. On November 5, 2021, the Department of Justice (“DOJ”) orally informed the Company that it had a related open investigation covering the Company. The Company has not received any subpoena or other request for documents or other information from the DOJ with respect to this investigation. The Company is cooperating with the SEC and DOJ investigations. At this point, the Company cannot predict the eventual scope, duration, or outcome of these matters.

During the second quarter of 2021, the Company became aware of a regulatory compliance issue related to our E-Series vehicles that will require retrofitting of such vehicles. Management continues to work on remediation of this issue and does not expect it to have a material impact on the Company’s financial condition and operations. Due to the uncertainties and many variables involved in regulatory matters, we cannot estimate the ultimate resolution of this issue and actual results may differ from our expectations.
Legal Proceedings

Securities Litigation

On March 8, 2021, Sam Farrar, individually and on behalf of other similarly situated purchasers of the Company’s securities, filed a putative class action complaint against the Company, Duane Hughes and Steve Schrader in the United States District Court for the Central District of California (Case 2:21-cv-02072) claiming violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On March 11, 2021, John Kinney, individually and on behalf of other similarly situated purchasers of the Company’s securities, filed a substantively identical putative class action complaint against the Company, Duane Hughes and Steve Schrader in the United States District Court for the Central District of California (Case 2:21-cv-02207) also claiming violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On May 18, 2021, the court consolidated the two cases and appointed Timothy M. Weis as lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995. On July 16, 2021, lead plaintiff filed an Amended Complaint. The Amended Complaint is now brought against the Company, Duane Hughes, Steve Schrader, Robert Willison and Gregory Ackerson, on behalf of purchasers of the Company’s securities from March 10, 2020 through May 10, 2021. It alleges the defendants violated the federal securities laws by intentionally or recklessly making material misrepresentations and/or omissions regarding the Company’s participation in the bidding process to manufacture the new fleet of USPS next generation delivery vehicles, the prospect of the USPS awarding the contract to Workhorse given alleged deficiencies in Workhorse’s proposal, the Company’s manufacturing abilities generally and the Company’s nonbinding “backlog” in its vehicles. Lead plaintiff seeks certification of a class and monetary damages in an indeterminate amount. The Company filed a motion to dismiss the Amended Complaint on September 3, 2021. On December 2, 2021, the Court denied in substantial part the Company's motion to dismiss, and, on January 18, 2022, the Company answered the remaining allegations in the Amended Complaint. On January 20, 2022, the Court issued a Scheduling Order setting the following dates: (1) June 12, 2023 as the deadline to file Motion for Class Certification; (2) December 9, 2023 as the deadline to complete all discovery; (3) January 8, 2024 as the deadline to have all other motions heard, including for summary judgment; (4) March 11, 2024 for a pre-trial conference; and (5) March 19, 2024 for the jury trial. The parties are now engaged in discovery. The Company believes the Securities Class Action is without merit and intends to vigorously pursue all legal avenues to fully defend itself.

Shareholder Derivative Litigation

On April 16, 2021, Romario St. Clair, derivatively on behalf of the Company, filed a stockholder derivative complaint in the Eighth Judicial District Court of the State of Nevada in and for Clark County (Case No. A-21-833050-B) for breach of fiduciary duty and unjust enrichment against Duane Hughes, Steve Schrader, Stephen Fleming, Robert Willison, Anthony Furey, H. Benjamin Samuels, Raymond J. Chess, Harry DeMott, Gerald B. Budde, Pamela S. Mader, Michael L. Clark and Jacqueline A. Dedo. In this action, the plaintiff alleges the defendants breached their fiduciary duties by allowing or causing the Company to violate the federal securities laws as alleged in the Securities Class Action discussed above and by selling Company stock and receiving other compensation while allegedly in possession of material non-public information about the prospect of the USPS awarding the contract to an electric vehicle manufacturer given electrifying the USPS’s entire fleet allegedly would be impractical and expensive. The plaintiff seeks damages and disgorgement in an indeterminate amount. Several nearly identical derivative complaints have been filed: (1) on May 19, 2021, Caruso v. Hughes et al. (Case No. 2:21-cv-04202) was filed in the Central District of California; (2) on May 24, 2021, Kistenmacher v. Hughes et al. (Case No. 2:21-cv-04294) was filed in the Central District of California; (3) on May 27, 2021, Brown v. Hughes et al. (Case No. 2:21-cv-04412) was filed in the Central District of California; (4) on June 24, 2021 Everson v. Hughes et al. (Case No. A-21-836888-B) was filed in the Eighth Judicial District Court of the State of Nevada in and for Clark County; and (5) on September 21, 2021, Cohen v. Hughes et al. (Case No. 1:21-cv-00601) was filed in the United States District Court for the Southern District of Ohio.

On June 21, 2021, the Court ordered the three cases filed in the Central District of California be consolidated and thereafter stayed the action pending the outcome in the Securities Class Action discussed above; the stay was lifted after the December 2, 2021 Order was entered in the Securities Class Action. On April 18, 2022, the plaintiffs filed their consolidated amended complaint, which now includes the additional allegations made in the Amended Complaint in the Securities Class Action discussed above, and names Gregory Ackerson as an additional defendant. Defendants’ response to the consolidated amended complaint is due June 2, 2022, plaintiffs’ opposition to any motion filed by defendants in response would then be due July 18, 2022 and defendants’ reply in support of any motion they may file would then be due August 8, 2022.

On November 5, 2021, the Court granted the parties' stipulation transferring the Cohen action (which now bears Case No. 2:21-08734) to the Central District of California, where it was eventually assigned to Judge Cormac J. Carney (who presides over the Securities Class Action and the consolidated Central District of California action). On March 18, 2022, the defendants and the Company filed a motion to stay the Cohen action, and the defendants filed motions to dismiss the Cohen action. The Company filed its answer concurrently therewith. The plaintiffs’ oppositions to the motions are due May 2, 2022, and the
defendants’ and the Company’s replies in support of the motions (where applicable) are due May 23, 2022. The hearing date for the motions is currently set for June 6, 2022.

On January 7, 2022, the Court ordered the two cases filed in Eight Judicial District Court of the State of Nevada in and for Clark County be consolidated under the St. Clair action. On January 24, 2022, the plaintiffs in the consolidated St. Clair action filed their consolidated amended complaint, which was also revised to include the additional allegations made in the Amended Complaint in the Securities Class Action discussed above. On March 22, 2022 the defendants and the Company filed a motion to stay the St. Clair consolidated action, and the defendants filed motions to dismiss the St. Clair consolidated action, which the Company joined in with respect to the arguments related to the plaintiffs’ lack of standing. The plaintiffs’ oppositions to the motions are due May 13, 2022, and the defendants’ replies in support of the motions are due June 17, 2022. The hearing date for the motions is currently set for June 30, 2022.

Although these actions purport to seek recovery on behalf of the Company, the Company will incur certain expenses due to indemnification and advancement obligations with respect to the defendants. The Company understands that defendants believe this action is without merit and intends to support them as they pursue all legal avenues to defend themselves fully.