Notes to Consolidated Financial Statements
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
Nature of operations
Workhorse Group Inc. (“Workhorse”, the “Company”, “we”, “us” or “our”) is a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. We are an American manufacturer who designs and builds high performance electric vehicles. As part of our solutions, we also develop cloud-based, real-time telematics performance monitoring systems that enable fleet operators to optimize energy and route efficiency. We are currently focused on bringing the C-Series electric delivery truck to market and fulfilling our existing backlog of orders. We are also exploring other opportunities in monetizing our intellectual property which could include a sale, license or other arrangement of assets that are outside of our core focus.
Principles of consolidation
The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Basis of presentation
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has limited revenue and a history of negative working capital and stockholders’ deficits. Our existing capital resources will be insufficient to fund our operations through the 2020. Unless and until we are able to generate a sufficient amount of revenue, reduce our costs and/or enter into a strategic relationship, we expect to finance future cash needs through public and/or private offerings of equity securities and/or debt financings. If we are not able to obtain additional financing and/or substantially increase revenue from sales, we will be unable to continue as a going concern. These conditions raise substantial doubt about the ability of the Company to continue as a going concern.
In view of these matters, continuation as a going concern is dependent upon the continued operations of the Company, which, in turn, is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and successfully carry out its future operations. The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary, should the Company not continue as a going concern.
The Company has continued to raise capital and debt. Management believes the proceeds from these offerings, future offerings, and the Company’s anticipated revenue, provides an opportunity to continue as a going concern. If additional funding is required, the Company plans to obtain working capital from either debt or equity financing from the sale of common, preferred stock, and/or convertible debentures. Obtaining such working capital is not assured. The Company is currently in a production ramp up mode and placing greater emphasis on manufacturing capability.
Reclassifications
Certain reclassifications were made to the prior year 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.
Financial instruments
The carrying amounts of financial instruments including cash, inventory, accounts payable and the Convertible Note 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 doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs and collections and current 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:
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Buildings
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15 - 39 years
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Software
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3 - 6 years
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Equipment
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5 years
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Vehicles and prototypes
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3 - 5 years
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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
We have elected the measurement alternative allowed under generally accepted accounting principles ("GAAP") for our investment in Lordstown Motor Corp. ("LMC"), which does not have a readily determinable fair value. Under the measurement alternative, we measure this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions in an identical or similar investment in LMC.
At each reporting period, we evaluate our investment in LMC to determine if there are any events or circumstances that are likely to have a significant adverse effect on the fair value of the investment. Examples of such impairment indicators include, but are not limited to, a significant deterioration in earnings performance, recent financing rounds at reduced valuations, a significant adverse change in the regulatory, economic or technological environment of an investee or a significant doubt about an investee’s ability to continue as a going concern. If we identify an impairment indicator, we will estimate the fair value of the investment and compare it to its carrying value. Our estimation of fair value considers financial information related to the investee available to us, including valuations based on recent third-party equity investments in the investee. If the fair value of the investment is less than its carrying value, the investment is impaired and we recognize an impairment loss equal to the difference between an investment’s carrying value and its fair value measured under the measurement alternative.
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. 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.
Activity for the Company's warranty accrual is as follows:
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December 31,
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2019
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2018
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Balance at beginning of year
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$
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7,058,769
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$
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142,560
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Accrual for warranty
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92,191
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7,981,413
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Warranty costs incurred
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(1,149,096)
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(1,065,204)
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Balance at end of year
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$
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6,001,864
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$
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7,058,769
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Fair value option
As permitted under ASC 825, Financial Instruments, (“ASC 825”), the Company has elected the fair value option to account for its Convertible Note that was issued during 2019. In accordance with ASC 825, the Company records its Convertible Note at fair value with changes in fair value recorded in the Consolidated Statement of Operations in Interest Expense. As a result of applying the fair value option, direct costs and fees related to the Convertible Note 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 loss per share
Basic loss per share is computed by dividing net 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 Note. For all periods presented, due to the Company’s net losses, all of the common stock equivalents were anti-dilutive and excluded from the calculation of diluted loss per share.
The following table shows the computation of basic and diluted earnings per share:
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Years Ended December 31,
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2019
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2018
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Net loss
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$
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(37,162,827)
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$
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(36,502,316)
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Deemed dividends
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86,207
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765,179
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Net loss attributable to common stockholders
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$
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(37,249,034)
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$
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(37,267,495)
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Basic weighted average shares outstanding
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64,314,756
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50,377,909
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Dilutive effect of options and warrants
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—
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—
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Dilutive effect of Convertible Note
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—
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—
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Diluted weighted average shares outstanding
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64,314,756
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50,377,909
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Anti-dilutive options and warrants excluded from diluted average shares outstanding
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36,021,502
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21,686,465
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Excluded from the above table are the shares on the conversion of the Convertible Note, which are convertible into 13,278,689 shares of common stock at December 31, 2019.
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 Note and litigation-related accruals. Actual results could differ from our estimates.
2. INVENTORY, NET
Inventory, net consists of the following:
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December 31,
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2019
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2018
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Raw materials
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$
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3,741,097
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$
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4,319,637
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Work in process
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422,176
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702,079
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Finished goods
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—
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—
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4,163,273
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5,021,716
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Less: Inventory reserve
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(2,365,127)
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(2,488,100)
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Total Inventory, net
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$
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1,798,146
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$
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2,533,616
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During the years ended December 31, 2019 and 2018, the Company recorded an increase in its inventory reserve of approximately $0.7 million and $2.5 million. In 2019, certain raw materials that were included in the inventory reserve as of December 31, 2018 were disposed of and reduced the reserve. The reserve relates to the Company’s strategic switch from the legacy E-GEN/E-100 platform to our C-Series platform. Certain raw materials and work in process were unique to the E-GEN/E-100 vehicles and cannot be repurposed.
3. REVENUE
Revenue Recognition
Net sales include products and shipping and handling charges, net of estimates for customer allowances. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. The majority of our contracts have a single performance obligation and are short term in nature.
Revenues related to repair and maintenance services are recognized over time as services are provided. Payment for used vehicles, services, and merchandise are typically received at the point when control transfers to the customer or in accordance with payment terms customary to the business.
Accounts Receivable
Credit is extended based upon an evaluation of the customer’s financial condition. Accounts receivable are stated at their estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts and our historical experience with accounts receivable write-offs.
As performance obligations are satisfied within one year from a given reporting date we omit disclosures of the transaction price apportioned to remaining performance obligations on open orders.
Disaggregation of Revenue
Our revenues related to the following types of business were as follows:
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Years Ended December 31,
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2019
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2018
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Automotive
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$
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240,280
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$
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498,000
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Other
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136,282
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265,173
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Total revenues
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$
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376,562
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$
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763,173
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Automotive – consists of sales of any of our truck platforms. We recognize revenue when control transfers upon shipment to the customer.
Other – consists of our former Delivery Service Protocol program, grant-related research work and non-warranty after-sales vehicle services.
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following:
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December 31,
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2019
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2018
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Land
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$
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700,000
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$
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700,000
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Buildings
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5,900,000
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5,900,000
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Leasehold Improvements
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—
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19,236
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Software
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28,352
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102,367
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Equipment
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860,104
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836,646
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Construction in progress
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1,925,500
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—
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Vehicles and prototypes
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65,529
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86,679
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9,479,485
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7,644,928
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Less: accumulated depreciation
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(2,649,304)
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(2,407,477)
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Property, plant and equipment, net
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$
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6,830,181
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$
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5,237,451
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5. CONVERTIBLE NOTE AND LONG-TERM DEBT
Convertible Note and long-term debt consists of the following:
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December 31,
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2019
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2018
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Convertible Note, at fair value
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$
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39,020,000
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$
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—
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Marathon Tranche I Loan
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—
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10,000,000
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Marathon Credit Agreement unamortized debt discount and issuance costs
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—
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(1,687,921)
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Net Marathon Credit Agreement
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—
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8,312,079
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Total long-term debt
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39,020,000
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8,312,079
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Less current portion
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19,620,000
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—
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Long-term debt, net of current portion
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$
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19,400,000
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$
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8,312,079
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Aggregate maturities of the Convertible Note are as follows:
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2020
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$
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19,500,000
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2021
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18,000,000
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2022
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3,000,000
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$
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40,500,000
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The amounts in the aggregate maturities table only include the par value of the Convertible Note to be repaid and does not include the additional 12% premium described below. The 2019 year includes the remaining $4.5 million the Company is required to convert by April 2020 and all of the Redemption Payments (described below).
The current portion of the Convertible Note includes the remaining $4.5 million required to be converted through April 1, 2020, as well as the Redemption Payment (described below) due in 2020.
Amortization expense for debt issuance costs and unamortized discounts was $1,922,164 and $2,348,289 for the years ended December 31, 2019 and 2018, respectively.
Convertible Note
On December 9, 2019, the Company issued a $41.0 million par value Convertible Note (the "Convertible Note") due November 2022, with a stated interest rate of 4.50% per annum. The Company has elected to account for the Convertible Note using the fair value option allowed under GAAP. The fair value of the Convertible Note was $38.5 million on December 9, 2019. The Convertible Note was issued at 95% of par. Interest is payable quarterly beginning February 1, 2020. The Convertible Note is initially convertible at a rate of $3.05 per share subject to change for anti-dilution adjustments or certain corporate events.
The Company is required to convert a minimum of $5.0 million of the Convertible Note for the period by April 1, 2020. During the year ended December 31, 2019, $0.5 million par value of the Convertible Note was converted into 185,186 shares of common stock resulting in a gain of $83,089, which is included in Interest Expense. Subsequent to December 31, 2019, an additional $4.5 million par value of the Convertible Note was converted into 1,546,889 shares of common stock.
As of December 31, 2019, the fair value of the Convertible Note was $39.0 million and the contractual principal balance was $40.5 million. In electing the fair value option, the Company recognizes changes in fair value related to changes in credit risk, if any, in Other Comprehensive Income and the remaining change in fair value in Interest Expense. For the year ended December 31, 2019, the fair value of the Convertible Note increased $1.0 million which is included in Interest Expense. No portion of the change in fair value was related to changes in credit risk for the period.
Any principal repayment of the Convertible Note is at 112% of the par value. Beginning March 1, 2020 the holder of the Convertible Note may require the Company to redeem up to $1.5 million par value ("Redemption Payment") of the Convertible Note monthly. Subject to certain limitations, the Company at its discretion can pay some or all of Redemption Payment in cash or shares of common stock.
The Convertible Note is a senior secured obligation of the Company secured by substantially all assets of the Company and rank senior to all unsecured debt of the Company. The Convertible Note contains certain covenants, including that we maintain at all times liquidity calculated as unrestricted, unencumbered cash and cash equivalents in a minimum amount of $8.0 million.
The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the Convertible Note (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives. The significant inputs to the valuation of the Convertible Note at fair value are Level 3 inputs since they are not observable directly. The fair value was determined using a binomial lattice valuation model, which is widely used for valuing convertible notes. The significant assumptions used in the model are the credit spread and volatility of the Company's common stock.
The Convertible Note was issued with 15,459,016 warrants to purchase common stock of the Company. The exercise price is the greater of the conversion price of the Convertible Note on the day the warrants become exercisable or the weighted average 30 day price of our common stock. The initial exercise price was $3.05 per share. The warrants are only exercisable at the option of the Company following the full or partial redemption of the Convertible Note. The Convertible Note and the warrants were determined to be freestanding instruments and were accounted for separately. The warrants are classified as equity instruments and the fair value has been estimated to be $0.4 million on December 9, 2019 and recorded as an increase to Additional Paid-In Capital.
Marathon Credit Agreement
On December 31, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”), with Marathon Asset Management, LP, on behalf of certain entities it manages (collectively, the “Lenders”). The Credit Agreement provided the Company with $10 million of term loans (the “Tranche One Loans”) and $25 million of revolving term loans (the Tranche Two Loans together with the Tranche One Loans, the “Loans”).
The Loans bore interest at a rate per annum equal to LIBOR plus 7.625%. The interest rate at December 31, 2018, was 10.4% per annum.
In conjunction with entering into the Credit Agreement, the Company issued a Common Stock Purchase Warrant to purchase 8,053,390 shares of common stock at an exercise price of $1.25 per share (the “Initial Warrants”). Until December 31, 2020 even after the payoff of the Loans, the Company is required to issue additional Common Stock Purchase Warrants (the “Additional Warrants”) to the Lenders equal to 10%, in the aggregate, of any additional issuance. The initial exercise price is 110% of the issuance price of the applicable issuance.
The Marathon Credit Agreement and Initial Warrants were determined to be freestanding instruments and were accounted for separately. The Initial Warrants do not qualify for equity classification and have been classified as liability instruments. The value of the Initial Warrants on the date of the Credit Agreement was estimated to be $965,747 which was determined using the Black-Scholes valuation model and was recorded as a liability with the offset being recorded as a debt discount. The liability for the Initial Warrants are marked-to-market quarterly in accordance with liability accounting with a corresponding charge to Interest Expense.
The closing costs associated with the Marathon Credit Agreement were allocated based on proportional value to the Tranche One Loan, Tranche Two Loan and the Initial Warrants. Costs of $722,174 allocated to Tranche 1 were recorded as a debt discount; costs of $1,830,435 allocated to Tranche 2 were recorded as a prepaid asset and were amortized over the expected life of the loan; and costs of $69,744 allocated to the Initial Warrants were expensed in the year ended December 31, 2018.
As of December 31, 2019 and 2018, the liability for the Initial Warrants was $16,335,000 and $965,747, respectively. Any additional warrants issued in connection with the Credit Agreement are classified as equity instruments and are not marked-to-market at each balance sheet date as they do not include the features of the Initial Warrants that required liability accounting.
A loss on extinguishment of approximately $6.1 million was recognized on the payoff of the Marathon Loans and is recorded within Interest Expense in the accompanying Consolidated Statements of Operations for the year ended December 31, 2019. The loss on extinguishment includes a $3.4 million premium which was payable on the early payoff of the Marathon Loans.
Arosa Loan Agreement
In 2018, the Company entered into a $7.8 million term loan with a fund managed by Arosa (the “Arosa Loan”). The interest rate for the Arosa Loan was 8% per annum. On December 31, 2018, proceeds from the Marathon Credit Agreement were utilized to repay all outstanding amounts under the Arosa Loan.
In conjunction with the Arosa Loan, the Company issued Arosa a warrant to purchase 5,000,358 shares of common stock of the Company at an exercise price of $2.00 per share exercisable in cash only for a period of five years. While the Arosa Loan remained outstanding, the Company was required to issue additional warrants to purchase common stock equal to 10% of any additional issuance of common stock.
The Arosa Loan and related warrants were considered freestanding instruments and were accounted for separately. The warrants did not qualify for equity accounting and liability treatment was applied. The fair value of the warrants on the date of the Arosa Loan was estimated to be $3,540,542, using the Black-Scholes valuation method and was recorded as a liability with the offset being recorded as a debt discount. Through and including December 31, 2018, the warrants held by Arosa were required to be marked-to-market as the warrants were classified as liabilities. On January 1, 2019, the warrants no longer included anti-dilution protection and no longer met the criteria for liability classification at which time they were reclassified to equity. As a result of the 2019 reclassification event, the $857,072 Arosa warrant liability was reclassified to Additional Paid-In Capital.
On August 14, 2018 the Company issued Arosa a warrant to acquire 1,143,200 shares of common stock at an exercise price of $1.21 following the closing of the Company's August 2018 public offering. On October 1, 2018, the Company issued Arosa a warrant to acquire 108,768 shares of common stock at an exercise price of $1.60 warrants, due to our third quarter At The Market (“ATM”) offerings. On the payoff of the Arosa Loan, the Company issued Arosa a Warrant to purchase 894,821 shares of common stock exercisable at $1.25 per share.
A loss on extinguishment of approximately $2.2 million was recognized on the payoff of the Arosa Loan which is recorded in Interest Expense in the accompanying Consolidated Statement of Operations for the year ended December 31, 2018.
6. DUKE FINANCING OBLIGATION
On November 28, 2018, the Company entered into a Sales Agreement to sell Duke Energy One, Inc. (“Duke”) 615,000 battery cells (the “ Cells”) for $1,340,700. Workhorse continued to use the Cells for the delivery of trucks.
The Duke transaction was accounted for as a financing obligation and a $1,340,700 liability was recorded. The Company exercised an option to purchase the Cells for a price of $2.18 per cell on December 11, 2019 at which time the financing obligation was repaid.
In consideration for consenting to the Company selling the Cells to Duke, which served as collateral for the Arosa Loan Agreement, the Company issued Arosa 2,000,000 shares of common stock and restruck the exercise price of previously issued warrants to $1.25 per share.
7. MANDATORY REDEEMABLE SERIES B PREFERRED STOCK
On June 5, 2019, the Company closed agreements for the sale of 1,250,000 units consisting of one share of Series B Preferred Stock (the “Preferred Stock”), with a stated value of $20.00 per share (the “Stated Value”) and a common stock purchase warrant to purchase 7.41 shares of the common stock (the “Warrants”) for an aggregate purchase price of $25.0 million. The Preferred Stock is not convertible and does not have voting rights.
The Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights upon liquidation, winding-up or dissolution. The Preferred Stock is entitled to annual dividends at a rate equal to 8.0% per annum on the Stated Value. Accrued dividends will be payable quarterly in shares of common stock of the Company based on a fixed share price of $1.62. The Warrants have an exercise price of $1.62 per share and expire seven years from the date of issuance.
In June 2023, the Company is required to redeem all the outstanding shares of the Preferred Stock at the Stated Value, plus accrued and unpaid dividends. At any time prior to such date, the Company may redeem any outstanding shares of Preferred Stock at the Stated Value, plus accrued and unpaid dividends.
The aggregate number of shares of common stock issued in payment of dividends on the Preferred Stock when added to the number of shares of common stock issued upon exercise of any warrants shall not exceed 19.9% of either (a) the total number of shares of common stock outstanding on the date hereof; or (b) the total voting power of the Company’s securities outstanding on the date hereof that are entitled to vote on a matter being voted on by holders of the common stock, unless and until the Company obtains stockholder approval permitting such issuances.
As the Preferred Stock is mandatorily redeemable, it is classified as a liability on the Consolidated Balance Sheets. All dividends payable on the Preferred Stock are classified as Interest Expense.
The Preferred Stock and Warrants are considered freestanding financial instruments and have been accounted for separately. The Warrants are considered equity instruments and not marked-to-market at each reporting period. On the date of issuance, the value of the Warrants was $6.7 million, which was determined using the Black-Scholes valuation model. The fair value of the Warrants was recorded as an increase to Additional Paid-In Capital and a discount of the Preferred Stock. The discount is being amortized to Interest Expense using the effective interest method through May 2023. Amortization of the discount was $0.9 million for the year ended December 31, 2019.
8. INCOME TAXES
For the years ended December 31, 2019 and 2018, the Company has net losses and no current tax expense was recorded. The Company has recorded a full valuation allowance on its deferred tax assets for the years ended December 31, 2019 and 2018 and no deferred tax expense was recorded.
The components of the provision for income tax is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
Current
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
State and Local
|
—
|
|
|
—
|
|
Total Current
|
—
|
|
|
—
|
|
|
|
|
|
Deferred
|
|
|
|
Federal
|
—
|
|
|
—
|
|
State and Local
|
—
|
|
|
—
|
|
Total Deferred
|
—
|
|
|
—
|
|
|
|
|
|
Total provision for income taxes
|
$
|
—
|
|
|
$
|
—
|
|
The reconciliation of the statutory federal income tax with the provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
Federal tax benefit at statutory rates
|
21.0
|
%
|
|
21.0
|
%
|
State and local taxes
|
(0.6)
|
%
|
|
0.8
|
%
|
Mark-to-market adjustment on stock warrants
|
(9.3)
|
%
|
|
1.5
|
%
|
Other permanent differences and credits
|
(0.8)
|
%
|
|
0.0
|
%
|
Change in valuation allowance
|
(10.3)
|
%
|
|
(23.3)
|
%
|
|
|
|
|
Total tax benefit
|
0.0
|
%
|
|
0.0
|
%
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided against deferred tax assets when, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. The Company cannot be certain that future taxable income will be sufficient to realize its deferred tax assets, and accordingly a full valuation allowance has been provided on its deferred tax assets. The valuation allowance increased by approximately $3.8 million and $8.5 million during the years ended December 31, 2019 and 2018, respectively.
Components of the Company’s deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2019
|
|
2018
|
Deferred Tax Assets:
|
|
|
|
Accrued expenses and reserves
|
$
|
802,526
|
|
|
$
|
850,857
|
|
Warranty reserve
|
1,275,047
|
|
|
1,539,765
|
|
Non-qualified stock options
|
961,919
|
|
|
1,034,261
|
|
Property, plant and equipment
|
202,755
|
|
|
183,917
|
|
Disallowed interest expense
|
—
|
|
|
1,118,212
|
|
Other temporary differences
|
(88,200)
|
|
|
—
|
|
Net operating losses
|
30,213,192
|
|
|
24,818,785
|
|
Total Deferred Tax Assets
|
33,367,239
|
|
|
|
29,545,797
|
|
Valuation Allowance
|
(33,367,239)
|
|
|
(29,545,797)
|
|
Total Deferred Tax Assets, net of valuation allowance
|
$
|
—
|
|
|
$
|
—
|
|
At December 31, 2019, the Company has approximately $90.6 million, of federal net operating loss (“NOL”) carry-forwards which expire through 2037 and approximately $49.7 million of federal NOLs that carry-forward indefinitely. Additionally, at December 31, 2019, the Company has approximately $0.8 million of state and local NOLs carry-forwards which expire through 2038. The NOL carry-forwards may be limited in certain circumstances, including ownership changes.
Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carry-forwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Certain tax attributes are subject to an annual limitation as a result of certain cumulative changes in ownership interest of significant shareholders which could constitute a change of ownership as defined under Internal Revenue Code Section 382. The Company has not yet analyzed whether it has experienced an ownership change for this purpose to determine if any of the net operating losses to date have a limitation on future deductibility.
Tabular reconciliation of unrecognized tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Unrecognized tax benefits - January 1
|
$
|
1,163,282
|
|
|
$
|
1,163,282
|
|
Gross increases - tax positions in prior period
|
—
|
|
|
—
|
|
Gross decreases - tax positions in prior period
|
—
|
|
|
—
|
|
Gross increases - tax positions in current period
|
—
|
|
|
—
|
|
Settlement
|
—
|
|
|
—
|
|
Lapse of statute of limitations
|
—
|
|
|
—
|
|
Unrecognized tax benefits - December 31
|
$
|
1,163,282
|
|
|
$
|
1,163,282
|
|
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2019, and 2018, due to the Company’s continued losses, no amounts of interest and penalties have been recognized in the Company’s consolidated statements of operations. If the unrecognized tax benefits were reversed, a deferred tax asset and corresponding valuation allowance would be recorded, and thus the reversal would have no impact on the effective rate.
The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and local jurisdictions. Generally, the Company’s 2016 through 2018 tax years remain open and subject to examination by federal, state and local taxing authorities. However, federal, state, and local net operating losses from 2009 through 2018 are subject to review by taxing authorities in the year utilized.
9. FAIR VALUE MEASUREMENTS
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 — Quoted market prices in active markets for identical assets or liabilities.
Level 2 — Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 — Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The Company's warrant liability was measured at fair value using Level 3 inputs on issuance and at each reporting date. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value models include: the estimates of the redemption dates; credit spreads; dividend payments; and the market price and volatility of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
The following table sets forth a reconciliation of the warrant liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Warrant liability, beginning of year
|
|
$
|
1,822,819
|
|
|
|
$
|
—
|
|
Fair value for new warrants issued
|
|
—
|
|
|
|
4,506,289
|
|
Change in fair value for the year
|
|
15,369,253
|
|
|
(2,683,470)
|
|
Reclassification to additional paid-in capital
|
|
(857,072)
|
|
|
—
|
|
Warrant liability, end of year
|
|
$
|
16,335,000
|
|
|
$
|
1,822,819
|
|
The Company's Convertible Note was measured at fair value using Level 3 inputs on issuance and at each reporting date. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value model includes: the estimates of the redemption dates; credit spreads; and the market price and volatility of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
The following table sets forth a reconciliation of the Convertible Note:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Convertible Note, beginning of year
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Fair value of Convertible Note on issuance
|
|
38,520,000
|
|
|
|
—
|
|
Conversion of Convertible Note into common stock
|
|
(481,728)
|
|
|
—
|
|
Change in fair value for the year
|
|
981,728
|
|
|
—
|
|
Convertible Note, end of year
|
|
$
|
39,020,000
|
|
|
$
|
—
|
|
10. STOCK-BASED COMPENSATION
The Company maintains, as approved by the board of directors, the 2019 Stock Incentive Plan (the “Plan”) providing for the issuance of stock-based awards to employees, officers, directors or consultants of the Company. Non-qualified stock options may only be granted with an exercise price equal to the market value of the Company’s common stock on the grant date. Awards under the plans may be either vested or unvested options, or unvested restricted stock. The Plan has authorized 8,000,000 shares for issuance of stock-based awards. As of December 31, 2019, there were 8,029,778 shares available for issuance of future stock awards, which includes shares available under the 2019 and 2017 Incentive plans.
Stock-based compensation expense
The following table summarizes stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Stock options
|
$
|
1,542,644
|
|
|
$
|
1,059,582
|
|
Restricted stock
|
437,354
|
|
|
—
|
|
Total stock-based compensation expense
|
$
|
1,979,998
|
|
|
$
|
1,059,582
|
|
In November 2019, the vesting for 1,000,000 stock options issued to an officer of the Company were accelerated, resulting in the remaining unvested compensation of $460,000 being recognized in the year ended December 31, 2019.
Stock options
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted
Average
Exercise Price
per Option
|
|
Weighted
Average Grant
Date Fair Value
per Option
|
|
Weighted
Average
Remaining Contractual Life (Years)
|
Balance December 31, 2017
|
|
3,851,371
|
|
|
$
|
3.11
|
|
|
|
|
|
|
Granted
|
|
340,000
|
|
|
1.18
|
|
|
0.54
|
|
|
|
Exercised
|
|
(52,500)
|
|
|
1.24
|
|
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Expired
|
|
(271,250)
|
|
|
3.22
|
|
|
|
|
|
|
|
Balance December 31, 2018
|
|
3,867,621
|
|
|
4.05
|
|
|
|
|
|
|
Granted
|
|
2,450,000
|
|
|
0.96
|
|
|
0.51
|
|
|
|
Exercised
|
|
(736,552)
|
|
|
0.72
|
|
|
|
|
|
|
|
Forfeited
|
|
(907,500)
|
|
|
4.49
|
|
|
|
|
|
Expired
|
|
(948,569)
|
|
|
5.01
|
|
|
|
|
|
|
|
Balance December 31, 2019
|
|
3,725,000
|
|
|
$
|
2.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options exercisable at December 31, 2019
|
|
3,069,000
|
|
|
$
|
2.35
|
|
|
|
|
5.4
|
As of December 31, 2019, unrecognized compensation expense was $0.5 million for unvested options which is expected to be recognized over the next 2.0 years.
Restricted stock
The following table summarizes restricted stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Unvested Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
Balance December 31, 2018
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
1,805,222
|
|
|
2.57
|
|
Vested
|
|
(36,496)
|
|
|
2.74
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Balance December 31, 2019
|
|
1,768,726
|
|
|
$
|
2.57
|
|
As of December 31, 2019, unrecognized compensation expense was $4.2 million for unvested restricted stock awards which is expected to be recognized over the next 2.3 years.
11. RECENT PRONOUNCEMENTS
Accounting Guidance Adopted in 2019
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize in the Consolidated Balance Sheet a liability to make lease payments (“the lease liability”) and a right-of-use asset representing its right to use the underlying asset for the lease term, initially measured at the present value of the lease payments. A lessee shall classify a lease as a finance lease or an operating lease.
Amortization of the right-of-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases on a straight-line basis over the lease term. The amendments in this update were applied using the current period adjustment method on January 1, 2019. The adoption of this standard did not have a material impact on the Consolidated Financial Statements.
Accounting Guidance Not Yet Adopted
In June 2016, the FASB issued an accounting standard update that revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The guidance is effective for the Company on January 1, 2023, including interim periods and should be applied on a modified retrospective basis. The Company expects that the adoption of this guidance will not have a material impact on the Company's financial condition and operations.
12. STOCKHOLDERS' EQUITY
2018 Stock Offerings
In 2017, the Company entered into an at the market issuance sales agreement (the “Cowen Agreement”) with Cowen and Company, LLC under which the Company sold shares of its Common Stock having an aggregate offering price of up to $25.0 million. For the year ended December 31, 2018, the Company issued 1,794,621 shares for proceeds of $3.7 million under the Cowen Agreement.
On April 26, 2018, the Company closed subscription agreements with accredited investors who purchased 531,066 shares of the Company’s common stock for a price of $1.4 million or $2.72 per share. Stephen Burns, Benjamin Samuels, Gerald Budde and Julio Rodriguez, executive officers and/or directors of the Company at the time of the offering, participated in this offering.
On June 4, 2018, the Company and holders of Warrants to Purchase Common Stock issued on September 18, 2017 (the “Warrants”) entered into exchange agreements, pursuant to which the Company issued 1,968,736 shares of common stock in exchange for the Warrants. In the second quarter of 2018, the “Down Round” feature of the Warrants was triggered causing the strike price to decrease from $3.80 per share to $2.62 per share. As a result, the Company recorded a $765,179 deemed
dividend which represents the value transferred to the Warrant holders from the Down Round feature. The deemed dividend was recorded as a reduction of Retained Earnings and increase in Additional Paid-in-Capital and increased net loss to common stockholders by the same amount.
In August 2018, the Company entered into an Underwriting Agreement with National Securities Corporation for the public offering of 10,288,800 shares of Common Stock at a price per share of $1.15 for net proceeds of $10.9 million.
2019 Stock Offerings
In February 2019, the Company sold 1,616,683 shares of common stock to investors (the “February 2019 Investors”) for net proceeds of $1.5 million. Through July 2019, if the Company issued shares of its common stock for a lower price per share than the price paid by the February 2019 Investors (a “Down Round”), the Company was required to issue additional shares of common stock (for no additional consideration) resulting in the effective purchase price per share being equal to the purchase price per share paid in the Down Round. On May 1, 2019 the Down Round provision of the agreement was triggered and an additional 116,496 shares of common stock were issued to the February 2019 Investors which was accounted for as a $86,207 deemed dividend. The deemed dividend was recorded as a reduction of Retained Earnings and increase in Additional Paid-in-Capital and increased the net loss to common stockholders by the same amount.
Benjamin Samuels and Gerald Budde, directors of the Company, acquired 841,928 and 26,310 shares of common stock, respectively, as part of the February 2019 offering at a price per share of $0.95, which was above the closing price the date prior to close. They did not receive the Down Round protection.
On May 1, 2019, the Company closed a registered public offering for the sale of 3,957,432 shares of common stock for a purchase price of $0.74 per share for net proceeds of approximately $2.9 million.
In 2019 the Company sold 1,609,373 shares of common stock under the Cowen Agreement for net proceeds of approximately $1.5 million. The Cowen Agreement was canceled in the first quarter of 2019.
Warrants
In connection with the issuance of debt, common stock and preferred stock, the Company has issued warrants to purchase shares of the Company's common stock. The following table summarizes warrant activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Warrants
|
|
Weighted Average Exercise Price per Warrant
|
|
|
|
|
|
Balance December 31, 2017
|
|
2,618,307
|
|
|
$
|
5.28
|
|
Granted, Arosa Loan Agreement
|
|
7,147,147
|
|
|
|
|
Granted, Marathon Credit Agreement
|
|
8,053,390
|
|
|
|
|
Exercised
|
|
—
|
|
|
|
|
Balance December 31, 2018
|
|
17,818,844
|
|
|
1.84
|
|
Granted, Series B Preferred Stock
|
|
9,262,500
|
|
|
|
|
Granted, Marathon Credit Agreement
|
|
3,379,466
|
|
|
|
|
Granted, Other
|
|
66,966
|
|
|
|
Exercised
|
|
—
|
|
|
|
|
Balance December 31, 2019
|
|
30,527,776
|
|
|
$
|
1.82
|
|
The above table excludes 15,459,016 warrants issued with the Convertible Note. The warrants are only exercisable at the option of the Company following the full or partial redemption of the Convertible Note.
13. RELATED PARTIES
The Company obtains its property and casualty insurance through Assured Partners NL, LLC ("Assured"), which one of our directors, Gerald Budde, is Eastern Region Chief Financial Officer of AssuredPartners, Inc. The placement of insurance was completed by an agent outside of the Eastern Region and Mr. Budde did not participate in any decisions about insurance, nor was he paid any portion of the brokerage fee. Assured earned brokerage fees of approximately $86,000 and $79,000 for the years ended December 31, 2019 and 2018, respectively.
On June 7, 2018, the Company received a $550,000 unsecured short-term loan from Stephen S. Burns, H. Benjamin Samuels, Gerald Budde and Ray Chess, each an executive officer and/or director of the Company (collectively, the “Related Parties”) at the time of the loan. The loan was paid off in August 2019. Interest accrued on the Related Parties notes at the rate of 12.0% per annum.
14. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for potential recognition and disclosures through the date the Consolidated Financial Statements were filed.
15. OTHER INCOME
The following summarizes other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Technology licensing income
|
$
|
12,194,800
|
|
|
$
|
—
|
|
Gain on divestiture
|
3,655,000
|
|
|
—
|
|
|
|
|
|
Total other income
|
$
|
15,849,800
|
|
|
|
$
|
—
|
|
LMC License Transaction
On November 7, 2019, the Company entered into a transaction with LMC 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 (the "LMC Transaction"). LMC was founded by Stephen S. Burns, a current stockholder and former Chief Executive Officer and Director of the Company.
In connection with the LMC Transaction, the following agreements (collectively, the “Agreements”) were entered into:
•Intellectual Property License Agreement between the Company and LMC (the “License Agreement”);
•Subscription Agreement between the Company and LMC (the “Subscription Agreement”);
•Voting and Registration Rights Agreement among the Company, LMC, and certain LMC stockholders (the “Voting Agreement”); and
•Consent and Waiver to Credit Agreement among the Company, Wilmington Trust, as agent, and the lenders under the Credit Agreement (defined below) (the “Consent and Waiver”).
LMC will endeavor to, among other things, raise sufficient third-party capital for the acquisition, retrofitting, and restart of the Lordstown Assembly Complex, and the ongoing operating costs, which amounts are expected to be significant (the “Capital Raise”). The Agreements provide that LMC would manufacture electric pickup trucks or similar vehicles under 10,001 gross vehicle weight using the Licensed Intellectual Property (the “Vehicles”).
LMC has exclusive rights to the Licensed Intellectual Property until the earliest of: (i) June 30, 2020, if the Capital Raise has not occurred; (ii) the second anniversary of the LMC Transaction, if LMC has not started regularly manufacturing Vehicles; (iii) the third anniversary of the LMC Transaction; and (iv) the date that any third-party automotive manufacturer acquires more
than ten percent of LMC’s outstanding common stock. The Licensed Intellectual Property excludes the Company’s intellectual property relating to delivery trucks for last mile delivery or commercial use. LMC will have the right, with limited exceptions, to match the best competing offer as a subcontractor for the Company should need to engage a subcontractor in connection with larger potential production contracts to assemble such vehicles utilizing its existing capabilities and technologies. The limited exceptions include the event in which the Company elects to award a subcontract for the manufacturing or assembly to a strategic partner owning in excess of 19% of the Company.
Consideration for the License Agreement is as follows:
•A ten percent ownership interest in the common stock of LMC in exchange for the Company’s obligations under the License Agreement. The LMC common stock received provides the Company with anti-dilution rights for two years. Under the Voting Agreement, the Company has the right to designate one director to LMC’s board of directors, subject to certain limitations.
•One percent of the aggregate debt and equity commitments funded to LMC upon completion of the Capital Raise (the “Minimum Royalty”). Any amount paid to the Company from the Capital Raise is non refundable.
•A one percent royalty on the gross sales price of the first 200,000 Vehicles sold, but only to the extent that the aggregate amount of such royalty fees exceeds the amount paid as the Royalty Advance.
•Upon completion of the Capital Raise, the Company intends to transfer approximately 6,000 existing Vehicles orders to LMC. LMC will pay a four percent commission on the gross sales price of any transferred orders fulfilled by LMC. The success of the Capital Raise is not within the Company’s control, and it therefore cannot provide assurance that it will receive the Royalty Advance or receive the projected underlying royalty from the production of Vehicles.
The consideration for the License Agreement 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 and was recorded in Other Income for the year ended December 31, 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 owned is sold.
Gain on divestiture
On November 27, 2019, the Company completed the sale of SureFly™ for $4.0 million. The gain on divestiture was $3.7 million, net of selling costs of $0.3 million. SureFly was the Company's hybrid electrically powered vertical takeoff and landing aircraft project. The Company had no revenues associated with SureFly in 2019 or 2018. Operating expenses associated with the development of Surefly were $1.4 million and $2.5 million in 2019 and 2018, respectively.
16. OTHER TRANSACTION
On October 31, 2019, the Company and ST Engineering Hackney, Inc. ("Seller") entered into an Asset Purchase Agreement ("Purchase Agreement") to purchase certain assets of Seller ("Acquired Assets") and assume certain liabilities of Seller. Upon execution of the Purchase Agreement, the Company deposited $1.0 million in cash and shares of its common stock having a value of $6.6 million ("Escrow Shares") into an escrow account ("Escrow Account") as collateral. The number of Escrow Shares is subject to adjustment if the value of the Escrow Shares is less than $5.28 million or greater than $7.92 million on certain dates.
The purchase price for the Acquired Assets was $7.0 million, $1.0 million which was payable from the Escrow Account upon satisfaction of certain conditions, and the remaining $6.0 million (the “Second Payment”) is payable in cash within 45 days if additional conditions are met. The Purchase Agreement provides that the Company shall make additional payments to Seller in the event the Second Payment is not made within 45 days of when the payment is due. In the event the Second Payment is not made to Seller within 105 days the payment is due, the Seller may, at its option, require that the Escrow Agent release to Seller Escrow Shares with a value (based on the then-current market price of the shares) equal to $6.0 million in satisfaction of the Second Payment.
The transaction will be accounted for as customer acquisition costs as the primary asset acquired is the right to bid on a customer contract. As each payment is made the Company will determine if there is future benefit associated with the contract and if it is determined that there is, the payment will be capitalized as a customer acquisition cost and expensed over the period of benefit. In January 2020, the transaction closed and the initial payment of $1.0 million was released from the escrow and was expensed in 2020.