Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
Nature of operations
Workhorse Group Inc. (“Workhorse”, the “Company”, “we”, “us” or “our”) is a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. As an American manufacturer, we design and build high performance electric vehicles and aircraft that make movement of people and goods more efficient and less harmful to the environment. As part of our solution, 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 our core competency of bringing the C-Series electric delivery truck to market and fulfilling our existing backlog of orders.
Principles of consolidation
The condensed consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Basis of presentation
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has limited revenues and a history of negative working capital and stockholders’ deficits. Our existing capital resources are expected to be sufficient to fund our operations for several years. Unless and until we are able to generate a sufficient amount of revenue, reduce our costs and/or enter into a strategic relationship, we expect to finance future cash needs through public and/or private offerings of equity securities and/or debt financings. If we are not able to obtain additional financing and/or substantially increase revenue from sales, we will be unable to continue as a going concern. These conditions raise substantial doubt about the ability of the Company to continue as a going concern.
In view of these matters, continuation as a going concern is dependent upon the continued operations of the Company, which, in turn, is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and successfully carry out its future operations. The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary, should the Company not continue as a going concern.
The Company has continued to raise capital and debt. Management believes the proceeds from these offerings, future offerings, and the Company’s anticipated revenue, provides an opportunity to continue as a going concern. If additional funding is required, the Company plans to obtain working capital from either debt or equity financing. Obtaining such working capital is not assured. The Company is currently in a production ramp up mode and placing greater emphasis on manufacturing capability.
In the opinion of Management, the Unaudited Condensed Consolidated Financial Statements include all adjustments that are necessary for the fair presentation of Workhorse’s financial conditions, results of operations and cash flows for the interim periods presented. Such adjustments are of a normal, recurring nature. The results of operations and cash flows for the interim periods presented may not necessarily be indicative of full-year results. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Workhorse contained in its Annual Report on Form 10-K for the year ended December 31, 2019.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Impact of COVID-19 Pandemic
In December 2019, a novel coronavirus disease (“COVID-19”) was reported. 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 September 30, 2020, our locations and primary suppliers continue to operate. However, the broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. We may experience constrained supply or other business disruptions that could materially impact our business, results of operations and overall financial performance in future periods. See Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.
2. INVENTORY, NET
Inventory, net consists of the following:
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|
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|
|
|
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|
|
September 30, 2020
|
|
December 31, 2019
|
Raw materials
|
$
|
7,310,381
|
|
|
$
|
3,741,097
|
|
Work in process
|
526,384
|
|
|
422,176
|
|
Finished goods
|
—
|
|
|
—
|
|
|
7,836,765
|
|
|
4,163,273
|
|
Less inventory reserve
|
(1,871,055)
|
|
|
(2,365,127)
|
|
Total inventory, net
|
$
|
5,965,710
|
|
|
$
|
1,798,146
|
|
3. INVESTMENT IN LMC
The Company has a ten percent ownership interest in Lordstown Motors Corp. (“LMC”) with a value of $13.1 million and $12.2 million as of 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.
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 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.
LMC Transaction
On November 7, 2019, the Company entered into a transaction with LMC (the "LMC Transaction") pursuant to which the Company granted LMC a perpetual and worldwide license to certain intellectual property relating to the Company’s W-15 electric pickup truck platform and its related technology (the “Licensed Intellectual Property”) for consideration as described below. LMC will endeavor to, among other things, raise sufficient third-party capital for the acquisition, retrofitting, and restart of the Lordstown Assembly Complex, and the ongoing operating costs, which amounts are expected to be significant (the “Capital Raise”).
Consideration
•A ten percent ownership interest in the common stock of LMC in exchange for the Company’s obligations under the License Agreement.
•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.
4. REVENUE
Revenue Recognition
Net sales include products and shipping and handling charges, net of estimates for customer allowances. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. The majority of our contracts have a single performance obligation and are short term in nature.
Revenues related to repair and maintenance services are recognized over time as services are provided. Payment for used vehicles, services, and merchandise are typically received at the point when control transfers to the customer or in accordance with payment terms customary to the business.
Accounts Receivable
Credit is extended based upon an evaluation of the customer’s financial condition. Accounts receivable are stated at their estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts and our historical experience with accounts receivable write-offs.
As performance obligations are satisfied within one year from a given reporting date, we omit disclosures of the transaction price apportioned to remaining performance obligations on open orders.
Disaggregation of Revenue
Our revenues related to the following types of business were as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
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|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
Automotive
|
$
|
560,327
|
|
|
$
|
—
|
|
|
$
|
645,327
|
|
|
$
|
240,000
|
|
|
|
|
|
Aviation
|
—
|
|
|
—
|
|
|
60,783
|
|
|
—
|
|
|
|
|
|
Other
|
4,380
|
|
|
4,258
|
|
|
34,839
|
|
|
133,948
|
|
|
|
|
|
Total revenues
|
$
|
564,707
|
|
|
$
|
4,258
|
|
|
$
|
740,949
|
|
|
$
|
373,948
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|
|
|
|
|
5. CONVERTIBLE NOTES AND LONG-TERM DEBT
Convertible notes and long-term debt consist of the following:
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|
|
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|
|
September 30, 2020
|
|
December 31, 2019
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Convertible Note, at fair value
|
—
|
|
|
39,020,000
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|
Convertible Note II, at fair value
|
121,817,001
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|
|
|
|
|
|
|
Long-term debt
|
1,411,000
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|
|
—
|
|
Less current portion
|
(122,679,279)
|
|
|
(19,620,000)
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|
Convertible notes and long-term debt, net of current portion
|
$
|
548,722
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|
|
$
|
19,400,000
|
|
High Trail Convertible Note II
Background
On July 16, 2020, the Company issued a $70.0 million par value convertible note (the“Convertible Note II” or “Note II”) due July 1, 2023. The Company has elected to account for Note II using the fair value option allowed under GAAP. Interest is payable quarterly beginning October 1, 2020 at a rate of 4.5% per annum. The Convertible Note II is initially convertible at a rate of $19.00 per share, subject to change for anti-dilution adjustments and adjustments for certain corporate events.
The Convertible Note II is a senior secured obligation of the Company secured by substantially all assets of the Company and ranks senior to all unsecured debt of the Company. Any principal repayment of Note II is at 110% of the par value. Beginning October 1, 2020, the holder of the Convertible Note II may require the Company to redeem up to $3.9 million par value. Subject to certain limitations, the Company can pay some or all of the redemption in cash or shares of common stock.
The fair value of the Convertible Note II as of September 30, 2020 was $121.8 million and the contractual principal balance was $70.0 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 three and nine months ended September 30, 2020, the fair value of the Convertible Note II increased $52.9 million, which is recorded in interest expense.
The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the Convertible Note II 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 of Note II as of September 30, 2020 was determined using the subsequent settlement cost of the note. The settlement cost is calculated
as the number of shares issued in exchange for the Note II multiplied by the closing price of Workhorse common stock on October 13, 2020, which was $23.63 per share.
Subsequent Activity
On October 14, 2020, the Company exchanged the full $70.0 million outstanding principal amount of the Convertible Note II at a premium for approximately 5.2 million shares of common stock.
High Trail Convertible Note
Current Activity
The fair value of the Convertible Note (the “Convertible Note”) as of September 30, 2020 and December 31, 2019 was zero and $39.0 million, respectively, and the contractual principal balance as of September 30, 2020 and December 31, 2019 was zero and $40.5 million, respectively. In electing the fair value option, the Company recognizes changes in fair value related to changes in credit risk, if any, in other comprehensive income and the remaining change in fair value in interest expense. Fair value adjustments for the nine months ended September 30, 2020 were approximately $74.1 million, which included a $1.1 million adjustment to other comprehensive income attributed to changes in credit risk and a $75.2 million adjustment to interest expense. The change related to credit risk was primarily caused by an increase in credit rating yield for comparable companies during the first quarter of 2020.
During the three months ended September 30, 2020, $18.5 million par value of the Convertible Note was converted to 6.1 million shares of common stock resulting in a loss of $14.9 million, which is recorded in interest expense. During the nine months ended September 30, 2020, the remaining $40.5 million par value of the Convertible Note was converted in full to 14.4 million shares of common stock, resulting in a loss of $35.9 million, which is recorded in interest expense.
Background
On December 9, 2019, the Company issued a $41.0 million par value Convertible Note due November 2022, with a stated interest rate of 4.5% per annum. The Company elected to account for the Convertible Note using the fair value option allowed under GAAP. Interest is payable quarterly beginning February 1, 2020. The Convertible Note is initially convertible at a rate of $3.05 per share subject to change for anti-dilution adjustments for certain corporate events.
Any principal repayment of the Convertible Note is at 112% of the par value. Beginning March 1, 2020, the holder of the Convertible Note may require the Company to redeem up to $1.5 million par value (“Redemption Payment”) of the Convertible Note monthly. Subject to certain limitations, the Company at its discretion can pay some or all of Redemption Payment in cash or shares of common stock.
The Convertible Note is a senior secured obligation of the Company secured by substantially all assets of the Company and ranks senior to all unsecured debt of the Company. The Convertible Note contains certain covenants, including that we maintain a minimum of $8.0 million of liquidity, calculated as unrestricted, unencumbered cash and cash equivalents.
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 originally issued with 15.5 million warrants to purchase common stock of the Company at an initial exercise price of $3.05. The Convertible Note and the warrants were determined to be freestanding instruments and were accounted for separately. The warrants were only exercisable at the option of the Company following the full or partial redemption of the Convertible Note. The percentage of the warrants exercisable upon full or partial redemption of the Convertible Note is equal to a percentage of the original principal amount redeemed at such time. Therefore, as the principal balance of the Convertible Note was fully converted during the period, the number of warrants exercisable as of September 30, 2020 is zero.
Paycheck Protection Program Term Note
On April 14, 2020, the Company entered into a Paycheck Protection Program Term Note (“PPP Term Note” or the “Note”) with PNC Bank, N.A. (“PNC”) under the Paycheck Protection Program of the recently enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The Company received total proceeds of $1.4 million from the PPP Term Note, which is due on April 13, 2022. In accordance with the requirements of the CARES Act, the Company used the proceeds primarily for payroll costs. Interest accrues on the Note at the rate of 1.0% per annum. The Company may apply to PNC for forgiveness of the amount due on the Note which shall be an amount equal to the sum of payroll costs, mortgage interest, rent obligations and covered utility payments incurred during the eight weeks following disbursement on the Note.
Neither principal nor interest shall be due or payable during the period from April 14, 2020 through the six-month anniversary of the date of the Note. On November 15, 2020, the outstanding principal of the Note that is not forgiven shall convert to an amortizing term loan and shall be due and payable in equal monthly installments until April 13, 2022. Additionally, on November 15, 2020, all accrued interest that is not forgiven shall be due and payable.
The Company has elected to account for the PPP Term Note as debt and will accrue interest over the term of the Note. During the three and nine months ended September 30, 2020, the Company did not make any repayments or apply for forgiveness of any amount due on the Note.
As of October 30, 2020, the Company applied for forgiveness of the full amount due on the Note.
Purchase Warrants
In December 31, 2018, the Company entered into a Credit Agreement (the "Credit Agreement"), with Marathon Asset Management, LP. In conjunction with entering into the Credit Agreement, the Company issued Common Stock Purchase Warrants (“Initial Warrants”) to purchase 8.1 million shares of common stock at an exercise price of $1.25 per share. The Credit Agreement was paid in 2019. Until December 31, 2020, the Company must issue additional Warrants to the Lenders equal to 10%, in the aggregate, of any additional equity issuances on substantially the same terms and conditions of the Initial Warrants, except that (i) the expiration date shall be five years from the issuance date, (ii) the exercise price shall be equal to 110% of the issuance price per share in the relevant issuance, and (iii) the holder shall be entitled to exercise the warrant on a cashless basis at any time.
The Initial Warrants are classified as liability financial instruments and required to be marked-to-market at each balance sheet date with a corresponding charge to interest expense. The Initial Warrants were exercised during the nine months ended September 30, 2020, resulting in the issuance of 8.1 million shares of common stock. The Initial Warrants were marked-to-market at each exercise date, which resulted in a charge to interest expense of $12.2 million for the nine months ended September 30, 2020. As of September 30, 2020 and December 31, 2019, the warrant liability for the Initial Warrants was zero and $16.3 million, respectively. Any additional warrants issued in connection with the Credit Agreement have been classified as equity instruments and are not required to be marked-to-market at each balance sheet date.
6. MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK
On June 5, 2019, the Company closed agreements for the sale of 1,250,000 units consisting of one share of Series B Preferred Stock (the “Preferred Stock”), with a stated value of $20.00 per share (the “Stated Value”) and a common stock purchase warrant to purchase 7.41 shares of the common stock (the “Warrants”) for an aggregate purchase price of $25.0 million. The Preferred Stock was not convertible and did not hold voting rights.
The Preferred Stock ranked senior to the Company’s common stock with respect to dividend rights and rights upon liquidation, winding-up or dissolution. The Preferred Stock was entitled to annual dividends at a rate equal to 8.0% per annum on the Stated Value. The Warrants have an exercise price of $1.62 per share and expire seven years from the date of issuance. Accrued dividends are payable quarterly in shares of common stock of the Company based on a fixed share price of $1.62. During the three and nine months ended September 30, 2020, the Company issued 0.3 million and 0.9 million shares of common stock to the holders of the Preferred Stock, respectively.
As the Preferred Stock was mandatorily redeemable, it was classified as a liability on the condensed consolidated balance sheets. All dividends payable on the Preferred Stock are classified as interest expense.
The Preferred Stock and Warrants were considered freestanding financial instruments and were accounted for separately. The Warrants were 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 was
amortized to interest expense using the effective interest method. Amortization of the discount for the three and nine months ended September 30, 2020 was $0.4 million and $1.1 million, respectively.
On September 28, 2020, the Company redeemed its Series B Preferred Stock in full for cash. Dividends on all shares of Series B Preferred Stock were paid in full as of the redemption date and will cease to accumulate. The Company recognized a loss on redemption of approximately $4.7 million related to the remaining unamortized discount, which is recorded within interest expense.
7. STOCK-BASED COMPENSATION
The Company maintains, as approved by the board of directors, the 2019 Stock Incentive Plan (the “Plan”) providing for the issuance of stock-based based awards to employees, officers, directors or consultants of the Company. Non-qualified stock options may only be granted with an exercise price equal to the market value of the Company’s common stock on the grant date. Awards under the Plan may be either vested or unvested options, or unvested restricted stock. The Plan has authorized 8.0 million shares for issuance of stock-based awards. As of September 30, 2020, there were shares available for issuance of future stock awards, which includes approximately 6.6 million shares available under the 2019 and 2017 incentive plans.
Stock-based compensation expense
The following table summarizes stock-based compensation expense:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Stock options
|
$
|
302,806
|
|
|
$
|
334,711
|
|
|
$
|
730,564
|
|
|
$
|
1,211,629
|
|
Restricted stock
|
435,710
|
|
|
—
|
|
|
2,037,170
|
|
|
—
|
|
Total stock-based compensation
|
$
|
738,516
|
|
|
$
|
334,711
|
|
|
$
|
2,767,734
|
|
|
$
|
1,211,629
|
|
Stock options
The following table summarizes option activity for directors, officers, consultants and employees:
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|
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, 2019
|
|
3,725,000
|
|
|
$
|
2.32
|
|
|
|
|
|
Granted
|
|
875,075
|
|
|
1.81
|
|
|
0.61
|
|
|
|
Exercised
|
|
(1,458,655)
|
|
|
2.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(118,943)
|
|
|
5.82
|
|
|
|
|
|
Expired
|
|
(20,000)
|
|
|
2.37
|
|
|
|
|
|
Balance, September 30, 2020
|
|
3,002,477
|
|
|
$
|
2.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options exercisable at September 30, 2020
|
|
1,755,345
|
|
|
$
|
2.26
|
|
|
|
|
6.7
|
As of September 30, 2020, unrecognized compensation expense was $0.3 million for unvested options which is expected to be recognized over the next 1.7 years.
Restricted stock
The following table summarizes restricted stock activity:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Unvested Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
Balance, December 31, 2019
|
|
1,768,726
|
|
|
$
|
2.57
|
|
Granted
|
|
643,220
|
|
|
2.67
|
|
Vested
|
|
(763,626)
|
|
|
2.55
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Balance, September 30, 2020
|
|
1,648,320
|
|
|
$
|
2.61
|
|
As of September 30, 2020, unrecognized compensation expense was $3.4 million for unvested restricted stock awards which is expected to be recognized over the next 2.0 years.
8. INCOME TAXES
As the Company has not generated taxable income since inception, the cumulative deferred tax assets remain fully reserved, and no provision or liability for federal or state income taxes has been included in the financial statements.
9. EARNINGS PER SHARE
Basic earnings 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 is 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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net loss
|
$
|
(84,130,722)
|
|
|
$
|
(11,493,587)
|
|
|
$
|
(210,705,940)
|
|
|
$
|
(37,817,959)
|
|
Deemed dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
86,207
|
|
Net loss attributable to common stockholders
|
$
|
(84,130,722)
|
|
|
$
|
(11,493,587)
|
|
|
$
|
(210,705,940)
|
|
|
$
|
(37,904,166)
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
107,406,000
|
|
|
66,176,921
|
|
|
83,611,526
|
|
|
63,566,295
|
|
Dilutive effect of options and warrants
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive effect of Convertible Note
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
107,406,000
|
|
|
66,176,921
|
|
|
83,611,526
|
|
|
63,566,295
|
|
|
|
|
|
|
|
|
|
Anti-dilutive options and warrants excluded from diluted average shares outstanding
|
5,948,219
|
|
|
32,917,619
|
|
|
5,948,219
|
|
|
32,917,619
|
|
Excluded from the table above are the warrant shares related to the Convertible Note, which represent 6.1 million and 13.3 million warrants calculated using the if converted method for the three and nine months ended September 30, 2020, respectively.
Also excluded from the table above are the shares on the conversion of the Convertible Note, which represent 1.0 million and 4.8 million shares of common stock calculated using the if converted method for the three and nine months ended September 30, 2020, respectively. The Convertible Note is convertible into shares of the Company's common stock.
10. RECENT ACCOUNTING DEVELOPMENTS
Accounting Standards Recently Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments, which requires entities to use a new impairment model based on current expected credit losses rather than incurred losses. Estimated credit losses under the ASU consider relevant information about past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets, resulting in recognition of lifetime expected credit losses at initial recognition of the related asset. The Company adopted the ASU as of January 1, 2020. The adoption of this guidance did not have a material impact on the Company's financial condition and operations.
Accounting Standards Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity and requires the use of the if-converted method for calculating diluted earnings per share. The ASU removes separation models for convertible debt with a cash conversion feature. Such convertible instruments will be accounted for as a single liability measured at amortized cost. The ASU is effective for interim and annual periods beginning after December 15, 2021, with early adoption permitted after December 15, 2020. Adoption of the ASU can either be on a modified retrospective or full retrospective basis. The Company is currently evaluating the impacts of this ASU on our financial statements.
11. STOCKHOLDERS' EQUITY
Warrants
In connection with the issuance of debt, common stock and preferred stock, the Company 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, 2019
|
30,527,776
|
|
|
$
|
1.82
|
|
Granted, Marathon debt
|
512,235
|
|
|
17.06
|
|
Exercised
|
(29,697,049)
|
|
|
1.85
|
|
Expired
|
(45,540)
|
|
|
1.60
|
|
Balance, September 30, 2020
|
1,297,422
|
|
|
$
|
9.99
|
|
2019 Stock Offerings
In February 2019, the Company sold 1.6 million 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 shareholders 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 June 22, 2017, the Company entered into an at the market issuance sales agreement with Cowen and Company, LLC under which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $25.0 million.
During the three months ended March 31, 2019, the Company issued 1.6 million shares under this agreement for net proceeds of approximately $1.5 million. This agreement was canceled in the first quarter of 2019.
On May 1, 2019, the Company closed a registered public offering for the sale of 4.0 million shares of Common Stock for a purchase price of $0.74 per share. The net proceeds to the Company were approximately $2.9 million.
12. 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 $5.3 million or greater than $7.9 million on certain dates. In January 2020, the transaction closed and the initial payment of $1.0 million was released from the Escrow Account and recorded as a selling expense. 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.
The purchase price for the Acquired Assets was $7.0 million, $1.0 million of 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.
13. 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 is 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:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
Warrant liability, beginning of year
|
|
$
|
16,335,000
|
|
Exercise of warrants
|
|
(28,511,690)
|
|
Change in fair value for the period
|
|
12,176,690
|
|
Warrant liability, end of period
|
|
$
|
—
|
|
The Company's convertible notes are 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:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
Convertible Note, beginning of year
|
|
$
|
39,020,000
|
|
|
|
|
Conversion of Convertible Note into common stock
|
|
(148,977,683)
|
|
Change in fair value for the period and loss on conversion to common stock
|
|
111,057,683
|
|
Change in fair value for the period, attributed to changes in credit risk
|
|
(1,100,000)
|
|
Convertible Note, end of period
|
|
$
|
—
|
|
The following table sets forth a reconciliation of the Convertible Note II:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
Convertible Note II, beginning of year
|
|
$
|
—
|
|
Fair value of Convertible Note II on issuance
|
|
68,925,000
|
|
Conversion of Convertible Note II into common stock
|
|
—
|
|
Change in fair value for the period
|
|
52,892,001
|
|
Change in fair value for the period, attributed to changes in credit risk
|
|
—
|
|
Convertible Note II, end of period
|
|
$
|
121,817,001
|
|
14. SUBSEQUENT EVENTS
The Company evaluates events and transactions occurring subsequent to the date of the condensed consolidated financial statements for matters requiring recognition or disclosure in the condensed consolidated financial statements. The accompanying condensed consolidated financial statements consider events through the date on which the condensed consolidated financial statements were available to be issued.
4.0% Senior Secured Convertible Notes Due 2024
On October 14, 2020 the Company issued $200 million par value convertible notes (the “Convertible Note III” or “Note III”) due October 14, 2024. Note III is a senior secured obligation of the Company, and ranks senior to all unsecured debt of the Company. Interest is payable quarterly beginning January 15, 2021 at a rate of 4.0% per annum. The interest rate on the Note III may be reduced to 2.75% if the Company meets certain conditions. The Convertible Note III is convertible at a rate of $35.29, subject to change for anti-dilution adjustments and adjustments for certain corporate events. Note III will generally not be redeemable at the option of the Company prior to the third anniversary of their issue date.
The Convertible Note III is guaranteed by all the Company’s current and future subsidiaries and are secured by substantially all the assets of the Company and its subsidiaries. The Company is required to hold the proceeds of the Convertible Note III in escrow until it completes certain requirements related to the collateral. Note III includes certain covenants, including limitations on liens, additional indebtedness, investments, and dividends and other restricted payments, and customary events of default. In connection with Note III, the Company entered into a security agreement, including customary covenants and agreements governing the collateral.
The Company paid commissions in connection with the Convertible Note III, reducing the proceeds to the Company to approximately $194.5 million. The Company expects to use the net proceeds from this offering to increase and accelerate production volume, advance new products to market, and support current working capital and other general corporate purposes.
Impact of COVID-19 Pandemic
The Company has recently experienced an outbreak of COVID-19 cases amongst our employees. As of the date of this filing, approximately 36% of our production employees have tested positive for COVID-19 or are currently awaiting test results. Additionally, several of our suppliers have experienced capacity constraints due to the pandemic, which has limited their shipment volumes. As a result, we expect a significant reduction to our planned production volume in the fourth quarter of 2020.