UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the fiscal year ended December 31, 2019
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 | |||||
Commission file number: 000-53704
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
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| (Address of principal executive offices) | (Registrant’s telephone number) | |||||||
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
| Title of each Class: | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| The NASDAQ Capital Market | ||||||||||||||
Securities Registered Pursuant to Section 12(g) of the Exchange Act: None.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2019, the last business day of the Registrant’s most recently completed second fiscal quarter, the market value of our common stock held by non-affiliates was $167,973,000 .
The number of shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of February 28, 2020, was 70,671,139 .
TABLE OF CONTENTS
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Forward-Looking Statements
The discussions in this Annual Report contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. When used in this Report, the words “anticipate”, expect”, “plan”, “believe”, “seek”, “estimate” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include, but are not limited to, statements about the features, benefits and performance of our products, our ability to introduce new product offerings and increase revenue from existing products, expected expenses including those related to selling and marketing, product development and general and administrative, our beliefs regarding the health and growth of the market for our products, anticipated increase in our customer base, expansion of our products functionalities, expected revenue levels and sources of revenue, expected impact, if any, of legal proceedings, the adequacy of liquidity and capital resource, and expected growth in business. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, market acceptance for our products, our ability to attract and retain customers for existing and new products, our ability to control our expenses, our ability to recruit and retain employees, legislation and government regulation, shifts in technology, global and local business conditions, our ability to effectively maintain and update our product and service portfolio, the strength of competitive offerings, the prices being charged by those competitors and the risks discussed elsewhere herein and our ability to raise capital under acceptable terms. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
All references in this Form 10-K that refer to the “Company”, “Workhorse Group”, “Workhorse”, “we,” “us” or “our” are to Workhorse Group Inc. and unless otherwise differentiated, its wholly-owned subsidiaries.
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PART I
ITEM 1. BUSINESS
Overview
We are a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. As an American manufacturer, we 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.
Automotive
We are an Original Equipment Manufacturer (“OEM”) of Class 3-6 commercial-grade, medium-duty trucks, to be marketed under the Workhorse® brand. All Workhorse last mile delivery trucks are assembled in the Union City assembly facility. We will be expanding our product portfolio with the C-Series electric delivery truck in 2020.
We believe our battery-electric and range-extended electric commercial vehicles offer fleet operators significant benefits, which include:
•Low Total Cost-of-Ownership as compared to conventional gas/diesel vehicles;
•Competitive advantage to increase brand loyalty and last mile delivery market share;
•Improved profitability through lower maintenance costs and reduced fuel expenses;
•Increased package deliveries per day through use of more efficient delivery methods;
•Decreased vehicle emissions and reduction in carbon footprint; and
•Improved vehicle safety and driver experience.
The Company sells its vehicles to fleet customers directly and through its primary distributor, Ryder System, Inc. ("Ryder"). Ryder also is a maintenance provider for Workhorse, which provides fleet operators with access to Ryder’s network of 800 maintenance facilities and nearly 6,000 trained service technicians across North America.
Delivery Trucks for Last Mile Delivery and Commercial Work Use
Workhorse delivery trucks are produced at our Union City, Indiana plant and are in use by our customers on daily routes across the United States. To date, we have built and delivered approximately 360 electric and range extended medium-duty delivery trucks to our customers. To our knowledge, we are the only American commercial electric vehicle OEM to achieve such a milestone. Our delivery customers include companies such as UPS, FedEx Express, Alpha Baking, W.B. Mason and Ryder.
In addition to improved fuel economy, we anticipate that the performance of our vehicles on-route will reduce long-term vehicle maintenance expense by approximately 60% as compared to fossil-fueled trucks. Over a 20-year vehicle life, we estimate that our C-Series delivery trucks will save over $170,000 in fuel and maintenance savings. Due to this positive return-on-investment, we charge a premium price for our vehicles. We expect that fleet operators will be able to achieve a three-year or better total cost of ownership break even (without government incentives), which we believe justifies the higher acquisition cost of our vehicles.
Our goal is to increase sales and continue development of our existing vehicle portfolio, while executing on a cost-down strategy in order to achieve sustained gross margin profitability of the last mile delivery truck platform. It is our intention that this strategy, which includes several delivery and utility truck platforms that target high-volume market segments, will further drive costs down across our supply chain.
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U.S. Post Office Replenishment Program / Next Generation Delivery Vehicle Project
Workhorse was one of the five participants that the United States Postal Service (“USPS”) selected to build prototype vehicles for the USPS Next Generation Delivery Vehicle (“NGDV”) project. The USPS has publicly stated that approximately 165,000 vehicles are to be replaced. In September 2017, Workhorse delivered six vehicles for prototype testing under the NGDV Acquisition Program in compliance with the terms set forth in their USPS prototype contract. In 2019, the vehicles completed the required testing protocol as specified by the USPS. The USPS published a Request for Proposals in December 2019 for the Production Program.
C-Series Electric Delivery Truck
In 2017, Workhorse announced the development of its C-Series electric delivery truck, which leverages the existing ultra-low floor, long-life commercial delivery vehicle platform, as well as our extensive customer experience gained from working with our E-GEN and E-100 customers. The C-Series incorporates lightweight materials, all-wheel drive, best in class turning radius, 360° cameras, collision avoidance systems and an optional roof mounted HorseFly™ delivery drone. These trucks weigh 7,000 pounds, compared to current 11,000 pound gasoline and diesel delivery trucks.
The Workhorse C-Series electric delivery truck platform will be available in 450, 650 and 1,000 cubic feet configurations. We intend to initially launch the 650 cubic foot and 1,000 cubic foot configurations with the goal of competing with conventional market leaders, including the Mercedes Sprinter, Ford Transit and Dodge ProMaster gasoline/diesel vans for both last mile delivery and other service-oriented applications such as telecommunications. We expect these vehicles to achieve a fuel economy of approximately 53 miles per gallon equivalent (“MPGe”) and offer fleet operators the most favorable total cost-of-ownership of any comparable conventional truck utilizing an internal combustion engine that is available today.
Package Delivery Aircraft
HorseFly
Our HorseFly Unmanned Aerial System ("UAS") is a custom-designed, purpose-built system that safely and efficiently delivers packages. Workhorse was granted a patent on our UAS with the description “Package Delivery by Means of an Automated Multi-Copter UAS/UAV Dispatched From A Conventional Delivery Vehicle.” Though initially designed to deliver packages from our electric trucks, the latest iteration of our system supports package delivery to and from almost anywhere.
In tests and demonstrations over the past two years, Workhorse has flown over 100 missions in the National Airspace System, demonstrating package delivery for large multi-national companies, including UPS.
In a 2017 press release, UPS estimated that a reduction of just one mile per driver per day could save UPS up to $50 million on an annualized basis. Rural delivery routes are the most expensive routes for companies like UPS to serve because of the time it takes to cover long, thin routes, and because of the increased maintenance costs that come with driving extra miles. During our tests and demonstrations, the HorseFly aircraft dispatches from the delivery vehicle to deliver a rural package while the driver continues on his route to make another. The HorseFly then returns to the truck at its new location and is ready for another delivery. This is an example of the significant cost savings available to delivery fleets, and we believe we are the first to offer a complete system to the market.
We have flown demonstrations in Ohio, Michigan, Florida and California, and are continuously improving our systems. The knowledge we’ve gained in these real-world tests shows us we can safely and reliably save the last mile delivery market a significant amount of money with our HorseFly system.
Certus
To accelerate our development of the HorseFly system, in November 2019, Workhorse and Moog Inc ("Moog") formed Certus Unmanned Arial Systems LLC ("Certus"). Moog is a worldwide designer, manufacturer, and integrator of precision control components and systems. Moog’s high-performance systems control military and commercial aircraft, satellites and space vehicles, launch vehicles, missiles, automated industrial machinery, marine and medical equipment.
The Company and Moog entered into a joint venture agreement for the development of the Company's Horsefly truck based electrically powered unmanned aerial systems (the "Horsefly Assets") and the related business (the “Horsefly Agreement”). Under the Horsefly Agreement, the Company contributed the Horsefly Assets and Moog contributed certain complementary assets to Certus Unmanned Aerial Systems LLC, (“Certus”) that is 50% owned by both the Company and Moog. Certus will
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license the Horsefly Assets to the Company and Moog so that each party may use the Horsefly Assets in their respective businesses. Through Certus, teams from Workhorse and Moog are improving HorseFly’s components and sub-systems with the goal of bringing the highest quality, most capable UAS to market. We believe combining the capabilities of the two companies brings significant value to the UAS marketplace, particularly in the area of high-reliability, safety-sensitive, certificated systems that require the highest levels of government approval for operations.
USOG
Workhorse successfully delivered two of its HorseFly systems for commercial use, selling the systems to the Unmanned Systems Operations Group ("USOG"). USOG is a logistics solutions company specializing in unmanned systems and secure transportation and delivery of drone flight missions by land, air or sea. Based in San Diego, California, USOG is using our HorseFly system and aircraft in commercial operations under Federal Aviation Administration ("FAA") regulations Part 107.
Technology
In-House Software Development is Essential
Our powertrains encompass the complete motor assemblies, computers, and software required for vehicle electrification. We use off-the-shelf proven components and combine them with our proprietary software.
Innovation is the Future
Additionally, we have developed a cloud-based, remote management system to manage and track the performance of all of the vehicles that we deploy in order to provide a 21st Century solution for fleet managers.
The telematics system and associated hardware installed in the Workhorse vehicles is designed to monitor the controller area network traffic for specific signals. These signals are uploaded along with GPS data to a Workhorse server facility where the data signals are tracked at ten second intervals while driving and during the electricity generating process and at sixty seconds during a plug-in charge. The real-time data is stored in a database as it arrives and delivers updates to clients connected through the web interface. We are moving to a ".Net" platform for more robust back-end tools and web support.
As a parameter-based system, we can set route-specific parameters to better manage the battery-provided power with the additional power generated through the regenerative braking process. In an upcoming release, we will add the ability to integrate Metron Telematics with the client’s internal telematics system and automatically update the parameters each day with information about the route. This enhancement will result in a “SMART-GEN” vehicle that will maximize efficiency by automating the process to determine the ideal times and locations to use the C-Series to add electricity to the batteries.
Locations and Facilities
Our company headquarters and 45,000 sq. ft. research and development facility is located at 100 Commerce Drive, Loveland, Ohio, a Cincinnati suburb.
Our truck assembly facility is located in Union City, Indiana. This facility consists of three buildings with 250,000 square feet of manufacturing and office space on 47 acres. This plant has capacity to build up to 60,000 trucks per year.
Marketing
There are over 300,000 last mile delivery trucks replaced annually in an $18.0 billion market space. Our sales team is focused on securing purchase orders from commercial transportation companies, in this space. These purchases will give us additional data on demand related to electric and extended range electric vehicles.
Our priority is to establish the commercial delivery truck as our core business. We intend to be the best choice for a vehicle in this segment regardless of the fuel type that the customer chooses. Our sales plan is to meet with the top potential customers and obtain purchase orders for new electric vehicles to be delivered through our production facility.
As the last mile delivery service space expands and non-traditional customers enter, Workhorse is reaching out to those potential new customers to gain product acceptance as their last mile delivery partner. This market is comprised of a higher quantity of smaller delivery vehicles, such as the new Workhorse C650, a 650-cu. ft. platform.
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Finally, we believe that our competitive advantage in the marketplace is our ability to provide purpose-built solutions to customers that have unique requirements at relatively low volume. To broaden our sales funnel, we have submitted proposals to companies for purpose-built vehicle applications.
Strategic Relationships
EnerDel, Inc.: EnderDel, Inc. ("EnerDel") is a designer and manufacturer of lithium-ion battery systems, focusing on heavy-duty transportation. EnerDel's advanced cell technology features a low-profile modular pack design that supports Workhorse's lightweight C-Series vehicles, enabling fleet customers to customize the pack size for each vehicle based on its duty cycle. Workhorse's selection of EnerDel as its latest battery supplier of choice complements the Company's existing utility partnership agreement, which seeks to generate second-life uses for its batteries.
Ryder: The Company has an agreement with Ryder to serve as the primary distributor, except with respect to certain exclusive accounts, in the United States, Mexico and Canada. Ryder also serves as a provider of certain repair services and distributor of certain vehicle parts in the United States, Canada and Mexico.
Prefix: Michigan-based Prefix Corporation began in 1979 developing innovative design and engineering solutions for the automotive industry. Workhorse relies on Prefix’s complementary capabilities in the areas of complete prototype design, build and finishing to more rapidly advance product development.
Duke Energy Corp.: Workhorse continues working in partnership with Duke Energy Corp ("Duke") in creating an innovative battery leasing program designed to provide customers a cost competitive electric vehicle product alternative. Duke intends to explore further development of eFleet solutions to Workhorse customers which may include single-point management and financing of all the Behind the Meter infrastructure necessary to support depot wide electrification, vehicle/battery leasing and distributed energy resources. Duke and Workhorse believe a seamless/integrated solution will help reduce the overall costs of converting fleets to electric power enabling faster adoption of electric vehicles into commercial fleets.
Research and Development
The majority of our research and development is conducted in-house at our facilities near Cincinnati, Ohio. Additionally, we contract with engineering firms to assist with validation and certification requirements as well as specific vehicle integration tasks.
Competition
The commercial vehicle market, specifically in the last mile delivery segment, is highly competitive and we expect it to become even more so in the future as additional companies launch competing vehicle offerings. However, the commercial alternative fueled vehicle market is less developed and less competitive. There are two primary competitors in the medium-duty vehicle segment in the US market: Ford and Freightliner. Neither has disclosed any plans to offer 100% electric vehicles or electric range extended vehicles in this segment. Ford is a vertically integrated company building a complete vehicle or chassis. They provide a chassis as a strip-chassis (which is similar to the Workhorse Truck chassis that was produced until 2018) or they provide it with a cab. Freightliner provides a chassis as a strip-chassis, which is similar to the Workhorse Truck chassis that was produced until 2018. Further, there have been a few start-ups that have announced their intention to produce electric vehicles in this segment.
Chanje is a California-based, privately held electric vehicle and energy solutions company that specializes in the last mile industry. Chanje introduced its first vehicle in 2017.
Motiv Power Systems is a manufacturer of all-electric powertrain control systems for commercial vehicles, based in Foster City, California. They also produce software for the systems and install them in vehicles that have already been manufactured.
We believe the most dramatic difference between Workhorse and the other competitors in the medium-duty truck market is our ability to offer customers purpose-built solutions that meet the needs of their unique requirements at a competitive price. While there are many electric car companies from abroad, there are only a few foreign companies that have vehicles in the category of medium-duty trucks.
We believe that the primary competitive factors within the medium-duty commercial vehicle market are:
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•the difference in the initial purchase prices of electric vehicles and comparable vehicles powered by internal combustion engines, both including and excluding the impact of government and other subsidies and incentives designed to promote the purchase of electric vehicles;
•the total cost of vehicle ownership over the vehicle’s expected life, which includes the initial purchase price and ongoing operational and maintenance costs;
•vehicle quality, performance and safety;
•government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
•the environmental impact of electric vehicles, which are less harmful to the environment than internal combustion engines; and
•the quality and availability of service for the vehicle, including the availability of replacement parts.
Government Regulation
Our electric vehicles are designed to comply with a significant number of governmental regulations and industry standards, some of which are changing as new technologies are deployed. Government regulations regarding the manufacture, sale and implementation of products and systems similar to our electric vehicles are subject to future change. We cannot predict what impact, if any, such changes may have upon our business.
Emission and fuel economy standards
Government regulation related to climate change is in effect at the U.S. federal and state levels. The U.S. Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (“NHTSA”) issued a final rule for greenhouse gas emissions and fuel economy requirements for trucks and heavy-duty engines on August 9, 2011, which is applicable in model years 2018 through 2020. NHTSA and EPA also issued a final rule on August 16, 2016 increasing the stringency of these standards for model years 2021 through 2027.
The rules provide emission standards for CO2 and fuel consumption standards for three main categories of vehicles: (i) combination tractors; (ii) heavy-duty pickup trucks and vans; and (iii) vocational vehicles. We believe that the Workhorse vehicles would be considered “vocational vehicles” and “heavy-duty pickup trucks and vans” under the rules. According to the EPA and NHTSA, vocational vehicles consist of a wide variety of truck and bus types, including delivery, refuse, utility, dump, cement, transit bus, shuttle bus, school bus, emergency vehicles, motor homes and tow trucks, and are characterized by a complex build process, with an incomplete chassis often built with an engine and transmission purchased from other manufacturers, then sold to a body manufacturer.
The EPA and NHTSA rule also establishes multiple flexibility and incentive programs for manufacturers of alternatively fueled vehicles, such as the Workhorse vehicles, including an engine Averaging, Banking and Trading (“ABT”) program, a vehicle ABT program and additional credit programs for early adoption of standards or deployment of advanced or innovative technologies. The ABT programs will allow for emission and/or fuel consumption credits to be averaged, banked or traded within defined groupings of the regulatory subcategories. The additional credit programs will allow manufacturers of engines and vehicles to be eligible to generate credits if they demonstrate improvements in excess of the standards established in the rule prior to the model year the standards become effective or if they introduce advanced or innovative technology engines or vehicles.
The Clean Air Act requires that we obtain a Certificate of Conformity issued by the EPA and a California Executive Order issued by the California Air Resource Board (“CARB”) with respect to emissions and mileage requirements for our vehicles. On February 14, 2020, Workhorse received its Certificate of Conformity from the EPA. The Certificate of Conformity is required for vehicles sold in states covered by the Clean Air Act’s standards and the Executive Order is required for vehicles sold in states that have sought and received a waiver from the EPA to utilize California standards. The California standards for emissions control for certain regulated pollutants for new vehicles and engines sold in California are set by CARB. States that have adopted the California standards as approved by EPA also recognize the Executive Order for sales of vehicles. The testing program that leads to an Executive Order from CARB is now underway.
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Manufacturers who sell vehicles in states covered by federal requirements under the Clean Air Act without a Certificate of Conformity may be subject to penalties of up to $44,539 per violation and be required to recall and remedy any vehicles sold with emissions in excess of Clean Air Act standards.
Vehicle safety and testing
The National Traffic and Motor Vehicle Safety Act of 1966 (the “Safety Act”) regulates motor vehicles and motor vehicle equipment in the United States in two primary ways. First, the Safety Act prohibits the sale in the United States of any new vehicle or equipment that does not conform to applicable motor vehicle safety standards established by NHTSA. Meeting or exceeding many safety standards is costly, in part because the standards tend to conflict with the need to reduce vehicle weight in order to meet emissions and fuel economy standards. Second, the Safety Act requires that defects related to motor vehicle safety be remedied through safety recall campaigns. A manufacturer is obligated to recall vehicles if it determines that the vehicles do not comply with a safety standard. Should we or NHTSA determine that either a safety defect or noncompliance exists with respect to any of our vehicles, the cost of such recall campaigns could be substantial.
Battery safety and testing
Our battery pack configurations are designed to conform to mandatory regulations that govern transport of “dangerous goods,” which includes lithium-ion batteries, which may present a risk in transportation. The governing regulations, which are issued by the Pipeline and Hazardous Safety Administration and are based on the United Nations Recommendations on the Safe Transport of Dangerous Goods Model Regulations, and related United Nations Manual of Tests and Criteria. The requirements for shipments of these goods vary by mode of transportation, such as ocean vessel, rail, truck and air.
Our battery suppliers have completed the applicable transportation test for our prototype and production battery packs demonstrating our compliance with the United Nations Manual of Tests and Criteria, including:
•altitude simulation, which involves simulating air transport;
•thermal cycling, which involves assessing cell and battery seal integrity;
•vibration, which involves simulating vibration during transport;
•shock, which involves simulating possible impacts during transport;
•external short circuit, which involves simulating an external short circuit; and
•overcharge, which involves evaluating the ability of a rechargeable battery to withstand overcharging.
Vehicle dealer and distribution regulation
Certain states’ laws require motor vehicle manufacturers and dealers to be licensed in such states in order to conduct manufacturing and sales activities. To date, we are registered as a motor vehicle manufacturer in Indiana and Ohio and as a dealer in California, New York and Chicago. We have not yet sought formal clarification of our ability to manufacture or sell our vehicles in any other states.
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Intellectual Property
We have four pending trademark applications and 12 issued trademark registrations (US and foreign). We also intend to pursue additional trademark registrations. We have four pending (one non-provisional, one design and two provisional) U.S. and foreign patent applications, and eight existing patents, two of which are design patents. We also plan to pursue appropriate foreign patent protection on those inventions, if available as well pursue additional inventions. The following is a summary of our patents:
| Country | Serial Number | Application Date | Patent Number | Issue/Grant Date | Expiration Date | Title | ||||||||||||||||||||||||||||||||
| United States | 13/283,663 | 10/28/2011 | 8,541,915 | 9/24/2013 | 12/16/2031 | Drive module and manifold for electric motor drive assembly | ||||||||||||||||||||||||||||||||
| Canada | 2,523,653 | 10/17/2005 | 2,523,653 | 12/22/2009 | 10/17/2025 | Vehicle chassis assembly | ||||||||||||||||||||||||||||||||
| United States | 11/252,220 | 10/17/2005 | 7,717,464 | 5/18/2010 | 9/6/2026 | Vehicle chassis assembly | ||||||||||||||||||||||||||||||||
| United States | 11/252,219 | 10/17/2005 | 7,559,578 | 7/14/2009 | 9/6/2026 | Vehicle chassis assembly | ||||||||||||||||||||||||||||||||
| United States | 29/243,074 | 11/18/2005 | D561,078 | 2/5/2008 | 2/5/2022 | Vehicle header | ||||||||||||||||||||||||||||||||
| United States | 29/243,129 | 11/18/2005 | D561,079 | 2/5/2008 | 2/5/2022 | Vehicle header | ||||||||||||||||||||||||||||||||
| United States | 14/606,497 | 1/27/2015 | 9,481,256 | 11/1/2016 | 5/3/2035 | Onboard generator drive system for electric vehicles | ||||||||||||||||||||||||||||||||
| United States | 14/989,870 | 1/7/2016 | 9,915,956 | 3/13/2018 | 6/24/2036 | Package delivery by means of an automated multicopter UAS/UAV dispatched from a conventional delivery vehicle | ||||||||||||||||||||||||||||||||
| United States | 15/915,144 | 3/8/2018 | Package delivery by means of an automated multicopter UAS/UAV dispatched from a conventional delivery vehicle (1) | |||||||||||||||||||||||||||||||||||
| United States | 62/957,577 | 1/6/2020 | Systems and Methods for Manufacturing Land Vehicles | |||||||||||||||||||||||||||||||||||
| United States | 62/959,548 | 1/10/2020 | Electric Delivery Truck Control System for Electric Power Management | |||||||||||||||||||||||||||||||||||
| United States | 29/719,591 | 1/6/2020 | Design Application that covering the electric delivery truck | |||||||||||||||||||||||||||||||||||
(1) Assigned to Certus, a joint venture, that is 50% owned by the Company and 50% owned by Moog Inc.
Employees
We currently have 81 full-time employees.
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ITEM 1A. RISK FACTORS
We need access to additional financing in 2020 and beyond, which may not be available to us on acceptable terms or at all. If we cannot access additional financing when we need it and on acceptable terms, our business may fail.
Our business plan to design, produce, sell and service commercial electric vehicles through our Union City facility will require continued capital investment in 2020. Our research and development activities will also require continued investment. For the year ended December 31, 2019, our independent registered public accounting firm issued a report on our 2019 financial statements that contained an explanatory paragraph stating that the lack of sales, negative working capital and stockholders’ deficit, raise substantial doubt about our ability to continue as a going concern. We expect to have adequate capital to continue operations through the second quarter 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. We do not currently have any committed future funding for operating costs or for confirmed purchase orders. If we are not able to obtain additional financing when needed in 2020 and/or substantially increase revenue from sales, we will be unable to continue as a going concern or satisfy the delivery of our orders. As a result, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and investors will likely lose a substantial part or all of their investment. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all. Further, if there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on acceptable terms or at all. If we cannot obtain additional financing when we need it and on terms acceptable to us, we will not be able to continue as a going concern.
Our results of operations have not resulted in profitability and we may not be able to achieve profitability going forward.
We have an accumulated deficit of $178.8 million as of December 31, 2019. We have had net losses in each year since our inception. We may continue to incur net losses in 2020. We may incur significant losses in the future for a number of reasons, including the other risks described in "Risk Factors", and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability. Our management is developing plans to alleviate the negative trends and conditions described above and there is no guarantee that such plans will be successfully implemented. Our business plan is focused on providing sustainable and cost-effective solutions to the commercial transportation sector but is still unproven. There is no assurance that even if we successfully implement our business plan, that we will be able to curtail our losses or ever achieve profitable operations. If we incur additional significant operating losses, our stock price may significantly decline.
We have yet to achieve positive cash flow and, given our projected funding needs, our ability to generate positive cash flow is uncertain.
We have had negative cash flow from operating activities of $36.9 million and $21.8 million for the years ended December 31, 2019 and 2018, respectively. We may continue to have negative cash flow from operating and investing activities for 2020 as we expect to incur research and development, sales and marketing, and general and administrative expenses and make capital expenditures in our efforts to increase sales and ramp up operations at our Union City facility. Our business also will at times require significant amounts of working capital to support our growth of additional platforms. An inability to generate positive cash flow for the near term may adversely affect our ability to raise needed capital for our business on reasonable terms, diminish supplier or customer willingness to enter into transactions with us, and have other adverse effects that may decrease our long-term viability. There can be no assurance that the Company will achieve positive cash flow in the near future or at all.
The development of our business in the near future is contingent upon the implementation of orders from UPS and other key customers for the purchase of Workhorse vehicles and if we are unable to perform under these orders, our business may fail.
On June 4, 2014, the Company entered into a Vehicle Purchase Agreement with United Parcel Service Inc. (“UPS”) which outlined the relationship by which the Company would sell vehicles to UPS. To date, we have received six separate orders totaling up to 1,405 vehicles from UPS. The sixth and most recent order is from the first quarter of 2018. There is no guarantee that the Company will be able to perform under these orders and if it does perform, that UPS will purchase additional vehicles from the Company. Also, there is no assurance that UPS will not terminate its agreement with the Company pursuant to the termination provisions therein. Further, if the Company is not able to raise the required capital to purchase required parts and
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pay certain vendors, the Company may not be able to comply with UPS’s deadlines. Accordingly, despite the receipt of the orders from UPS, there is no assurance, due to the Company’s financial constraints and status as a development stage company, that the Company will be able to deliver such vehicles or that it will receive additional orders whether from UPS or other potential customers.
If we are unable to perform under our orders with UPS, the Company business will be negatively impacted.
The Covid-19 novel coronavirus, or other epidemics, could have a material adverse impact on our business, results of operations, or financial condition.
In December 2019, COVID-19 began to impact the population of Wuhan, China. We rely upon third-party manufacturers to provide certain parts that are incorporated into our vehicles. The outbreak has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on manufacturing and the movement of employees in many regions of the country. As a result of COVID-19 and the measures designed to contain the spread of the virus, our third-party manufacturers may not have the materials, capacity, or capability to manufacture such parts according to our schedule and specifications. If our third-party manufacturers’ operations are curtailed, we may need to seek alternate manufacturing sources, which may be more expensive. Alternate sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. While the disruptions and restrictions on the ability to travel, quarantines, and temporary closures of the facilities of our third-party manufacturers and suppliers, as well as general limitations on movement in the region are expected to be temporary, the duration of the production and supply chain disruption, and related financial impact, cannot be estimated at this time. Should the production and distribution closures continue for an extended period of time, the impact on our supply chain in China and globally could have a material adverse effect on our results of operations and cash flows.
Our limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future performance.
As we begin to fully implement our manufacturing capabilities, it is difficult, if not impossible, to forecast our future results based upon our historical data. Because of the uncertainties related to our lack of historical operations, we may be hindered in our ability to anticipate and adapt to increases or decreases in revenues or expenses. If we make poor budgetary decisions as a result of limited historical data, we could be less profitable or incur losses.
We offer no financing on our vehicles. As such, our business is dependent on cash sales, which may adversely affect our growth prospects.
While most of our current customers are well-established companies with significant purchasing power, many of our potential smaller and medium-sized customers may need to rely on credit or leasing arrangements to gain access to our vehicles. Unlike some of our competitors who provide credit or leasing services for the purchase of their vehicles, we do not provide, and currently do not have commercial arrangements with a third party that provides, such financial services. We believe the current limited availability of credit or leasing solutions for our vehicles could adversely affect our revenues and market share in the commercial electric vehicle market.
We do not receive progress payments on orders of our vehicles, and if a purchaser fails to pay upon delivery, we may not be able to recoup the costs we incurred in producing such vehicles.
Our arrangements with existing customers do not provide for progress payments as we begin to fulfill orders. Customers are only required to pay us upon delivery of vehicles. If a customer fails to take delivery of an ordered vehicle or fails to pay for such vehicle, we may not receive cash to offset the production expenses of such vehicle, which could adversely affect our cash flows.
Our business, prospects, financial condition and operating results will be adversely affected if we cannot reduce and adequately control the costs and expenses associated with operating our business, including our material and production costs.
We incur significant costs and expenses related to procuring the materials, components and services required to develop and produce our electric vehicles. We have secured supply agreements for our critical components including our batteries. However, these are dependent on volume to ensure that they are available at a competitive price. We continually work on cost-down initiatives to reduce our cost structure so that we may effectively compete. If we do not reduce our costs and expenses, our net losses will continue.
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Increases in costs, disruption of supply or shortage of lithium-ion cells could harm our business.
We may experience increases in the cost or a sustained interruption in the supply or shortage of lithium-ion cells. Any such increase, supply interruption or shortage could materially and negatively impact our business, prospects, financial condition and operating results. The prices for these lithium-ion cells can fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and operating results. We are exposed to multiple risks relating to lithium-ion cells including:
•the inability or unwillingness of current battery manufacturers to build or operate battery cell manufacturing plants to supply the numbers of lithium-ion cells we may require going forward;
•disruption in the supply of cells due to quality issues or recalls by battery cell manufacturers;
•an increase in the cost of raw materials used in the cells; and
•fluctuations in the value of the Japanese yen against the U.S. dollar in the event our purchasers of lithium-ion cells are denominated in Japanese yen.
Our business is dependent on the continued supply of battery cells for the battery packs used in our vehicles. While we believe several sources of the battery cells are available for such battery cells, we have fully qualified EnerDel for the supply of the cells used in such battery packs and have very limited flexibility in changing cell suppliers. Any disruption in the supply of battery cells could disrupt production of our vehicles until such time as a different supplier is fully qualified. Furthermore, fluctuations or shortages in petroleum, tariff or trade issues and other economic or tax conditions may cause us to experience significant increases in freight charges. Substantial increases in the prices for the battery cells or prices charged to us, would increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased vehicle prices. Any attempts to increase vehicle prices in response to increased costs in our battery cells could result in cancellations of vehicle orders and therefore materially and adversely affect our brand, image, business, prospects and operating results.
The demand for commercial electric vehicles depends, in part, on the continuation of current trends resulting from dependence on fossil fuels. Extended periods of low diesel or other petroleum-based fuel prices could adversely affect demand for our vehicles, which would adversely affect our business, prospects, financial condition and operating results.
We believe that much of the present and projected demand for commercial electric vehicles results from concerns about volatility in the cost of petroleum-based fuel, the dependency of the United States on oil from unstable or hostile countries, government regulations and economic incentives promoting fuel efficiency and alternative forms of energy, as well as the belief that climate change results in part from the burning of fossil fuels. If the cost of petroleum-based fuel decreased significantly, the outlook for the long-term supply of oil to the United States improved, the government eliminated or modified its regulations or economic incentives related to fuel efficiency and alternative forms of energy, or if there is a change in the perception that the burning of fossil fuels negatively impacts the environment, the demand for commercial electric vehicles could be reduced, and our business and revenue may be harmed.
Diesel and other petroleum-based fuel prices have been extremely volatile, and we believe this continuing volatility will persist. Lower diesel or other petroleum-based fuel prices over extended periods of time may lower the perception in government and the private sector that cheaper, more readily available energy alternatives should be developed and produced. If diesel or other petroleum-based fuel prices remain at deflated levels for extended periods of time, the demand for commercial electric vehicles may decrease, which would have an adverse effect on our business, prospects, financial condition and operating results.
Our future growth is dependent upon the willingness of operators of commercial vehicle fleets to adopt electric vehicles and on our ability to produce, sell and service vehicles that meet their needs. This often depends upon the cost for an operator adopting electric vehicle technology as compared to the cost of traditional internal combustion technology.
Our growth is dependent upon the adoption of electric vehicles by operators of commercial vehicle fleets and on our ability to produce, sell and service vehicles that meet their needs. The entry of commercial electric vehicles into the medium-duty commercial vehicle market is a relatively new development, particularly in the United States, and is characterized by rapidly changing technologies and evolving government regulation, industry standards and customer views of the merits of using electric vehicles in their businesses. This process has been slow as without including the impact of government or other subsidies and incentives, the purchase prices for our commercial electric vehicles currently is higher than the purchase prices for diesel-fueled vehicles. Our growth has also been negatively impacted by the relatively low price of oil over the last few years.
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If the market for commercial electric vehicles does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition and operating results will be adversely affected.
As part of our sales efforts, we must educate fleet managers as to the economical savings we believe they will benefit from during the life of the vehicle. As such, we believe that operators of commercial vehicle fleets should consider a number of factors when deciding whether to purchase our commercial electric vehicles (or commercial electric vehicles generally) or vehicles powered by internal combustion engines, particularly diesel-fueled or natural gas-fueled vehicles. We believe these factors include:
•the difference in the initial purchase prices of commercial electric vehicles and vehicles with comparable gross vehicle weight powered by internal combustion engines, both including and excluding the impact of government and other subsidies and incentives designed to promote the purchase of electric vehicles;
•the total cost of ownership of the vehicle over its expected life, which includes the initial purchase price and ongoing operating and maintenance costs;
•the availability and terms of financing options for purchases of vehicles and, for commercial electric vehicles, financing options for battery systems;
•the availability of tax and other governmental incentives to purchase and operate electric vehicles and future regulations requiring increased use of nonpolluting vehicles;
•government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
•fuel prices, including volatility in the cost of diesel;
•the cost and availability of other alternatives to diesel fueled vehicles, such as vehicles powered by natural gas;
•corporate sustainability initiatives;
•commercial electric vehicle quality, performance and safety (particularly with respect to lithium-ion battery packs);
•the quality and availability of service for the vehicle, including the availability of replacement parts;
•the range over which commercial electric vehicles may be driven on a single battery charge;
•access to charging stations and related infrastructure costs, and standardization of electric vehicle charging systems;
•electric grid capacity and reliability; and
•macroeconomic factors.
If, in weighing these factors, operators of commercial vehicle fleets determine that there is not a compelling business justification for purchasing commercial electric vehicles, particularly those that we produce and sell, then the market for commercial electric vehicles may not develop as we expect or may develop more slowly than we expect, which would adversely affect our business, prospects, financial condition and operating results.
We currently do not have long-term supply contracts with guaranteed pricing which exposes us to fluctuations in component, materials and equipment prices. Substantial increases in these prices would increase our operating costs and could adversely affect our business, prospects, financial condition and operating results.
Because we currently do not have long-term supply contracts with guaranteed pricing, we are subject to fluctuations in the prices of the raw materials, parts and components and equipment we use in the production of our vehicles. Substantial increases in the prices for such raw materials, components and equipment would increase our operating costs and could reduce our margins if we cannot recoup the increased costs through increased vehicle prices. Any attempts to increase the announced or expected prices of our vehicles in response to increased costs could be viewed negatively by our customers and could adversely affect our business, prospects, financial condition and operating results.
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If we are unable to scale our operations at our Union City facility in an expedited manner from our limited low volume production to high volume production, our business, prospects, financial condition and operating results will be adversely affected.
We are assembling our orders at our Union City facility which has been acceptable for our historical orders. To satisfy increased demand, we will need to quickly scale operations in our Union City facility as well as scale our supply chain including access to batteries. Such a substantial and rapid increase in operations may strain our management capabilities. Our business, prospects, financial condition and operating results could be adversely affected if we experience disruptions in our supply chain, if we cannot obtain materials of sufficient quality at reasonable prices or if we are unable to scale our Union City facility.
We depend upon key personnel and need additional personnel. The loss of key personnel or the inability to attract additional personnel may adversely affect our business and results of operations.
Our success depends on the continuing services of our CEO, Duane Hughes and top management. On November 6, 2019, Mr. Hughes and the Company entered into an Amended and Restated Employment Agreement. Further, we entered into an amended and restated employment agreement with Mr. Robert Willison, our Chief Operating Officer. The loss of any of these individuals could have a material and adverse effect on our business operations. Additionally, the success of our operations will largely depend upon our ability to successfully attract and maintain other competent and qualified key management personnel. As with any company with limited resources, there can be no guarantee that we will be able to attract such individuals or that the presence of such individuals will necessarily translate into profitability for our company. Our inability to attract and retain key personnel may materially and adversely affect our business operations. Any failure by our management to effectively anticipate, implement, and manage the changes required to sustain our growth would have a material adverse effect on our business, financial condition, and results of operations.
We face intense competition. Some of our competitors have substantially greater financial or other resources, longer operating histories and greater name recognition than we do and could use their greater resources and/or name recognition to gain market share at our expense or could make it very difficult for us to establish market share.
Companies currently competing in the fleet logistics market offering alternative fuel medium-duty trucks include Ford Motor Company and Freightliner. Ford and Freightliner are currently selling alternative fuel fleet vehicles including hybrids. Ford and Freightliner have substantially more financial resources, established market positions, long-standing relationships with customers and dealers, and who have more significant name recognition, technical, marketing, sales, financial and other resources than we do. Although we believe that HorseFly™, our unmanned aerial system (“UAS”), is unique in the marketplace in that it currently does not have any competitors when it comes to a UAS that works in combination with a truck, there are better-financed competitors in this emerging industry, including Google and Amazon. While we are seeking to partner with existing delivery companies to improve their efficiencies in the last mile of delivery, our competitors are seeking to redefine the delivery model using drones from a central location requiring extended flight patterns. Our competitors’ new aerial delivery model would essentially eliminate traditional package delivery companies. Our model is focused on coupling our delivery drone with delivery trucks supplementing the existing model and providing shorter-term flight patterns. Google and Amazon have more significant financial resources, established market positions, long-standing relationships with customers, more significant name recognition and a larger scope of resources including technical, marketing and sales than we do.
The resources available to our competitors to develop new products and introduce them into the marketplace exceed the resources currently available to us. As a result, our competitors may be able to compete more aggressively and sustain that competition over a longer period than we can. This intense competitive environment may require us to make changes in our products, pricing, licensing, services, distribution, or marketing to develop a market position. Each of these competitors has the potential to capture significant market share in our target markets, which could have an adverse effect on our position in our industry and on our business and operating results.
Our electric vehicles compete for market share with vehicles powered by other vehicle technologies that may prove to be more attractive than ours.
Our target market currently is serviced by manufacturers with existing customers and suppliers using proven and widely accepted fossil fuel technologies. Additionally, our competitors are working on developing technologies that may be introduced in our target market. If any of these alternative technology vehicles can provide lower fuel costs, greater efficiencies, greater reliability or otherwise benefit from other factors resulting in an overall lower total cost of ownership, this may negatively affect the commercial success of our vehicles or make our vehicles uncompetitive or obsolete.
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We currently have a limited number of customers, with whom we do not have long-term agreements, and expect that a significant portion of our future sales will be from a limited number of customers. The loss of any of these customers could materially harm our business.
A significant portion of our projected future revenue is expected to be generated from a limited number of fleet customers. Additionally, much of our business model is focused on building relationships with a few large fleet customers. Currently, we have no contracts with customers that include long-term commitments or minimum volumes that ensure future sales of vehicles. As such, a customer may take actions that negatively affect us for reasons that we cannot anticipate or control, such as reasons related to the customer’s financial condition, changes in the customer’s business strategy or operations or as the result of the perceived performance or cost-effectiveness of our vehicles. The loss of or a reduction in sales or anticipated sales to our most significant customers would have a material adverse effect on our business, prospects, financial condition and operating results.
Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity.
The modern electric vehicle industry is in its infancy and has experienced substantial change in the last few years. To date, demand for electric vehicles has been slower than forecasted by industry experts. As a result, growth in the electric vehicle industry depends on many factors outside our control, including, but not limited to:
•continued development of product technology, especially batteries;
•the environmental consciousness of customers;
•the ability of electric vehicles to successfully compete with vehicles powered by internal combustion engines; and
•whether future regulation and legislation requiring increased use of non-polluting vehicles is enacted.
We cannot assume that growth in the electric vehicle industry will continue. Our business will suffer if the electric vehicle industry does not grow or grows more slowly than it has in recent years or if we are unable to maintain the pace of industry demands.
President Trump’s administration may create regulatory uncertainty for the alternative energy sector and may materially harm our business, financial condition and operating results.
President Trump’s administration may create regulatory uncertainty in the alternative energy sector. During the election campaign, President Trump made comments suggesting that he was not supportive of various clean energy programs and initiatives designed to curtail global warming. Since taking office, President Trump has released his America First Energy Plan which relies on fossil fuels, canceled U.S. participation in the Paris Climate Agreement and signed several executive orders relating to oil pipelines. It remains unclear what specifically President Trump would or would not do with respect to these programs and initiatives, and what support he would have for any potential changes to such legislative programs and initiatives in the Unites States Congress. If President Trump and/or the United States Congress take action or publicly speak out about the need to eliminate or further reduce legislation, regulations and incentives supporting alternative energy or take action to further support the use of fossil fuels, such actions may result in a decrease in demand for alternative energy in the United States and may materially harm our business, financial condition and operating results.
The unavailability, reduction, elimination or adverse application of government subsidies, incentives and regulations could have an adverse effect on our business, prospects, financial condition and operating results.
We believe that, currently, the availability of government subsidies and incentives including those available in California and other areas is an important factor considered by our customers when purchasing our vehicles, and that our growth depends in part on the availability and amounts of these subsidies and incentives. Any reduction, elimination or discriminatory application of government subsidies and incentives because of budgetary challenges, policy changes, the reduced need for such subsidies and incentives due to the perceived success of electric vehicles or other reasons may result in the diminished price competitiveness of the alternative fuel vehicle industry.
We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position.
Our current products are designed for use with, and are dependent upon, existing electric vehicle technology. As technologies change, we plan to upgrade or adapt our products to continue to provide products with the latest technology. However, our
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products may become obsolete or our research and development efforts may not be sufficient to adapt to changes in or to create the necessary technology. Thus, our potential inability to adapt and develop the necessary technology may harm our competitive position.
The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business.
We have secured supply agreements for our critical components, including our batteries. However, the agreements are dependent on volume to ensure that they are available at a competitive price. If these suppliers become unwilling or unable to provide components or if we are unable to meet certain volume requirements in our existing supply agreements, there are a limited number of alternative suppliers who could provide them and the price for them could be substantially higher. Changes in business conditions, wars, governmental changes, and other factors beyond our control or which we do not presently anticipate could negatively affect our ability to receive components from our suppliers. Further, it could be difficult to find replacement components if our current suppliers fail to provide the parts needed for these products. A failure by our major suppliers to provide these components could severely restrict our ability to manufacture our products and prevent us from fulfilling customer orders in a timely fashion.
Product liability or other claims could have a material adverse affect on our business.
The risk of product liability claims, product recalls, and associated adverse publicity is inherent in the manufacturing, marketing, and sale of electrical vehicles. Although we have product liability insurance for our consumer and commercial products, that insurance may be inadequate to cover all potential product claims. We also carry liability insurance on our products. Any product recall or lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our coverage, may have a material adverse effect on our business and financial condition. We may not be able to secure additional product liability insurance coverage on acceptable terms or at reasonable costs when needed. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of other future product candidates. We cannot provide assurance that such claims and/or recalls will not be made in the future.
Regulatory requirements may have a negative impact upon our business.
While our vehicles are subject to substantial regulation under federal, state, and local laws, we believe that our vehicles are in compliance with all applicable laws. However, to the extent the laws change, or if we introduce new vehicles in the future, some or all of our vehicles may not comply with applicable federal, state, or local laws. Further, certain federal, state, and local laws and industrial standards currently regulate electrical and electronics equipment. Although standards for electric vehicles are not yet generally available or accepted as industry standards, our products may become subject to federal, state, and local regulation in the future. Compliance with these regulations could be burdensome, time consuming, and expensive.
Our products are subject to environmental and safety compliance with various federal and state regulations, including regulations promulgated by the EPA, NHTSA, FAA and various state boards, and compliance certification is required for each new model year. The cost of these compliance activities and the delays and risks associated with obtaining approval can be substantial. The risks, delays, and expenses incurred in connection with such compliance could be substantial.
Our success may be dependent on protecting our intellectual property rights.
We rely on trade secret protections to protect our proprietary technology as well as several registered patents and five patent applications. Our patents relate to the vehicle chassis assembly, vehicle header and drive module and manifold for electric motor drive assembly. Our existing patent applications relates to the onboard generator drive system for electric vehicles and the delivery drone. Our success will, in part, depend on our ability to obtain additional trademarks and patents. We are working on registering additional patents and trademarks with the United States Patent and Trademark Office but have not finalized any as of this date. Although we have entered into confidentiality agreements with our employees and consultants, we cannot be certain that others will not gain access to these trade secrets. Others may independently develop substantially equivalent proprietary information and technologies or otherwise gain access to our trade secrets. We do not maintain proprietary rights agreements with our employees, which agreements would further protect our intellectual property rights against claims by our employees. Therefore we may be subject to disputes with our employees over ownership of any new technologies or enhancements that such employees help to develop.
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Our business may be adversely affected by union activities.
Although none of our employees are currently represented by a labor union, it is common throughout the automotive industry for many employees at automotive companies to belong to a union, which can result in higher employee costs and increased risk of work stoppages. Our employees may join or seek recognition to form a labor union, or we may be required to become a union signatory. Our production facility in Union City, Indiana was purchased from Navistar. Prior employees of Navistar were union members and our future work force at this facility may be inclined to vote in favor of forming a labor union. Furthermore, we are directly or indirectly dependent upon companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a work stoppage occurs, it could delay the manufacture and sale of our trucks and have a material adverse effect on our business, prospects, operating results or financial condition. The mere fact that our labor force could be unionized may harm our reputation in the eyes of some investors. Consequently, the unionization of our labor force could negatively impact our company’s health.
We may be exposed to liability for infringing upon the intellectual property rights of other companies.
Our success will, in part, depend on our ability to operate without infringing on the proprietary rights of others. Although we have conducted searches and are not aware of any patents and trademarks which our products or their use might infringe, we cannot be certain that infringement has not or will not occur. We could incur substantial costs, in addition to the great amount of time lost, in defending any patent or trademark infringement suits or in asserting any patent or trademark rights, in a suit with another party.
Our electric vehicles make use of lithium-ion battery cells, which, if not appropriately managed and controlled, have occasionally been observed to catch fire or vent smoke and flames. If such events occur in our electric vehicles, we could face liability associated with our warranty, for damage or injury, adverse publicity and a potential safety recall, any of which would adversely affect our business, prospects, financial condition and operating results.
The battery packs in our electric vehicles use lithium-ion cells, which have been used for years in laptop computers and cell phones. On occasion, if not appropriately managed and controlled, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials. Highly publicized incidents of laptop computers and cell phones bursting into flames have focused consumer attention on the safety of these cells. These events also have raised questions about the suitability of these lithium-ion cells for automotive applications. There can be no assurance that a field failure of our battery packs will not occur, which would damage the vehicle or lead to personal injury or death and may subject us to lawsuits. Furthermore, there is some risk of electrocution if individuals who attempt to repair battery packs on our vehicles do not follow applicable maintenance and repair protocols. Any such damage or injury would likely lead to adverse publicity and potentially a safety recall. Any such adverse publicity could adversely affect our business, prospects, financial condition and operating results. Warranty expense for the years ended December 31, 2019 and 2018 was $0.1 million and $8.0 million, respectively.
We are subject to significant corporate regulation as a public company and failure to comply with all applicable regulations could subject us to liability or negatively affect our stock price.
As a publicly traded company, we are subject to a significant body of regulation, including the Sarbanes-Oxley Act of 2002. While we have developed and instituted a corporate compliance program based on what we believe are the current best practices in corporate governance and continue to update this program in response to newly implemented or changing regulatory requirements, we cannot provide assurance that we are or will be in compliance with all potentially applicable corporate regulations. If we fail to comply with any of these regulations, we could be subject to a range of regulatory actions, fines or other sanctions or litigation. If we disclose any material weakness in our internal control over financial reporting, our stock price could decline.
Any impairment of our investment in Lordstown Motor Corp. could negatively impact our financial results.
Our investment in Lordstown Motor Corp. ("LMC") is recorded at fair value. For the year ended December 31, 2019, the carrying value of our investment is $12.2 million. In the event there are future events or circumstances that are likely to have a significant adverse effect on LMC, 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 LMC available to us, including valuations based on recent third-party equity investments in LMC. If the fair value of the investment is less than its carrying value, we will recognize an impairment loss which will negatively impact our financial position and results of operations.
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Cyber-attacks could adversely affect the Company.
The Company faces a risk of cyber-attack. Cyber-attacks may include hacking, viruses, malware, denial of service attacks, ransomware or other data security breaches. The Company’s business requires the continued operation of information systems and network infrastructure. In the event of a cyber-attack that the Company was unable to defend against or mitigate, the Company could have its operations and the operations of its customers and others disrupted. The Company could also have their financial and other information systems and network infrastructure impaired, property damaged and customer and employee information stolen; experience substantial loss of revenues, response costs and other financial loss; and be subject to increased regulation, litigation, penalties and damage to their reputation.
Risks Related to Owning Our Warrants or Common Stock
There is no public market for the Warrants to purchase shares of our common stock.
There is no public trading market for Warrants to purchase shares of our common stock, and we do not expect a market to develop. In addition, we do not intend to apply to list the Warrants on any national securities exchange or other nationally recognized trading system, including the Nasdaq Capital Market. Without an active market, the liquidity of the Warrants will be limited, and warrant holders may not be able to resell the Warrants. If the Warrants cannot be resold, a holder will have to depend upon any appreciation in the value of our common stock over the exercise price of the Warrants in order to realize a return on investment in the Warrants.
Except as otherwise provided in the Warrants, holders of our Warrants will not have the rights or privileges of a holder of our common stock, including any voting rights, until such holders exercise their Warrants and acquire our common stock.
Except as otherwise provided in the Warrants, holders of our Warrants will not have the rights or privileges of a holder of our common stock, including any voting rights, until such holders exercise their Warrants and acquire our common stock. As a result, absent exercise of the Warrants, holders of the Warrants will not have the ability to vote their shares underlying the Warrants, which may limit the influence that investors in our offering may have over the outcome of matters submitted to our stockholders for a vote.
Our stock price and trading volume may be volatile, which could result in substantial losses for our stockholders.
The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We have experienced significant volatility in the price of our stock. In addition, the stock markets in general can experience considerable price and volume fluctuations.
We have not paid cash dividends in the past and have no immediate plans to pay cash dividends.
We plan to reinvest all of our earnings, to the extent we have earnings, in order to develop our products, deliver on our orders and cover operating costs and to otherwise become and remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot assure common stockholders that we would, at any time, generate sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend. Therefore, common stockholders should not expect to receive cash dividends on our common stock.
Stockholders may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that may not be the same as the price per share in our prior offerings. We may sell shares or other securities in any future offering at a price per share that is lower than the price per share paid by historical investors, which would result in those newly issued shares being dilutive. In addition, investors purchasing shares or other securities could have rights superior to existing stockholders, which could impair the value of existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by our historical investors.
Our charter documents and Nevada law may inhibit a takeover that stockholders consider favorable.
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Provisions of our certificate of incorporation and bylaws and applicable provisions of Nevada law may delay or discourage transactions involving an actual or potential change in control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. The provisions in our certificate of incorporation and bylaws:
•limit who may call stockholder meetings;
•do not provide for cumulative voting rights; and
•provide that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.
There are limitations on director/officer liability.
As permitted by Nevada law, our certificate of incorporation limits the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of our charter provision and Nevada law, shareholders may have limited rights to recover against directors for breach of fiduciary duty. In addition, our certificate of incorporation provides that we shall indemnify our directors and officers to the fullest extent permitted by law.
Risks Related to Owning Our Convertible Note
In the event we do not redeem our debt in shares of common stock, servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our obligations under the 4.5% Convertible Note (the "Note").
Our ability to make scheduled payments of principal or to pay interest on or to refinance the Note depends on our future performance, which is subject to economic, financial, competitive and other factors, some of which are beyond our control. As of December 31, 2019, our outstanding indebtedness is approximately $58.2 million, and the terms of the Note requires us to repay or redeem the full principal amount of the Note at maturity or any other time. Our business may not generate cash flow from operations in the future sufficient to satisfy our obligations under the Note. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance the Note will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the Note.
Some significant restructuring transactions may not constitute a fundamental change as defined in the Note, in which case we would not be obligated to offer to purchase the Note.
Upon the occurrence of a fundamental change, note holders have the right to require us to purchase the Note. However, the fundamental change provisions will not afford protection to holder of the Note in the event of other transactions that could adversely affect the Note. For example, transactions such as leveraged recapitalizations, refinancings, restructurings, or acquisitions initiated by us may not constitute a fundamental change requiring us to purchase the Note. In the event of any such transaction, the holders would not have the right to require us to purchase the Note, even though each of these transactions could increase the amount of our indebtedness, or otherwise adversely affect our capital structure or any credit ratings, thereby adversely affecting the holder of the Note.
Conversion of the Note may dilute the ownership interest of existing stockholders or may otherwise depress the price of our common stock.
Conversion of the Note will dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of the Note. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Note may encourage short selling by market participants because the conversion of the Note could be used to satisfy short positions, or anticipated conversion of the Note into shares of our common stock could depress the price of our common stock.
Upon conversion of the Note, note holders may receive less valuable consideration than expected because the value of our common stock may decline after you exercise your conversion right but before we settle our conversion obligation.
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Under the Note, a converting holder will be exposed to fluctuations in the value of our common stock during the period from the date such holder surrenders the Note for conversion until the date we settle our conversion obligation. We will deliver the consideration due in respect of conversion on the second business day immediately following the relevant conversion date. Accordingly, if the price of our common stock decreases during this period, the amount and/or value of consideration a note holder will receive will be adversely affected.
The fundamental change repurchase feature of the Note may delay or prevent an otherwise beneficial attempt to take over our Company.
The terms of the Note require us to repurchase the Note in the event of a fundamental change. A takeover of our Company would trigger an option of the holder of the Note to require us to repurchase the Note. This may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to investors in the Note.
The holder of the Note will not be entitled to certain rights with respect to our common stock, but will be subject to all changes made with respect to them.
The holder of the Note will not be entitled to certain rights with respect to our common stock (including, without limitation, voting rights) but to the extent the conversion consideration includes shares of our common stock, the holder of the Note will be subject to all changes affecting our common stock.
We cannot assure that an active trading market will develop for the Note.
There has been no trading market for the Note, and we do not intend to apply to list the Note on any securities exchange or to arrange for quotation on any automated dealer quotation system. As a result, we cannot assure note holders that an active trading market will develop for the Note. If an active trading market does not develop or is not maintained, the market price and liquidity of the Note may be adversely affected. In that case note holders may not be able to sell the Note at a particular time or note holders may not be able to sell their Note at a favorable price.
We are subject to certain covenants set forth in the Note. Upon an event of default, including a breach of a covenant or the failure to obtain shareholder approval to increase our authorized shares of common stock, we may not be able to make such accelerated payments under the Note.
The Note contains customary events of default, including for non-payment, misrepresentation, breach of covenants, defaults under other material indebtedness, material adverse change, bankruptcy, change of control and material judgments. Among other things, we will be required to maintain a minimum liquidity of at least $8.0 million at all times. We do not expect that we will be able to maintain compliance with this covenant unless we obtain further financing in addition to the proceeds of this offering.
Upon an event of default, the outstanding principal amount of the loan plus any other amounts owed under the Note will become immediately due and payable and the holder of the Note could foreclose on our assets. A default would also likely significantly diminish the market price of our common stock.
Note holders may be subject to tax if we make or fail to make certain adjustments to the applicable conversion rate of the Note even though note holders did not receive a corresponding cash distribution.
The conversion rate is subject to adjustment in certain circumstances, including the payment of cash dividends. If the applicable conversion rate is adjusted as a result of a distribution that is taxable to our common stockholders, such as a cash dividend, note holders may be deemed to have received a dividend subject to U.S. federal income tax without the receipt of any cash. In addition, a failure to adjust (or to adjust adequately) the applicable conversion rate after an event that increases a note holders' proportionate interest in us could be treated as a deemed taxable dividend to a note holder.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
The following table sets forth the location, approximate size and primary use of our principal owned, leased and licensed facilities:
| Location | Approximate Size (Building) in Square Feet | Primary Use | Owned, Lease or Licensed | Lease/License Expiration Date (if applicable) | ||||||||||||||||||||||
| Loveland, Ohio | 45,000 | Administration, Research and Development, Manufacturing | Owned | N/A | ||||||||||||||||||||||
| Union City, Indiana | 250,000 | Manufacturing | Owned | N/A | ||||||||||||||||||||||
| Loveland, Ohio | 5,810 | Administration | Lease | Monthly | ||||||||||||||||||||||
We believe our facilities are in good operating condition and that our facilities are adequate for all present and near term uses.
ITEM 3. LEGAL PROCEEDINGS
In May 2018, Precision Manufacturing Company, Inc. (“PMC”) filed a complaint against the Company in the Common Pleas Court of Montgomery, Ohio, which complaint was amended July 26, 2018. PMC, a former vendor, is claiming Breach of Contract, Unjust Enrichment, Action on Account and Fraud and is seeking approximately $132,000 in damages plus attorney fees and costs. On June 10, 2019, the Company and PMC settled all claims whereby the Company paid PMC $75,000 in consideration of PMC releasing the Company.
In August 2018, Workhorse Motor Works Inc was served with a Declaration of Forced Intervention and Application in Warranty in connection with an action in the Superior Court (Civil Division) located in the Province of Quebec, District of Montreal between Aviva Insurance Company of Canada v. Thor Motor Coach and Navistar Canada, Inc. pertaining to the motor home destroyed by fire. The Company intends to vigorously defend this action. On October 22, 2019, the parties entered into a Settlement Agreement whereby the parties agreed to settle the matter for a nominal cash payment in consideration of a full release.
On May 3, 2019, C.E.E., LLC, a California limited liability company filed an action entitled C.E.E., LLC, a California limited liability company, against the Company in the Central Justice Center of the Superior Court of California for the County of Orange, Case No. 30- 2019-01067928-CU-BC-CJC for breach of contract. In August 2019, the parties settled all claims whereby the Company paid C.E.E., LLC $75,000 in consideration of C.E.E., LLC releasing the Company.
On January 10, 2019, the Company was served with a Default Request, Affidavit, Entry and Judgment in the Circuit Court for the County of Oakland by a former service provider (“Vendor”) relating to a Verified Complaint by Pilot for Breach of Contract claim that the Company was not properly served. On February 14, 2019, the Company and Pilot entered into a Stipulated Order to Set Aside and Dismiss Lawsuit providing that the parties have entered into a Settlement Agreement whereby Workhorse agreed to make cash payments in the amount of $600,000 in several tranches in return of certain property including two development chassis, the development vehicle and all intellectual property developed as well as a full release of all parties.
On July 18, 2019, All Cell Technologies, LLC and Illinois Institute of Technology filed a Complaint for Patent Infringement against the Company in the United States District Court for the Southern District of Indiana (Civil Action No. 1:19-cv-2975) claiming infringement of US Patent No. 6,468,689, 6,942,944 and, 8,273,474. On October 28, 2019, the Company filed its Answer, Affirmative Defenses and Counterclaims. On November 18, 2019, the Plaintiffs filed their Answer to Counterclaims.
On November 21, 2019, the Court entered a Scheduling Order with a trial date set for June 21, 2021. On February 28, 2020, the Court ordered a Settlement Conference between the parties for May 22, 2020 before the Magistrate Judge assigned to the case. Management of the Company believes this lawsuit is baseless and, in addition to defending itself vigorously, is also pursuing whether the lawsuit can be settled. Because the number of allegedly infringing products (battery bricks) is small and the accused products are no longer being used by the Company, Management believes that the lawsuit may be amenable to early resolution.
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On October 15, 2019, Jennifer Johnson-Campbell, individually, and as administrator of the Estate of Cathy and Windham Johnson, deceased, and Jessica Tagney, Individually, filed a Complaint in the Superior Court of Dougherty County in the State of Georgia (Civil Action File No. 2019SUCV2019001345) against the Company in connection with the death of the plaintiff while operating a W-42 truck on October 19, 2017 claiming Strict Liability, Negligence and Punitive Damages. The Company does not believe it manufactured the W-42 that is the subject to the Complaint. On November 15, 2019, the Company removed this case to U.S. District Court for the Middle District of Georgia (Civil Action File No 1:19-cv-00209), and on December 6, 2019, timely filed a motion to dismiss for lack of personal jurisdiction and failure to state a claim, advising the court and the Plaintiffs that the Company was not the manufacturer of the subject W-42 truck and had insufficient contacts with the state of Georgia to justify the exercise of jurisdiction in Georgia. The Plaintiffs responded to the motion to dismiss on December 26, 2019 and subsequently filed a motion for leave to amend their complaint to add Workhorse Trucks, Inc., Navistar, and Workhorse Custom Chassis, LLC. The Company opposed the motion for leave to amend on the grounds that the proposed amendments would be futile, because Georgia courts do not have jurisdiction over either the Company or Workhorse Trucks. The motions are fully briefed and pending before the Court. In the event that the motion to dismiss is not granted, the Company will vigorously defend themselves and, among other things, move for summary judgment at the close of discovery on the grounds that these entities did not manufacture the subject truck.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company's common stock is traded on the NASDAQ Capital Market under the symbol “WKHS”.
Holders of our Common Stock
As of February 28, 2020, there were approximately 200 stockholders of record of our common stock. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.
Dividends
The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain future earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.
Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or incorporated by reference into any filing of Workhorse under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph shows a comparison from January 1, 2014 through December 31, 2019, of the cumulative total return for our common stock, the NASDAQ Composite Index, and a group of peer group companies similarly situated. Such returns are based on historical results and are not intended to suggest future performance. Data for The NASDAQ Composite Index and the peer group assumes an investment of $100 on January 1, 2014 and reinvestment of dividends. We have never declared or paid cash dividends on our capital stock nor do we anticipate paying any such cash dividends in the foreseeable future.
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Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2019:
| Plan | Number of Securities to be Issued upon Exercise of Outstanding Options and Rights | Weighted Average Exercise Price of Outstanding Options | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in first column) | |||||||||||||||||
Equity Compensation Plans approved by security holders - 2015 Stock Incentive Plan | 197,500 | $ | 4.41 | — | ||||||||||||||||
Equity Compensation Plans approved by security holders - 2016 Stock Incentive Plan | 455,000 | $ | 6.59 | — | ||||||||||||||||
Equity Compensation Plans approved by security holders - 2017 Stock Incentive Plan | 2,672,500 | $ | 1.64 | 2,235,000 | ||||||||||||||||
Equity Compensation Plans approved by security holders - 2019 Stock Incentive Plan | 400,000 | $ | 0.93 | 5,794,778 | ||||||||||||||||
| 3,725,000 | 8,029,778 | |||||||||||||||||||
Unregistered Sales of Equity Securities
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. 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.
The Company entered into an employment agreement (the “Ackerson Employment Agreement”) with Mr. Ackerson, effective November 12, 2019. Pursuant to the Ackerson Employment Agreement, among other compensation, Mr. Ackerson was granted 104,166 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years.
On November 6, 2019, the Company entered into an amended and restated employment agreement (the “Hughes Employment Agreement”) with Duane Hughes, Chief Executive Officer, effective November 6, 2019. Pursuant to the Hughes Employment Agreement, among other compensation, the Company granted 239,044 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years commencing on January 1, 2020. The stock options to acquire 1,000,000 shares of common stock issued earlier in 2019 immediately vested on the effective date of the Hughes Employment Agreement.
The Company entered into an amended and restated employment agreement (the “Willison Employment Agreement”) with Mr. Robert Willison, Chief Operating Officer, effective November 6, 2019. Pursuant to the Willison Employment Agreement, Mr.
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Willison, among other compensation, was granted 119,522 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years commencing on January 1, 2020.
The Company entered into an employment agreement (the “Furey Employment Agreement”) with Mr. Anthony Furey, Vice President of Finance, effective November 6, 2019. Pursuant to the Furey Employment Agreement, Mr. Furey, among other compensation, was granted 338,648 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years. In addition, for services in relation to the sale of Surefly during the year ended December 31, 2019, Mr. Furey was granted 34,496 shares of restricted common stock which vested on November 27, 2019.
On November 6, 2019, the Company appointed Mr. Stephen M. Fleming as General Counsel and Vice President of the Company. In connection with the appointment of Mr. Fleming, the Company entered into an employment agreement (the “Fleming Employment Agreement”) with Mr. Fleming effective November 6, 2019. Pursuant to the Fleming Employment Agreement, among other compensation, Mr. Fleming was granted 517,928 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan.
The Company granted Ray Chess, Chairman of the Board, 47,809 shares of restricted common stock for historical services rendered for which no director compensation was received. The restricted stock will vest over two years in semi-annual installments commencing May 6, 2020. In addition, for director services for the year ended December 31, 2019, Mr. Chess was granted 29,880 shares of common stock vesting May 6, 2020. Going forward, Mr. Chess will receive an annual grant of restricted stock in the amount of $75,000. In addition, Michael Clark, Gerald Budde, Benjamin Samuels and Harry DeMott were granted 47,809 restricted common stock in consideration for historical services. The restricted stock will vest over two years in semi-annual installments commencing on May 6, 2020. In addition, for director services for the year ended December 31, 2019, Messrs. Clark, Budde, Samuels and DeMott were granted 23,904 shares of restricted common stock vesting May 6, 2020. Going forward, Messrs. Clark, Budde, Samuels and DeMott will receive an annual grant of restricted stock in the amount of $60,000. All stock grants were issued under the Company’s 2019 Stock Incentive Plan.
Pursuant to the Credit Agreement entered between the Company and Marathon Asset Management, LP, on behalf of certain entities it manages (the “Marathon Lenders”), dated December 31, 2018 , the Company issued the Marathon Lenders warrants to acquire 358,450 shares of common stock exercisable at a price of $1.039 per share on March 27, 2019, 1,481,825 shares of common stock exercisable at a price of $1.4863 per share on June 30, 2019, 11,274 shares of common stock exercisable at a price of $1.782 per share on July 1, 2019, 34,293 shares of common stock exercisable at a price of $1.782 per share on October 1, 2019, 1,493,624 shares of common stock exercisable at a price of $3.355 per share on December 4, 2019 and 34,293 shares of common stock exercisable at a price of $1.782 per share on January 1, 2020.
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. During the year ended December 31, 2019, the Company issued 718,755 shares of common stock to the holders of the Preferred Stock.
The Company entered into an employment agreement (the “Schrader Employment Agreement”) with Mr. Schrader effective December 19, 2019. Pursuant to the Schrader Employment Agreement, Mr. Schrader, among other compensation, was granted Mr. Schrader 84,877 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years commencing on July 1, 2020.
The shares of common stock described above have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) and were issued and sold in reliance upon the exemption from registration contained in Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. Each of the parties is an accredited investor as defined by Rule 501 under the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
| YEARS ENDED DECEMBER 31, | 2019 | 2018 | 2017 | |||||||||||||||||
| OPERATING SUMMARY | ||||||||||||||||||||
| Net sales | $ | 376,562 | $ | 763,173 | $ | 10,038,460 | ||||||||||||||
| Net loss | $ | (37,162,827) | $ | (36,502,316) | $ | (41,216,788) | ||||||||||||||
| Net loss attributable to common stockholders per share – basic and diluted | $ | (0.58) | $ | (0.74) | $ | (1.06) | ||||||||||||||
| Weighted average number of common shares outstanding | 64,314,756 | 50,377,909 | 38,755,796 | |||||||||||||||||
| FINANCIAL POSITION SUMMARY | ||||||||||||||||||||
| Total assets | $ | 50,673,829 | $ | 11,804,773 | $ | 16,504,293 | ||||||||||||||
| Long-term debt and mandatory redeemable Series B preferred stock | $ | 19,142,908 | $ | 8,312,079 | $ | 1,709,881 | ||||||||||||||
| Convertible Note, at fair value | $ | 39,020,000 | $ | — | $ | — | ||||||||||||||
| Cash dividends per common share | $ | — | $ | — | $ | — | ||||||||||||||
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this Annual Report on Form 10-K.
Overview and 2019 Highlights
We are 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 battery-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. We have licensed some of our previously developed intellectual property to Lordstown Motors Corp. (“LMC”) and have sold our SureFly™ multicopter business which were assets that are outside of our core focus.
Workhorse electric delivery trucks are in use by our customers on U.S. roads. Our delivery customers include companies such as UPS, FedEx Express, Alpha Baking and W.B. Mason. Data from our in-house developed telematics system demonstrates our vehicles on the road are averaging approximately a 500% increase in fuel economy as compared to conventional gasoline-based trucks of the same size and duty cycle.
In addition to improved fuel economy, we anticipate that the performance of our vehicles on-route will reduce long-term vehicle maintenance expense by approximately 60% as compared to fossil-fueled trucks.
We are an OEM capable of manufacturing Class 3-6 commercial-grade, medium-duty truck at our Union City, Indiana facility, marketed under the Workhorse® brand. Workhorse last mile delivery trucks are assembled in the Union City assembly facility.
From our development modeling and the existing performance of our electric vehicles on American roads, we estimate that our C-Series delivery trucks will save over $170,000 in fuel and maintenance savings over the 20-year life of the vehicle. We expect that fleet buyers will be able to achieve a three-year or better return-of-investment (without government incentives), which we believe justifies the higher acquisition cost of our vehicles.
Our goal is to continue to increase sales and production, while executing on our cost-down strategy to a point that will enable us to achieve gross margin profitability of the last mile delivery truck platform. As a key strategy, we have developed the Workhorse C-Series platform, which has been accelerated from our previous development efforts.
The Workhorse C-Series electric delivery truck platform will be available in multiple size configurations, 450, 650 and 1,000 cubic feet. This ultra-low floor platform incorporates state-of-the-art safety features, economy and performance. We expect these vehicles offer fleet operators the most favorable total cost-of-ownership of any comparable vehicle available today. We believe we are the first American OEM to market a U.S. built electric delivery truck, and early indications of fleet interest are significant. We expect the C-Series trucks will be supported by our Ryder Systems partnership. Using C-Series light duty prototypes, we delivered over 100,000 packages in San Francisco and Ohio during our testing. During the testing period we achieved 50 MPGe and successfully demonstrated the role the vehicle can have in last mile delivery.
Our HorseFly™ delivery drone is a custom designed, purpose-built drone that is fully integrated in our electric trucks. HorseFly is designed with a maximum gross weight of 30 lbs., a 10 lb. payload and a maximum air speed of 50 mph. It is designed and built to be rugged and consisting of redundant systems to further meet the FAA’s required rules and regulations. As part of the divestiture of SureFly, the Company formed a 50/50 joint venture to which we contributed our HorseFly technology.
SureFly
On November 27, 2019, the Company completed the sale of SureFly for $4.0 million.
Hackney
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On October 31, 2019, the Company and ST Engineering Hackney, Inc. ("Seller") entered into an Asset Purchase Agreement (the "Purchase Agreement") to purchase certain assets of Seller (the "Acquired Assets") and assume certain liabilities of Seller. The closing under the Purchase Agreement provides that the Company will be required to deliver shares of its common stock to the Seller if it does not make the Second Payment (as defined below) on a timely basis. Accordingly, upon execution of the Purchase Agreement, the Company deposited $1.0 million in cash and shares of its common stock having an aggregate value of $6.6 million based on the closing price as of the day immediately preceding the date of the Purchase Agreement (the "Escrow Shares") into an escrow account (the "Escrow Account"). The number of Escrow Shares shall be subject to adjustment if the aggregate value of the Escrow Shares is less than $5.28 million or greater than $7.92 million on certain dates.
The Company agreed to pay $7.0 million for the purchase of the Acquired Assets, $1.0 million of which was paid from the Escrow Account in January 2020 after satisfaction of certain conditions, and the remaining $6.0 million which (the “Second Payment”) is payable in cash within 45 days if certain additional conditions are attained. 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 such payment is due. In the event the Second Payment is not made to Seller within 105 days after such payment is due, 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 $6,000,000 in satisfaction of the Second Payment.
LMC
On November 7, 2019, the Company entered into a transaction with LMC pursuant to which the Company agreed to grant LMC a perpetual and worldwide license to certain intellectual property relating to the Company’s W-15 electric pickup truck platform and its related technology (the “Licensed Intellectual Property”) in exchange for royalties, equity interests in LMC, and other consideration (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, of which 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 (“GVW”) using the Licensed Intellectual Property (the “Vehicles”).
Under the Agreements, LMC has exclusive rights to the Licensed Intellectual Property from the date of the License Agreement 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.
LMC must pay the Company one percent of the aggregate debt and equity commitments funded to LMC upon completion of the Capital Raise (the “Royalty Advance”). LMC must also pay 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 exceed the amount paid as the Royalty Advance. Upon completion of the Capital Raise, the Company intends to transfer its approximately 6,000 existing orders for Vehicles to LMC, subject to customer consent. LMC will pay the Company a four percent commission on the gross sales price of any transferred existing 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.
Under the Subscription Agreement, LMC issued ten percent of its common stock to the Company in exchange for the Company’s obligations under the License Agreement. The Subscription Agreement grants the Company anti-dilution rights for
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two years. The Company is subject to certain restrictions on transferring LMC’s equity for this two-year period. Under the Voting Agreement, the Company has the right to designate one director to LMC’s board of directors, subject to certain limitations.
Results of Operations
Our Consolidated Statements of Operations financial information is as follows:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Net sales | $ | 376,562 | 763,173 | ||||||||
| Cost of sales | 5,752,700 | 7,981,413 | |||||||||
| Warranty expense | 92,191 | 7,972,152 | |||||||||
| Gross loss | (5,468,329) | (15,190,392) | |||||||||
| Operating expenses | |||||||||||
| Selling, general and administrative | 10,199,534 | 11,485,482 | |||||||||
| Research and development | 8,199,074 | 7,391,693 | |||||||||
| Total operating expenses | 18,398,608 | 18,877,175 | |||||||||
| Other income | 15,849,800 | — | |||||||||
| Loss from operations | (8,017,137) | (34,067,567) | |||||||||
| Interest expense, net | 29,145,690 | 2,434,749 | |||||||||
| Loss before provision for income taxes | (37,162,827) | (36,502,316) | |||||||||
| Provision for income taxes | — | — | |||||||||
| Net loss | $ | (37,162,827) | $ | (36,502,316) | |||||||
Revenue
Net sales for the years ended December 31, 2019 and 2018 were $0.4 million and $0.8 million, respectively. The decrease in net sales was primarily due to a strategic shift to development of the C-Series, which resulted in a decrease in volume of trucks sold.
Cost of Sales
Cost of sales for the years ended December 31, 2019 and 2018 were $5.8 million and $8.0 million, respectively. The cost of sales decrease was primarily due to a decrease in volume of trucks sold due to strategic shift to development of the C-Series platform. In addition, cost of sales included an inventory reserve of $0.7 million and $2.5 million for the years ended December 31, 2019 and 2018, respectively.
Warranty Expense
Warranty expense for the years ended December 31, 2019 and 2018 was $0.1 million and $8.0 million, respectively. The expense in 2018 relates to issues with certain battery packs in our 2016 and 2017 E-Series trucks. During the fourth quarter of 2018, the battery pack monitoring software indicated that some of the battery packs were not performing at expected levels. In 2019, some vehicles have undergone replacement of battery pack components. The expense includes estimated costs for labor and transportation and excludes any contribution from vendors.
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Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2019 were $10.2 million, a decrease from $11.5 million for the year ended December 31, 2018. The decrease is primarily due to lower spending in areas such as marketing and employee-related costs.
Research and Development Expenses
Research and development (“R&D”) expenses for the year ended December 31, 2019 were $8.2 million, an increase from $7.4 million for the year ended December 31, 2018. The increase in R&D expenses is due to the increase in prototype and product design expenses for our bid for the United States Postal Service and for the C-Series design.
Other Income
Other income is comprised of the following:
| 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
On November 7, 2019, the Company entered into a transaction with LMC and granted LMC a perpetual license to certain intellectual property.
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 owed is sold.
SureFly 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.
28
Interest Expense, Net
Interest expense, net is comprised of the following:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Contractual interest expense | $ | 4,673,979 | $ | 520,130 | |||||||
| Amortization of discount and debt issuance costs | 1,922,164 | 2,348,289 | |||||||||
| Loss on extinguishment of debt | 6,079,000 | 2,249,800 | |||||||||
| Change in fair value of warrant liability | 15,369,253 | (2,683,470) | |||||||||
| Change in fair value of Convertible Note | 981,728 | — | |||||||||
| Other | 119,566 | — | |||||||||
| Total interest expense, net | $ | 29,145,690 | $ | 2,434,749 | |||||||
Contractual interest expense increased due to higher loan balances year-over-year. The dividends on the mandatory redeemable Series B preferred stock are classified as interest expense. The loss on extinguishment of debt in 2019 includes a $2.4 million write-off of deferred loan fees and a $3.4 million premium payable on the early payoff of the Marathon Loans. The loss on extinguishment of debt in 2018 includes a $2.2 million write-off of deferred loan fees on the payoff of the Arosa Loans. Warrants issued under certain of our loan agreements have been classified as liabilities and are marked-to-market at each balance sheet date until terms of the respective warrant agreements change and no longer meet the criteria to be classified as liabilities. Our 4.5% Convertible Note issued in December 2019 (the "Convertible Note") is accounted for at fair value and changes in fair value are classified in interest expense.
Provision for Income Tax
For the years ended December 31, 2019 and 2018, the Company has net losses and no current tax expense or benefit 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 has been recorded.
Liquidity and Capital Resources
Cash Requirements
From inception, we have financed our operations primarily through sales of equity securities and issuance of debt. We have utilized this capital for research and development and to fund designing, building and delivering vehicles to customers and for working capital purposes.
As of December 31, 2019, we had approximately $23.9 million in cash and cash equivalents, compared to approximately $1.5 million as of December 31, 2018, an increase of $22.4 million. The increase in cash and cash equivalents was primarily attributable to the issuance of debt and other financings during the year offset by cash used in operations.
We believe our existing capital resources will be sufficient to support our current and projected funding requirements through the second quarter of 2020 after which time additional funding will be required.
Our operations will require significant additional funding for the foreseeable future. Unless we are able to generate a sufficient amount of revenue and reduce our costs, we expect to finance future cash needs through public and/or private offerings of equity securities and/or debt financings. With the exception of contingent and royalty payments that we may receive under our existing collaborations, we do not currently have any committed future funding. To the extent we raise additional capital by issuing equity securities, our stockholders could at that time experience substantial dilution. Any debt financing that we are able to obtain may involve operating covenants that restrict our business.
29
Our future funding requirements will depend upon many factors, including, but not limited to:
•our ability to acquire or license other technologies that we may seek to pursue;
•our ability to manage our growth;
•competing technological and market developments;
•the costs and timing of obtaining, enforcing and defending our patent and other intellectual property rights; and
•expenses associated with any unforeseen litigation.
For the years ended December 31, 2019 and 2018, we maintained an investment in a bank money market fund. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation. Wherever possible, we seek to minimize the potential effects of concentration and degrees of risk. We will continue to monitor the impact of the changes in the conditions of the credit and financial markets to our investment portfolio and assess if future changes in our investment strategy are necessary.
Summary of Cash Flows
| For the Years Ended December 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Net cash used in operating activities | $ | (36,871,677) | $ | (21,754,133) | |||||||
| Net cash provided by (used in) investing activities | 1,654,502 | (18,422) | |||||||||
| Net cash provided by financing activities | 58,572,841 | 19,215,828 | |||||||||
Cash Flows from Operating Activities
Our cash flows from operating activities are affected by our cash investments to support the business in research and development, manufacturing, selling, general and administration. Our operating cash flows are also affected by our working capital needs to support fluctuations in inventory, personnel expenses, accounts payable and other current assets and liabilities.
During the years ended December 31, 2019 and 2018, cash used in operating activities was $36.9 million and $21.8 million, respectively. The increase in net cash used in operations in 2019 as compared to 2018 is mainly due to the net loss for the year, payments for prepaid purchases during the year and the reduction of accounts payable and accrued expense balances.
Cash Flows from Investing Activities
During the year ended December 31, 2019 cash provided by investing activities was $1.7 million, while in 2018 it was negligible. The Company received net proceeds from the divestiture of SureFly of $3.7 million and had capital expenditures of $2.0 million for tooling for the production of the C-Series truck.
Cash Flows from Financing Activities
During the years ended December 31, 2019 and 2018, net cash provided by financing activities was $58.6 million and $19.2 million, respectively.
The significant financing activities that occurred in 2019 and 2018 include:
2019
•Issuance of Convertible Note with net proceeds of $39.0 million.
•Issuance of Series B Preferred Stock with net proceeds of $25.0 million.
•Sale of common stock with net proceeds of $5.9 million.
•$5.8 million drawn on the Marathon Tranche Two loan, paid off at the end of 2019.
•$10.0 million for the pay off of the Marathon Tranche One loan.
30
2018
•$17.8 million net proceeds from long-term debt.
•Sale of common stock with net proceeds of $16.4 million.
•$9.9 million of payments on long-term debt.
•$5.8 million payment on notes payable.
The Company may seek to raise additional capital through public or private debt or equity financings in order to fund its operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Policies and Estimates
The following accounting principles and practices of the Company are set forth to facilitate the understanding of data presented in the consolidated financial statements:
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Investment in LMC
We have an investment in LMC, which is a private company with no readily determinable fair value. We have elected the measurement alternative for valuing our investment in LMC. 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 made in LMC.
Warranty liability
We generally offer warranty coverage for our products. We accrue warranty related costs under standard warranty terms and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers. As of December 31, 2019 and 2018 the warranty liability was $6.0 million and $7.1 million, respectively.
Provisions for estimated assurance warranties are recorded at the time of sale and are periodically adjusted to reflect actual experience. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring Company obligations under the warranty plans. Historically, the cost of fulfilling the Company’s warranty obligations has principally involved replacement parts, labor and sometimes travel for any field retrofit campaigns. The Company’s estimates are based on historical experience, the extent of pre-production testing, the number of units involved and the extent of features/components included in product models. Also, each quarter, the Company reviews actual warranty claims experience to determine if there are systemic defects that would require a field campaign.
Although we believe that the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed to increases or decreases in our warranty accrual that could be material.
Warrant liability
We account for certain outstanding common stock warrants as liabilities recorded at fair value which are marked-to-market at the end of each reporting period. As of December 31, 2019 and 2018 the warrant liability was $16.3 million and $1.8 million, respectively. The warrant liability is remeasured at each balance sheet date until the warrants are exercised, expire or there is a change in their terms that changes their classification to an equity instrument. Any change in fair value is recognized as an adjustment to current period interest expense. The fair value of the warrants is measured using a Black-Scholes valuation model which includes various inputs, including the market price of our common stock on the balance sheet date and estimated
31
volatility of our common stock. If factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different. Generally, as the market price of our common stock increases, the fair value of the warrant increases, and conversely, as the market price of our common stock decreases, the fair value of the warrant decreases. Also, a significant increase in the volatility of the market price of the Company’s common stock, in isolation, would result in a significantly higher fair value measurement; and a significant decrease in volatility would result in a significantly lower fair value measurement. Changes in the fair value of the warrants are reflected in the Consolidated Statements of Operations as Interest Expense.
Fair Value Option for Convertible Notes
As permitted under ASC 825, Financial Instruments, (“ASC 825”), the Company has elected the fair value option to account for its Convertible Note that was issued during 2019. As of December 31, 2019 the fair value of the Convertible Note was $39.0 million. 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. 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 fair value is determined using a binomial lattice valuation model, which is widely used for valuing convertible notes. The significant assumptions used in the model are the credit spread and the volatility of the Company's common stock. If different assumptions are used, the fair value of the convertible notes and the change in estimated fair value could be materially different. Generally, as the credit spread increases, the fair value decreases, and conversely, as the credit spread decreases, the fair value of the convertible notes increases. Also, a significant increase in the volatility of the market price of the Company’s common stock, in isolation, would result in a significantly higher fair value; and a significant decrease in volatility would result in a significantly lower fair value.
Income taxes
The Company has had no taxable income for the last three years and deferred tax assets of $33.4 million at December 31, 2019 are fully reserved. No provision or benefit for federal or state income taxes has been included in the consolidated financial statements.
Research and development costs
Research and development costs are expensed as they are incurred. Research and development expense was $8.2 million and $7.4 million for the years ended December 31, 2019 and 2018, respectively, consisting of consulting, payroll and payroll taxes, engineering, supplies, legal fees, parts and small tools.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities in which we invest may have market risk. This means that a change in prevailing interest rates may cause the fair value amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value amount of our investment will decline. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including money market funds and government and non-government debt securities and the maturities of each of these instruments is less than one year. In 2019, we maintained an investment portfolio primarily in money market funds. Due to the primarily short-term nature and low interest rate yields of these investments, we believe we do not have a material exposure to interest rate risk and market risk arising from our investments. Therefore, no quantitative tabular disclosure is provided.
We have operated primarily in the United States. Accordingly, we have not had any significant exposure to foreign currency rate fluctuations.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
| Financial Statements: | |||||
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Workhorse Group Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Workhorse Group Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated March 13, 2020 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
March 13, 2020
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Workhorse Group Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Workhorse Group Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 13, 2020 expressed an unqualified opinion.
Going concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company incurred a net loss of $37,162,827 during the year ended December 31, 2019, and as of that date, the Company’s current liabilities exceeded its current assets by $15,524,360 and its total liabilities exceeded its total assets by $34,913,110. These conditions, along with other matters as set forth in Note 1, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2018.
Cincinnati, Ohio
March 13, 2020
F-3
Workhorse Group Inc.
Consolidated Balance Sheets
| December 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash held in escrow | |||||||||||
Accounts receivable, less allowance for doubtful accounts of $ | |||||||||||
| Lease receivable, current | |||||||||||
| Inventory, net | |||||||||||
| Prepaid expenses and deposits | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Investment in LMC | |||||||||||
| Lease receivable, long-term | |||||||||||
| Total Assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Deficit | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Warranty liability | |||||||||||
| Warrant liability | |||||||||||
| Customer deposits | |||||||||||
| Duke financing obligation | |||||||||||
| Current portion of Convertible Note, at fair value | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | — | ||||||||||
| Convertible Note, at fair value | — | ||||||||||
| Mandatory redeemable Series B preferred stock | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ deficit: | |||||||||||
Series A preferred stock, par value of $ | |||||||||||
Common stock, par value of $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders' deficit | ( | ( | |||||||||
| Total Liabilities and Stockholders' Deficit | $ | $ | |||||||||
See accompanying notes to the consolidated financial statements.
F-4
Workhorse Group Inc.
Consolidated Statements of Operations
| For the Years Ended December 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Net sales | $ | $ | |||||||||
| Cost of sales | |||||||||||
| Warranty expense | |||||||||||
| Gross loss | ( | ( | |||||||||
| Operating expenses | |||||||||||
| Selling, general and administrative | |||||||||||
| Research and development | |||||||||||
| Total operating expenses | |||||||||||
| Other income | |||||||||||
| Loss from operations | ( | ( | |||||||||
| Interest expense, net | |||||||||||
| Loss before provision for income taxes | ( | ( | |||||||||
| Provision for income taxes | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Net loss attributable to common stockholders per share - basic and diluted | $ | ( | $ | ( | |||||||
| Weighted average number of common shares outstanding | |||||||||||
See accompanying notes to the consolidated financial statements.
F-5
Workhorse Group Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
For the Years Ended December 31, 2019 and 2018
| Common Stock | Series A Preferred Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | ||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2017 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
Issuance of common stock | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock options and warrants exercised | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Exchange offer - 2017 Warrants deemed dividend | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||
| Exchange offer - 2017 Warrants | — | — | ( | — | |||||||||||||||||||||||||||||||||||||
Conversion of accounts payable | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net loss for the year ended December 31, 2018 | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2018 | ( | ( | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock | — | — | — | ||||||||||||||||||||||||||||||||||||||
Stock options and warrants exercised, and vesting of restricted shares | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Reclassification of warrants to equity | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Deemed dividend | — | — | ( | — | |||||||||||||||||||||||||||||||||||||
| Value of warrants issued with Series B Preferred Stock | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Value of warrants issued with Convertible Note | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Common stock issued for preferred stock dividends | — | — | — | ||||||||||||||||||||||||||||||||||||||
Conversion of Convertible Note | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Net loss for the year ended December 31, 2019 | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
F-6
Workhorse Group Inc.
Consolidated Statements of Cash Flows
| For the Years Ended December 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operations: | |||||||||||
| Depreciation | |||||||||||
| Amortization of discount and debt issuance costs on long-term debt | |||||||||||
| Amortization of discount on mandatory redeemable Series B preferred stock | |||||||||||
| Change in fair value of Convertible Note and loss on conversion to common stock | |||||||||||
| Change in fair value of warrant liability | ( | ||||||||||
| Dividends for mandatory redeemable Series B preferred stock paid in common stock | |||||||||||
| Stock-based compensation | |||||||||||
| Write down of inventory | |||||||||||
| Gain on divestiture | ( | ||||||||||
| Investment received from license of intellectual property | ( | ||||||||||
| Loss on sale of fixed assets | |||||||||||
| Effects of changes in operating assets and liabilities: | |||||||||||
| Accounts and lease receivable | |||||||||||
| Inventory | ( | ||||||||||
| Prepaid expenses and deposits | ( | ( | |||||||||
| Accounts payable and accrued liabilities | ( | ||||||||||
| Warranty liability | ( | ||||||||||
| Accounts payable, related parties | ( | ||||||||||
| Customer deposits | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Net proceeds received on divestiture | |||||||||||
| Proceeds from sale of fixed assets | |||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from notes payable | |||||||||||
| Payments on notes payable | ( | ( | |||||||||
| Proceeds from issuance of mandatory redeemable Series B preferred stock | |||||||||||
| Proceeds from issuance of Convertible Note | |||||||||||
| (Repayment) proceeds, Duke financing obligation | ( | ||||||||||
| Proceeds from long-term debt | |||||||||||
| Payments on long-term debt | ( | ( | |||||||||
| Loan issuance costs | ( | ||||||||||
| Proceeds from issuance of common stock | |||||||||||
| Proceeds from exercise of warrants and options | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Change in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of the year | |||||||||||
| Cash, cash equivalents and restricted cash, end of the year | $ | $ | |||||||||
Cash paid for interest was $7,193,613 and $1,128,470 for the years ended December 31, 2019 and 2018, respectively.
The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported within the consolidated balance sheets:
| December 31 | |||||||||||
| 2019 | 2018 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash held in escrow | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
Supplemental disclosure of non-cash activities:
During the year ended December 31, 2019, the Company issued warrants to purchase common stock in connection with the issuance of our Series B Preferred Stock, which were valued at $6,709,961 . The Company recorded additional paid-in capital with the offset as a discount on the Series B Preferred Stock.
During the year ended December 31, 2018, the Company issued warrants to purchase common stock in connection with debt financing, which were valued at $965,747 . The Company recorded a warrant liability with the offset as a debt discount for the Marathon Loan.
During the year ended December 31, 2018, the Company issued warrants to purchase common stock to Arosa in association with the Arosa Loan, which were valued at $3,540,542 . The Company recorded a warrant liability with the offset recorded as a debt discount.
During the year ended December 31, 2018, the Company settled $298,350 of accounts payable by the issuance of common stock.
See accompanying notes to the consolidated financial statements.
F-7
Workhorse Group Inc.
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.
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Property, plant and equipment, net
Property, plant and equipment, net is stated at cost less accumulated depreciation. Major renewals and improvements are capitalized while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed as incurred. When property, plant and equipment is retired or otherwise disposed of, a gain or loss is realized for the difference between the net book value of the asset and the proceeds realized thereon. Depreciation is calculated using the straight-line method, based upon the following estimated useful lives:
| Buildings | |||||
| Software | |||||
| Equipment | |||||
| Vehicles and prototypes | |||||
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.
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.
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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:
| December 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Balance at beginning of year | $ | $ | |||||||||
| Accrual for warranty | |||||||||||
| Warranty costs incurred | ( | ( | |||||||||
| Balance at end of year | $ | $ | |||||||||
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
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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:
| Years Ended December 31, | ||||||||||||||
| 2019 | 2018 | |||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Deemed dividends | ||||||||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | ||||||||||
| Basic weighted average shares outstanding | ||||||||||||||
| Dilutive effect of options and warrants | ||||||||||||||
| Dilutive effect of Convertible Note | ||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||
| Anti-dilutive options and warrants excluded from diluted average shares outstanding | ||||||||||||||
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.
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2. INVENTORY, NET
Inventory, net consists of the following:
| December 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| Less: Inventory reserve | ( | ( | |||||||||
| Total Inventory, net | $ | $ | |||||||||
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:
| Years Ended December 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Automotive | $ | $ | |||||||||
| Other | |||||||||||
| Total revenues | $ | $ | |||||||||
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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:
| December 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Land | $ | $ | |||||||||
| Buildings | |||||||||||
| Leasehold Improvements | |||||||||||
| Software | |||||||||||
| Equipment | |||||||||||
| Construction in progress | |||||||||||
| Vehicles and prototypes | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
5. CONVERTIBLE NOTE AND LONG-TERM DEBT
Convertible Note and long-term debt consists of the following:
| December 31, | |||||||||||
| 2019 | 2018 | ||||||||||
| Convertible Note, at fair value | $ | $ | |||||||||
Marathon Tranche I Loan | |||||||||||
Marathon Credit Agreement unamortized debt discount and issuance costs | ( | ||||||||||
Net Marathon Credit Agreement | |||||||||||
| Total long-term debt | |||||||||||
| Less current portion | |||||||||||
| Long-term debt, net of current portion | $ | $ | |||||||||
Aggregate maturities of the Convertible Note are as follows:
| 2020 | $ | ||||
| 2021 | |||||
| 2022 | |||||
| $ | |||||
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).
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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.
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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.
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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.
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8. INCOME TAXES
For the years ended December 31, 2019 and 2018, the Company has net losses and no no
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 | % | % | |||||||||
| State and local taxes | ( | % | % | ||||||||
| Mark-to-market adjustment on stock warrants | ( | % | % | ||||||||
| Other permanent differences and credits | ( | % | % | ||||||||
| Change in valuation allowance | ( | % | ( | % | |||||||
| Total tax benefit | % | % | |||||||||
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.
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Components of the Company’s deferred tax assets and liabilities are as follows:
| December 31 | |||||||||||
| 2019 | 2018 | ||||||||||
| Deferred Tax Assets: | |||||||||||
| Accrued expenses and reserves | $ | $ | |||||||||
| Warranty reserve | |||||||||||
| Non-qualified stock options | |||||||||||
| Property, plant and equipment | |||||||||||
| Disallowed interest expense | |||||||||||
| Other temporary differences | ( | ||||||||||
| Net operating losses | |||||||||||
| Total Deferred Tax Assets | |||||||||||
| Valuation Allowance | ( | ( | |||||||||
| Total Deferred Tax Assets, net of valuation allowance | $ | $ | |||||||||
At December 31, 2019, the Company has approximately $90.6 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 | $ | $ | |||||||||
| 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 | $ | $ | |||||||||
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
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.
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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 | $ | $ | ||||||||||||
| Fair value for new warrants issued | ||||||||||||||
| Change in fair value for the year | ( | |||||||||||||
| Reclassification to additional paid-in capital | ( | |||||||||||||
| Warrant liability, end of year | $ | $ | ||||||||||||
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 | ||||||||||||||
| Conversion of Convertible Note into common stock | ( | |||||||||||||
| Change in fair value for the year | ||||||||||||||
| Convertible Note, end of year | $ | $ | ||||||||||||
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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 | $ | $ | |||||||||
| Restricted stock | |||||||||||
| Total stock-based compensation expense | $ | $ | |||||||||
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 | $ | |||||||||||||||||||||||||
| Granted | ||||||||||||||||||||||||||
| Exercised | ( | |||||||||||||||||||||||||
| Forfeited | — | |||||||||||||||||||||||||
| Expired | ( | |||||||||||||||||||||||||
| Balance December 31, 2018 | ||||||||||||||||||||||||||
| Granted | ||||||||||||||||||||||||||
| Exercised | ( | |||||||||||||||||||||||||
| Forfeited | ( | |||||||||||||||||||||||||
| Expired | ( | |||||||||||||||||||||||||
| Balance December 31, 2019 | $ | |||||||||||||||||||||||||
| Number of options exercisable at December 31, 2019 | $ | |||||||||||||||||||||||||
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.
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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 | ||||||||||||||
| Vested | ( | |||||||||||||
| Forfeited | ||||||||||||||
| Balance December 31, 2019 | $ | |||||||||||||
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
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
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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 | $ | |||||||||||||
| Granted, Arosa Loan Agreement | ||||||||||||||
| Granted, Marathon Credit Agreement | ||||||||||||||
| Exercised | ||||||||||||||
| Balance December 31, 2018 | ||||||||||||||
| Granted, Series B Preferred Stock | ||||||||||||||
| Granted, Marathon Credit Agreement | ||||||||||||||
| Granted, Other | ||||||||||||||
| Exercised | ||||||||||||||
| Balance December 31, 2019 | $ | |||||||||||||
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.
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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.
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 | $ | $ | |||||||||
| Gain on divestiture | |||||||||||
| Total other income | $ | $ | |||||||||
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
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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.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective.
Our Chief Executive Officer and Chief Financial Officer have concluded that the Consolidated Financial Statements included in this Annual Report on Form 10-K present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018 and the consolidated results of operations and cash flows for each of the years presented herein in conformity with United States generally accepted accounting principles.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as required by Sarbanes-Oxley (“SOX”) Section 404(a). The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Principal Executive Officer and Principal Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with United States generally accepted accounting principles.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with US GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with management’s assessment of our internal control over financial reporting as required under SOX, we identified the following material weaknesses in our internal control over financial reporting as of December 31, 2018:
•The Company had not established adequate financial reporting monitoring activities to mitigate the risk of accounting errors.
•The lack of a fully implemented enterprise resource planning (“ERP”) system caused over reliance on manual entries.
Because of the material weaknesses noted above, management has concluded that it did not maintain effective internal control over financial reporting as of December 31, 2018, based on Internal Control over Financial Reporting - Guidance for Smaller Public Companies issued by COSO.
In 2019, we have implemented the following changes to our internal controls which have remediated the material weaknesses identified in 2018:
•Added resources to our accounting and finance function.
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•Identified significant accounts, disclosures, and assertions present in 2019 having a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated. Designed and implemented controls to respond to risk factors relevant to the identified significant accounts, disclosures and assertions.
•Identified gaps in our internal controls over financial reporting and designed and implemented controls to remediate those gaps.
•Hired an international accounting firm to function as our internal audit group.
•Hired a director of Information Technology ("IT") to direct our IT operations, including overseeing information technology general controls ("ITGC's").
•Assessed and strengthened our ITGCs, including removing inappropriate access to our IT systems and improving change management controls.
•Completed implementation of the ERP module covering our purchase orders.
After implementing the changes in internal control and remediation efforts described above, the Company has concluded that internal controls were effective as of December 31, 2019.
The independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report has issued an attestation report on the Company’s internal control over financial reporting which appears herein.
(c) Changes in Internal Control over Financial Reporting
Except as noted above, there were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The officers and directors of the Company are as follows:
| Name | Age | Position | ||||||||||||
| Raymond J. Chess | 62 | Director, Chairman | ||||||||||||
| Harry DeMott | 53 | Director | ||||||||||||
| H. Benjamin Samuels | 52 | Director | ||||||||||||
| Gerald B. Budde | 58 | Director | ||||||||||||
| Michael L. Clark | 48 | Director | ||||||||||||
| Duane A. Hughes | 56 | President and Chief Executive Officer | ||||||||||||
| Robert Willison | 58 | Chief Operating Officer | ||||||||||||
| Steve Schrader | 57 | Chief Financial Officer | ||||||||||||
| Stephen Fleming | 47 | General Counsel and Vice President | ||||||||||||
| Anthony Furey | 47 | Vice President of Finance | ||||||||||||
| Gregory Ackerson | 43 | Controller | ||||||||||||
Officers are elected annually by the Board of Directors (subject to the terms of any employment agreement) to hold such office until an officer’s successor has been duly appointed and qualified, unless an officer dies, resigns or is removed by the Board.
Our officers and directors have not been the subject of any order, judgment, or decree of any court of competent jurisdiction, or any regulatory agency permanently or temporarily enjoining, barring, suspending or otherwise limiting them from acting as an investment advisor, underwriter, broker or dealer in the securities industry, or as an affiliated person, director or employee of an investment company, bank, savings and loan association, or insurance company or from engaging in or continuing any conduct or practice in connection with any such activity or in connection with the purchase or sale of any securities.
Our officers and directors have not been convicted in any criminal proceeding (excluding traffic violations) and are not the subject of any criminal proceedings which are currently pending.
Background of Directors and Executive Officers
Raymond J. Chess, Director, Chairman
Raymond Chess has 40+ years in the automotive industry. Mr. Chess joined General Motors in 1980, and during his 37 years with the company, he held ever increasing roles and responsibilities in both manufacturing and product development. While in manufacturing, Mr. Chess held key positions in both plant floor operations and manufacturing engineering such as Chief Manufacturing Engineer and Executive Director of Stamping and Assembly. While in product development, Ray was a Vehicle Line Executive, where he lead global cross functional responsibilities for GM’s commercial truck line from 2001 to 2009 and GM’s cross over segment from 2009 through 2012. Upon retirement from General Motors, he formed his own engineering consulting company. In 2014, Ray was elected onto the Board of Directors of Rush Enterprises. Ray also sits on the advisory board of Productive Research LLC. He started working with Workhorse in 2014 on their advisory board, was then elected to their Board of Directors and subsequently became the Chairman.
H. Benjamin Samuels, Director
Mr. Samuels served as CEO of Victory Packaging from May 2007 through 2015, during which time he led an executive team managing more than 1,700 employees. In 2015, Mr. Samuels was appointed as Co-President after Victory Packaging was acquired by KapStone Paper and Packaging Corporation. From 1995 through 2007, Mr. Samuels served in multiple roles, including as Vice Chairman and leader of Victory Packaging’s national accounts group, real estate, finance and legal departments, achieving a period of unprecedented growth in sales and revenues. Mr. Samuels is an active member in the community, where he served as the Chairman of the Houston Food Bank and as a director of the Samuels Family Foundation. Samuels serves on the boards of and holds leadership positions with Teach For America, Children at Risk, Brighter Bites, Move For Hunger, American Jewish Committee, Leo Baeck Education Center Foundation, and Jewish Federation of Greater Houston.
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Mr. Samuels received a Bachelor’s Degree in American studies and economics from Amherst College in Massachusetts as well as an MBA from the Harvard Graduate School of Business Administration.
Gerald B. Budde, Director
Mr. Budde is currently the Eastern Regions Chief Financial Officer of AssuredPartners, Inc. Mr. Budde started his career in public accounting with EY after graduating with a Bachelor of Science degree in Accounting from the University of Dayton. After almost eleven years with EY as a licensed CPA, Mr. Budde was hired in April 1994 by Cincinnati Milacron Inc. Mr. Budde was appointed as Machine Tool Group Controller in January 1995, became the Vice President of Finance for Cincinnati Machine, a successor company, in October 1998, and was subsequently appointed as Vice President of Finance and Administration for UNOVA Manufacturing Technologies in 2002. Mr. Budde left UNOVA in 2003 to become the Chief Financial Officer at Neace Lukens, who was acquired by AssuredPartners in 2011. Prior to his current role, Mr. Budde was the Chief Financial Officer of AssuredPartners NL, LLC overseeing multiple AssuredPartners entities. Mr. Budde was previously a member of the Board of Trustees and remains as an active member of the Finance Committee for Mount Notre Dame high school and is also a member of the Finance Commission for St Margaret of York parish and school. Mr. Budde’s business, management, and accounting knowledge and experience led to the conclusion he should serve on the Board of Directors, given the Company’s business and structure.
Harry DeMott, Director
Mr. DeMott, has more than 25 years of experience in the investment community, having worked as an analyst and portfolio manager at leading brokerage firms and investment management firms. He has also served on the boards of several companies. He is a long-time operator and investor in the media, sports and entertainment industries. He is the co-founder of Raptor Ventures I LP, where he has been a General Partner since February 2011. In addition, Mr. DeMott is a member of the Board of Directors of Proper (where he also serves as executive Chairman), Hi.Fi, SecurityPoint Media, Australis and Ticket Evolution.
He also serves as founder and managing partner for Hamerle Investments, a family investment company. Prior to co-founding Raptor Ventures, Mr. DeMott served on the Board of Directors of Pandora Media, Inc. from 2006 through 2011. Earlier, he served as senior analyst at Knighthead Capital Management, analyst at King Street Capital Management, portfolio manager at Bourgeon Capital Management and managing member and founder at Gothic Capital Management. During this 16-year period, Mr. DeMott focused on finding, fostering and investing in disruptive technology companies. He previously spent nine years at First Boston (now Credit Suisse), where he was a director in the equity research division specializing in radio, television, outdoor advertising and cell towers. He earned a Bachelor of Arts in economics from Princeton University in 1988 and a MBA in finance from New York University in 1991.
Michael L. Clark, Director
Mr. Clark is a Chartered Financial Analyst (CFA) Charterholder with close to twenty years of investing and capital markets experience. He also serves as a director of privately-held Laws Whiskey House, Denver-based award winning craft distillery. Mr. Clark has also served as a director of Halcón Resources from since September 2016 until October 2019 and as a director of Paragon Offshore Ltd., as Chairman of the Corporate Governance and Compensation Committee and a member of its Audit Committee from July 2017 until its sale to Borr Drilling Limited in March 2018. Mr. Clark was a Retired Partner of SIR Capital Management, LLC from 2014 until his departure in 2016 and from 2008 to 2013 served as a Portfolio Manager and Partner. Prior to that, Mr. Clark valued equities as a Portfolio Manager at Satellite Asset Management, LLC from 2005 to 2007 and as an Equity Research Analyst at SAC Capital Management, LLC from 2003 to 2005 and at Merrill Lynch from 1997 to 2002. Mr. Clark began his career at Deloitte & Touche, LLP, progressing to Senior Auditor. He is a Certified Public Accountant licensed in New York State and also holds the Accredited in Business Valuation (ABV) credential awarded by the American Institute of Certified Public Accountants. The National Association of Corporate Directors (NACD) recognized him as a NACD Governance Fellow in 2017. Mr. Clark graduated cum laude from the University of Pennsylvania with a Bachelor of Arts in Economics and earned a Masters of Business Administration in Finance and Economics with Distinction (top 10%) from New York University’s Stern School of Business. Mr. Clark’s qualifications to serve on the board include his public company board service and his wealth of accounting, valuation and capital markets experience.
Duane A. Hughes, President and Chief Executive Officer
Mr. Hughes is a senior-level executive with more than 20 years of experience including direct business relationships in the automotive, advertising, and technology segments and is currently serving as our President and Chief Executive Officer. Prior to that, Mr. Hughes was the President and Chief Operating Officer of Workhorse from 2015 to 2019. Prior to joining Workhorse, Duane served as Chief Operating Officer for Cumulus Interactive Technologies Group. As COO, Duane was
36
responsible for managing the company’s day-to-day sales and operations. He was responsible for all operations of the business unit. Prior to Cumulus ITG, Duane spent nearly fifteen years in senior management positions with Gannett Co., Inc., including his duties as Vice President of Sales and Operations for Gannett Media Technologies International.
Robert Willison, Chief Operating Officer
On February 19, 2019, the Company announced the appointment of Robert Willison as Chief Operating Officer effective February 18, 2019. Mr. Willison previously served as Director of Fleet Technology for Sysco Corporation. Prior to joining Sysco, Mr. Willison served as the Company’s Director of Research and Development from 2016 until 2018. Prior to joining the Company, Mr. Willison served as a Partner and Chief Technology Officer for Räv Technology LLC from 2014 until 2016. Prior to joining Räv Technology, Mr. Willison served as Director of International Operations and New Business Development for PDi Communication Systems.
Steve Schrader, Chief Financial Officer
Mr. Schrader has over sixteen years of experience in public and private companies in industries such as manufacturing, health care and utilities and is currently serving as our Chief Financial Officer. Prior to his appointment by the Company, from December 2015 to December 2019, Mr. Schrader was Chief Financial Officer of Fuyao Glass America Inc., a subsidiary of a Chinese-owned public company specializing in the manufacture of automobile glass. From October 2006 to May 2015, Mr. Schrader served as the Chief Financial Officer of Oncology Hematology Care (OHC), the largest oncology practice in the Cincinnati metro area. Mr. Schrader started his career working for utilities that are now part of Duke Energy. His last position there was Vice President and Chief Financial Officer of Cinergy’s Regulated Business prior to Duke’s acquisition in 2006. Mr. Schrader holds a B.S. in Finance and Accounting from Ball State and an MBA from Butler University. He also received an Advanced Management Program Certificate from Harvard Business School.
Stephen Fleming, General Counsel and Vice President
Mr. Fleming serves has our corporate general counsel. Prior to joining Workhorse in November 2019, Mr. Fleming served as outside corporate/securities counsel to Workhorse since 2010. Mr. Fleming has served as the Managing Member of Fleming PLLC, a boutique law firm specializing in corporate/securities law, since 2008. Mr. Fleming graduated from Catholic University of America in 1995 with a Bachelor of Arts in Political Science. In 1999, Mr. Fleming received his Juris Doctorate and Master of Science in Finance from the University of Denver.
Anthony Furey, Vice President of Finance
Mr. Furey is a senior-level finance executive with more than 25 years of experience in corporate finance and capital markets and is currently serving as our Vice President of Finance. Prior to that, Mr. Furey was the Director of Business Development for Workhorse and Director of Finance for SureFly a former subsidiary of Workhorse Group. Prior to joining Workhorse, Anthony owned and was president of Fastnet Advisors, LLC, an mergers and acquisition and corporate advisory practice. As President, Anthony led over $300 million in financing and uplisting transactions and was responsible for managing the company’s day-to-day growth and operations. Prior to Fastnet Advisors, LLC, Anthony spent fifteen years on both the buy and sell side in institutional sales and trading, holding Series 7,65 & 63 licenses.
Gregory Ackerson, Controller
Mr. Ackerson has been with the Company since April 2018. Prior to joining the Company, Mr. Ackerson was an Assurance Senior Manager with BDO USA LLP from December 2015 through March 2018, Assistant Vice President Accounting Risk and Policy at Fifth Third Corporation from June 2015 to December 2015 and Senior Manager Technical Accounting for NewPage Corporation from April 2011 through March 2015. Mr. Ackerson has also served as an Inspection Specialist for PCAOB and various progressive audit roles with PwC. Mr. Ackerson received his Master of Science in Accounting and Bachelor of Business Administration and Finance both in 2000.
Family Relationships
There are no family relationships among our directors and executive officers. There is no arrangement or understanding between or among our executive officers and directors pursuant to which any director or officer was or is to be selected as a director or officer.
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Involvement in Certain Legal Proceedings
To our knowledge, during the last ten years, none of our directors and executive officers has:
•Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
•Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
•Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
•Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
•Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
CORPORATE GOVERNANCE
Governance Policies of the Board of Directors
The Board of Directors has adopted Governance Policies of the Board of Directors to assist the Board in the exercise of its duties and responsibilities and to serve the best interests of the Company and its stockholders. These policies provide a framework for the conduct of the Board’s business.
Committees
Establishment of Board Committees and Adoption of Charters
The Company has a Nominating and Corporate Governance Committee, a Compensation Committee and an Audit Committee (collectively, the “Committees”) and approved and adopted charters to govern each of the Committees.
In connection with the establishment of the Nominating and Corporate Governance Committee, Compensation Committee and Audit Committee, the Board of Directors of the Company appointed members to each such committee. Currently, all three committees are comprised of at least three (3) directors meeting the requirements set forth in each applicable charter. The membership of these three standing committees of the Board of Directors of the Company is as follows:
| Nominating and Corporate Governance Committee | Compensation Committee | Audit Committee | ||||||||||||
| Raymond J. Chess (Chairman) | Harry DeMott (Chairman) | Gerald B. Budde (Chairman) | ||||||||||||
| Gerald B. Budde | Gerald B. Budde | Raymond J. Chess | ||||||||||||
| Harry DeMott | H. Benjamin Samuels | H. Benjamin Samuels | ||||||||||||
| Michael L. Clark | Michael L. Clark | |||||||||||||
Nominating and Corporate Governance Committee.
Our board of directors has determined that each of the members of the Governance Committee is an “independent director” as defined by the rules of The NASDAQ Stock Market, Inc. The Governance Committee is generally responsible for recommending to our full board of directors’ policies, procedures, and practices designed to help ensure that our corporate governance policies, procedures, and practices continue to assist the board of directors and our management in effectively and efficiently promoting the best interests of our stockholders. The Governance Committee is also responsible for selecting and
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recommending for approval by our board of directors and our stockholders a slate of director nominees for election at each of our annual meetings of stockholders, and otherwise for determining the board committee members and chairmen, subject to board of directors ratification, as well as recommending to the board director nominees to fill vacancies or new positions on the board of directors or its committees that may occur or be created from time to time, all in accordance with our bylaws and applicable law. The Governance Committee’s principal functions include:
•developing and maintaining our corporate governance policy guidelines;
•developing and maintaining our codes of conduct and ethics;
•overseeing the interpretation and enforcement of our Code of Conduct and our Code of Ethics for Chief Executive Officer and Senior Financial and Accounting Officers;
•evaluating the performance of our board of directors, its committees, and committee chairmen and our directors; and
•selecting and recommending a slate of director nominees for election at each of our annual meetings of the stockholders and recommending to the board director nominees to fill vacancies or new positions on the board of directors or its committees that may occur from time to time.
During 2019, the Governance Committee met one time. The Governance Committee is governed by a written charter approved by our board of directors. A copy of the Governance Committee’s charter is posted on the Company’s website at www.workhorse.com in the “Investors” section of the website. In identifying potential independent board of directors’ candidates with significant senior-level professional experience, the Governance Committee solicits candidates from the board of directors, senior management and others and may engage a search firm in the process. The Governance Committee reviews and narrows the list of candidates and interviews potential nominees. The final candidate is also introduced and interviewed by the board of directors and the lead director if one has been appointed. In general, in considering whether to recommend any particular candidate for inclusion in our board of directors’ slate of recommended director nominees, the Governance Committee will apply the criteria set forth in our corporate governance guidelines. These criteria include the candidate’s integrity, business acumen, commitment to understanding our business and industry, experience, conflicts of interest and the ability to act in the interests of our stockholders. Further, specific consideration is given to, among other things, diversity of background and experience that a candidate would bring to our board of directors. The Governance Committee does not assign specific weights to particular criteria and no particular criterion is a prerequisite for each prospective nominee. We believe that the backgrounds and qualifications of our directors, considered as a group, should provide a composite mix of experience, knowledge and abilities that will allow our board of directors to fulfill its responsibilities. Stockholders may recommend individuals to the Governance Committee for consideration as potential director candidates by submitting their names, together with appropriate biographical information and background materials to our Governance Committee. Assuming that appropriate biographical and background material has been provided on a timely basis, the Governance Committee will evaluate stockholder recommended candidates by following substantially the same process, and applying substantially the same criteria, as it follows for candidates submitted by others.
Audit Committee.
We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our board of directors has determined that the members are all “independent directors” as defined by the rules of The NASDAQ Stock Market, Inc. applicable to members of an audit committee and Rule 10A-3(b)(i) under the Exchange Act. In addition, Mr. Budde is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K and demonstrates “financial sophistication” as defined by the rules of The NASDAQ Stock Market, Inc. The Audit Committee is appointed by our board of directors to assist our board of directors in monitoring (1) the integrity of our financial statements, (2) our compliance with legal and regulatory requirements, and (3) the independence and performance of our internal and external auditors. The Audit Committee’s principal functions include:
•reviewing our annual audited financial statements with management and our independent auditors, including major issues regarding accounting principles, auditing practices and financial reporting that could significantly affect our financial statements;
•reviewing our quarterly financial statements with management and our independent auditor prior to the filing of our Quarterly Reports on Form 10-Q, including the results of the independent auditors’ reviews of the quarterly financial statements;
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•recommending to the board of directors the appointment of, and continued evaluation of the performance of, our independent auditor;
•approving the fees to be paid to our independent auditor for audit services and approving the retention of our independent auditor for non-audit services and all fees for such services;
•reviewing periodic reports from our independent auditor regarding our auditor’s independence, including discussion of such reports with the auditor;
•reviewing the adequacy of our overall control environment, including internal financial controls and disclosure controls and procedures; and
•reviewing with our management and legal counsel legal matters that may have a material impact on our financial statements or our compliance policies and any material reports or inquiries received from regulators or governmental agencies.
During 2019, the audit committee met four times. A copy of the Audit Committee’s charter is posted on the Company’s website at www.workhorse.com in the “Investors” section of the website.
Meetings may be held from time to time to consider matters for which approval of our Board of Directors is desirable or is required by law.
Compensation Committee.
A full discussion of our compensation committee can be found under Item 11 – Executive Compensation.
Company Policies
The Company has established the following written policies that have been distributed and reviewed with all Company employees: Approval policy, Purchase Requisition policy, Conflict of Interest policy, “Do the Right Thing” (ethics) policy and a Travel and Expense policy.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and persons who own more than 10% of the issued and outstanding shares of our common stock to file reports of initial ownership of common stock and other equity securities and subsequent changes in that ownership with the SEC. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the year ended December 31, 2019 all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS ("CD&A")
This CD&A is designed to provide our shareholders with an understanding of our compensation philosophy and objectives, as well as the analysis that we performed in setting executive compensation for 2019. It discusses the Compensation Committee’s (referred to as the Committee in this CD&A) determination of how and why, in addition to what, compensation actions were taken during 2019 for our Chief Executive Officer and our two next highest paid executive officers (the "Named Executive Officers" or "NEOs"). As a Smaller Reporting Company much of this disclosure is voluntary but allows us to showcase our adoption of many widely accepted compensation and governance “best practices.”
Overview
Many of our compensation decisions for the last year reflect our continued transition of our executive compensation program. Workhorse's historical compensation philosophy was to provide base salaries with equity based incentives, primarily in the form of stock options. However, in order to continue to attract high quality executives and employees, we recognized that we needed to be more competitive on cash compensation going forward by offering a more structured annual bonus program, and we also shifted to granting restricted stock awards mixed with options as part of our equity incentives to better align with market practices.
Highlights of key changes made as part of our transition include:
Salary increase for our CEO – our CEO received an increase in base salary in recognition of his transition from COO to President & CEO bringing it more in line with competitive pay levels and to more accurately reflect his duties and responsibilities.
Established annual incentive target opportunities – each NEO now has a target bonus opportunity expressed as a percentage of base salary. We see this as a step toward better alignment with peers and market best practices.
A formalized approach to funding annual incentives – the bonus funding for 2019 was formulaically determined based on a mix of financial and individual performance targets. Although we made substantial progress on our operating model in Fiscal 2019, both adjusted EBITDA and year end net debt balance were below threshold for 2019. Individual performance was assessed by the Compensation Committee to be at maximum performance levels resulting in overall annual incentive funding below target opportunity level.
Shifted to include restricted stock awards with time-based vesting – given our historical reliance on stock options, our executives had relatively little in-the-money unvested equity. As a result, the Compensation Committee determined that it was appropriate to use restricted stock awards as a primary vehicle for equity awards for 2019 in order to provide greater retention incentives, create more direct alignment with stockholders, and be more consistent with peers.
Increased allocation of CEO's at-risk / variable compensation - 78% of our CEO's compensation is at-risk or variable in nature. The graph below illustrates the allocation of our CEO's pay under our latest programs and awards.
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Our Named Executive Officers
Our Named Executive Officers, along with other select members of the senior management team participate in the compensation plans and programs described in this CD&A. While different in some aspects of their operation, the compensation programs for the broader employee population at Workhorse are driven by consistent principles which seek to compete effectively in our industry with the ability to reward for strong corporate and individual performance.
The list below reflects our Principal Executive Officer and our two other highest paid executive officers in 2019:
| Name | Age | Position | ||||||||||||
| Duane A. Hughes | 56 | President and Chief Executive Officer | ||||||||||||
| Robert Willison | 58 | Chief Operating Officer | ||||||||||||
| Stephen Fleming | 47 | General Counsel and Vice President | ||||||||||||
Workhorse's Executive Compensation Objections & Practices
In order to accomplish our goals and to ensure that the Company's executive compensation program is consistent with its direction and business strategy, the compensation program for our senior executive officers is based on the following objectives:
•to attract, motivate, retain and reward a knowledgeable and driven management team and to encourage them to attain and exceed performance expectations within a calculated risk framework; and
•to reward each executive based on individual and corporate performance and to incentivize such executives to drive the organization's current growth and sustainability objectives.
These objectives serve to assure our long-term success and are built on the following compensation principles:
•compensation is designed to align executives to the critical business issues facing the Company;
•compensation should be fair and reasonable to shareholders and be set with reference to the local market and similar positions in comparable companies;
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•an appropriate portion of total compensation should be equity-based, aligning the interest of executives with shareholders; and
•compensation should be transparent to the Board of Directors, executives, and our shareholders.
All elements of compensation are compared to the total compensation packages of a peer group of companies, which includes both competitors and companies representing our industry broadly to reflect the markets in which we compete for business and people.
Compensation Best Practices
We have made significant effort to align our executive compensation programs and practices with stockholder interests, and to incorporate strong governance standards within our compensation program, such as:
†Annual Incentives Based on Performance - in 2019 we designed and implemented an annual incentive award program that is based on Company financial and operational performance and also includes an assessment of individual performance as determined by the Committee.
†Cap on Incentive Award Payouts - incentive award payouts are capped in our new program
†Balanced Mix of Variable & Performance Based Compensation - we provide our executives with a balanced mix of variable and performance based compensation designed to motivate our executives to improve both our financial performance and stock price over the short and long-term.
†Actively Engage with our Shareholders - throughout the year we actively engage with our largest shareholders and consider feedback and input on our programs and practices
†Anti-Hedging & Anti-Pledging Policies - we prohibit our executives and directors from hedging and pledging Company securities.
†"Double Trigger" Change of Control Payments - our change of control program provides for cash payments that are triggered only in a qualifying termination of employment occurs in connection with the change in control.
†Clawback Policy - our annual incentive awards and any future performance based awards are subject to a clawback policy which applies to all of our executive officers and provides for the forfeiture of these awards or the return of any related gain in the event of a restatement of our financial statements.
†No Excise Tax Gross-Ups - we do not provide gross-ups in any executive employment agreement or severance program.
†Engagement of Independent Compensation Consultant - our Committee retains an independent compensation consultant who reports directly to the Committee and does not provide any other services to management or the Company.
What We Don't Do
X No Guaranteed Annual Salary Increases or Bonuses.
X No Special Tax Gross Ups.
X No Repricing or Exchange of Underwater Stock Options.
X No Plans that Encourage Excessive Risk-Taking.
X No Hedging or Pledging of Workhorse Securities.
X No Excessive Perks.
Executive Compensation Recoupment Policy
The Board can recoup all or part of any compensation paid to an executive officer in the event of a material restatement of the company's financial results. The Board will consider:
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•whether any executive officer received compensation based on the original consolidated financial statements because it appeared he or she achieved financial performance targets that in fact were not achieved based on the restatement; and
•the accountability of any executive officer whose acts or omissions were responsible, in whole or in part, for the events that led to the restatement and whether such actions or omissions constituted misconduct.
Role of the Compensation Committee in Setting Compensation & Overall Oversight of Our Programs
Our compensation committee consists of Harry DeMott, Gerald Budde, Michael Clark and Benjamin Samuels. Our board of directors has determined that each of the members are an “independent director” as defined by the rules of The NASDAQ Stock Market, Inc. applicable to members of a compensation committee. The Compensation Committee is responsible for establishing the compensation of our senior management, including salaries, bonuses, termination arrangements, and other executive officer benefits as well as director compensation. The Compensation Committee also administers our equity incentive plans. During 2019, the Compensation Committee met six times. The Compensation Committee is governed by a written charter approved by the board of directors. A copy of the Compensation Committee’s charter is posted on the Company’s website at www.workhorse.com in the “Investors” section of the website. The Compensation Committee works with the Chairman of the Board and Chief Executive Officer and reviews and approves compensation decisions regarding senior management including compensation levels and equity incentive awards. The Compensation Committee also approves employment and compensation agreements with our key personnel and directors. The Compensation Committee has the power and authority to conduct or authorize studies, retain independent consultants, accountants or others, and obtain unrestricted access to management, our internal auditors, human resources and accounting employees and all information relevant to its responsibilities.
The responsibilities of the Compensation Committee, as stated in its charter, include the following:
•review and approve the Company’s compensation guidelines and structure;
•review and approve on an annual basis the corporate goals and objectives with respect to compensation for the Chief Executive Officer;
•review and approve on an annual basis the evaluation process and compensation structure for the Company’s other officers, including salary, bonus, incentive and equity compensation; and
•periodically review and make recommendations to the Board of Directors regarding the compensation of non-management directors.
The Compensation Committee is responsible for developing the executive compensation philosophy and reviewing and recommending to the Board of Directors for approval all compensation policies and compensation programs for the executive team.
Role of Management in Setting Compensation
Our CEO is consulted in the Committee’s determination of compensation matters related to the executive officers reporting directly to the CEO. Each year, the CEO makes recommendations to the Committee regarding such components as salary adjustments, target annual incentive opportunities and the value of long-term incentive awards. In making his recommendations, the CEO considers such components as experience level, individual performance, overall contribution to Company performance and market data for similar positions. The Committee takes the CEO’s recommendations under advisement, but the Committee makes all final decisions regarding such individual compensation.
Our CEO’s compensation is reviewed and discussed by the Committee, which then makes recommendations regarding his compensation to the independent members of our board of directors. Our board of directors ultimately makes decisions regarding the CEO’s compensation.
Our CEO attends Committee meetings as necessary. He is excused from any meeting when the Committee deems it advisable to meet in executive session or when the Committee meets to discuss items that would impact the CEO’s compensation. The Committee may also consult other employees, including the remaining Named Executive Officers, when making compensation decisions, but the Committee is under no obligation to involve the Named Executive Officers in its decision-making process.
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Role of the Compensation Consultant in Setting Compensation
The Compensation Committee has engaged the services of Compensation Advisory Partners, LLC (“CAP”) as its independent executive compensation consultant. Certain of our Board members have worked with CAP in the past and value the firm’s collective knowledge and capabilities, and its ability to help us develop compensation programs that incentivize our executives and align performance with company strategies and stockholders’ interests.
CAP’s current role is to advise the Committee on matters relating to executive compensation to help guide, develop, and implement our executive compensation programs. CAP reports directly to the Compensation Committee. The Committee regularly reviews the services provided by CAP and believe the firm to be independent in providing executive compensation consulting services to us. A review of CAP’s relationship did not raise any conflicts of interest, consistent with the guidelines provided under the Dodd-Frank Act and by the SEC and the NYSE. In making this determination, the Committee notes that during 2019:
•CAP did not provide any services to the Company or management other than services requested by or with the approval of the Committee, and its services were limited to executive and director compensation consulting;
•The Committee or members of the Committee meet regularly in executive session with CAP outside the presence of management;
•CAP maintains a conflicts policy, which was provided to the Committee with specific policies and procedures designed to ensure independence;
•Fees paid to CAP by Workhorse during 2019 were less than 1% of CAP's total revenue;
•None of the CAP consultants working on matters with us had any business or personal relationship with Committee members (other than in connection with working on matters with us);
•None of the CAP consultants working on matters with us (or any consultants at CAP) had any business or personal relationship with any of our executive officers; and
•None of the CAP consultants working on matters with us owns shares of our common stock.
The Committee continues to monitor the independence of its compensation consultant on a periodic basis.
Compensation Peer Group
We have developed a compensation peer group, which is composed of specific peer companies within our industry. Our peer group was developed with the assistance of CAP and is used to analyze our executive and director compensation levels and overall program design. This compensation peer group is used to determine market levels of the main elements of executive compensation (base salary, annual incentives/bonus, long-term incentives, as well as total direct compensation).
The peer group is also used to gauge industry practices regarding the structure and mechanics of annual and long-term incentive plans, employment agreements, severance and change in control policies and employee benefits. The composition of the peer group is reviewed by the Committee on an annual basis to ensure that we have and maintain an appropriate group of comparator companies.
In May 2019, with the assistance of CAP, the Committee developed and approved the peer group for use as a source of executive compensation and practices data. Criteria for selecting peer companies for compensation benchmarking is based on a number of factors. The peer companies selected should reflect an optimum mix of the criteria listed below in their relative order of importance:
Competitive market:
†Competing Talent—companies with executive talent similar to that valued by us;
†Competitors—companies in the same or similar industry sector; and
†Competing Industry—companies in the same general industry sector having similar talent pools.
Size and demographics:
†Companies that are generally similar in revenue and/or market cap size and whose median revenue for the group approximates our revenue;
†Firms with a competitive posture and comparable area of operations;
†Companies within our corporate headquarters region
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The Committee, based on CAP’s analysis and our internal analysis, determined to use the following peer group of 14 companies to evaluate and compare our compensation practices in 2019:
Overview of Executive Compensation
The Company recognizes that people are our primary asset and our principal source of competitive advantage. In order to recruit, motivate and retain the most qualified individuals as senior executive officers, the Company strives to maintain an executive compensation program that is competitive in the commercial transportation industry, which is a competitive, global labor market.
The Compensation Committee’s compensation objective is designed to attract and retain the best available talent while efficiently utilizing available resources. The Compensation Committee compensates executive management primarily through base salary and equity compensation designed to be competitive with comparable companies, and to align management’s compensation with the long-term interests of shareholders. In determining executive management’s compensation, the Compensation Committee also takes into consideration the financial condition of the Company and discussions with the executive.
In order to accomplish our goals and to ensure that the Company’s executive compensation program is consistent with its direction and business strategy, the compensation program for our senior executive officers is based on the following objectives:
•to attract, motivate, retain and reward a knowledgeable and driven management team and to encourage them to attain and exceed performance expectations within a calculated risk framework; and
•to reward each executive based on individual and corporate performance and to incentivize such executives to drive the organization’s current growth and sustainability objectives.
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The following key principles guide the Company’s overall compensation philosophy:
•compensation is designed to align executives to the critical business issues facing the Company;
•compensation should be fair and reasonable to shareholders and be set with reference to the local market and similar positions in comparable companies;
•an appropriate portion of total compensation should be equity-based, aligning the interests of executives with shareholders; and
•compensation should be transparent to the Board of Directors, executives and shareholders.
Compensation Elements and Rationale
There are three basic components to the Company’s executive compensation program: base salary, our new annual incentive program, and long-term incentive equity compensation. The Compensation Committee actively evaluates our executive compensation program design against best market practices as the Company experiences further growth.
Base Salary
Base salary is the foundation of the compensation program and is intended to compensate competitively relative to comparable companies within our industry and the marketplace where we compete for talent. Base salary is a fixed component of the compensation program and is used as the base to determine elements of incentive compensation and benefits.
As shown in the table below Mr. Hughes base salary increased by 36% in 2019 to $475,000. This increase was approved by the Board in connection with and in recognition of Mr. Hughes promotion to President and CEO. Mr. Hughes was also receiving a retainer for his service on the Board. Our Committee determined that it would be more appropriate for Mr. Hughes to no longer receive his Board retainer and that value be captured within his base salary. Mr. Willison and Mr. Fleming were hired in 2019. Their respective salaries were set in consideration of internal and external market considerations.
| Executive | 2018 Position | 2018 Base Salary | 2019 Position | 2019 Base Salary | % Change | |||||||||||||||||||||||||||
| Duane A. Hughes | Chief Operating Officer | $275,000 | President and Chief Executive Officer | $475,000 | 73% | |||||||||||||||||||||||||||
| Robert Willison | n/a | n/a | Chief Operating Officer | $300,000 | n/a | |||||||||||||||||||||||||||
| Stephen Fleming | n/a | n/a | General Counsel and Vice President | $300,000 | n/a | |||||||||||||||||||||||||||
Annual Incentive Program (Bonus)
During the 1st quarter of 2019, the Committee established the 2019 annual cash incentive bonus program, pursuant to which our Named Executive Officers were eligible to receive performance-based cash bonuses based on certain quantitative and qualitative performance metrics. For 2019, our Named Executive Officers’ target bonus opportunities were set based on market norms and each executive's role within the Company. Our CEO bonus target is set at 100% of base salary, 75% for our COO, and 50% for our General Counsel. Our Named Executive Officers’ maximum bonus opportunities were 200% for our CEO, 100% of base salary for our COO, and 75% for our General Counsel.
| Bonus Target as Percent of Base | Maximum Bonus as Percent of Base | |||||||
| President & CEO | 100% | 200% | ||||||
| COO | 75% | 100% | ||||||
| General Counsel and VP | 50% | 75% | ||||||
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The financial measures of adjusted EBITDA and Year End Net Debt Balance accounted for a total of 60% of the target bonus opportunity while personal performance goals accounted for the remaining 40% of target bonus opportunity, as detailed below:
Payout opportunities were established according to a threshold, target and maximum performance for each performance metric. For each financial performance metric, threshold performance is equal to 50% of target performance and maximum performance is equal to 200% of target performance. In addition, with respect to each financial performance metric, if threshold level performance is achieved, then a threshold level payout is triggered, and if the maximum performance is achieved then a maximum level payout occurs. The chart below shows our CEO payout curves for each performance metric under the 2019 annual cash incentive bonus program:
After the level of performance is determined by the Compensation Committee, the payout percentage for each individual metric is added together to calculate the total payout percentage for each Named Executive Officer. The final payout percentage is then multiplied by the participant’s target bonus opportunity in order to calculate the total bonus payable to each Named Executive Officer. On January 28, 2020, based on the Company’s achievement relative to the adjusted EBITDA, Year End Net Debt Balance, and each Named Executive Officer’s individual performance, our Compensation Committee approved payouts to be made to our Named Executive Officers under the 2019 annual cash incentive bonus program in the amounts set forth in the “Non-Equity Incentive Plan Compensation” column in the Summary Compensation Table.
2019 Payouts
Performance for both our adjusted EBITDA and Year End Net Debt Balance fell below threshold levels. As a result our executives did not receive a bonus payout related to these two financial measures which accounts for 60% of the target opportunity. For the individual performance component of our program the Compensation Committee determined that our executives performed at a very high level navigating through strained capital availability while developing a lightweight C-
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Series and a next generation all-electric delivery vehicle among other accomplishments. The Committee also considered how well the stock performed in 2019 during our CEO's tenure and determined that the individual performance component should pay out at above target for time in the position. Fifty percent of the bonus earned was paid upon approval while the remaining fifty percent will be paid out at the Company's next capital raise.
Long-Term Incentive (Equity)
The Company’s long-term incentive program provides for the granting of stock options and restricted stock to executive officers to both motivate executive performance and retention, as well as to align executive officer performance to shareholder value creation. In awarding long-term incentives, the Company compares the long-term incentive program to that of comparable companies within our industry and evaluates such factors as the value of awards granted to each executive position within the market, the number of shares available under our Stock Incentive Plan, and the number of awarded shares outstanding relative to our total common shares outstanding. The Board of Directors fixes the exercise price of stock options at the time of the grant based on the market price of our stock on the NASDAQ.
Each long-term incentive grant is based on the level of the position held and overall market competitiveness. The Compensation Committee takes into consideration previous grants when it considers new grants of stock options and restricted stock.
2019 NEO Awards
In 2019 we awarded stock options to our CEO and COO. Our CEO, Mr. Hughes received a grant of 1,000,000 stock options with a grant date fair value of $634,300. Mr. Hughes also received a grant of 50,000 stock options with a grant date fair value of $31,715 for his role as a director. Mr. Willison, our COO, received a grant of 400,000 stock options with a grant date fair value of $170,600, which vest ratably over a four year period. We believe that awarding stock options provides a performance based element to our mix of long-term compensation by directly tying the interests of our executives to stock price appreciation. During the negotiation of Mr. Hughes' employment agreement entered into in 2019 it was determined that his February 2019 stock option grant would vest immediately upon execution of the agreement which occurred on November 6, 2019.
Each of our NEOs were awarded time based restricted shares in 2019 in connection with the execution of new employment agreements. We believe that granting full value restricted shares is an important vehicle for retaining long-term executive talent. Restricted stock grants deliver value and ownership to the executive upon vesting which provides strong linkage between our executive's interests and that of our shareholders. Mr. Hughes was awarded a grant of restricted stock with a grant date value of $600,000 while Mr. Willison and Fleming were each awarded $300,000 worth of restricted shares. These grants vest ratably over a 3 year period. Mr. Fleming was also granted a separate award as inducement to accept our offer of employment consisting of additional restricted shares with a grant date value of $1,000,000.
Non-Cash Compensation
The Company provides standard health benefits to its executives, including medical, dental and disability insurance.
The Company’s non-cash compensation is intended to provide a similar level of benefits as those provided by comparable companies within our industry.
Pension Benefits
None.
Non-Qualified Deferred Compensation
None.
Retirement, Resignation or Termination Plans
Each of the Company’s executive employment agreements with Messrs. Hughes, Willison and Fleming contemplates the case of termination due to various provisions whereby the named executive officers will receive severance payments, as described below.
Compensation and Risk
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We do not believe that our compensation policies and practices are reasonably likely to have a material adverse effect on us. We have taken steps to ensure our executive compensation program does not incentivize risk outside the Company’s risk appetite. Some of the key ways that we currently manage compensation risk are as follows:
•appointed a Compensation Committee which is composed entirely of independent directors to oversee the executive compensation program;
•the use of deferred equity compensation in the form of stock options to encourage a focus on long-term corporate performance versus short-term results; and
•disclosure of executive compensation to stakeholders;
Consideration of Most Recent Shareholder Advisory Vote on Executive Compensation
As required by Section 14A of the Exchange Act, at our 2018 Annual Meeting of Stockholders our stockholders voted, in an advisory manner, on a proposal to approve our named executive officer compensation. This was our most recent stockholder advisory vote to approve named executive officer compensation. The proposal was approved by our stockholders, receiving approximately 91% of the vote of the stockholders present in person or represented by proxy and voting at the meeting. We considered this vote to be a ratification of our current executive compensation policies and decisions and, therefore, did not make any significant changes to our executive compensation policies and decisions based on the vote.
Compensation Committee Interlocks and Insider Participation
No person who served as a member of our Compensation Committee during Fiscal 2019 was a current or former officer or employee of our Company or engaged in certain transactions with our Company required to be disclosed by regulations of the SEC. Additionally, during Fiscal 2019 there were no Compensation Committee “interlocks,” which generally means that no executive officer of our Company served: (a) as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity which had an executive officer serving as a member of our Company’s Compensation Committee; (b) as a director of another entity which had an executive officer serving as a member of our Company’s Compensation Committee; or (c) as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity which had an executive officer serving as a director of our Company.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the foregoing compensation discussion and analysis with Company management. Based on that review and those discussions, the Compensation Committee recommended to the Board of Directors that the compensation discussion and analysis be included in this Annual Report. This report is provided by the following independent directors, who comprise the Compensation Committee: Harry DeMott, Benjamin Samuels and Gerald Budde.
The following summary compensation table sets out details of compensation paid to (a) our principal executive officer; (b) each of our two most highly compensated executive officers who served as executive officers during the fiscal year ended December 31, 2019; and (c) up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at the end of the year ended December 31, 2018, except that no disclosure is provided for any named executive officer, other than our principal executive officer, whose total compensation did not exceed $100,000 for the fiscal year ended December 31, 2019:
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Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($)(1) | Option Awards ($)(2) | Non-equity Incentive Plan Compensation | Change in Pension Value and Non Qualified Preferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||||||||||||||||||||||||
| Duane A. Hughes (3) | 2019 | $ | 391,058 | $ | 50,000 | $ | 600,000 | $ | 666,015 | $ | 132,500 | $ | 1,839,573 | |||||||||||||||||||||||||||||||||||||||||||
President and Chief Executive Officer | 2018 | 275,000 | 275,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 253,750 | 796,400 | 1,050,150 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Robert Willison (4) | 2019 | 217,308 | 300,000 | 170,600 | 42,000 | 729,908 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Chief Operating Officer | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stephen Fleming (5) | 2019 | 32,307 | 1,300,000 | 45,000 | 295,000 | 1,672,307 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| General Counsel and Vice President | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Represents the restricted stock awards granted to Mr. Hughes, Mr. Willison, and Mr. Fleming in November.
(2)Represents the aggregate grant date fair value of the award computed in accordance with FASB ASC Topic 718 to each of our Named Executive Officers. For 2019, these amounts include stock option awards granted to Mr. Hughes in February and to Mr. Willison in May.
(3)Mr. Hughes was appointed President & CEO on February 4, 2019. For his role as a Director he was paid a retainer of $30,000 which is included in the Salary column above. Upon the execution of Mr. Hughes' employment agreement he was entitled to receive a bonus of $25,000 and an additional $25,000 upon the successful closing a financing in excess of $10,000,000. This $50,000 is reflected in the Bonus column of 2019 for Mr. Hughes.
(4)Mr. Willison was appointed as our Chief Operating Officer on February 19, 2019.
(5)Mr. Fleming was appointed our General Counsel and Vice President on November 6, 2019. Mr. Fleming was paid $295,000 in 2019 for outside legal consultation and guidance which is reflected in the All Other Compensation column above.
Employment Agreements
On November 6, 2019, the Company entered into new employment agreements with our executive officers. These new agreements define the position held by each executive officer as well as base salary level and eligibility to participate in the Company's short and long term incentive programs.
Pursuant to the terms of the executive retention agreements in certain circumstances, the Company has agreed to provide specified severance and bonus amounts and to accelerate the vesting on their equity awards upon termination upon a change of control, as the term is defined in the agreements. In the event of a termination upon a change of control or an involuntary termination, our CEO is entitled to receive an amount equal to 24 months of his base salary plus two times the target annual bonus then in effect. Our COO is entitled to receive an amount equal to 18 months of his base salary plus 1.5 times his target bonus amount. Our General Counsel is entitled to receive 16 months of his base salary plus 1.25 times his target bonus amount. Executives are also entitled to receive payment equal to the target bonus then in effect for the executive officer for the year in which such termination occurs, such bonus payment to be pro-rated to reflect the full number of months the executive remained in the Company’s employ. In addition, the vesting on any equity award held by the executive officer will be accelerated in full upon a termination and change of control or an involuntary termination. In the event the executive is terminated for cause, then the vesting of all equity awards shall cease and such equity awards will be terminated. In the event the executive leaves for any reason that is not considered a good reason, then the vesting of equity award shall cease. At the election of the executive officer,
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the Company will also continue to provide health related employee insurance coverage for nine-twelve months, at the Company’s expense upon termination upon a change of control or an involuntary termination.
If the Executive’s employment with the Company terminates by reason of an Involuntary Termination, then the Executive shall be entitled to receive an amount equal to nine-twelve months of base salary. Our CEO is entitled to receive 12 months of his base salary while our COO and General Counsel are entitled to receive 9 months of their then current base salaries. Executives are also entitled to receive the amount equal to the target Cash Bonus then in effect for the Executive for the year in which such termination occurs prorated to reflect the number of full or partial months the Executive was employed with the Company during such calendar year. Acceleration of vesting on outstanding equity awards in the event of an Involuntary Termination occurs only at the discretion of the Board.
Grants of Plan-Based Awards
The following table provides information regarding grants of share based awards to the Named Executive Officers in 2019.
| Name | Grant date | Threshold | Target | Maximum | All Other Stock Awards: Number of Shares of Stock or Units # | All Other Stock Awards: Number of Securities Underlying (#) | Exercise Price of Options Awards ($/sh) | Grant Data Fair Value of Stock and Options Awards $ (1) | ||||||||||||||||||||||||||||||||||||||||||
| Duane A. Hughes | 02/4/2019 | 1,000,000 | $ | 634,300 | ||||||||||||||||||||||||||||||||||||||||||||||
President and Chief Executive Officer | 02/4/2019 | 50,000 | 31,715 | |||||||||||||||||||||||||||||||||||||||||||||||
| 11/6/2019 | 239,044 | 600,000 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Rob Willison | 5/2/2019 | 400,000 | 170,600 | |||||||||||||||||||||||||||||||||||||||||||||||
| Chief Operating Officer | 11/06/2019 | 119,522 | 300,000 | |||||||||||||||||||||||||||||||||||||||||||||||
| Stephen Fleming | 11/6/2019 | 517,928 | 1,300,000 | |||||||||||||||||||||||||||||||||||||||||||||||
| General Counsel and Vice President | ||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Represents the aggregate grant date fair value of the award computed in accordance with FASB ASC Topic 718.
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Outstanding Equity Awards
The following table sets forth information with respect to the outstanding equity awards of our principal executive officers and principal financial officer during 2019, and each person who served as an executive officer of the Company as of December 31, 2019:
| Outstanding Equity Awards at Year-End | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Name and Principal Position | Number of Securities underlying unexercised options (#) Exercisable | Number of securities underlying unexercised options (#) Unexercisable | Equity incentive plan awards: number of securities underlying unexercised options (3) | Options exercise price ($) | Option expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares or units of stock that have not vested ($) | Equity incentive plan awards: Number if unearned shares other rights that have not vested (#) | Equity incentive awards: Market or payout value of unearned shares, units or other rights that have not vested ($) (1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Duane A. Hughes | — | — | — | — | — | 239,044 | $ | 726,694 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| President and Chief Executive Officer | 1,000,000 | 0.97 | 2/4/2029 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 18,000 | 32,000 | 0.97 | 2/4/2029 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 275,000 | 125,000 | — | 5.28 | 5/19/2027 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| 22,000 | — | — | 7.21 | 8/15/2021 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| 25,000 | — | — | 4.99 | 2/1/2021 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| 20,000 | — | — | 1.75 | 8/11/2020 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Robert Willison | — | — | — | — | — | 119,522 | 363,347 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Chief Operating Officer | 75,000 | 325,000 | — | 0.93 | 5/2/2024 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Stephen Fleming | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General Counsel and Vice President | — | — | — | — | — | 517,928 | 1,574,501 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| 46,875 | 103,125 | — | 1.19 | 8/14/2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)The market value of unvested restricted stock is computed based on the $3.04 closing price per share of our common stock on December 31, 2019.
No Pension Benefits
The Company does not maintain any plan that provides for payments or other benefits to its executive officers at, following or in connection with retirement and including, without limitation, any tax-qualified defined benefit plans or supplemental executive retirement plans.
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No Deferred Compensation
The Company does not maintain any defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.
Director Compensation
Under the Non-Employee Director Compensation Program, our non-employee directors are generally eligible to receive compensation for services they provide to us consisting of retainers and equity compensation as described below. During 2019, each non-employee director was eligible to receive the following for their service on the Board pursuant to the Non-Employee Director Compensation Program:
•An annual Board retainer of $50,000
•An additional retainer of $10,000 for the Chairman of the Board
In addition to cash compensation, our non-employee directors are eligible to receive annual equity-based compensation consisting of restricted stock awards with an aggregate grant date value equal to $60,000 or, in the case of the Chairman of the Board, $75,000. Generally, the forfeiture restrictions applicable to the restricted stock awards lapse on the six month anniversary of the date of grant of such awards. The restricted stock awards granted to our non-employee directors are subject to the terms and conditions of the Stock Plan and the award agreements pursuant to which such awards are granted. Each non-employee director is also reimbursed for travel and miscellaneous expenses to attend meetings and activities of the Board or its committees.
| Name | Fees Earned or Paid in Cash $ (1) | Stock Awards $ (2) | Total $ | ||||||||||||||||||||
| Raymond J. Chess | $ | 43,330 | $ | 75,000 | $ | 118,330 | |||||||||||||||||
| H. Benjamin Samuels | 41,664 | 60,000 | 101,664 | ||||||||||||||||||||
| Gerald B. Budde | 41,664 | 60,000 | 101,664 | ||||||||||||||||||||
| Harry DeMott | 41,664 | 60,000 | 101,664 | ||||||||||||||||||||
| Michael L. Clark | 41,664 | 60,000 | 101,664 | ||||||||||||||||||||
(1) Amounts reported in this column reflect annual cash retainer amounts received by our non-employee directors for service on our Board. As described above, in 2019, our directors received monthly retainer payments of $3,333 for board service January through October 2019. In November the monthly retainer payment was increased to $4,167. In addition, Mr. Chess received an additional monthly retainer of $833 for his service as Chairman of the Board (annual value of $10,000).
(2) In November 2019, our non-employee directors received restricted stock awards covering 23,904 shares of common stock with a grant date fair value equal to approximately $60,000 for their service on our Board. As discussed above, Mr. Chess received a restricted stock award covering 29,880 shares of common stock with a grant date fair value equal to approximately $75,000 for his service as Chairman of the Board. The amounts reflected in the “Stock awards” column represent the grant date fair value of restricted stock awards granted to our non-employee directors pursuant to the Stock Plan, as computed in accordance with FASB ASC Topic 718.
Directors’ and Officers’ Insurance
The Company has purchased directors and officer’s liability insurance (“D&O Insurance”) for the benefit of its directors and officers, and the directors and officers of its subsidiaries, against liability incurred by them in the performance of their duties as directors and officers of the Company, or its subsidiaries, as the case may be. The primary policy also provides coverage to the corporate entity for security claims.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information, as of February 28, 2020 with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
| Name of Beneficial Owner (1) | Common Stock Beneficially Owned | Percentage of Common stock (2) | ||||||||||||
| Marathon Asset Management, L.P. | (3) | 11,467,149 | 14.0 | % | ||||||||||
| Joseph T. Lukens | (4) | 7,511,786 | 10.5 | % | ||||||||||
| Arosa Opportunistic Fund, L.P. | (5) | 7,927,755 | 9.9 | % | ||||||||||
| Seaport Global Capital L.P. | (6) | 6,370,775 | 8.3 | % | ||||||||||
| Stephen D. Baksa | (7) | 3,833,174 | 5.4 | % | ||||||||||
| Benjamin Samuels † | (8) | 2,133,441 | 3.0 | % | ||||||||||
| Duane Hughes † | (9) | 1,624,044 | 2.3 | % | ||||||||||
| Stephen Fleming † | (10) | 651,818 | * | |||||||||||
| Gerald Budde † | (11) | 247,405 | * | |||||||||||
| Robert Willison † | (12) | 219,522 | * | |||||||||||
| Raymond Chess † | (13) | 179,289 | * | |||||||||||
| Harry DeMott † | (14) | 109,713 | * | |||||||||||
| Michael Clark † | (15) | 89,713 | * | |||||||||||
| All officers and directors as a group (11 people) | 5,878,324 | 8.1 | % | |||||||||||
* Less than one percent.
† Executive officer and/or director.
(1)Except as otherwise indicated, the address of each beneficial owner is c/o Workhorse Group Inc, 100 Commerce Drive, Loveland, Ohio 45140.
(2)Applicable percentage ownership is based on 70,671,139 shares of common stock outstanding as of February 28, 2020. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Stock options to purchase shares of common stock that are currently exercisable or exercisable within 60 days of February 28, 2020 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(3)Represents (i) a common stock warrant to purchase 2,994,249 shares of common stock at $1.25 per share held by Marathon Centre Street Partnership, L.P. (“Marathon Centre”); (ii) a common stock warrant to purchase 2,300,969 shares of common stock at $1.25 per share held by Marathon Structured Products Strategies Fund, LP (“Marathon Structured”); (iii) a common stock warrant to purchase 1,514,498 shares of common stock at $1.25 per share held by TRS Credit Fund, LP (“TRS”); (iv) a common stock warrant to purchase 1,243,674 shares of common stock at $1.25 per share held by Marathon Blue Grass Credit Fund, LP (“Marathon Blue Grass”); (v) a common stock warrant to purchase 550,942 shares of common stock at $1.4863 per share held by Marathon Centre; (vi) a common stock warrant to purchase 423,379 shares of common stock at $1.4863 per share held by Marathon Structured; (vii) a common stock warrant to purchase 278,668 shares of common stock at $1.4863 per share held by Marathon Blue Grass; (viii) a common stock warrant to purchase 228,836 shares of common stock at $1.4863 per share held by TRS; (ix) a common stock warrant to purchase 133,272 shares of common stock at $1.039 per share held by Marathon Centre; (x) a common stock warrant to purchase 102,414 shares of common stock at $1.039 per share held by Marathon Structured; (xi) a common stock warrant to purchase 67,409 shares of common stock at $1.039 per share held by Marathon Blue Grass, (xii) a common stock warrant to purchase 55,355 shares of common stock at $1.039 per share held by TRS; (xiii) a common stock warrant to purchase 15,018 shares of common
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stock at $1.7820 per share held by Marathon Blue Grass; (xiv) a common stock warrant to purchase 29,692 shares of common stock at $1.7820 per share held by Marathon Centre; (xv) a common stock warrant to purchase 22,817 shares of common stock at $1.7820 per share held by Marathon Structured; (xvi) a common stock warrant to purchase 12,333 shares of common stock at $1.7820 per share held by TRS; (xvii) a common stock warrant to purchase 280,887 shares of common stock at $3.3550 per share held by Marathon Blue Grass; (xviii) a common stock warrant to purchase 555,329 shares of common stock at $3.3550 per share held by Marathon Centre; (xix) a common stock warrant to purchase 426,750 shares of common stock at $3.3550 per share held by Marathon Structured; and (xx) a common stock warrant to purchase 230,658 shares of common stock at $3.3550 per share held by TRS. Marathon Asset Management, L.P. is the manager of Marathon Centre, Marathon Structured, TRS and Marathon Blue Grass. The general partner of Marathon Asset Management, L.P. is Marathon Asset Management GP, L.L.C. (the “General Partner”). Bruce Richards and Louis Hanover are the managing members of the General Partner. The business address is One Bryant Park, 38th Floor, New York, New York 10036.
(4)Represents (i) 7,040,847 shares of common stock held by Mr. Lukens fund, the New Era Capital Fund; (ii) 77,435 shares of common stock held by The Joe & Kim Lukens Foundation; (iii) 25,000 shares of common stock held by the Joseph T Lukens, Jr. and Gerald Budde, Co-Trustee of the Joseph T. Lukens, Jr. Irrevocable Trust for Nathan J. Lukens U/T/A Dated 2/23/2016; (iv) 25,000 shares of common stock held by the Joseph T. Lukens, Jr. and Gerald Budde, Co-Trustee of the Joseph T. Lukens, Jr. Irrevocable Trust for Roman E. Lukens U/T/A Dated 2/23/2016; and (vi) a common stock purchase warrant to acquire 571,429 shares of common stock at $5.28 per share.
(5)Represents (i) a common stock warrant to purchase 5,000,358 shares of common stock at $1.25 per share; (ii) a common stock warrant to purchase 1,143,200 shares of common stock at $1.21 per share; (iii) a common stock warrant to purchase 894,821 shares of common stock at $1.25 per share; (iv) a common stock warrant to purchase 108,768 shares of common stock at $1.25 per share; (v) a common stock warrant to purchase 2,260,050 shares of common stock at $1.62 per shares; and (vi) 2,025,377 shares of common stock held by Arosa Capital Management LP. Pursuant to the warrants, Arosa may not exercise such warrant if such exercise would result in Arosa beneficially owning in excess of 9.99% of our then issued and outstanding common stock. The shares, including the shares of common stock issuable upon exercise of the warrants, are held by Arosa Opportunistic Fund LP, a Cayman Islands exempted limited partnership (“Arosa Opportunistic Fund”). Arosa Capital Management LP, a Delaware limited partnership (“Arosa Capital”), serves as the registered investment adviser of Arosa Opportunistic Fund, and Till Bechtolsheimer, the managing member of the general partner of Arosa Opportunistic Fund and Chief Executive Officer of Arosa Capital, may be deemed to beneficially own the shares reported herein. The business address of Arosa is 55 Hudson Yards, Suite 2800, NY, NY 10036.
(6)Represents (i) 518,675 shares of common stock held by Seaport Global Asset Management, LLC; (ii) a common stock warrant to purchase 3,241,910 shares of common stock at $1.62 per share held by Seaport Global Asset Management EV LLC; (iii) a common stock warrant to purchase 1,424,590 shares of common stock at $1.62 per share held by the Armory Fund, LLP; and (iv) a common stock warrant to purchase 1,185,600 shares of common stock at $1.62 per share held by AMFCO-4, LLC. Pursuant to the warrants, Seaport may not exercise such warrants if such exercise would result in Seaport beneficially owning in excess of 9.99% of our then issued and outstanding common stock. Seaport Global Asset Management, LLC (“SGAM”) is the manager of Seaport Global Asset Management EV LLC, Armory Fund, LP and AMFCO-4, LLC. Stephen C. Smith is the Chief Executive Officer of SGAM. The business address of the foregoing person is 319 Clematis Street, Suite 1000, West Palm Beach, FL 33401 and the business address of SGAM is 360 Madison Avenue, 20th Floor, New York, New York 10017.
(7)Represents 3,833,174 shares of common stock held directly by Mr. Baksa.
(8)Represents (i) 765,094 shares of common stock held by Samuel 2012 Children’s Trust UAD 10/28/12 (the “Trust”), (ii) a common stock purchase warrant to acquire 285,071 shares of common stock at an exercise price of $5.28 per share held by the Trust, (iii) a common stock purchase warrant to acquire 95,253 shares of common stock at an exercise price of $5.28 per share held by the Trust, and (iv) a stock option to acquire 50,000 shares of common stock at $7.01 per share; (v) a stock option to acquire 10,000 shares of common stock at $7.21 per share; (vi) 439,346 shares of common stock held directly by Mr. Samuels; and (vii) 420,964 shares of common stock held by the Marci Rosenberg 2012 Family Trust, a trust managed by Mr. Samuels’ wife. Mr. Samuels is a trustee of the Children’s Trust.
(9)Represents (i) a stock option to acquire 20,000 shares of common stock at $1.75 per share; (ii) a stock option to acquire 25,000 shares of common stock at $4.99 per share; (iii) a stock option to acquire 22,000 shares of common stock at $7.21 per share; (iv) a common stock option to acquire 400,000 shares of common stock at $5.28 per share; (v) a common stock option to acquire 1,000,000 shares of common stock at $0.97 per share; and (vii) 239,044 shares of restricted stock.
(10)Represents (i) a stock option to acquire 150,000 shares of common stock at $1.19 per share; (ii) 517,928 shares of restricted stock; and (3) 77,640 shares of common stock held directly.
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(11)Represents (i) a stock option to acquire 50,000 shares of common stock at $7.01 per share; (ii) a stock option to acquire 10,000 shares of common stock at $7.21 per share; (iii) 119,692 shares of common stock owned by the Gerald B. Budde Living Trust, which Mr. Budde is the trustee; and (v) 71,713 shares of restricted stock.
(12)Represents a stock option to acquire 400,000 shares of common stock at $0.932 per share and 119,522 shares of restricted stock.
(13)Represents (i) a stock option to acquire 10,000 shares of common stock at $1.75 per share; (ii) a stock option to acquire 10,000 shares of common stock at $4.99 per share, (iii) a stock option to acquire 10,000 shares of common stock at $7.21 per share; (iv) 77,689 shares of restricted stock; and (v) 71,600 shares of common stock held directly.
(14)Represents (i) a stock option to acquire 50,000 shares of common stock at $8.20 per share; and (ii) 71,713 shares of restricted stock.
(15)Represents (i) a stock option to acquire 50,000 shares of common stock at $1.10 per share; and (ii) 71,713 shares of restricted stock.
Changes in Control
We have no knowledge of any arrangements, including any pledge by any person of our securities, the operation of which may, at a subsequent date, result in a change in our control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
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 Partners LP received revenue of approximately $86,000 on insurance policies totaling approximately $750,000 in premiums in 2019.
Other than noted above, at no other time during the last two fiscal years has any executive officer, director or any member of these individuals’ immediate families, any corporation or organization with whom any of these individuals is an affiliate or any trust or estate in which any of these individuals serves as a trustee or in a similar capacity or has a substantial beneficial interest been indebted to the Company or was involved in any transaction in which the amount exceeded $120,000 and such person had a direct or indirect material interest.
Procedures for Approval of Related Party Transactions
Our Board of Directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
Director Independence
The Board of Directors has determined that Ray Chess, Gerald Budde, H. Benjamin Samuels, Michael Clark and Harry DeMott each qualify as independent directors under the listing standards of the Nasdaq.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees for professional services provided by our independent auditors, Grant Thornton LLP in each of the last two years, in each of the following categories including expenses are:
| 2019 | 2018 | |||||||||||||
| Audit fees | $ | 285,170 | $ | 233,965 | ||||||||||
| Audit-related fees | 22,357 | 20,300 | ||||||||||||
| Tax fees | — | — | ||||||||||||
| All other fees | — | — | ||||||||||||
| Total fees | $ | 307,527 | $ | 254,265 | ||||||||||
Audit Fees
Audit fees include the audit of the Annual Report on Form 10-K, including the audit of internal control over financial reporting and reviews of the Quarterly Reports on Form 10-Q.
Audit related fees include work associated with registration statements and issuance of comfort letters.
The policy of the audit committee, is to approve the appointment of the principal auditing firm and any permissible audit-related services. Fees charged by Grant Thornton LLP were approved by the Board with engagement letters signed by Gerald Budde, Audit Committee Chairman.
The Audit Committee is responsible for the pre-approval of audit and permitted non-audit services to be performed by the Company’s independent auditor. The Audit Committee will, on an annual basis, consider and, if appropriate, approve the provision of audit and non-audit services by the auditor. Thereafter, the Audit Committee will, as necessary, consider and, if appropriate, approve the provision of additional audit and non-audit services by the auditor which are not encompassed by the Audit Committee’s annual pre-approval and are not prohibited by law. The Audit Committee has delegated to the Chair of the Audit Committee the authority to pre-approve, on a case-by-case basis, non-audit services to be performed by the auditor. The Audit Committee has approved all audit and permitted non-audit services performed by the auditor for the year ended December 31, 2019.
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PART IV
Item 15. Exhibits
| Exhibit No. | Description | Form Incorporated From | Report Date | |||||||||||||||||
| 3.1 | 8-K | 1/4/2010 | ||||||||||||||||||
| 3.2 | 8-K | 5/25/2010 | ||||||||||||||||||
| 3.3 | 8-K | 5/25/2010 | ||||||||||||||||||
| 3.4 | 8-K | 5/25/2010 | ||||||||||||||||||
| 3.5 | 8-K | 5/25/2010 | ||||||||||||||||||
| 3.6 | 8-K | 9/10/2010 | ||||||||||||||||||
| 3.7 | SB-2 | 2/4/2008 | ||||||||||||||||||
| 3.8 | 8-K | 4/16/2015 | ||||||||||||||||||
| 3.9 | 8-K | 12/10/2015 | ||||||||||||||||||
| 3.10 | 10-Q | 8/9/2017 | ||||||||||||||||||
| 3.11 | 10-Q | 5/7/2019 | ||||||||||||||||||
| 3.12 | 8-K | 6/6/2019 | ||||||||||||||||||
| 4.1 | 8-K | 12/21/2015 | ||||||||||||||||||
| 4.2 | 8-K | 12/21/2015 | ||||||||||||||||||
| 4.3 | 8-K | 9/9/2016 | ||||||||||||||||||
| 4.4 | 8-K | 9/14/2017 | ||||||||||||||||||
| 4.5 | 10-Q | 8/6/2018 | ||||||||||||||||||
| 4.6 | 8-K | 10/1/2018 | ||||||||||||||||||
| 4.7 | 8-K | 12/3/2018 | ||||||||||||||||||
| 4.8 | 8-K | 1/2/2019 | ||||||||||||||||||
| 4.9 | 8-K | 2/11/2019 | ||||||||||||||||||
| 4.10 | 8-K | 4/16/2019 | ||||||||||||||||||
| 4.11 | 8-K | 4/16/2019 | ||||||||||||||||||
| 4.12 | † | |||||||||||||||||||
| 10.1 | 8-K | 3/4/2013 | ||||||||||||||||||
| 10.2 | 8-K | 3/13/2013 | ||||||||||||||||||
| 10.3 | 8-K | 10/30/2013 | ||||||||||||||||||
| 10.4 | 8-K | 12/21/2015 | ||||||||||||||||||
| 10.5 | 8-K | 12/21/2015 | ||||||||||||||||||
| 10.6 | 8-K | 9/9/2016 | ||||||||||||||||||
| 10.7 | 8-K | 5/3/2017 | ||||||||||||||||||
59
| 10.8 | 8-K | 5/19/2017 | ||||||||||||||||||
| 10.9 | 8-K | 8/11/2017 | ||||||||||||||||||
| 10.10 | 8-K | 5/19/2017 | ||||||||||||||||||
| 10.11 | 8-K | 5/19/2017 | ||||||||||||||||||
| 10.12 | 8-K | 7/10/2018 | ||||||||||||||||||
| 10.13 | 8-K | 7/10/2018 | ||||||||||||||||||
| 10.14 | 8-K | 7/10/2018 | ||||||||||||||||||
| 10.15 | 10-Q | 8/6/2018 | ||||||||||||||||||
| 10.16 | 8-K | 10/1/2018 | ||||||||||||||||||
| 10.17 | 8-K | 12/3/2018 | ||||||||||||||||||
| 10.18 | 8-K | 12/3/2018 | ||||||||||||||||||
| 10.19 | 8-K | 1/2/2019 | ||||||||||||||||||
| 10.20 | 8-K | 1/2/2019 | ||||||||||||||||||
| 10.21 | 8-K | 1/2/2019 | ||||||||||||||||||
| 10.22 | 8-K | 1/2/2019 | ||||||||||||||||||
| 10.23 | 8-K | 1/2/2019 | ||||||||||||||||||
| 10.24 | 8-K | 2/5/2019 | ||||||||||||||||||
| 10.25 | 8-K | 2/5/2019 | ||||||||||||||||||
| 10.26 | 8-K | 2/5/2019 | ||||||||||||||||||
| 10.27 | 10-K | 3/18/2019 | ||||||||||||||||||
60
| 10.28 | 8-K | 4/30/2019 | ||||||||||||||||||
| 10.29 | 8-K | 4/30/2019 | ||||||||||||||||||
| 10.30 | 8-K | 5/31/2019 | ||||||||||||||||||
| 10.31 | 8-K | 10/1/2019 | ||||||||||||||||||
| 10.32 | 8-K | 10/1/2019 | ||||||||||||||||||
| 10.33 | 8-K | 10/1/2019 | ||||||||||||||||||
| 10.34 | 8-K | 11/6/2019 | ||||||||||||||||||
| 10.35 | 8-K | 11/6/2019 | ||||||||||||||||||
| 10.36 | 8-K | 11/6/2019 | ||||||||||||||||||
| 10.37 | 8-K | 11/6/2019 | ||||||||||||||||||
| 10.38 | 8-K | 11/6/2019 | ||||||||||||||||||
| 10.39 | 8-K | 11/6/2019 | ||||||||||||||||||
| 10.4 | 8-K | 11/27/2019 | ||||||||||||||||||
| 10.41 | † | |||||||||||||||||||
| 10.42 | † | |||||||||||||||||||
| 10.43 | 8-K | 12/9/2019 | ||||||||||||||||||
| 10.44 | 8-K | 12/9/2019 | ||||||||||||||||||
| 10.45 | 8-K | 12/9/2019 | ||||||||||||||||||
| 10.46 | 8-K | 12/9/2019 | ||||||||||||||||||
| 10.47 | † | |||||||||||||||||||
| 21.1 | † | |||||||||||||||||||
| 23.1 | † | |||||||||||||||||||
| 31.1 | † | |||||||||||||||||||
| 31.2 | † | |||||||||||||||||||
| 32.1 | † | |||||||||||||||||||
| 32.2 | † | |||||||||||||||||||
| 99.1 | 10-Q | 8/9/2017 | ||||||||||||||||||
| 99.2 | 10-Q | 8/9/2017 | ||||||||||||||||||
| 99.3 | 10-Q | 8/9/2017 | ||||||||||||||||||
| 101.INS | Inline XBRL INSTANCE DOCUMENT | |||||||||||||||||||
61
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | |||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||
| 104 | Inline XBRL Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||||||||||||||
† Exhibits that are filed with this report.
* Portions of this exhibit have been redacted pursuant to a request for confidential treatment submitted to the Securities and Exchange Commission.
Item 16. Form 10-K Summary.
None.
62
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| WORKHORSE GROUP INC. | |||||||||||
| Dated: | March 13, 2020 | By: | /s/ Duane A. Hughes | ||||||||
| Name: | Duane A. Hughes | ||||||||||
| Title: | Chief Executive Officer (Principal Executive Officer) | ||||||||||
| Dated: | March 13, 2020 | By: | /s/ Steve Schrader | ||||||||
| Name: | Steve Schrader | ||||||||||
| Title: | Chief Financial Officer (Principal Financial Officer) | ||||||||||
| Dated: | March 13, 2020 | By: | /s/ Gregory T. Ackerson | ||||||||
| Name: | Gregory T. Ackerson | ||||||||||
| Title: | Controller (Principal Accounting Officer) | ||||||||||
In accordance with the Exchange Act, this report has been signed below by the following persons on March 13, 2020, on behalf of the registrant and in the capacities indicated.
| Signature | Title | |||||||
| /s/ Duane A. Hughes | Chief Executive Officer and Director (Principal Executive Officer) | |||||||
| Duane A. Hughes | ||||||||
| /s/ Steve Schrader | Chief Financial Officer (Principal Financial Officer) | |||||||
| Steve Schrader | ||||||||
| /s/ Raymond Chess | Director | |||||||
| Raymond Chess | ||||||||
| /s/ Gerald B. Budde | Director | |||||||
| Gerald Budde | ||||||||
| /s/ H. Benjamin Samuels | Director | |||||||
| H. Benjamin Samuels | ||||||||
| /s/ Harry DeMott | Director | |||||||
| Harry DeMott | ||||||||
| /s/ Michael L. Clark | Director | |||||||
| Michael L. Clark | ||||||||
63