Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
Nature of operations
Workhorse Group Inc. (“Workhorse”, the “Company”, “we”, “us” or “our”) is a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. 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 condensed consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Basis of presentation
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has limited revenues and a history of negative working capital and stockholders’ deficits. Our existing capital resources are expected to be sufficient to fund our operations into 2022. Unless and until we are able to generate a sufficient amount of revenue, reduce our costs and/or enter into a strategic relationship, we expect to finance future cash needs through public and/or private offerings of equity securities and/or debt financings. If we are not able to obtain additional financing and/or substantially increase revenue from sales, we will be unable to continue as a going concern. These conditions raise substantial doubt about the ability of the Company to continue as a going concern.
In view of these matters, continuation as a going concern is dependent upon the continued operations of the Company, which, in turn, is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and successfully carry out its future operations. The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary, should the Company not continue as a going concern.
The Company has continued to raise capital and debt. Management believes the proceeds from these offerings, future offerings, and the Company’s anticipated revenue, provides an opportunity to continue as a going concern. If additional funding is required, the Company plans to obtain working capital from either debt or equity financing. Obtaining such working capital is not assured. The Company is currently in a production ramp up mode and placing greater emphasis on manufacturing capability.
In the opinion of Management, the Unaudited Condensed Consolidated Financial Statements include all adjustments that are necessary for the fair presentation of Workhorse’s financial conditions, results of operations and cash flows for the interim periods presented. Such adjustments are of a normal, recurring nature. The results of operations and cash flows for the interim periods presented may not necessarily be indicative of full-year results. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Workhorse contained in its Annual Report on Form 10-K for the year ended December 31, 2019.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Impact of COVID-19 Pandemic
In December 2019, a novel coronavirus disease (“COVID-19”) was reported and on January 30, 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO
raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.
As of the date of this filing, our locations and primary suppliers continue to operate. However, the broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. We may experience constrained supply or other business disruptions that could materially impact our business, results of operations and overall financial performance in future periods. See Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.
2. INVENTORY, NET
Inventory, net consists of the following:
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|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Raw materials
|
$
|
5,412,613
|
|
|
$
|
3,741,097
|
|
Work in process
|
927,351
|
|
|
422,176
|
|
Finished goods
|
—
|
|
|
—
|
|
|
6,339,964
|
|
|
4,163,273
|
|
Less inventory reserve
|
(2,163,675)
|
|
|
(2,365,127)
|
|
Total inventory, net
|
$
|
4,176,289
|
|
|
$
|
1,798,146
|
|
3. INVESTMENT IN LMC
The Company has a ten percent ownership interest in Lordstown Motors Corp. ("LMC") with a value of $13.1 million and $12.2 million as of June 30, 2020 and December 31, 2019, respectively. The investment was obtained pursuant to the transaction with LMC described below. During the six months ended June 30, 2020, the Company received additional shares as part of its anti-dilution feature with LMC, which were valued at approximately $0.9 million. There were no additional shares received during the three months ended June 30, 2020.
We have elected the measurement alternative allowed under generally accepted accounting principles ("GAAP") for our investment in LMC, which does not have a readily determinable fair value. Under the measurement alternative, we measure this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions in an identical or similar investment in LMC.
At each reporting period, we evaluate our investment in LMC to determine if there are any events or circumstances that are likely to have a significant adverse effect on the fair value of the investment. Examples of such impairment indicators include, but are not limited to, a significant deterioration in earnings performance, recent financing rounds at reduced valuations, a significant adverse change in the regulatory, economic or technological environment of an investee or a significant doubt about an investee’s ability to continue as a going concern. If we identify an impairment indicator, we will estimate the fair value of the investment and compare it to its carrying value. Our estimation of fair value considers financial information related to the investee available to us, including valuations based on recent third-party equity investments in the investee. If the fair value of the investment is less than its carrying value, the investment is impaired and an impairment loss equal to the difference between the investment’s carrying value and its fair value is recognized under the measurement alternative.
LMC Transaction
On November 7, 2019, the Company entered into a transaction with LMC (the "LMC Transaction") pursuant to which the Company granted LMC a perpetual and worldwide license to certain intellectual property relating to the Company’s W-15 electric pickup truck platform and its related technology (the “Licensed Intellectual Property”) for consideration as described below. LMC will endeavor to, among other things, raise sufficient third-party capital for the acquisition, retrofitting, and restart of the Lordstown Assembly Complex, and the ongoing operating costs, which amounts are expected to be significant (the “Capital Raise”).
Consideration
•A ten percent ownership interest in the common stock of LMC in exchange for the Company’s obligations under the License Agreement. The LMC common stock received provides the Company with anti-dilution rights for two years.
•One percent of the aggregate debt and equity commitments funded to LMC upon completion of the Capital Raise (the "Royalty Advance"). Any amount paid to the Company from the Capital Raise is non-refundable.
•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 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.
•The variable component consists of the four percent commission and the one percent royalty. Variable consideration will be recognized when each vehicle for which a royalty or commission is owed is sold.
4. REVENUE
Revenue Recognition
Net sales include products and shipping and handling charges, net of estimates for customer allowances. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. The majority of our contracts have a single performance obligation and are short term in nature.
Revenues related to repair and maintenance services are recognized over time as services are provided. Payment for used vehicles, services, and merchandise are typically received at the point when control transfers to the customer or in accordance with payment terms customary to the business.
Accounts Receivable
Credit is extended based upon an evaluation of the customer’s financial condition. Accounts receivable are stated at their estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts and our historical experience with accounts receivable write-offs.
As performance obligations are satisfied within one year from a given reporting date we omit disclosures of the transaction price apportioned to remaining performance obligations on open orders.
Disaggregation of Revenue
Our revenues related to the following types of business were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
Automotive
|
$
|
85,000
|
|
|
$
|
—
|
|
|
$
|
85,000
|
|
|
$
|
240,000
|
|
|
|
|
|
Aviation
|
—
|
|
|
—
|
|
|
60,783
|
|
|
—
|
|
|
|
|
|
Other
|
6,942
|
|
|
5,508
|
|
|
30,459
|
|
|
129,690
|
|
|
|
|
|
Total revenues
|
$
|
91,942
|
|
|
$
|
5,508
|
|
|
$
|
176,242
|
|
|
$
|
369,690
|
|
|
|
|
|
5. CONVERTIBLE NOTE AND LONG-TERM DEBT
Convertible Note and long-term debt consist of the following:
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|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
Convertible Note, at fair value
|
95,330,000
|
|
|
39,020,000
|
|
|
|
|
|
Long-term debt
|
1,411,000
|
|
|
—
|
|
Less current portion
|
(95,957,111)
|
|
|
(19,620,000)
|
|
Convertible Note and long-term debt, net of current portion
|
$
|
783,889
|
|
|
$
|
19,400,000
|
|
Convertible Note
Current Activity
The fair value of the Convertible Note as of June 30, 2020 and December 31, 2019 was $95.3 million and $39.0 million, respectively, and the contractual principal balance as of June 30, 2020 and December 31, 2019 was $18.5 million and $40.5 million, respectively. In electing the fair value option, the Company recognizes changes in fair value related to changes in credit risk, if any, in other comprehensive income and the remaining change in fair value in interest expense. For the six months ended June 30, 2020, the fair value of the Convertible Note increased $56.3 million which included a $1.1 million adjustment to other comprehensive income attributed to changes in credit risk and a $75.2 million adjustment to interest expense. The change related to credit risk was primarily caused by an increase in credit rating yield for comparable companies during the first quarter of 2020.
During the three months ended June 30, 2020, $17.5 million par value of the Convertible Note was converted to 6,837,381 shares of common stock resulting in a loss of $20.1 million, which is recorded in interest expense. During the six months ended June 30, 2020, $22.0 million par value of the Convertible Note was converted to 8,384,270 shares of common stock resulting in a loss of $21.0 million, which is recorded in interest expense.
Based on the contractual principal balance as of June 30, 2020, the number of warrants exercisable following the full or partial redemption of the Convertible Note is 6,975,410. 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.
Subsequent Activity
The fair value of the Convertible Note as of the date of this filing is zero. During the period July 1, 2020 through August 3, 2020, the remaining $18.5 million par value of the Convertible Note was converted to 6,065,576 shares of common stock resulting in a loss of $14.9 million, which is recorded in interest expense. Based on the contractual principal balance, the number of warrants exercisable following the full redemption of the Convertible Note is zero.
Background
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. 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.
Any principal repayment of the Convertible Note is at 112% of the par value. Beginning March 1, 2020 the holder of the Convertible Note may require the Company to redeem up to $1.5 million par value ("Redemption Payment") of the Convertible Note monthly. Subject to certain limitations, the Company at its discretion can pay some or all of Redemption Payment in cash or shares of common stock.
The Convertible Note is a senior secured obligation of the Company secured by substantially all assets of the Company and ranks senior to all unsecured debt of the Company. The Convertible Note contains certain covenants, including that we maintain at all times liquidity calculated as unrestricted, unencumbered cash and cash equivalents in a minimum 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 at an initial exercise price of $3.05. The warrants are only exercisable at the option of the Company following the full or partial redemption of the Convertible Note. In the event the Convertible Note is redeemed in part, the percentage of the warrants that will become exercisable upon such redemption will be equal to a percentage of the original principal amount of the Note redeemed at such time. Each exercise of the warrants entitles the holder to common shares equal to 115% of the total principal amount redeemed at such time divided by the conversion price. The Convertible Note and the warrants were determined to be freestanding instruments and were accounted for separately.
Paycheck Protection Program Term Note
On April 14, 2020, the Company entered into a Paycheck Protection Program Term Note (“PPP Term Note” or the “Note”) with PNC Bank, N.A. (“PNC”) under the Paycheck Protection Program of the recently enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The Company received total proceeds of $1.4 million from the PPP Term Note, which is due on April 13, 2022. In accordance with the requirements of the CARES Act, the Company will use the proceeds primarily for payroll costs. Interest accrues on the Note at the rate of 1.0% per annum. The Company may apply to PNC for forgiveness of the amount due on the Note which shall be an amount equal to the sum of payroll costs, mortgage interest, rent obligations and covered utility payments incurred during the eight weeks following disbursement on the Note.
Neither principal nor interest shall be due or payable during the period from April 14, 2020 through the six-month anniversary of the date of the Note. On November 15, 2020, the outstanding principal of the Note that is not forgiven shall convert to an amortizing term loan and shall be due and payable in equal monthly installments until April 13, 2022. Additionally on November 15, 2020, all accrued interest that is not forgiven shall be due and payable.
The Company has elected to account for the PPP Term Note as debt and will accrue interest over the term of the Note. During the six months ended June 30, 2020, the Company did not make any repayments or apply for forgiveness of any amount due on the Note.
Purchase Warrants
In December 31, 2018, the Company entered into a Credit Agreement (the "Credit Agreement"), with Marathon Asset Management, LP. In conjunction with entering into the Credit Agreement, the Company issued Common Stock Purchase Warrants (“Initial Warrants”) to purchase 8,053,390 shares of common stock at an exercise price of $1.25 per share. The Credit Agreement was paid in 2019. Until December 31, 2020, the Company must issue additional Warrants to the Lenders equal to 10%, in the aggregate, of any additional equity issuances on substantially the same terms and conditions of the Initial Warrants, except that (i) the expiration date shall be five years from the issuance date, (ii) the exercise price shall be equal to 110% of the issuance price per share in the relevant issuance, and (iii) the holder shall be entitled to exercise the warrant on a cashless basis at any time.
The Initial Warrants are classified as liability financial instruments and required to be marked-to-market at each balance sheet date with a corresponding charge to interest expense. The Initial Warrants were exercised during the six months ended June 30, 2020, resulting in the issuance of 8,053,390 shares of common stock. The Initial Warrants were marked-to-market at each exercise date, which resulted in a charge to interest expense of $12.2 million for the six months ended June 30, 2020. As of June 30, 2020 and December 31, 2019, the warrant liability for the Initial Warrants was zero and $16.3 million, respectively. Any additional warrants issued in connection with the Credit Agreement have been classified as equity instruments and are not required to be marked-to-market at each balance sheet date.
6. MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK
On June 5, 2019, the Company closed agreements for the sale of 1,250,000 units consisting of one share of Series B Preferred Stock (the “Preferred Stock”), with a stated value of $20.00 per share (the “Stated Value”) and a common stock purchase
warrant to purchase 7.41 shares of the common stock (the “Warrants”) for an aggregate purchase price of $25.0 million. The Preferred Stock is not convertible and does not hold 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. The Warrants have an exercise price of $1.62 per share and expire seven years from the date of issuance. Accrued dividends are payable quarterly in shares of common stock of the Company based on a fixed share price of $1.62. During the three and six months ended June 30, 2020, the Company issued 308,642 and 617,284 shares of common stock to the holders of the Preferred Stock, respectively.
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 condensed 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 for the three and six months ended June 30, 2020 was $0.4 million and $0.8 million, respectively.
7. STOCK-BASED COMPENSATION
The Company maintains, as approved by the board of directors, the 2019 Stock Incentive Plan (the "Plan") providing for the issuance of stock-based based awards to employees, officers, directors or consultants of the Company. Non-qualified stock options may only be granted with an exercise price equal to the market value of the Company’s common stock on the grant date. Awards under the Plan may be either vested or unvested options, or unvested restricted stock. The Plan has authorized 8,000,000 shares for issuance of stock-based awards. As of June 30, 2020, there were shares available for issuance of future stock awards, which includes 6,641,577 shares available under the 2019 and 2017 incentive plans.
Stock-based compensation expense
The following table summarizes stock-based compensation expense:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Stock options
|
$
|
347,328
|
|
|
$
|
185,848
|
|
|
$
|
427,758
|
|
|
$
|
876,918
|
|
Restricted stock
|
822,863
|
|
|
—
|
|
|
1,601,460
|
|
|
—
|
|
Total stock-based compensation
|
$
|
1,170,191
|
|
|
$
|
185,848
|
|
|
$
|
2,029,218
|
|
|
$
|
876,918
|
|
Stock options
The following table summarizes option activity for directors, officers, consultants and employees:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted
Average
Exercise Price
per Option
|
|
Weighted
Average Grant
Date Fair Value
per Option
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
Balance, December 31, 2019
|
|
3,725,000
|
|
|
$
|
2.32
|
|
|
|
|
|
Granted
|
|
875,075
|
|
|
1.81
|
|
|
0.61
|
|
|
|
Exercised
|
|
(22,500)
|
|
|
2.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(117,594)
|
|
|
4.42
|
|
|
|
|
|
Expired
|
|
(12,500)
|
|
|
2.74
|
|
|
|
|
|
Balance, June 30, 2020
|
|
4,447,481
|
|
|
$
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options exercisable at June 30, 2020
|
|
3,117,500
|
|
|
$
|
2.39
|
|
|
|
|
5.4
|
As of June 30, 2020, unrecognized compensation expense was $0.6 million for unvested options which is expected to be recognized over the next 1.2 years.
Restricted stock
The following table summarizes restricted stock activity:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Unvested Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
Balance, December 31, 2019
|
|
1,768,726
|
|
|
$
|
2.57
|
|
Granted
|
|
643,220
|
|
|
2.67
|
|
Vested
|
|
(467,368)
|
|
|
2.53
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Balance, June 30, 2020
|
|
1,944,578
|
|
|
$
|
2.61
|
|
As of June 30, 2020, unrecognized compensation expense was $4.3 million for unvested restricted stock awards which is expected to be recognized over the next 2.1 years.
8. INCOME TAXES
As the Company has not generated taxable income since inception, the cumulative deferred tax assets remain fully reserved, and no provision or liability for federal or state income taxes has been included in the financial statements.
9. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net loss available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted earnings per share is calculated using the treasury stock method, on the basis of the weighted average number of shares outstanding plus the dilutive effect, if any, of stock options, unvested restricted stock and warrants. The if converted method is used for determining the impact of the Convertible Note.
The following table shows the computation of basic and diluted earnings per share:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net loss
|
$
|
(131,331,909)
|
|
|
$
|
(20,060,200)
|
|
|
$
|
(126,575,218)
|
|
|
$
|
(26,324,372)
|
|
Deemed dividends
|
—
|
|
|
86,207
|
|
|
—
|
|
|
86,207
|
|
Net income loss attributable to common stockholders
|
$
|
(131,331,909)
|
|
|
$
|
(20,146,407)
|
|
|
$
|
(126,575,218)
|
|
|
$
|
(26,410,579)
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
74,701,343
|
|
|
60,530,168
|
|
|
71,583,551
|
|
|
60,530,168
|
|
Dilutive effect of options and warrants
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive effect of Convertible Note
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
74,701,343
|
|
|
60,530,168
|
|
|
71,583,551
|
|
|
60,530,168
|
|
|
|
|
|
|
|
|
|
Anti-dilutive options and warrants excluded from diluted average shares outstanding
|
24,294,118
|
|
|
33,315,619
|
|
|
24,294,118
|
|
|
33,315,619
|
|
Excluded from the table above are the warrant shares related to the Convertible Note, which represent 11,803,279 and 13,278,689 warrants calculated using the if converted method for the three and six months ended June 30, 2020, respectively. The warrants are issuable at the option of the Company following the full or partial redemption of the Convertible Note. In the event the Convertible Note is redeemed, the percentage of the warrants that will be issued upon such redemption will be equal to the percentage of the principal amount at such time. Therefore, as the principal balance of the Convertible Note decreases, the number of potential warrants to be issued decreases proportionally.
Also excluded from the table above are the shares on the conversion of the Convertible Note, which represent 9,958,506 and 12,488,899 shares of common stock calculated using the if converted method for the three and six months ended June 30, 2020, respectively. The Convertible Note is convertible into shares of the Company's common stock.
10. RECENT ACCOUNTING DEVELOPMENTS
Accounting Guidance Not Yet Adopted
In June 2016, the FASB issued an accounting standard update that revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The guidance is effective for the Company on January 1, 2023, including interim periods and should be applied on a modified retrospective basis. The Company expects that the adoption of this guidance will not have a material impact on the Company's financial condition and operations.
11. STOCKHOLDERS' EQUITY
Warrants
In connection with the issuance of debt, common stock and preferred stock, the Company issued warrants to purchase shares of the Company's common stock. The following table summarizes warrant activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Warrants
|
|
Weighted Average Exercise Price per Warrant
|
Balance, December 31, 2019
|
30,527,776
|
|
|
$
|
1.82
|
|
Granted, Marathon debt
|
68,586
|
|
|
1.78
|
|
Exercised
|
(12,651,146)
|
|
|
1.48
|
|
Expired
|
(43,157)
|
|
|
1.40
|
|
Balance, June 30, 2020
|
17,902,059
|
|
|
$
|
2.06
|
|
The above table excludes 6,975,410 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.
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 shareholders by the same amount.
Benjamin Samuels and Gerald Budde, directors of the Company, acquired 841,928 and 26,310 shares of common stock, respectively, as part of the February 2019 offering at a price per share of $0.95, which was above the closing price the date prior to close. They did not receive the Down Round protection.
On June 22, 2017, the Company entered into an at the market issuance sales agreement with Cowen and Company, LLC under which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $25.0 million. For the three months ended March 31, 2019, the Company issued 1,609,373 shares under this agreement for net proceeds of approximately $1.5 million. This agreement was canceled in the first quarter of 2019.
12. OTHER TRANSACTION
On October 31, 2019, the Company and ST Engineering Hackney, Inc. ("Seller") entered into an Asset Purchase Agreement ("Purchase Agreement") to purchase certain assets of Seller ("Acquired Assets") and assume certain liabilities of Seller. Upon execution of the Purchase Agreement, the Company deposited $1.0 million in cash and shares of its common stock having a value of $6.6 million ("Escrow Shares") into an escrow account ("Escrow Account") as collateral. The number of Escrow Shares is subject to adjustment if the value of the Escrow Shares is less than $5.3 million or greater than $7.9 million on certain dates. In January 2020, the transaction closed and the initial payment of $1.0 million was released from the Escrow Account and recorded as a selling expense. The transaction will be accounted for as customer acquisition costs as the primary asset acquired is the right to bid on a customer contract. As each payment is made the Company will determine if there is future benefit associated with the contract and if it is determined that there is, the payment will be capitalized as a customer acquisition cost and expensed over the period of benefit.
The purchase price for the Acquired Assets was $7.0 million, $1.0 million of which was payable from the Escrow Account upon satisfaction of certain conditions, and the remaining $6.0 million (the “Second Payment”) is payable in cash within 45 days if additional conditions are met. The Purchase Agreement provides that the Company shall make additional payments to Seller in the event the Second Payment is not made within 45 days of when the payment is due. In the event the Second Payment is not made to Seller within 105 days the payment is due, the Seller may, at its option, require that the escrow agent release to Seller Escrow Shares with a value (based on the then-current market price of the shares) equal to $6.0 million in satisfaction of the Second Payment.
13. FAIR VALUE MEASUREMENTS
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 — Quoted market prices in active markets for identical assets or liabilities.
Level 2 — Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 — Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The Company's warrant liability is measured at fair value using Level 3 inputs on issuance and at each reporting date. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value models include: the estimates of the redemption dates; credit spreads; dividend payments; and the market price and volatility of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
The following table sets forth a reconciliation of the warrant liability:
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|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Warrant liability, beginning of year
|
|
$
|
16,335,000
|
|
Exercise of warrants
|
|
(28,511,690)
|
|
Change in fair value for the period
|
|
12,176,690
|
|
Warrant liability, end of period
|
|
$
|
—
|
|
The Company's Convertible Note is measured at fair value using Level 3 inputs on issuance and at each reporting date. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value 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:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Convertible Note, beginning of year
|
|
$
|
39,020,000
|
|
|
|
|
Conversion of Convertible Note into common stock
|
|
(38,735,019)
|
|
Change in fair value for the period and loss on conversion to common stock
|
|
96,145,019
|
|
Change in fair value for the period, attributed to changes in credit risk
|
|
(1,100,000)
|
|
Convertible Note, end of period
|
|
$
|
95,330,000
|
|
14. SUBSEQUENT EVENTS
The Company evaluates events and transactions occurring subsequent to the date of the condensed consolidated financial statements for matters requiring recognition or disclosure in the condensed consolidated financial statements. The accompanying condensed consolidated financial statements consider events through the date on which the condensed consolidated financial statements were available to be issued.
High Trail Convertible Note
The Company entered into a securities purchase agreement, with HT Investments MA LLC pursuant to which the Company agreed to issue and sell a senior secured convertible note for the principal amount of $70.0 million (the “Note”). The closing of the offering took place on July 16, 2020.
The Company did not pay underwriting discounts or commissions. However, after discounts the proceeds before expenses were $69.0 million. The Company expects to use the net proceeds from this offering for working capital to finance the production of its trucks and for general corporate purposes.
The Note ranks equal with the Company’s outstanding senior secured note and senior to all unsecured debt of the Company, and will be due on July 1, 2023. Interest is payable quarterly beginning October 1, 2020 at a rate of 4.5% per annum. The Note is initially convertible at a rate of $19.00 per share, subject to customary anti-dilution adjustments and adjustments for certain corporate events.
Any principal repayment of the Note is at 110% of the par value (the “Repayment Price”). Beginning October 1, 2020, the holder of the Note may require the Company to redeem up to $3.5 million of the par value (“Redemption Payment”). Subject to certain limitations, the Company, at its discretion, can pay some or all of the Redemption Payment in cash or shares of common stock. The Company may redeem all (or any portion in excess of $8.0 million) of the Note at any time at the greater of (a) 115% of the conversion value, calculated based on the highest volume weighted average price during the period beginning 30 days prior to such redemption and ending the day prior to the redemption date, or (b) 105% of the Repayment Price, in each case plus accrued and unpaid interest.
Pursuant to the credit agreement entered into between the Company and Marathon Asset Management, LP, on behalf of certain entities it manages (the "Marathon Lenders") dated December 31, 2018, until December 31, 2020, the Company must issue additional warrants to the Marathon Lenders when the Company makes certain equity issuances, in amount equal to approximately 10% of the Company’s fully diluted equity interests, and on substantially the same terms and conditions of the initial warrants issued, except that (i) the expiration date shall be five years from the issuance date, (ii) the exercise price shall be equal to 110% of the issuance price per share in the relevant issuance, and (iii) the holder shall be entitled to exercise the warrant on a cashless basis at any time. Accordingly, the Company issued the Marathon Lenders warrants to acquire an aggregate of 409,356 shares of common stock exercisable at a price of $20.90 per share.
Lordstown Motors Corp. Merger
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”) in exchange for royalties, equity interests in LMC, and other consideration (the “LMC Transaction”). 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 it expects to incur (the “Capital Raise”). Among other consideration, LMC is required to 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.
In order to fully implement its business plan and close on the Capital Raise, on August 1, 2020, LMC entered into an Agreement and Plan of Merger (the “LMC Merger Agreement”) with DiamondPeak Holdings Corp., pursuant to which LMC agreed to merge with and into a subsidiary of DiamondPeak (the “LMC Merger”). The LMC Merger Agreement may be terminated under certain circumstance, including, termination at the option of either party if the LMC Merger is not consummated by February 1, 2021, and conditions precedent including no Material Adverse Effect (as defined in the Merger Agreement), the retention by LMC of certain key employees and LMC having cash on hand equal to or in excess of $300 million. The shareholders of LMC will receive in the aggregate 58% of the issued and outstanding shares of Class A Common Stock of DiamondPeak as of the closing of the LMC Merger. Further, on August 1, 2020, DiamondPeak entered into subscription agreements with certain investors, pursuant to which, DiamondPeak agreed to issue and sell, in private placements to close immediately prior to the closing of the LMC Merger, an aggregate of 50 million shares of Class A Common Stock for $10.00 per share.
In order to further define the Company’s rights with respect to LMC, the Company and LMC entered into an Agreement on August 1, 2020 pursuant to which the parties confirmed that the Company will own 9.99% of DiamondPeak following the closing of the LMC Merger and the Royalty Advance was defined as $4,750,000. Further, the Company has entered into a Registration Rights and Lock Up Agreement with DiamondPeak, which will become effective upon completion of the LMC Merger pursuant to which DiamondPeak has agreed to file a registration statement with the Securities and Exchange Commission, registering the Company’s shares of Class A Common Stock held in DiamondPeak within 45 days of the closing of the LMC Merger (the “Filing Deadline”) and to use reasonable efforts to have such registration statement declared effective within 60 days of the Filing Deadline, which may be extended up to 120 days in the event the Securities and Exchange Commission elects to review such registration statement. The Company has agreed, subject to certain exceptions, to not sell any of its shares of Class A Common Stock for a period of six months following the closing of the LMC Merger.