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Workhorse Group Inc. – ‘10-Q’ for 3/31/20

On:  Wednesday, 5/6/20, at 8:56am ET   ·   For:  3/31/20   ·   Accession #:  1628280-20-6544   ·   File #:  1-37673

Previous ‘10-Q’:  ‘10-Q’ on 11/8/19 for 9/30/19   ·   Next:  ‘10-Q’ on 8/10/20 for 6/30/20   ·   Latest:  ‘10-Q’ on 11/9/20 for 9/30/20   ·   1 Reference:  By:  Workhorse Group Inc. – ‘S-3’ on 10/28/20

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 5/06/20  Workhorse Group Inc.              10-Q        3/31/20   62:4.5M                                   Workiva Inc Wde… FA01/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    492K 
 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     23K 
 3: EX-31.2     Certification -- §302 - SOA'02                      HTML     23K 
 4: EX-32.1     Certification -- §906 - SOA'02                      HTML     19K 
 5: EX-32.2     Certification -- §906 - SOA'02                      HTML     19K 
36: R1          Document and Entity Information                     HTML     70K 
52: R2          Condensed Consolidated Balance Sheets               HTML    102K 
47: R3          Condensed Consolidated Balance Sheets               HTML     40K 
                (Parenthetical)                                                  
13: R4          Condensed Consolidated Statements of Operations     HTML     74K 
                (Unaudited)                                                      
35: R5          Statement of Comprehensive Income (Statement)       HTML     31K 
51: R6          Condensed Consolidated Statements of Stockholders   HTML     65K 
                Equity (Deficit) (Unaudited)                                     
46: R7          Condensed Consolidated Statements of Cash Flows     HTML     97K 
                (Unaudited)                                                      
14: R8          Summary of Significant Accounting Principles        HTML     29K 
34: R9          Inventory                                           HTML     32K 
45: R10         Investments in LMC                                  HTML     29K 
61: R11         Revenue                                             HTML     34K 
26: R12         Long-Term Debt                                      HTML     37K 
19: R13         Mandatory Redeemable Series B Preferred Stock       HTML     27K 
44: R14         Stock-Based Compensation                            HTML     66K 
60: R15         Income Taxes                                        HTML     21K 
24: R16         Earnings Per Share                                  HTML     37K 
18: R17         Recent Accounting Developments                      HTML     21K 
43: R18         Share Holders Equity (Deficit)                      HTML     35K 
62: R19         Other Transaction                                   HTML     22K 
38: R20         Fair Value Measurement                              HTML     43K 
17: R21         Subsequent Events                                   HTML     24K 
50: R22         Summary of Significant Accounting Principles        HTML     36K 
                (Policies)                                                       
56: R23         Inventory (Tables)                                  HTML     34K 
37: R24         Revenue (Tables)                                    HTML     30K 
16: R25         Long-Term Debt (Tables)                             HTML     32K 
49: R26         Stock-Based Compensation (Tables)                   HTML     67K 
55: R27         Earnings Per Share (Tables)                         HTML     35K 
39: R28         Share Holders Equity (Deficit) (Tables)             HTML     29K 
15: R29         Fair Value Measurement (Tables)                     HTML     38K 
20: R30         Inventory (Details)                                 HTML     34K 
28: R31         Investments, All Other Investments (Details)        HTML     38K 
58: R32         Revenue (Details)                                   HTML     27K 
40: R33         Long-Term Debt (Details)                            HTML     29K 
21: R34         Long-Term Debt (Details Textual)                    HTML     77K 
29: R35         Mandatory Redeemable Series B Preferred Stock       HTML     51K 
                (Details)                                                        
59: R36         Stock Based Compensation (Details)                  HTML     34K 
42: R37         Stock Based Compensation - Share Based              HTML     26K 
                Compensation Expense (Details)                                   
22: R38         Stock Based Compensation - Stock Option Activity    HTML     60K 
                (Details)                                                        
27: R39         Stock Based Compensation - Restricted Stock         HTML     43K 
                (Details)                                                        
11: R40         Earnings Per Share (Details)                        HTML     44K 
32: R41         Share Holders Equity (Deficit) (Details Textual)    HTML     55K 
53: R42         Share Holders Equity (Deficit) (Details)            HTML     37K 
48: R43         Other Transaction (Details)                         HTML     36K 
12: R44         Fair Value Measurement - Warrants (Details)         HTML     26K 
33: R45         Fair Value Measurement - Convertible Note           HTML     31K 
                (Details)                                                        
54: R46         Subsequent Events (Details)                         HTML     24K 
25: R9999       Uncategorized Items - wkhs-20200331.htm             HTML     20K 
30: XML         IDEA XML File -- Filing Summary                      XML    105K 
23: XML         XBRL Instance -- wkhs-20200331_htm                   XML    852K 
57: EXCEL       IDEA Workbook of Financial Reports                  XLSX     54K 
 7: EX-101.CAL  XBRL Calculations -- wkhs-20200331_cal               XML    152K 
 8: EX-101.DEF  XBRL Definitions -- wkhs-20200331_def                XML    459K 
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10: EX-101.PRE  XBRL Presentations -- wkhs-20200331_pre              XML    676K 
 6: EX-101.SCH  XBRL Schema -- wkhs-20200331                         XSD    131K 
31: JSON        XBRL Instance as JSON Data -- MetaLinks              233±   351K 
41: ZIP         XBRL Zipped Folder -- 0001628280-20-006544-xbrl      Zip    188K 


‘10-Q’   —   Quarterly Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Part I
"Financial Information
"Item 1
"Financial Statements
"Condensed Consolidated Balance Sheets
"Condensed Consolidated Statements of Operations
"Condensed Consolidated Statements of Stockholders
"Deficit
"Condensed Consolidated Statements of Cash Flows
"Notes to Condensed Consolidated Financial Statements
"Item 2
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Item 3
"Quantitative and Qualitative Disclosures About Market Risk
"Item 4
"Controls and Procedures
"Part Ii
"Other Information
"Legal Proceedings
"Item 1A
"Risk Factors
"Unregistered Sales of Equity Securities and Use of Proceeds
"Defaults Upon Senior Securities
"Mine Safety Disclosures
"Item 5
"Item 6
"Exhibits
"Signatures

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM  i 10-Q
 i QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended  i March 31, 2020
or
 i TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number:  i 000-53704
 i WORKHORSE GROUP INC.
(Exact name of registrant as specified in its charter)
 i Nevada i 26-1394771
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 i 100 Commerce Drive,  i Loveland,  i Ohio  i 45140
(Address of principal executive offices, including zip code)
( i 513)  i 360-4704
(Registrant’s telephone number, including area code)
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.  i Yes   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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  i Yes   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 i Accelerated filer
Non-accelerated filerSmaller reporting company i 
Emerging growth company i 
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  i   No 

Title of each classTrading SymbolName of each exchange on which registered
 i Common Stock, $0.001 par value per share i WKHSThe NASDAQ Capital Market

The number of shares of the Registrant's Common Stock, $0.001 par value per share, outstanding as of April 30, 2020, was  i 70,629,331.





TABLE OF CONTENTS


Condensed Consolidated Statements of Comprehensive Income (Loss)

i


Forward-Looking Statements
The discussions in this Quarterly 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. 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-Q that refer to the “Company”, “Workhorse Group”, “Workhorse”, “we,” “us” or “our” are to Workhorse Group Inc.
ii


PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Workhorse Group Inc.
Condensed Consolidated Balance Sheets
March 31,
2020
December 31,
2019
(Unaudited)
Assets
Current assets:
Cash and cash equivalents$ i 16,824,627  $ i 23,868,416  
Restricted cash held in escrow i    i 1,000,000  
Accounts receivable, less allowance for doubtful accounts of $ i  i 0 /  at March 31, 2020
    and December 31, 2019
 i 48,830   i 7,921  
Lease receivable, current i 33,100   i 33,100  
Inventory, net i 2,630,824   i 1,798,146  
Prepaid expenses i 4,756,923   i 4,812,088  
      Total current assets i 24,294,304   i 31,519,671  
Property, plant and equipment, net
 i 6,768,619   i 6,830,181  
Investment in LMC i 13,059,700   i 12,194,800  
Lease receivable, long-term i 123,661   i 129,177  
Total Assets$ i 44,246,284  $ i 50,673,829  
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable$ i 3,061,730  $ i 1,678,983  
Accrued liabilities i 3,387,921   i 3,105,184  
Warranty liability i 5,302,770   i 6,001,864  
Warrant liability i 7,190,000   i 16,335,000  
Customer deposits i 190,000   i 303,000  
Current portion of Convertible Note, at fair value i 20,160,000   i 19,620,000  
      Total current liabilities i 39,292,421   i 47,044,031  
Convertible Note, at fair value i 7,430,000   i 19,400,000  
Mandatorily redeemable Series B preferred stock i 19,520,491   i 19,142,908  
Commitments and contingencies i  i 
Stockholders’ deficit:
Series A preferred stock, par value $ i  i 0.001 /  per share,  i  i 75,000,000 /  shares authorized,
 i  i  i  i 0 /  /  /  shares issued and outstanding at March 31, 2020 and December 31, 2019
 i    i   
Common stock, par value $ i  i 0.001 /  per share,  i  i 250,000,000 /  shares authorized, 69,493,836
shares issued and outstanding at March 31, 2020 and  i  i 67,105,000 /  shares issued and
outstanding at December 31, 2019
 i 69,494   i 67,105  
Additional paid-in capital i 150,883,717   i 143,826,315  
Accumulated deficit( i 174,049,839) ( i 178,806,530) 
Accumulated other comprehensive income i 1,100,000   i   
      Total stockholders' deficit( i 21,996,628) ( i 34,913,110) 
Total Liabilities and Stockholders' Deficit$ i 44,246,284  $ i 50,673,829  
See accompanying notes to the condensed consolidated financial statements.
1


Workhorse Group Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
20202019
Net sales$ i 84,300  $ i 364,182  
Cost of sales i 1,747,975   i 1,397,606  
Gross loss( i 1,663,675) ( i 1,033,424) 
Operating expenses
Selling, general and administrative i 5,565,787   i 2,090,890  
Research and development i 1,902,236   i 1,362,275  
Total operating expenses i 7,468,023   i 3,453,165  
Other income i 864,900   i   
Loss from operations( i 8,266,798) ( i 4,486,589) 
Interest (income) expense, net( i 13,023,489)  i 1,777,583  
Income (loss) before provision for income taxes i 4,756,691  ( i 6,264,172) 
Provision for income taxes i    i   
Net income (loss)$ i 4,756,691  $( i 6,264,172) 
Net income (loss) attributable to common stockholders per share - basic$ i 0.07  $( i 0.11) 
Net income (loss) attributable to common stockholders per share - diluted$ i 0.06  $( i 0.11) 
Weighted average number of common shares outstanding - basic i 68,465,759   i 55,260,519  
Weighted average number of common shares outstanding - diluted i 83,768,820   i 55,260,519  
See accompanying notes to the condensed consolidated financial statements.

2


Workhorse Group Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)


Three Months Ended March 31,
20202019
Net income (loss)$ i 4,756,691  $( i 6,264,172) 
Other comprehensive income
Credit risk adjustment in fair value of Convertible Note i 1,100,000   i   
Comprehensive income (loss)$ i 5,856,691  $( i 6,264,172) 
See accompanying notes to the condensed consolidated financial statements.
3


Workhorse Group Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
(Unaudited)

Common StockSeries A
Preferred Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
Stockholders’
Deficit
Number
of Shares
AmountNumber
of Shares
Amount
Balance as of December 31, 2018 i 58,270,934  $ i 58,271   i   $ i   $ i 126,076,782  $( i 141,557,496) $—  $( i 15,422,443) 
Issuance of common stock i 3,226,056   i 3,226  —  —   i 2,996,509  —  —   i 2,999,735  
Stock-based compensation—  —  —  —   i 691,070  —  —   i 691,070  
Net loss for the three months ended March 31, 2019—  —  —  —  —  ( i 6,264,172) —  ( i 6,264,172) 
Balance as of March 31, 2019 i 61,496,990  $ i 61,497   i   $ i   $ i 129,764,361  $( i 147,821,668) $—  $( i 17,995,810) 

Common StockSeries A
Preferred Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
Stockholders’
Deficit
Number
of Shares
AmountNumber
of Shares
Amount
Balance as of December 31, 2019 i 67,105,000  $ i 67,105   i   $ i   $ i 143,826,315  $( i 178,806,530) —  $( i 34,913,110) 
Stock options and warrants exercised, and vesting of restricted shares i 432,112   i 432  —  —   i 242,568  —  —   i 243,000  
Common stock issued for preferred stock dividends i 308,642   i 309  —  —   i 499,691  —  —   i 500,000  
Conversion of Convertible Note i 1,546,889   i 1,547  —  —   i 5,192,005  —  —   i 5,193,552  
Common stock issued for interest on Convertible Note i 101,193   i 101  —  —   i 264,111  —  —   i 264,212  
Stock-based compensation—  —  —  —   i 859,027  —  —   i 859,027  
Net income for the three months ended March 31, 2020—  —  —  —  —   i 4,756,691  —   i 4,756,691  
Other comprehensive income—  —  —  —  —  —   i 1,100,000   i 1,100,000  
Balance as of March 31, 2020 i 69,493,836  $ i 69,494   i   $ i   $ i 150,883,717  $( i 174,049,839) $ i 1,100,000  $( i 21,996,628) 

See accompanying notes to the condensed consolidated financial statements.
4


Workhorse Group Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
20202019
Cash flows from operating activities:
Net income (loss)$ i 4,756,691  $( i 6,264,172) 
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation i 171,761   i 96,687  
Tooling expense i 353,786   i   
Amortization of discount and debt issuance costs on long-term debt i    i 129,050  
Amortization of discount on mandatorily redeemable Series B preferred stock i 377,583   i   
Change in fair value of Convertible Note and loss on conversion to common stock( i 5,136,448)  i   
Change in fair value of warrant liability( i 9,145,000)  i 568,066  
Change in fair value of investment in LMC( i 864,900)  i   
Dividends for mandatorily redeemable Series B preferred stock paid in common stock i 500,000   i   
Interest on Convertible Note paid in common stock i 264,212   i   
Stock-based compensation i 859,027   i 691,070  
Effects of changes in operating assets and liabilities:
Accounts and lease receivable( i 35,393) ( i 351,138) 
Inventory( i 832,678)  i 42,818  
Prepaid expenses i 55,165   i 225,761  
Accounts payable and accrued liabilities i 1,665,484  ( i 747,229) 
Warranty liability( i 699,094) ( i 147,602) 
Customer deposits( i 113,000) ( i 12,000) 
Net cash used in operating activities( i 7,822,804) ( i 5,768,689) 
Cash flows from investing activities:
Capital expenditures( i 463,985)  i   
Net cash used in investing activities( i 463,985)  i   
Cash flows from financing activities:
Proceeds from long-term debt i    i 4,104,140  
Issuance of common stock i    i 2,999,735  
Exercise of warrants and options i 243,000   i   
Net cash provided by financing activities i 243,000   i 7,103,875  
Change in cash and cash equivalents( i 8,043,789)  i 1,335,186  
Cash, cash equivalents and restricted cash, beginning of the period i 24,868,416   i 1,512,750  
Cash and cash equivalents, end of the period$ i 16,824,627  $ i 2,847,936  










5


The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported within the condensed consolidated balance sheets:

March 31, 2020December 31, 2019
Cash and cash equivalents$ i 16,824,627  $ i 23,868,416  
Restricted cash held in escrow i    i 1,000,000  
Total cash, cash equivalents and restricted cash$ i 16,824,627  $ i 24,868,416  

Supplemental disclosure of non-cash activities:

During the three months ended March 31, 2020, the Company issued  i 1,546,889 shares of common stock in connection with the conversion of the Convertible Note, which were valued at $ i 4,335,557. The Company recorded additional paid-in capital with the offset as a reduction to the fair value of the Convertible Note.

During the three months ended March 31, 2020, the decrease in fair value of the Convertible Note included a $ i 1,100,000 adjustment attributed to changes in credit risk. The Company recorded other comprehensive income with the offset as a reduction to the fair value of the Convertible Note.

See accompanying notes to the condensed consolidated financial statements.
6



Workhorse Group Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. i SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
 i 
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.
 i 
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 through the second quarter of 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. 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. Intercompany balances and transactions are eliminated in consolidation. 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.
7


2.  i INVENTORY, NET

 i 
Inventory, net consists of the following:
March 31, 2020December 31, 2019
Raw materials$ i 4,489,572  $ i 3,741,097  
Work in process i 422,176   i 422,176  
Finished goods i    i   
 i 4,911,748   i 4,163,273  
Less inventory reserve( i 2,280,924) ( i 2,365,127) 
  Total inventory, net$ i 2,630,824  $ i 1,798,146  
 / 

3.  i INVESTMENT IN LMC

The Company has a  i  i ten /  percent ownership interest in Lordstown Motors Corp. ("LMC") with a value of $ i 13.1 million and $ i 12.2 million as of March 31, 2020 and December 31, 2019, respectively. The investment was obtained pursuant to the transaction with LMC described below. During the period, the Company received additional shares as part of its anti-dilution feature with LMC, which were valued at approximately $ i 0.9 million.

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  i 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.
 i 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  i one percent royalty on the gross sales price of the first  i 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  i 6,000 existing Vehicles orders to LMC. LMC will pay a  i 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:

8


The fixed component consists of the  i  i ten /  percent ownership interest in LMC and any amounts received under the Minimum Royalty. The fair value of the LMC ownership interest received was $ i 12.2 million.
The variable component consists of the  i four percent commission and the  i one percent royalty. Variable consideration will be recognized when each vehicle for which a royalty or commission is owed is sold.
4.  i REVENUE
 i 
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
 i 
Our revenues related to the following types of business were as follows:
Three Months Ended March 31,
20202019
Automotive$ i   $ i 240,000  
Aviation i 60,783   i   
Other i 23,517   i 124,182  
Total revenues$ i 84,300  $ i 364,182  
 / 


5.  i CONVERTIBLE NOTE AND LONG-TERM DEBT
 i 
Convertible Note consists of the following:
March 31, 2020December 31, 2019
Convertible Note, at fair value i 27,590,000   i 39,020,000  
Less current portion( i 20,160,000) ( i 19,620,000) 
Convertible Note, net of current portion$ i 7,430,000  $ i 19,400,000  
 / 

Convertible Note
On December 9, 2019, the Company issued a $ i 41.0 million par value Convertible Note (the "Convertible Note") due November 2022, with a stated interest rate of  i 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 $ i 3.05 per share subject to change for anti-dilution adjustments or certain corporate events.
The fair value of the Convertible Note as of March 31, 2020 and December 31, 2019 was $ i 27.6 million and $ i 39.0 million, respectively, and the contractual principal balance as of March 31, 2020 and December 31, 2019 was $ i 36.0 million and $ i 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 three months ended March 31, 2020, the fair value of the Convertible Note decreased $ i 11.4 million which included a $ i 1.1 million adjustment to other comprehensive income attributed to changes in credit risk and a $ i 5.1 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 period.
During the three months ended March 31, 2020, $ i 4.5 million par value of the Convertible Note was converted to  i 1,546,889 shares of common stock resulting in a loss of $ i 0.9 million, which is included in interest expense.
Any principal repayment of the Convertible Note is at  i 112% of the par value. Beginning March 1, 2020 the holder of the Convertible Note may require the Company to redeem up to $ i 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 $ i 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  i 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  i 30 day price of our common stock. The initial exercise price was $ i 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.

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  i 8,053,390 shares of common stock at an exercise price of $ i 1.25 per share. The Credit Agreement was paid in 2019, but the Initial Warrants are still outstanding. Until December 31, 2020, the Company must issue additional Warrants to the Lenders equal to  i 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  i five years from the issuance date, (ii) the exercise price shall be equal to  i 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.

Currently 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. As of March 31, 2020 and December 31, 2019, the warrant liability for the Initial Warrants was $ i 7.2 million and $ i 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.
10


6.  i MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK
On June 5, 2019, the Company closed agreements for the sale of  i 1,250,000 units consisting of one share of Series B Preferred Stock (the “Preferred Stock”), with a stated value of $ i 20.00 per share (the “Stated Value”) and a common stock purchase warrant to purchase  i 7.41 shares of the common stock (the “Warrants”) for an aggregate purchase price of $ i 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  i 8.0% per annum on the Stated Value. Accrued dividends are payable quarterly in shares of common stock of the Company based on a fixed share price of $ i 1.62. The Warrants have an exercise price of $ i 1.62 per share and expire  i 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  i 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 $ i 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 for the three months ended March 31, 2020 was $ i 0.4 million.
7.  i 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  i 8,000,000 shares for issuance of stock-based awards. As of March 31, 2020, there were shares available for issuance of future stock awards, which includes  i 8,042,278 shares available under the 2019 and 2017 incentive plans.
Stock-based compensation expense
 i 
The following table summarizes stock-based compensation expense:
Three Months Ended March 31,
20202019
Stock options$ i 80,430  $ i 691,070  
Restricted stock i 778,597   i   
Total stock-based compensation$ i 859,027  $ i 691,070  
 / 

Stock options
 i The following table summarizes option activity for directors, officers, consultants and employees:
11


Number of OptionsWeighted
Average
Exercise Price
per Option
Weighted
Average Grant
Date Fair Value
 per Option
Weighted
Average
Remaining
Contractual Life
(Years)
Balance, December 31, 2019 i  i 3,725,000 /   $ i  i 2.32 /   
Granted i  i  /    i 
Exercised i  i  /    i 
Forfeited i  i  /    i 
Expired( i 12,500)  i 2.74  
Balance, March 31, 2020 i 3,712,500  $ i  i 2.31 /   
Number of options exercisable at March 31, 2020 i 3,128,500  $ i 2.38   i 5.4

As of March 31, 2020, unrecognized compensation expense was $ i 0.4 million for unvested options which is expected to be recognized over the next  i 2.0 years.

Restricted stock
The following table summarizes restricted stock activity:

Number of Unvested Shares Weighted Average Grant Date Fair Value per Share
Balance, December 31, 2019 i 1,768,726  $ i 2.57  
Granted i    i   
Vested( i 282,112)  i 2.54  
Forfeited i    i   
Balance, March 31, 2020 i 1,486,614  $ i 2.57  

As of March 31, 2020, unrecognized compensation expense was $ i 3.4 million for unvested restricted stock awards which is expected to be recognized over the next  i 2.2 years.
 i 
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.

 i 
9. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (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.




12



 i 
The following table shows the computation of basic and diluted earnings per share:
Three Months Ended March 31,
20202019
Net income (loss)$ i 4,756,691  $( i 6,264,172) 
Net income (loss) attributable to common stockholders$ i 4,756,691  $( i 6,264,172) 
Basic weighted average shares outstanding i 68,465,759   i 55,260,519  
Dilutive effect of options and warrants i 15,303,061   i   
Diluted weighted average shares outstanding i 83,768,820   i 55,260,519  
Anti-dilutive options and warrants excluded from diluted average shares outstanding i 5,066,931   i 22,752,782  
 / 

Excluded from the table above are the warrant shares related to the Convertible Note, which represent  i 13,278,689 warrants calculated using the if converted method. 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  i 14,137,319 shares of common stock calculated using the if converted method. The Convertible Note is convertible into shares of the Company's common stock.

 i 
10. RECENT ACCOUNTING DEVELOPMENTS
 i 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.  i STOCKHOLDERS' EQUITY
2019 Stock Offerings
In February 2019, the Company sold  i 1,616,683 shares of common stock to investors (the “February 2019 Investors”) for net proceeds of $ i 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  i 116,496 shares of common stock were issued to the February 2019 Investors which was accounted for as a $ i 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  i 841,928 and  i 26,310 shares of common stock, respectively, as part of the February 2019 offering at a price per share of $ i 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 $ i 25.0 million.
13


For the three months ended March 31, 2019, the Company issued  i 1,609,373 shares under this agreement for net proceeds of approximately $ i 1.5 million. This agreement was canceled in the first quarter of 2019.

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.  i The following table summarizes warrant activity:
Number of WarrantsWeighted Average Exercise Price per Warrant
Balance, December 31, 2019 i 30,527,776  $ i  i 1.82 /   
Granted, Marathon debt i 34,293   i  i 1.78 /   
Exercised( i 173,809)  i 1.59  
Expired( i 43,157)  i 1.40  
Balance, March 31, 2020 i 30,345,103  $ i  i 1.82 /   

The above table excludes  i 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.

12.  i 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 $ i 1.0 million in cash and shares of its common stock having a value of $ i 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 $ i 5.3 million or greater than $ i 7.9 million on certain dates. In January 2020, the transaction closed and the initial payment of $ i 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 $ i 7.0 million, $ i 1.0 million of which was payable from the Escrow Account upon satisfaction of certain conditions, and the remaining $ i 6.0 million (the “Second Payment”) is payable in cash within  i 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  i 45 days of when the payment is due. In the event the Second Payment is not made to Seller within  i 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 $ i 6.0 million in satisfaction of the Second Payment.
14


13.  i 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.
 i 
The following table sets forth a reconciliation of the warrant liability:

March 31, 2020
Warrant liability, beginning of year$ i 16,335,000  
Fair value of new warrants issued i   
Change in fair value for the period( i 9,145,000) 
Warrant liability, end of period$ i 7,190,000  
 / 

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:

March 31, 2020
Convertible Note, beginning of year$ i 39,020,000  
Conversion of Convertible Note into common stock( i 4,335,557) 
Change in fair value for the period( i 5,994,443) 
Change in fair value for the period, attributed to changes in credit risk( i 1,100,000) 
Convertible Note, end of period$ i 27,590,000  
15



 i 
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.
Paycheck Protection Program Term Note
On April 14, 2020, the Company entered into a Paycheck Protection Program Term Note (“PNC Note”) with PNC Bank, N.A. (“PNC”) under the Paycheck Protection Program (the "Program") of the recently enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") administered by the U.S. Small Business Administration. The Company received total proceeds of $ i 1.4 million from the PNC Note. In accordance with the requirements of the CARES Act, the Company will use proceeds from the PNC Note primarily for payroll costs. Interest accrues on the PNC Note at the rate per annum of  i 1.00%. The Company may apply to PNC for forgiveness of the amount due on the PNC 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 under the PNC Note.
During the period from April 14, 2020 through the six-month anniversary of the date of the PNC Note (the “Deferral Expiration Date”), neither principal nor interest shall be due and payable during this deferral period. On the Deferral Expiration Date, the outstanding principal of the PNC Note that is not forgiven under the Program (the “Conversion Balance”) shall convert to an amortizing term loan. On November 15, 2020, all accrued interest that is not forgiven under the Program shall be due and payable. Additionally, on November 15, 2020 and continuing on the 15th day of each month thereafter until April 13, 2022 equal installments of principal shall be due and payable, each in an amount determined by dividing the Conversion Balance by 18 (the “Monthly Principal Amount”). Interest shall be payable at the same time as the Monthly Principal Amount. Any outstanding principal and accrued interest shall be due and payable in full on April 13, 2022.
 / 
Impact of COVID-19 Pandemic
In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 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 be operating. 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.
16


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview and Quarter 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 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.
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 trucks 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 in November 2019, the Company formed a 50/50 joint venture to which we contributed our HorseFly technology.


17




Results of Operations
Our condensed consolidated statements of operations data is as follows:
Three Months Ended
March 31,
2020
2019
Net sales$84,300  $364,182  
Cost of sales1,747,975  1,397,606  
Gross loss(1,663,675) (1,033,424) 
Operating expenses
Selling, general and administrative5,565,787  2,090,890  
Research and development1,902,236  1,362,275  
Total operating expenses7,468,023  3,453,165  
Other income864,900  —  
Loss from operations(8,266,798) (4,486,589) 
Interest (income) expense, net(13,023,489) 1,777,583  
Income (loss) before provision for income taxes4,756,691  (6,264,172) 
Provision for income taxes—  —  
Net (income) loss$4,756,691  $(6,264,172) 
Net Sales
Net sales for the three months ended March 31, 2020 and 2019 were $0.1 million and $0.4 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 three months ended March 31, 2020 and 2019 were $1.7 million and $1.4 million, respectively. The cost of sales increase was primarily due to an increase in tooling costs incurred for production of the C-Series.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses during the three months ended March 31, 2020 and 2019 were $5.6 million and $2.1 million, respectively. The increase in SG&A expenses was primarily due to recognition of $1.0 million of selling expense, higher employee-related costs and higher spending in areas such as contract labor.
Research and Development Expenses
Research and development (“R&D”) expenses during the three months ended March 31, 2020 and 2019 were $1.9 million and $1.4 million, respectively. The increase in R&D expenses is primarily due to the finalization of the design of the C-Series.

18


Interest (Income) Expense, Net
Interest (income) expense, net is comprised of the following:

Three Months Ended March 31,
2020
2019
Contractual interest expense$922,838  $933,725  
Amortization of discount and debt issuance costs377,584  281,586  
Adjustment to fair value of warrant liability(9,145,000) 568,066  
Adjustment to fair value of Convertible Note(5,136,448) —  
Other(42,463) (5,794) 
Total interest (income) expense, net$(13,023,489) $1,777,583  

Interest (income) expense, net for the three months ended March 31, 2020 and 2019 was $(13.0) million and $1.8 million, respectively. The change was primarily attributable to a $9.1 million mark-to-market adjustment in 2020 for warrants issued to lenders due to the change in the stock price during the first quarter. In addition there was a change in the fair value of the Convertible Note of approximately $5.1 million for the three months ended March 31, 2020
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 March 31, 2020, we had approximately $16.8 million in cash and cash equivalents, as compared to approximately $23.9 million as of December 31, 2019, a decrease of $7.1 million. The decrease in cash and cash equivalents was primarily attributable to spend related to our ramp-up of the C-Series, including contract labor, employee-related costs and inventory build.
We believe our existing capital resources will be sufficient to support our current and projected funding requirements through the second quarter of 2020 at 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.
Our future funding requirements will depend upon many factors, including, but not limited to:
our ability to acquire or license other technologies or compounds 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 three months ended March 31, 2020, 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
19


Summary of Cash Flows
Three Months Ended March 31,
20202019
Net cash used in operating activities$(7,822,804) $(5,768,689) 
Net cash used in investing activities$(463,985) $—  
Net cash provided by financing activities$243,000  $7,103,875  
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 three months ended March 31, 2020 and 2019, net cash used in operating activities was $7.8 million and $5.8 million, respectively. The increase in net cash used in operations during the three months ended March 31, 2020 as compared to 2019 was primarily attributable to spend related to our ramp-up of the C-Series, including contract labor, employee-related costs and inventory build.
Cash Flows from Investing Activities
During the three months ended March 31, 2020, net cash used in investing activities was $0.5 million, while in 2019 it was negligible. The Company had capital expenditures of $0.5 million for tooling for the production of the C-Series truck.
Cash Flows from Financing Activities
During the three months ended March 31, 2020 and 2019, net cash provided by financing activities was $0.2 million and $7.1 million, respectively. The decrease in net cash provided by financing activities was primarily driven by $4.1 million of proceeds from revolving loans and $3.0 million of proceeds from issuance of common stock during the three months ended March 31, 2019.
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
Our accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations. Our Unaudited Condensed Consolidated Financial Statements are prepared in conformity with GAAP and follow general practices within the industry in which we operate. The preparation of the financial statements requires management to make certain judgments and assumptions in determining accounting estimates. Accounting estimates are considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and different estimates reasonably could have been used in the current period, or changes in the accounting estimate are reasonably likely to occur from period to period, that would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.
For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2019, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
20


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of our quantitative and qualitative disclosures about market risk, see “Quantitative and Qualitative Disclosures About Market Risks” included in our Annual Report on Form 10-K for the year ended December 31, 2019, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There have been no material changes to the information provided in our Annual Report on Form 10-K for the year ended December 31, 2019.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures”, as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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 of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of the covered by this Quarterly Report, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
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 quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
21


PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS

We are involved from time to time in legal proceedings incidental to the conduct of our business. Material legal proceedings which arose, or in which there were material developments, during the three months ended March 31, 2020 are discussed below.

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 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 intends to defend vigorously, but is also pursuing whether the lawsuit can be settled. 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.

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.

On March 20, 2020, the Company filed a Complaint against Outlast Technologies LLC, a manufacturer of battery thermal management matrix products, in the United States District Court for the District of Colorado (Case No. 1:20-cv-00774-NRN) claiming breaches of the implied warranty against infringement and implied warranty for a particular purpose. The Company is seeking damages to be assessed at trial. The products at issue are the battery bricks that the Company is being accused of patent infringement over in the All Cell litigation described above.
ITEM 1A. RISK FACTORS
For a detailed discussion of risk factors affecting us, see “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes in the current period regarding our risk factors, other than the addition of the following:
We face various risks related to health epidemics such as the global COVID-19 pandemic, which may have material adverse consequences on our operations, financial position, cash flows, and those of our customers and suppliers.
We face adverse effects related to the global COVID-19 pandemic, including disruption and volatility in the global capital markets, disruption in our global supply chain and delays in our overall manufacturing activities. We would expect the COVID-19 pandemic to adversely affect our operations if significant portions of our workforce are unable to work effectively due to illness, quarantines, government actions, facility closures, or other restrictions in connection with the COVID-19 pandemic. Additionally, our financial position, supply chain, liquidity, cash flow and customer orders would also face pressures for at least the balance of this fiscal year.
Substantially all of our operations and production activities have remained operational during the COVID-19 pandemic. We believe our facilities are considered essential activities exempt from closure directives. However, they are subject to various local and national directives curtailing operations, requiring work from home and social distancing which otherwise could impact the efficiency of our operations. Such directives could change at any time.
22


We continue to monitor the situation, assess further possible implications to our operations, supply chain, liquidity, cash flow and customer orders, and take actions in an effort to mitigate adverse consequences.
Recognizing the unprecedented nature, scale and uncertainty associated with this global health crisis, the duration and extent of the on-going impact cannot be reasonably estimated at this time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Preferred Dividends
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 quarter ended March 31, 2020, the Company issued 308,642 shares of common stock to the holders of the Preferred Stock.
Warrant Exercise
During the first quarter ended March 31, 2020, the Company issued 23,809 shares of common stock in connection with the exercise of Common Stock Purchase Warrants in consideration of $33,333.
The offer, sale and issuance of the above securities was made to accredited investors and the Company relied upon the exemptions contained in Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Rule 506 of Regulation D promulgated thereunder with regard to the sale. No advertising or general solicitation was employed in offering the securities. The offer and sales were made to accredited investors and transfer of the common stock will be restricted by the Company in accordance with the requirements of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION

None.
23


ITEM 6. EXHIBITS
Exhibit No.Description
31.1*  
31.2*  
32.1*  
32.2*  
101.INSInline XBRL INSTANCE DOCUMENT
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LABInline XBRL Taxonomy Extension Labels Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
104Inline XBRL Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*Filed herewith.
24


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

WORKHORSE GROUP INC.
Dated: May 6, 2020By:/s/ Duane A. Hughes
Name: Duane A. Hughes
Title:   Chief Executive Officer
(Principal Executive Officer)

Dated: May 6, 2020By:/s/ Steve Schrader
Name: Steve Schrader
Title:   Chief Financial Officer
(Principal Financial Officer)


Dated: May 6, 2020By:/s/ Gregory T. Ackerson
Name: Gregory T. Ackerson
Title:   Corporate Controller
(Principal Accounting Officer)

25

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
1/1/23
4/13/22
12/31/20
11/15/20
5/22/20
Filed on:5/6/204,  8-K,  CORRESP
4/30/20S-3
4/14/208-K
For Period end:3/31/20
3/20/20
3/11/20
3/1/20
2/28/20
2/1/20
12/31/1910-K
12/26/19
12/9/19424B5,  8-K
12/6/19
11/15/193
11/7/198-K
10/31/198-K
10/15/19
7/18/19
6/5/19
5/1/19CORRESP,  UPLOAD
3/31/1910-Q
12/31/1810-K,  3,  8-K
10/19/17
6/22/17424B5,  8-K
 List all Filings 


1 Subsequent Filing that References this Filing

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

10/28/20  Workhorse Group Inc.              S-3                    3:283K                                   Edgar Agents LLC/FA
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