Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The following accounting principles and practices are set forth to facilitate the understanding of data presented in the condensed consolidated financial statements:
Nature of operations and principles of consolidation
Workhorse Group Inc. (“Workhorse”, the “Company”, “we”, “us” or “our”) is a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. As an American manufacturer, we design and build high performance battery-electric vehicles and aircraft that make movement of people and goods more efficient and less harmful to the environment. As part of our solution, we also develop cloud-based, real-time telematics performance monitoring systems that enable fleet operators to optimize energy and route efficiency. Although we operate as a single unit through our subsidiaries, we approach our development through two divisions, Automotive and Aviation. We are currently focused on our core competency of bringing the N-GEN electric cargo van 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.
The Company’s wholly owned subsidiaries include Workhorse Technologies Inc., Workhorse Motor Works Inc., Workhorse Properties Inc. and Surefly, Inc
On May 3, 2019, the Company filed an amendment to its Articles of Incorporation to increase its authorized shares of common stock from 100,000,000 to 250,000,000.
Restatement of Previously Issued Consolidated Financial Statements
Subsequent to the filing of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, filed with the SEC on August 9, 2019, management identified accounting adjustments related to an overstatement of the estimated warrant liability and interest expense. Certain warrants issued to lenders in 2018, were previously classified as liability financial instruments and marked-to-market at each reporting date with a corresponding adjustment to interest expense. On January 1, 2019, due to the payoff of debt to the lenders that the warrants were originally issued to, the warrants no longer met the criteria to be classified as liabilities and should have been reclassified to equity with no future mark-to-market adjustments. The adjustment resulted from the Company not recognizing that a reclassification event had occurred resulting in a change in the classification of certain of the Company’s outstanding warrants.
In addition, the Company determined that the classification of certain warrants issued in 2019 to lenders were misclassified as liability financial instruments, while they should have been classified as equity instruments and not marked-to-market.
Although the reclassification event occurred on January 1, 2019, and the missclassification of the 2019 warrants occurred in early 2019, management has determined that the $300,000 impact to the net loss for the three months ended March 31, 2019 is not material and therefore is not restating that period. The impact of the misstatement for the three months ended March 31, 2019, has been included in the adjustment for the three and six months ended June 30, 2019.
The following tables present the effect of the correction discussed above on selected line items of our previously reported consolidated balance sheet, consolidated statement of operations and statement of cash flows as of and for the three and six months ended June 30, 2019.
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Condensed Consolidated Balance Sheet
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June 30, 2019
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As originally reported
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Adjustments
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As restated
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Warrant liability
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$
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33,529,599
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$
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(17,653,184)
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$
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15,876,415
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Additional paid-in capital
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139,670,292
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857,072
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140,527,364
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Accumulated deficit
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(184,764,188)
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16,796,113
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(167,968,075)
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Total shareholders' deficit
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(45,027,814)
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17,653,185
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(27,374,629)
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Condensed Consolidated Statement of Operations
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Three Months Ended June 30, 2019
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Six Months Ended June 30, 2019
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As originally reported
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Adjustments
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As restated
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As originally reported
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Adjustments
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As restated
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Interest expense, net
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$
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32,718,876
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$
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(16,796,113)
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$
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15,922,763
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$
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34,496,459
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$
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(16,796,113)
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$
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17,700,346
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Net loss
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(36,856,313)
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16,796,113
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(20,060,200)
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(43,120,485)
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16,796,113
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(26,324,372)
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Net loss attributable to common stockholders
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(36,942,520)
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16,796,113
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(20,146,407)
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(43,206,692)
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16,796,113
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(26,410,579)
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Net loss attributable to common stockholders per share - basic and diluted
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$
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(0.61)
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$
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0.28
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$
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(0.33)
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$
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(0.71)
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$
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0.28
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$
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(0.44)
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Condensed Consolidated Statement of Cash Flows
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Six Months Ended June 30, 2019
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As originally reported
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Adjustments
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As restated
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Net loss
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(43,120,485)
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16,796,113
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(26,324,372)
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Change in fair value of warrants
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31,706,780
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(16,796,112)
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14,910,668
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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 end of 2019. Unless and until we are able to generate a sufficient amount of revenue, reduce our costs and/or enter 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,
meet its future bank covenant requirements, 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. Management believes the proceeds from these offerings, future offerings, and the Company’s anticipated revenue, provides an opportunity to continue as a going concern. If additional funding is required, the Company plans to obtain working capital from either debt or equity financing from the sale of common stock, preferred stock, and/or convertible debentures. Obtaining such working capital is not assured. The Company is currently in a production ramp up mode and placing greater emphasis on manufacturing capability.
The Marathon Credit Facility includes financial covenants that require our compliance beginning in the fourth quarter of 2019. We expect to be able to satisfy the covenant requirements either through results of operations or the available Equity Cure in the Credit Agreement.
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, 2018.
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.
Certain reclassifications were made to the prior year financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operation or stockholders’ equity (deficit).
2. INVENTORY
As of June 30, 2019, and December 31, 2018, our inventory consisted of the following:
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2019
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2018
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Raw materials
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$
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4,285,830
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$
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4,319,637
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Work in process
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422,176
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702,079
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Finished goods
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—
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—
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4,708,006
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5,021,716
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Less: Inventory reserve
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2,510,323
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2,488,100
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$
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2,197,683
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$
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2,533,616
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3. REVENUE
Revenue Recognition
Net sales include products and shipping and handling charges, net of estimates for customer allowances. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. The majority of our contracts have a single performance obligation and are short term in nature.
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.
The Company has elected the following practical expedient allowed under ASU 2014-09. Performance obligations are satisfied within one year from a given reporting date, consequently we omit disclosure 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 for the periods ended June 30, 2019:
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2019
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2018
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2019
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2018
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Automotive
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—
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118,398
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240,000
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523,252
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Aviation
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—
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—
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—
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—
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Other
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5,508
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52,286
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129,690
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207,661
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Total revenues
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5,508
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170,684
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369,690
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730,913
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4. LONG-TERM DEBT (as restated)
Long-term debt consists of the following:
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June 30, 2019
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December 31, 2018
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Marathon Tranche One Loan, due December 31, 2021, interest only quarterly payments, variable interest rate of 10.25% as of June 30, 2019
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$
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10,000,000
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$
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10,000,000
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Marathon Tranche Two Loan, due December 31, 2021, interest only quarterly payments, variable interest rate of 10.25% as of June 30, 2019
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5,854,140
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—
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Marathon Credit Agreement unamortized discount and issuance costs
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(1,427,818)
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(1,687,921)
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Net Marathon Credit Agreement
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14,426,322
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8,312,079
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Less current portion
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5,854,140
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—
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Long-term debt
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$
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8,572,182
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$
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8,312,079
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On December 31, 2018, the Company entered into a Credit Agreement (the “Credit Agreement”), with Marathon Asset Management, LP, on behalf of certain entities it manages, as lenders (collectively, the “Lenders”). The Credit Agreement provided the Company with a $10 million tranche of term loans (the “Tranche One Loan”) which may not be re-borrowed following repayment and (ii) a $25 million tranche of revolving loans which may be re-borrowed following repayment (the “Tranche Two Loans” together with the Tranche One Loan, the “Loans”).
The Trance Two Loan has been classified as current debt, because the agreement includes a lock box and cash sweep feature, which requires current presentation of the debt.
Second Amendment to Credit Agreement
On April 1, 2019, the Company entered into the Second Amendment to the Credit Agreement (the “Marathon Second Amendment”) with the Lenders. The Marathon Second Amendment delayed the application of certain financial covenants including:
(i)the minimum liquidity, providing that at least $4 million must be maintained at all times on or after April 30, 2019 rather than beginning on March 31, 2019;
(ii)the maximum total leverage ratio (ratio of total debt borrowed by the Company and its subsidiaries to EBITDA), providing that the maximum total leverage ratio shall not exceed 4.50:1.00 on the last day of the quarter ending December 31, 2019, rather than beginning with the quarter ending September 30, 2019, which total leverage ratio is adjusted for subsequent quarters as set forth in the Credit Agreement; and
(iii)the maximum debt service coverage ratio (ratio of EBITDA (for the four consecutive fiscal quarters most recently ended, subject to certain adjustments set forth in the Credit Agreement) to interest expense and payments for operating leases), providing that the maximum debt service coverage ratio shall not exceed 1.25:1.00 on the last day of the quarter ending December 31, 2019, rather than beginning with the quarter ending September 30, 2019, which debt service coverage ratio is adjusted for subsequent quarters as set forth in the Credit Agreement.
Third Amendment to Credit Agreement
On April 30, 2019, the Company entered into the Third Amendment to Credit Agreement (the “Marathon Third Amendment”). The Marathon Third Amendment amended the minimum liquidity covenant, providing that at least $4 million must be maintained at all times at or after May 31, 2019 rather than at all times on or after April 30, 2019. Unless the Company fails to maintain minimum liquidity as of the last day of any calendar month, the Company may cure a failure to maintain minimum liquidity by increasing liquidity to $4.0 million within five business days of the occurrence.
Purchase Warrants
In conjunction with entering into the Credit Agreement, the Company issued each Lender a Common Stock Purchase Warrant to purchase, in the aggregate, 8,053,390 shares of common stock at an exercise price of $1.25 per share exercisable in cash only for a period of three years and then for cash or cashless thereafter (collectively, the “Initial Warrants”). Until the later of the repayment of all obligations owed to the Lenders or two years from the closing date, the Company will be required to issue additional Common Stock Purchase Warrants (the “Additional Warrants”) to the Lenders equal to 10%, in the aggregate, of any additional equity issuances, subject to certain exceptions, on substantially the same terms and conditions of the Initial Warrants, except that (i) the applicable expiration date thereof shall be five years from the issuance date of the applicable warrant, (ii) the initial exercise price shall be a price equal to the price per share of common stock used in the relevant issuance multiplied by 110%, and (iii) the holder shall be entitled to exercise the warrant on a cashless exercise at any time the warrant is exercisable.
On April 16, 2019, the Company entered into an Amendment No. 1 to Common Stock Purchase Warrants with Marathon Asset Management LP, on behalf of certain entities it manages, as warrant holders (collectively, the “Holders”) (collectively, the “Marathon Warrant Amendment”), amending certain terms of the existing warrants issued by the Company in favor of each Holder. Pursuant to the Marathon Warrant Amendment, unless the Company has obtained the approval of its shareholders the number of shares to be issued under warrants held by the Holders shall not exceed 19.99% of the issued and outstanding common stock of the Company as of December 31, 2018. The Marathon Warrant Amendment also provide that the failure to obtain shareholder approval of an increase in the number of authorized shares of common stock of the Company, sufficient to enable the Company to issue common stock upon exercise of the warrants held by each Holder, will constitute an event of default under the existing Credit Agreement.
The Initial Warrants are required to be marked to market at each balance sheet date with a corresponding charge to interest expense. As of June 30, 2019 and December 31, 2018, the warrant liability was $15,876,415 and $965,747, respectively.
The Company has outstanding previously issued warrants to Arosa pursuant to agreements for debt issued in 2018. The Arosa debt was subsequently paid off on December 31, 2018, with the proceeds from the Credit Agreement. Through and including December 31, 2018, the warrants held by Arosa were required to be marked-to-market as the warrants were classified as liabilities. On January 1, 2019, the warrants no longer included dilution protection and therefore no longer met the criteria for liability classification and were reclassified to equity. As a result of the reclassification event, the $857,072 warrant liability for the Arosa warrants was reclassified as an increase to additional paid-in capital in 2019.
5. DUKE FINANCING OBLIGATION
On November 28, 2018, the Company entered into a Sales Agreement with Duke Energy One, Inc (“Duke”) pursuant to which the Company sold Duke 615,000 battery cells (the “615,000 Cells”) in consideration of $1,340,700. The
Company will continue to use the cells in the near term for the delivery of trucks to UPS and DHL. Until October 15, 2019, the Company has the right and option to require Duke to sell the 615,000 Cells back to the Company and Duke has the right and option to require the Company to purchase the 615,000 Cells at price equal to the price the 615,000 Cells were sold.
On November 28, 2018, in consideration for consenting to the Company selling the 615,000 Cells to Duke, which served as collateral for Arosa for their Loan Agreement, the Company entered into a Limited Consent, Waiver and Release pursuant to which the Company issued Arosa 2,000,000 shares of common stock and restruck the exercise price of warrants previously issued to $1.25 per share.
The Duke transactions was accounted for as a financing obligation and as such, the Company has recorded a $1,340,700 liability related to the transaction.
6. MANDATORY REDEEMABLE SERIES B PREFERRED STOCK
Commencing May 31, 2019 through June 5, 2019 (“Closing Date”), the Company entered into Subscription Agreements with institutional investors pursuant to which the investors purchased 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 of purchase price of $25.0 million.
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 of the Preferred Stock. Accrued dividends will be payable quarterly in shares of common stock of the Company based on a fixed share price of $1.62. The Warrants have an exercise price of $1.62 per share, which was in excess of the closing price of $1.60 on May 30, 2019, and are immediately exercisable and will expire seven years from the date of issuance.
The Preferred Stock is not convertible and does not hold voting rights.
On the fourth anniversary of the Closing Date, 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 subject to the repayment and retirement of the Credit Agreement, may redeem any outstanding shares of Preferred Stock at the Stated Value, plus accrued and unpaid dividends (“Optional Redemption”). Notwithstanding the foregoing, the Company may elect an Optional Redemption prior to the fourth anniversary of the Closing Date so long as it obtains from the lenders to the Credit Agreement their prior written consent to such Optional Redemption.
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 presented as a liability on the condensed consolidated balance sheet. All dividends payable on the Preferred Stock are classified as interest expense.
The Preferred Stock and Warrants have been determined to be freestanding financial instruments and have been accounted for separately. The Warrants are considered equity instruments and are not required to be recorded as a liability and marked-to-market at each reporting period. On the date of issuance, the value of the Warrants was determined to be $6.7 million, which was determined using the Black-Scholes valuation model. The fair value of the warrants was recorded as an increase to Additional Paid-In Capital and a discount of the Preferred Stock. The discount will be amortized to interest expense through May 2023.
7.
STOCK-BASED COMPENSATION
Options to directors, officers, consultants and employees
The Company maintains, as adopted by the board of directors, the 2019 Stock Incentive Plan as well as previous years plans (the “Plans”) providing for the issuance of equity based awards to employees, officers, directors or consultants of the Company. Non-qualified stock options granted under the plans may only be granted with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. Awards under the plans may be either vested or unvested options.
In addition to the Plans, the Company has granted, on various dates, stock options to directors, officers, consultants and employees to purchase common stock of the Company. The terms, exercise prices and vesting of these awards vary.
The following table summarizes option activity for directors, officers, consultants and employees:
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Outstanding Stock Options
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Options Available for Grant
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Number of Options Outstanding
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Weighted
Average
Exercise Price
per Option
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Weighted
Average Grant
Date Fair Value
per Option
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Weighted
Average
Remaining
Exercise Term
in Months
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Balance, December 31, 2017
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4,145,774
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|
3,851,371
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$
|
3.11
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|
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$
|
1.84
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43
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Granted
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(340,000)
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|
340,000
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|
1.18
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|
|
0.54
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|
|
56
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Exercised
|
—
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(52,500)
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|
|
1.24
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|
|
0.68
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|
|
—
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Forfeited
|
—
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|
|
—
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|
|
—
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|
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—
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|
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—
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Expired
|
—
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|
(271,250)
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|
|
3.22
|
|
|
1.58
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|
|
—
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Balance, December 31, 2018
|
3,805,774
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|
|
3,867,621
|
|
|
4.05
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|
|
$
|
1.84
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|
|
64
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Additional Shares Authorized under 2019 Plan
|
8,000,000
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|
|
—
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|
|
|
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|
|
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Granted
|
(2,400,000)
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|
|
2,400,000
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|
|
0.96
|
|
|
0.53
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|
|
81
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Exercised
|
—
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|
|
(498,552)
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|
|
0.13
|
|
|
1.92
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Forfeited
|
1,375,069
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|
|
(1,375,069)
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|
|
4.75
|
|
|
1.95
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|
|
27
|
Expired
|
—
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|
|
—
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|
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|
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|
Balance, June 30, 2019
|
10,780,843
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|
|
4,394,000
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|
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$
|
2.60
|
|
|
$
|
1.32
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|
|
94
|
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 loss per share is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. For all periods presented, due to the Company’s net losses, all of the Company’s common stock equivalents were excluded from the calculation of diluted loss per share because they were anti-dilutive.
10. RECENT ACCOUNTING DEVELOPMENTS
Accounting Guidance Adopted in 2019
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize in the statement of financial position a liability to make lease payments (“the lease liability”) and a right-of-use asset representing its right to use the underlying asset for the lease term, initially measured at the present value of the lease payments. A lessee shall classify a lease as a finance lease or an operating lease.
Amortization of the right-of-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this update were applied using the current period adjustment method, as defined, and were effective on January 1, 2019. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.
11. SHARE HOLDERS EQUITY (DEFICIT)
Stock Offerings
On June 4, 2018, the Company and holders of all outstanding Warrants to Purchase Common Stock of the Company issued on September 18, 2017 (collectively, the “Warrants”) entered into separate, privately-negotiated exchange agreements (the “Exchange Agreements”), pursuant to which the Company issued an aggregate of 1,968,736 shares of the Company’s common stock in exchange for the Warrants. In addition, the “Down Round” feature of the Warrants was triggered in the second quarter of 2018, causing the strike price to decrease from $3.80 per share to $2.62 per share. As a result, the Company recorded a deemed dividend of $765,179 which represents the fair value transferred to the Warrant holders from the Down Round being triggered. The deemed dividend was recorded as a reduction of Retained Earnings and increase in Additional Paid-in-Capital and reduced net income available to common shareholders by the same amount.
Commencing February 11, 2019, the Company entered into and closed Subscription Agreements with accredited investors (the “February 2019 Accredited Investors”) for the purchase of 1,613,683 shares of the Company’s common stock for a purchase price of $1,465,056. If, prior to the six month anniversary, the Company issues shares of its common stock for a purchase price per share less than the purchase price paid by the February 2019 Accredited Investors (a “Down Round”), the Company will issue additional shares of common stock (for no additional consideration) such that the effective purchase price per share is equal to the purchase price per share paid in the Down Round. The Down Round provisions were triggered by the May 1, 2019 sale of common stock and an additional 116,496 shares of common stock were issued to the February 2019 Accredited Investors. The issuance of the additional shares is accounted for as a $86,207 deemed dividend.
Benjamin Samuels and Gerald Budde, directors of the Company, acquired 841,928 and 26,310 shares of common stock, respectively, as part of this offering at a per share purchase was $0.9501, which was above the closing price the date prior to close. They did not receive the Down Round protection.
On May 1, 2019, the Company closed under a registered public offering the sale of $3,957,432 shares of Common Stock for a purchase price of $0.74 per share. The net proceeds to the Company were approximately $2.9 million, after deducting estimated expenses payable by the Company. The Company expects to use the net proceeds from this offering for working capital, general corporate purposes and repayment of debt and other obligations.
Warrants
In connection with the issuance of debt and preferred stock, the Company has issued warrants to purchase share of Common Stock.
The following table summarizes warrant activity for the period:
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Number of Warrants
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Weighted Average Exercise Price per Warrant
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Weighted Average Remaining Exercise Term in Months
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Balance, December 31, 2018
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17,818,844
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$
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1.84
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52
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Granted, Series B Preferred Stock
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9,262,500
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1.62
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48
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Granted, Marathon debt
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1,840,275
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1.40
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60
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Exercised
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—
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Balance, June 30, 2019
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28,921,619
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$
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2.58
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69
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12. 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.