This prospectus provides you with a general
description of us and our securities. We may add, update or change in a prospectus supplement any of the information contained
in this prospectus or the documents incorporated by reference. For further information about our business and our securities,
you should refer to the registration statement and the reports incorporated by reference in this prospectus, as described in “Additional
Information” and “Incorporation of Certain Information by Reference”. This prospectus contains summaries of certain
provisions contained in some of the documents described herein, but reference is made to the actual documents for complete information.
All of the summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein
have been filed, will be filed or will be incorporated by reference as exhibits to the registration statement of which this prospectus
is a part, and you may obtain copies of those documents as described below under the heading “Where You Can Find More Information.”
You must not rely upon any information
or representation not contained or incorporated by reference in this prospectus. You should rely only on the information contained
in this prospectus and in any prospectus supplement (including in any documents incorporated by reference herein or therein).
You should not assume that the information contained in this prospectus is accurate on any date subsequent to the date set forth
on the front of the document or that any information we have incorporated by reference is correct on any date subsequent to the
date of the document incorporated by reference, even though this prospectus is delivered or securities are sold on a later date.
We and the Selling Stockholder have not authorized anyone to provide you with any different information. The Selling Stockholder
is offering to sell our securities, and seeking offers to buy, only in jurisdictions where offers and sales are permitted.
RISK
FACTORS
Investing
in our Common Stock involves a high degree of risk. Before purchasing our Common Stock, you should read and consider carefully
the following risk factors as well as all other information contained and incorporated by reference in this prospectus supplement
and the accompanying base prospectus, including our consolidated financial statements and the related notes. Each of these risk
factors, either alone or taken together, could adversely affect our business, operating results and financial condition, as well
as adversely affect the value of an investment in our Common Stock. There may be additional risks that we do not presently know
of or that we currently believe are immaterial, which could also impair our business and financial position. If any of the events
described below were to occur, our financial condition, our ability to access capital resources, our results of operations and/or
our future growth prospects could be materially and adversely affected and the market price of our Common Stock could decline.
As a result, you could lose some or all of any investment you may make in our Common Stock.
Risks
Relating to Our Business
We
have incurred substantial net losses since our inception and anticipate that we will continue to incur substantial net losses
for the foreseeable future. We may never achieve or sustain profitability.
We
have incurred net losses amounting to $118.5 million for the period from inception (February 20, 2007) through June 30, 2018.
We have had net losses in each quarter since our inception. We expect that we will continue to incur net losses for the foreseeable
future. We may incur significant losses in the future for several reasons, including the other risks described in this prospectus,
and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not
be able to achieve or maintain profitability. Our management is developing plans to alleviate the negative trends and conditions
described above but there is no guarantee that such plans will be successfully implemented. There is no assurance that even if
we successfully implement our business plan, that we will be able to curtail our losses. If we incur additional significant operating
losses, our stock price may decline significantly.
We
have yet to achieve positive cash flow and, given our projected funding needs, our ability to generate positive cash flow is uncertain.
We
have had negative cash flow from operating activities of $7.6 million and $19.7 million for the six months ended June 30, 2018
and 2017. We anticipate that we will continue to have negative cash flow from operating and investing activities for the foreseeable
future as we expect to incur increased research and development, sales and marketing, and general and administrative expenses
and make significant capital expenditures in our efforts to increase sales and commence significant operations at our Union City
facility. Our business also will at times require significant amounts of working capital to support our growth, particularly as
we acquire inventory to support our anticipated increase in production. An inability to generate positive cash flow for the foreseeable
future may adversely affect our ability to raise needed capital for our business on reasonable terms, diminish supplier or customer
willingness to enter into transactions with us, and have other adverse effects that would decrease our long-term viability. There
can be no assurance we will achieve positive cash flow in the foreseeable future.
We
need access to additional financing in 2018 and beyond, which may not be available to us on acceptable terms or at all. Our auditor’s
report for the fiscal years ended December 31, 2017 and 2016 includes a going concern opinion due to our lack of sales, negative
working capital and stockholders’ deficit. If we cannot access additional financing when we need it and on acceptable terms,
our business may fail.
Our
business plan to design, produce, sell and service commercial electric vehicles through our Union City facility will require substantial
continued capital investment. Our research and development activities will also require substantial continued investment. For
the year ended December 31, 2017, our independent registered public accounting firm issued a report on our 2017 financial statements
that contained an explanatory paragraph stating that the lack of sales, negative working capital and stockholders’ deficit,
raise substantial doubt about our ability to continue as a going concern. For example, our existing capital resources, including
the expected proceeds from this offering, will be insufficient to fund our operations beyond the end of November 2018. Moreover,
following the offering, we will have approximately $5.9 million of outstanding indebtedness. Our cash flow from operations is
not expected to be sufficient to satisfy our debt obligations. In the event, we do not consummate a sale of Surefly, Inc. in which
we receive sufficient proceeds, we may not be able to repay our outstanding indebtedness. Accordingly, we will need additional
financing. We will also need additional financing beyond 2018. If we are not able to obtain additional financing and/or substantially
increase revenue from sales, we will default on our debt obligations and be unable to continue as a going concern. As a result,
we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated
financial statements, and investors will likely lose a substantial part or all of their investment. We cannot be certain that
additional financing will be available to us on favorable terms when required, or at all, particularly given that we do not now
have a committed credit facility with any government or financial institution. Further, if there remains doubt about our ability
to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on acceptable
terms or at all. If we cannot obtain additional financing when we need it and on terms acceptable to us, we will not be able to
continue as a going concern.
The
development of our business in the near future is contingent upon the receipt and fulfillment of orders from UPS and other key
customers for the purchase of E-GENs and N-GENs and if we are unable to perform under these orders, our business may fail.
On
June 4, 2014, the Company entered into a Vehicle Purchase Agreement with UPS which outlined the relationship by which the Company
would sell vehicles to UPS. To date, we have received six separate orders totaling up to 1,405 vehicles from UPS. The most recent
order is from Q1 2018, which was amended in May 2018. The May 2018 UPS Agreement provides that UPS will purchase 1,000 N-GENs.
UPS is initially committed to purchase 50 N-GENs that will be designed and developed with the input from UPS’s automotive
engineering team and deployed as a test fleet. This order is expected to account for substantially all of our revenues over the
next six months and, if UPS purchases additional vehicles, UPS would account for a greater percentage of our revenues and we will
become more dependent upon them. The timing of the balance of the 950 N-GENs will be on a timeframe solely determined by UPS,
which is entitled to reduce or cancel the order in its sole discretion based on the result of the test fleet. Upon completion
of this offering, we will need to raise additional capital in order to satisfy our obligations under the May 2018 UPS Agreement.
There is no guarantee that we will be able to perform under these orders and if we and the vehicles do not perform, that UPS will
purchase additional vehicles from our company. Also, there is no assurance that UPS will not terminate its agreement with our
company pursuant to the termination provisions therein. Further, we will need significant financing to fulfill any future orders
and we are not able to raise the required capital to purchase required parts and pay certain vendors, we may not be able to comply
with UPS’s deadlines. Accordingly, despite the receipt of the orders from UPS, there is no assurance, due our financial
constraints and status as a development stage company, that we will be able to deliver such vehicles or that it will receive additional
orders whether from UPS or other potential customers.
If
we are unable to perform under our orders with UPS, the Company business will be significantly negatively impacted.
Our
limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those
estimates of our future performance.
Our
revenue increased from $6.4 million in 2016 to $10.8 million in 2017. However, our revenue for the six months ended June 30, 2018
decreased to $730 thousand from $1.8 million for the comparable period in 2017. As evidenced by the fluctuations in our revenue,
a significant portion of our activities are still focused on research and development. We have a limited operating history and
have generated limited revenue. As we begin to fully implement our manufacturing capabilities, it is difficult, if
not impossible, to forecast our future results based upon our historical data. Because of the uncertainties related to our lack
of historical operations, we may be hindered in our ability to anticipate and timely adapt to increases or decreases in revenues
or expenses. If we make poor budgetary decisions as a result of unreliable historical data, we could be less profitable
or incur losses, which may result in a decline in our stock price.
Our
obligations to Arosa, which holds a secured loan, are secured by a security interest in substantially all of our assets, so if
we default on those obligations, Arosa could foreclose on, liquidate and/or take possession of our assets. If that were to happen,
we could be forced to curtail, or even to cease, our operations.
All
amounts due under the loan payable to Arosa are secured by our assets. As a result, if we default on our obligations under the
secured loan, Arosa could foreclose on its security interest and liquidate or take possession of some or all of these assets,
which would harm our business, financial condition and results of operations and could require us to curtail, or even to cease
our operations.
We
are subject to certain covenants set forth in the Arosa Loan Agreement. Upon an event of default, including a breach of a covenant,
we may not be able to make such accelerated payments under the Loan Agreement.
Under
the Arosa Loan Agreement, so long as the loan remains outstanding, we are subject to various negative covenants, including but
not limited to, restrictions on incurring additional indebtedness or additional encumbrances, mergers and acquisitions or dispositions
of property as well as certain affirmative covenants, including a covenant to consummate a sale of Surefly, Inc., our indirect
wholly-owned subsidiary resulting in cash proceeds of no less than $20,000,000 by January 6, 2019. In the event we propose to
raise any capital, Arosa has the right, but not the obligation, to participate in such ROFR Financing on terms no less favorable
that those offered to investors in such ROFR Financing (the “ROFR”). In addition, under the loan agreement, an event
of default occurs upon any of the following: (i) non-payment of principal or interest, (ii) violations of covenants,
(iii) bankruptcy and (iv) material judgments. Upon an event of default, the outstanding principal amount of the loan plus any
other amounts owed to Arosa will become immediately due and payable and Arosa could foreclose on our assets. A default would also
likely significantly diminish the market price of our Common Stock.
We
offer no financing on our vehicles. As such, our business is dependent on cash sales, which may adversely affect our growth prospects.
While
most of our current customers are well-established companies with significant purchasing power, many of our potential smaller
and medium-sized customers may need to rely on credit or leasing arrangements to gain access to our vehicles. Unlike some of our
competitors who provide credit or leasing services for the purchase of their vehicles, we do not provide, and currently do not
have commercial arrangements with a third party that provides, such financial services. We believe the current limited availability
of credit or leasing solutions for our vehicles could adversely affect our revenues and market share in the commercial electric
vehicle market.
Worsening
economic conditions may result in decreased demand for our products which could harm our operating results.
Uncertainty
and negative trends in general economic conditions in the United States and abroad, including significant tightening of credit
markets, historically have created a difficult environment for companies in our industry. Many factors, including factors that
are beyond our control, may have a detrimental impact on our operating performance. These factors include general economic conditions,
unemployment levels, energy costs and interest rates, as well as events such as natural disasters, acts of war, terrorism and
catastrophes. These conditions may result in a decline in the demand for our products by potential customers or result in the
delay of our development of new products and/or enhancements to our existing products for our existing customers. There can be
no assurance that economic conditions will remain favorable for our business or that demand for our products will remain at current
levels. Reduced demand for our products would negatively impact our growth and revenue.
Our
business, prospects, financial condition and operating results will be adversely affected if we cannot reduce and adequately control
the costs and expenses associated with operating our business, including our material and production costs.
We
incur significant costs and expenses related to procuring the materials, components and services required to develop and produce
our electric vehicles. We have secured supply agreements for our critical components including our batteries. However, these are
dependent on volume to ensure that they are available at a competitive price. Thus, our current cost projections are higher than
the projected revenue stream that such vehicles will produce, excluding vehicles purchased under voucher programs, such the Hybrid
and Zero-Emission Truck and Bus Voucher Incentive Project offered in California. As a result, we currently lose money on each
medium-duty vehicle sold without an associated voucher. We continually work on cost-down initiatives to reduce our cost structure
so that we may effectively compete. If we do not reduce our costs and expenses, our net losses will continue which will negatively
impact our business and stock price.
Increases
in costs, disruption of supply or shortage of lithium-ion cells could harm our business.
Over
the last couple of years, there has been a worldwide fear of a lithium shortage which has nearly tripled the metal’s price
and correspondingly increasing the price of lithium-ion cells. We may continue to experience increases in the cost or a sustained
interruption in the supply or shortage of lithium-ion cells. Any such increase, supply interruption or shortage could materially
and negatively impact our business, prospects, financial condition and operating results. The prices for these lithium-ion cells
can fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and
operating results. We are exposed to multiple risks relating to lithium-ion cells including:
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the inability or unwillingness of current battery
manufacturers to build or operate battery cell manufacturing plants to supply the numbers of lithium-ion cells we may require
going forward;
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disruption in the supply of cells due to quality
issues or recalls by battery cell manufacturers;
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an increase in the cost of raw materials used
in the cells; and
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fluctuations in the value of the Japanese yen
against the U.S. dollar in the event our purchasers of lithium-ion cells are denominated in Japanese yen.
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Our
business is dependent on the continued supply of battery cells for the battery packs used in our vehicles. While we believe several
sources of the battery cells are available for such battery cells, we have fully qualified only Panasonic for the supply of the
cells used in such battery packs and have very limited flexibility in changing cell suppliers. Any disruption in the supply of
battery cells could disrupt production of our vehicles until such time as a different supplier is fully qualified. Furthermore,
fluctuations or shortages in petroleum, tariff or trade issues and other economic or tax conditions may cause us to experience
significant increases in freight charges. Substantial increases in the prices for the battery cells or prices charged to us, would
increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased vehicle prices.
Any attempts to increase vehicle prices in response to increased costs in our battery cells could result in cancellations of vehicle
orders and therefore materially and adversely affect our brand, image, business, prospects and operating results.
The
demand for commercial electric vehicles depends, in part, on the continuation of current trends resulting from dependence on fossil
fuels. Extended periods of low diesel or other petroleum-based fuel prices could adversely affect demand for our vehicles, which
would adversely affect our business, prospects, financial condition and operating results.
We
believe that much of the present and projected demand for commercial electric vehicles results from concerns about volatility
in the cost of petroleum-based fuel, the dependency of the United States on oil from unstable or hostile countries, government
regulations and economic incentives promoting fuel efficiency and alternative forms of energy, as well as the belief that climate
change results in part from the burning of fossil fuels. If the cost of petroleum-based fuel decreased significantly, the outlook
for the long-term supply of oil to the United States improved, the government eliminated or modified its regulations or economic
incentives related to fuel efficiency and alternative forms of energy, or if there is a change in the perception that the burning
of fossil fuels negatively impacts the environment, the demand for commercial electric vehicles could be reduced, and our business
and revenue may be harmed.
Diesel
and other petroleum-based fuel prices have been extremely volatile, and we believe this continuing volatility will persist. Lower
diesel or other petroleum-based fuel prices over extended periods of time may lower the perception in government and the private
sector that cheaper, more readily available energy alternatives should be developed and produced. If diesel or other petroleum-based
fuel prices remain at deflated levels for extended periods of time, the demand for commercial electric vehicles may decrease,
which would have an adverse effect on our business, prospects, financial condition and operating results.
Our
future growth is dependent upon the willingness of operators of commercial vehicle fleets to adopt electric vehicles and on our
ability to produce, sell and service vehicles that meet their needs. This often depends upon the cost for an operator adopting
electric vehicle technology as compared to the cost of traditional internal combustion technology. When the price of oil is low,
as it recently has been, it is difficult to convince commercial fleet operations to change to more expensive electric vehicles.
Our
growth is dependent upon the adoption of electric vehicles by operators of commercial vehicle fleets and on our ability to produce,
sell and service vehicles that meet their needs. The entry of commercial electric vehicles into the medium-duty commercial vehicle
market is a relatively new development, particularly in the United States, and is characterized by rapidly changing technologies
and evolving government regulation, industry standards and customer views of the merits of using electric vehicles in their businesses.
This process has been slow as without including the impact of government or other subsidies and incentives, the purchase prices
for our commercial electric vehicles currently is higher than the purchase prices for diesel-fueled vehicles. Our growth has also
been negatively impacted by the relatively low price of oil over the last few years.
If
the market for commercial electric vehicles does not develop as we expect or develops more slowly than we expect, our business,
prospects, financial condition and operating results will be adversely affected.
As
part of our sales efforts, we must educate fleet managers as to the economical savings we believe they will benefit from during
the life of the vehicle. As such, we believe that operators of commercial vehicle fleets should consider a number of factors when
deciding whether to purchase our commercial electric vehicles (or commercial electric vehicles generally) or vehicles powered
by internal combustion engines, particularly diesel-fueled or natural gas-fueled vehicles. We believe these factors include:
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the difference in the initial purchase prices
of commercial electric vehicles and vehicles with comparable gross vehicle weight powered by internal combustion engines,
both including and excluding the impact of government and other subsidies and incentives designed to promote the purchase
of electric vehicles;
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the total cost of ownership of the vehicle over
its expected life, which includes the initial purchase price and ongoing operating and maintenance costs;
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the availability and terms of financing options
for purchases of vehicles and, for commercial electric vehicles, financing options for battery systems;
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the availability of tax and other governmental
incentives to purchase and operate electric vehicles and future regulations requiring increased use of nonpolluting vehicles;
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government regulations and economic incentives
promoting fuel efficiency and alternate forms of energy;
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fuel prices, including volatility in the cost
of diesel;
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the cost and availability of other alternatives
to diesel fueled vehicles, such as vehicles powered by natural gas;
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corporate sustainability initiatives;
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commercial electric vehicle quality, performance
and safety (particularly with respect to lithium-ion battery packs);
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the quality and availability of service for
the vehicle, including the availability of replacement parts;
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the limited range over which commercial electric
vehicles may be driven on a single battery charge;
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access to charging stations and related infrastructure
costs, and standardization of electric vehicle charging systems;
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electric grid capacity and reliability; and
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macroeconomic factors.
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If,
in weighing these factors, operators of commercial vehicle fleets determine that there is not a compelling business justification
for purchasing commercial electric vehicles, particularly those that we produce and sell, then the market for commercial electric
vehicles may not develop as we expect or may develop more slowly than we expect, which would adversely affect our business, prospects,
financial condition and operating results.
If
our customers are unable to efficiently and effectively integrate our electric vehicles into their existing commercial fleets
our sales may suffer and our business, prospects, financial condition and operating results may be adversely affected.
Our
sales strategy involves a comprehensive plan for the pilot and roll-out of our electric vehicles, as well as the ongoing replacement
of existing commercial vehicles with our electric vehicles, that is tailored to the individual needs of our customers. If we are
unable to develop and execute fleet integration strategies or fleet management support services that meet our customers’
unique circumstances with minimal disruption to their businesses, our customers may not realize the economic benefits they expect
from our electric vehicles. If this were to occur, our customers may not order additional vehicles from us, which could adversely
affect our business, prospects, financial condition and operating results.
We
currently do not have long-term supply contracts with guaranteed pricing which exposes us to fluctuations in component, materials
and equipment prices. Substantial increases in these prices would increase our operating costs and could adversely affect our
business, prospects, financial condition and operating results.
Because
we currently do not have long-term supply contracts with guaranteed pricing, we are subject to fluctuations in the prices of the
raw materials, parts and components and equipment we use in the production of our vehicles. Substantial increases in the prices
for such raw materials, components and equipment would increase our operating costs and could reduce our margins if we cannot
recoup the increased costs through increased vehicle prices. Any attempts to increase the announced or expected prices of our
vehicles in response to increased costs could be viewed negatively by our customers and could adversely affect our business, prospects,
financial condition and operating results.
The
failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business.
We
have secured supply agreements for our critical components including our batteries. However, the agreements are dependent on volume
to ensure that they are available at a competitive price. Further, we rely on a small group of suppliers to provide us with components
for our products. If these suppliers become unwilling or unable to provide components or if we are unable to meet certain volume
requirements in our existing supply agreements, there are a limited number of alternative suppliers who could provide them and
the price for them could be substantially higher. Changes in business conditions, wars, governmental changes, and other factors
beyond our control or which we do not presently anticipate could negatively affect our ability to receive components from our
suppliers. Further, it could be difficult to find replacement components if our current suppliers fail to provide the parts needed
for these products. A failure by our major suppliers to provide these components could severely restrict our ability to manufacture
our products and prevent us from fulfilling customer orders in a timely fashion.
If
we are unable to scale our operations at our Union City facility in an expedited manner from our limited low volume production
to high volume production, our business, prospects, financial condition and operating results could be adversely affected.
We
are currently assembling our orders at our Union City facility which is acceptable for our existing orders. To satisfy increased
demand, we will need to quickly scale operations in our Union City facility as well as scale our supply chain including access
to batteries. Such a substantial and rapid increase in operations will be extremely difficult, will strain our management capabilities
and require additional finance personnel and other resources which we currently do not possess. Our business, prospects, financial
condition and operating results could be adversely affected if we experience disruptions in our supply chain, if we cannot obtain
materials of sufficient quality at reasonable prices or if we are unable to scale our Union City facility.
Failure
to successfully integrate the Workhorse® brand, logo, intellectual property, patents and assembly plant in Union City, Indiana
into our operations could adversely affect our business and results of operations.
As
part of our strategy to become an OEM, in March 2013, we acquired assets including the Workhorse® brand, logo, intellectual
property, patents and assembly plant in Union City, Indiana. Maintaining and enhancing our brand awareness may require us to spend
increasing amounts of money on, and devote greater resources, to advertising, marketing and other brand-building efforts, and
these investments may not be successful. Even if successful, they may not be cost effective. In addition, the Workhorse acquisition
may expose us to operational challenges and risks, including the diversion of management’s attention from our existing business,
the failure to retain key Workhorse dealers and our ability to commence operations at the plant in Union City, Indiana. Our ability
to sustain our growth and maintain our competitive position may be affected by our ability to successfully integrate these Workhorse
assets.
We
depend upon key personnel and need additional personnel. The loss of key personnel or the inability to attract additional personnel
may adversely affect our business and results of operations.
Our
success depends on the continuing services of Stephen Burns, CEO, and top management. Our success depends on the continuing services
of Stephen Burns, CEO, and top management. Although Mr. Burns and the Company entered into an Executive Retention Agreement and
the Company entered Executive Retention Agreements with Duane Hughes as President and Chief Operating Officer, Paul Gaitan as
Chief Financial Officer and Julio Rodriguez as Chief Information Officer, we cannot assure you that we will be able to retain
their services. The loss of any of these individuals could have a material and adverse effect on our business operations. Additionally,
the success of our operations will largely depend upon our ability to successfully attract and maintain competent and qualified
key management personnel. As with any company with limited resources, there can be no guarantee that we will be able to attract
such individuals or that the presence of such individuals will necessarily translate into profitability for our company. Our inability
to attract and retain key personnel may materially and adversely affect our business operations. Any failure by our management
to effectively anticipate, implement, and manage the changes required to sustain our growth would have a material adverse effect
on our business, financial condition, and results of operations.
We
face intense competition. Some of our competitors have substantially greater financial or other resources, longer operating histories
and greater name recognition than we do and could use their greater resources and/or name recognition to gain market share at
our expense or could make it very difficult for us to establish market share.
Companies
currently competing in the fleet logistics market offering alternative fuel medium-duty trucks include Ford Motor Company and
Freightliner. Ford and Freightliner are currently selling alternative fuel fleet vehicles including hybrids. Ford and Freightliner
have substantially more financial resources, established market positions, long-standing relationships with customers, vendors
and dealers, and who have more significant name recognition, technical, marketing, sales, financial and other resources than we
do. Although we believe that HorseFly, our Unmanned Aerial System (UAS), is unique in the marketplace in that it currently does
not have any competitors when it comes to a UAS that works in combination with a truck, there are better financed competitors
in this emerging industry, including Google and Amazon. While we are seeking to partner with existing delivery companies to improve
their efficiencies in the last mile of delivery, our competitors are seeking to redefine the delivery model using drones from
a central location requiring extended flight patterns. Our competitors’ new aerial delivery model would essentially eliminate
traditional package delivery companies. Our model is focused on coupling our delivery drone with delivery trucks supplementing
the existing model and providing shorter term flight patterns. Google and Amazon have more significant financial resources, established
market positions, long-standing relationships with customers, more significant name recognition and a larger scope of resources
including technical, marketing and sales than we do.
The
market for personal eVTOL aircraft is new, rapidly evolving, characterized by rapidly changing technologies, price competition,
additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing
consumer demands and behaviors. The market is highly competitive, and the SureFly design is competing with experimental aircraft
from large original equipment manufacturers, or OEMs, small OEMs, other aviation related companies, technology companies and entrepreneurs.
Currently, there are several VTOL aircraft being developed that have some similarity to SureFly, including eHang and Volocopter.
Many of our competitors are, in some ways, more advanced than we are.
The
financial, personnel and other resources available to our competitors to develop new products and introduce them into the marketplace
exceed the resources currently available to us. As a result, our competitors may be able to compete more aggressively and sustain
that competition over a longer period than we can. This intense competitive environment may require us to make changes in our
products, pricing, licensing, services, distribution, or marketing to develop a market position. Each of these competitors has
the potential to capture significant market share in our target markets which could have an adverse effect on our position in
our industry and on our business and operating results.
Our
electric vehicles compete for market share with vehicles powered by other vehicle technologies that may prove to be more attractive
than ours.
Our
target market currently is serviced by manufacturers with existing customers and suppliers using proven and widely accepted fuel
technologies. Additionally, our competitors are working on developing technologies that may be introduced in our target market.
If any of these alternative technology vehicles can provide lower fuel costs, greater efficiencies, greater reliability or otherwise
benefit from other factors resulting in an overall lower total cost of ownership, this may negatively affect the commercial success
of our vehicles or make our vehicles uncompetitive or obsolete.
We
currently have a limited number of customers, with whom we do not have long-term agreements, and expect that a significant portion
of our future sales will be from a limited number of customers. The loss of any of these customers could materially harm our business.
A
significant portion of our projected future revenue, if any, is expected to be generated from a limited number of vehicle customers.
Our sales to UPS, our top customer accounted for approximately 98% and 91% of our net sales for the years ended December 31, 2017
and 2016, respectively. Additionally, much of our business model is focused on building relationships with a few large customers.
Currently we have no contracts with customers that include long-term commitments or minimum volumes that ensure future sales of
vehicles. As a result, our relationship with our major customers could change at any time. As such, a customer may take actions
that negatively affect us for reasons that we cannot anticipate or control, such as reasons related to the customer’s financial
condition, changes in the customer’s business strategy or operations or as the result of the perceived performance or cost-effectiveness
of our vehicles. The loss of or a reduction in sales or anticipated sales to our most significant customers would have a material
adverse effect on our business, prospects, financial condition and operating results.
Changes
in the market for electric vehicles could cause our products to become obsolete or lose popularity.
The
modern electric vehicle industry is in its infancy and has experienced substantial change in the last few years. To date, demand
for electric vehicles has been slower than forecasted by industry experts. As a result, growth in the electric vehicle industry
depends on many factors outside our control, including, but not limited to:
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continued development of product technology,
especially batteries;
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the environmental consciousness of customers;
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the ability of electric vehicles to successfully
compete with vehicles powered by internal combustion; engines
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limitation of widespread electricity shortages;
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whether future regulation and legislation requiring
increased use of non-polluting vehicles is enacted.
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We
cannot assume that growth in the electric vehicle industry will continue. Our business will suffer if the electric vehicle industry
does not grow or grows more slowly than it has in recent years or if we are unable to maintain the pace of industry demands.
President Trump’s administration may create regulatory
uncertainty for the alternative energy sector and may materially harm our business, financial condition and operating results.
President Trump’s administration,
may create regulatory uncertainty in the alternative energy sector. During the election campaign, President Trump made comments
suggesting that he was not supportive of various clean energy programs and initiatives designed to curtail global warming. Since
taking office, President Trump has released his America First Energy Plan which relies on fossil fuels, cancelled U.S. participation
in the Paris Climate Agreement and signed several executive orders relating to oil pipelines. It remains unclear what specifically
President Trump would or would not do with respect to these programs and initiatives, and what support he would have for any potential
changes to such legislative programs and initiatives in the Unites States Congress, regardless of the fact that both the House
of Representatives and Senate are controlled by the Republican Party. If President Trump and/or the United States Congress take
action or publicly speak out about the need to eliminate or further reduce legislation, regulations and incentives supporting alternative
energy or take action to further support the use of fossil fuels, such actions may result in a decrease in demand for alternative
energy in the United States and may materially harm our business, financial condition and operating results.
The unavailability, reduction, elimination or adverse application
of government subsidies, incentives and regulations could have an adverse effect on our business, prospects, financial condition
and operating results.
We believe that, currently, the availability
of government subsidies and incentives including those available in New York, California and Chicago is an important factor considered
by our customers when purchasing our vehicles, and that our growth depends in part on the availability and amounts of these subsidies
and incentives. Any reduction, elimination or discriminatory application of government subsidies and incentives because of budgetary
challenges, policy changes, the reduced need for such subsidies and incentives due to the perceived success of electric vehicles
or other reasons may result in the diminished price competitiveness of the alternative fuel vehicle industry.
Certain regulations and programs that encourage
sales of electric vehicles could be eliminated or applied in a way that adversely impacts sales of our commercial electric vehicles,
either currently or at any time in the future. For example, the U.S. federal government and many state governments are experiencing
political change and facing fiscal crises, which could result in the elimination of programs, subsidies and incentives that encourage
the purchase of electric vehicles. If government subsidies and incentives to produce and purchase electric vehicles were no longer
available to us or to our customers, or the amounts of such subsidies and incentives were reduced, our business and results of
operations would be adversely affected.
We may be unable to keep up with changes in electric vehicle
technology and, as a result, may suffer a decline in our competitive position.
There are companies in the electric vehicle
industry that have developed or are developing vehicles and technologies that compete or will compete with our vehicles. Our current
products are designed for use with, and are dependent upon, existing electric vehicle technology. As technologies change, we plan
to upgrade or adapt our products to continue to provide products with the latest technology. We cannot assure that our competitors
will not be able to duplicate our technology or provide products and services similar to ours more efficiently. However, our products
may become obsolete or our research and development efforts may not be sufficient to adapt to changes in or to create the necessary
technology. If for any reason we are unable to keep pace with changes in electric vehicle technology, particularly battery technology,
our competitive position may be adversely affected.
Product liability or other claims could have a material adverse
effect on our business.
The risk of product liability claims, product
recalls, and associated adverse publicity is inherent in the manufacturing, marketing, and sale of electrical vehicles. Although
we have product liability insurance for our consumer and commercial products, that insurance may be inadequate to cover all potential
product claims. We also carry liability insurance on our products. Any product recall or lawsuit seeking significant monetary damages
either in excess of our coverage, or outside of our coverage, may have a material adverse effect on our business and financial
condition. We may not be able to secure additional product liability insurance coverage on acceptable terms or at reasonable costs
when needed. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a
product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization
of other future product candidates. We cannot provide assurance that such claims and/or recalls will not be made in the future.
We may have to devote substantial resources to implementing
a retail product distribution network.
Dealers are often hesitant to provide their
own financing to contribute to our product distribution network. Thus, we anticipate that we may have to provide financing or other
consignment sale arrangements for dealers. A capital investment such as this presents many risks, foremost among them being that
we may not realize a significant return on our investment if the network is not profitable. Our inability to collect receivables
from dealers could cause us to suffer losses. Additionally, the amount of time that our management will need to devote to this
project may divert them from performing other functions necessary to assure the success of our business. We cannot assure you that
we will be able to successfully implement our distribution network or that its efforts will be successful.
Regulatory requirements may have a negative impact upon our
business.
While our vehicles are subject to substantial
regulation under federal, state, and local laws, we believe that our vehicles are or will be materially in compliance with all
applicable laws. However, to the extent the laws change, or if we introduce new vehicles in the future, some or all of our vehicles
may not comply with applicable federal, state, or local laws. Further, certain federal, state, and local laws and industrial standards
currently regulate electrical and electronics equipment. Although standards for electric vehicles are not yet generally available
or accepted as industry standards, our products may become subject to federal, state, and local regulation in the future. Compliance
with these regulations could be burdensome, time consuming, and expensive.
Our products are subject to environmental
and safety compliance with various federal and state regulations, including regulations promulgated by the EPA, NHTSA, and various
state boards, and compliance certification is required for each new model year. The cost of these compliance activities and the
delays and risks associated with obtaining approval can be substantial. The risks, delays, and expenses incurred in connection
with such compliance could be substantial.
Our success may be dependent on protecting our intellectual
property rights.
We rely on trade secret protections to
protect our proprietary technology as well as several registered patents and pending patent applications. Our patents relate to
the vehicle chassis assembly, vehicle header and drive module and manifold for electric motor drive assembly. Our existing patent
applications relates to the onboard generator drive system for electric vehicles, the delivery drone, and the manned multicopter.
Our success will, in part, depend on our ability to obtain additional trademarks and patents. We are working on obtaining additional
patents and trademarks registered with the United States Patent and Trademark Office. Although we have entered into confidentiality
agreements with our employees and consultants, we cannot be certain that others will not gain access to these trade secrets. Others
may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade
secrets.
Competitors may infringe our issued patents
or other intellectual property. To counter infringement or unauthorized use, we may be required to file infringement claims, which
can be expensive and time consuming. Any claims we assert against perceived infringers could provoke these parties to assert
counterclaims against us alleging that we infringe their patents. In addition, in a patent infringement proceeding, a court may
decide that a patent of ours is invalid or unenforceable, in whole or in part; construe the patent’s claims narrowly; or
refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in
question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated or interpreted
narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation,
there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.
Most of our competitors are larger than
we are and have substantially greater resources than we do. They are, therefore, likely to be able to sustain the costs of complex
patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse
effect on our ability to raise the funds necessary to continue our operations.
Our business may be adversely affected by union activities.
Although none of our employees are currently
represented by a labor union, it is common throughout the automotive industry for many employees at automotive companies to belong
to a union, which can result in higher employee costs and increased risk of work stoppages. Our employees may join or seek recognition
to form a labor union, or we may be required to become a union signatory. Our production facility in Union City, Indiana was purchased
from Navistar. Prior employees of Navistar were union members and our future work force at this facility may be inclined to vote
in favor of forming a labor union. Furthermore, we are directly or indirectly dependent upon companies with unionized work forces,
such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a
material adverse impact on our business, financial condition or operating results. If a work stoppage occurs, it could delay the
manufacture and sale of our trucks and have a material adverse effect on our business, prospects, operating results or financial
condition. The mere fact that our labor force could be unionized may harm our reputation in the eyes of some investors and thereby
negatively affect our stock price. Consequently, the unionization of our labor force could negatively impact our company’s
health.
We may be exposed to liability for infringing upon the intellectual
property rights of other companies.
Our success will, in part, depend on our
ability to operate without infringing on the proprietary rights of others. Although we have conducted searches and are not aware
of any patents and trademarks which our products or their use might infringe, we cannot be certain that infringement has not or
will not occur. We could incur substantial costs, in addition to the great amount of time lost, in defending any patent or trademark
infringement suits or in asserting any patent or trademark rights, in a suit with another party.
Our electric vehicles make use of lithium-ion battery cells,
which, if not appropriately managed and controlled, have occasionally been observed to catch fire or vent smoke and flames. If
such events occur in our electric vehicles, we could face liability for damage or injury, adverse publicity and a potential safety
recall, any of which would adversely affect our business, prospects, financial condition and operating results.
The battery packs in our electric vehicles
use lithium-ion cells, which have been used for years in laptop computers and cell phones. On occasion, if not appropriately managed
and controlled, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can
ignite nearby materials. Highly publicized incidents of laptop computers and cell phones bursting into flames have focused consumer
attention on the safety of these cells. These events also have raised questions about the suitability of these lithium-ion cells
for automotive applications. There can be no assurance that a field failure of our battery packs will not occur, which would damage
the vehicle or lead to personal injury or death and may subject us to lawsuits. Furthermore, there is some risk of electrocution
if individuals who attempt to repair battery packs on our vehicles do not follow applicable maintenance and repair protocols. Any
such damage or injury would likely lead to adverse publicity and potentially a safety recall. Any such adverse publicity could
adversely affect our business, prospects, financial condition and operating results.
Our facilities could be damaged or adversely affected as
a result of disasters or other unpredictable events. Any prolonged disruption in the operations of our facility would adversely
affect our business, prospects, financial condition and operating results.
We engineer and assemble our electric vehicles
in a facility in Loveland, Ohio and we intend to locate the assembly function to our facility in Union City. Any prolonged disruption
in the operations of our facility, whether due to technical, information systems, communication networks, accidents, weather conditions
or other natural disaster, or otherwise, whether short or long-term, would adversely affect our business, prospects, financial
condition and operating results
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We may be exposed to potential risks relating to our internal
controls over financial reporting and our ability to have those controls attested to by our independent auditors.
As a publicly traded company, we are subject
to a significant body of regulation, including the Sarbanes-Oxley Act of 2002. While we have developed and instituted a corporate
compliance program based on what we believe are the current best practices in corporate governance and continue to update this
program in response to newly implemented or changing regulatory requirements, we cannot provide assurance that we are or will be
in compliance with all potentially applicable corporate regulations. In connection with management’s assessment of our internal
control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified material weaknesses
pertaining to the lack of established adequate financial reporting activities and the lack of established proper accounting and
financing reporting oversight. While we have taken steps to address these material weaknesses, we cannot assure you that we have
adequately addressed them. We cannot provide assurance that, in the future, our management will not find additional material weakness
in connection with its annual review of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley
Act. We also cannot provide assurance that we will be able to remediate existing weaknesses and any such additional weakness
identified; our failure to do so would prevent our management from concluding that our internal control over financial reporting
as of the end of our fiscal year is effective. If we fail to comply with any of these regulations, we could be subject to a range
of regulatory actions, fines or other sanctions or litigation. If we must disclose any material weakness in our internal control
over financial reporting, our stock price could decline.
Risks Related to Owning Our Securities
If we fail to continue to meet the listing standards of NASDAQ,
our Common Stock may be delisted, which could have a material adverse effect on the liquidity of our Common Stock.
Our Common Stock is currently listed on
the Nasdaq Capital Market. The NASDAQ Stock Market LLC has requirements that a company must meet in order to remain listed on NASDAQ.
In particular, NASDAQ rules require us to maintain a minimum bid price of $1.00 per share of our Common Stock. If the closing bid
price of our Common Stock were to fall below $1.00 per share for 30 consecutive trading days or we do not meet other listing requirements,
we would fail to be in compliance with NASDAQ’s listing standards. There can be no assurance that we will continue to meet
the minimum bid price requirement, or any other requirement in the future. If we fail to meet the minimum bid price requirement,
The NASDAQ Stock Market LLC may initiate the delisting process with a notification letter. If we were to receive such a notification,
we would be afforded a grace period of 180 calendar days to regain compliance with the minimum bid price requirement. In order
to regain compliance, shares of our Common Stock would need to maintain a minimum closing bid price of at least $1.00 per share
for a minimum of 10 consecutive trading days. In addition, we may be unable to meet other applicable NASDAQ listing requirements,
including maintaining minimum levels of stockholders’ equity or market values of our Common Stock in which case, our Common
Stock could be delisted. If our Common Stock were to be delisted, the liquidity of our Common Stock would be adversely affected
and the market price of our Common Stock could decrease.
The trading of our shares of common has been relatively thin
and there is no assurance that a liquid market for our shares of Common Stock will develop.
Our Common Stock has traded on the Nasdaq
Capital Market, under the symbol “WKHS”, since January 2016. Since that date, our Common Stock has been relatively
thinly traded. There can be no assurance that we will be able to successfully develop a liquid market for our common shares. The
stock market in general, and early stage public companies in particular, has experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of such companies. These market fluctuations may
adversely affect the price of our Common Stock and other interests in our company when you want to sell you interest in us.
We have not paid dividends in the past and have no immediate
plans to pay dividends.
We plan to reinvest all of our earnings,
to the extent we have earnings, in order to develop our products, deliver on our orders and cover operating costs and to otherwise
become and remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future.
We cannot assure you that we would, at any time, generate sufficient surplus cash that would be available for distribution to the
holders of our Common Stock as a dividend. Therefore, you should not expect to receive cash dividends on our Common Stock.
Shares eligible for future sale may adversely affect the
market for our Common Stock.
Of the 56,270,934 shares of our Common
Stock outstanding as of August 14, 2018, approximately 47.1 million shares are held by “non-affiliates” and are freely
tradable without restriction pursuant to Rule 144. In addition, our Registration Statement on Form S-3 (File No. 333-213100) for
purposes of registering the resale of 1,033,717 shares of Common Stock and 1,833,193 shares of Common Stock issuable upon exercise
of stock purchase warrants has been declared effective. Any substantial sale of our Common Stock pursuant to Rule 144 or pursuant
to any resale prospectus may have a material adverse effect on the market price of our Common Stock.
A significant number of shares of our Common Stock are issuable
upon exercise of outstanding warrants and/or options to purchase shares of Common Stock, and we expect to issue additional shares
of Common Stock in the future. Any exercise or sales of these securities will dilute the interests of other security holders and
may depress the price of our Common Stock.
As of August 14, 2018, there were up to 8,761,865 shares of Common Stock issuable upon exercise of outstanding
warrants, which includes the warrants held by Arosa or that we are required to issue to Arosa pursuant to the Loan Agreement, and
4,121,621 shares of Common Stock issuable upon exercise of outstanding options. In addition, in accordance with the Loan Agreement
entered with Arosa, while the Arosa Loan remains outstanding, we are required to issue additional warrants to purchase Common Stock
to Arosa equal to 10% of any additional issuance excluding issuances under an approved stock plan. The additional warrants to purchase
Common Stock will have an exercise price equal to the lesser of $2.00 or a 5% premium to the price utilized in such issuance. Pursuant
to the warrant, Arosa may not exercise such warrant if such exercise would result in Arosa beneficially owning in excess of 9.99%
of our Common Stock outstanding immediately after giving effect to such exercise. Since July 6, 2018, we have issued and sold 978,915
shares of Common Stock at an average price of $1.52 requiring us to issue Arosa an additional warrant to acquire 108,768 shares
of Common Stock at an exercise price of $1.596 following the end of the third quarter as well as an additional warrant to purchase
additional 1,143,200 shares of Common Stock at an exercise price of $1.208 as a result of our August 2018 public offering. In the
future, we may issue additional Common Stock and warrants from time to time to finance our operations, to fund potential acquisitions
or in connection with additional stock options or other equity awards granted to our employees, officers, directors and consultants
under our equity compensation plans. Future anti-dilution adjustments to such securities may result in substantial additional dilution
to existing stockholders. The issuance of additional shares of Common Stock, convertible securities or warrants to purchase Common
Stock, the perception that such issuances may occur, or exercise of outstanding warrants, convertible securities or options will
have a dilutive impact on other shareholders and could have a material negative effect on the market price of our Common Stock.
You may experience future dilution as a result of future
equity offerings.
In order to raise additional capital, we
may in the future offer additional shares of our Common Stock or other securities convertible into or exchangeable for our Common
Stock at prices that may not be at prices which are reflected in the trading price of our securities on the NASDAQ Capital Market.
We may sell shares or other securities in any future offering at a price per share that is lower than the market price for our
securities, which would result in those newly issued shares being dilutive. In addition, investors purchasing shares or other securities
in the future could have rights superior to existing stockholders, which could impair the value of your shares. The price per share
at which we sell additional shares of our Common Stock, or securities convertible or exchangeable into Common Stock, in future
transactions may be higher or lower than the price per share paid by investors in the open market.
Our charter documents and Nevada law may inhibit a takeover
that stockholders consider favorable.
Provisions of our certificate of incorporation
and bylaws and applicable provisions of Nevada law may delay or discourage transactions involving an actual or potential change
in control or change in our management, including transactions in which stockholders might otherwise receive a premium for their
shares, or transactions that our stockholders might otherwise deem to be in their best interests. The provisions in our certificate
of incorporation and bylaws:
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provide our board of directors the authority to issue up to 75,000,000 shares of preferred stock in one or more series and to determine the powers, preferences and rights of each series without shareholder approval;
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limit who may call stockholder meetings;
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do not provide for cumulative voting rights; and
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provide that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.
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There are limitations on our directors’ and officers’
liability.
As permitted by Nevada law, our certificate
of incorporation limits the liability of our directors for monetary damages for breach of a director’s fiduciary duty except
for liability in certain instances. As a result of our charter provision and Nevada law, shareholders may have limited rights to
recover against directors for breach of fiduciary duty. In addition, our certificate of incorporation provides that we shall indemnify
our directors and officers to the fullest extent permitted by law.