The following accounting principles
and practices are set forth to facilitate the understanding of data presented in the condensed consolidated financial statements:
Workhorse Group Inc. and its
predecessor companies (“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 the Company’s solution, it also develops
cloud-based, real-time telematics performance monitoring systems that enable fleet operators to optimize energy and route efficiency.
Although the Company operates as a single unit through its subsidiaries, it approaches its development through two divisions,
Automotive and Aviation. The Company’s core products, under development and/or in manufacture, are the medium duty step
van, the light duty pickup, the delivery drone and the manned multicopter (“SureFly” ™).
The Company’s wholly owned
subsidiaries include Workhorse Technologies Inc., Workhorse Motor Works Inc. and Workhorse Properties Inc.
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. These conditions raise substantial doubt about the ability of the Company to continue as a going concern.
In view of these matters, continuation
as a going concern is dependent upon the continued operations of the Company, which, in turn, is dependent upon the Company’s
ability to meet its financial requirements, raise additional capital, and successfully carry out its future operations. The financial
statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary, should
the Company not continue as a going concern.
The Company has continued to
raise capital. 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 or
from the sale of a product line/business. Obtaining such working capital is not assured.
In the opinion of Management,
the Unaudited Condensed Consolidated Financial Statements include all adjustments that are necessary for the fair presentation
of Workhorse’s respective 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. It
is suggested that these financial statements 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, 2017, as amended.
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.
Long-term debt consists
of the following:
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
Arosa Loan, due July 6, 2019, interest only quarterly payments, interest rate 8.0% (discount is based on warrant valuation and imputed interest of approximately 58%)
|
|
$
|
7,800,000
|
|
|
$
|
-
|
|
|
Arosa Loan unamortized discount and issuance costs
|
|
|
(3,022,084
|
)
|
|
|
|
|
|
Net Arosa Loan
|
|
|
4,777,916
|
|
|
|
|
|
|
Senior Secured Notes, due July 6, 2018 (discount is based on imputed interest rate of 26%)
|
|
|
-
|
|
|
|
5,750,000
|
|
|
Less: unamortized discount and debt issuance costs on Senior Secured Notes
|
|
|
-
|
|
|
|
(987,500
|
)
|
|
Net Senior Secured Notes
|
|
|
-
|
|
|
|
4,762,500
|
|
|
Secured mortgage payable, due November 2026, to Bank for 100 Commerce Drive Building, interest rate 6.5%, due in monthly installments of $11,951, inclusive of principal and interest
|
|
|
-
|
|
|
|
1,741,378
|
|
|
Note payable, former building owner interest payment only due in monthly installments of $1,604 interest at 5.5%. A balloon payment of $350,000 plus unpaid interest due August 2018.
|
|
|
-
|
|
|
|
350,000
|
|
|
|
|
|
4,777,916
|
|
|
|
6,853,878
|
|
|
Less current portion
|
|
|
4,777,916
|
|
|
|
5,143,997
|
|
|
Long-term debt
|
|
$
|
-
|
|
|
$
|
1,709,881
|
|
On
December 26, 2017, as part of its initial efforts to spin-off Surefly Inc., the Company entered into a Securities Purchase Agreement
with several existing institutional investors the (“Spin-Off Investors”) pursuant to which the Company issued original
issue discount Senior Secured Notes in the aggregate principal amount of $5,750,000 in consideration of gross proceeds of $5,000,000
paid by the Spin-Off Investors. The loan was convertible into Surefly Inc. equity upon achieving the spin-off. On June 28, 2018,
the Company entered into an amendment agreement with the Spin-Off Investors. The amendment agreement provided that the Senior Secured
Notes were amended to provide a maturity date of July 6, 2018. Upon the closing of the Loan Agreement with Arosa, the Company paid
off the Senior Secured Notes
.
Amortization expense recorded
as interest related to the debt issuance costs and unamortized discounts for the Senior Secured Notes was $987,500 for the nine
months ended September 30, 2018.
On June 7, 2018, the Company
received a short-term loan in the aggregate principal amount of $550,000 from Stephen S. Burns, H. Benjamin Samuels, Gerald Budde
and Ray Chess, each an executive officer and/or director of the Company (collectively, the “Related Parties”). The
Company used the net proceeds from the transaction for general business and working capital purposes. To evidence the loans, the
Company issued the Related Parties promissory notes (the “Related Parties Notes”) in the aggregate principal amount
of $550,000. The Related Parties Notes are unsecured obligations of the Company and are not convertible into equity securities
of the Company. Principal and interest under the Related Parties Notes are due and payable December 6, 2018, however, in the event
that the Company raises in excess of $10,000,000 in equity financing, then the Company will use part of its proceeds to pay off
the Related Parties Notes. Under no circumstance may the Related Parties Notes be paid off on or prior to the 91st day following
the maturity date of the Senior Secured Notes issued by the Company on December 27, 2017 in the principal aggregate amount of $5,750,000.
Interest accrues on the Related Parties Notes at the rate of 12.0% per annum. The Related Parties Notes contain terms and events
of default customary for similar transactions.
On July 6, 2018, the Company received
a short-term loan in the aggregate principal amount of $500,000 from accredited investors (collectively, the “Loan Parties”),
which included Mr. Samuels, a director of the Company. To evidence the loans, we issued the Loan Parties promissory notes (the
“Loan Parties Notes”) in the aggregate principal amount of $500,000. The Loan Parties Notes are unsecured obligations
of the Company and are not convertible into equity securities of our company. Principal and interest under the Loan Parties Notes
is due and payable January 5, 2019, however, in the event that the Company raises in excess of $10,000,000 in equity or debt financing,
the Company will use a portion of the proceeds to pay off the Loan Parties Notes. Interest accrues on the Loan Parties Notes at
the rate of 12.0% per annum. The Loan Parties Notes contain terms and events of default customary for similar transactions.
The Related Parties Notes and Loan
Parties Notes were paid off following the closing of the August 2018 public offering.
On July 6, 2018, the Company,
as borrower, entered into a Loan Agreement with a fund managed by Arosa Capital Management LP (“Arosa”), as lender,
providing for a term loan (the “Arosa Loan”) in the principal amount of $6,100,000 (the “Loan Agreement”).
The maturity date of the Arosa Loan is July 6, 2019 (the “Maturity Date”). The interest rate for the Arosa Loan is
8% per annum payable in quarterly installments commencing October 6, 2018. The Company may prepay the Arosa Loan at any time upon
three days written notice.
The Company used the proceeds
from the Arosa Loan to satisfy the Senior Secured Loans initially issued December 27, 2017 in the amount of $5,750,000 and a loan
in the amount of $350,000 payable to the former owner of the Company’s facility based in Loveland, Ohio.
The Loan Agreement requires the
Company to pay Arosa’s expenses including attorney fees. The Loan Agreement also requires the Company to make certain representations
and warranties and other agreements that are customary in loan agreements of this type and also includes covenants to raise $10,000,000
in equity prior to September 30, 2018 and to consummate a sale of Surefly, Inc., the Company’s indirect wholly-owned subsidiary
resulting in cash proceeds of no less than $20,000,000. The Loan Agreement also contains customary events of default, including non-payment of
principal or interest, violations of covenants, bankruptcy and material judgments. The Company’s subsidiaries and Arosa also
entered into a Guarantee and Collateral Agreement and Intellectual Property Security Agreement providing that the Company’s
obligations to Arosa are secured by substantially all of the Company’s assets. In addition, the Company is required to appoint
to the Board of Directors a person designated in writing by Arosa for a period of no less than 12 months.
In accordance with the Loan Agreement,
the Company issued Arosa a warrant to purchase 5,000,358 shares of common stock of the Company at an exercise price of $2.00 per
share exercisable in cash only for a period of five years. While the Arosa Loan remains outstanding, the Company will be 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 financing. 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 the Company’s then issued and outstanding common stock. On
August 2, 2018, after conducting additional due diligence on the Company’s available collateral base, Arosa agreed to enter
into the First Amendment to the Loan Agreement with the Company pursuant to which an additional $1,700,000 was loaned to the Company
for working capital purposes and general corporate purposes. In addition, various covenants were added or amended including, but
not limited to, requiring the Company to satisfy its Mortgage on its Loveland, Ohio facility no later than October 1, 2018, which
we paid off in August 2018 with a payment of $1.85 million.
The Company determined that the
Arosa Loan and related warrants were freestanding instruments issued together and therefore should be accounted for separately.
We determined the warrants did not qualify for equity classification and therefore have applied liability treatment to the instruments.
The value of the warrants on the date of the Arosa Loan was determined to be $3,540,542, which was determined using the Black-Scholes
method and was recorded as a liability with the offset being recorded as a debt discount, which will be amortized into interest
expense over the life of the loan. The liability for the warrants, as well as any future warrant issuances, will be marked to marked
quarterly in accordance with liability accounting.
On August 14, 2018, in accordance
with the Loan Agreement, we issued a warrant to acquire 1,143,200 shares of common stock at an exercise price of $1.208 warrants
to Arosa following the closing of our public offering on August 13, 2018 and the related over-allotment on August 14, 2018.
|
Principal amounts:
|
|
At September 30,
2018
|
|
|
Principal
|
|
$
|
7,800,000
|
|
|
Unamortized debt discount and issuance costs
(1)
|
|
|
(3,022,084
|
)
|
|
Net debt carrying amount
|
|
$
|
4,777,916
|
|
|
Carrying amount of warrant the liability component (2)
|
|
$
|
2,013,128
|
|
|
(1)
|
Includes the unamortized portion of the initial warrant liability of $3,540,542 and issuance costs
of $70,047.
|
|
(2)
|
Includes marked to market liability of initial warrant liability as well August 2018 warrants issued.
|
Change in Accounting Principle
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts
with Customers (Topic 606)”. The guidance in this ASU affects any entity that either enters into contracts with customers
to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within
the scope of other standards (for example, insurance contracts or lease contracts). This guidance requires a company to recognize
revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive
in exchange for those goods or services.
Beginning in January 2018, the
Company adopted the provisions of ASU 2014-09 Topic 606 under the modified retrospective method, which requires a cumulative effect
adjustment to the opening balance of retained earnings on the date of adoption. This approach was applied to contracts not completed
as of December 31, 2017. No significant change to revenue recognition, as previously recognized, was identified. At date of adoption,
there was no adjustment to retained earnings related to the adoption of ASU 2014-09. At date of adoption, there was no significant
change to our past revenue recognition practices and therefore no adjustment to the opening balance of retained earnings was required.
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
expedients 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:
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
$
|
-
|
|
|
$
|
3,066,000
|
|
|
$
|
523,252
|
|
|
$
|
4,886,500
|
|
|
Aviation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
|
|
|
10,997
|
|
|
|
-
|
|
|
|
218,658
|
|
|
|
1,537
|
|
|
Total revenues
|
|
$
|
10,997
|
|
|
$
|
3,066,000
|
|
|
$
|
741,910
|
|
|
$
|
4,888,037
|
|
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.
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, all of the Company’s common stock equivalents were excluded from the calculation
of diluted loss per common share because they were anti-dilutive, due to the Company’s net losses.
|
7.
|
RECENT ACCOUNTING
DEVELOPMENTS
|
Accounting Guidance Adopted
in 2017
Effective September 30, 2017,
we early-adopted FASB ASU 2017-11, “Earnings per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features. Part I of
ASU 2017-11 simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked
financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price
of future equity offerings. Previous accounting guidance created cost and complexity for organizations that issue financial instruments
with down round features by requiring, on an ongoing basis, fair value measurement of the entire instrument or conversion option.
The new standard requires companies to disregard the down round feature when assessing whether the instrument is indexed to its
own stock, for purposes of determining liability of equity classification. Companies that provide earnings per share (“EPS”)
data will adjust their diluted EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of
the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize
the effect of the trigger within equity. We applied this guidance on a prospective basis. The primary impact of adoption is that
equity-linked financial instruments are less likely to be liability classified than prior to the adoption of this standard. The
adoption of the new standard resulted in warrants issued in September 2017 not being classified as liabilities in our Consolidated
Financial Statements.
Accounting Guidance Adopted
in 2018
Effective January 1, 2018, we
adopted FASB ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,
and affects the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2016-10 clarifies the
following two aspects of Topic 606: evaluating whether promised goods and services are separately identifiable and determining
whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual
property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied
over time. The Company adopted ASU No. 2016-10, using the modified retrospective approach, which did not have a material impact
on the Company’s condensed consolidated financial statements. Additional information is available in Note 4, “Revenue.”
Effective January 1, 2018, we
adopted FASB ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net), and affects the guidance in ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”.
When another party is involved in providing goods or services to a customer, ASU No. 2014-09 requires an entity to determine whether
the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange
for that good or service to be provided by the other party (that is, the entity is an agent). The amendments in ASU No. 2016-08
are intended to improve the operability and understandability of the implementation guidance in ASU No. 2014-09 on principal versus
agent considerations by offering additional guidance to be considered in making the determination. The Company adopted ASU No.
2016-08, using the modified retrospective approach, which did not have a material impact on the Company’s condensed consolidated
financial statements. Additional information is available in Note 4, “
Revenue.
”
Accounting Guidance Not Yet
Adopted
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. When measuring assets and liabilities
arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain,
as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase
the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable
lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments. A lessee
shall classify a lease as a finance lease if it meets any of five listed criteria: 1) The lease transfers ownership of the underlying
asset to the lessee by the end of the lease term. 2) The lease grants the lessee an option to purchase the underlying asset that
the lessee is reasonably certain to exercise. 3) The lease term is for the major part of the remaining economic life of the underlying
asset. 4) The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds
substantially all of the fair value of the underlying asset. 5) The underlying asset is of such a specialized nature that it is
expected to have no alternative use to the lessor at the end of the lease term. For finance leases, a lessee shall recognize in
the statement of comprehensive income interest on the lease liability separately from amortization of the right-of-use asset.
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. If the lease does not meet any
of the five criteria, the lessee shall classify it as an operating lease and shall recognize a single lease cost on a straight-line
basis over the lease term. 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 are to be
applied using a modified retrospective approach, as defined, and are effective for public business entities for fiscal years,
and for interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted. The Company
is currently evaluating the financial statement impact of adopting the new guidance.
On February 1, 2017, the Company
announced the completion of its underwritten public offering of 6,500,000 shares of its common stock at a public offering price
of $3.00 per share. In addition, the underwriters exercised an option to purchase an additional 975,000 shares of common stock
at the public offering price, less the underwriting discounts and commissions.
All of the shares in the offering
were sold by the Company, with gross proceeds to the Company of approximately $22.4 million and net proceeds of approximately
$20.5 million, after deducting underwriting discounts and commissions and estimated offering expenses.
On June 22, 2017, the Company
entered into an at the market issuance sales agreement (the “Cowen Agreement”) with Cowen and Company, LLC
(“Cowen”) under which the Company may offer and sell, from time to time at its sole discretion, shares of its Common
Stock having an aggregate offering price of up to $25.0 million through Cowen as its sales agent. As of September 30, 2018, the
Company issued 2,855,404 shares from this facility for proceeds of approximately $7.2 million.
On September 14, 2017, the Company
entered into an underwriting agreement (the “Underwriting Agreement”) with Cowen relating to the public offering and
sale (the “Offering”) of 3,749,996 shares of the Company’s common stock, and five-year warrants (exercisable
beginning on the date of issuance) to purchase up to an aggregate of 2,812,497 shares of the Company’s common stock. Each
investor received a warrant to purchase 0.75 shares of the Company’s common stock at an exercise price of $3.80 per share,
for each share of common stock purchased.
On April 26, 2018, the Company
entered into and closed Subscription Agreements with accredited investors (the “April 2018 Accredited Investors”) pursuant
to which the April 2018 Accredited Investors purchased 531,066 shares of the Company’s common stock (“April 2018 Shares”)
for a purchase price of $1.4 million or $2.72 per share. Stephen Burns, Benjamin Samuels, Gerald Budde and Julio Rodriguez, executive
officers and/or directors of the Company, participated in this offering.
Pursuant to the Underwriting
Agreement, Cowen purchased 3,749,996 shares of the Company’s common stock and accompanying warrants at a price per share
of $3.20. The net proceeds to the Company were approximately $10.9 million after deducting underwriting discounts and
commissions and offering expenses. The sale of such shares and accompanying warrants closed on September 18, 2017. The
warrants contained full ratchet anti-dilution protection upon the issuance of any common stock, securities convertible into common
stock or certain other issuances at a price below $3.20, with certain exceptions.
On June 4, 2018, the Company
and holders of all outstanding Warrants to Purchase Common Stock of the Company issued September 18, 2017 (collectively, the “Warrants”)
entered into separate, privately-negotiated exchange agreements (the “Exchange Agreements”), pursuant to which the
Company issued to such holders an aggregate of 1,968,736 shares of the Company’s common stock in exchange for the Warrants.
The closing of the exchanges contemplated by the Exchange Agreements occurred on June 5, 2018. 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 approximately $765,179 as a deemed dividend which represents the value transferred
to the Warrant holders due to 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.
On August 9, 2018, the Company entered
into an Underwriting Agreement (the “Underwriting Agreement”) with National Securities Corporation (the “Underwriter”),
relating to the public offering and sale (the “2018 Offering”) of 9,000,000 shares of our Common Stock at a price per
share of $1.15 for aggregate gross proceeds of $10.4 million. This offering closed on August 13, 2018. Pursuant to the
Underwriting Agreement, the Company granted the Underwriter a 45-day option to purchase from the Company up to an additional 1,350,000
shares of Common Stock at the offering price to cover over allotments, if any. On August 14, 2018, the Underwriter exercised its
over-allotment option and acquired an additional 1,288,800 shares of Common Stock at a price per share of $1.15 for aggregate gross
proceeds of $1.4 million. The over-allotment closing occurred on August 14, 2018. The Company used the net proceeds from this offering
for working capital, general corporate purposes and repayment of debt and other obligations.
The 2018 Offering was made
pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-213100), including
the prospectus dated December 23, 2016 contained therein, as the same was supplemented, as well as a preliminary prospectus
supplement and final prospectus supplement filed with the SEC on August 8, 2018 and August 9, 2018, respectively, in
connection with the Company’s takedown relating to the Offering.
The Underwriting Agreement contains
customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations
of the Company and the Underwriters, including for liabilities under the Securities Act of 1933, as amended, other obligations
of the parties and termination provisions. The representations, warranties and covenants contained in the Underwriting
Agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to
such agreement and may be subject to limitations agreed upon by the contracting parties.
Pursuant to the Underwriting
Agreement, subject to certain exceptions, the Company, its directors and officers have agreed not to sell or otherwise dispose
of any of the Company’s securities held by them for a period ending 90 days after the date of the Underwriting Agreement
without first obtaining the written consent of National Securities Corporation, as representative of the Underwriters, subject
to certain exceptions.
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.
On October 1, 2018, the Company issued
a warrant to acquire 108,768 shares of common stock at an exercise price of $1.596 per share to Arosa.