This prospectus is part of a registration
statement on Form S-3 that we filed with the U.S. Securities and Exchange Commission (the “SEC”), using a “shelf”
registration process. By using such registration statement, the Selling Stockholder may, from time to time, offer and sell (in
one or more transactions as described under “Plan of Distribution”) 2,000,000 shares of Common Stock and up to 6,252,326
shares of our Common Stock, par value $0.001 per share (the “Common Stock”) that are issuable upon the exercise of
the Amended and Restated Warrants issued pursuant to a loan agreement dated July 6, 2018,which Warrants were subsequently amended
and restated on November 28, 2018. We will not receive any of the proceeds from the sales of the Common Stock by the Selling Stockholder.
We will, however, receive the net proceeds of any Warrants exercised for cash, which, if exercised in cash at the current applicable
exercise prices with respect to all of the Warrants, would result in gross proceeds to the Company of approximately $7.8 million.
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.
Workhorse Group Inc. and its subsidiaries
are collectively referred to herein as “Workhorse”, “the Company”, “we”, “us”,
and “our”, unless otherwise specified or the context indicates otherwise.
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
$123.9 million for the period from inception (February 20, 2007) through September 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 $18.8 million and $29.5 million for the six months ended September 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 2019 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, will be insufficient to fund our operations
beyond the end of December 2018. Moreover, we have approximately $7.8 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 2019. 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.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, our 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 nine months ended September 30, 2018 decreased to $742 thousand
from $4.9 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:
|
●
|
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;
|
|
|
|
|
●
|
disruption in the supply of cells due to quality issues or recalls by battery cell manufacturers;
|
|
|
|
|
●
|
an increase in the cost of raw materials used in the cells; and
|
|
|
|
|
●
|
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.
|
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:
|
●
|
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;
|
|
|
|
|
●
|
the total cost of ownership of the vehicle over its expected life, which includes the initial purchase price and ongoing operating and maintenance costs;
|
|
|
|
|
●
|
the availability and terms of financing options for purchases of vehicles and, for commercial electric vehicles, financing options for battery systems;
|
|
|
|
|
●
|
the availability of tax and other governmental incentives to purchase and operate electric vehicles and future regulations requiring increased use of nonpolluting vehicles;
|
|
|
|
|
●
|
government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
|
|
|
|
|
●
|
fuel prices, including volatility in the cost of diesel;
|
|
|
|
|
●
|
the cost and availability of other alternatives to diesel fueled vehicles, such as vehicles powered by natural gas;
|
|
|
|
|
●
|
corporate sustainability initiatives;
|
|
|
|
|
●
|
commercial electric vehicle quality, performance and safety (particularly with respect to lithium-ion battery packs);
|
|
|
|
|
●
|
the quality and availability of service for the vehicle, including the availability of replacement parts;
|
|
|
|
|
●
|
the limited range over which commercial electric vehicles may be driven on a single battery charge;
|
|
|
|
|
●
|
access to charging stations and related infrastructure costs, and standardization of electric vehicle charging systems;
|
|
|
|
|
●
|
electric grid capacity and reliability; and
|
|
|
|
|
●
|
macroeconomic factors.
|
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 we entered into an Executive Retention Agreement with Mr. Burns, 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:
|
●
|
continued development of product technology, especially batteries;
|
|
|
|
|
●
|
the environmental consciousness of customers;
|
|
|
|
|
●
|
the ability of electric vehicles to successfully compete with vehicles powered by internal combustion; engines
|
|
|
|
|
●
|
limitation of widespread electricity shortages; and
|
|
|
|
|
●
|
whether future regulation and legislation requiring increased use of non-polluting vehicles is enacted.
|
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. 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.
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. On December 4, 2018,
we received a notice from the Listing Qualifications Department of the NASDAQ Stock Market indicating that, for the last 30 consecutive
business days, the bid price for our common stock had closed below the minimum $1.00 per share required for continued inclusion
on The NASDAQ Capital Market under NASDAQ Listing Rule 5550(a)(2). The notification letter states that pursuant to NASDAQ Listing
Rule 5810(c)(3)(A) we will be afforded 180 calendar days, or until June 3, 2019, to regain compliance with the minimum bid price
requirement. In order to regain compliance, shares of our common stock must maintain a minimum bid closing price of at least $1.00
per share for a minimum of ten consecutive business days. If we do not regain compliance by June 3, 2019, NASDAQ may provide written
notification that our common stock will be delisted. At that time, we may appeal NASDAQ’s delisting determination to a NASDAQ
Listing Qualifications Panel. Alternatively, we may be eligible for an additional 180 day grace period if it satisfies all of the
requirements, other than the minimum bid price requirement, for listing on The NASDAQ Capital Market set forth in NASDAQ Listing
Rule 5505. 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 58,270,934 shares of our Common
Stock outstanding as of December 21, 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 December 21, 2018, there were up
to 8,870,633 shares of Common Stock issuable upon exercise of outstanding warrants, which includes the warrants held by Arosa,
and 4,444,121 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 the then existing exercise price or the sale price of such issuance.. In
addition, while the Arosa Loan remains outstanding, the exercise price of the Arosa Warrants will be restruck to equal the price
of any issued equity, including the issuance of any common stock purchase warrants or other derivative convertible securities,
if the issuing price of such securities is less than $1.25. 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. We issued Arosa an additional warrant to acquire 108,768 shares of Common Stock at an exercise price of
$$1.25, as amended, on October 1, 2018 as well as an additional warrant to purchase additional 1,143,200 shares of Common Stock
at an exercise price of $1.21, as amended. 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:
|
●
|
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;
|
|
|
|
|
●
|
limit who may call stockholder meetings;
|
|
|
|
|
●
|
do not provide for cumulative voting rights; and
|
|
|
|
|
●
|
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.
|
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.