Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
Overview
We are a technology company with a vision to pioneer the transition to zero-emission commercial vehicles. Our primary focus is to provide sustainable and cost-effective solutions to the commercial transportation sector. We design and manufacture all-electric delivery trucks and drone systems, including the technology that optimizes the way these vehicles operate. We are focused on our core competency of bringing our electric delivery vehicle platforms to market.
Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and reflect our accounts and operations and those of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures in the accompanying notes.
In the opinion of our management, the Unaudited Condensed Consolidated Financial Statements include all adjustments that are necessary for the fair presentation of Workhorse’s financial condition, results of operations and cash flows for the interim periods presented. Such adjustments are of a normal, recurring nature. The results of operations and cash flows for the interim periods presented may not necessarily be indicative of full-year results. Reference should be made to the financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2021.
2. INVENTORY, NET
Inventory, net consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Raw materials | $ | 58,629,245 | | | $ | 66,238,615 | |
Work in process | 23,991,215 | | | 20,826,644 | |
Finished goods | — | | | — | |
| 82,620,460 | | | 87,065,259 | |
Less: inventory reserves | (70,063,141) | | | (76,997,892) | |
Inventory, net | $ | 12,557,319 | | | $ | 10,067,367 | |
We reserve inventory for any excess or obsolete inventories or when we believe the net realizable value of inventories is less than the carrying value.
As of June 30, 2022 and December 31, 2021, the Company recorded inventory reserves of $70.1 million and $77.0 million, respectively. During 2021, the Company significantly increased its inventory reserves due to its decision to produce the C-1000 vehicle platform at low-volume and transition to a new all-electric delivery truck platform in the future. This decision was based on results of extensive testing performed on the C-1000 vehicles, which concluded in early 2022. The $6.9 million decrease in inventory reserves as compared to December 31, 2021 is primarily driven by the Company’s efforts to dispose of inventory that is not expected to be used in future production.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Prepaid purchases(1) | $ | 32,928,751 | | | $ | 24,101,695 | |
Less: prepaid purchases reserve(2) | (22,020,805) | | | (23,912,025) | |
Prepaid purchases, net | 10,907,946 | | | 189,670 | |
Prepaid insurance | 327,035 | | | 2,205,608 | |
Right of return asset | — | | | 1,620,000 | |
Other | 514,383 | | | 342,551 | |
Prepaid expenses and other current assets | $ | 11,749,364 | | | $ | 4,357,829 | |
(1) The Company’s prepaid purchases balance consists primarily of deposits made to our suppliers for non-recurring engineering costs, capital expenditures, and production parts. The increase in prepaid purchases as compared to December 31, 2021 is primarily due to deposits on orders related to the Company’s W750 vehicle platform.
(2) We record reserves on prepaid purchase balances that are significantly aged, for balances that represent deposits for certain production parts related to the Company’s C-Series vehicle platform, and for balances specifically identified as having a carrying value in excess of net realizable value. The reserve represents our best estimate of deposits on orders that we do not expect to recover.
4. REVENUE
Revenue Recognition
The following table provides a summary of sales activity for the period indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Sales, net of returns and allowances | $ | 12,555 | | | $ | 1,202,876 | | | $ | 26,854 | | | $ | 1,723,936 | |
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied. Generally, this occurs when we transfer control of our vehicles, parts, or accessories, or provide services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. For the majority of sales, this occurs when products are shipped from our manufacturing facility. At the time of revenue recognition, we reduce the transaction price and record a sales return reserve against revenue for estimated variable considerations related to future product returns. Such estimates are based on an analysis of known pending returns and historical experience. We adjust our estimate of revenue at the earlier of when the value of consideration we expect to receive changes or when the consideration becomes fixed.
Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. The expected costs associated with our base warranties and field service actions are recognized as expense when the products are sold. We do not have any material significant payment terms as payment is received at or shortly after the point of sale.
We have elected to recognize the cost for freight and shipping when control over vehicles, parts, or accessories has transferred to the customer as an expense in Cost of Sales.
Accounts Receivable
Accounts receivable primarily include amounts related to sales of our products and services rendered. We provide an allowance against accounts receivable for the amount we expect to be uncollectible. We write-off accounts receivable against the allowance when they are deemed uncollectible.
5. DEBT
4.0% Senior Secured Convertible Notes Due 2024 (“2024 Notes”)
The fair value of the 2024 Notes as of June 30, 2022 and December 31, 2021 was zero and $24.7 million, respectively. The contractual principal balance of the 2024 Notes as of June 30, 2022 and December 31, 2021 was zero and $27.5 million, respectively.
In April 2022, the Company exchanged the remaining $27.5 million in aggregate principal of the 2024 Notes for approximately 7.8 million shares of the Company’s common stock. The number of shares issued was calculated by dividing $29.4 million, which represented 107% of the principal amount of the notes, plus $0.3 million of interest accrued on the notes, by the average of the daily volume weighted average price for the 10 days immediately preceding April 21, 2022. The Company recognized a loss of $1.8 million in the first quarter of 2022, which included a $0.4 million adjustment to the fair value of the convertible notes to the value of the shares issued under the exchange and a $1.4 million adjustment related to the realization of the amount previously recognized in Accumulated Other Comprehensive Loss. The total loss was recorded in Interest Expense for the six months ended June 30, 2022.
Subsequent to the exchange, the Company has no convertible notes outstanding and the indenture and related security agreement under which the 2024 Notes were issued have been terminated.
Interest on the 2024 Notes was payable quarterly beginning January 15, 2021 at a rate of 4.0% per annum. The following table summarizes contractual interest expense related to the 2024 Notes for the period indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Contractual interest expense | $ | — | | | $ | 1,977,777 | | | $ | 332,707 | | | $ | 3,977,777 | |
See Note 13, Fair Value Measurements, for additional information regarding the fair value measurement of the 2024 Notes.
PPP Term Note
On April 14, 2020, the Company entered into a Paycheck Protection Program Term Note (“PPP Term Note”) under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Company received total proceeds of approximately $1.4 million. In accordance with the requirements of the CARES Act, the Company used the proceeds primarily for payroll costs. Interest accrued on the PPP Term Note at the rate of 1.0% per annum. The Company elected to account for the PPP Term Note as debt and accrued interest over the term of the note.
On January 15, 2021, the outstanding principal and interest accrued on the PPP Term Note were fully forgiven. The Company recognized approximately $1.4 million in gain on the forgiveness of the PPP Term Note, which was recorded in Interest Income for the six months ended June 30, 2021.
6. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued liabilities and other current liabilities consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Accrued commissions | $ | 1,750,000 | | | $ | 4,000,000 | |
Compensation and related costs | 3,294,304 | | | 4,030,085 | |
Accrued interest | — | | | 232,222 | |
Sales return reserve | — | | | 2,410,000 | |
Other | 4,552,049 | | | 4,080,520 | |
Total accrued and other current liabilities | $ | 9,596,353 | | | $ | 14,752,827 | |
Warranties
We generally offer warranty coverage for our products. We accrue warranty related costs under standard warranty terms and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers.
Provisions for estimated assurance warranties are recorded at the time of sale and are periodically adjusted to reflect actual experience. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring Company obligations under its warranty plans. Historically, the cost of fulfilling the Company’s warranty obligations has principally involved replacement parts, towing and transportation costs, labor and travel for any field retrofit campaigns. The Company’s estimates are based on historical experience, the extent of pre-production testing, the number of units involved, and the extent of features/components included in product models. The Company reviews actual warranty claims experience to determine if there are systemic defects that would require a field campaign.
Although we believe the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed to increases or decreases in our warranty accrual that could be material.
Warranty liability activity consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Warranty liability, beginning of period | $ | 4,315,463 | | | $ | 5,255,043 | | | $ | 4,583,916 | | | $ | 5,400,000 | |
Warranty costs incurred | (348,005) | | | (488,830) | | | (698,958) | | | (733,787) | |
Provision for warranty | (645,246) | | | 100,000 | | | (562,746) | | | 200,000 | |
Warranty liability, end of period | $ | 3,322,212 | | | $ | 4,866,213 | | | $ | 3,322,212 | | | $ | 4,866,213 | |
7. LEASES
We have entered into various operating and finance lease agreements for offices, manufacturing and warehouse facilities. We determine if an arrangement is a lease, or contains a lease, at inception and record the leases in our financial statements upon lease commencement, which is the date when the underlying asset is made available for our use by the lessor.
Our leases may include options to extend the lease term for up to 5 years. Some of our leases also include options to terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
During the second quarter of 2022, we entered into a lease agreement for additional office and warehouse space. We obtained a Letter of Credit (“LOC”) in the amount of $0.5 million to secure the lease, which bears interest at five percent per annum. Under the terms of the agreement, the landlord may use the whole or any part of the LOC for the payment of any amount as to which we are in default or to compensate the landlord for certain specified losses or damage.
Lease expense for operating leases is recognized on a straight-line basis over the lease term as cost of sales or operating expenses depending on the nature of the leased asset.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Short-term lease expense | $ | 248,103 | | | $ | 226,268 | | | $ | 424,008 | | | $ | 349,783 | |
Operating lease expense | 465,544 | | | — | | | 762,967 | | | — | |
Total lease expense | $ | 713,647 | | | $ | 226,268 | | | $ | 1,186,975 | | | $ | 349,783 | |
Lease right-of-use assets consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Operating leases | $ | 5,743,960 | | | $ | 1,538,852 | |
Finance leases | 5,922,316 | | | — | |
Total lease right-of-use assets | $ | 11,666,276 | | | $ | 1,538,852 | |
Lease liabilities consisted of the following:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Operating leases | $ | 6,540,730 | | | $ | 1,554,767 | |
Finance leases | 3,452,506 | | | — | |
Total lease liabilities | 9,993,236 | | | 1,554,767 | |
Less: current portion | (1,050,585) | | | (363,714) | |
Long-term portion | $ | 8,942,651 | | | $ | 1,191,053 | |
Supplemental cash flow information related to leases where we are the lessee is as follows:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
| | | |
| | | |
| | | |
Leased assets obtained in exchange for finance lease liabilities | 6,022,694 | | | — | |
Leased assets obtained in exchange for operating lease liabilities | 5,024,284 | | | — | |
8. STOCK-BASED COMPENSATION
The Company maintains, as approved by the board of directors, the 2017 Incentive Stock Plan and the 2019 Incentive Stock Plan (the “Plans”) providing for the issuance of stock-based awards to employees, officers, directors or consultants of the Company. Non-qualified stock options may only be granted with an exercise price equal to the market value of the Company’s common stock on the grant date. Awards under the Plan may be either vested or unvested options, or unvested restricted stock. The Plans have authorized 13.0 million shares for issuance of stock-based awards. As of June 30, 2022 there were approximately 2.0 million shares available for issuance of future stock awards under the Plans.
Stock-based compensation expense
The following table summarizes stock-based compensation expense:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Stock options | $ | 254,585 | | | $ | 21,210 | | | $ | 486,963 | | | $ | 91,622 | |
Restricted stock awards | 2,226,865 | | | 1,118,703 | | | 3,906,109 | | | 1,940,719 | |
Performance-based restricted stock awards | 810,959 | | | — | | | 1,249,630 | | | — | |
Total stock-based compensation expense | $ | 3,292,409 | | | $ | 1,139,913 | | | $ | 5,642,702 | | | $ | 2,032,341 | |
Stock options
A summary of stock option activity for the six months ended June 30, 2022 is as follows:
| | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted Average Exercise Price per Option | | Weighted Average Remaining Contractual Life (Years) |
Balance, December 31, 2021 | 495,836 | | | $ | 6.80 | | | 6.5 |
Exercised | (51,198) | | | 1.36 | | | |
Forfeited | (625) | | | 22.30 | | | |
| | | | | |
Balance, June 30, 2022 | 444,013 | | | $ | 7.45 | | | 6.7 |
| | | | | |
Number of options exercisable at June 30, 2022 | 188,988 | | | $ | 4.03 | | | 3.2 |
As of June 30, 2022, unrecognized compensation expense was $2.1 million for unvested options which is expected to be recognized over the next 2.2 years.
Restricted stock awards
A summary of restricted stock award activity for the six months ended June 30, 2022 is as follows:
| | | | | | | | | | | |
| Number of Unvested Shares | | Weighted Average Grant Date Fair Value per Share |
Balance, December 31, 2021 | 1,617,192 | | | $ | 9.33 | |
Granted | 2,829,992 | | | 3.10 | |
Vested | (282,504) | | | 9.06 | |
Forfeited | (145,016) | | | 6.05 | |
Balance, June 30, 2022 | 4,019,664 | | | $ | 5.07 | |
As of June 30, 2022, unrecognized compensation expense was $17.4 million for unvested restricted stock awards which is expected to be recognized over the next 2.4 years.
Performance share units (“PSUs”)
On February 23, 2022, the Company issued 0.9 million PSUs to certain executives. The PSUs will vest upon achievement of the performance objectives over a performance period ending December 31, 2024 as defined in the agreement. Fifty percent of the PSUs vest based upon the Company’s total shareholder return as compared to a group of peer companies (“TSR PSUs”), and fifty percent of the PSUs vest based upon the Company’s performance on certain measures including a cumulative adjusted EBITDA target (“EBITDA PSUs”). Depending on the actual achievement on the performance objectives, the grantee may earn between 0% and 200% of the target PSUs.
A summary of the activity for PSU awards with total shareholder return performance objectives for the six months ended June 30, 2022 is as follows:
| | | | | | | | | | | |
| Number of Unvested Shares | | Weighted Average Grant Date Fair Value per Share |
Balance, December 31, 2021 | 306,197 | | | $ | 11.79 | |
Granted | 454,832 | | | 11.79 | |
Forfeited | (11,138) | | | 11.79 | |
Balance, June 30, 2022 | 749,891 | | | $ | 11.79 | |
The grant date fair value of $11.79 per TSR PSU was estimated using a Monte-Carlo simulation model using a volatility assumption of 117% and risk-free interest rate of 0.69%.
As of June 30, 2022, unrecognized compensation expense was $7.8 million for unvested TSR PSUs, which is expected to be recognized over the next 2.5 years.
A summary of the PSU awards with cumulative adjusted EBITDA targets for the six months ended June 30, 2022 is as follows:
| | | | | |
| Number of Unvested Shares |
Balance, December 31, 2021 | — | |
Granted | 454,822 | |
Forfeited | (11,138) | |
Balance, June 30, 2022 | 443,684 | |
The fair value of performance share units is calculated based on the stock price on the date of grant. The stock-based compensation expense recognized each period is dependent upon our estimate of the number of shares that will ultimately vest based on the achievement of EBITDA-based performance conditions. Future stock-based compensation expense for unvested EBITDA PSUs will be based on the fair value of the awards as of the grant date, which has not yet occurred, as the cumulative adjusted EBITDA target condition is not yet defined.
9. INCOME TAXES
As of June 30, 2022 and December 31, 2021, the Company's deferred tax liability was zero. Cumulative deferred tax assets are fully reserved as there is not sufficient evidence to conclude that it is more likely than not the deferred tax assets are realizable. No current liability for federal or state income taxes has been included in these Condensed Consolidated Financial Statements due to the loss for the periods.
10. EARNINGS PER SHARE
Basic loss per share of common stock is calculated by dividing net loss by the weighted-average shares outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards and warrants using the treasury stock method, and convertible notes using the if-converted method, are included when calculating the diluted net loss per share of common stock when their effect is dilutive.
The following table presents the potentially dilutive shares that were excluded from the computation of diluted net loss per share of common stock, because their effect was anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Stock-based awards and warrants | 6,765,581 | | | 3,827,804 | | | 6,765,581 | | | 3,827,804 | |
Convertible notes(1) | 7,833,666 | | | 5,667,328 | | | 7,833,666 | | | 5,667,328 | |
(1) Represents shares issued in exchange of convertible notes in April 2022. See Note 5, Debt, for additional information regarding shares issued subsequent to the date of the Condensed Consolidated Financial Statements.
11. RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Recently Adopted
In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity’s own equity and requires the use of the if-converted method for calculating diluted earnings per share. The ASU removes separation models for convertible debt with a cash conversion feature. Such convertible instruments will be accounted for as a single liability measured at amortized cost. The Company adopted the ASU as of January 1, 2022. The adoption of this guidance did not have a material impact on the Company's financial condition and results of operations.
12. OTHER TRANSACTION
On October 31, 2019, the Company and ST Engineering Hackney, Inc. (“Hackney”) entered into an Asset Purchase Agreement to purchase certain assets and assume certain liabilities of Hackney. Upon execution of the agreement, the Company deposited approximately 2.3 million shares of its common stock into an escrow account that were to be released to Hackney if certain conditions were met.
The Company believes that such conditions were not met and does not expect to make further payments to Hackney in connection with the Asset Purchase Agreement. Further, the Company expects the shares of its common stock to be released from escrow in 2022.
13. FAIR VALUE MEASUREMENTS
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 — Quoted market prices in active markets for identical assets or liabilities.
Level 2 — Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 — Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities measured at fair value and fair value measurement level were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Fair Value | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Liabilities | | | | | | | | | | | | | | | |
Convertible notes | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 24,705,000 | | | $ | — | | | $ | — | | | $ | 24,705,000 | |
Total liabilities at fair value | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 24,705,000 | | | $ | — | | | $ | — | | | $ | 24,705,000 | |
Convertible Notes
The Company's convertible notes were measured at fair value using Level 3 inputs upon issuance and at each reporting date. Considerable judgment was required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could have realize in a current market exchange. Significant assumptions used in the fair value model included estimates of the redemption dates, credit spreads and the market price and volatility of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have had a material effect on the estimated fair values.
The Company recognized changes in fair value of the convertible notes related to changes in credit spread, if any, in Other Comprehensive Loss and the remaining changes in fair value in Interest Expense (Income).
14. COMMITMENTS AND CONTINGENCIES
General Matters
The Company is party to various negotiations and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.
Federal Motor Vehicle Safety Standards (“FMVSS”) Certification and Other Regulatory Matters
On September 22, 2021, we announced the Company decided to suspend deliveries of C-1000 vehicles and recall the vehicles we had already delivered to customers. The new leadership team determined additional testing and modifications to existing vehicles are required to bring the C-1000 vehicles into full compliance with FMVSS. The Company further announced we filed a report with the National Highway Traffic Safety Administration (“NHTSA”) regarding the need for additional testing and vehicle modifications to bring our C-1000 vehicles into full compliance with FMVSS. We indicated our previous statements related to the C-1000’s compliance with NHTSA standards cannot be relied upon and so notified the Securities and Exchange Commission. We also disclosed we identified a number of enhancements to our production process and the design of the C-1000 vehicles to address customer feedback, primarily related to payload capacity.
The certification testing was completed in February 2022. Upon completion of this review, the C-1000 platform was determined to be eligible for certification and reintroduction as a limited production vehicle with constrained cargo capacity. In 2022, Workhorse decided to repurchase all of the C-1000 vehicles involved in the recall announced in September 2021 instead
of repairing them and so notified NHTSA. Because the Company repurchased all of the C-1000 vehicles involved in the recall, it has no further obligations under the recall.
Due to the uncertainties and many variables involved in NHTSA matters, we cannot estimate the ultimate resolution of this matter and whether it will have a material adverse effect on the Company's financial position, results of operations, cash flows or liquidity. We cooperated with NHTSA with respect to the now-completed recall that was announced in September 2021. However, we cannot assure that NHTSA or other government authorities will not attempt to impose potentially significant fines and penalties in response to the recall.
On October 19 and November 1, 2021, the Company received letters from the SEC requesting that it voluntarily provide information relating to (a) the events and trading in its securities leading up to the announcement of the award of a contract by the U.S. Postal Service (the “USPS”) for the manufacture of a postal service vehicle fleet and (b) recognition of revenue, if any, related to purchases of vehicles by certain of the Company’s customers. On November 5, 2021, the Department of Justice (“DOJ”) orally informed the Company that it had a related open investigation covering the Company. The Company has not received any subpoena or other request for documents or other information from the DOJ with respect to this investigation. On May 9, 2022, the Company received a letter from the SEC requesting that it voluntarily provide information relating to certain customer sales and customer complaints. The Company is cooperating with the SEC and DOJ investigations. At this point, the Company cannot predict the eventual scope, duration, or outcome of these matters.
During the second quarter of 2021, the Company became aware of a regulatory compliance issue related to our E-Series vehicles that will require retrofitting of such vehicles. Management continues to work on remediation of this issue and does not expect it to have a material impact on the Company’s financial condition and operations. Due to the uncertainties and many variables involved in regulatory matters, we cannot estimate the ultimate resolution of this issue and actual results may differ from our expectations.
Legal Proceedings
Securities Litigation
The Company, Duane Hughes, Steve Schrader, Robert Willison and Gregory Ackerson are defendants in a putative class action (the “Securities Class Action”) brought in the Central District of California (Case No.2:21-cv-02072) on behalf of purchasers of the Company’s securities from March 10, 2020 through May 10, 2021. The amended complaint in this action, filed by lead plaintiff, Timothy M. Weis, on July 16, 2021, alleges the defendants violated the federal securities laws by intentionally or recklessly making material misrepresentations and/or omissions regarding the Company’s participation in the bidding process to manufacture the new fleet of USPS next generation delivery vehicles, the prospect of the USPS awarding the contract to Workhorse given alleged deficiencies in Workhorse’s proposal, the Company’s manufacturing abilities generally and the Company’s nonbinding “backlog” in its vehicles. Lead plaintiff seeks certification of a class and monetary damages in an indeterminate amount. The Court denied the Company’s motion to dismiss in substantial part, and the Securities Class Action is currently scheduled to begin trial on March 19, 2024. The parties are now engaged in discovery. The Company believes the Securities Class Action is without merit. The parties have scheduled a mediation of the Securities Class Action for August 23, 2022 and there can be no assurance as to the results, if any, of the mediation.
Shareholder Derivative Litigation
A total of seven nearly identical derivative actions were originally filed for breach of fiduciary duty and unjust enrichment against Duane Hughes, Steve Schrader, Stephen Fleming, Robert Willison, Anthony Furey, Gregory Ackerson, H. Benjamin Samuels, Raymond J. Chess, Harry DeMott, Gerald B. Budde, Pamela S. Mader, Michael L. Clark and Jacqueline A. Dedo in state court in Nevada and federal courts in Ohio and California. In these actions, the plaintiffs allege the defendants breached their fiduciary duties by allowing or causing the Company to violate the federal securities laws as alleged in the Securities Class Action discussed above and by selling Company stock and receiving other compensation while allegedly in possession of material non-public information about the prospect of the USPS awarding the contract to an electric vehicle manufacturer given electrifying the USPS’s entire fleet allegedly would be impractical and expensive. The plaintiffs seek damages and disgorgement in an indeterminate amount.
The three derivative cases filed in the Central District of California were consolidated into a single action on June 21, 2021 (under Case No. 2:21-cv-04202). On April 18, 2022, the plaintiffs filed their consolidated amended complaint in the consolidated action. On June 2, 2022, the defendants filed motions to dismiss, which the Company joined in with respect to the arguments related to the plaintiffs’ lack of standing, as well as a motion to stay the case pending resolution of the Securities Class Action. In accordance with the Court’s Scheduling Order of June 22, 2022, plaintiffs filed their opposition to the motion
to stay on July 20, 2022 and have until August 17, 2022 to file their oppositions to the motions to dismiss. The hearing on all of these motions will be on October 17, 2022.
A fourth case, originally filed in the Southern District of Ohio, was transferred to the Central District of California on November 5, 2021 (under Case No. 2:21-cv-08734) and assigned to the same judge who presides over the Securities Class Action and the consolidated Central District of California derivative action. Plaintiffs filed their first amended complaint on May 2, 2022. On July 22, 2022, the Court granted the Defendants’ motion to stay the action pending resolution of the Securities Class Action.
Two further actions, both filed in the Eight Judicial District Court of the State of Nevada in and for Clark County, were consolidated on January 7, 2022 (under Case No. A-21-833050-B). On January 24, 2022, the plaintiffs in the consolidated action in Nevada state court filed their consolidated amended complaint, which was also revised to include the additional allegations made in the Amended Complaint in the Securities Class Action discussed above. On March 22, 2022, the defendants and the Company filed a motion to stay the Nevada state court consolidated action, and the defendants filed motions to dismiss the consolidated action, which the Company joined in with respect to the arguments related to the plaintiffs’ lack of standing. Plaintiffs’ oppositions to these motions were filed on June 3, 2022. Defendants’ replies were filed on July 15, 2022. On August 4, 2022, the court denied the defendants' motion to dismiss the consolidated action, but granted the defendants' motion to stay the action pending resolution of the Securities Class Action.
The most recent shareholder derivative action was filed on June 22, 2022 in the Nevada District Court under Case No. 2:22-cv-00980. The Company’s response is currently due on September 13, 2022.
Although these actions purport to seek recovery on behalf of the Company, the Company will incur certain expenses due to indemnification and advancement obligations with respect to the defendants. The Company understands that defendants believe these actions are without merit and intends to support them as they pursue all legal avenues to defend themselves fully.