Company Quick10K Filing
Workhorse
Price3.54 EPS-1
Shares66 P/E-4
MCap234 P/FCF-10
Net Debt4 EBIT-14
TEV239 TEV/EBIT-17
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-09
10-Q 2020-06-30 Filed 2020-08-10
10-Q 2020-03-31 Filed 2020-05-06
10-K 2019-12-31 Filed 2020-03-13
10-Q 2019-09-30 Filed 2019-11-08
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-07
10-K 2018-12-31 Filed 2019-03-18
10-Q 2018-09-30 Filed 2018-11-07
10-Q 2018-06-30 Filed 2018-08-06
10-K 2017-12-31 Filed 2018-03-14
10-Q 2017-12-31 Filed 2018-05-09
10-Q 2017-09-30 Filed 2017-11-07
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-10
10-K 2016-12-31 Filed 2017-03-14
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-15
10-Q 2016-03-31 Filed 2016-05-16
10-K 2015-12-31 Filed 2016-03-25
10-Q 2015-09-30 Filed 2015-11-16
10-Q 2015-06-30 Filed 2015-08-14
10-Q 2015-03-31 Filed 2015-05-15
10-K 2014-12-31 Filed 2015-03-30
10-Q 2014-09-30 Filed 2014-11-13
10-Q 2014-06-30 Filed 2014-08-14
10-Q 2014-03-31 Filed 2014-05-20
10-K 2013-12-31 Filed 2014-04-15
10-Q 2013-09-30 Filed 2013-11-19
10-Q 2013-06-30 Filed 2013-08-19
10-Q 2013-03-31 Filed 2013-05-15
10-K 2012-12-31 Filed 2013-04-12
10-Q 2012-09-30 Filed 2012-11-15
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-15
10-K 2011-12-31 Filed 2012-04-04
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-13
10-K 2010-12-31 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-15
10-Q 2010-06-30 Filed 2010-08-16
10-Q 2010-03-31 Filed 2010-05-20
10-K 2009-12-31 Filed 2010-03-31
8-K 2020-11-09
8-K 2020-10-14
8-K 2020-10-12
8-K 2020-09-21
8-K 2020-09-03
8-K 2020-08-10
8-K 2020-08-01
8-K 2020-07-16
8-K 2020-06-30
8-K 2020-05-06
8-K 2020-05-01
8-K 2020-04-14
8-K 2020-03-13
8-K 2020-03-10
8-K 2020-01-29
8-K 2020-01-13
8-K 2019-12-19
8-K 2019-12-09
8-K 2019-11-27
8-K 2019-11-25
8-K 2019-11-21
8-K 2019-11-08
8-K 2019-11-07
8-K 2019-11-06
8-K 2019-10-31
8-K 2019-10-31
8-K 2019-10-28
8-K 2019-10-01
8-K 2019-08-12
8-K 2019-08-06
8-K 2019-05-31
8-K 2019-05-31
8-K 2019-05-07
8-K 2019-04-30
8-K 2019-04-16
8-K 2019-04-01
8-K 2019-03-18
8-K 2019-02-18
8-K 2019-02-11
8-K 2019-01-30
8-K 2018-12-31
8-K 2018-12-04
8-K 2018-11-28
8-K 2018-11-08
8-K 2018-11-07
8-K 2018-09-28
8-K 2018-08-13
8-K 2018-08-09
8-K 2018-08-06
8-K 2018-07-05
8-K 2018-06-29
8-K 2018-06-07
8-K 2018-06-04
8-K 2018-05-30
8-K 2018-05-03
8-K 2018-04-26
8-K 2018-04-05
8-K 2018-01-23

WKHS 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 wkhs-20200930xexx311.htm
EX-31.2 wkhs-20200930xexx312.htm
EX-32.1 wkhs-20200930xexx321.htm
EX-32.2 wkhs-20200930xexx322.htm

Workhorse Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
40224-14-32-502012201420172020
Assets, Equity
10.00.0-10.0-20.0-30.0-40.02012201420172020
Rev, G Profit, Net Income
3021123-6-152012201420172020
Ops, Inv, Fin

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-37673
WORKHORSE GROUP INC.
(Exact name of registrant as specified in its charter)
Nevada26-1394771
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
100 Commerce Drive, Loveland, Ohio 45140
(Address of principal executive offices, including zip code)
(513) 360-4704
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth comp any, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par value per shareWKHSThe NASDAQ Capital Market

The number of shares of the Registrant's Common Stock, $0.001 par value per share, outstanding as of October 30, 2020, was 120,529,157.


1


TABLE OF CONTENTS


Condensed Consolidated Statements of Comprehensive Loss

i


Forward-Looking Statements
The discussions in this Quarterly Report contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. When used in this Report, the words “anticipate”, expect”, “plan”, “believe”, “seek”, “estimate” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include, but are not limited to, statements about the features, benefits and performance of our products, our ability to introduce new product offerings and increase revenue from existing products, expected expenses including those related to selling and marketing, product development and general and administrative, our beliefs regarding the health and growth of the market for our products, anticipated increase in our customer base, expansion of our products functionalities, expected revenue levels and sources of revenue, expected impact, if any, of legal proceedings, the adequacy of liquidity and capital resource, and expected growth in business. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, market acceptance for our products, our ability to attract and retain customers for existing and new products, our ability to control our expenses, our ability to recruit and retain employees, legislation and government regulation, shifts in technology, global and local business conditions, our ability to effectively maintain and update our product and service portfolio, the strength of competitive offerings, the prices being charged by those competitors and the risks discussed elsewhere herein. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
All references in this Form 10-Q that refer to the “Company”, “Workhorse Group”, “Workhorse”, “we,” “us” or “our” are to Workhorse Group Inc.
ii


PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Workhorse Group Inc.
Condensed Consolidated Balance Sheets
September 30,
2020
December 31,
2019
(Unaudited)
Assets
Current assets:
Cash and cash equivalents$80,222,741 $23,868,416 
Restricted cash held in escrow 1,000,000 
Accounts receivable, less allowance for doubtful accounts of $41,583 and zero at September 30, 2020 and December 31, 2019, respectively
527,796 7,921 
Lease receivable, current33,100 33,100 
Inventory, net5,965,710 1,798,146 
Prepaid expenses12,959,268 4,812,088 
      Total current assets99,708,615 31,519,671 
Property, plant and equipment, net
7,545,291 6,830,181 
Investment in LMC13,059,700 12,194,800 
Lease receivable, long-term134,694 129,177 
Total Assets$120,448,300 $50,673,829 
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable$1,467,778 $1,678,983 
Accrued liabilities4,295,753 3,105,184 
Warranty liability3,565,942 6,001,864 
Warrant liability 16,335,000 
Customer deposits77,000 303,000 
Current portion of long-term debt862,278  
Current portion of convertible notes, at fair value121,817,001 19,620,000 
      Total current liabilities132,085,752 47,044,031 
Long-term debt548,722  
Convertible notes, at fair value 19,400,000 
Mandatorily redeemable Series B preferred stock 19,142,908 
Commitments and contingencies
Stockholders’ deficit:
Series A preferred stock, par value $0.001 per share, 75,000,000 shares authorized,
zero shares issued and outstanding as of September 30, 2020 and December 31, 2019
  
Common stock, par value $0.001 per share, 250,000,000 shares authorized, 114,963,145
shares issued and outstanding as of September 30, 2020 and 67,105,000 shares issued and
outstanding as of December 31, 2019
114,964 67,105 
Additional paid-in capital376,111,332 143,826,315 
Accumulated deficit(389,512,470)(178,806,530)
Accumulated other comprehensive income1,100,000  
      Total stockholders' deficit(12,186,174)(34,913,110)
Total Liabilities and Stockholders' Deficit$120,448,300 $50,673,829 
See accompanying notes to the condensed consolidated financial statements.
1


Workhorse Group Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net sales$564,707 $4,258 $740,949 $373,948 
Cost of sales2,815,242 1,423,904 6,074,577 3,751,674 
Gross loss(2,250,535)(1,419,646)(5,333,628)(3,377,726)
Operating expenses
Selling, general and administrative5,950,058 2,551,406 15,464,926 6,638,350 
Research and development1,614,485 1,640,454 5,133,325 4,219,456 
Total operating expenses7,564,543 4,191,860 20,598,251 10,857,806 
Other income  864,900  
Loss from operations(9,815,078)(5,611,506)(25,066,979)(14,235,532)
Interest expense, net74,315,644 5,882,081 185,638,961 23,582,427 
Loss before provision for income taxes(84,130,722)(11,493,587)(210,705,940)(37,817,959)
Provision for income taxes    
Net loss(84,130,722)(11,493,587)(210,705,940)(37,817,959)
Net loss attributable to common stockholders per share -
basic and diluted
$(0.78)$(0.17)$(2.52)$(0.60)
Weighted average number of common shares outstanding -
basic and diluted
107,406,000 66,176,921 83,611,526 63,566,295 
See accompanying notes to the condensed consolidated financial statements.

2


Workhorse Group Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)


Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net loss$(84,130,722)$(11,493,587)$(210,705,940)$(37,817,959)
Other comprehensive income
Credit risk adjustment in fair value of Convertible Note  1,100,000  
Comprehensive loss$(84,130,722)$(11,493,587)$(209,605,940)$(37,817,959)
See accompanying notes to the condensed consolidated financial statements.
3


Workhorse Group Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
(Unaudited)

Common StockSeries A
Preferred Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
Stockholders’
Deficit
Number
of Shares
AmountNumber
of Shares
Amount
Balance as of June 30, 201966,081,812 $66,082  $ $140,527,364 $(167,968,075)$ $(27,374,629)
Stock options and warrants exercised6,330 6 — — 1,967 — — 1,973 
Stock-based compensation— — — — 334,711 — — 334,711 
Common stock issued for payment of Series B Preferred Stock dividend101,471 102 — — 166,669 — — 166,771 
Net loss for the three months ended September 30, 2019— — — — — (11,493,587)— (11,493,587)
Balance as of September 30, 201966,189,613 $66,190  $ $141,030,711 $(179,461,662)$ $(38,364,761)

Common StockSeries A
Preferred Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
Stockholders’
Deficit
Number
of Shares
AmountNumber
of Shares
Amount
Balance as of December 31, 201858,270,934 $58,271  $ $126,076,782 $(141,557,496)$ $(15,422,443)
Issuance of common stock7,183,488 7,184 — — 5,921,051 — — 5,928,235 
Stock options and warrants exercised517,224 517 — — 1,456 — — 1,973 
Deemed dividend116,496 116 — — 86,091 (86,207)—  
Stock-based compensation— — — — 1,211,629 — — 1,211,629 
Effect of reclassification of warrants— — — — 857,072 857,072 
Value of warrants issued with preferred stock— — — — 6,709,961 — — 6,709,961 
Common stock issued for payment of Series B Preferred Stock Dividend101,471 102 166,669 166,771 
Net loss for the nine months ended September 30, 2019— — — — — (37,817,959)— (37,817,959)
Balance as of September 30, 201966,189,613 $66,190  $ $141,030,711 $(179,461,662)$ $(38,364,761)














4



Workhorse Group Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
(Unaudited)

Common StockSeries A
Preferred Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
Stockholders’
Deficit
Number
of Shares
AmountNumber
of Shares
Amount
Balance as of June 30, 202089,330,123 $89,330  $ $233,715,623 $(305,381,748)$1,100,000 $(70,476,795)
Stock options and warrants exercised, and vesting of restricted shares19,247,746 19,248 — — 30,634,257 — — 30,653,505 
Common stock issued for preferred stock dividends303,617 304 — — 491,556 — — 491,860 
Conversion of Convertible Note6,065,576 6,066 — — 110,236,598 — — 110,242,664 
Common stock issued for interest on Convertible Note16,083 16 — — 294,782 — — 294,798 
Stock-based compensation— — — — 738,516 — — 738,516 
Net loss for the three months ended September 30, 2020— — — — — (84,130,722)— (84,130,722)
Other comprehensive income— — — — — — —  
Balance as of September 30, 2020114,963,145 $114,964  $ $376,111,332 $(389,512,470)$1,100,000 $(12,186,174)


Common StockSeries A
Preferred Stock
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
Stockholders’
Deficit
Number
of Shares
AmountNumber
of Shares
Amount
Balance as of December 31, 201967,105,000 $67,105  $ $143,826,315 $(178,806,530) $(34,913,110)
Stock options and warrants exercised, and vesting of restricted shares32,158,980 32,159 — — 77,779,745 — — 77,811,904 
Common stock issued for preferred stock dividends920,901 922 — — 1,490,938 — — 1,491,860 
Conversion of Convertible Note14,449,846 14,450 — — 148,963,233 — — 148,977,683 
Common stock issued for interest on Convertible Note328,418 328 — — 1,283,367 — — 1,283,695 
Stock-based compensation— — — — 2,767,734 — — 2,767,734 
Net loss for the nine months ended September 30, 2020— — — — — (210,705,940)— (210,705,940)
Other comprehensive income— — — — — — 1,100,000 1,100,000 
Balance as of September 30, 2020114,963,145 $114,964  $ $376,111,332 $(389,512,470)$1,100,000 $(12,186,174)

See accompanying notes to the condensed consolidated financial statements.



5


Workhorse Group Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
20202019
Cash flows from operating activities:
Net loss$(210,705,940)$(37,817,959)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation574,287 291,287 
Tooling expense350,500  
Amortization of discount and debt issuance costs on long-term debt 850,800 
Amortization of discount and loss on redemption of on mandatorily redeemable Series B preferred stock5,857,092 482,589 
Change in fair value of Convertible Note and loss on conversion to common stock163,949,684  
Change in fair value of warrant liability12,176,690 18,935,392 
Change in fair value of investment in LMC(864,900) 
Dividends for mandatorily redeemable Series B preferred stock paid in common stock1,491,860  
Interest on Convertible Note paid in common stock1,283,695  
Stock-based compensation2,767,734 1,213,602 
Other 41,588 
Effects of changes in operating assets and liabilities:
Accounts and lease receivable(525,392)33,863 
Inventory(4,167,564)122,407 
Prepaid expenses(8,147,180)(4,538,704)
Accounts payable and accrued liabilities979,364 (3,128,203)
Warranty liability(2,435,922)(551,798)
Customer deposits(226,000)(72,000)
Net cash used in operating activities(37,641,992)(24,137,136)
Cash flows from investing activities:
Capital expenditures(1,639,897)(4,001,838)
Proceeds on disposition of property, plant and equipment 5,000 
Net cash used in investing activities(1,639,897)(3,996,838)
Cash flows from financing activities:
Proceeds from Convertible Note II68,925,000  
Proceeds from long-term debt1,411,000 5,854,140 
Redemption of Series B preferred stock(25,000,000) 
Proceeds from issuance of Series B preferred stock 25,000,000 
Issuance of common stock 5,928,235 
Exercise of warrants and options and restricted share award activity49,300,214  
Net cash provided by financing activities94,636,214 36,782,375 
Change in cash and cash equivalents55,354,325 8,648,401 
Cash, cash equivalents and restricted cash, beginning of the period24,868,416 1,512,750 
Cash and cash equivalents, end of the period$80,222,741 $10,161,151 



6


Supplemental disclosure of non-cash activities:

During the nine months ended September 30, 2020, the Company issued 14.4 million shares of common stock in connection with the conversion of the Convertible Note, which were valued at $149.0 million. The Company recognized the conversion as an adjustment to additional paid-in capital with the offset as a reduction to the fair value of the Convertible Note.

During the nine months ended September 30, 2020, the change in fair value of the Convertible Note included a $1.1 million adjustment attributed to changes in credit risk. The Company recognized the adjustment as other comprehensive income with the offset as a reduction to the fair value of the Convertible Note.

See accompanying notes to the condensed consolidated financial statements.
7



Workhorse Group Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
Nature of operations
Workhorse Group Inc. (“Workhorse”, the “Company”, “we”, “us” or “our”) is a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. As an American manufacturer, we design and build high performance electric vehicles and aircraft that make movement of people and goods more efficient and less harmful to the environment. As part of our solution, we also develop cloud-based, real-time telematics performance monitoring systems that enable fleet operators to optimize energy and route efficiency. We are currently focused on our core competency of bringing the C-Series electric delivery truck to market and fulfilling our existing backlog of orders.
Principles of consolidation
The condensed consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Basis of presentation
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has limited revenues and a history of negative working capital and stockholders’ deficits. Our existing capital resources are expected to be sufficient to fund our operations for several years. Unless and until we are able to generate a sufficient amount of revenue, reduce our costs and/or enter into a strategic relationship, we expect to finance future cash needs through public and/or private offerings of equity securities and/or debt financings. If we are not able to obtain additional financing and/or substantially increase revenue from sales, we will be unable to continue as a going concern. These conditions raise substantial doubt about the ability of the Company to continue as a going concern.
In view of these matters, continuation as a going concern is dependent upon the continued operations of the Company, which, in turn, is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and successfully carry out its future operations. The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary, should the Company not continue as a going concern.
The Company has continued to raise capital and debt. Management believes the proceeds from these offerings, future offerings, and the Company’s anticipated revenue, provides an opportunity to continue as a going concern. If additional funding is required, the Company plans to obtain working capital from either debt or equity financing. Obtaining such working capital is not assured. The Company is currently in a production ramp up mode and placing greater emphasis on manufacturing capability.
In the opinion of Management, the Unaudited Condensed Consolidated Financial Statements include all adjustments that are necessary for the fair presentation of Workhorse’s financial conditions, results of operations and cash flows for the interim periods presented. Such adjustments are of a normal, recurring nature. The results of operations and cash flows for the interim periods presented may not necessarily be indicative of full-year results. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Workhorse contained in its Annual Report on Form 10-K for the year ended December 31, 2019.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Impact of COVID-19 Pandemic
In December 2019, a novel coronavirus disease (“COVID-19”) was reported. On January 30, 2020, the World Health Organization (“WHO”) declared COVID-19 a Public Health Emergency of International Concern. On February 28, 2020, the
8


WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.
As of September 30, 2020, our locations and primary suppliers continue to operate. However, the broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. We may experience constrained supply or other business disruptions that could materially impact our business, results of operations and overall financial performance in future periods. See Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.

2.    INVENTORY, NET

Inventory, net consists of the following:
September 30, 2020December 31, 2019
Raw materials$7,310,381 $3,741,097 
Work in process526,384 422,176 
Finished goods  
7,836,765 4,163,273 
Less inventory reserve(1,871,055)(2,365,127)
  Total inventory, net$5,965,710 $1,798,146 


3.    INVESTMENT IN LMC

The Company has a ten percent ownership interest in Lordstown Motors Corp. (“LMC”) with a value of $13.1 million and $12.2 million as of September 30, 2020 and December 31, 2019, respectively. The investment was obtained pursuant to the transaction with LMC described below.

We have elected the measurement alternative allowed under generally accepted accounting principles (“GAAP”) for our investment in LMC, which did not have a readily determinable fair value as of September 30, 2020. Under the measurement alternative, we measure this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions in an identical or similar investment in LMC. During the nine months ended September 30, 2020, the Company received additional shares as part of its anti-dilution feature with LMC, which were valued at approximately $0.9 million. There were no transactions in identical or similar securities during the three months ended September 30, 2020.
At each reporting period, we evaluate our investment in LMC to determine if there are any events or circumstances that are likely to have a significant adverse effect on the fair value of the investment. Examples of such impairment indicators include, but are not limited to, a significant deterioration in earnings performance, recent financing rounds at reduced valuations, a significant adverse change in the regulatory, economic or technological environment of an investee or a significant doubt about an investee’s ability to continue as a going concern. If we identify an impairment indicator, we will estimate the fair value of the investment and compare it to its carrying value. Our estimation of fair value considers financial information related to the investee available to us, including valuations based on recent third-party equity investments in the investee. If the fair value of the investment is less than its carrying value, the investment is impaired and an impairment loss equal to the difference between the investment’s carrying value and its fair value is recognized under the measurement alternative.
LMC Merger
On August 1, 2020, LMC entered into an Agreement and Plan of Merger (the “Merger Agreement”) with DiamondPeak Holdings Corp., in which LMC agreed to merge with and into a subsidiary of DiamondPeak (the “LMC Merger”). The shareholders of LMC will receive in the aggregate 58% of the issued and outstanding shares of Class A Common Stock of DiamondPeak as of the closing of the LMC Merger. Further, on August 1, 2020, DiamondPeak entered into subscription agreements with certain investors in which DiamondPeak agreed to issue and sell an aggregate of 50.0 million shares of Class A Common Stock for $10.00 per share.
In order to further define the Company’s rights with respect to LMC, the Company and LMC entered into an Agreement on August 1, 2020, which confirmed that the Company will own 9.99% of DiamondPeak following the closing of the LMC Merger
9


and the Royalty Advance was defined as $4.75 million. Further, DiamondPeak has agreed to register the Company’s shares of Class A Common Stock held in DiamondPeak. The Company has agreed, subject to certain exceptions, to not sell any of its shares of Class A Common Stock for a period of six months following the closing of the LMC Merger.
On October 23, 2020, DiamondPeak completed its merger with LMC and on October 26, 2020, the LMC shares of Class A Common Stock began trading on the Nasdaq Global Select market under the ticker symbol “RIDE.” Workhorse obtained approximately 16.5 million shares of Class A Common Stock in connection with the LMC Merger, which were valued at $13.05 per share as of October 30, 2020. The Company no longer has anti-dilution rights or similar protections following the merger.
As a result of the Merger, the Company's investment in LMC will no longer qualifty for the measurement alternative as the fair value will be readily determinable. As such, in future periods, the Company will hold its investment at fair value.

LMC Transaction

On November 7, 2019, the Company entered into a transaction with LMC (the "LMC Transaction") pursuant to which the Company granted LMC a perpetual and worldwide license to certain intellectual property relating to the Company’s W-15 electric pickup truck platform and its related technology (the “Licensed Intellectual Property”) for consideration as described below. LMC will endeavor to, among other things, raise sufficient third-party capital for the acquisition, retrofitting, and restart of the Lordstown Assembly Complex, and the ongoing operating costs, which amounts are expected to be significant (the “Capital Raise”).

Consideration

A ten percent ownership interest in the common stock of LMC in exchange for the Company’s obligations under the License Agreement.
One percent of the aggregate debt and equity commitments funded to LMC upon completion of the Capital Raise (the "Royalty Advance"). Any amount paid to the Company from the Capital Raise is non-refundable. In accordance with the Agreement entered into on August 1, 2020, the Royalty Advance was defined as $4.75 million.
A one percent royalty on the gross sales price of the first 200,000 vehicles sold, but only to the extent that the aggregate amount of such royalty fees exceeds the amount paid as the Royalty Advance.
Upon completion of the Capital Raise, the Company intends to transfer approximately 6,000 existing vehicles orders to LMC. LMC will pay a four percent commission on the gross sales price of any transferred orders fulfilled by LMC.

The consideration includes a fixed and variable component:

The fixed component consists of the ten percent ownership interest in LMC and any amounts received under the Minimum Royalty. The fair value of the LMC ownership interest received was $12.2 million on November 7, 2019.
The variable component consists of the four percent commission and the one percent royalty. Variable consideration will be recognized when each vehicle for which a royalty or commission is owed is sold.

4.    REVENUE
Revenue Recognition
Net sales include products and shipping and handling charges, net of estimates for customer allowances. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. The majority of our contracts have a single performance obligation and are short term in nature.
Revenues related to repair and maintenance services are recognized over time as services are provided. Payment for used vehicles, services, and merchandise are typically received at the point when control transfers to the customer or in accordance with payment terms customary to the business.
Accounts Receivable
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Credit is extended based upon an evaluation of the customer’s financial condition. Accounts receivable are stated at their estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accounts and our historical experience with accounts receivable write-offs. 
As performance obligations are satisfied within one year from a given reporting date, we omit disclosures of the transaction price apportioned to remaining performance obligations on open orders.
Disaggregation of Revenue
Our revenues related to the following types of business were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Automotive$560,327 $ $645,327 $240,000 
Aviation  60,783  
Other4,380 4,258 34,839 133,948 
Total revenues$564,707 $4,258 $740,949 $373,948 

5.    CONVERTIBLE NOTES AND LONG-TERM DEBT
Convertible notes and long-term debt consist of the following:
September 30, 2020December 31, 2019
Convertible Note, at fair value 39,020,000 
Convertible Note II, at fair value121,817,001 
Long-term debt1,411,000  
Less current portion(122,679,279)(19,620,000)
Convertible notes and long-term debt, net of current portion$548,722 $19,400,000 

High Trail Convertible Note II
Background
On July 16, 2020, the Company issued a $70.0 million par value convertible note (the“Convertible Note II” or “Note II”) due July 1, 2023. The Company has elected to account for Note II using the fair value option allowed under GAAP. Interest is payable quarterly beginning October 1, 2020 at a rate of 4.5% per annum. The Convertible Note II is initially convertible at a rate of $19.00 per share, subject to change for anti-dilution adjustments and adjustments for certain corporate events.
The Convertible Note II is a senior secured obligation of the Company secured by substantially all assets of the Company and ranks senior to all unsecured debt of the Company. Any principal repayment of Note II is at 110% of the par value. Beginning October 1, 2020, the holder of the Convertible Note II may require the Company to redeem up to $3.9 million par value. Subject to certain limitations, the Company can pay some or all of the redemption in cash or shares of common stock.
The fair value of the Convertible Note II as of September 30, 2020 was $121.8 million and the contractual principal balance was $70.0 million. In electing the fair value option, the Company recognizes changes in fair value related to changes in credit risk, if any, in other comprehensive income and the remaining change in fair value in interest expense. For the three and nine months ended September 30, 2020, the fair value of the Convertible Note II increased $52.9 million, which is recorded in interest expense.
The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the Convertible Note II at fair value in its entirety versus bifurcation of the embedded derivatives. The significant inputs to the valuation of the Convertible Note at fair value are Level 3 inputs since they are not observable directly. The fair value of Note II as of September 30, 2020 was determined using the subsequent settlement cost of the note. The settlement cost is calculated
11


as the number of shares issued in exchange for the Note II multiplied by the closing price of Workhorse common stock on October 13, 2020, which was $23.63 per share.
Subsequent Activity
On October 14, 2020, the Company exchanged the full $70.0 million outstanding principal amount of the Convertible Note II at a premium for approximately 5.2 million shares of common stock.
High Trail Convertible Note

Current Activity
The fair value of the Convertible Note (the “Convertible Note”) as of September 30, 2020 and December 31, 2019 was zero and $39.0 million, respectively, and the contractual principal balance as of September 30, 2020 and December 31, 2019 was zero and $40.5 million, respectively. In electing the fair value option, the Company recognizes changes in fair value related to changes in credit risk, if any, in other comprehensive income and the remaining change in fair value in interest expense. Fair value adjustments for the nine months ended September 30, 2020 were approximately $74.1 million, which included a $1.1 million adjustment to other comprehensive income attributed to changes in credit risk and a $75.2 million adjustment to interest expense. The change related to credit risk was primarily caused by an increase in credit rating yield for comparable companies during the first quarter of 2020.
During the three months ended September 30, 2020, $18.5 million par value of the Convertible Note was converted to 6.1 million shares of common stock resulting in a loss of $14.9 million, which is recorded in interest expense. During the nine months ended September 30, 2020, the remaining $40.5 million par value of the Convertible Note was converted in full to 14.4 million shares of common stock, resulting in a loss of $35.9 million, which is recorded in interest expense.
Background
On December 9, 2019, the Company issued a $41.0 million par value Convertible Note due November 2022, with a stated interest rate of 4.5% per annum. The Company elected to account for the Convertible Note using the fair value option allowed under GAAP. Interest is payable quarterly beginning February 1, 2020. The Convertible Note is initially convertible at a rate of $3.05 per share subject to change for anti-dilution adjustments for certain corporate events.
Any principal repayment of the Convertible Note is at 112% of the par value. Beginning March 1, 2020, the holder of the Convertible Note may require the Company to redeem up to $1.5 million par value (“Redemption Payment”) of the Convertible Note monthly. Subject to certain limitations, the Company at its discretion can pay some or all of Redemption Payment in cash or shares of common stock.
The Convertible Note is a senior secured obligation of the Company secured by substantially all assets of the Company and ranks senior to all unsecured debt of the Company. The Convertible Note contains certain covenants, including that we maintain a minimum of $8.0 million of liquidity, calculated as unrestricted, unencumbered cash and cash equivalents.
The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the Convertible Note (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives. The significant inputs to the valuation of the Convertible Note at fair value are Level 3 inputs since they are not observable directly. The fair value was determined using a binomial lattice valuation model, which is widely used for valuing convertible notes. The significant assumptions used in the model are the credit spread and volatility of the Company's common stock.
The Convertible Note was originally issued with 15.5 million warrants to purchase common stock of the Company at an initial exercise price of $3.05. The Convertible Note and the warrants were determined to be freestanding instruments and were accounted for separately. The warrants were only exercisable at the option of the Company following the full or partial redemption of the Convertible Note. The percentage of the warrants exercisable upon full or partial redemption of the Convertible Note is equal to a percentage of the original principal amount redeemed at such time. Therefore, as the principal balance of the Convertible Note was fully converted during the period, the number of warrants exercisable as of September 30, 2020 is zero.
Paycheck Protection Program Term Note
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On April 14, 2020, the Company entered into a Paycheck Protection Program Term Note (“PPP Term Note” or the “Note”) with PNC Bank, N.A. (“PNC”) under the Paycheck Protection Program of the recently enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The Company received total proceeds of $1.4 million from the PPP Term Note, which is due on April 13, 2022. In accordance with the requirements of the CARES Act, the Company used the proceeds primarily for payroll costs. Interest accrues on the Note at the rate of 1.0% per annum. The Company may apply to PNC for forgiveness of the amount due on the Note which shall be an amount equal to the sum of payroll costs, mortgage interest, rent obligations and covered utility payments incurred during the eight weeks following disbursement on the Note.
Neither principal nor interest shall be due or payable during the period from April 14, 2020 through the six-month anniversary of the date of the Note. On November 15, 2020, the outstanding principal of the Note that is not forgiven shall convert to an amortizing term loan and shall be due and payable in equal monthly installments until April 13, 2022. Additionally, on November 15, 2020, all accrued interest that is not forgiven shall be due and payable.
The Company has elected to account for the PPP Term Note as debt and will accrue interest over the term of the Note. During the three and nine months ended September 30, 2020, the Company did not make any repayments or apply for forgiveness of any amount due on the Note.
As of October 30, 2020, the Company applied for forgiveness of the full amount due on the Note.

Purchase Warrants

In December 31, 2018, the Company entered into a Credit Agreement (the "Credit Agreement"), with Marathon Asset Management, LP. In conjunction with entering into the Credit Agreement, the Company issued Common Stock Purchase Warrants (“Initial Warrants”) to purchase 8.1 million shares of common stock at an exercise price of $1.25 per share. The Credit Agreement was paid in 2019. Until December 31, 2020, the Company must issue additional Warrants to the Lenders equal to 10%, in the aggregate, of any additional equity issuances on substantially the same terms and conditions of the Initial Warrants, except that (i) the expiration date shall be five years from the issuance date, (ii) the exercise price shall be equal to 110% of the issuance price per share in the relevant issuance, and (iii) the holder shall be entitled to exercise the warrant on a cashless basis at any time.

The Initial Warrants are classified as liability financial instruments and required to be marked-to-market at each balance sheet date with a corresponding charge to interest expense. The Initial Warrants were exercised during the nine months ended September 30, 2020, resulting in the issuance of 8.1 million shares of common stock. The Initial Warrants were marked-to-market at each exercise date, which resulted in a charge to interest expense of $12.2 million for the nine months ended September 30, 2020. As of September 30, 2020 and December 31, 2019, the warrant liability for the Initial Warrants was zero and $16.3 million, respectively. Any additional warrants issued in connection with the Credit Agreement have been classified as equity instruments and are not required to be marked-to-market at each balance sheet date.

6.    MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK
On June 5, 2019, the Company closed agreements for the sale of 1,250,000 units consisting of one share of Series B Preferred Stock (the “Preferred Stock”), with a stated value of $20.00 per share (the “Stated Value”) and a common stock purchase warrant to purchase 7.41 shares of the common stock (the “Warrants”) for an aggregate purchase price of $25.0 million. The Preferred Stock was not convertible and did not hold voting rights.
The Preferred Stock ranked senior to the Company’s common stock with respect to dividend rights and rights upon liquidation, winding-up or dissolution. The Preferred Stock was entitled to annual dividends at a rate equal to 8.0% per annum on the Stated Value. The Warrants have an exercise price of $1.62 per share and expire seven years from the date of issuance. Accrued dividends are payable quarterly in shares of common stock of the Company based on a fixed share price of $1.62. During the three and nine months ended September 30, 2020, the Company issued 0.3 million and 0.9 million shares of common stock to the holders of the Preferred Stock, respectively.
As the Preferred Stock was mandatorily redeemable, it was classified as a liability on the condensed consolidated balance sheets. All dividends payable on the Preferred Stock are classified as interest expense.
The Preferred Stock and Warrants were considered freestanding financial instruments and were accounted for separately. The Warrants were considered equity instruments and not marked-to-market at each reporting period. On the date of issuance, the value of the Warrants was $6.7 million, which was determined using the Black-Scholes valuation model. The fair value of the Warrants was recorded as an increase to additional paid-in capital and a discount of the Preferred Stock. The discount was
13


amortized to interest expense using the effective interest method. Amortization of the discount for the three and nine months ended September 30, 2020 was $0.4 million and $1.1 million, respectively.
On September 28, 2020, the Company redeemed its Series B Preferred Stock in full for cash. Dividends on all shares of Series B Preferred Stock were paid in full as of the redemption date and will cease to accumulate. The Company recognized a loss on redemption of approximately $4.7 million related to the remaining unamortized discount, which is recorded within interest expense.

7.    STOCK-BASED COMPENSATION
The Company maintains, as approved by the board of directors, the 2019 Stock Incentive Plan (the “Plan”) providing for the issuance of stock-based 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 Plan has authorized 8.0 million shares for issuance of stock-based awards. As of September 30, 2020, there were shares available for issuance of future stock awards, which includes approximately 6.6 million shares available under the 2019 and 2017 incentive plans.
Stock-based compensation expense
The following table summarizes stock-based compensation expense:

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Stock options$302,806 $334,711 $730,564 $1,211,629 
Restricted stock435,710  2,037,170  
Total stock-based compensation$738,516 $334,711 $2,767,734 $1,211,629 

Stock options
The following table summarizes option activity for directors, officers, consultants and employees:

Number of OptionsWeighted
Average
Exercise Price
per Option
Weighted
Average Grant
Date Fair Value
 per Option
Weighted
Average
Remaining
Contractual Life
(Years)
Balance, December 31, 20193,725,000 $2.32 
Granted875,075 1.81 0.61 
Exercised(1,458,655)2.44 
Forfeited(118,943)5.82 
Expired(20,000)2.37 
Balance, September 30, 20203,002,477 $2.04 
Number of options exercisable at September 30, 20201,755,345 $2.26 6.7

As of September 30, 2020, unrecognized compensation expense was $0.3 million for unvested options which is expected to be recognized over the next 1.7 years.

Restricted stock
The following table summarizes restricted stock activity:

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Number of Unvested Shares Weighted Average Grant Date Fair Value per Share
Balance, December 31, 20191,768,726 $2.57 
Granted643,220 2.67 
Vested(763,626)2.55 
Forfeited  
Balance, September 30, 20201,648,320 $2.61 

As of September 30, 2020, unrecognized compensation expense was $3.4 million for unvested restricted stock awards which is expected to be recognized over the next 2.0 years.

8.    INCOME TAXES
As the Company has not generated taxable income since inception, the cumulative deferred tax assets remain fully reserved, and no provision or liability for federal or state income taxes has been included in the financial statements.

9.    EARNINGS PER SHARE
Basic earnings per share is computed by dividing net loss available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted earnings per share is calculated using the treasury stock method, on the basis of the weighted average number of shares outstanding plus the dilutive effect, if any, of stock options, unvested restricted stock and warrants. The if converted method is used for determining the impact of the convertible notes.
The following table shows the computation of basic and diluted earnings per share:

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net loss$(84,130,722)$(11,493,587)$(210,705,940)$(37,817,959)
Deemed dividends   86,207 
Net loss attributable to common stockholders$(84,130,722)$(11,493,587)$(210,705,940)$(37,904,166)
Basic weighted average shares outstanding107,406,000 66,176,921 83,611,526 63,566,295 
Dilutive effect of options and warrants    
Dilutive effect of Convertible Note    
Diluted weighted average shares outstanding107,406,000 66,176,921 83,611,526 63,566,295 
Anti-dilutive options and warrants excluded from diluted average shares outstanding5,948,219 32,917,619 5,948,219 32,917,619 

Excluded from the table above are the warrant shares related to the Convertible Note, which represent 6.1 million and 13.3 million warrants calculated using the if converted method for the three and nine months ended September 30, 2020, respectively.

Also excluded from the table above are the shares on the conversion of the Convertible Note, which represent 1.0 million and 4.8 million shares of common stock calculated using the if converted method for the three and nine months ended September 30, 2020, respectively. The Convertible Note is convertible into shares of the Company's common stock.

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10.    RECENT ACCOUNTING DEVELOPMENTS

Accounting Standards Recently Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments, which requires entities to use a new impairment model based on current expected credit losses rather than incurred losses. Estimated credit losses under the ASU consider relevant information about past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets, resulting in recognition of lifetime expected credit losses at initial recognition of the related asset. The Company adopted the ASU as of January 1, 2020. The adoption of this guidance did not have a material impact on the Company's financial condition and operations.
A