Overview
We are an American 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.
Recent Developments
Investment in Tropos Technologies, Inc.
The Company has a minority ownership in Tropos Technologies, Inc. ("Tropos")
with a value of $10.0 million as of September 30, 2022. The investment was
obtained pursuant to the transaction with Tropos as described below.
On August 8, 2022, the Company entered into a three-year Assembly Services
Agreement (the "Assembly Agreement") with Tropos. Under the Assembly Agreement,
the Company will provide services at its Union City, Indiana manufacturing
facility required to assemble a minimum annual quantity of 2,000 vehicles in
2023, 2,000 vehicles in 2024, and 250 vehicles in 2025 for a total of 4,250
vehicles during the term of the agreement. In exchange for the assembly
services, the Company will receive a service fee from Tropos.
On August 23, 2022, the Company entered into a Preferred Stock Purchase
Agreement (the "Stock Purchase Agreement") with Tropos. Under the Stock Purchase
Agreement, the Company received 605,811 shares of Series B Preferred Stock in
Tropos with an option to purchase an additional 424,068 shares of Series B
Preferred Stock in exchange for a cash payment of $5.0 million, and a
$5.0 million contribution of non-cash consideration representing a deposit from
Tropos for future assembly services. See Note 5, Revenue, of the Condensed
Consolidated Financial Statements for treatment of the $5.0 million of non-cash
consideration received as of September 30, 2022.
The Company utilized the measurement alternative allowed under GAAP to record
the investment of the Series B Preferred Stock at cost, less any impairment, as
of September 30, 2022. As of September 30, 2022, the Company recorded the
investment at a cost of $10.0 million with no impairment.
Asset Purchase Agreement with ESG Logistics Corp.
During July 2022, we entered into an Asset Purchase Agreement (the "Asset
Purchase Agreement") with ESG Logistics Corp. ("ESG"), a provider of package
pickup and delivery services. ESG was party to an agreement with FedEx Package
System, Inc. ("FXG") under which ESG provided services to FXG on an exclusive
basis in its business segments known as FedEx delivery throughout a geographic
territory consisting of certain ZIP codes located in the Cincinnati, Ohio
metropolitan area. Under the Asset Purchase Agreement, we purchased
substantially all of the assets relating to ESG's business, including ESG's
rights and interests under the FXG agreement, motor vehicles, intellectual
property, and other miscellaneous equipment for a purchase price of $0.6
million.
Stables & Stalls
During the third quarter, we began operating the FedEx delivery route under the
FXG agreement using the historical motor vehicles and equipment acquired through
the Asset Purchase Agreement. This effort, known as Stables & Stalls, is
designed to have the Company experience, firsthand, the challenges facing
independent operators executing last mile delivery and to develop the
appropriate business model as the contractors' transition to electric vehicle
fleets. As part of this effort, Workhorse is outfitting a fully functional
services site, the 'Stable', and charging infrastructure, the 'Stalls', designed
to support small fleet operators as they make the transition to EV's. We intend
to transition the fleet of motor vehicles operating the FedEx delivery route to
electric vehicles by the second quarter of 2023.
GreenPower Motor Company Inc. Supply Agreement
In February 2022, we entered into a three-year vehicle purchase and supply
agreement (the "Supply Agreement") with GreenPower Motor Company Inc.
("GreenPower") to facilitate the manufacturing and delivery of medium-duty Class
4 step vans into the North American market. Under the Supply Agreement, we will
purchase 1,500 base vehicles from GreenPower,
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and complete the manufacturing process on the base vehicles. We will market two
versions of the vehicle, a cab chassis version known as the W4 CC and a complete
vehicle with a step van body, known as the W750, to customers in the United
States and Canada. The W4 CC will have a payload capacity of 5,000 pounds and
the W750 is expected to have a payload capacity of 5,000 pounds. Both the W4 CC
and the W750 will feature up to 150 miles of all-electric range. Delivery of
base vehicles under the Supply Agreement and production of the W4 CC began in
the third quarter of 2022.
Securities Exchange Agreement
In April 2022, we entered into a securities exchange agreement to exchange the
remaining $27.5 million in aggregate principal of our convertible notes for
approximately 7.8 million shares of our common stock. The number of shares
issued was calculated by dividing $29.4 million, which represents 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. We recognized a loss of $1.8 million in
the first quarter of 2022, which includes 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 nine months ended September 30, 2022.
Subsequent to the exchange, we have no convertible notes outstanding, and the
indenture and related security agreement under which the 2024 Notes were issued
have been terminated.
Securities Litigation Settlement
On October 27, 2022, the Company entered into a binding settlement term sheet to
resolve the Securities Class Action litigation as well as the related
Shareholder Derivative Litigation. Under the terms of the settlement and in
resolution of all claims, Workhorse will pay $15 million in cash, which will be
funded fully by proceeds of available insurance, and $20 million payable in
Workhorse stock. The settlement will be subject to final documentation, public
notice and approval by the Court. The Company recorded a $15 million insurance
receivable in Other receivable and a $35 million legal reserve in Accrued
liabilities and other in the Condensed Consolidated Balance Sheet at September
30, 2022. The Company also recognized a $20 million expense which was recognized
in Selling, general and administrative of the Condensed Consolidated Statements
of Operations for the three and nine months ended September 30, 2022.
Shareholder Derivative Litigation Settlement
As more fully described above, the Company and the individual defendants entered
into a binding term sheet to resolve the
Shareholder Derivative Litigation as well as the related Securities Class
Action. The settlement will be subject to final documentation, public notice and
court approval by the State District Court of Nevada.
Recent Trends and Market Conditions
COVID-19. The impact of COVID-19, including pandemic fears and market downturns,
and restrictions on business and individual activities, has created significant
volatility in the global economy. Recent COVID-19 outbreaks in certain regions
have continued to cause intermittent disruptions to our supply chain and,
although we have been relatively successful in navigating the impact of the
COVID-19 pandemic, we have previously been affected by temporary manufacturing
closures. As of September 30, 2022, our locations and most of our primary
suppliers are in operation and we continue to work through supplier constraints
as a result of the COVID-19 pandemic, as well as other supply chain
difficulties.
Commodities. Prices for commodities remain volatile, and we expect to experience
price increases for base metals and raw materials that are used in batteries for
electric vehicles (e.g., lithium, cobalt, and nickel) as well as steel, aluminum
and other material inputs. Global demand and differences in output across
sectors as a result of the COVID-19 pandemic have generated divergence in price
movements across different commodities. We expect the net impact on us overall
will be higher material costs. To help ensure supply of raw materials for
critical components (such as batteries), we have engaged in multi-year sourcing
agreements.
Inflation. Inflation has significantly risen during the nine months of 2022,
resulting from both supply and demand imbalances as economies continue to
recover from the COVID-19 pandemic as well as the impact on the availability and
cost of energy and other commodities resulting from Russia's invasion of Ukraine
in February 2022, which is ongoing. We are seeing a near-term impact on our
business due to inflationary pressure. In an effort to dampen inflationary
pressures, central banks have started to raise interest rates which will likely
raise the cost of any financing the Company may undertake in the future.
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The Inflation Reduction Act of 2022 (the "Act") was signed into law and enacted
on August 16, 2022. The Act modifies, expands and enhances incentives, tax
provisions and credits to support the investment and use of clean-energy
vehicles. The Act also provides incentives and tax credits for electric vehicle
manufacturers to invest in domestic manufacturing supply chain production. The
new tax credits for commercial EV purchases and investments in clean energy
production, supply chains and manufacturing facilities are included in the Act
effective beginning in 2023. We are evaluating the potential impact of the Act
on our financial results.
The following section provides a narrative discussion about our financial
condition and results of operations. The comments should be read in conjunction
with our Condensed Consolidated Financial Statements and related Notes thereto
included in Item 1 of this Form 10-Q and in conjunction with our Annual Report
on Form 10-K filed with the Securities and Exchange Commission on March 1, 2022.
Results of Operations
The following table sets forth, for the periods indicated, the components of the
Company's Condensed Consolidated Statements of Operations:
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