The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes that appear elsewhere in
this Annual Report on Form 10-K.
Overview and 2020 Highlights
We are a technology company focused on providing sustainable and cost-effective
solutions to the commercial transportation sector. As an American manufacturer,
we create all-electric delivery trucks and drone systems, including the
technology that optimizes the way these mechanisms operate. We are last-mile
delivery's first purpose-built electric mobility solution and we are currently
focused on our core competency of bringing the C-Series electric delivery trucks
to market and fulfilling our existing backlog of orders.
Workhorse electric delivery trucks are in use by our customers on daily routes
across the United States. Our delivery customers include companies such as Alpha
Baking, FedEx Express, Fluid Market, Inc., Pride Group Enterprises, Pritchard,
Ryder, UPS and W.B. Mason. Data from our in-house developed telematics system
demonstrates our vehicles on the road are averaging approximately a 500%
increase in fuel economy as compared to conventional gasoline-based trucks of
the same size and duty cycle.
In addition to improved fuel economy, we anticipate the performance of our
vehicles will reduce long-term vehicle maintenance expense by approximately 60%
as compared to fossil-fueled trucks. Over a 20-year vehicle life, we estimate
our C-Series delivery trucks will save over $170,000 in fuel and maintenance
savings. We expect fleet operators will be able to achieve a three-year or
better total cost of ownership break-even without government incentives.
Our goal is to continue to increase sales and production, while executing on our
cost-down strategy to a point that will enable us to achieve gross margin
profitability of the last-mile delivery truck platform. As a key strategy, we
have developed the Workhorse C-Series platform, which has been accelerated from
our previous development efforts.
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 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 December 31, 2020, our locations and primary suppliers continue to
operate. However, during the fourth quarter of 2020, the Company experienced an
outbreak of COVID-19 cases amongst our employees. Approximately 40% of our
production employees tested positive for COVID-19. Additionally, several of our
suppliers experienced capacity constraints due to the pandemic, which has
limited their shipment volumes. As a result, we experienced a significant
reduction to our planned production volume in the fourth quarter of 2020.
The Workhorse C-Series electric delivery truck platform is available in 650 and
1,000 cubic feet configurations. This ultra-low floor platform incorporates
state-of-the-art safety features, economy and performance. We expect these
vehicles offer fleet operators the most favorable total cost-of-ownership of any
comparable vehicle available today. We believe we are the first American OEM to
market a U.S. built electric delivery truck, and early indications of fleet
interest are significant.
Our HorseFly Unmanned Aerial System ("UAS") is a custom-designed, purpose-built,
all-electric drone system that is incorporated into our trucks and safely and
efficiently delivers packages. HorseFly is designed with a maximum gross weight
of 30 lbs., a 10 lb. payload and a maximum air speed of 50 mph. Our first
aircraft can deliver a meaningful payload up to 10 miles, automatically lowering
packages safely from 50 feet above the delivery point via our proprietary winch
system. It is designed and built to be rugged and consisting of redundant
systems to further meet the FAA's required rules and regulations. Workhorse was
granted a patent on our UAS, and though initially designed as a complimentary
system delivering packages from our electric trucks, the latest iteration of our
UAS supports package delivery point-to-point, enabling deliveries to and from
almost anywhere, allowing it to serve a broader customer base. As part of the
divestiture of SureFly, the Company formed a 50/50 joint venture to which we
contributed our HorseFly technology.
SureFly
On November 27, 2019, the Company completed the sale of SureFly for
$4.0 million.
                                       25
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Hackney


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 $1.0 million in cash and shares of its common stock having a value of
$6.6 million into an escrow account. The number of shares held in escrow is
subject to adjustment if the value of the shares is less than $5.28 million or
greater than $7.92 million on certain dates.
The purchase price for the acquired assets was $7.0 million, $1.0 million of
which was released from the escrow account in January 2020 upon satisfaction of
certain conditions, and the remaining $6.0 million (the "Second Payment") is
payable in cash within 45 days if additional conditions are met. The Company is
required to make additional payments to Hackney in the event the Second Payment
is not made within 45 days of when the payment is due. In the event the Second
Payment is not made within 105 days of when the payment is due, Hackney may
require that the Escrow Agent release the shares held in escrow with a value
(based on the then-current market price of the shares) equal to $6.0 million in
satisfaction of the Second Payment.

Investment in LMC



On November 7, 2019, the Company entered into a transaction with LMC pursuant to
which the Company agreed to grant 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 in exchange for royalties, equity
interests in LMC, and other consideration. The fair value of the LMC ownership
interest received was approximately $12.2 million as of December 31, 2019.
On August 1, 2020, LMC entered into an Agreement and Plan of Merger with
DiamondPeak Holdings Corporation in which LMC agreed to merge with and into a
subsidiary of DiamondPeak (the "LMC Merger"). In connection with the LMC Merger,
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
merger. The Agreement also defined the Royalty Advance as approximately $4.8
million, which is recorded in Other Income in the Consolidated Statements of
Operations for the year ended December 31, 2020.
On October 23, 2020, DiamondPeak announced the completion of 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."
The Company obtained approximately 16.5 million shares of Class A Common Stock
in connection with the LMC Merger, which were valued at $20.06 per share as of
December 31, 2020. The change in fair value of the investment is recorded in
Other Income on the Consolidated Statements of Operations for the year ended
December 31, 2020. The Company will record an adjustment to the fair value of
its investment in LMC each quarter based on the closing price per share as of
the last day of each quarter.
                                       26
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Results of Operations
Our Consolidated Statements of Operations financial information is as follows:
                                                              Years Ended
                                                             December 31,
                                                        2020              2019
Net sales                                          $  1,392,519      $     376,562

Cost of sales                                        13,067,108          5,844,891

Gross loss                                          (11,674,589)        (5,468,329)

Operating expenses
Selling, general and administrative                  20,157,658         10,199,534
Research and development                              9,148,931          8,199,074
Total operating expenses                             29,306,589         18,398,608

Other income                                        323,111,944         15,849,800

Income (loss) from operations                       282,130,766         (8,017,137)

Interest expense, net                               190,520,337         29,145,690

Income (loss) before provision for income taxes      91,610,429        (37,162,827)
Provision for income taxes                           21,833,930                  -

Net income (loss)                                  $ 69,776,499      $ (37,162,827)



Revenue
Net sales for the years ended December 31, 2020 and 2019 were $1.4 million and
$0.4 million, respectively. The increase in net sales was primarily due to an
increase in volume related to our initial production of the C-Series electric
delivery truck.
Cost of Sales
Cost of sales for the years ended December 31, 2020 and 2019 were $13.1 million
and $5.8 million, respectively. The cost of sales increase was primarily due to
an increase in volume of trucks as we started production of our C-Series
platform in 2020. Included in cost of sales is warranty expense for the years
ended December 31, 2020 and 2019 of $2.1 million and $0.1 million, respectively.
The warranty expense in 2020 primarily relates to a change in estimate in the
amount of labor required to maintain our current warranty program with our 2016
and 2017 E-Series trucks. The expense includes estimated costs for labor and
transportation and excludes any contribution from vendors.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the year ended
December 31, 2020 were $20.2 million, an increase from $10.2 million for the
year ended December 31, 2019. The increase was primarily due to higher
compensation-related costs of approximately $5.0 million, higher consulting
costs of approximately $3.5 million and $1.0 million of selling expense in 2020
related to the Hackney transaction.
Research and Development Expenses
Research and development ("R&D") expenses for the year ended December 31, 2020
were $9.1 million, an increase from $8.2 million for the year ended December 31,
2019. The increase in R&D expenses is primarily due to the finalization of the
design of the C-Series and the Horsefly delivery drone system.
                                       27
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Other Income
Other income for the years ended December 31, 2020 and 2019 was $323.1 million
and $15.8 million, respectively. The increase was primarily due to an increase
in the fair value of our Investment in LMC of approximately $317.5 million and
receipt of the Royalty Advance of approximately $4.8 million.
Interest Expense, Net
Interest expense, net is comprised of the following:
                                                                                Years Ended
                                                                                December 31,
                                                                         2020                  2019

Change in fair value of convertible notes and loss on conversion to common stock

$ 160,749,118          $    981,728
Change in fair value of warrant liability                             12,176,690            15,369,253
Amortization of discount and debt issuance costs                       7,696,671             1,922,164
Contractual interest expense                                           4,832,128             4,673,979

Loss on extinguishment of mandatorily redeemable Series B preferred stock

                                                        4,710,634                     -
Other                                                                    355,096               119,566
Loss on extinguishment of debt                                                 -             6,079,000
Total interest expense, net                                        $ 

190,520,337 $ 29,145,690

The increase of interest expense was driven primarily by a $159.8 million increase in the fair value of our convertible notes, offset by a $3.2 million decrease due to changes in the fair value of warrants. Provision for Income Tax



For the years ended December 31, 2020 and 2019, the Company had taxable losses
primarily due to operations and stock compensation related deductions and thus
has no current tax expense recorded. The Company recorded a full valuation
allowance on its deferred tax assets for the year ended December 31, 2019. As of
December 31, 2020, the Company released a portion of the valuation allowance
with the exception of certain tax credits and net operating losses determined to
be unrealizable. The Company recorded deferred tax liabilities, with a
corresponding deferred provision for federal and state income taxes.
Liquidity and Capital Resources
Cash Requirements
From inception, we have financed our operations primarily through sales of
equity securities and issuance of debt. We have utilized this capital for
research and development and to fund designing, building and delivering vehicles
to customers and for working capital purposes.
As of December 31, 2020, we had approximately $46.8 million in cash and cash
equivalents, compared to approximately $23.9 million as of December 31, 2019, an
increase of $22.9 million. The increase in cash and cash equivalents was
primarily attributable to the issuance of convertible notes during the year,
offset by cash used in operations as the Company ramped up its production of its
C Series.
Additionally, as of December 31, 2020 and 2019, the Company had restricted cash
of $194.4 million and $1.0 million, respectively. The increase was due to the
net proceeds from the convertible notes issued in October 2020 and held in
escrow as of December 31, 2020. The net proceeds were released from escrow in
January 2021.
Assuming we are able to monetize our position in LMC, we believe our existing
capital resources will be sufficient to support our current and projected
funding requirements for several years after which time additional funding will
be required. However, if the opportunity arises, we may elect to raise
additional financing in 2021.
                                       28
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With the exception of contingent and royalty payments that we may receive under
our existing collaborations, we do not currently have any committed future
funding. To the extent we raise additional capital by issuing equity securities,
our stockholders could at that time experience substantial dilution. Any debt
financing that we can obtain may involve operating covenants that restrict our
business.
Our future funding requirements will depend upon many factors, including, but
not limited to:
•our ability to acquire or license other technologies that we may seek to
pursue;
•our ability to manage our growth;
•competing technological and market developments;
•the costs and timing of obtaining, enforcing and defending our patent and other
intellectual property rights; and
•expenses associated with any unforeseen litigation.
For the years ended December 31, 2020 and 2019, we maintained an investment in a
bank money market fund. Cash in excess of immediate requirements is invested
with regard to liquidity and capital preservation. Wherever possible, we seek to
minimize the potential effects of concentration and degrees of risk. We will
continue to monitor the impact of the changes in the conditions of the credit
and financial markets to our investment portfolio and assess if future changes
in our investment strategy are necessary.
Summary of Cash Flows
                                                                           

For the Years Ended December 31,


                                                                             2020                        2019
Net cash used in operating activities                              $     (70,278,949)              $ (36,871,677)
Net cash (used in) provided by investing activities                       (5,728,130)                  1,654,502
Net cash provided by financing activities                                292,367,730                  58,572,841



Cash Flows from Operating Activities
Our cash flows from operating activities are affected by our cash investments to
support the business in research and development, manufacturing, selling,
general and administration. Our operating cash flows are also affected by our
working capital needs to support fluctuations in inventory, personnel expenses,
accounts payable and other current assets and liabilities.
During the years ended December 31, 2020 and 2019, cash used in operating
activities was $70.3 million and $36.9 million, respectively. The increase in
net cash used in operations in 2020 as compared to 2019 was primarily
attributable to spend related to our ramp-up of the C-Series, including contract
labor, employee-related costs, and inventory build.
Cash Flows from Investing Activities
During the years ended December 31, 2020 and 2019, cash (used in) provided by
investing activities was $(5.7) million and $1.7 million, respectively. Capital
expenditures for the Company increased by $3.7 million during the year, which
was offset by net proceeds of approximately $3.7 million received in 2019 from
the divestiture of SureFly.
Cash Flows from Financing Activities
During the years ended December 31, 2020 and 2019, net cash provided by
financing activities was $292.4 million and $58.6 million, respectively.
The significant financing activities that occurred in 2020 and 2019 include:
2020
•Issuance of convertible notes with net proceeds of approximately $262.4
million.
•Exercise of stock options and warrants with net proceeds of approximately $53.6
million.
•$1.4 million of net proceeds from the Paycheck Protection Plan Term Note.
                                       29
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•$25.0 million for the redemption of the mandatorily redeemable Series B
Preferred Stock.
2019
•Issuance of Convertible Note with net proceeds of $39.0 million.
•Issuance of Series B Preferred Stock with net proceeds of $25.0 million.
•Sale of common stock with net proceeds of $5.9 million.
•$5.8 million drawn on the Marathon Tranche Two loan, paid off at the end of
2019.
•$10.0 million for the redemption of the Marathon Tranche One loan.

The Company may seek to raise additional capital through public or private debt
or equity financings in order to fund its operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors.
Critical Accounting Policies and Estimates
The following accounting principles and practices of the Company are set forth
to facilitate the understanding of data presented in the consolidated financial
statements:
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Warranty liability
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. As of December 31, 2020 and 2019 the warranty liability was $5.4
million and $6.0 million, respectively.
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 the warranty plans.
Historically, the cost of fulfilling the Company's warranty obligations has
principally involved replacement parts, labor and sometimes 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. Also, each quarter,
the Company reviews actual warranty claims experience to determine if there are
systemic defects that would require a field campaign.
Although we believe that 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.
Warrant liability
We account for certain outstanding common stock warrants as liabilities recorded
at fair value which are marked-to-market at the end of each reporting period. As
of December 31, 2020, there were no outstanding common stock warrants that were
required to be marked-to-market. As of December 31, 2019 the warrant liability
was $16.3 million. The warrant liability is remeasured at each balance sheet
date until the warrants are exercised, expire or there is a change in their
terms that changes their classification to an equity instrument. Any change in
fair value is recognized as an adjustment to current period interest expense.
The fair value of the warrants is measured using a Black-Scholes valuation model
which includes various inputs, including the market price of our common stock on
the balance sheet date and estimated volatility of our common stock. If factors
change and different assumptions are used, the warrant liability and the change
in estimated fair value could be
                                       30

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materially different. Generally, as the market price of our common stock
increases, the fair value of the warrant increases, and conversely, as the
market price of our common stock decreases, the fair value of the warrant
decreases. Also, a significant increase in the volatility of the market price of
the Company's common stock, in isolation, would result in a significantly higher
fair value measurement; and a significant decrease in volatility would result in
a significantly lower fair value measurement. Changes in the fair value of the
warrants are reflected in the Consolidated Statements of Operations as Interest
Expense.
Fair Value Option for Convertible Notes
As permitted under ASC 825, Financial Instruments, ("ASC 825"), the Company has
elected the fair value option to account for its convertible notes. As of
December 31, 2020 and December 31, 2019, the fair value of the convertible notes
was $197.7 million and $39.0 million, respectively. In accordance with ASC 825,
the Company records changes in fair value of the convertible notes in Interest
Expense in the Consolidated Statement of Operations. The primary reason for
electing the fair value option is for simplification and cost-benefit
considerations of accounting for the convertible notes (the hybrid financial
instrument) at fair value in its entirety versus bifurcation of the embedded
derivatives. The fair value is 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 the volatility of the
Company's common stock. If different assumptions are used, the fair value of the
convertible notes and the change in estimated fair value could be materially
different. Generally, as the credit spread increases, the fair value decreases,
and conversely, as the credit spread decreases, the fair value of the
convertible notes increases. Also, a significant increase in the volatility of
the market price of the Company's common stock, in isolation, would result in a
significantly higher fair value; and a significant decrease in volatility would
result in a significantly lower fair value.
Income taxes
The Company incurred net operating losses for the years ended December 31, 2020
and 2019 and, therefore, no current provision for federal or state income taxes
has been recorded in the Consolidated Financial Statements. As of December 31,
2020, the Company recorded deferred tax liabilities of approximately $21.8
million, with a corresponding deferred provision for federal and state income
taxes.

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