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 acrossthe United States . Our delivery customers include companies such as Alpha Baking,FedEx Express ,Fluid Market, Inc. ,Pride Group Enterprises , Pritchard, Ryder,UPS andW.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. InDecember 2019 , a novel coronavirus disease ("COVID-19") was reported. OnJanuary 30, 2020 , theWorld Health Organization ("WHO") declared COVID-19 a Public Health Emergency of International Concern. OnFebruary 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 onMarch 11, 2020 , the WHO characterized COVID-19 as a pandemic. As ofDecember 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 aU.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 theFAA '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 OnNovember 27, 2019 , the Company completed the sale of SureFly for$4.0 million . 25 --------------------------------------------------------------------------------
Hackney
OnOctober 31, 2019 , the Company and STEngineering 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 inJanuary 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
OnNovember 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 ofDecember 31, 2019 . OnAugust 1, 2020 , LMC entered into an Agreement and Plan of Merger withDiamondPeak Holdings Corporation in which LMC agreed to merge with and into a subsidiary ofDiamondPeak (the "LMC Merger"). In connection with the LMC Merger, the Company and LMC entered into an Agreement onAugust 1, 2020 , which confirmed that the Company will own 9.99% ofDiamondPeak 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 endedDecember 31, 2020 . OnOctober 23, 2020 ,DiamondPeak announced the completion of its merger with LMC and onOctober 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$20.06 per share as ofDecember 31, 2020 . The change in fair value of the investment is recorded in Other Income on the Consolidated Statements of Operations for the year endedDecember 31, 2020 . The Company will record an adjustment to the fair value of its investment in LMC each quarter based on the closing price per share as of the last day of each quarter. 26 -------------------------------------------------------------------------------- Results of Operations Our Consolidated Statements of Operations financial information is as follows: Years Ended December 31, 2020 2019 Net sales$ 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2020 were$20.2 million , an increase from$10.2 million for the year endedDecember 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 endedDecember 31, 2020 were$9.1 million , an increase from$8.2 million for the year endedDecember 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 -------------------------------------------------------------------------------- Other Income Other income for the years endedDecember 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
The increase of interest expense was driven primarily by a
For the years endedDecember 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 endedDecember 31, 2019 . As ofDecember 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 ofDecember 31, 2020 , we had approximately$46.8 million in cash and cash equivalents, compared to approximately$23.9 million as ofDecember 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 ofDecember 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 inOctober 2020 and held in escrow as ofDecember 31, 2020 . The net proceeds were released from escrow inJanuary 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 -------------------------------------------------------------------------------- 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 endedDecember 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
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 endedDecember 31, 2020 and 2019, cash used in operating activities was$70.3 million and$36.9 million , respectively. The increase in net cash used in operations in 2020 as compared to 2019 was primarily attributable to spend related to our ramp-up of the C-Series, including contract labor, employee-related costs, and inventory build. Cash Flows from Investing Activities During the years endedDecember 31, 2020 and 2019, cash (used in) provided by investing activities was$(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 endedDecember 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 -------------------------------------------------------------------------------- •$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 inthe 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 ofDecember 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 ofDecember 31, 2020 , there were no outstanding common stock warrants that were required to be marked-to-market. As ofDecember 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 ofDecember 31, 2020 andDecember 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 endedDecember 31, 2020 and 2019 and, therefore, no current provision for federal or state income taxes has been recorded in the Consolidated Financial Statements. As ofDecember 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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