UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number: 000-53704
WORKHORSE GROUP INC.
(Name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
100 Commerce Drive
Loveland, Ohio 45140
(Address of principal executive offices)
26-1394771
(I.R.S. Employer
Identification No.)
513-360-4704
(Registrant’s telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
Title of each Class:
Common Stock, $0.001 par value per share
Name of Each Exchange
The NASDAQ Stock Market LLC
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
None.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
☒
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2016, the last business day of the Registrant’s most recently completed second fiscal quarter, the market value of our
common stock held by non-affiliates was $111,346,964.
The number of shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of March 14, 2017, was 35,956,697.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Signatures
1
10
22
23
23
23
24
26
27
31
F-1
32
32
32
33
39
46
48
48
49
52
Forward-Looking Statements
The discussions in this Annual 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 and our ability to raise capital under
acceptable terms. 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-K that refer to the “Company”, “WORKHORSE GROUP”, “Workhorse”, “we,” “us” or “our” are to
WORKHORSE GROUP INC. and unless otherwise differentiated, its wholly-owned subsidiaries, Workhorse Technologies Inc.,
Workhorse Motor Works Inc and Workhorse Properties Inc.
ITEM 1. BUSINESS
Overview
PART I
We are 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 battery-electric 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. Although we operate as a single unit
through our subsidiaries, we approach our development through two divisions, Automotive and Aviation.
Automotive
Medium-Duty Delivery Vehicles
Medium-duty electric delivery vans are currently in production and are in use by our customers on U.S. roads. Our delivery customers
include companies such as UPS, FedEx Express and Alpha Baking. 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 are anticipating that the performance of our vehicles on-route will reduce long-term vehicle
maintenance expense by approximately 50% as compared to fossil-fueled trucks.
We estimate that our E-GEN Range-Extended Electric delivery vans will save over $150,000 in fuel and maintenance savings over the 20-
year life of the vehicle. Due to the positive return-on-investment we are able to command a premium price for our vehicles from major fleet
buyers. Fleet buyers are able to achieve a four-year or better return-on-investment (without government incentives), which justifies the
higher acquisition cost of our vehicles.
We believe that we are the only medium-duty battery-electric OEM in the U.S. Our goal is to continue to increase sales and production to a
point that will allow us to achieve gross margin profitability of the delivery van platform.
Our battery-electric delivery vans provide customers with additional benefits, including:
● Low Total Cost-of-Ownership
● Gaining a competitive edge to increase market share
● Improving profitability created by
Lower maintenance costs
o
o Reduced fuel expenses
● Increasing the number of deliveries per day through more efficient delivery methods
● Strengthening sustainability programs
● Improving safety and driver experience
In March of 2013, we purchased the former Workhorse Custom Chassis assembly plant in Union City, Indiana from Navistar International
(NAV: NYSE). With this acquisition, we acquired the capability to be an Original Equipment Manufacturer (OEM) of Class 3-6
commercial-grade, medium-duty truck chassis, to be marketed under the Workhorse® brand.
1
The Workhorse Custom Chassis acquisition includes other important assets including the Workhorse brand and logo, intellectual property,
schematics, logistical support from Up-Time Parts (a Navistar subsidiary) and access to a network of 400-plus sales and service outlets
across North America. We believe the combination of our assembly capability, coupled with our battery-electric product development
expertise gives Workhorse a unique opportunity to manufacture at scale in the U.S.
W-15 Pickup Truck
The success of our value selling equation to fleet buyers of medium-duty vehicles encouraged us to bring this same philosophy to the much
higher volume segment of light-duty trucks. Our first product offering in the light-duty truck environment is our W-15 Range-Extended
Electric Pickup Truck, which is presently under development.
To date, we have received letters of intent for 2,150 W-15 pickup trucks from fleets. We plan on unveiling a working concept version of the
W-15 at the Advanced Clean Transportation conference in Long Beach, CA on May 1, 2017.
To capture further efficiencies and economies-of-scale we are designing our light-duty vehicles to take advantage of our existing supply
chain repurposing the use of the critical components such as Panasonic Li-ion cells, the BMW engines as our range extender, our in-house
developed vehicle control system software and our Metron Telematics performance monitoring system. In addition, we are also using
composite carbon fiber body panels on the W-15 which dramatically reduce our tooling costs, reduce vehicle weight and are completely
rustproof.
To realize further efficiencies, we intend to assemble the W-15 at our existing 250,000 square foot facility in Union City, Indiana. This
plant has the capability to produce 60,000 vehicles per year. The battery packs will be built in our Loveland, Ohio battery pack plant which
also serves as our corporate headquarters.
Post Office Replenishment Program
Workhorse, with our partner VT Hackney, is one of five awardees that the United States Postal Service selected to build prototype vehicles
for USPS Next Generation Delivery Vehicle project. The Post Office has stated that the number of vehicles to be replaced in the project is
approximately 180,000. We are on track to deliver our prototypes to the USPS by the September 2017 deadline. The Post Office has stated
that they intend to test the prototypes for six months and select a winning bid(s) following the testing process. We have designed our Post
Office truck such that it can be built on the same line as the W-15 in Union City, Indiana.
Aviation
Delivery Drones
Our HorseFly Delivery Drone is a custom designed, purpose-built drone that is fully integrated in our electric trucks. We have a patent
pending on this architecture and we believe we are the only company in the world with a working drone/truck system. The HorseFly
delivery drone and truck system is designed to work within the FAA Rule 107 that permits the use of commercial drones in U.S. airspace
under certain conditions.
UPS conducted a successful real world test with us in February 2017 and it received worldwide news coverage. The knowledge we have
gained in building electric delivery trucks for last-mile delivery has led us to believe that a drone/truck delivery system can have significant
cost savings in the parcel delivery ecosphere.
As stated in UPS’s press release issued on February 21, 2017, a reduction of just one mile per driver per day over one year can save UPS up
to $50 million. Rural delivery routes are the most expensive to serve due to the time and vehicle expenses required to complete each
delivery. In this test, the drone made one delivery while the driver continued down the road to make another. This is a possible role UPS
envisions for drones in the future.
2
Manned Multicopter
We are leveraging our knowledge of high-voltage battery packs, electric motor controls and range extending generators to design a multi-
copter that can carry a pilot and passenger. Several companies are now developing similar aircraft; however, we believe that our range-
extended truck experience combined with our technical aviation development experience will give us competitive advantages and speed-to-
market with such an aircraft.
Technology
Batteries Are Key
The battery pack is key to the design, development, and manufacture of advanced electric-vehicle power trains. Where some other EV
manufacturers purchase their batteries in a plug-and-play pack, we build our own battery packs. This keeps the intellectual property related
to the design and production of the pack in-house and avoids the issues that occur when a battery supplier fails. And it also enables us to
pay less for our batteries and pack than do our competitors thus our all-electric truck is less expensive than competitive vehicles. We use
the Panasonic or LG Chem 18650 cells and design the pack around these commodity cells.
In-House Software Development is Essential
Our power trains encompass the complete motor assemblies, computers, and software required for vehicle electrification. We use off-the-
shelf, proven components and combine them with our proprietary software.
Innovation is the Future
Additionally, we have developed a cloud-based, remote management system to manage and track the performance of all of the vehicles that
we deploy in order to provide a 21st Century solution for fleet managers.
3
The telematics system and associated hardware installed the Workhorse vehicles is designed to monitor the CAN network traffic for
specific signals. These signals are uploaded along with GPS data to a Workhorse server facility where the data signals are tracked at ten
(10) second intervals while driving and during the E-GEN electricity generating process and at sixty (60) seconds during a plug-in charge.
The real-time data is stored in a database as it arrives and delivers updates to clients connected through the web interface.
4
Clients are given login credentials (username and password) to the telematics website where they can monitor the performance and
location of the vehicles. Group privileges can be configured to limit access to client-specific vehicles securing the vehicle data so clients
can only view their vehicle data. Administrator privileges allow all data for all clients to be monitored and viewed.
As a parameter-based system, we can set route-specific parameters to better manage the battery-provided power with the additional power
generated through the E-GEN process (not applicable to E-100). In an upcoming release, we will add the ability to integrate Metron
Telematics with the client’s internal telematics system and automatically update the parameters each day with information about the route.
This enhancement will result in a “SMART-GEN” vehicle that will maximize efficiency by automating the process to determine the ideal
times and locations to use the E-GEN to add electricity to the batteries.
Locations and Facilities
Our company headquarters and R & D facility is located at 100 Commerce Drive, Loveland, Ohio, a Cincinnati suburb. We occupy a
45,500 sq. ft. facility that allows for the manufacture of 1,000 electric power train kits per year. Power trains will be delivered to the
Workhorse facility in Indiana or shipped to our dealer network for onsite installation in conversion vehicles. On October 28, 2016 the
Company purchased its operating facilities in Loveland, Ohio. The total purchase price was $2.5 million with $1.7 million financed with a
financial institution. The note carries an interest rate of 6.5% accruing monthly with a maturity date of January 1, 2027.
Workhorse Group Inc. Location
Our truck assembly facility is located in Union City, Indiana. This facility consists of three buildings with 270,000 square feet of
manufacturing and office space on 46 acres.
Workhorse Facility
In March of 2013, we purchased the former Workhorse Custom Chassis assembly plant in Union City, Indiana. With this acquisition, we
became an Original Equipment Manufacturer (OEM) of Class 3-6 commercial-grade, medium-duty truck chassis to be marketed under the
Workhorse® brand.
5
Ownership and operation of this plant enables us to build new chassis with gross vehicle weight capacity of between 10,000 and 26,000
pounds and to offer them in four different fuel variants—electric, gas, propane, and CNG. We plan to offer well- known Workhorse chassis
as well as a new, 88” track W88 truck chassis that will be offered to fleet purchasing managers at price points that are both attractive and
cost competitive.
At the same time, the Company intends to partner with engine suppliers and body fabricators to offer fleet-specific, custom, purpose-built
chassis that provide total cost of ownership solutions that are superior to the competition.
In addition to building our own chassis, we design and produce battery-electric power trains that can be installed in new Workhorse chassis
or installed as repower packages to convert used Class 3-6 medium-duty vehicles from diesel or gasoline power to electric power. Our
approach is to provide battery-electric power trains utilizes proven, automotive-grade, mass-produced parts in its architecture coupled with
in-house control software that it has developed over the last five years.
The Workhorse Custom Chassis acquisition includes other important assets including the Workhorse brand and logo, intellectual property,
schematics, logistical support from UpTime Parts (a Navistar subsidiary) and, perhaps most importantly, a network of 400 plus sales and
service outlets across North America. We believe the combination of Workhorse’s chassis assembly capability, coupled with its ability to
offer an array of fuel choices, gives Workhorse a unique opportunity in the marketplace.
Marketing
Our sales team is focused on a targeted list of high profile, former purchasers, and current buyers of the Workhorse chassis with the goal of
securing purchase orders from these companies. These purchase orders will give us the first look at next year’s chassis demand related to
electric and extended range electric vehicles.
Our priority is to establish the commercial step van as our core business. We intend to be the best choice for a vehicle in this segment
regardless of the fuel type that the customer chooses. Our sales plan is to meet with the top potential customers and obtain purchase orders
for new electric and extended range electric vehicles for their production vehicle requirements.
Finally, since our competitive advantage in the marketplace is our ability to provide purpose-built solutions to customers that have unique
requirements at relatively low-volume, we have submitted proposals to companies for purpose-built vehicle applications.
6
Strategic Relationships
Panasonic: Workhorse Group has signed an agreement with the rechargeable battery division of Panasonic Industrial Devices Sales Co. of
America for the supply of “18650” cylindrical Panasonic lithium-ion batteries for Workhorse’s battery-electric, medium-duty trucks.
Morgan Olsen, Utilimaster, ECO, and other up-fitters or body fabricators: All of these companies build bodies customized for the
needs of their customers and mated to chassis that are available to them from the short list of chassis suppliers. The functionality and
configuration the end-user receives in the finished product is limited by the available chassis/powertrain. Workhorse will work with these
organizations to provide chassis that not only best fit the needs of the end user customer but also provide the customer with a competitive
advantage in their specific industry or application.
Research and Development
The majority of our research and development is conducted in-house at our facilities near Cincinnati, Ohio. Additionally, we contract with
engineering firms to assist with validation and certification requirements as well as specific vehicle integration tasks.
Competitive Companies
The medium-duty commercial vehicle market is highly competitive and we expect it to become even more so in the future as additional
companies launch competing vehicle offerings. The medium-duty commercial alternatively fueled vehicle market, however, is less
developed and competitive. There are two primary competitors in the medium-duty vehicle segment in the US market: Ford and
Freightliner. Neither has disclosed any plans to offer 100% EV or EREV vehicles in this segment. Ford is vertically integrated building a
complete vehicle or chassis including Ford engine and transmission. They provide a chassis as a strip-chassis (which is similar to the
Workhorse product) or they provide it with a cab. Freightliner provides a chassis as a strip-chassis, which is similar to the Workhorse Truck
chassis.
We believe the most dramatic difference between Workhorse and the other competitors in the medium duty truck market is our ability to
offer customers purpose-built solutions that meet the needs of their unique requirements at a competitive price. While there are many
electric car companies from abroad, there are only a few foreign companies that have vehicles in the category of medium-duty trucks.
We believe that the primary competitive factors within the medium-duty commercial vehicle market are:
● the difference in the initial purchase prices of electric vehicles and comparable vehicles powered by internal combustion engines,
both including and excluding the impact of government and other subsidies and incentives designed to promote the purchase of
electric vehicles;
● the total cost of vehicle ownership over the vehicle's expected life, which includes the initial purchase price and ongoing operational
and maintenance costs;
● vehicle quality, performance and safety;
● government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
● the quality and availability of service for the vehicle, including the availability of replacement parts.
7
GOVERNMENT REGULATION
Our electric vehicles are designed to comply with a significant number of governmental regulations and industry standards, some of which
are evolving as new technologies are deployed. Government regulations regarding the manufacture, sale and implementation of products
and systems similar to our electric vehicles are subject to future change. We cannot predict what impact, if any, such changes may have
upon our business. We believe that our vehicles are in conformity with all applicable laws in all relevant jurisdictions.
Emission and fuel economy standards
Government regulation related to climate change is under consideration at the U.S. federal and state levels. The EPA and the National
Highway Traffic Safety Administration, or NHTSA, issued a final rule for greenhouse gas emissions and fuel economy requirements for
trucks and heavy-duty engines on August 9, 2011, which will have an initial phase in starting with model year 2014 and a final phase in
occurring in model year 2017. NHTSA standards for model year 2014 and 2015 will be voluntary, while mandatory standards will first
come into effect in 2016.
The rule provides emission standards for CO2 and fuel consumption standards for three main categories of vehicles: (i) combination
tractors, (ii) heavy-duty pickup trucks and vans and (iii) vocational vehicles. We believe that the Workhorse chassis would be considered
“vocational vehicles" under the rule. According to the EPA and NHTSA, vocational vehicles consist of a wide variety of truck and bus
types, including delivery, refuse, utility, dump, cement, transit bus, shuttle bus, school bus, emergency vehicles, motor homes and tow
trucks, and are characterized by a complex build process, with an incomplete chassis often built with an engine and transmission purchased
from other manufacturers, then sold to a body manufacturer.
The EPA and NHTSA rule also establishes multiple flexibility and incentive programs for manufacturers of alternatively fueled vehicles,
such as the Workhorse E-100 full electric and the E-Gen Electric, including an engine averaging, banking and trading, or ABT, program, a
vehicle ABT program and additional credit programs for early adoption of standards or deployment of advanced or innovative
technologies. The ABT programs will allow for emission and/or fuel consumption credits to be averaged, banked or traded within defined
groupings of the regulatory subcategories. The additional credit programs will allow manufacturers of engines and vehicles to be eligible to
generate credits if they demonstrate improvements in excess of the standards established in the rule prior to the model year the standards
become effective or if they introduce advanced or innovative technology engines or vehicles.
The Clean Air Act requires that we obtain a Certificate of Conformity issued by the EPA and a California Executive Order issued by
CARB with respect to emissions for our vehicles. The Certificate of Conformity is required for vehicles sold in states covered by the Clean
Air Act's standards and the Executive Order is required for vehicles sold in states that have sought and received a waiver from the EPA to
utilize California standards. The California standards for emissions control for certain regulated pollutants for new vehicles and engines
sold in California are set by CARB. States that have adopted the California standards as approved by EPA also recognize the Executive
Order for sales of vehicles.
Manufacturers who sell vehicles in states covered by federal requirements under the Clean Air Act without a Certificate of Conformity may
be subject to penalties of up to $37,500 per violation and be required to recall and remedy any vehicles sold with emissions in excess of
Clean Air Act standards. In 2013, we received approval from CARB to sell the E-100 in California based on our own emissions tests.
Vehicle safety and testing
The National Traffic and Motor Vehicle Safety Act of 1966, or the Safety Act, regulates motor vehicles and motor vehicle equipment in the
United States in two primary ways. First, the Safety Act prohibits the sale in the United States of any new vehicle or equipment that does
not conform to applicable motor vehicle safety standards established by NHTSA. Meeting or exceeding many safety standards is costly, in
part because the standards tend to conflict with the need to reduce vehicle weight in order to meet emissions and fuel economy standards.
Second, the Safety Act requires that defects related to motor vehicle safety be remedied through safety recall campaigns. A manufacturer is
obligated to recall vehicles if it determines that the vehicles do not comply with a safety standard. Should we or NHTSA determine that
either a safety defect or noncompliance exists with respect to any of our vehicles, the cost of such recall campaigns could be substantial.
8
Battery safety and testing
Our battery packs conform to mandatory regulations that govern transport of "dangerous goods," which includes lithium-ion batteries,
which may present a risk in transportation. The governing regulations, which are issued by PHMSA, are based on the UN
Recommendations on the Safe Transport of Dangerous Goods Model Regulations, and related UN Manual of Tests and Criteria. The
requirements for shipments of these goods vary by mode of transportation, such as ocean vessel, rail, truck and air.
Our battery module suppliers have completed the applicable transportation tests for our prototype and production battery packs
demonstrating our compliance with the UN Manual of Tests and Criteria, including:
● altitude simulation, which involves simulating air transport;
● thermal cycling, which involves assessing cell and battery seal integrity;
● vibration, which involves simulating vibration during transport;
● shock, which involves simulating possible impacts during transport;
● external short circuit, which involves simulating an external short circuit; and
● overcharge, which involves evaluating the ability of a rechargeable battery to withstand overcharging.
Vehicle dealer and distribution regulation
Certain states' laws require motor vehicle manufacturers and dealers to be licensed in such states in order to conduct manufacturing and
sales activities. To date, we are registered as both a motor vehicle manufacturer and dealer in Indiana and Ohio as well as a dealer in
California and Chicago. We have not yet sought formal clarification of our ability to manufacture or sell our vehicles in any other states.
Intellectual Property
We have five pending trademark applications and nine issued trademark registrations (US and foreign). We also intend to pursue additional
foreign trademark registrations. We have two pending non-provisional U.S. patent application, one pending provisional patent application,
and six existing patents, two of which are design patents. We also plan to pursue appropriate foreign patent protection on those inventions,
if available. The following is a summary of our patents:
Country
Canada
Status
Serial
Number
Application
Date
Patent
Number
Issue
/Grant Date
Granted
2523653 10/17/2005
2523653 12/22/2009
United States
Granted
11/252,220 10/17/2005
7,717,464 5/18/2010
United States
United States
United States
Granted
Granted
Granted
11/252,219 10/17/2005
29/243,074 11/18/2005 D561,078
29/243,129 11/18/2005 D561,079
7,559,578 7/14/2009
2/5/2008 Vehicle Header
2/5/2008 Vehicle Header
United States
Granted
13/283,663 10/28/2011
8,541,915 9/24/2013
United States
Filed
14/606,497 1/27/2015
NA
NA
United States
Filed
62
1/9/2015
NA
NA
9
Drive Module And
Manifold For Electric
Motor Drive Assembly 12/16/2031
Onboard Generator
Drive System For
Electric Vehicles
Multi-Copter
UAS/UAV Dispatched
from a Conventional
Delivery Vehicle
Title
Vehicle Chassis
Assembly
Vehicle Chassis
Assembly
Vehicle Chassis
Assembly
Expiration
Date
10/17/2025
9/6/2026
9/6/2026
2/5/2022
2/5/2022
Employees
We currently have 60 full-time and 15 part-time employees located in Loveland, Ohio and 19 full-time employees located in Union City,
Indiana. We also contract for hire with approximately four outside consultants and contractors.
ITEM 1A. RISK FACTORS
Our results of operations have not resulted in profitability and we may not be able to achieve profitability going forward.
We have incurred net losses amounting to $63.1 million for the period from inception (February 20, 2007) through December 31,
2016. We have had net losses in each quarter since our inception. We expect that we will continue to incur net losses for the foreseeable
future. We may incur significant losses in the future for a number of reasons, including the other risks described in this report, and we may
encounter unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not be able to achieve
or maintain profitability. Our management is developing plans to alleviate the negative trends and conditions described above and there is
no guarantee that such plans will be successfully implemented. Our business plan has changed from concentrating on the electric passenger
vehicle market to the electric medium duty trucks, and has been further focused on providing sustainable and cost-effective solutions to the
commercial transportation sector, but is still unproven. There is no assurance that even if we successfully implement our business plan, that
we will be able to curtail our losses. If we incur additional significant operating losses, our stock price may decline, perhaps significantly.
We have yet to achieve positive cash flow and, given our projected funding needs, our ability to generate positive cash flow is
uncertain.
We have had negative cash flow from operating activities of $19.1 million and $8.2 million for the year ended December 31, 2016 and
2015 respectively. We anticipate that we will continue to have negative cash flow from operating and investing activities for the
foreseeable future as we expect to incur increased research and development, sales and marketing, and general and administrative expenses
and make significant capital expenditures in our efforts to increase sales and commence operations at our Union City facility. Our business
also will at times require significant amounts of working capital to support our growth, particularly as we acquire inventory to support our
anticipated increase in production. An inability to generate positive cash flow for the foreseeable future may adversely affect our ability to
raise needed capital for our business on reasonable terms, diminish supplier or customer willingness to enter into transactions with us, and
have other adverse effects that may decrease our long-term viability. There can be no assurance we will achieve positive cash flow in the
foreseeable future.
10
We need access to additional financing in 2017 and beyond, which may not be available to us on acceptable terms or at all. If we
cannot access additional financing when we need it and on acceptable terms, our business may fail.
Our business plan to design, produce, sell and service commercial electric vehicles through our Union City facility will require substantial
continued capital investment. Our research and development activities will also require substantial continued investment. For the year
ended December 31, 2016, our independent registered public accounting firm issued a report on our 2016 financial statements that
contained an explanatory paragraph stating that the lack of sales, negative working capital and stockholders’ deficit, raise substantial doubt
about our ability to continue as a going concern. For example, our existing capital resources, will be insufficient to fund our operations
beyond the end of the fourth quarter of 2017. Accordingly, we will need additional financing. We will also need additional financing
beyond 2017. 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. As a result, we may have to liquidate our assets and may receive less than the value at which those assets are
carried on our consolidated financial statements, and investors will likely lose a substantial part or all of their investment. We cannot be
certain that additional financing will be available to us on favorable terms when required, or at all, particularly given that we do not now
have a committed credit facility with any government or financial institution. Further, if there remains doubt about our ability to continue as
a going concern, investors or other financing sources may be unwilling to provide additional funding on acceptable terms or at all. If we
cannot obtain additional financing when we need it and on terms acceptable to us, we will not be able to continue as a going concern.
The development of our business in the near future is contingent upon the implementation of orders from UPS and other key
customers for the purchase of E-GENs and if we are unable to perform under these orders, our business may fail.
On June 4, 2014, the Company entered into a Vehicle Purchase Agreement with United Parcel Service Inc. (“UPS”) which outlined the
relationship by which the Company would sell vehicles to UPS. To date, we have received orders to purchase 343 E-GENs from UPS. We
have entered into various purchase orders with UPS relating to the delivery of the vehicles ordered. Currently, the schedule agreed to with
UPS requires that we deliver specified numbers of vehicles per month. However, these deadlines are expected to evolve as the individual
UPS operations personnel from the seven states are involved in the scheduling. There is no guarantee that the Company will be able to
perform under these orders and if it does perform, that UPS will purchase additional vehicles from the Company. Also, there is no
assurance that UPS will not terminate its agreement with the Company pursuant to the termination provisions therein. Further, if the
Company is not able to raise the required capital to purchase required parts and pay certain vendors, the Company may not be able to
comply with UPS’s deadlines. Accordingly, despite the receipt of the orders from UPS, there is no assurance, due to the Company’s
financial constraints and status as a development stage company, that the Company will be able to deliver such vehicles or that it will
receive additional orders whether from UPS or other potential customers.
If we are unable to perform under our orders with UPS, the Company business will be significantly negatively impacted.
11
Our limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those
estimates of our future performance.
We have basically been a research and development company since beginning operations in February 2007. We have a limited operating
history and have generated limited revenue. As we move more toward a manufacturing environment it is difficult, if not impossible, to
forecast our future results based upon our historical data. Because of the uncertainties related to our lack of historical operations, we may
be hindered in our ability to anticipate and timely adapt to increases or decreases in revenues or expenses. If we make poor budgetary
decisions as a result of unreliable historical data, we could be less profitable or incur losses, which may result in a decline in our stock
price.
We offer no financing on our vehicles. As such, our business is dependent on cash sales, which may adversely affect our growth
prospects.
While most of our current customers are well-established companies with significant purchasing power, many of our potential smaller
and medium-sized customers may need to rely on credit or leasing arrangements to gain access to our vehicles. Unlike some of our
competitors who provide credit or leasing services for the purchase of their vehicles, we do not provide, and currently do not have
commercial arrangements with a third party that provides, such financial services. We believe the current limited availability of credit or
leasing solutions for our vehicles could adversely affect our revenues and market share in the commercial electric vehicle market.
Our business, prospects, financial condition and operating results will be adversely affected if we cannot reduce and adequately
control the costs and expenses associated with operating our business, including our material and production costs.
We incur significant costs and expenses related to procuring the materials, components and services required to develop and produce
our electric vehicles. We have secured supply agreements for our critical components including our batteries. However, these are
dependent on volume to ensure that they are available at a competitive price. Thus, our current cost projections are considerably higher than
the projected revenue stream that such vehicles will produce. As a result, we currently lose money on each vehicle we sell and are
continually working on initiatives to reduce our cost structure so that we may effectively compete. If we do not reduce our costs and
expenses, our net losses will continue which will negatively impact our business and stock price.
Increases in costs, disruption of supply or shortage of lithium-ion cells could harm our business.
We may experience increases in the cost or a sustained interruption in the supply or shortage of lithium-ion cells. Any such increase,
supply interruption or shortage could materially and negatively impact our business, prospects, financial condition and operating results.
The prices for these lithium-ion cells can fluctuate depending on market conditions and global demand for these materials and could
adversely affect our business and operating results. We are exposed to multiple risks relating to lithium-ion cells including:
● the inability or unwillingness of current battery manufacturers to build or operate battery cell manufacturing plants to supply the
numbers of lithium-ion cells we may require going forward;
● disruption in the supply of cells due to quality issues or recalls by battery cell manufacturers;
● an increase in the cost of raw materials used in the cells; and
● fluctuations in the value of the Japanese yen against the U.S. dollar in the event our purchasers of lithium-ion cells are denominated
in Japanese yen.
12
Our business is dependent on the continued supply of battery cells for the battery packs used in our vehicles. While we believe several
sources of the battery cells are available for such battery cells, we have fully qualified only Panasonic for the supply of the cells used in
such battery packs and have very limited flexibility in changing cell suppliers. Any disruption in the supply of battery cells could disrupt
production of our vehicles until such time as a different supplier is fully qualified. Furthermore, fluctuations or shortages in petroleum,
tariff or trade issues and other economic or tax conditions may cause us to experience significant increases in freight charges. Substantial
increases in the prices for the battery cells or prices charged to us, would increase our operating costs, and could reduce our margins if we
cannot recoup the increased costs through increased vehicle prices. Any attempts to increase vehicle prices in response to increased costs in
our battery cells could result in cancellations of vehicle orders and therefore materially and adversely affect our brand, image, business,
prospects and operating results.
The demand for commercial electric vehicles depends, in part, on the continuation of current trends resulting from dependence on
fossil fuels. Extended periods of low diesel or other petroleum-based fuel prices could adversely affect demand for our vehicles,
which would adversely affect our business, prospects, financial condition and operating results.
We believe that much of the present and projected demand for commercial electric vehicles results from concerns about volatility in
the cost of petroleum-based fuel, the dependency of the United States on oil from unstable or hostile countries, government regulations and
economic incentives promoting fuel efficiency and alternative forms of energy, as well as the belief that climate change results in part from
the burning of fossil fuels. If the cost of petroleum-based fuel decreased significantly, the outlook for the long-term supply of oil to the
United States improved, the government eliminated or modified its regulations or economic incentives related to fuel efficiency and
alternative forms of energy, or if there is a change in the perception that the burning of fossil fuels negatively impacts the environment, the
demand for commercial electric vehicles could be reduced, and our business and revenue may be harmed.
Diesel and other petroleum-based fuel prices have been extremely volatile, and we believe this continuing volatility will persist.
Lower diesel or other petroleum-based fuel prices over extended periods of time may lower the perception in government and the private
sector that cheaper, more readily available energy alternatives should be developed and produced. If diesel or other petroleum-based fuel
prices remain at deflated levels for extended periods of time, the demand for commercial electric vehicles may decrease, which would have
an adverse effect on our business, prospects, financial condition and operating results.
Our future growth is dependent upon the willingness of operators of commercial vehicle fleets to adopt electric vehicles and on our
ability to produce, sell and service vehicles that meet their needs. This often depends upon the cost for an operator adopting
electric vehicle technology as compared to the cost of traditional internal combustion technology. When the price of oil is low, as it
recently has been, it is difficult to convince commercial fleet operations to change to more expensive electric vehicles.
Our growth is dependent upon the adoption of electric vehicles by operators of commercial vehicle fleets and on our ability to
produce, sell and service vehicles that meet their needs. The entry of commercial electric vehicles into the medium-duty commercial
vehicle market is a relatively new development, particularly in the United States, and is characterized by rapidly changing technologies and
evolving government regulation, industry standards and customer views of the merits of using electric vehicles in their businesses. This
process has been slow as without including the impact of government or other subsidies and incentives, the purchase prices for our
commercial electric vehicles currently is higher than the purchase prices for diesel-fueled vehicles. Our growth has also been negatively
impacted by the relatively low price of oil over the last few years.
13
If the market for commercial electric vehicles does not develop as we expect or develops more slowly than we expect, our business,
prospects, financial condition and operating results will be adversely affected.
As part of our sales efforts, we must educate fleet managers as to the economical savings we believe they will benefit from during the
life of the vehicle. As such, we believe that operators of commercial vehicle fleets should consider a number of factors when deciding
whether to purchase our commercial electric vehicles (or commercial electric vehicles generally) or vehicles powered by internal
combustion engines, particularly diesel-fueled or natural gas-fueled vehicles. We believe these factors include:
● the difference in the initial purchase prices of commercial electric vehicles and vehicles with comparable GVWs powered by
internal combustion engines, both including and excluding the impact of government and other subsidies and incentives designed to
promote the purchase of electric vehicles;
● the total cost of ownership of the vehicle over its expected life, which includes the initial purchase price and ongoing operating and
maintenance costs;
● the availability and terms of financing options for purchases of vehicles and, for commercial electric vehicles, financing options for
battery systems;
● the availability of tax and other governmental incentives to purchase and operate electric vehicles and future regulations requiring
increased use of nonpolluting vehicles;
● government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
● fuel prices, including volatility in the cost of diesel;
● the cost and availability of other alternatives to diesel fueled vehicles, such as vehicles powered by natural gas;
● corporate sustainability initiatives;
● commercial electric vehicle quality, performance and safety (particularly with respect to lithium-ion battery packs);
● the quality and availability of service for the vehicle, including the availability of replacement parts;
● the limited range over which commercial electric vehicles may be driven on a single battery charge;
● access to charging stations and related infrastructure costs, and standardization of electric vehicle charging systems;
● electric grid capacity and reliability; and
● macroeconomic factors.
If, in weighing these factors, operators of commercial vehicle fleets determine that there is not a compelling business justification for
purchasing commercial electric vehicles, particularly those that we produce and sell, then the market for commercial electric vehicles may
not develop as we expect or may develop more slowly than we expect, which would adversely affect our business, prospects, financial
condition and operating results.
If our customers are unable to efficiently and effectively integrate our electric vehicles into their existing commercial fleets our
sales may suffer and our business, prospects, financial condition and operating results may be adversely affected.
Our sales strategy involves a comprehensive plan for the pilot and roll-out of our electric vehicles, as well as the ongoing replacement
of existing commercial vehicles with our electric vehicles, that is tailored to the individual needs of our customers. If we are unable to
develop and execute fleet integration strategies or fleet management support services that meet our customers’ unique circumstances with
minimal disruption to their businesses, our customers may not realize the economic benefits they expect from our electric vehicles. If this
were to occur, our customers may not order additional vehicles from us, which could adversely affect our business, prospects, financial
condition and operating results.
14
We currently do not have long-term supply contracts with guaranteed pricing which exposes us to fluctuations in component,
materials and equipment prices. Substantial increases in these prices would increase our operating costs and could adversely affect
our business, prospects, financial condition and operating results.
Because we currently do not have long-term supply contracts with guaranteed pricing, we are subject to fluctuations in the prices of
the raw materials, parts and components and equipment we use in the production of our vehicles. Substantial increases in the prices for such
raw materials, components and equipment would increase our operating costs and could reduce our margins if we cannot recoup the
increased costs through increased vehicle prices. Any attempts to increase the announced or expected prices of our vehicles in response to
increased costs could be viewed negatively by our customers and could adversely affect our business, prospects, financial condition and
operating results.
If we are unable to scale our operations at our Union City facility in an expedited manner from our limited low volume production
to high volume production, our business, prospects, financial condition and operating results will be adversely affected.
We are currently assembling our orders at our Union City facility which has been acceptable for our historical orders. To satisfy
increased demand, we will need to quickly scale operations in our Union City facility as well as scale our supply chain including access to
batteries. Such a substantial and rapid increase in operations will be extremely difficult and will strain our management capabilities. Our
business, prospects, financial condition and operating results could be adversely affected if we experience disruptions in our supply chain, if
we cannot obtain materials of sufficient quality at reasonable prices or if we are unable to scale our Union City facility.
Failure to successfully integrate the Workhorse® brand, logo, intellectual property, patents and assembly plant in Union City,
Indiana into our operations could adversely affect our business and results of operations.
As part of our strategy to become an OEM, in March 2013, we acquired Workhorse and the Workhorse Assets including the Workhorse ®
brand, logo, intellectual property, patents and assembly plant in Union City, Indiana. The Workhorse acquisition may expose us to
operational challenges and risks, including the diversion of management’s attention from our existing business, the failure to retain key
Workhorse dealers and our ability to commence operations at the plant in Union City, Indiana. Our ability to sustain our growth and
maintain our competitive position may be affected by our ability to successfully integrate the Workhorse Assets.
We depend upon key personnel and need additional personnel. The loss of key personnel or the inability to attract additional
personnel may adversely affect our business and results of operations.
Our success depends on the continuing services of Stephen Burns, CEO, and top management. On December 8, 2010, we entered into
an employment agreement with Mr. Burns for a term of two years which automatically renews for one year periods unless either of the
parties elects to not renew for such period. The loss of any of these individuals could have a material and adverse effect on our business
operations. Additionally, the success of our operations will largely depend upon our ability to successfully attract and maintain competent
and qualified key management personnel. As with any company with limited resources, there can be no guarantee that we will be able to
attract such individuals or that the presence of such individuals will necessarily translate into profitability for our company. Our inability to
attract and retain key personnel may materially and adversely affect our business operations. Any failure by our management to effectively
anticipate, implement, and manage the changes required to sustain our growth would have a material adverse effect on our business,
financial condition, and results of operations.
15
We face intense competition. Some of our competitors have substantially greater financial or other resources, longer operating
histories and greater name recognition than we do and could use their greater resources and/or name recognition to gain market
share at our expense or could make it very difficult for us to establish market share.
Companies currently competing in the fleet logistics market offering alternative fuel medium-duty trucks include Ford Motor
Company and Freightliner. Ford and Freightliner are currently selling alternative fuel fleet vehicles including hybrids. In the electric
medium duty truck market in the United States, we compete with a few other manufacturers, including Electric Vehicles International and
Smith Electric Vehicles. Ford and Freightliner have substantially more financial resources, established market positions, long-standing
relationships with customers and dealers, and who have more significant name recognition, technical, marketing, sales, financial and other
resources than we do. Although we believe that HorseFly™, our unmanned aerial system (UAS), is unique in the marketplace in that it
currently does not have any competitors when it comes to a UAS that works in combination with a truck, there are better financed
competitors in this emerging industry, including Google and Amazon. While we are seeking to partner with existing delivery companies to
improve their efficiencies in the last mile of delivery, our competitors are seeking to redefine the delivery model using drones from a
central location requiring extended flight patterns. Our competitors’ new aerial delivery model would essentially eliminate traditional
package delivery companies. Our model is focused on coupling our delivery drone with delivery trucks supplementing the existing model
and providing shorter term flight patterns. Google and Amazon have more significant financial resources, established market positions,
long-standing relationships with customers, more significant name recognition and a larger scope of resources including technical,
marketing and sales than we do. The resources available to our competitors to develop new products and introduce them into the
marketplace exceed the resources currently available to us. As a result, our competitors may be able to compete more aggressively and
sustain that competition over a longer period that we can. This intense competitive environment may require us to make changes in our
products, pricing, licensing, services, distribution, or marketing to develop a market position. Each of these competitors has the potential to
capture significant market share in our target markets which could have an adverse effect on our position in our industry and on our
business and operating results.
If we are unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.
There are companies in the electric vehicle industry that have developed or are developing vehicles and technologies that compete or
will compete with our vehicles. We cannot assure that our competitors will not be able to duplicate our technology or provide products and
services similar to ours more efficiently. If for any reason we are unable to keep pace with changes in electric vehicle technology,
particularly battery technology, our competitive position may be adversely affected. We plan to upgrade or adapt our vehicles and introduce
new models to continue to provide electric vehicles that incorporate the latest technology. However, there is no assurance that our research
and development efforts will keep pace with those of our competitors.
Our electric vehicles compete for market share with vehicles powered by other vehicle technologies that may prove to be more
attractive than ours.
Our target market currently is serviced by manufacturers with existing customers and suppliers using proven and widely accepted fuel
technologies. Additionally, our competitors are working on developing technologies that may be introduced in our target market. If any of
these alternative technology vehicles can provide lower fuel costs, greater efficiencies, greater reliability or otherwise benefit from other
factors resulting in an overall lower total cost of ownership, this may negatively affect the commercial success of our vehicles or make our
vehicles uncompetitive or obsolete.
16
We currently have a limited number of customers, with whom we do not have long-term agreements, and expect that a significant
portion of our future sales will be from a limited number of customers. The loss of any of these customers could materially harm
our business.
A significant portion of our projected future revenue, if any, is expected to be generated from a limited number of vehicle customers.
Additionally, much of our business model is focused on building relationships with a few large customers. Currently we have no contracts
with customers that include long-term commitments or minimum volumes that ensure future sales of vehicles. As such, a customer may
take actions that negatively affect us for reasons that we cannot anticipate or control, such as reasons related to the customer’s financial
condition, changes in the customer’s business strategy or operations or as the result of the perceived performance or cost-effectiveness of
our vehicles. The loss of or a reduction in sales or anticipated sales to our most significant customers would have a material adverse effect
on our business, prospects, financial condition and operating results.
Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity.
The modern electric vehicle industry is in its infancy and has experienced substantial change in the last few years. To date, demand
for electric vehicles has been slower than forecasted by industry experts. As a result, growth in the electric vehicle industry depends on
many factors outside our control, including, but not limited to:
● continued development of product technology, especially batteries;
● the environmental consciousness of customers;
● the ability of electric vehicles to successfully compete with vehicles powered by internal combustion; engines
● limitation of widespread electricity shortages; and
● whether future regulation and legislation requiring increased use of non-polluting vehicles is enacted.
We cannot assume that growth in the electric vehicle industry will continue. Our business will suffer if the electric vehicle industry
does not grow or grows more slowly than it has in recent years or if we are unable to maintain the pace of industry demands.
The results of the 2016 United States presidential and congressional elections may create regulatory uncertainty for the alternative
energy sector and may materially harm our business, financial condition and operating results.
Donald Trump’s victory in the U.S. presidential election, as well as the Republican Party maintaining control of both the House of
Representatives and Senate of the United States in the congressional election, may create regulatory uncertainty in the alternative energy
sector. During the election campaign, President Trump made comments suggesting that he was not supportive of various clean energy
programs and initiatives designed to curtail global warming. It remains unclear what specifically President Trump would or would not do
with respect to these programs and initiatives, and what support he would have for any potential changes to such legislative programs and
initiatives in the Unites States Congress, even if both the House of Representatives and Senate are controlled by the Republican Party. If
President Trump and/or the United States Congress take action or publicly speak out about the need to eliminate or further reduce
legislation, regulations and incentives supporting alternative energy, such actions may result in a decrease in demand for alternative energy
in the United States and may materially harm our business, financial condition and operating results.
The unavailability, reduction, elimination or adverse application of government subsidies, incentives and regulations could have an
adverse effect on our business, prospects, financial condition and operating results.
We believe that, currently, the availability of government subsidies and incentives including those available in New York, California
and Chicago is an important factor considered by our customers when purchasing our vehicles, and that our growth depends in part on the
availability and amounts of these subsidies and incentives. Any reduction, elimination or discriminatory application of government
subsidies and incentives because of budgetary challenges, policy changes, the reduced need for such subsidies and incentives due to the
perceived success of electric vehicles or other reasons may result in the diminished price competitiveness of the alternative fuel vehicle
industry.
17
Certain regulations and programs that encourage sales of electric vehicles could be eliminated or applied in a way that adversely
impacts sales of our commercial electric vehicles, either currently or at any time in the future. For example, the U.S. federal government
and many state governments are experiencing political change and facing fiscal crises, which could result in the elimination of programs,
subsidies and incentives that encourage the purchase of electric vehicles. If government subsidies and incentives to produce and purchase
electric vehicles were no longer available to us or to our customers, or the amounts of such subsidies and incentives were reduced, our
business and results of operations would be adversely affected.
We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive
position.
Our current products are designed for use with, and are dependent upon, existing electric vehicle technology. As technologies change,
we plan to upgrade or adapt our products to continue to provide products with the latest technology. However, our products may become
obsolete or our research and development efforts may not be sufficient to adapt to changes in or to create the necessary technology. Thus,
our potential inability to adapt and develop the necessary technology may harm our competitive position.
The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business.
We have secured supply agreements for our critical components including our batteries. However, the agreements are dependent on
volume to ensure that they are available at a competitive price. Further, we rely on a small group of suppliers to provide us with
components for our products. If these suppliers become unwilling or unable to provide components or if we are unable to meet certain
volume requirements in our existing supply agreements, there are a limited number of alternative suppliers who could provide them and the
price for them could be substantially higher. Changes in business conditions, wars, governmental changes, and other factors beyond our
control or which we do not presently anticipate could negatively affect our ability to receive components from our suppliers. Further, it
could be difficult to find replacement components if our current suppliers fail to provide the parts needed for these products. A failure by
our major suppliers to provide these components could severely restrict our ability to manufacture our products and prevent us from
fulfilling customer orders in a timely fashion.
Product liability or other claims could have a material adverse effect on our business.
The risk of product liability claims, product recalls, and associated adverse publicity is inherent in the manufacturing, marketing, and
sale of electrical vehicles. Although we have product liability insurance for our consumer and commercial products, that insurance may be
inadequate to cover all potential product claims. We also carry liability insurance on our products. Any product recall or lawsuit seeking
significant monetary damages either in excess of our coverage, or outside of our coverage, may have a material adverse effect on our
business and financial condition. We may not be able to secure additional product liability insurance coverage on acceptable terms or at
reasonable costs when needed. A successful product liability claim against us could require us to pay a substantial monetary award.
Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent
commercialization of other future product candidates. We cannot provide assurance that such claims and/or recalls will not be made in the
future.
We may have to devote substantial resources to implementing a retail product distribution network.
Dealers are often hesitant to provide their own financing to contribute to our product distribution network. Thus, we anticipate that
we may have to provide financing or other consignment sale arrangements for dealers. A capital investment such as this presents many
risks, foremost among them being that we may not realize a significant return on our investment if the network is not profitable. Our
inability to collect receivables from dealers could cause us to suffer losses. Additionally, the amount of time that our management will need
to devote to this project may divert them from performing other functions necessary to assure the success of our business.
18
Regulatory requirements may have a negative impact upon our business.
While our vehicles are subject to substantial regulation under federal, state, and local laws, we believe that our vehicles are or will be
materially in compliance with all applicable laws. However, to the extent the laws change, or if we introduce new vehicles in the future,
some or all of our vehicles may not comply with applicable federal, state, or local laws. Further, certain federal, state, and local laws and
industrial standards currently regulate electrical and electronics equipment. Although standards for electric vehicles are not yet generally
available or accepted as industry standards, our products may become subject to federal, state, and local regulation in the future.
Compliance with these regulations could be burdensome, time consuming, and expensive.
Our products are subject to environmental and safety compliance with various federal and state regulations, including regulations
promulgated by the EPA, NHTSA, and various state boards, and compliance certification is required for each new model year. The cost of
these compliance activities and the delays and risks associated with obtaining approval can be substantial. The risks, delays, and expenses
incurred in connection with such compliance could be substantial.
Our success may be dependent on protecting our intellectual property rights.
We rely on trade secret protections to protect our proprietary technology as well as several registered patents and one patent
application. Our patents relate to the vehicle chassis assembly, vehicle header and drive module and manifold for electric motor drive
assembly. Our existing patent application relates to the onboard generator drive system for electric vehicles. Our success will, in part,
depend on our ability to obtain additional trademarks and patents. We are working on obtaining patents and trademarks registered with the
United States Patent and Trademark Office but have not finalized any as of this date. Although we have entered into confidentiality
agreements with our employees and consultants, we cannot be certain that others will not gain access to these trade secrets. Others may
independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.
Our business may be adversely affected by union activities.
Although none of our employees are currently represented by a labor union, it is common throughout the automotive industry for
many employees at automotive companies to belong to a union, which can result in higher employee costs and increased risk of work
stoppages. Our employees may join or seek recognition to form a labor union, or we may be required to become a union signatory. Our
production facility in Union City, Indiana was purchased from Navistar. Prior employees of Navistar were union members and our future
work force at this facility may be inclined to vote in favor of forming a labor union. Furthermore, we are directly or indirectly dependent
upon companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes
organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a work stoppage
occurs, it could delay the manufacture and sale of our trucks and have a material adverse effect on our business, prospects, operating results
or financial condition. The mere fact that our labor force could be unionized may harm our reputation in the eyes of some investors and
thereby negatively affect our stock price. Consequently, the unionization of our labor force could negatively impact our company’s health.
We may be exposed to liability for infringing upon the intellectual property rights of other companies.
Our success will, in part, depend on our ability to operate without infringing on the proprietary rights of others. Although we have
conducted searches and are not aware of any patents and trademarks which our products or their use might infringe, we cannot be certain
that infringement has not or will not occur. We could incur substantial costs, in addition to the great amount of time lost, in defending any
patent or trademark infringement suits or in asserting any patent or trademark rights, in a suit with another party.
19
Our electric vehicles make use of lithium-ion battery cells, which, if not appropriately managed and controlled, have occasionally
been observed to catch fire or vent smoke and flames. If such events occur in our electric vehicles, we could face liability for
damage or injury, adverse publicity and a potential safety recall, any of which would adversely affect our business, prospects,
financial condition and operating results.
The battery packs in our electric vehicles use lithium-ion cells, which have been used for years in laptop computers and cell phones.
On occasion, if not appropriately managed and controlled, lithium-ion cells can rapidly release the energy they contain by venting smoke
and flames in a manner that can ignite nearby materials. Highly publicized incidents of laptop computers and cell phones bursting into
flames have focused consumer attention on the safety of these cells. These events also have raised questions about the suitability of these
lithium-ion cells for automotive applications. There can be no assurance that a field failure of our battery packs will not occur, which would
damage the vehicle or lead to personal injury or death and may subject us to lawsuits. Furthermore, there is some risk of electrocution if
individuals who attempt to repair battery packs on our vehicles do not follow applicable maintenance and repair protocols. Any such
damage or injury would likely lead to adverse publicity and potentially a safety recall. Any such adverse publicity could adversely affect
our business, prospects, financial condition and operating results.
Our facilities could be damaged or adversely affected as a result of disasters or other unpredictable events. Any prolonged
disruption in the operations of our facility would adversely affect our business, prospects, financial condition and operating results.
We engineer and assemble our electric vehicles in a facility in Loveland, Ohio and we intend to locate the assembly function to our
facility in Union City. Any prolonged disruption in the operations of our facility, whether due to technical, information systems,
communication networks, accidents, weather conditions or other natural disaster, or otherwise, whether short or long-term, would
adversely affect our business, prospects, financial condition and operating results.
We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have those
controls attested to by our independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), the Securities and Exchange Commission adopted rules
requiring smaller reporting companies, such as our company, to include a report of management on the company’s internal controls over
financial reporting in their annual reports for fiscal years ending on or after December 15, 2007. We were required to include the
management report in annual reports starting with the year ending December 31, 2009. Previous SEC rules required a non-accelerated filer
to include an attestation report in its annual report for years ending on or after June 15, 2010. Section 989G of the Dodd-Frank Act added
SOX Section 404(c) to exempt from the attestation requirement smaller issuers that are neither accelerated filers nor large accelerated filers
under Rule 12b-2. Under Rule 12b-2, subject to periodic and annual reporting criteria, an “accelerated filer” is an issuer with market value
of $75 million, but less than $700 million; a “large accelerated filer” is an issuer with market value of $700 million or greater. As a result,
the exemption effectively applies to companies with less than $75 million in market capitalization. We expect that this exemption will
continue to not apply to us during the year ended December 31, 2017 and we will have to come into compliance with such rules. Attaining
compliance with such rules will take substantial management and financial resources, and there will be no assurance that we will be able to
do so.
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Risks Related to Owning Our Common Stock
If we fail to continue to meet the listing standards of NASDAQ, our common stock may be delisted, which could have a material adverse
effect on the liquidity of our common stock.
Our common stock is currently listed on the Nasdaq Capital Market. The NASDAQ Stock Market LLC has requirements that a
company must meet in order to remain listed on NASDAQ. In particular, NASDAQ rules require us to maintain a minimum bid price of
$1.00 per share of our common stock. If the closing bid price of our common stock were to fall below $1.00 per share for 30 consecutive
trading days or we do not meet other listing requirements, we would fail to be in compliance with NASDAQ’s listing standards. There can
be no assurance that we will continue to meet the minimum bid price requirement, or any other requirement in the future. If we fail to meet
the minimum bid price requirement, The NASDAQ Stock Market LLC may initiate the delisting process with a notification letter. If we
were to receive such a notification, we would be afforded a grace period of 180 calendar days to regain compliance with the minimum bid
price requirement. In order to regain compliance, shares of our common stock would need to maintain a minimum closing bid price of at
least $1.00 per share for a minimum of 10 consecutive trading days. In addition, we may be unable to meet other applicable NASDAQ
listing requirements, including maintaining minimum levels of stockholders’ equity or market values of our common stock in which case,
our common stock could be delisted. If our common stock were to be delisted, the liquidity of our common stock would be adversely
affected and the market price of our common stock could decrease.
The trading of our shares of common has been relatively thin and there is no assurance that a liquid market for our shares of
common stock will develop.
Our common stock has traded on the Nasdaq Capital Market, under the symbol “WKHS”, since January 2016. Since that date, our
common stock has been relatively thinly traded. There can be no assurance that we will be able to successfully develop a liquid market for
our common shares. The stock market in general, and early stage public companies in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. If we are unable to develop
a market for our common shares, you may not be able to sell your common shares at prices you consider to be fair or at times that are
convenient for you, or at all.
Our stock price and trading volume may be volatile, which could result in substantial losses for our stockholders.
The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of
equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry
or our operating performance and financial condition. In addition, the trading volume in our common stock has been low and may fluctuate
and cause significant price variations to occur. We have experienced significant volatility in the price of our stock. In addition, the stock
markets in general can experience considerable price and volume fluctuations.
We have not paid dividends in the past and have no immediate plans to pay dividends.
We plan to reinvest all of our earnings, to the extent we have earnings, in order to develop our products, deliver on our orders and
cover operating costs and to otherwise become and remain competitive. We do not plan to pay any cash dividends with respect to our
securities in the foreseeable future. We cannot assure you that we would, at any time, generate sufficient surplus cash that would be
available for distribution to the holders of our common stock as a dividend. Therefore, you should not expect to receive cash dividends on
our common stock.
21
Shares eligible for future sale may adversely affect the market for our common stock.
Of the 35,956,697 shares of our common stock outstanding as of the date hereof, approximately 22.7 million shares are held by “non-
affiliates” and are freely tradable without restriction pursuant to Rule 144. In addition, our Registration Statement on Form S-3 for
purposes of registering the resale of 1,033,717 shares of common stock and 1,833,193 shares of common stock issuable upon exercise of
stock purchase warrants has been declared effective. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any
resale prospectus may have a material adverse effect on the market price of our common stock.
Shareholders may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible
into or exchangeable for our common stock at prices that may not be the same as the price per share in our prior offerings. We may sell
shares or other securities in any future offering at a price per share that is lower than the price per share paid by historical investors, which
would result in those newly issued shares being dilutive. In addition, investors purchasing shares or other securities in the future could have
rights superior to existing stockholders, which could impair the value of existing shareholders. The price per share at which we sell
additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher
or lower than the price per share paid by our historical investors.
Our charter documents and Nevada law may inhibit a takeover that stockholders consider favorable.
Provisions of our certificate of incorporation and bylaws and applicable provisions of Nevada law may delay or discourage
transactions involving an actual or potential change in control or change in our management, including transactions in which stockholders
might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests.
The provisions in our certificate of incorporation and bylaws:
● limit who may call stockholder meetings;
● do not provide for cumulative voting rights; and
● provide that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.
There are limitations on director/officer liability.
As permitted by Nevada law, our certificate of incorporation limits the liability of our directors for monetary damages for breach of a
director’s fiduciary duty except for liability in certain instances. As a result of our charter provision and Nevada law, shareholders may have
limited rights to recover against directors for breach of fiduciary duty. In addition, our certificate of incorporation provides that we shall
indemnify our directors and officers to the fullest extent permitted by law.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
22
ITEM 2. PROPERTIES
Our principal offices are located at 100 Commerce Drive, Loveland, Ohio 45247, which include 7,500 square feet in office space and
22,500 square feet in manufacturing/development space. We pay $11,951 monthly mortgage and our loan is for 25 years.
The following table sets forth the location, approximate size and primary use of our principal owned, leased and licensed facilities:
Approximate
Size
(Building) in
Square Feet
Primary Use
30,000 Administration, research and development and manufacturing
Location
Loveland, Ohio
Union City, Indiana
270,000 Manufacturing
Owned,
Leased or
Licensed
Owned
Lease/ License
Expiration
Date (if
applicable)
N/A
Owned
N/A
We believe our facilities are in good operating condition and that our facilities are adequate for all present and near term uses.
ITEM 3. LEGAL PROCEEDINGS
We are currently not a party to any legal or administrative proceedings and are not aware of any pending or threatened legal or
administrative proceedings against us in all material aspects. We may from time to time become a party to various legal or administrative
proceedings arising in the ordinary course of our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
23
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
On January 4, 2016 the Company was approved by Nasdaq Capital Market and our common stock is now quoted on Nasdaq under the
symbol “WKHS”. Our common stock was previously quoted on the OTCQB under the symbol "TTSO" from July 14, 2009 through May
24, 2010 and then under the symbol “AMPD” from May 24, 2010 to April 16, 2015 when the Company was renamed Workhorse Group
Inc. and uplisted to Nasdaq. The following table sets forth the range of high and low prices per share of our common stock for each period
indicated.
Quarter Ended
March 31
June 30
September 30
December 31
2016
2015
2014
High
Low
High
Low
High
Low
High
Low
$
$
$
$
$
$
$
$
10.73 $
4.43 $
11.41 $
6.40 $
9.34 $
5.79 $
8.52 $
6.37 $
1.40 $
1.09 $
3.90 $
1.90 $
6.10 $
1.75 $
9.35 $
3.40 $
1.70
1.00
1.40
1.00
3.35
0.80
2.30
1.20
On December 9, 2015, the Company filed a Certificate of Change (the “Certificate”) with the State of Nevada to effect a reverse stock split
of its outstanding and authorized shares of common stock at a ratio of 1 for 10 (the “Reverse Stock Split”). Fractional shares that resulted
from the Reverse Stock Split were rounded up to the next highest number. The Certificate was approved by the Board of Directors of the
Company. The effective date of the Reverse Stock Split was December 11, 2015. At the effective time, every 10 shares of common stock
issued and outstanding were automatically combined into one share of issued and outstanding common stock, without any change in the par
value. In addition, the authorized shares of common stock were reduced from 500,000,000 to 50,000,000. The above market prices reflect
such Reverse Stock Split.
Holders of our Common Stock
As of March 14, 2017, there were approximately 209 stockholders of record of our common stock. This number does not include shares
held by brokerage clearing houses, depositories or others in unregistered form. The stock transfer agent for our securities is Empire Stock
Transfer, Inc., 1859 Whitney Mesa Drive, Henderson, Nevada 89014.
Dividends
The Company has never declared or paid any cash dividends on its common stock. The Company currently intends to retain future
earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the
foreseeable future.
24
Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended
(the Exchange Act), or incorporated by reference into any filing of Workhorse under the Securities Act of 1933, as amended, or the
Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph shows a comparison from January 1, 2011 through December 31, 2016, of the cumulative total return for our
common stock, the NASDAQ Composite Index, and a group of peer group companies similarly situated. Such returns are based on
historical results and are not intended to suggest future performance. Data for The NASDAQ Composite Index and the peer group assumes
an investment of $100 on January 1, 2011 and reinvestment of dividends. We have never declared or paid cash dividends on our capital
stock nor do we anticipate paying any such cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2016:
Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
first column)
Number of
securities to
be issued
upon exercise
of
outstanding
options and
rights
Weighted-
average exercise
price of
outstanding
options and rights
158,200 $
4.20
22,500 $
2,175,357 $
500,000 $
3,700,000 $
500,000 $
7,056,057 $
7.00
7.70
2.81
2.50
6.37
6.37
0
0
0
0
0
462,971
462,971
Plan
Equity compensation plans approved by security holders – 2010
Stock Incentive Plan
Equity compensation plans approved by security holders – 2011
Incentive Stock Plan
Equity compensation plans or arrangements not approved by security holders - 2012
Incentive Stock Plan
Equity compensation plans or arrangements not approved by security holders - 2013
Incentive Stock Plan
Equity compensation plans or arrangements not approved by security holders - 2014
Incentive Stock Plan
Equity compensation plans or arrangements not approved by security holders - 2016
Incentive Stock Plan
Total
25
Unregistered Sales of Equity Securities
On January 10, 2017, the Company entered into a Securities Purchase Agreement with Jospeh T. Lukens (“Lukens”) providing for the sale
by the Company to Lukens of a 6% Convertible Debenture in the aggregate amount of $2,000,000 (the "Lukens Debenture") in
consideration of $2,000,000. The financing closed on January 10, 2017. On January 27, 2017, the Company and Lukens entered into a
Conversion Agreement pursuant to which Lukens agreed to convert his outstanding 6% Convertible Debenture in the principal amount of
$2,000,000 plus interest into shares of common stock of the Company at the offering price of the Company’s public offering.
During the year ended December 31, 2016, warrant holders exercised stock purchase warrants to receive an aggregate of 5.3 million shares
of common stock in consideration of an aggregate of $15.3 in cash consideration.
In November and December 2016, we entered into Warrant Exercise Agreements pursuant to which, each of the warrant holders agreed to
exercise at least one-third of their Stock Purchase Warrants (the “Warrant Exercises”). In consideration of the warrant holders exercising
the minimum required amount, we agreed to register for resale all shares of common stock issued in connection with the Warrant Exercise
and the remaining shares of common stock that may be issued upon exercise of the Stock Purchase Warrants in the future. As a result of the
Warrant Exercises, we received gross proceeds of $3,889,329 and issued 915,217 shares of common stock to the warrant holders (the
“November Shares”). In addition, in September 2016, a warrant holder exercised 143,500 shares of common stock (the “September Shares”
and collectively with the November Shares, the “Exercised Shares”) under a Stock Purchase Warrant for $5.28 per share for aggregate
consideration of $757,680. We were required to register the Exercised Shares, less 25,000 Exercised Shares held by Gerald Budde, a
director of our company, as well as 1,833,193 shares of common stock underlying the Stock Purchase Warrants. Maxim Group LLC
(“Maxim”) acted as solicitation agent for the Warrant Exercises. The Company paid Maxim a cash fee equal to 6.0% of the Warrant
Exercise proceeds, as well as fees and expenses of $10,000. In addition, we paid Maxim $140,000 as exclusive consideration of Maxim
terminating its advisory agreement and the related right of first refusal for any future financing therein.
On September 15, 2016, Harry DeMott was appointed as a director of the Company. Mr. DeMott entered into a letter agreement with the
Company pursuant to which he was appointed as a director of the Company in consideration of an annual fee of $40,000. Additionally, the
Company granted Mr. DeMott an option to purchase 50,000 shares of the Company’s common stock at $8.20 per share. The option will
expire five (5) years from the vesting period with 10,000 options vesting upon the signing of the agreement and 4,000 every June 30 and
December 31 thereafter for a total of 50,000 shares.
The offers, sales, and issuances of the securities described above were deemed to be exempt from registration under the Securities Act in
reliance on Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving a public
offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of
the recipients of securities in these transactions was an accredited or sophisticated person and had adequate access, through employment,
business or other relationships, to information about us.
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
OPERATING SUMMARY
Sales
Net loss
Basic and diluted loss per share
Shares used in per share calculation
FINANCIAL POSITION SUMMARY
Total assets
Cash and cash equivalents
Total current assets
Total current liabilities
Net working capital
Stockholders’ equity (deficit)
Common stock outstanding
CASH FLOW SUMMARY
Net cash used by operations
Net cash used by investing activities
Net cash provided by financing activities
Net increase (decrease) in cash and equivalents
Note: Share and per share data adjusted for reverse stock split
26
2016
2015
2014
139,980 $
6,414,800 $
$
177,500
$ (19,555,868) $ (9,426,853) $ (6,608,680)
(0.49)
$
17,293,394 13,602,884
(0.78) $
25,201,261
(0.55) $
469,570 $
4,951,989
$ 10,239,793 $ 14,641,728 $
442,257
7,677,163 $
$
909,630
3,916,668 $ 10,905,369 $
$
4,334,390 $ 18,424,863 $
$
3,267,235
(417,722) $ (7,519,494) $ (2,357,605)
$
(809,387)
3,816,974 $ (3,783,135) $
$
27,578,864
18,204,923 14,994,498
(528,095) $
$ (19,034,163) $ (8,220,232) $ (4,466,588)
(23,104)
$
(65,226) $
4,924,930
$ 12,354,665 $ 15,520,363 $
435,238
7,234,905 $
$ (7,207,593) $
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2016 Highlights
We are 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 battery-electric 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. Although we operate as a single unit
through our subsidiaries, we approach our development through two divisions, Automotive and Aviation. Our core products, under
development and/or in manufacture, are the medium duty step van, the light duty pickup, the delivery drone and the manned multicopter.
Medium-duty electric delivery vans are currently in production and are in use by our customers on U.S. roads. Our delivery customers
include companies such as UPS, FedEx Express and Alpha Baking. The success of our value selling equation to fleet buyers of medium-
duty vehicles encouraged us to bring this same philosophy to the much higher volume segment of light-duty trucks. Our first product
offering in the light-duty truck environment is our W-15 Range-Extended Electric Pickup Truck, which is presently under development. To
date, we have received letters of intent for 2,150 W-15 pickup trucks from fleets. We plan on unveiling a working concept version of the
W-15 at the Advanced Clean Transportation conference in Long Beach, CA on May 1, 2017. Workhorse, with our partner VT Hackney, is
one of five awardees that the United States Postal Service selected to build prototype vehicles for USPS Next Generation Delivery Vehicle
project. The Post Office has stated that the number of vehicles to be replaced in the project is approximately 180,000. We are on track to
deliver our prototypes to the USPS by the September 2017 deadline.
Our HorseFly Delivery Drone is a custom designed, purpose-built drone that is fully integrated in our electric trucks. We are leveraging our
knowledge of high-voltage battery packs, electric motor controls and range extending generators to design a multi-copter that can carry a
pilot and passenger.
27
Results of Operations
Our condensed consolidated statement of operations data for the period presented follows:
Sales
Cost of Sales
Gross loss
Operating Expenses
Selling, general and administrative
Research and development
Total operating expenses
Interest expense, net
Net loss
Revenue
2016
2015
2014
$
6,414,800 $
139,980 $
177,500
13,578,262
(7,163,462)
-
139,980
-
-
6,202,569
6,145,801
12,348,371
3,860,618
4,740,331
8,600,949
2,950,467
3,436,751
6,387,218
44,036
965,884
398,963
$ (19,555,868) $ (9,426,853) $ (6,608,680)
Sales for the years ended December 31, 2016 and 2015 were $6.4 million and $140 thousand respectively were related to delivery of the
production vehicles for UPS and other customers.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consist primarily of personnel and facilities costs related to our development
including, marketing, sales, executive, finance, human resources, information technology and professional, legal and contract services.
SG&A expenses during year ended December 31, 2016 were $6.2 million, an increase from $3.9 million for the year ended December 30,
2015. The increase in our SG&A expenses consisted primarily in employee salaries and benefits, consulting and investor relations, due the
increased activity in the period.
Research and Development Expenses
Research and development (“R&D”) expenses consist primarily of personnel costs for our teams in engineering and research, prototyping
expense, and contract and professional services. Union City plant expenses prior to the start of production are also included in research and
development expenses.
R&D expenses during the year ended December 31, 2016 were $6.1 million, an increase from $4.7 million for the year ended December
31, 2015. The R&D expenses consisted primarily in employee salaries and benefits, consulting and materials related to the start of the Next
Generation Delivery Vehicles (NGDVs) and Pick-up truck projects.
Interest Expenses
Our interest expense is incurred primarily from our long-term loan with Navistar in connection to the purchase of the Union City plant
mentioned before in the Property, Plant and Equipment and Long Term Loan notes to the financial statements.
Interest expenses during the year ended December 31, 2016 were $44.0 thousand, a decrease from $965.9 thousand for year ended
December 31, 2015. The lower expense was mainly due to the payment of the Navistar note early in 2016.
Liquidity and Capital Resources
Cash Requirements
From inception, we have financed our operations primarily through sales of equity securities. We have consumed substantial
amounts of capital to date as we continue our research and development activities and manufacturing our vehicles.
28
As of December 31, 2016, we had approximately $470 thousand in cash, cash equivalents and short-term investments, as compared
to approximately $7.6 million of December 31, 2015, a decrease of approximately $7.2 million. The decrease was primarily attributable to
increased activity in the production and delivery of the product to our customers for the year ended December 31, 2016. During the year
ended December 31, 2016, warrant holders exercised stock purchase warrants to receive an aggregate of 5.3 million shares of common
stock in consideration of an aggregate of $15.3 in cash consideration. On January 10, 2017, the Company entered into a Securities Purchase
Agreement with Joseph T. Lukens (“Lukens”) providing for the sale by the Company to Lukens of a 6% Convertible Debenture in the
aggregate amount of $2,000,000 (the "Lukens Debenture") in consideration of $2,000,000. The financing closed on January 10, 2017. On
January 27, 2017, the Company and Lukens entered into a Conversion Agreement pursuant to which Lukens agreed to convert his
outstanding 6% Convertible Debenture in the principal amount of $2,000,000 plus interest into shares of common stock of the Company at
the offering price of the Company’s public offering. In February 2017, the Company completed an underwritten public offering of
6,500,000 shares of its common stock at a public offering price of $3.00 per share. In addition, the underwriters have exercised an option to
purchase an additional 975,000 shares of common stock at the public offering price, less the underwriting discounts and commissions.
We believe that our existing capital resources will be sufficient to support our current and projected funding requirements, through
October 2017. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources
sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our business and
research and development activities, including risks and uncertainties that could impact the rate of progress of our development activities,
we are unable to estimate with certainty the amounts of increased capital outlays and operating expenditures.
Our operations will require significant additional funding for the foreseeable future. Unless and until we are able to generate a
sufficient amount of revenue and reduce our costs, we expect to finance future cash needs through public and/or private offerings of equity
securities and/or debt financings. 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 are able to 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 or compounds 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.
Insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs, limit our
sales activities, limit or cease production or negatively impact our operations.
For the years ended December 31, 2016 and 2015, we maintained an investment portfolio primarily in money market funds, U. S.
treasury bills, government-sponsored enterprise securities, and corporate bonds and commercial paper. 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
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Cash Flows from Operating Activities
2016
2015
2014
$ (19,034,163) $ (8,220,232) $ (4,466,588)
(23,104)
(65,226) $
$
4,924,930
$ 12,354,665 $ 15,520,363 $
(528,095) $
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.
29
During the year ended December 31, 2016 and 2015, cash used in operating activities was $19.1 million and $8.2 million. The decrease in
operating cash flows in 2016 as compared to 2015 was mainly due to an increase in operating losses, inventory purchases and accounts
receivable net of an increase in accounts payable.
Cash Flows from Investing Activities
Cash flow from investing activities primarily relates to capital expenditures to support our future growth in operations.
During the years ended December 31, 2016 and 2015, cash used in investing activities was $528 thousand and $65 thousand respectively.
The increase in investing activities during the year is mainly due to the purchase of the headquarters building in Loveland, Ohio.
Cash Flows from Financing Activities
During the year ended December 31, 2016 and 2015, net cash provided by financing activities was $12.4 million and $15.5 million,
respectively. Cash flows from financing activities during the year ended December 31, 2016 consisted mainly of a decrease of $2.7 million
for the payment of the Navistar note mentioned above and $15.0 million of funds received from the conversion of warrants.
Credit Facility
Presently we have no revolving Credit Facility established. There is no guarantee that we will be able to enter into an agreement to
establish a line of credit or that if we do enter into such agreement that it will be on favorable terms.
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.
Federal Tax Credit Qualification by the IRS
The Company has been qualified by the IRS for a vehicle federal tax credit of up to $7,500. The Company joins a list of plug-in electric
drive motor vehicle manufacturers, including Ford Motor Company, General Motors Corporation, Tesla, Toyota, and 13 EV manufacturers
in all, qualifying purchasers for up to a $7,500 tax credit when purchasing an electric vehicle.
Additionally, many states offer additional sales tax exemptions and zero emission tax credits of up to $5,000 that can also be applied to the
purchase.
California Air Resources Board Approval
On February 20, 2013 the California Air Resource Board (CARB) approved the medium to heavy duty the Company’s commercial truck
for sale in the state of California. Most other states use this approval for sale of vehicles in their state.
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:
30
Nature of operations
We are 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 battery-electric 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. Although we operate as a single unit
through our subsidiaries, we approach our development through two divisions, Automotive and Aviation. Our core products, under
development and/or in manufacture, are the medium duty step van, the light duty pickup, the delivery drone and the manned multicopter.
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.
Property and depreciation
Property and equipment is recorded at cost. Depreciation is provided on the straight-line and accelerated methods over the estimated useful
lives of the respective assets.
Income taxes
With the consent of its shareholders, at the date of inception, the Company elected under the Internal Revenue Code to be taxed as an S
corporation. Since shareholders of an S corporation are taxed on their proportionate share of the Company’s taxable income, an S
corporation is generally not subject to either federal or state income taxes at the corporate level. On December 28, 2009 pursuant to the
merger transaction the company revoked its election to be taxed as an S-corporation.
As no taxable income has occurred from the date of this merger to December 31, 2016 cumulative deferred tax assets of approximately
$17.9 million are fully reserved, and no provision or liability for federal or state income taxes has been included in the financial
statements. Carryover amounts are:
Approximate net
operating loss
($ millions)
3.6
6.7
3.9
4.7
6.1
9.0
18.7
Carryover to be used
against taxable
income generated
through year
2030
2031
2032
2033
2034
2035
2036
Research and development costs
Research and development costs are expensed as they are incurred. Research and development expense incurred was approximately $6.1
million and $4.7 million for the years ended December 31, 2016 and 2015, respectively consisting of consulting, payroll and payroll taxes,
engineering, purchased supplies, legal fees, parts and small tools.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we
receive from our investments without significantly increasing risk. Some of the securities in which we invest may have market risk. This
means that a change in prevailing interest rates may cause the fair value amount of the investment to fluctuate. For example, if we hold a
security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value
amount of our investment will decline. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including money market funds and government and non-government debt securities and the maturities of each of these
instruments is less than one year. In 2016, we maintained an investment portfolio primarily in money market funds, U. S. treasury bills,
government-sponsored enterprise securities, and corporate bonds and commercial paper. Due to the primarily short-term nature and low
interest rate yields of these investments, we believe we do not have a material exposure to interest rate risk and market risk arising from our
investments. Therefore, no quantitative tabular disclosure is provided.
We have operated primarily in the United States. Accordingly, we have not had any significant exposure to foreign currency rate
fluctuations.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Financial Statement
F-1
F-2
F-4
F-5
F-6
F-7
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Workhorse Group Inc.
Cincinnati, Ohio
We have audited the accompanying consolidated balance sheets of Workhorse Group Inc. as of December 31, 2016 and 2015, and the
related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period
ended December 31, 2016. Workhorse Group Inc.’s management is responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Workhorse Group Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the
two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Workhorse
Group Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 14, 2017, expressed an unqualified opinion.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As
described in Note 1 to the consolidated financial statements, the Company has not had positive cash flows from operations and has incurred
significant net losses which have caused a significant accumulated deficit. These conditions raise substantial doubt about its ability to
continue as a going concern. Management’s plans regarding those matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect
to that matter.
Cincinnati, Ohio
March 14, 2017
one east fourth street, ste. 1200
cincinnati, oh 45202
www.cshco.com
p. 513.241.3111
f. 513.241.1212
cincinnati | cleveland | columbus | miami valley | northern kentucky | springfield | toledo
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Workhorse Group Inc.
Cincinnati, Ohio
We have audited Workhorse Group, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Workhorse Group Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Workhorse Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance
sheets and the related statements of operation, stockholders’ equity (deficit), and cash flows of Workhorse Group, Inc. and our report dated
March 14, 2017, expressed an unqualified opinion with an emphasis of a matter due to a going concern.
Cincinnati, Ohio
March 14, 2017
1 east fourth street, suite 1200
cincinnati, ohio 45202
www.cshco.com
p. 513.241.3111
f. 513.241.1212
cincinnati | columbus | cleveland | miami valley | springfield | toledo
F-3
Workhorse Group, Inc.
Consolidated Balance Sheets
December 31, 2016 and 2015
2016
2015
$
469,570 $
628,700
98,400
2,464,835
255,163
7,677,163
-
-
78,917
3,149,289
3,916,668 10,905,369
6,002,631
320,494
3,736,359
$ 10,239,793 $ 14,641,728
Assets
Current assets:
Cash and cash equivalents
Accounts receivable
Lease receivable current
Inventory
Prepaid expenses and deposits
Property, plant and equipment, net
Lease receivable long-term
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable
Accounts payable, related parties
Notes payable
Shareholder advances
Current portion of long-term debt
Long-term debt
Stockholders' equity (deficit):
$
3,923,758 $
101,339
1,606,695
399,542
- 13,534,426
111,700
2,772,500
4,334,390 18,424,863
229,772
79,521
2,088,429
-
-
-
27,579
18,205
60,322,604 33,557,615
6,158,390
6,540,004
(63,073,213) (43,517,345)
(3,783,135)
3,816,974
Series A preferred stock, par value of $.001 per share 75,000,000 shares authorized, 0 shares issued and
outstanding at June 30, 2016 and December 31, 2015
Common stock, par value of $.001 per share 50,000,000 shares authorized, 27,578,864 shares issued and
outstanding at December 31, 2016 and 18,204,923 shares issued and outstanding at December 31,
2015
Additional paid-in capital
Stock based compensation
Accumulated deficit
See accompanying notes to the consolidated financial statements.
F-4
$ 10,239,793 $ 14,641,728
Workhorse Group, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2016 and 2015
Sales
Cost of Sales
Gross loss
Operating Expenses
Selling, general and administrative
Research and development
Total operating expenses
Interest expense, net
Net loss
Basic and diluted loss per share
Weighted average number of common shares outstanding
See accompanying notes to the consolidated financial statements.
F-5
2016
2015
$
6,414,800 $
139,980
13,578,262
(7,163,462)
-
139,980
6,202,569
6,145,801
12,348,370
3,860,618
4,740,331
8,600,949
44,036
965,884
$ (19,555,868) $ (9,426,853)
$
(0.78) $
(0.55)
25,201,261 17,293,394
Workhorse Group, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Common Stock
Series A
Preferred Stock
Number
of Shares Amount
Number
of Shares Amount
Additional
Paid-in
Capital
Stock Based
Compensation
Accumulated
Deficit
Total
Stockholders'
Equity
(Deficit)
Balance as of
December 31, 2014 14,994,514 $ 14,994
-
- $27,263,525 $
6,002,586 $(34,090,492) $
(809,387)
Issuance of common
stock, and fulfillment
of stock
subscriptions
receivable
Stock options and
warrants exercised
Conversion of account
payable
Share based
2,184,236
2,184
298,371
299
727,802
728
-
-
-
- 4,390,419
-
-
4,392,603
-
380,101
(246,714)
-
133,686
- 1,523,570
-
-
1,524,298
-
-
-
-
-
402,518
-
402,518
compensation for the
year ended
December 31, 2015
Net loss from
operations for the
year ended
December 31, 2015
Balance as of
-
-
December 31, 2015 18,204,923 $ 18,205
Issuance of common
stock, and fulfillment
of stock
subscriptions
receivable
Stock options and
warrants exercised
Conversion of account
payable
Share based
3,883,593
3,884
5,472,166
5,472
18,182
18
compensation for the
year ended
December 31, 2016
Net loss from
operations for the
year ended
December 31, 2016
Balance as of
-
-
-
-
-
-
-
-
(9,426,853)
(9,426,853)
- $33,557,615 $
6,158,390 $(43,517,345) $ (3,783,135)
- 11,371,398
-
- 11,375,282
- 15,373,609
(417,938)
- 14,961,143
-
19,982
-
-
20,000
-
-
-
-
-
799,552
-
799,552
December 31, 2016 27,578,864 $ 27,579
-
-
-
-
-
-
- (19,555,868) (19,555,868)
- $60,322,604 $
6,540,004 $(63,073,213) $ 3,816,974
See accompanying notes to the consolidated financial statements.
F-6
Workhorse Group, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2016 and 2015
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss from operations to cash used by operations:
Depreciation
Stock based compensation
Write down of inventory
Effects of changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and deposits
Accounts payable
Accounts payable, related parties
Net cash used by operations
Cash flows from investing activities:
Capital expenditures
Net cash used by investing activities
Cash flows from financing activities:
Proceeds from notes payable
Payments on long-term debt
Shareholder advances, net of repayments
Issuance of common and preferred stock
Exercise of warrants and options
Net cash provided by financing activities
Change in cash and cash equivalents
Cash at the beginning of the period
Cash at the end of the period
Supplemental disclosure of non-cash activities:
2016
2015
$ (19,555,868) $ (9,426,853)
381,823
799,552
78,917
(1,047,594)
(2,464,835)
622,489
2,449,556
(298,203)
371,226
402,518
313,833
-
-
(803,029)
907,308
14,765
(19,034,163)
(8,220,232)
(528,095)
(65,226)
(528,095)
(65,226)
(2,724,550)
118,072
-
14,961,143
- 12,242,104
(5,045)
111,700
3,171,604
-
12,354,665 15,520,363
(7,207,593)
7,234,905
7,677,163
469,570 $
442,257
7,677,163
$
Notes payable of $13,534,426 and Accounts Payable of $112,487, net of $2,271,637 in deferred costs related to the 2015 PPM offering,
were converted to equity during the year ended December 31, 2016.
Certain options and warrants were exercised utilizing an allowed cashless method. These cashless exercises resulted in an increase to
common stock of $86, an increase to additional paid in capital of $389,848 and a decrease to stock based compensation in equity of
$389,934 during the year ended December 31, 2016.
Capital assets of $2,120,000 were acquired via financing during the year ended December 31, 2016.
Accounts payable of $20,000 were converted to equity during the year ended December 31, 2016
See accompanying notes to the consolidated financial statements.
F-7
1.
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Workhorse Group, Inc.
Notes to Consolidated Financial Statements
The following accounting principles and practices are set forth to facilitate the understanding of data presented in the financial
statements:
Nature of operations and principles of consolidation
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 battery-electric electric vehicles and aircraft that make movement of people and goods more efficient and less harmful
to the environment. As part of the Company’s solution, it also develops cloud-based, real-time telematics performance monitoring
systems that enable fleet operators to optimize energy and route efficiency. Although the Company operates as a single unit through
its subsidiaries, it approaches its development through two divisions, Automotive and Aviation. The Company’s core products,
under development and/or in manufacture, are the medium duty step van, the light duty pickup, the delivery drone and the manned
multicopter.
Workhorse, formerly known as Title Starts Online, Inc. and AMP Holding Inc., was incorporated in the State of Nevada in 2007
with $3,100 of capital from the issuance of common shares to the founding shareholder. On August 11, 2008 the Company received
a Notice of Effectiveness from the U.S. Securities and Exchange Commission, and on September 18, 2008, the Company closed a
public offering in which it accepted subscriptions for an aggregate of 200,000 shares of its common stock, raising $50,000 less
offering costs of $46,234. With this limited capital the Company did not commence operations and remained a “shell company” (as
defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended).
On December 28, 2009, the Company entered into and closed a Share Exchange Agreement with the Shareholders of Advanced
Mechanical Products, Inc. (n/k/a AMP Electric Vehicles, Inc.) (AMP) pursuant to which the Company acquired 100% of the
outstanding securities of AMP in exchange for 14,890,904 shares of the Company’s common stock. Considering that, following the
merger, the AMP Shareholders control the majority of the outstanding voting common stock of the Company, and effectively
succeeded the Company’s otherwise minimal operations to those that are AMP. AMP is considered the accounting acquirer in this
reverse-merger transaction. A reverse-merger transaction is considered and accounted for as a capital transaction in substance; it is
equivalent to the issuance of AMP securities for net monetary assets of the Company, which are deminimus, accompanied by a
recapitalization. Accordingly, goodwill or other intangible assets have not been recognized in connection with this reverse merger
transaction. AMP is the surviving entity and the historical financials following the reverse merger transaction will be those of
AMP. The Company was a shell company immediately prior to the acquisition of AMP pursuant to the terms of the Share
Exchange Agreement. As a result of such acquisition, the Company operations are now focused on the design, marketing and sale
of vehicles with an all-electric power train and battery systems. Consequently, we believe that acquisition has caused the Company
to cease to be a shell company as it now has operations. The Company formally changed its name to AMP Holding Inc. on May 24,
2010.
Since the acquisition, the Company has devoted the majority of its resources to the development of an all-electric drive system
capable of moving heavy large vehicles ranging from full size SUV’s up to and including Medium Duty Commercial
trucks. Additionally, in February 2013, the Company formed a new wholly owned subsidiary, AMP Trucks Inc., an Indiana
corporation. On March 13, 2013 AMP Trucks Inc. closed on the acquisition of an asset purchase of Workhorse Custom Chassis,
LLC. The assets included in this transaction included: the Workhorse brand, access to the dealer network of 440 dealers
nationwide, intellectual property, and all physical assets which included the approximately 250,000 sq. ft. of facilities on 48 acres of
land in Union City, Indiana. This acquisition allows the Company to position itself as a medium duty OEM capable of producing
new chassis with electric, propane, compressed natural gas, and hybrid configurations, as well as gasoline drive systems.
On April 16, 2015 the Company filed Articles of Merger with the Secretary of State of the State of Nevada to change the name from
“AMP Holding Inc.” to “Workhorse Group Inc.”. The Company believed that this change will allow investors, customers and
suppliers to better associate the Company with the Workhorse brand, which is well known in the market.
The consolidated financial statements include Workhorse Group Inc. and its wholly owned subsidiaries, together referred as “The
Company”. Intercompany transactions and balances are eliminated in consolidation.
The Company’s wholly owned subsidiaries include Workhorse Technologies Inc., Workhorse Motor Works Inc. and Workhorse
Properties Inc.
F-8
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 has negative working capital and
stockholders’ deficits. 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. 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 from the sale of common, preferred stock, and/or
convertible debentures. Obtaining such working capital is not assured. The Company is currently starting production and is
switching focus from R&D to manufacturing.
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.
Certain reclassifications were made to the prior year financial statements to conform to the current year presentation. These
reclassifications had no effect on previously reported results of operation or stockholders’ deficit.
Financial instruments
The carrying amounts of financial instruments including cash, inventory, accounts payable and short-term debt approximate fair
value because of the relatively short maturity of these instruments.
Accounts receivable
Accounts receivable consist of collectible amounts for products and services rendered. The Company carries its accounts receivable
at invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and
establishes an allowance for doubtful accounts based on a history of past write-offs and collections and current credit conditions.
The Company generally does not require collateral for accounts receivable. During 2016 and 2015, sales to one customer
approximated 91% and 100% of net sales, respectively. At December 31, 2016 the entire balance of accounts receivable was due
from two customers.
Lease Receivable
The Company’s leasing activities consist of the leasing of trucks which are classified as direct financing leases. Revenue is
recognized at the inception of the lease. The leases have a term of 8 years. Future payments to be received on the leases are as
follows:
2017
2018
2019
2020
2021
Thereafter
Inventory
98,400
41,375
41,375
41,375
41,375
154,994
418,894
Inventory is stated at the lower of cost or market. Manufactured inventories are valued at average cost, and consist of raw materials,
work in process and finished goods.
Property and depreciation
Property and equipment is recorded at cost. Major renewals and improvements are capitalized while replacements, maintenance
and repairs, which do not improve or extend the lives of the respective assets, are expensed. When property and equipment is
retired or otherwise disposed of, a gain or loss is realized for the difference between the net book value of the asset and the
proceeds realized thereon. Depreciation is calculated using the straight-line method, based upon the following estimated useful
lives:
Buildings:
Leasehold improvements:
Software:
Equipment:
15 - 30 years
7 years
3 - 6 years
5 years
Vehicles and prototypes:
3 - 5 years
F-9
Common stock
On April 22, 2010, the directors of the Company approved a forward stock split of the common stock of the Company on a 14:1
basis. On May 12, 2010, the stockholders of the Company voted to approve the amendment of the certificate of incorporation
resulting in a decrease of the number of shares of common stock. Management filed the certificate of amendment decreasing the
authorized shares of common stock with the State of Nevada on September 8, 2010. On February 11, 2015, the Company filed a
certificate of amendment to its articles of incorporation to increase the authorized shares of common stock to 50,000,000.
On December 9, 2015, the Company filed a Certificate of Amendment to its Certificate of Incorporation to implement a one-for-ten
reverse split of the Corporation’s issued and outstanding common stock (the “Reverse Stock Split”), as authorized by the
stockholders of the Company. The Reverse Stock Split became effective at the open of trading on December 11, 2015 (the
“Effective Date”). As of the Effective Date, every ten shares of issued and outstanding common stock were combined into one
newly issued share of common stock. No fractional shares were issued in connection with the Reverse Stock Split. Total cash
payments made by the Company to stockholders in lieu of fractional shares was not material.
All references in the financial statements and MD&A to number of common shares, price per share and weighted average shares of
common stock have been adjusted to reflect the Reverse Stock Split on a retroactive basis for all prior periods presented, unless
otherwise noted, including reclassifying an amount equal to the reduction in par value of common stock to additional paid in capital.
The capital stock of the Company is as follows:
Preferred Stock - The Company has authorized 75,000,000 shares of preferred stock with a par value of $.001 per share. These
shares may be issued in series with such rights and preferences as may be determined by the Board of Directors. There are no shares
of preferred stock outstanding.
Common Stock - The Company has authorized 50,000,000 shares of common stock with a par value of $0.001 per share.
Revenue recognition / customer deposits
It is the Company's policy that revenues will be recognized in accordance with SEC Staff Bulletin (SAB) No. 104, "Revenue
Recognition". Under SAB 104, product revenues (or service revenues) are recognized when persuasive evidence of an arrangement
exists, delivery has occurred (or service has been performed), the sales price is fixed and determinable, and collectability is
reasonably assured.
Income taxes
With the consent of its shareholders, at the date of inception, the Company elected under the Internal Revenue Code to be taxed as
an S corporation. Since shareholders of an S corporation are taxed on their proportionate share of the Company’s taxable income, an
S corporation is generally not subject to either federal or state income taxes at the corporate level. On December 28, 2009 pursuant
to the merger transaction the Company revoked its election to be taxed as an S-corporation.
As no taxable income has occurred from the date of this merger to December 31, 2016 cumulative deferred tax assets of
approximately $17.9 million are fully reserved, and no provision or liability for federal or state income taxes has been included in
the financial statements. Carryover amount are:
Approximate net operating loss ($ millions)
3.6
6.7
3.9
4.7
6.1
9.0
18.7
F-10
Carryover
to be used
against
taxable
income
generated
through
year
2030
2031
2032
2033
2034
2035
2036
Research and development costs
The Company expenses research and development costs as they are incurred. Research and Development costs were approximately
$6.1 million and $4.7 million for the years ended December 31, 2016 and 2015 respectively, consisting primarily of personnel costs
for our teams in engineering and research, prototyping expense, and contract and professional services. Union City plant expenses
prior to the start of production are also included in research and development expenses.
Basic and diluted loss per share
Basic loss per share is computed by dividing net loss available to common shareholders (numerator) by the weighted average
number of shares outstanding (denominator) during the period. For all periods, all of the Company’s common stock equivalents
were excluded from the calculation of diluted loss per common share because they were anti-dilutive, due to the Company’s net
losses.
Stock based compensation
The Company accounts for its stock based compensation in accordance with “Share-Based Payments” (codified in FASB ASC
Topic 718 and 505). The Company recognizes in its statement of operations the grant-date fair value of stock options and warrants
issued to employees and non-employees. The fair value is estimated on the date of grant using a lattice-based valuation model that
uses assumptions concerning expected volatility, expected term, and the expected risk-free rate of return. For the awards granted,
the expected volatility was estimated by management as 50% based on a range of forecasted results. The expected term of the
awards granted was assumed to be the contract life of the option or warrant (one, two, three, five or ten years as determined in the
specific arrangement). The risk-free rate of return was based on market yields in effect on the date of each grant for United States
Treasury debt securities with a maturity equal to the expected term of the award.
Related party transactions
Certain stockholders and stockholder family members have advanced funds or performed services for the Company. These services
are believed to be at market rates for similar services from non-related parties. Related party accounts payable are segregated in the
balance sheet.
Subsequent events
The Company evaluates events and transactions occurring subsequent to the date of the consolidated financial statements for
matters requiring recognition or disclosure in the consolidated financial statements. The accompanying consolidated financial
statements consider events through March 14, 2017, the date on which the consolidated financial statements were available to be
issued.
2.
INVENTORY
As of December 31, 2016 and 2015, our inventory consisted of the following:
Finished Goods
Work in Process
Parts
F-11
2016
212,884
987,665
1,264,286
2,464,835
2015
-
-
78,917
78,917
3.
PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2016 and 2015, our property, plant and equipment, net, consisted of the following:
Land
Buildings
Leasehold Improvements
Software
Equipment
Vehicles and prototypes
Less accumulated depreciation
2016
700,000 $
2015
$
300,000
5,900,000 3,800,000
19,225
27,721
724,507
198,965
7,548,229 5,070,418
(1,545,598) (1,334,059)
$ 6,002,631 $ 3,736,359
19,225
57,587
808,512
62,905
4.
LONG-TERM DEBT
As of December 31, 2016 and 2015 the long-term debt consists of the following:
Secured mortgage payable to Bank for the purchase of the 100 Commerce Drive Building due in
monthly installments of $11,900.
1,767,950
Note payable, former building owner with only payments due in monthly installments of $1,604 at
5.5%. A balloon payment of $350 thousand plus unpaid interests due August 2018.
350,000
-
-
Secured debenture payable to Workhorse Custom Chassis, LLC, due March 2016 plus interest at
10%. The debenture is secured by the real estate and related assets of the plant located in Union
City, Indiana. Paid in February 2016
Note payable to the City of Loveland with interest of 8%. The note is unsecured and contains
restrictions on the use of proceeds.
- 2,722,500
50,000
50,000
2016
2015
Less current portion
Long term debt
Aggregate maturities of long-term debt are as follows:
2018
2019
2020
2021
2022
Thereafter
F-12
2,167,950 2,772,500
79,521 2,772,500
-
2,088,429
381,498
33,607
35,858
38,260
44,345
1,554,861
2,088,429
The note payable to the City of Loveland contains job creation incentives whereby each annual payment may be forgiven by the
City upon the Company meeting minimum job creation benchmarks. This loan agreement amended the incentives to 30 full time
employees within the City of Loveland with payroll totaling $135,000 by October 31, 2013 and 40 employees with payroll totaling
$175,000 by July 31, 2014, continuing with an average of 40 employees with payroll totaling $175,000 thereafter. The proceeds
from this loan were to be used for qualified disbursements only, and the Company has been notified it did not meet the requirements
for qualified disbursements and for forgiveness of the 2012 principal and interest payment, which is past due. In 2013 the Company
made payments to an escrow account totaling $22,900.
5.
6.
SHAREHOLDER AND RELATED PARTY ADVANCES
As of December 31, 2016, the Company had deposits for $229,772 that were not yet issued as common stock.
LEASE OBLIGATIONS
On October 1, 2011 the Company began leasing operating facilities under an agreement expiring on September 30, 2018. The
building subject to the lease was purchased in December 2016.
F-13
7.
STOCK BASED COMPENSATION
Options to directors, officers and employees
The Company maintains, as adopted by the board of directors, the 2014 Stock Incentive Plan, the 2014 Stock Compensation Plan,
2013 Incentive Stock Plan, the 2012 Incentive Stock Plan, the 2011 Incentive Stock Plan and the 2010 Stock Incentive Plan (the
plans) providing for the issuance of up to 1,100,000 options to employees, officers, directors or consultants of the
Company. Incentive stock options granted under the plans may only be granted with an exercise price of not less than fair market
value of the Company’s common stock on the date of grant (110% of fair market value for incentive stock options granted to
principal stockholders). Non-qualified stock options granted under the plans may only be granted with an exercise price of not less
than 85% of the fair market value of the Company’s common stock on the date of grant. Awards under the plans may be either
vested or unvested options. The unvested options vest ratably over two years for options with a five or three-year term and after one
year for options with a two-year term.
In addition to the plans, the Company has granted, on various dates, stock options to directors, officers and employees to purchase
common stock of the Company. The terms, exercise prices and vesting of these awards vary.
The following table summarizes option activity for directors, officers and employees:
Outstanding Stock Options
Weighted
Average
Grant
Date Fair
Value
Weighted
Average
Exercise
Price
per Share
2.34 $
- $
1.93 $
1.30 $
- $
- $
2.21 $
- $
6.38 $
1.79 $
- $
3.83 $
2.46 $
per Share
1.52
-
1.29
0.75
-
-
1.46
-
2.82
0.49
-
1.65
1.53
Weighted
Average
Remaining
Exercise
Term
in Months
41
-
55
-
-
-
49
-
58
-
-
-
43
Shares
Available
for Grant
Number of
Shares
1,120,000
(443,436)
-
-
-
80,907 1,667,068 $
- $
443,436 $
(130,070) $
- $
- $
757,471 1,980,434 $
500,000
- $
794,500 $
(794,500)
(138,113) $
-
-
- $
492,500 $
-
462,971 3,129,321 $
Balance, December 31, 2014
Additional stock reserved
Granted
Exercised
Forfeited
Expired
Balance December 31, 2015
Additional stock reserved
Granted
Exercised
Forfeited
Expired
Balance December 31, 2016
The Company recorded $768,196 and $298,044 compensation expense for stock options to directors, officers and employees for the
years ended December 31, 2016 and 2015 respectively. As of December 31, 2016, unrecognized compensation expense of
$2,622,748 is related to non-vested options granted to directors, officers and employees which is anticipated to be recognized over
the next 46 months, commensurate with the vesting schedules.
F-14
Options to consultants
The Company has also granted, on various dates, stock options to purchase common stock of the Company to consultants for
services previously provided to the Company. The terms, exercise prices and vesting of these awards vary.
The following table summarizes option activity for consultants:
Outstanding Stock Options
Weighted
Average
Grant
Date Fair
Value
Weighted
Average
Exercise
Price
per Share
1.27 $
- $
- $
0.10 $
- $
- $
0.36 $
- $
4.99 $
0.34 $
- $
- $
0.49 $
per Share
1.31
-
-
0.98
-
-
1.01
-
0.44
0.81
-
-
1.05
Weighted
Average
Remaining
Exercise
Term
in Months
50
-
-
-
-
-
41
-
52
-
-
-
37
Shares
Available
for Grant
Number of
Shares
39,327
-
-
-
59,976
-
99,303
-
(9,000)
-
-
-
90,303
399,273 $
- $
- $
(32,524) $
(59,976) $
- $
306,773 $
- $
9,000 $
(138,312) $
- $
- $
177,461 $
Balance, December 31, 2014
Additional stock reserved
Granted
Exercised
Forfeited
Expired
Balance December 31, 2015
Additional stock reserved
Granted
Exercised
Forfeited
Expired
Balance December 31, 2016
The Company recorded $31,356 and $71,530 compensation expense for stock options to consultants for the years ended December
31, 2016 and 2015, respectively. As of December 31, 2016, unrecognized compensation expense of $137,941 is related to non-
vested options granted to consultants which is anticipated to be recognized over the next 31 months, commensurate with the vesting
schedules.
Warrants to placement agent and consultants
Through December 2011, the Company compensated the placement agent for assisting in the sale of the Company’s securities by
paying the placement agent commissions and issuing the placement agent common stock purchase warrants to purchase shares of
the Company’s common stock. The warrants have a five-year term and various exercise prices.
The Company has also granted, on various dates, stock warrants to purchase common stock of the Company to consultants for
services previously provided to the Company. The terms, exercise prices and vesting of these awards vary.
F-15
The following table summarizes warrant activity for the placement agent and consultants:
Outstanding Warrants
Weighted
Average
Exercise
Price
per Share
3.59 $
- $
1.40 $
2.36 $
- $
- $
2.79 $
- $
- $
2.69 $
- $
6.00 $
2.56 $
Weighted
Average
Grant
Date Fair
Value
per Share
1.51
-
1.17
1.09
-
-
1.26
-
-
0.43
-
2.70
1.16
Weighted
Average
Remaining
Exercise
Term
in Months
14
-
59
-
-
-
9
-
-
-
-
-
17
Shares
Available
for Grant
Number of
Shares
274,098
-
(63,871)
-
-
-
210,227
-
-
-
-
-
210,227
410,149 $
- $
63,871 $
(161,719) $
(5,478) $
- $
306,823 $
- $
- $
(60,160) $
- $
87,458 $
334,121 $
Balance, December 31, 2014
Additional stock reserved
Granted
Exercised
Forfeited
Expired
Balance December 31, 2015
Additional stock reserved
Granted
Exercised
Forfeited
Expired
Balance December 31, 2016
The Company recorded $0 and $32,944 compensation expense for stock warrants to the placement agent and consultants for the
years ended December 31, 2016 and 2015, respectively. There is no unrecognized compensation expense for the placement agent
warrants because they are fully vested at date of grant.
Warrants to directors and officers
In December 2010 and May 2011, the Company issued to certain directors and officers common stock purchase warrants to acquire
shares of common stock at an exercise price of $2.00 per share for a period of five years. In November 2011, under the terms of a
Promissory Note issued to a director and officer, common stock purchase warrants were issued to acquire 10,000 shares of common
stock at an exercise price of $5.00 per share for a period of one year. In May 2012, a director and officer received 10,000 2012
Warrants to acquire common stock of the Company at an exercise price of $5.00 for a period of three years. In June 2012, a director
and officer converted secured and unsecured loans provided to the Company from September 2011 to June 2012 in the aggregate
amount of $389,250 into 2012 Notes and 2012 Warrants. In November 2012, the Company entered into a Note and Warrant
Amendment and Conversion Agreement whereby the holders and 2012 Investors converted all principal and interest under the 2012
Notes into shares of common stock. Further, the exercise price of the 2012 Warrants was reduced to $2.50 per share. The $7,388
cost of the reduction in the exercise price is included in stock based compensation expense for the year ended December 31, 2012.
F-16
The following table summarizes warrant activity for directors and officers:
Balance, December 31, 2014
Additional stock reserved
Granted
Exercised
Forfeited
Expired
Balance December 31, 2015
Additional stock reserved
Granted
Exercised
Forfeited
Expired
Balance December 31, 2016
Shares
Available
for Grant
Number of
Shares
348,925
-
-
-
-
-
348,925
-
-
-
-
-
348,925
338,925 $
- $
- $
- $
- $
- $
338,925 $
- $
- $
- $
- $
150,000 $
488,925 $
Outstanding Warrants
Weighted
Average
Grant
Date Fair
Value
Weighted
Average
Exercise
Price
per Share
17.83 $
- $
- $
- $
- $
- $
20.00 $
- $
- $
- $
- $
20.00 $
20.00 $
per Share
0.95
-
-
-
-
-
1.02
-
-
-
-
0.15
1.02
Weighted
Average
Remaining
Exercise Term
in Months
9
-
-
-
-
-
4
-
-
-
-
-
4
The Company recorded no compensation expense for stock warrants to directors and officers for the years ended December 31,
2016 and 2015, respectively. There is no unrecognized compensation expense for these warrants because they are fully vested at
date of grant.
F-17
8.
RECENT PRONOUNCEMENTS
In April 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and affects the guidance
in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. ASU No. 2016-10 clarifies
the following two aspects of Topic 606: evaluating whether promised goods and services are separately identifiable, and
determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual
property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied over time. ASU
No. 2016-10 is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim
periods within that reporting period. Transitional guidance is included in the update. Earlier adoption is permitted only as of annual
reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Adoption of
ASU No. 2016-10 is not expected to have a material impact on the Company's consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting, and affects all entities that issue share-based payment awards to their employees. The new
guidance involves several aspects of the accounting for share-based payment transactions, including income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under ASU No. 2016-09,
any excess tax benefits or tax deficiencies should be recognized as income tax expense or benefit in the income statement. Excess
tax benefits are to be classified as an operating activity in the statement of cash flows. In accruing compensation cost, an entity can
make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, as required under
current guidance, or account for forfeitures when they occur. For an award to qualify for equity classification, an entity cannot
partially settle the award in excess of the employer's maximum statutory withholding requirements. Such cash paid by an employer
when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash
flows. The amendments in ASU No. 2016-09 are effective for public business entities for fiscal years, and for interim periods
within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Adoption of ASU No. 2016-07 is not
expected to have a material impact on the Company's consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net), and affects the guidance in ASU No. 2014-09, "Revenue from Contracts
with Customers (Topic 606)," which is not yet effective. When another party is involved in providing goods or services to a
customer, ASU No. 2014-09 requires an entity to determine whether the nature of its promise is to provide the specified good or
service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the
entity is an agent). The amendments in ASU No. 2016-08 are intended to improve the operability and understandability of the
implementation guidance in ASU No. 2014-09 on principal versus agent considerations by offering additional guidance to be
considered in making the determination. ASU No. 2016-08 is effective for public companies for annual reporting periods beginning
after December 15, 2017, including interim periods within that reporting period. Transitional guidance is included in the update.
Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting
periods within that reporting period. Adoption of ASU No. 2016-08 is not expected to have a material impact on the Company's
consolidated financial statements.
F-18
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and requires a lessee to recognize in the statement of
financial position a liability to make lease payments ("the lease liability") and a right-of-use asset representing its right to use the
underlying asset for the lease term, initially measured at the present value of the lease payments. When measuring assets and
liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably
certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to
purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most
variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments. A
lessee shall classify a lease as a finance lease if it meets any of five listed criteria: 1) The lease transfers ownership of the underlying
asset to the lessee by the end of the lease term. 2) The lease grants the lessee and option to purchase the underlying asset that the
lessee is reasonably certain to exercise. 3) The lease term is for the major part of the remaining economic life of the underlying
asset. 4) The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds
substantially all of the fair value of the underlying asset. 5) The underlying asset is of such a specialized nature that it is expected to
have no alternative use to the lessor at the end of the lease term. For finance leases, a lessee shall recognize in the statement of
comprehensive income interest on the lease liability separately from amortization of the right-of-use asset. Amortization of the
right-of-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee
expects to consume the right-of-use asset’s future economic benefits. If the lease does not meet any of the five criteria, the lessee
shall classify it as an operating lease and shall recognize a single lease cost on a straight-line basis over the lease term. For leases
with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to
recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases
generally on a straight-line basis over the lease term. The amendments in this update are to be applied using a modified retrospective
approach, as defined, and are effective for public business entities for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2018. Early application is permitted. The Company is currently evaluating the financial statement
impact of adopting the new guidance.
In August 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in this update defer the
effective date of Update 2014-09 for all entities by one year. Public companies should apply the guidance in Update 2014-09 to
annual reporting periods beginning after December 31, 2017, including interim reporting periods within that reporting period. Early
adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods
within that reporting period.
9.
PRIVATE PLACEMENT MEMORANDUM AND SUBSEQUENT EVENT
During 2015, the Company entered into a placement agency agreement with a third party to assist in raising capital. Direct costs of
this private placement memorandum (PPM) will be deferred and reduce the proceeds from the shares sold in the PPM. Costs of
$2,271,637 have been incurred and capitalized related to this PPM as of December 31, 2015 and are recorded in prepaid expenses,
deposits and deferred costs.
Total amount to be converted to common stock is $13,534,426 was recorded as notes payable as of December 31, 2015. Net
proceeds to the Company were $12,242,104 which was converted on early 2016.
In February 1, 2017, the Company announced the completion of its underwritten public offering of 6,500,000 shares of its common
stock at a public offering price of $3.00 per share. In addition, the underwriters exercised an option to purchase an additional
975,000 shares of common stock at the public offering price, less the underwriting discounts and commissions.
All of the shares in the offering were sold by Workhorse Group, with gross proceeds to Workhorse Group of approximately $22.4
million and net proceeds of approximately $20.5 million, after deducting underwriting discounts and commissions and estimated
offering expenses.
10.
QUARTERLY FINANCIAL DATA (UNAUDITED)
2016
First quarter
Second quarter
Third quarter
Fourth quarter
2015
First quarter
Second quarter
Third quarter
Fourth quarter
Sales
Gross profit
(loss)
Net loss
Basic and
diluted loss
per share
$
236,000 $ (228,377) $ (4,380,012) $
1,234,600 (1,060,075) (2,935,830)
1,906,000 (2,267,364) (5,262,859)
3,038,200 (3,607,646) (6,977,167)
(0.23)
(0.14)
(0.25)
(0.28)
$
- $
- $ (2,059,358) $
(0.13)
67,980
72,000
-
67,980 (1,881,292)
72,000 (3,793,108)
- (1,693,095)
(0.12)
(0.24)
(0.09)
F-19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end
of the period covered by this Annual Report. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer
have concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as
required by Sarbanes-Oxley (SOX) Section 404(a). The Company’s internal control over financial reporting is a process designed under the
supervision of the Company’s Principal Executive Officer and Principal Financial Officer and effected by the Company’s Board of
Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company’s consolidated financial statements for external purposes in accordance with United States generally accepted
accounting principles.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also,
projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
As of December 31, 2016, management assessed the effectiveness of the Company’s internal control over financial reporting based on the
criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, the Company’s management concluded that, as of December 31, 2016, the Company’s internal
control over financial reporting was effective.
The independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report has
issued an attestation report on the Company’s internal control over financial reporting which attestation report which appears herein.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the fourth fiscal quarter of the year ended
December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Cash
The cash balance as of March 14, 2017 is $15.3 million.
32
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The officers and director of the Company are as follows:
PART III
Name
Raymond J. Chess
Harry DeMott
H. Benjamin Samuels
Gerald B. Budde
Stephen S. Burns
Duane Hughes
Julio C. Rodriguez
Age
58
49
50
55
56
53
58
Position
Director, Chairman
Director
Director
Director
Director, Chief Executive Officer, Secretary and Treasurer
President
Chief Financial Officer
Officers are elected annually by the Board of Directors (subject to the terms of any employment agreement) to hold such office until an
officer’s successor has been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board.
Our officers and directors have not been the subject of any order, judgment, or decree of any court of competent jurisdiction, or any
regulatory agency permanently or temporarily enjoining, barring, suspending or otherwise limiting them from acting as an investment
advisor, underwriter, broker or dealer in the securities industry, or as an affiliated person, director or employee of an investment company,
bank, savings and loan association, or insurance company or from engaging in or continuing any conduct or practice in connection with any
such activity or in connection with the purchase or sale of any securities.
Our officers and directors have not been convicted in any criminal proceeding (excluding traffic violations) and are not the subject of any
criminal proceedings which are currently pending.
Background of Executive Officers and Directors
Raymond J. Chess, Director Chairman
Prior to joining the Company, Mr. Chess served as a Global Vehicle Line Executive for General Motors Co. (“GM”), where he was
responsible for global, cross functional general management of the GM crossover market segment from May 2009 through December 2012.
Prior to this, from August 2001 until April 2009, Mr. Chess was responsible for GM’s commercial truck segment. Previous GM
assignments included leadership roles in the full size truck segment, metal fabrication and body assembly. Mr. Chess's background includes
broad, hands-on manufacturing leadership roles with manufacturing, engineering and manufacturing floor operations. Mr. Chess holds a
Bachelor’s of Science degree in Mechanical Engineering from Kettering University and an MBA from Indiana University.
Stephen S. Burns, Director, Chief Executive Officer, Treasurer and Secretary
Mr. Burns is a Co-Founder in the Company and has served as the Company’s CEO since inception. Mr. Burns was appointed as CEO, and
Secretary of the Company on December 28, 2009. Mr. Burns had founded several companies, most recently iTookThisOnMyPhone.com, a
mobile photo and video-sharing technology company, MobileVoiceControl, Inc. a developer of high-end speech recognition software for
smartphones sold to Nuance Communications (NASDAQ:NUAN), Inc. in 2006, AskMeNow [OTC:AKMN] a mobile search and
information delivery system sold to Ocean West Holdings in 2005, PocketScript, the leading mobile electronic prescription system in the
world which was sold to ZixCorp [NASDAQ:ZIXI] in 2002, Over The Line/AdLink, sold to Gannett Co. Inc. (NYSE:GCI) in 1994 and the
design and development of Suspension Parameter Measurement Machines.
33
H. Benjamin Samuels, Director
Mr. Samuels served as CEO of Victory Packaging from May 2007 through 2015, during which time he led an executive team which
currently manages more than 1,500 employees. In 2015, Mr. Samuels was appointed as Co-President after Victory Packaging was acquired
by KapStone Paper and Packaging Corporation. From 1997 through 2007, Mr. Samuels served as Vice Chairman and leader of Victory
Packaging's national accounts group, real estate, finance and legal departments, achieving a period of unprecedented growth in sales and
revenues. Mr. Samuels joined Victory Packaging in 1995 as its regional operating manager of Texas. Mr. Samuels is an active member in
the community, where he recently served as the Chairman of the Houston Food Bank. Mr. Samuels also served as the President of the
Houston Chapter of the American Jewish Committee before joining its National Board of Governors. Mr. Samuels served on the boards of
and held leadership positions with American Leadership Forum, Serve Houston, Holocaust Museum Houston, Jewish Federation of Greater
Houston and Jewish Family Service. Mr. Samuels received a Bachelor’s degree in American studies and economics from Amherst College
in Massachusetts well as an MBA from the Harvard Graduate School of Business Administration.
Gerald Budde, Director
From September 2011 through the present, Mr. Budde serves as the Chief Financial Officer of AssuredPartners NL, LLC. and maintains
titles for other affiliated companies. Mr. Budde was previously the Chief Financial Officer and shareholder of Neace Lukens Holding
Company and Subsidiaries from July 2003 through September 2011, when it was acquired by Assured Partners Capital, Inc.
AssuredPartners was founded in 2011 and is a national partnership of leading independent property and casualty and employee benefits
brokerage firms. Mr. Budde was the Machine Tool Group Controller of Cincinnati Milacron Inc. from April 1994 to October 1998, at
which time he was appointed as Vice President of Finance after Cincinnati Milacron’s machine tool group was acquired by UNOVA
Industrial Automation Systems, Inc. Mr. Budde remained in that role prior to joining Neace Lukens in 2003. Mr. Budde was a Certified
Public Accountant until he left public accounting Ernst & Young and after 11 years of service in 1994. Mr. Budde is currently a member of
the Board of Trustees and the Finance Committee of Mt. Notre Dame high school and is also a member of the Finance Commission of St.
Margaret of York parish and school. Mr. Budde received a Bachelor’s degree in Accounting from the University of Dayton.
Harry DeMott, Director
Mr. DeMott, has more than 25 years experience in the investment community, having worked as an analyst and portfolio manager at
leading brokerage firms and investment management firms. He has also served on the boards of several companies. He is a long-time
operator and investor in the media, sports and entertainment industries. He is the co-founder of Raptor Ventures I LP, where he has been a
General Partner since February 2011. In addition, Mr. DeMott is a member of the Board of Directors of Fan Manager, SecurityPoint Media,
Signal360 and Ticket Evolution.
He also serves as founder and managing partner for Hamerle Investments, a family investment company. Prior to co-founding Raptor
Ventures, Mr. DeMott served on the Board of Directors of Pandora Media, Inc. from 2006 through 2011. Earlier, he served as senior analyst
at Knighthead Capital Management, analyst at King Street Capital Management, portfolio manager at Bourgeon Capital Management and
managing member and founder at Gothic Capital Management. During this 16-year period, Mr. DeMott focused on finding, fostering and
investing in disruptive technology companies. He previously spent nine years at First Boston (now Credit Suisse), where he was a director
in the equity research division specializing in radio, TV, outdoor advertising and cell towers. He earned a bachelor of arts in economics
from Princeton University in 1988 and a MBA in finance from New York University in 1991.
Duane Hughes, President
Mr. Hughes is a senior-level executive with more than 20 years experience including direct business relationships in the automotive,
advertising, and technology segments. Prior to joining Workhorse/AMP Electric Vehicles, Duane served as Chief Operating Officer for
Cumulus Interactive Technologies Group. As COO, Duane was responsible for managing the company’s day-to-day sales and operations.
He was responsible for all operations of the business unit. Prior to Cumulus ITG, Duane spent nearly fifteen years in senior management
positions with Gannett Co., Inc., including his duties as Vice President of Sales and Operations for Gannett Media Technologies
International.
34
Julio C. Rodriguez, Chief Financial Officer
Mr. Rodriguez is a finance executive with over 25 years of experience in financial and operational leadership roles within various industries
including the automotive industry. Most recently, he served in various executive roles for Genuine Parts Company ("GPC") including
Director Process Improvement for GPC corporate, and Vice President Finance & Corporate Secretary for Johnson Industries, a subsidiary
of GPC. Prior to GPC Mr. Rodriguez served as Director of International Finance for Federal Mogul an OEM manufacturer of automotive
systems, and Director of Finance for Chiquita Brands International in the fruit ingredients manufacturing division. Mr. Rodriguez was a
Certified Public Accountant until he left public accounting working for Arthur Andersen for 8 years. Mr. Rodriguez holds a Bachelor of
Science degree in Business Administration and a Bachelor of Science degree in Accounting from Catholic University Caracas, Venezuela.
Family Relationships
There are no family relationships among our directors and executive officers. There is no arrangement or understanding between or among
our executive officers and directors pursuant to which any director or officer was or is to be selected as a director or officer.
Involvement in Certain Legal Proceedings
To our knowledge, during the last ten years, none of our directors and executive officers has:
● Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at
the time of the bankruptcy or within two years prior to that time.
● Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other
minor offenses.
● Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking activities.
● Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to
have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
● Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory
organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority
over its members or persons associated with a member.
35
CORPORATE GOVERNANCE
Governance Policies of the Board of Directors
The Board of Directors has adopted Governance Policies of the Board of Directors to assist the Board in the exercise of its duties and
responsibilities and to serve the best interests of the Company and its stockholders. These policies provide a framework for the conduct of
the Board’s business.
Committees
Establishment of Board Committees and Adoption of Charters
On December 17, 2015, the Company established a Nominating and Corporate Governance Committee, a Compensation Committee and an
Audit Committee (collectively, the "Committees") and approved and adopted charters to govern each of the Committees.
In connection with the establishment of the Nominating and Corporate Governance Committee, Compensation Committee and Audit
Committee, the Board of Directors of the Company appointed members to each such committee. Currently, all three committees are
comprised of three (3) directors meeting the requirements set forth in each applicable charter. The membership of these three standing
committees of the Board of Directors of the Company is as follows:
Nominating and Corporate
Governance Committee
Compensation Committee
Audit Committee
Raymond Chess (Chairman)
Gerald Budde
Harry DeMott
Harry DeMott (Chairman)
Gerald Budde
Benjamin Samuels
Gerald Budde (Chairman)
Raymond Chess
Benjamin Samuels
36
Nominating and Corporate Governance Committee.
Our board of directors has determined that each of the members of the Governance Committee is an “independent director” as defined by
the rules of The NASDAQ Stock Market, Inc. The Governance Committee is generally responsible for recommending to our full board of
directors policies, procedures, and practices designed to help ensure that our corporate governance policies, procedures, and practices
continue to assist the board of directors and our management in effectively and efficiently promoting the best interests of our stockholders.
The Governance Committee is also responsible for selecting and recommending for approval by our board of directors and our stockholders
a slate of director nominees for election at each of our annual meetings of stockholders, and otherwise for determining the board committee
members and chairmen, subject to board of directors ratification, as well as recommending to the board director nominees to fill vacancies
or new positions on the board of directors or its committees that may occur or be created from time to time, all in accordance with our
bylaws and applicable law. The Governance Committee’s principal functions include:
● developing and maintaining our corporate governance policy guidelines;
● developing and maintaining our codes of conduct and ethics;
● overseeing the interpretation and enforcement of our Code of Conduct and our Code of Ethics for Chief Executive Officer and
Senior Financial and Accounting Officers;
● evaluating the performance of our board of directors, its committees, and committee chairmen and our directors; and
● selecting and recommending a slate of director nominees for election at each of our annual meetings of the stockholders and
recommending to the board director nominees to fill vacancies or new positions on the board of directors or its committees that may
occur from time to time.
During 2016, the Governance Committee meet one time. The Governance Committee is governed by a written charter approved by our
board of directors. A copy of the Governance Committee’s charter is posted on the Company’s website at www.workhorse.com in the
“Investors” section of the website. In identifying potential independent board of directors candidates with significant senior-level
professional experience, the Governance Committee solicits candidates from the board of directors, senior management and others and may
engage a search firm in the process. The Governance Committee reviews and narrows the list of candidates and interviews potential
nominees. The final candidate is also introduced and interviewed by the board of directors and the lead director if one has been appointed.
In general, in considering whether to recommend any particular candidate for inclusion in our board of directors’ slate of recommended
director nominees, the Governance Committee will apply the criteria set forth in our corporate governance guidelines. These criteria include
the candidate’s integrity, business acumen, commitment to understanding our business and industry, experience, conflicts of interest and
the ability to act in the interests of our stockholders. Further, specific consideration is given to, among other things, diversity of background
and experience that a candidate would bring to our board of directors. The Governance Committee does not assign specific weights to
particular criteria and no particular criterion is a prerequisite for each prospective nominee. We believe that the backgrounds and
qualifications of our directors, considered as a group, should provide a composite mix of experience, knowledge and abilities that will
allow our board of directors to fulfill its responsibilities. Stockholders may recommend individuals to the Governance Committee for
consideration as potential director candidates by submitting their names, together with appropriate biographical information and
background materials to our Governance Committee. Assuming that appropriate biographical and background material has been provided
on a timely basis, the Governance Committee will evaluate stockholder recommended candidates by following substantially the same
process, and applying substantially the same criteria, as it follows for candidates submitted by others.
37
Audit Committee.
We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Our board of directors has determined that the members are all “independent directors” as
defined by the rules of The NASDAQ Stock Market, Inc. applicable to members of an audit committee and Rule 10A-3(b)(i) under the
Exchange Act. In addition, Mr. Budde is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K and
demonstrates “financial sophistication” as defined by the rules of The NASDAQ Stock Market, Inc. The Audit Committee is appointed by
our board of directors to assist our board of directors in monitoring (1) the integrity of our financial statements, (2) our compliance with
legal and regulatory requirements, and (3) the independence and performance of our internal and external auditors. The Audit Committee’s
principal functions include:
● reviewing our annual audited financial statements with management and our independent auditors, including major issues regarding
accounting and auditing principles and practices and financial reporting that could significantly affect our financial statements;
● reviewing our quarterly financial statements with management and our independent auditor prior to the filing of our Quarterly
Reports on Form 10-Q, including the results of the independent auditors’ reviews of the quarterly financial statements;
● recommending to the board of directors the appointment of, and continued evaluation of the performance of, our independent
auditor;
● approving the fees to be paid to our independent auditor for audit services and approving the retention of our independent auditor
for non-audit services and all fees for such services;
● reviewing periodic reports from our independent auditor regarding our auditor’s independence, including discussion of such reports
with the auditor;
● reviewing the adequacy of our overall control environment, including internal financial controls and disclosure controls and
procedures; and
● reviewing with our management and legal counsel legal matters that may have a material impact on our financial statements or our
compliance policies and any material reports or inquiries received from regulators or governmental agencies.
During 2016, the audit committee met one time. A copy of the Audit Committee’s charter is posted on the Company’s website at
www.workhorse.com in the “Investors” section of the website.
Meetings may be held from time to time to consider matters for which approval of our Board of Directors is desirable or is required by law.
A full discussion of our compensation committee can be found under Item 11 – Executive Compensation.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics Policy (the “Code of Ethics”) that applies to all directors and officers. The Code
of Ethics describes the legal, ethical and regulatory standards that must be followed by the directors and officers of the Company and sets
forth high standards of business conduct applicable to each director and officer. As adopted, the Code of Ethics sets forth written standards
that are designed to deter wrongdoing and to promote, among other things:
● honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and
professional relationships;
● compliance with applicable governmental laws, rules and regulations;
● the prompt internal reporting of violations of the Code of Ethics to the appropriate person or persons identified in the code; and
● accountability for adherence to the Code of Ethics.
Company Policies
The Company has established the following written policies that have been distributed and reviewed with all Company employees:
Approval policy, Purchase Requisition policy, Conflict of Interest policy, “Do the Right Thing” (ethics) policy and a Travel and Expense
policy.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and persons who own more
than 10% of the issued and outstanding shares of our common stock to file reports of initial ownership of common stock and other equity
securities and subsequent changes in that ownership with the SEC. Officers, directors and greater than ten percent stockholders are required
by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies
of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31,
2016 all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.
38
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Oversight of Executive Compensation Program
Compensation Committee.
Our compensation committee consists of Harry DeMott, Gerald Budde and Benjamin Samuels. Our board of directors has determined that
each of the members are an “independent director” as defined by the rules of The NASDAQ Stock Market, Inc. applicable to members of a
compensation committee. The Compensation Committee is responsible for establishing the compensation of our senior management,
including salaries, bonuses, termination arrangements, and other executive officer benefits as well as director compensation. The
Compensation Committee also administers our equity incentive plans. During 2016, the Compensation Committee meet one time. The
Compensation Committee is governed by a written charter approved by the board of directors. A copy of the Compensation Committee’s
charter is posted on the Company’s website at www.workhorse.com in the “Investors” section of the website. The Compensation
Committee works with the Chairman of the Board and Chief Executive Officer and reviews and approves compensation decisions regarding
senior management including compensation levels and equity incentive awards. The Compensation Committee also approves employment
and compensation agreements with our key personnel and directors. The Compensation Committee has the power and authority to conduct
or authorize studies, retain independent consultants, accountants or others, and obtain unrestricted access to management, our internal
auditors, human resources and accounting employees and all information relevant to its responsibilities.
The responsibilities of the Compensation Committee, as stated in its charter, include the following:
·
·
·
·
review and approve the Company’s compensation guidelines and structure;
review and approve on an annual basis the corporate goals and objectives with respect to compensation for the Chief Executive
Officer;
review and approve on an annual basis the evaluation process and compensation structure for the Company’s other officers,
including salary, bonus, incentive and equity compensation; and
periodically review and make recommendations to the Board of Directors regarding the compensation of non-management directors.
The Compensation Committee is responsible for developing the executive compensation philosophy and reviewing and recommending to
the Board of Directors for approval all compensation policies and compensation programs for the executive team.
Overview of Executive Compensation
The Company recognizes that people are our primary asset and our principal source of competitive advantage. In order to recruit, motivate
and retain the most qualified individuals as senior executive officers, the Company strives to maintain an executive compensation program
that is competitive in the commerical transportation industry, which is a competitive, global labor market.
The Compensation Committee’s compensation objective is designed to attract and retain the best available talent while efficiently utilizing
available resources. The Compensation Committee compensates executive management primarily through base salary and equity
compensation designed to be competitive with comparable companies, and to align management’s compensation with the long-term
interests of shareholders. In determining executive management’s compensation, the Compensation Committee also takes into
consideration the financial condition of the Company and discussions with the executive.
39
In order to accomplish our goals and to ensure that the Company’s executive compensation program is consistent with its direction and
business strategy, the compensation program for our senior executive officers is based on the following objectives:
·
·
to attract, motivate, retain and reward a knowledgeable and driven management team and to encourage them to attain and exceed
performance expectations within a calculated risk framework; and
to reward each executive based on individual and corporate performance and to incentivize such executives to drive the
organization’s current growth and sustainability objectives.
The following key principles guide the Company’s overall compensation philosophy:
·
·
·
·
compensation is designed to align executives to the critical business issues facing the Company;
compensation should be fair and reasonable to shareholders and be set with reference to the local market and similar positions in
comparable companies;
an appropriate portion of total compensation should be equity-based, aligning the interests of executives with shareholders; and
compensation should be transparent to the Board of Directors, executives and shareholders.
Compensation Elements and Rationale
There are two basic components to the Company’s executive compensation program: base salary and long-term incentive equity
compensation. The Compensation Committee determined that it would continue evaluating and evolving the compensation program design
against best market practices as the Company experiences further growth. We intend to add short-term incentive cash awards in the near
future.
Base Salary
Base salary is the foundation of the compensation program and is intended to compensate competitively relative to comparable companies
within our industry and the marketplace where we compete for talent. Base salary is a fixed component of the compensation program and is
used as the base to determine elements of incentive compensation and benefits.
Long-Term Incentive (Equity)
The Company’s long-term incentive program provides for the granting of stock options to executive officers to both motivate executive
performance and retention, as well as to align executive officer performance to shareholder value creation. In awarding long-term
incentives, the Company compares the long-term incentive program to that of comparable companies within our industry and evaluates
such factors as the number of options available under its Stock Incentive Plan and the number of options outstanding relative to the number
of shares outstanding. The Company has historically sought to award stock options on a competitive basis based on a comparison with
comparable companies.
Each long-term incentive grant is based on the level of the position held and overall market competitiveness. The Compensation Committee
takes into consideration previous grants when it considers new grants of options.
The Board of Directors fixes the exercise price of stock options at the time of the grant based on the market price on the Nasdaq.
In Fiscal 2016, long-term equity incentive plan awards were awarded to the executive officers in the form of stock options.
40
Our Board of Directors adopted the Company’s 2016 Stock Incentive Plan. On June 29, 2016 our shareholders ratified the 2016 Stock
Incentive Plan.
The following table summarizes the pay mix for the executive officers and illustrates the percentage of fixed versus at-risk pay for the
fiscal year ended December 31, 2016:
Name and Principal Position
Stephen S. Burns
CEO and Director
Duane Hughes
President
Julio C. Rodriguez
Non-Cash Compensation
Base Salary
Stock Options
(LTIP)
54%
54%
55%
46%
46%
45%
The Company provides standard health benefits to its executives, including medical, dental and disability insurance.
The Company’s non-cash compensation is intended to provide a similar level of benefits as those provided by comparable companies
within our industry.
Review of Executive Officer Performance
On an annual basis, the Compensation Committee reviews the overall compensation package for our executive officers and evaluates
executive officer performance relative to corporate goals. The Compensation Committee has the opportunity to meet with the executive
officers at various times throughout the year, which assists the Compensation Committee in forming its own assessment of each
individual’s performance. The executive officers are not present during voting or deliberations of the Compensation Committee relating to
executive compensation.
In determining the compensation for the executive officers, the Compensation Committee considers compensation paid to executive
officers of other companies within the industry, the executive’s performance in meeting goals, the complexity of the management position
and the experience of the individual. During 2016, the Company’s operations were still in development and no significant portion of the
executive’s pay was linked to performance goals. During 2017, the Company intends to set individual and/or corporate performance goals.
Executive and Director Compensation
Director Compensation
On October 24, 2013, Raymond J. Chess was appointed as a director of the Company. Prior to joining the Board of Directors, Mr. Chess
served on our advisory board pursuant to which he received a stock option to acquire 10,000 shares of common stock at an exercise price of
$2.50 per share. On October 24, 2013, Mr. Chess entered into a letter agreement with the Company pursuant to which he was appointed as
a director of the Company in consideration of an annual fee of $40,000. Additionally, the Company granted Mr. Chess options to purchase
50,000 shares of the Company’s common stock at $2.60 per share. The options will expire five years from the vesting period with 10,000
options vesting upon the signing of the agreement and 4,000 every six months thereafter for a total of 50,000 shares.
On December 17, 2015, Messrs. Budde and Samuels entered into letter agreements with the Company pursuant to which they were each
appointed as directors of the Company in consideration of an annual fee of $40,000. Additionally, the Company granted Messrs. Budde
and Samuels options to purchase 50,000 shares of the Company’s common stock at $7.01 per share. The options will expire five years
from the vesting period with 10,000 options vesting upon the signing of the agreement and 4,000 every June 30 and December 31 thereafter
for a total of 50,000 shares.
On September 14, 2016, Mr. DeMott entered into a letter agreement with the Company pursuant to which he was appointed as a director of
the Company in consideration of an annual fee of $40,000. Additionally, the Company granted Mr. DeMott an option to purchase 50,000
shares of the Company’s common stock at $8.20 per share. The option will expire five (5) years from the vesting period with 10,000
options vesting upon the signing of the agreement and 4,000 every June 30 and December 31 thereafter for a total of 50,000 shares.
41
The Company’s compensation policy for the above directors was based on comparisons of other companies’ remunerations made to their
Chairman and other directors and the value of their expertise to the Company.
Executive Compensation
Messrs Burns, Hughes and Rodriguez are retained according to employment agreements with our Company, and each individuals
compensation for serving as an executive officer of the Company is disclosed below in the “Summary Compensation Table”. The
compensation committee is presently contemplating amending and/or restating the employment agreements to provide for a uniform
structure and in order to appropriately update such agreements.
The Company’s compensation policy for each of the above parties is based on comparisons of other companies’ remunerations made to
each of the respective positions and the value that each executive’s expertise to the Company.
Pension Benefits
None.
Non-Qualified Deferred Compensation
None.
Retirement, Resignation or Termination Plans
Each of the Company’s executive employment agreements with Messrs Burns, Rodriguez and Hughes contemplates the case of termination
due to various provisions whereby the named executive officers will receive severance payments, as described below.
Compensation and Risk
We do not believe that our compensation policies and practices are reasonably likely to have a material adverse effect on us. We have taken
steps to ensure our executive compensation program does not incentivize risk outside the Company’s risk appetite. Some of the key ways
that we currently manage compensation risk are as follows:
·
·
·
appointed a Compensation Committee which is composed entirely of independent directors to oversee the executive compensation
program;
the use of deferred equity compensation in the form of stock options to encourage a focus on long-term corporate performance
versus short-term results; and
disclosure of executive compensation to stakeholders;
Consideration of Most Recent Shareholder Advisory Vote on Executive Compensation
As required by Section 14A of the Exchange Act, at our 2016 Annual Meeting of Stockholders our stockholders voted, in an advisory
manner, on a proposal to approve our named executive officer compensation. This was our most recent stockholder advisory vote to
approve named executive officer compensation. The proposal was approved by our stockholders, receiving approximately 74% of the vote
of the stockholders present in person or represented by proxy and voting at the meeting. We considered this vote to be a ratification of our
current executive compensation policies and decisions and, therefore, did not make any significant changes to our executive compensation
policies and decisions based on the vote.
Compensation Committee Interlocks and Insider Participation
No person who served as a member of our Compensation Committee during Fiscal 2016 was a current or former officer or employee of our
Company or engaged in certain transactions with our Company required to be disclosed by regulations of the SEC. Additionally, during
Fiscal 2016 there were no Compensation Committee “interlocks,” which generally means that no executive officer of our Company served:
(a) as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such
committee, the entire board of directors) of another entity which had an executive officer serving as a member of our Company’s
Compensation Committee; (b) as a director of another entity which had an executive officer serving as a member of our Company’s
Compensation Committee; or (c) as a member of the compensation committee (or other board committee performing equivalent functions
or, in the absence of any such committee, the entire board of directors) of another entity which had an executive officer serving as a director
of our Company.
42
Compensation Committee Report
The Compensation Committee has reviewed and discussed the foregoing compensation discussion and analysis with Company
management. Based on that review and those discussions, the Compensation Committee recommended to the Board of Directors that the
compensation discussion and analysis be included in this Annual Report. This report is provided by the following independent directors,
who comprise the Compensation Committee: Harry DeMott, Benjamin Samuels and Gerald Budde.
The following summary compensation table sets out details of compensation paid to (a) our principal executive officer; (b) each of our two
most highly compensated executive officers who served as executive officers during the fiscal year ended December 31, 2016; and (c) up to
two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as
our executive officer at the end of the fiscal year ended December 31, 2016, except that no disclosure is provided for any named executive
officer, other than our principal executive officer, whose total compensation did not exceed $100,000 for the fiscal year ended December
31, 2016:
Summary Compensation Table
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-equity
Incentive Plan
Compensation
($)
Change in
Pension
Value
and Non-
Qualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($)
Total
($)
-
-
- 231,231
- 111,900
-
-
-
-
- 506,231
- 386,900
-
-
125,063
44,760
-
125,063
55,950
-
-
-
-
-
269,063
- 182,760
275,063
- 205,950
Name and
Principal Position
Stephen S. Burns
CEO and Director
Salary
($)
Year
2016 275,000
2015 275,000
Duane Hughes
President
2016 144,000
2015 138,000
Julio C. Rodriguez
2016 150,000
Chief Financial Officer 2015 150,000
Employment Agreements
Stephen S. Burns Employment Agreement
On December 8, 2010, Stephen S. Burns entered into an employment agreement with the Company pursuant to which he was appointed as
the President of the Company in consideration of an annual salary of $200,000, however, only 50% of the salary ($100,000) will be
payable at this time. The remaining 50% of the salary will accrue and be deferred until the board of directors elects to increase the salary to
include all or a portion of the deferred salary based on certain events. Additionally, Mr. Burns will be eligible for annual bonuses with a
target amount of 100% of his salary. The actual amount of any bonus may be more or less than such target and will be determined by the
Board in its absolute discretion. Half of the bonus may be paid, in the Company’s discretion, in unregistered shares of common stock at a
price per share equal to the weighted average closing price per share of the common stock over the twenty most recent trading days prior to
such grant. In addition to the salary and any bonus, Mr. Burns will be entitled to receive health and fringe benefits that are generally
available to the Company’s management employees in accordance with the then existing terms and conditions of the Company’s policies.
As additional compensation, the Company granted Mr. Burns options to acquire 30,000 shares of common stock at an exercise price of
$7.20 per share for a period of ten years. The Company also provided Mr. Burns with a common stock purchase warrant to acquire 30,000
shares of Common Stock exercisable at any time in the five years following the signing of the agreement at an exercise price of $2.00 per
share. Effective August 24, 2012, Mr. Burns resigned as President and continues to serve as a director as well as Chief Executive Officer,
Secretary and Treasurer of the Company. As of December 31, 2015, payroll in the amount of $108,335 was due and payable and included in
accounts payable, based on terms of Mr. Burns’ employment agreement.
43
Duane Hughes Employment Agreement
Mr. Hughes presently does not have an employment agreement. We pay Mr. Hughes $244,000 per annum. We are presently negotiating an
employment agreement with Mr. Hughes and expect to finalize such agreement in the near future..
Julio C. Rodriguez Employment Agreement
On August 15, 2013, Julio C. Rodriguez and the Company entered into an employment agreement pursuant to which Mr. Rodriguez agreed
to serve as the Chief Financial Officer of the Company. The Agreement was effective on August 7, 2013. Pursuant to the terms of the
Employment Agreement, Mr. Rodriguez shall receive an annual salary of $150,000,w hich was subsequently increased to $200,000 per
annum. In addition to the salary, Mr. Rodriguez will be entitled to receive health and fringe benefits that are generally available to the
Company’s management employees. As additional compensation, the Company granted Mr. Rodriguez options to acquire 30,000 shares of
common stock at an exercise price of $4.00 per share for a period of two years.
Grants of Plan Based Awards
We granted awards to the Named Executive Officers in the fiscal year ended December 31, 2016, as follows:
Threshold Target
Maximum
Name
Stephen S. Burns
CEO and Director
Duane Hughes
President
Julio C. Rodriguez
Chief Financial Officer
Grant
Date
8/16/2016
8/16/2016
2/3/2016
8/16/2016
2/3/2016
8/16/2016
2/3/2016
10,000
35,000
40,000
22,000
25,000
22,000
25,000
44
All Other
Stock
Awards:
Number
of
Shares of
Stock or
Units
10,000
35,000
40,000
22,000
25,000
22,000
25,000
All Other
Stock
Awards:
Number of
Securities
Underlying
Grant
Data Fair
Value of
Stock
and
Options
Awards
3.1766
3.1766
2.2071
3.1766
2.2071
3.1766
2.2071
Exercise
Price of
Options
Awards
7.2100
7.2100
4.9900
7.2100
4.9900
7.2100
4.9900
Option Exercises and Stock Vested
There were no options exercised or stock vested for the year ended December 31, 2016.
Outstanding Equity Awards
The following table sets forth information with respect to the outstanding equity awards of our principal executive officers and principal
financial officer during 2014, and each person who served as an executive officer of the Company as of December 31, 2015 :
Outstanding Equity Awards at Fiscal Year-End
Option awards
Stock awards
Number of
shares or
units of
stock that
have not
vested
(#)
Market
value of
shares or
units of
stock that
have not
vested
($)
Equity
incentive
plan
awards:
Number of
unearned
shares
other rights
that have
not vested
(#)
Options
exercise
price ($)
Option
expiration
Date
Equity
incentive
plan
awards:
Market
or
payout
value
of
unearned
shares,
units
or other
rights
that
have not
vested
($)
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
7.21 8/15/2021
7.21 8/15/2021
4.99 2/1/2021
1.75 8/11/2020
1.40 12/18/2019
0.10 6/30/2019
0.10 6/30/2019
0.10 6/30/2019
0.10 6/30/2019
2.90 3/14/2018
7.20 12/5/2020
4.00 11/15/2020
7.21 8/15/2021
4.99 2/1/2021
1.75 8/11/2020
7.21 8/15/2021
4.99 2/1/2021
1.75 8/11/2020
1.40 12/18/2019
0.10 6/30/2019
0.10 6/30/2019
0.10 6/30/2019
4.00 8/6/2018
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0 $
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Name and
principal position
Stephen S. Burns
CEO and Director
Equity
incentive
plan awards:
Number of
securities
underlying
unexercised
options
(#)
Number of
securities
underlying
unexercised
options (#)
Exercisable
10,000
35,000
40,000
50,000
50,000
16,667
40,000
50,000
174,773
40,000
30,000
60,000
Number of
securities
underlying
unexercised
options (#)
Unexercisable
7,222
25,278
13,333
2,778
0
0
0
0
0
0
0
0
Duane Hughes
President
Julio C. Rodriguez
CFO
No Pension Benefits
22,000
25,000
20,000
22,000
25,000
25,000
15,000
49,323
4,110
20,000
30,000
15,889
8,333
1,111
15,889
8,333
1,389
0
0
0
0
0
The Company does not maintain any plan that provides for payments or other benefits to its executive officers at, following or in
connection with retirement and including, without limitation, any tax-qualified defined benefit plans or supplemental executive retirement
plans.
No Nonqualified Deferred Compensation
The Company does not maintain any defined contribution or other plan that provides for the deferral of compensation on a basis that is not
tax-qualified.
45
Director Compensation
Fees Earned
or Paid in
Cash
$
53,333
16,667
16,667
16,667
56,667
Name
Raymond Chess
Benjamin Samuels
Gerald Budde
Stephen S. Burns
James Taylor *
* Resigned
Directors’ and Officers’ Insurance
Stock
Awards
$
Option
Awards
$
Non-equity
Incentive Plan
Compensation
$
Change in
Pension
Value and
Non-
Qualified
Degerred
Compensation
Earnings
$
All Other
Compensation
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
$
53,333
16,667
16,667
16,667
56,667
The Company has purchased directors and officers liability insurance (“D&O Liability Insurance”) for the benefit of its directors and
officers, and the directors and officers of its subsidiaries, against liability incurred by them in the performance of their duties as directors
and officers of the Company, or its subsidiaries, as the case may be. The amount of premium paid with respect to D&O Liability Insurance
for the fiscal year ended December 31, 2016, was $121.2 thousand. The entire premium is paid by the Company. The Company’s D&O
Liability Insurance is comprised of the following policies:
D&O Liability Insurance
Primary and Excess Policy
Side A – DIC Policy (2)
Annual
Limit
$
Deductible
5,000,000 $
N/A
750,000(1)
N/A
(1) Not applicable to non-indemnifiable loss, crisis loss or derivative investigation costs. There is a $250,000 dedcutibel for
Indemnifiable Non-Securities Claims, $500,000 deductible for Indemnifiable Securities Claims and a $750,000 deductible for
Indemnifiable M&A Claims
(2) In prior years there was a $1M Side A excess of (Primary + Excess) $4M D&O policies. At the July 22, 2016, renewal, a single
$5N D&O policy was purchased to replace the previous layered program.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth certain information, as of March 14, 2017 with respect to the beneficial ownership of the outstanding
common stock by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the
Company’s directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting
and investment power over the shares beneficially owned.
Name of Beneficial Owner (1)
Joseph T. Lukens
Stephen D. Baksa 2
Woods Lane Chatham, NJ 07928
Stephen S. Burns *
Benjamin Samuels *
Raymond Chess *
Gerald Budde *
Duane Hughes*
Julio C. Rodriguez *
Common
Stock
Beneficially
Owned
6,695,335
3,389,442
1,523,126
1,202,856
180,000
135,000
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
67,000
190,433
Percentage
of Common
Stock (2)
18.6%
9.4%
4.1%
3.3%
**
**
**
**
Executive officers and directors as a group
3,298,415
7.5%
Executive officer and/or director of the Company.
*
** Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is c/o Workhorse Group Inc, 100 Commerce Drive, Loveland,
Ohio 45140
46
(2) Applicable percentage ownership is based on 35,956,697 shares of common stock outstanding as of March 14, 2017. Beneficial
ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of
March 14, 2017 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of
any other person.
(3) Represents (i) 3,491,888 shares of common stock held directly by Mr. Lukens; (ii) 154,871 shares of common stock held by The Joe
& Kim Lukens Foundation; (iii) 2,697,147 shares of common stock held by the US Trust Company of Delaware Administrative
Trustee of the Joe & Kim Lukens Dynasty Trust; (iv) 25,000 shares of common stock held by the Joseph T Lukens, Jr. and Gerald
Budde, Co-Trustee of the Joseph T. Lukens, Jr. Irrevocable Trust for Nathan J. Lukens U/T/A Dated 2/23/2016; (v) 25,000 shares of
common stock held by the Joseph T Lukens, Jr. and Gerald Budde, Co-Trustee of the Joseph T. Lukens, Jr. Irrevocable Trust for
Roman E. Lukens U/T/A Dated 2/23/2016; and (vi) a common stock purchase warrant to acquire 571,429 shares of common stock at
$5.28 per share. On February 10, 2017, the Reporting Person resigned from all positions with Our Lady of America Ministries Inc., an
Ohio 501(c)(3) charity which holds 570,000 shares of common stock of the Company
(4) Represents (i) 3,358,421 shares of common stock held directly by the Mr. Baksa; and (ii) 31,000 shares of common stock held by the
Stephen D. Baksa 2012 Trust F/B/O Sarah E. Marra, F/B/O Brian S. Baksa.
(5) Represents (i) 767,337 shares of common stock held by Mr. Burns, (ii) 50,000 shares of common stock held by Mr. Burns’ wife, (iii)
a stock option to acquire 35,000 shares of common stock at $7.21 per share, (iv) a stock option to acquire 10,000 shares of common
stock at $7.21 per share , (iv) a stock option to acquire 40,000 shares of common stock at $4.99 per share, (v) a stock option to acquire
50,000 shares of common stock at $1.75 per share, (vi) a stock option to acquire 50,000 shares of common stock at $1.40 per share,
(vii) a stock option to acquire 281,440 shares of common stock at $0.10 per share, (viii) a stock option to acquire 50,000 shares of
common stock at $1.75 per share, (ix) a stock option to acquire 40,000 shares of common stock at $2.90 per share, (x) a stock option
to acquire 50,000 shares of common stock at $6.00 per share, (xi) a stock option to acquire 30,000 shares of common stock at $1.10
per share, (xii) a stock option to acquire 30,000 shares of common stock at $7.20 per share, (xiii) a stock option to acquire 60,000
shares of common stock at $4.00 per share and (xiv) a common stock purchase to acquire 29,350 shares of common stock at $1.50 per
share
(6) Represents (i) 762,532 shares of common stock held by Samuel 2012 Children's Trust UAD 10/28/12 (the "Trust"), (ii) a common
stock purchase warrant to acquire 237,467 shares of common stock at an exercise price of $5.28 per share held by the Trust, (iii) a
common stock purchase warrant to acquire 142,857 shares of common stock at an exercise price of $5.28 per share held by the Trust,
and (iv) a stock option to acquire 50,000 shares of common stock at $7.01 per share and (v) a stock option to acquire 10,000 shares of
common stock at $7.21 per share. . Mr. Samuels is a trustee of the Trust.
(7) Represents a stock option to acquire 180,000 shares of common stock at $1.89 per share.
(8) Represents (i) 75,000 shares of common stock, (ii) stock option to acquire 50,000 shares of common stock at an exercise price of
$7.01 per share and (iii) a common stock purchase warrant to acquire 10,000 shares of common stock at $7.21 per share.
(9) Represents 67,000 shares of common stock at $4.75 per share.
(10) Represents a stock option to acquire 190,433 shares of common stock at $2.50 per share.
Changes in Control
We have no knowledge of any arrangements, including any pledge by any person of our securities, the operation of which may, at a
subsequent date, result in a change in our control.
47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
At no time during the last two fiscal years has any executive officer, director or any member of these individuals’ immediate families, any
corporation or organization with whom any of these individuals is an affiliate or any trust or estate in which any of these individuals serves
as a trustee or in a similar capacity or has a substantial beneficial interest been indebted to the Company or was involved in any transaction
in which the amount exceeded $120,000 and such person had a direct or indirect material interest.
Procedures for Approval of Related Party Transactions
Our Board of Directors is charged with reviewing and approving all potential related party transactions. All such related party transactions
must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such
transactions, but instead review them on a case-by-case basis.
Director Independence
The Board of Directors has determined that Gerald Budde, H. Benjamin Samuels and Harry DeMott each qualify as independent directors
under the listing standards of the Nasdaq.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The total fees charged to the Company by Clark Schaefer Hackett & Company, the Company's independent registered public accounting
firm, are as follows ($ thousands):
2016
2015
Audit
Taxes
Other
Total
47.0
71.2
6.1
4.8
47.2
2.4
100.4
78.4
The current policy of the directors, acting as the audit committee, is to approve the appointment of the principal auditing firm and any
permissible audit-related services. The audit and audit related fees include fees for the annual audit of the financial statements and review
of financial statements included in 10Q filings. Fees charged by Clark, Schaefer Hackett & Company were approved by the Board with
engagement letters signed by Stephen S. Burns, Chief Executive Officer.
The Audit Committee is responsible for the pre-approval of audit and permitted non-audit services to be performed by the Company’s
independent auditor. The Audit Committee will, on an annual basis, consider and, if appropriate, approve the provision of audit and non-
audit services by the auditor. Thereafter, the Audit Committee will, as necessary, consider and, if appropriate, approve the provision of
additional audit and non-audit services by the auditor which are not encompassed by the Audit Committee’s annual pre-approval and are
not prohibited by law. The Audit Committee has delegated to the Chair of the Audit Committee the authority to pre-approve, on a case-by-
case basis, non-audit services to be performed by the auditor. The Audit Committee has approved all audit and permitted non-audit services
performed by the auditor for the year ended December 31, 2016.
48
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
The Company’s financial statements filed as part of this report are listed in the Table of Contents and provided in response to Item 8.
Exhibits required by Item 601 of Regulation S-K:
Exhibit No.
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.1
4.2
4.3
Description
Certificate of Designation for Series A Preferred Stock (1)
Certificate of Change (2)
Certificate of Correction (2)
Articles of Merger (3)
Certificate of Correction (Articles of Merger) (3)
Certificate of Amendment to the Certificate of Incorporation (4)
Certificate of Incorporation (5)
Articles of Merger between AMP Holding Inc. Workhorse Group Inc. (16)
Certificate of Change filed December 9, 2015 (20)
Stock Option to acquire 500,000 shares of common stock issued to James Taylor dated May 25, 2011 (6)
Common Stock Purchase Warrant to acquire 500,000 shares of common stock issued to James Taylor dated May 25, 2011 (6)
Stock Option to acquire 500,000 shares of common stock issued to Stephen Burns dated May 25, 2011 (6)
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
Common Stock Purchase Warrant to acquire 500,000 shares of common stock issued to Stephen Burns dated May 25, 2011
(6)
Conversion Letter Agreement by and between Stephen Burns and AMP Holding Inc. (7)
Form of Warrant by and between AMP Holding Inc. and the January 2013 Accredited Investor (8)
Common Stock Purchase Warrant issued to Stephen Baksa (9)
2014 Incentive Stock Plan (11)
Form of Common Stock Purchase issued to Joseph T. Lukens (14)
Form of Common Stock Purchase Warrant issued to the December 2014 Investors (14)
Stock Option Agreement issued to James Taylor dated February 13, 2015 (14)
Form of Subscription Agreement by and between Workhorse Group Inc. and the 2015 Accredited Investors (17)
Form of Securities Purchase Agreement entered between Workhorse Group Inc. and the November 2015 Investors (18)
Form of 6% Convertible Promissory Note issued to the November 2015 Investors (18)
Form of Stock Purchase Warrant issued to the November 2015 Investors (18)
Form of Securities Purchase Agreement entered between Workhorse Group Inc. and the Convertible Note Investor (19)
Form of 6% Convertible Promissory Note issued to the Investors (19)
Form of Stock Purchase Warrant issued to the Investors (19)
Stock Option Agreement by and between Workhorse Group Inc. and Gerald Budde dated December 17, 2015 (21)
Stock Option Agreement by and between Workhorse Group Inc. and H. Benjamin Samuels dated December 17, 2015 (21)
Stock Option Agreement by and between Workhorse Group Inc. and Harry DeMott dated September 16, 2016 (24)
Intentionally left blank.
Securities Purchase Agreement entered between Workhorse Group Inc. and Joseph T. Lukens dated January 10, 2017 (26)
6% Convertible Debenture issued to Joseph T. Lukens dated January 10, 2017 (26)
49
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
21.1
23.1
31.1
31.2
32.1
32.2
99.1
Share Exchange Agreement dated as of December 28, 2009 by and among Advanced Mechanical Products, Inc., the
shareholders of Advanced Mechanical Products, Inc. and Title Starts Online, Inc. (1)
Employment Agreement by and between AMP Holding Inc. and Stephen S. Burns dated December 8, 2010 (12)
Letter Agreement by and between AMP Holding Inc. and Martin J. Rucidlo dated August 24, 2012 (13)
Asset Purchase Agreement by and between Workhorse Custom Chassis, LLC, as Seller, and AMP Trucks Inc., as Buyer
dated as of March 4, 2013 (10)
Amendment No. 1 to the Asset Purchase Agreement by and between Workhorse Custom Chassis, LLC, as Seller, and AMP
Trucks Inc., as Buyer dated as of March 13, 2013 (10)
Employment Agreement between AMP Holding Inc. and Julio C. Rodriguez dated August 15, 2013 (14)
Director Agreement by and between AMP Holding Inc. and Raymond Chess dated October 24, 2013 (15)
Director Agreement by and between Workhorse Group Inc. and Gerald Budde dated December 17, 2015 (21)
Director Agreement by and between Workhorse Group Inc. and Benjamin Samuels dated December 17, 2015 (21)
Director Agreement by and between Workhorse Group Inc. and Harry DeMott dated September 15, 2016 (24)
Form of Warrant Exercise Agreement (25)
Conversion Agreement between Jospeh T. Lukens and the Company dated January 27, 2017 (27)
List of Subsidiaries (28)
Consent of Clark, Schaefer, Hackett & Co
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Nominating and Corporate Governance Committee Charter adopted by the Board of Directors of Workhorse Group Inc. on
December 17, 2015(21)
Compensation Committee Charter adopted by the Board of Directors of Workhorse Group Inc. on December 17, 2015 (21)
Audit Committee Charter adopted by the Board of Directors of Workhorse Group Inc. on December 17, 2015 (21)
99.2
99.3
EX-101.INS XBRL INSTANCE DOCUMENT
EX-101.SCH XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
EX-101.CAL XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
EX-101.DEF XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
EX-101.LAB XBRL TAXONOMY EXTENSION LABELS LINKBASE
EX-101.PRE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
50
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
(28)
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on January 4, 2010.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on May 25, 2010.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on May 25, 2010.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on September 10, 2010.
Incorporated by referenced to the Form SB-2 Registration Statement filed with the Securities and Exchange Commission on February
4, 2008.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on June 1, 2011.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on July 11, 2012.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on February 5, 2013.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on February 28, 2013.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on March 13, 2013.
Incorporated by reference to the Form S-8 Current Report filed with the Securities and Exchange Commission on January 17, 2014.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on December 13, 2010.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on August 30, 2012.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on August 16, 2013.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on October 30, 2013.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on April 16, 2015.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on September 10, 2015.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on November 12, 2015.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on November 12, 2015.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on December 10, 2015.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on December 21, 2015.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on March 30, 2016.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on July 8, 2016.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on September 9, 2016.
Incorporated by reference to the Form S-3/A Registration Statement filed with the Securities and Exchange Commission on December
12, 2016.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on January 12, 2017.
Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on February 1, 2017.
Incorporated by reference to the Form 10-Q Quarterly Report filed with the Securities and Exchange Commission on November 14,
2017.
51
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned hereunto duly authorized.
Signatures
Dated: March 14, 2017
Dated: March 14, 2017
WORKHORSE GROUP INC.
/s/ Stephen S. Burns
By:
Name: Stephen S. Burns
Title: Chief Executive Officer
(Principal Executive Officer)
/s/ Julio C. Rodriguez
By:
Name: Julio C. Rodriguez
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
In accordance with the Exchange Act, this report has been signed below by the following persons on March 14, 2017, on behalf of the
registrant and in the capacities indicated.
Signature
Title
/s/ Stephen S. Burns
Stephen S. Burns
/s/ Julio C. Rodriguez
Julio C. Rodriguez
/s/ Raymond Chess
Raymond Chess
/s/ Gerald Budde
Gerald Budde
/s/ H. Benjamin Samuels
H. Benjamin Samuels
/s/ Harry DeMott
Harry DeMott
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Director
Director
Director
Director
52
CONSENT OF INDEPENDENT AUDITORS
EXHIBIT 23.1
Board of Directors
Workhorse Group Inc.
We consent to the incorporation by reference in the following Registration Statements:
Form S-8 Registration Statements File No. 333-193425 filed with the SEC on January 17, 2014;
i.
ii. Form S-8 Registration Statements File No.333-196631 filed with the SEC on June 10, 2014; and
iii. Form S-3/A Registration Statement File No. 333-213100 filed with the SEC on December 12, 2016.
of our report dated March 14, 2017 on our audits of the balance sheets of Workhorse Group Inc. as of December 31, 2016 and 2015 and the
related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended included in this Form 10-K.
/s/ Clark, Schaefer, Hackett & Co.
Cincinnati, Ohio
March 14, 2017
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Stephen S. Burns, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Workhorse Group Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant) and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal annual period that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial
reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: March 14, 2017
/s/ Stephen S. Burns
Stephen S. Burns
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Julio Rodriguez, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Workhorse Group Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant) and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal annual period that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial
reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: March 14, 2017
/s/ Julio Rodriguez
Julio Rodriguez
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual report of Workhorse Group Inc. (the "Company") on Form 10-K for the period ending December 31, 2016
as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen S. Burns, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 14, 2017
/s/ Stephen S. Burns
Stephen S. Burns
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual report of Workhorse Group Inc. (the "Company") on Form 10-K for the period ending December 31, 2016
as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Julio Rodriguez, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 14, 2017
/s/ Julio Rodriguez
Julio Rodriguez
Chief Financial Officer
(Principal Financial and Accounting Officer)