Workhorse Group Inc

Notes to Consolidated Financial Statements

1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Overview

Workhorse Group Inc. (“Workhorse”, the “Company”, “we”, “us”, or “our”) is an American technology company with a vision to pioneer the transition to zero-emission commercial vehicles. We design, develop, manufacture and sell fully electric ground and air-based electric vehicles.

Basis of Presentation

The consolidated financial statements include the accounts of Workhorse Group Inc. and its subsidiaries, with all intercompany transactions and balances having been eliminated. The Company prepared the consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and, in the Company's opinion, reflect all adjustments, including normal recurring items that are necessary.

Going Concern and Liquidity

The accompanying consolidated financial statements have been prepared in accordance with GAAP applicable to a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these consolidated financial statements are issued and will be able to realize assets and discharge its liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.

Pursuant to the requirements of the Financial Accounting Standard Board's (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern (“ASC 205-40”), management must evaluate whether there are conditions and events, considered in aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for one year after the date these consolidated financial statements are issued. In accordance with ASC 205-40, management’s analysis can only include the potential mitigating impact of management’s plans that have not been fully implemented as of the issuance date if (a) it is probable that management’s plans will be effectively implemented on a timely basis, and (b) it is probable that the plans, when implemented, will alleviate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern.

We had salesof $13.1 million, incurred a net loss of $123.9 million and used$123.0 million of cash in operating activities during the year ended December 31, 2023. As of December 31, 2023, the Company had total working capital of $40.5 million, including $25.8 million of unrestricted cash and cash equivalents, and an accumulated deficit of $751.6 million.

As a result of our recurring losses from operations, accumulated deficit, projected capital needs, and delays in bringing our vehicles to market and lower than expected market demand, substantial doubt exists regarding our ability to continue as a going concern within one year after the issuance date of the accompanying consolidated financial statements. Our ability to continue as a going concern is contingent upon successful execution of management’s intended plan over the next twelve months to improve the Company’s liquidity and working capital, which includes, but is not limited to:

•Generating revenue by increasing sales of our vehicles and other services.

•Reducing expenses and limiting non-contracted capital expenditures.

•Raising capital to fund operations through the issuance of debt or equity securities, including through our At-the-Market Sales Agreement (“ATM Agreement”), the sale of assets, or other strategic transactions.

It is essential that we have access to capital as we bring our existing line of vehicles to market, scale up production and sales of such vehicles and continue to develop our next generation of vehicles. There is no assurance that we will be successful in implementing management’s plans to generate liquidity to fund these activities or other aspects of our short and long-term strategy, that our projections of our future capital needs will prove accurate or that any additional funding would be available or sufficient to continue operations in future periods.

To the extent revenues from operations are insufficient to meet our liquidity requirements, our ability to continue as a going concern will be dependent on effectively raising capital through private or public placement of our equity securities, including the continued use of the ATM Agreement (as further described below), for which there can be no assurance we will be successful in such efforts. We will also rely on debt financing or other sources of capital funding such as through the sale of assets to obtain sufficient financial resources to fund our operating activities. If we are unable to maintain sufficient financial resources, our business, financial condition and results of operations, as well as our ability to continue to develop, produce and market our new vehicle programs and satisfy our obligations as they become due, will be materially and adversely affected. This could affect future vehicle program production and sales. Failure to obtain additional financing will have a material, adverse impact on our business operations. There can be no assurance that we will be able to obtain the financing needed to achieve our goals on acceptable terms or at all. Additionally, any equity or equity linked financings would likely have a dilutive effect on the holdings of our existing stockholders. The Company’s current level of cash and cash equivalents are not sufficient to execute our business plan. For the foreseeable future, we will incur significant operating expenses, capital expenditures and working capital funding that will deplete our cash on hand. These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of at least one year from the date of issuance of these consolidated financial statements.

Our ability to obtain additional financing is extremely limited under current market conditions including the significant amount of capital required, the Nasdaq Listing Requirements, the market price of our stock and potential dilution from the issuance of any additional securities. If we are unable to identify other sources of funding, we may need to further adjust our operations and seek protection by filing a voluntary petition for relief under the Bankruptcy Code. If this were to occur, the value available to our various stakeholders, including our creditors and stockholders, is uncertain and trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in bankruptcy proceedings, if any.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures in the accompanying notes. The estimates used for, but not limited to, sales return reserves, income taxes, the collectability of accounts receivable, inventory valuation, warranties, leases, fair value of long-lived assets and fair value of financial instruments.

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation in the consolidated financial statements and the accompanying notes.

Cash and Cash Equivalents

Cash and cash equivalents are defined as short-term, highly-liquid investments with original maturities of three months or less.

Restricted Cash

Cash and cash equivalents subject to contractual restrictions and not readily available are classified as restricted cash. Our restricted cash is comprised primarily of cash held to service certain payments under secured debt facilities. In addition, restricted cash includes cash held as collateral for real estate leases. We record restricted cash in the consolidated balance sheets and determine current or non-current classification based on the expected duration of the restriction.

Our total cash, cash equivalents, and restricted cash, as presented in the consolidated statements of cash flows, was as follows:

Accounts Receivable and Allowance for Credit Losses

Accounts receivable primarily consists of amounts that are due and payable from our customers for the sale of vehicles, parts, and services. We evaluate the collectability of receivables each reporting period and record an allowance for credit losses to present the net amount expected to be collected on our receivables. Additions to the allowance are charged to bad debt expense reported in selling, general and administrative expense.

Concentration of Risk

Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents, restricted cash, and accounts receivable. Our cash balances are primarily on deposit at high credit quality financial institutions or invested in money market funds. These deposits are typically in excess of insured limits. As of December 31, 2023, no entity represented 10% or more of our total receivables balance. As of December 31, 2022, one entity represented 10% or more of our total receivables balance.

Supply Risk

We are dependent on our suppliers, including single source suppliers, and the inability of these suppliers to deliver necessary components of our products in a timely manner at prices, quality levels and volumes acceptable to us, or our inability to efficiently manage these components from these suppliers, could have a material adverse effect on our business, prospects, financial condition and operating results.

Inventories

Inventories are stated at the lower of cost or net realizable value. Inventory cost includes cost of raw material, labor and overhead. Manufactured inventories are valued at standard cost, which approximates actual costs on a first-in, first-out basis. We record inventory write-downs for excess or obsolete inventories based on assumptions about current and future demand forecasts. If inventory on-hand is in excess of our future demand forecast, the excess amounts are written-off.

We also review our inventory to determine whether its carrying value exceeds the net amount realizable upon the ultimate sale of the inventory. This requires us to determine the estimated selling price of our vehicles less the estimated cost to convert the inventory on-hand into a finished product. Once inventory is written-down, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

Should our estimates of future inventory usage or selling prices change, additional and potentially material increases to this reserve may be required. A small change in our estimates may result in a material charge to our reported financial results.

Property, Plant and Equipment, Net

Property, plant and equipment, net, including leasehold improvements, are recognized at cost less accumulated depreciation. Depreciation is generally computed using the straight-line method over the estimated useful lives of the respective assets, as follows:

Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or the term of the related leases.

Upon the retirement or sale of our property, plant and equipment, the cost and associated accumulated depreciation are removed from the consolidated balance sheets, and the resulting gain or loss is reflected on the consolidated statements of operations. Maintenance and repair expenditures are expensed as incurred while major improvements that increase the functionality, output or expected life of an asset are capitalized and depreciated ratably over the identified useful life.

Impairment of Long-Lived Assets

We review long-lived assets, such as property, plant, and equipment, for potential impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be fully recoverable. Events that trigger a test for recoverability include material adverse changes in projected revenues and expenses, present cash flow losses combined with a history of cash flow losses or a forecast that demonstrates significant continuing losses, significant negative industry or economic trends, a current expectation that a long-lived asset group will be disposed of significantly before the end of its useful life, a significant adverse change in the manner in which an asset group is used or in its physical condition, or when there is a change in the asset grouping. When an indicator of impairment is present, the Company assesses the risk of impairment based on an estimate of the undiscounted cash flows at the lowest level for which identifiable cash flows exist against the carrying value of the asset group. Impairment exists when the carrying value of the asset group exceeds the estimated future undiscounted cash flows generated by those assets. The Company records an impairment charge for the difference between the carrying value of the asset group and its estimated fair market value. Depending on the asset, estimated fair market value may be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in similar condition.

During 2023, we identified triggering events related to certain asset groups. In each situation in which we experienced a triggering event during the year, we tested our long-lived assets for impairment using our internal economic and business projections, and determined that the carrying values of the long-lived assets were recoverable. If, in future quarters, our economic or business projections were to change as a result of an update to our plans, a deterioration of the economic or business environment, a significant adverse change in the extent or manner in which a long-lived asset is being used, or an expectation that a long-lived asset group will be disposed of significantly before the end of its useful life, we would undertake additional testing, as appropriate, which could result in an impairment of long-lived assets. For the years ended December 31, 2023 and 2022, we have recognizedno impairments of long-lived assets.

Capitalization of Software Costs

We capitalize costs incurred in the development of internal use software, during the application development stage to property, plant and equipment, net on the consolidated balance sheets. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Such costs are amortized on a straight-line basis over their estimated useful life ofthree tofive years.

We evaluate the useful lives of these assets on an annual basis, and we test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. For the years ended December 31, 2023 and 2022, we have recognizedno impairments of capitalized software costs.

Investment

As permitted under ASC 321, Equity Securities, we recorded our investment in Tropos, an equity investment without a readily determinable fair value, at cost minus impairment. We assessed our investment for impairment each reporting period to determine if the fair value of the investment declined below its cost basis and if the impairment was other-than-temporary.

For the years ended December 31, 2023 and 2022, we have recognized impairment losses of $10.0 million andzero, respectively. For additional information regarding the investment and related impairment, see to Note 5, Contract Manufacturing Services and Investment in Tropos.

Warranty Liability

We generally provide a manufacturer's warranty on all new vehicles we sell. We record a warranty liability for the products sold by us, which includes our best estimate of the projected costs to repair or replace items under warranties and recalls if identified. The amount of warranty liability accrued reflects management’s best estimate of the nature, frequency, and costs of future claims. Historically, the cost of fulfilling the warranty obligations has principally involved replacement parts, towing and transportation costs, labor and sometimes travel for any field retrofit campaigns. Our estimates are based on historical experience, the extent of pre-production testing, the number of units involved and the extent of features/components included in product models.

Although we believe the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed to increases or decreases in our warranty liability accrual that could be material. Accrued warranty activity consisted of the following:

(1)The decrease to the warranty liability accrual in 2022 primary relates to a decreased volume of vehicles covered under warranty as well as a lower liability per vehicle as compared to 2021.

Fair Value Measurements

The Company follows the accounting guidance in ASC Topic 820 for its fair value measurements of financial assets and liabilities measured at fair value on a recurring basis. A three-level valuation hierarchy, based upon observable and unobservable inputs, is used for fair value measurements. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidence available. These two types of inputs create the following fair value hierarchy: Level 1 – Quoted prices for identical instruments in active markets; Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose significant inputs are observable; and Level 3 – Instruments whose significant inputs are unobservable.

Income Taxes

We account for income taxes under a method that requires deferred income tax assets and liabilities to be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Authoritative guidance also requires deferred income tax assets, which include state tax credit carryforwards, operating loss carryforwards and deductible temporary differences, be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred income tax assets will not be realized.

We evaluate the likelihood of realizing our deferred income tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income, the projected reversal of temporary differences and available tax planning strategies that could be implemented to realize the net deferred income tax assets.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Although management believes the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.

Revenue Recognition

The following table disaggregates our revenue by major source:

Vehicles

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs when we transfer control of our vehicles. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. For the majority of vehicles, we transfer control and recognize a sale when we ship the product from our manufacturing facility to our customer (dealers and distributors). The amount of consideration we receive and revenue we recognize varies with changes in incentives and return rights we offer to our customers. When we give our dealers the right to return eligible vehicles, we estimate the expected returns based on an analysis of historical experience, current market conditions, and other measures. We receive cash equal to the invoice price for most vehicle sales and we do not have any material significant payment terms as payment is received at or shortly after the point of sale.

Sales and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. The expected costs associated with our base warranties and field service actions are recognized as expense when the products are sold (see Note 6, Accrued Liabilities and Other Current Liabilities). We have elected to recognize the cost for freight and shipping when control over vehicles, parts, or accessories has transferred to the customer as an expense in Cost of sales.

Services, Parts and Accessories

Services, parts and accessories revenue consists of non-warranty after-sales vehicle services, body shop and parts, and assembly services. It also includes revenue generated from operating our Stables by Workhorse route, Drones As A Service, and other service revenue. We recognize revenue related to sales of service, parts and other accessories when we transfer control of the items. For the majority of vehicles, parts, and accessories, we transfer control and recognize a sale when we ship the product from our manufacturing facility to our customer (dealers and distributors). We recognize service revenue upon the transfer of control to the customer, which is generally when at the time the service is completed.

For the year ended December 31, 2023, two entities represented 10% or more of our total revenues. For the year ended December 31, 2022, one entity represented 10% or more of our total revenues.

Deferred Revenue

Deferred revenue related to our Assembly Services Agreement with Tropos Technologies, Inc. consisted of the following:

See Note 5, Contract Manufacturing Services and Investment in Tropos, for further discussion of deferred revenue.

Cost of Sales

Cost of sales include direct and indirect materials, labor costs, manufacturing overhead, including depreciation costs of tooling and machinery, shipping and logistics costs, and reserves for estimated warranty expenses. Cost of sales also includes charges to write down the carrying value of our inventory when it exceeds its estimated net realizable value and to provide for obsolete and on-hand inventory in excess of forecasted demand.

Research and Development Costs

Research and development costs consist primarily of personnel costs for our teams in engineering and research, prototyping expense, contract and professional services, and amortized equipment expense. R&D costs are expensed as incurred. R&D costs for the years ended December 31, 2023 and 2022 were $24.5 million and $23.2 million, respectively.

Advertising Costs

Advertising costs are recorded in Selling, general, and administrative in the consolidated statements of operations as they are incurred. During the years ended December 31, 2023 and 2022, advertising costs recognized were $1.2 million and $1.0 million, respectively.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of adjustments to the fair value of our convertible notes due to changes in credit risk.

Stock-Based Compensation

We use the fair value method of accounting for our stock options, restricted stock awards (“RSA”) and performance share units (“PSUs”) granted to employees. The fair value of stock option awards with only service conditions is estimated on the grant or offering date using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires inputs such as the risk-free interest rate, expected term and expected volatility. These inputs are subjective and generally require significant judgment. The fair value of RSAs is measured on the grant date based on the closing fair market value of our common stock. The resulting cost is recognized over the period during which an employee is required to provide services in exchange for the awards, usually the vesting period. Stock-based compensation expense is recognized on a straight-line basis, net of actual forfeitures in the period.

The fair value of market-vested awards is based on a Monte-Carlo simulation that estimates the fair value based on the Company's stock price activity relative to a defined comparative group of companies, expected term of the award, risk-free interest rate, expected dividends, and the expected volatility of the stock of the Company and those in the comparative group. The grant date fair value per share of market-vested awards already reflects the probability of achieving the market condition, and is therefore used to record the expense on a straight-line basis over the performance period regardless of actual achievement.

For performance-based awards, stock-based compensation expense is recognizable over the expected performance achievement period of individual performance milestones when the achievement of each individual performance milestone becomes probable.

As we issue additional employee stock-based awards over time and as we incorporate additional market data related to our common stock, we may calculate significantly different volatilities and expected lives, which could materially impact the valuation of our stock-based awards and the stock-based compensation expense that we will recognize in future periods. Stock-based compensation expense is recorded in selling, general and administrative expense in the consolidated statements of operations.

Defined Contribution Plan

We have a 401(k) savings plan that is intended to qualify as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Beginning in January 2021, we began to match 100% of each employee’s contributions up to a maximum of 6% of the employee’s eligible compensation, vested immediately. During the years ended December 31, 2023 and 2022, we recognized $1.3 million and $0.9 million, respectively, of expenses related to employer contributions for the 401(k) savings plan.

Net Loss per Share of Common Stock

Basic loss per share of common stock is calculated by dividing net loss by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards, warrants and convertible senior notes using the treasury stock method or the if-converted method, as applicable, are included when calculating the diluted net loss per share of common stock when their effect is dilutive.

The following table presents the potentially dilutive shares that were excluded from the computation of diluted net loss per share of common stock, because their effect was anti-dilutive:

1 Represents shares issued upon exchange of the warrants on March 1, 2024. See Note 7, Debt, and Note 16, Subsequent Events, for more information regarding the warrants.

2. INVENTORY

Our inventory consisted of the following:

(1)Finished goods inventory includes new vehicles available for sale.

We reserve inventory for any excess or obsolete inventories or when we believe the net realizable value of inventories is less than the carrying value. During the years ended December 31, 2023 and 2022, we recorded net write-downs of $6.8 million and $19.5 million, respectively, in Cost of sales in the consolidated statements of operations. The year over year decrease to inventory reserves was primarily driven by our efforts to sell and dispose of C-Series inventory which had been fully reserved as of December 31, 2022 following the Company's decision to discontinue the program. The sale and disposal activity did not have a material impact on the Company's results of operations during the year ended December 31, 2023.

During the year ended December 31, 2022, we recognized a gain of $13.6 million, net of $0.5 million of selling costs, related to the sale of C-Series inventory. The gain on sale was recorded in Other (loss) income in the consolidated statements of operations. The selling costs of $0.5 million represent a commission paid to a related party who was a former executive of the Company.

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following:

Prepaid purchases consist of deposits made to our suppliers for non-recurring engineering costs and production parts. As of December 31, 2023 and 2022, net prepaid purchases primarily consisted of deposits for direct materials associated with our W4 CC and W750 vehicles.

The year over year decrease to prepaid purchases reserves was primarily driven by write-offs related to the C-Series vehicle program, which did not have a material impact on the Company's results of operations during the year ended December 31, 2023.

4. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consists of the following:

Construction in progress is primarily comprised of equipment and tooling related to the manufacturing of our products, and construction and expansion of our facilities. Completed assets are transferred to their respective asset classes, and depreciation begins when an asset is ready for its intended use.

Depreciation expense during the years ended December 31, 2023 and 2022 was $4.1 million and $1.9 million, respectively.

5. CONTRACT MANUFACTURING SERVICES AND INVESTMENT IN TROPOS

We had a minority ownership investment in Tropos Technologies, Inc. (“Tropos”). The investment was obtained during the third quarter of 2022 in exchange for a cash payment of $5.0 million and a $5.0 million contribution of non-cash consideration representing a deposit from Tropos for future assembly services under an Assembly Services Agreement. The $5.0 million non-cash consideration was recorded as deferred revenue and is recognized as revenue over time as assembly service performance obligations are satisfied.

We recorded our investment at cost less impairment, if applicable. In accordance with FASB ASC Topic 321, Investments - Equity Securities, we assessed our investment for impairment at each reporting period to determine if the fair value declined below its cost basis and if the impairment is other-than-temporary.

During the third quarter of 2023, we determined that our investment in Tropos was impaired based on the economic conditions and uncertainties that have significantly affected Tropos' performance and financial position. The impairment is considered other-than-temporary as the decline in fair value of the investment is not expected to recover in the foreseeable future.

The impairment charge recognized for our investment is $10.0 million, which represents the difference between the original cost of the investment and its fair value as of the impairment assessment date. The impairment loss was recognized in Other (loss) income in the consolidated statements of operations for the year ended December 31, 2023.

The impairment of our investment did not release the Company from its obligation to perform assembly services under the agreement. Therefore, the Company continues to perform assembly services and carry the balance of deferred revenue on its consolidated balance sheets as of December 31, 2023. As of December 31, 2023 and December 31, 2022, deferred revenue related to the Assembly Services Agreement was $4.7 million and $5.4 million, respectively.

6. ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES

Accrued liabilities and other current liabilities consisted of the following:

7. DEBT

A reconciliation of the fair value of the convertible notes is as follows:

(1) The Company recognizes changes in fair value of convertible notes for common stock in Interest expense in the consolidated statements of operations.

Green Senior Convertible Notes Due 2026

On December 12, 2023, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) under which the Company issued, pursuant to an indenture and supplemental indenture (the “Indenture”), $20.0 million principal amount of green senior convertible notes (the “2026 Notes”) due October 1, 2026. The 2026 Notes are a senior secured obligation of the Company and ranked senior to all unsecured debt of the Company. The 2026 Notes are guaranteed by all the Company’s current subsidiaries and are secured by substantially all the assets of the Company and its subsidiaries. The 2026 Notes were issued with an original issue discount of 12.5%. In the event of a default under the Indenture, the 2026 Notes would accrue default interest at a rate of 15.0% per annum (the “Default Interest”) until such default is cured and all outstanding Default Interest has been paid. The 2026 Notes do not bear interest other than the Default Interest. The 2026 notes are convertible into 38.6 million shares of common stock at a rate of $0.5178 per share, subject to change for anti-dilution adjustments and adjustments for certain corporate events.

The Company paid fees in connection with the issuance of the 2026 Notes of $0.6 million, resulting in net proceeds of $16.9 million. We have elected to account for the 2026 Notes using the fair value option under GAAP. All direct costs related to the issuance of our convertible notes were recognized in Interest expense in the consolidated statements of operations for the year ended December 31, 2023.

The 2026 Notes contain certain covenants, including limitations on liens, additional indebtedness, investments, dividends and other restricted payments, changes in the business, transactions with affiliates, and customary events of default. The Company is also required to at all times maintain minimum liquidity of the lesser of $10.0 million and the then aggregate outstanding principal amount under the 2026 Notes in a deposit account under the control of the collateral agent. In addition, the 2026 Notes requires that the Company have cash and cash equivalents of at least $25.0 million on December 31, 2023, $13.5 million on January 31, 2024, and of $20.0 million on February 29, 2024. In the event we consummate a sale and leaseback transaction with respect to the real property where our Union City, IN plant is located, the holder of the 2026 Notes may, at its option, require us to use up to half of the proceeds we receive in such a sale leaseback transaction to redeem outstanding principal under the 2026 Notes. For additional information regarding the sale of our Union City plant, refer to Note 16, Subsequent Events, to our consolidated financial statements.

As of December 31, 2023, the contractual principal balance of the 2026 Notes was $20.0 million and the fair value was $20.2 million. During the year ended December 31, 2023, we recorded a $6.5 million fair value adjustment in Interest expense in the statements of operations related to the 2026 Notes. No fair value adjustments related to the 2026 Notes attributable to changes in credit risk were recorded during the year ended December 31, 2023. Going forward, any future fair value adjustments attributable to changes in credit risk will be recorded in Other comprehensive loss.

The estimated fair value of the 2026 Notes upon issuance on December 12, 2023 was $13.7 million. The fair value was computed using a Binomial Lattice Model which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement. The unobservable inputs utilized for measuring the fair value of the 2026 Notes reflect our assumptions about the assumptions that market participants would use in valuing the Note as of the issuance date and subsequent reporting period.

We determined the fair value by using the following key inputs to the Binomial Lattice Model:

As of December 31, 2023, the Company is in compliance with the debt terms and associated covenant under the 2026 Notes. The holder may, at its option, require the Company to redeem up to 12.5% of the original principal amount of the 2026 Notes in cash on the first and fifteenth of each month beginning January 1, 2024. Subsequent to December 31, 2023, the Company has repaid $7.5 million of the initial principal balance upon request of the holder. On February 29, 2024, the Company entered into a First Amendment to Green Senior Secured Convertible Note Due 2026 (the “2026 Notes Amendment”) with the holder. In connection with the 2026 Notes Amendment, the Company redeemed $10.0 million principal amount of the 2026 Notes, thereby reducing the outstanding principal amount of the Note to $2.5 million. Therefore, given the Company has made partial redemption payments and expects the holder to require repayment of the 2026 Notes in full within 12 months, the Company classified the 2026 Notes as current in the consolidated balance sheets.

Warrants Exercisable Prior to December 2026

On December 12, 2023, as part of the Securities Purchase Agreement, the Company issued warrants (the “2026 Warrants”) to purchase 25,601,639 shares of common stock at an exercise price of $0.4492 per share. The 2026 Warrants may be exercised by the holder immediately upon issuance and prior to December 12, 2026. No fractional shares will be issued upon exercise of the 2026 Warrants. Upon a change of control or corporate event (as defined in the warrant agreement), the holder may request that the Company repurchase the 2026 Warrants for cash in an amount equal to the Black Scholes Value (as defined in the warrant agreement). A Black Scholes Value settlement is meant to compensate the holder of the warrant for lost time value related to a forced early exercise upon the contingent event. As the 2026 Warrants are recorded at fair value and measured pursuant to a Black Scholes option pricing model, the carrying value approximates the amount that the Company would have to pay in a Black Scholes Value settlement.

The fair value of the components of the Securities Purchase Agreement was allocated between the 2026 Notes and 2026 Warrants. As of December 12, 2023 (the initial recognition) and December 31, 2023, the fair value of the 2026 Warrants was $3.8 million and $5.6 million, respectively. During the year ended December 31, 2023, we recorded a $1.8 million fair value adjustment in Interest expense in the statements of operations related to the 2026 Notes. The fair value of the 2026 Warrants was measured using the Black Scholes model approach. Significant inputs to the model at December 12, 2023 and December 31, 2023 are as follows:

4.0% Senior Secured Convertible Notes Due 2024

On October 14, 2020 the Company issued $200.0 million par value convertible notes (the “2024 Notes”) due October 14, 2024. The 2024 Notes were a senior secured obligation of the Company, and ranked senior to all unsecured debt of the Company. The 2024 Notes were guaranteed by all the Company’s current and future subsidiaries and were secured by substantially all the assets of the Company and its subsidiaries. Interest was payable quarterly beginning on January 15, 2021 at a rate of 4.0% per annum. The 2024 Notes were convertible at a rate of $35.29 per share, subject to change for anti-dilution adjustments and adjustments for certain corporate events.

In the fourth quarter of 2021, the Company entered into securities exchange agreements with certain holders of its 2024 Notes, to exchange $172.5 million in principal amount of the notes for 27.7 million shares of common stock. In the second quarter of 2022, the remaining $27.5 million in aggregate principal of the 2024 Notes was exchanged for 7.8 million shares of common stock. The number of shares issued was calculated by dividing $29.4 million, which represents 107% of the principal amount of the notes, plus $0.3 million of interest accrued on the notes, by the average of the daily volume weighted average price (“VWAP”) for the 10 days immediately preceding April 21, 2022. During the year ended December 31, 2022, the Company recognized a loss of $1.8 million, which included a $0.4 million fair value adjustment and a $1.4 million adjustment related to the amount previously recognized in Accumulated other comprehensive loss. The total loss was recorded in Interest expense in the consolidated statements of operations. During the year ended December 31, 2022, cash paid for contractual interest on the 2024 Notes was $0.3 million.

After the exchanges described above, the indenture and related security agreement under which the 2024 Notes were issued were terminated.

Floorplan Line of Credit

On August 10, 2023, we entered into a Floorplan and Security Agreement (the “Floorplan LOC”) with Mitsubishi HC Capital America, Inc. under which we obtained a revolving floorplan line of credit with a maximum borrowing limit of $5.0 million.

The intended use of the Floorplan LOC was to finance the acquisition of inventory used in production of our W4 CC and W750 vehicles. The terms of the Floorplan LOC included interest charged on the outstanding borrowings and other fees and covenants. Interest was to be charged at a variable rate based on a reference interest rate, such as the Secured Overnight Financing Rate (“SOFR”), plus 4.86%.

In connection with the Securities Purchase Agreement described above, we terminated the Floorplan and Security Agreement. During the year ended December 31, 2023, we did not draw on or incur any charges related to the Floorplan LOC.

8. LEASES

We have entered into various operating and finance lease agreements for offices, manufacturing and warehouse facilities. We determine if an arrangement is a lease, or contains a lease, at inception and record the leases in our financial statements upon lease commencement, which is the date when the underlying asset is made available for our use by the lessor.

We have elected not to disclose in the consolidated balance sheets leases with a lease term of 12 months or less at lease inception that do not contain a purchase option or renewal term provision we are reasonably certain to exercise. All other lease right-of-use assets (“ROU”) and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments.

Our leases may include options to extend the lease term for up to 5 years. Some of our leases also include options to terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.

During the second quarter of 2022, we entered into a lease agreement for additional office and warehouse space. We obtained a Letter of Credit (“LOC”) in the amount of $0.5 million to secure the lease, which bears interest atfive percent per annum. Under the terms of the agreement, the landlord may use the whole or any part of the LOC for the payment of any amount as to which we are in default or to compensate the landlord for certain specified losses or damage.

The Company assesses the carrying value of its ROU assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such indicators may include, but are not limited to, significant underperformance relative to historical or projected future operating results, changes in the business climate or legal factors, and changes in the expected use of the leased asset. The assessment of whether a ROU asset is impaired involves management's judgment, including considerations of future cash flows, market conditions, and other relevant factors.

If impairment indicators are identified, the Company estimates the future cash flows expected to result from the use and eventual disposition of the leased asset. These estimates consider factors such as anticipated future operating results, market conditions, and other relevant factors. If the sum of the expected future cash flows is less than the carrying amount of the ROU asset, an impairment loss is recognized for the difference between the carrying amount and the fair value of the ROU asset. The fair value is determined based on various valuation techniques, including discounted cash flow analysis, market comparable transactions, and other appropriate methods.

Impairment losses are recognized in the consolidated statements of operations. The Company determines the level at which the impairment loss is recognized based on whether it expects to retain or dispose of the ROU asset. If the Company expects to retain the ROU asset, the impairment loss is recognized as an adjustment to the carrying amount of the ROU asset, with a corresponding adjustment to accumulated depreciation and amortization. If the Company expects to dispose of the ROU asset, the impairment loss is recognized in Selling, general and administrative expense in the statements of operations.

During the year ended December 31, 2023, the Company identified indicators of impairment due to slower than expected market adoption and conducted an impairment test on its ROU assets in accordance with applicable accounting standards. The fair value less costs to sublease was determined based on market prices for similar assets, while the value in use was calculated using discounted cash flow projections. As a result of these assessments, we recognized an impairment loss of $0.9 million related to the ROU asset for our Aero facility located in Mason, Ohio, which is recorded in the Selling, general and administrative expense in the statements of operations.

Lease expense for operating leases is recognized on a straight-line basis over the lease term as cost of sales or operating expenses depending on the nature of the lease right-of-use asset. Amortization of finance lease assets is recognized over the lease term as cost of sales or operating expenses depending on the nature of the leased asset. Interest expense on finance lease liabilities is recognized over the lease term within Interest expense in the consolidated statements of operations.

The components of lease expense are as follows within our consolidated statements of operations:

Lease right-of-use assets consisted of the following:

Lease liabilities consisted of the following:

Other information related to leases is as follows:

Supplemental cash flow information related to leases where we are the lessee is as follows:

As of December 31, 2023, the maturities of our operating and finance lease liabilities (excluding short-term leases) are as follows:

9. INCOME TAXES

During the years ended December 31, 2023 and 2022, the Company has taxable losses primarily due to operations and thus hasno current federal tax expense recorded. We continue to record a valuation allowance against our deferred tax assets as of December 31, 2023.

The U.S. components of loss before income taxes and a reconciliation of the statutory federal income tax with the provision for income taxes follows:

The reconciliation of taxes at the federal statutory rate to our provision for income taxes was as follows:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. When realization of the deferred tax asset is more likely than not to occur, the benefit related to the deductible temporary differences attributable to operations is recognized as a reduction of income tax expense. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2023 and 2022, our ability to realize our net deferred tax asset is not more likely than not to occur and the valuation allowance reduces the deferred tax asset tozero.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

For the year ended December 31, 2023, the Company recorded an increase to the valuation allowance of $23.3 million as a component of income tax expense.

As of December 31, 2023 and 2022, the Company has $17.2 million of federal net operating loss (“NOL”) carry-forward deferred tax assets which expire through 2038. Additionally, as of December 31, 2023 and 2022, the Company has approximately $84.3 million and $47.0 million, respectively, of federal NOL deferred tax assets which carry-forward indefinitely, and approximately $2.0 million and $0.9 million, respectively, of state and local NOL carry-forward deferred tax assets which expire through 2037. The NOL carry-forwards may be limited in certain circumstances, including ownership changes.

Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carry-forwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Certain tax attributes are subject to an annual limitation as a result of certain cumulative changes in ownership interest of significant shareholders which could constitute a change of ownership as defined under Internal Revenue Code Section 382. The Company completed a full analysis of historical ownership changes and determined that a portion of the NOLs to-date have a limitation on future deductibility. Approximately $8.4 million of NOLs incurred prior to 2014 will be unable to offset future taxable income and have been reserved via a valuation allowance to reduce the deferred tax asset to the expected realizable amount.

The following table presents a reconciliation of unrecognized tax benefits:

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2023, and 2022, due to the Company’s continued losses, no amounts of interest and penalties have been recognized in the consolidated statements of operations. If the unrecognized tax benefits were reversed, a deferred tax asset and corresponding valuation allowance would be recorded, and thus the reversal would have no impact on the effective rate.

The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and local jurisdictions. Generally, the Company’s 2019 through 2022 tax years remain open and subject to examination by federal, state and local taxing authorities. However, federal, state, and local net operating losses from 2009 through 2022 are subject to review by taxing authorities in the year utilized.

10. FAIR VALUE MEASUREMENTS

We estimate the fair value of the 2026 Notes and 2026 Warrants using commonly accepted valuation methodologies upon issuance and at each reporting date. Considerable judgment was required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value model included estimates of the redemption dates, credit spreads and the market price and volatility of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values. The following table presents the estimated fair values:

11. STOCK-BASED COMPENSATION

Incentive Stock Plans

We maintain, as approved by the board of directors and the stockholders, the 2017 Incentive Stock Plan, the 2019 Incentive Stock Plan and the 2023 Long-Term Incentive Plan (collectively, the “Plans”) providing for the issuance of stock-based awards to employees, officers, directors or consultants of the Company. Non-qualified stock options may only be granted with an exercise price equal to the market value of our common stock on the grant date. Shares reserved for stock awards under the plans total 17.5 million. Total shares remaining available for stock incentive grants under the Plans totaled approximately 3.0 million as of December 31, 2023. We have granted new stock options, restricted stock awards (“RSAs”), restricted stock units, and performance share units (“PSUs”) under the Plans.

Stock-Based Compensation Expense

The following table summarizes stock-based compensation expense:

Stock Options

During 2023, activity for stock options was as follows:

As of December 31, 2023, unrecognized compensation expense was $1.0 million for unvested options, which is expected to be recognized over the next year. During 2023, no new stock options were granted.

Restricted Stock Awards

Granted restricted stock awards generally vest ratably over athree-year service period. The fair value of vested RSAs for the years ended December 31, 2023 and 2022 were $2.4 million and $2.7 million, respectively.

During 2023, activity for RSAs was as follows:

As of December 31, 2023, unrecognized compensation expense was $9.2 million for unvested restricted stock, which is expected to be recognized over the next 1.9 years.

Performance Share Units

As of December 31, 2023, the number of unvested PSUs was 3.0 million. The vesting of PSUs is conditioned upon achievement of certain performance objectives over performance periods ending December 31, 2024 and 2025 as defined in each award agreement. Fifty percent of the PSUs vest based upon the Company’s total shareholder return (“TSR”) as compared to a group of peer companies, andfifty percent of the PSUs vest based upon our performance on certain measures including a cumulative adjusted EBITDA target (“EBITDA PSUs”). Depending on the actual achievement of the performance objectives, the grantee may earn between 0% and 200% of the target PSUs.

During 2023, activity for PSUs with a TSR metric was as follows:

Inputs and assumptions used to calculate the fair value at grant date through a Monte-Carlo simulation were as follows:

(a) Expected volatility based on 2.7 years of daily closing share price changes.

As of December 31, 2023, unrecognized compensation expense was $4.0 million, which is expected to be recognized over the next 1.3 years.

During 2023, activity for EBITDA PSUs was as follows:

The fair value of performance share units is calculated based on the stock price on the date of grant. The stock-based compensation expense recognized each period is dependent upon our estimate of the number of shares that will ultimately vest based on the achievement of EBITDA-based performance conditions. Future stock-based compensation expense for unvested EBITDA PSUs will be based on the fair value of the awards as of the grant date, which has not yet occurred, as the cumulative adjusted EBITDA target condition is not yet defined.

12. NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards

ASU 2016-13, Financial Instruments - Credit Losses. In June 2016, the FASB issued ASU 2016-13, which requires entities to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. We adopted this standard effective January 1, 2023. The adoption of this standard did not have a material impact on our consolidated balance sheets or statements of operations.

ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for convertible instruments by removing certain separation models in ASC 470-20, Debt—Debt with Conversion and Other Options, for convertible instruments. The ASU updates the guidance on certain embedded conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital, such that those features are no longer required to be separated from the host contract. The convertible debt instruments will be accounted for as a single liability measured at amortized cost. This will also result in the interest expense recognized for convertible debt instruments to be typically closer to the coupon interest rate when applying the guidance in Topic 835, Interest. Further, the ASU made amendments to the EPS guidance in Topic 260 for convertible debt instruments, the most significant impact of which is requiring the use of the if-converted method for diluted EPS calculation, and no longer allowing the net share settlement method. The ASU also made revisions to Topic 815-40, which provides guidance on how an entity must determine whether a contract qualifies for a scope exception from derivative accounting. The amendments to Topic 815-40 change the scope of contracts that are recognized as assets or liabilities. We adopted this standard effective January 1, 2022. The adoption of this standard did not have a material impact on our consolidated balance sheets or statements of operations.

Accounting Standards Issued But Not Yet Adopted

ASU 2023-07, Segment Reporting - Improvements to Reportable Segment Disclosures. In November 2023, the FASB issued ASU 2023-07 related to disclosures about a public entity’s reportable segments and provides more detailed information about a reportable segment’s expenses. The new standard is effective for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024, with retrospective application required. We are assessing the effect on our annual consolidated financial statement disclosures; however, adoption will not impact our consolidated balance sheets or statements of operations.

ASU 2023-09, Improvements to Income Tax Disclosures. In December 2023, the FASB issued ASU 2023-09 to enhance the transparency and decision usefulness of income tax disclosures. The new standard is effective for fiscal years beginning after December 15, 2024, with retrospective application permitted. We are assessing the effect on our annual consolidated financial statement disclosures; however, adoption will not impact our consolidated balance sheets or statements of operations.

All other ASUs issued but not yet adopted were assessed and determined to be not applicable or are not expected to have a material impact on our consolidated financial statements or financial statement disclosures.

13. STOCKHOLDERS' EQUITY

Securities Litigation Settlement

On September 1, 2023, we issued 25.4 million shares of common stock with an aggregate value of $20.0 million in connection with the settlement of the Securities Litigation as described below in Note 15, Commitments and Contingencies. The number of shares was based on the market price per share of our common stock on August 31, 2023. This transaction was recorded as a noncash operating activity.

As a result of the settlement, we no longer have any obligation related to the securities litigation and, as such, the $15.0 million insurance receivable previously recorded in Other Receivable and $35.0 million legal reserve previously recorded in Accrued and Other Current Liabilities were zero as of December 31, 2023.

ATM Sales Agreement

On March 10, 2022, we entered into an ATM Sales Agreement, under which we may offer and sell shares of our common stock having an aggregate sales price of up to $175.0 million.

During the years ended December 31, 2023 and 2022, we issued 89.3 million and 4.9 million shares, respectively, under the ATM Agreement for net proceeds of $62.2 million and $12.9 million, respectively. Commissions paid in connection with the issuances under the ATM Agreement are recorded as a reduction of the share proceeds. During the years ended December 31, 2023 and 2022, we incurred commissions of$1.3 million and $0.3 million, respectively. The remaining aggregate sales available under the ATM Agreement was $96.9 millionas of December 31, 2023.

Equity Line of Credit

On December 12, 2023, the Company entered into an equity line of credit purchase agreement (the “ELOC Purchase Agreement”) with Lincoln Park Capital Fund, LLC (the “Purchaser”) which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company may sell to the Purchaser up to $50.0 million of shares of common stock over the 24-month term of the ELOC Purchase Agreement. Concurrently with entering into the ELOC Purchase Agreement, the Company also entered into a registration rights agreement (the “ELOC Registration Rights Agreement”) with the Purchaser, whereby the issuance of the shares pursuant to the ELOC Purchase Agreement were registered pursuant to the Company’s effective shelf registration statement on Form S-3, and the related base prospectus included in the registration statement, as supplemented by a prospectus supplement filed on December 27, 2023.

The Company may direct the Purchaser, at its sole discretion, and subject to certain conditions, to purchase up to 1.0 million shares of common stock on any business day (a “Regular Purchase”). The amount of a Regular Purchase may be increased under certain circumstances to 1.25 million shares if the closing price is not below $0.40 and up to 1.5 million if the closing price is not below $0.50 provided the Purchaser’s committed obligation under any single Regular Purchase shall not exceed $2.0 million. The purchase price for Regular Purchases (the “Purchase Price”) shall be equal to 97.5% of the lower of the lowest sale price of common stock on the Purchase Date for such Regular Purchase and the arithmetic average of thethree lowest closing sale prices for the common stock during theten consecutive business days ending on the business day immediately prior to the Purchase Date, with a floor of $0.10. In the event the Company issues the full amount allowed under a Regular Purchase on any given business day, we may also direct the Purchaser to purchase additional amounts as accelerated purchases. The purchase price for the accelerated and additional accelerated purchases shall be equal to the lesser of 97.0% of such day’s the VWAP of the common stock on the principal market and the closing sale price of the common stock on such day.

In connection with the ELOC Purchase Agreement and ELOC Registration Rights Agreement, the Company paid a non-cash commitment fee to the Purchaser in the amount of 3,775,105 shares of common stock of the Company (valued at $1.5 million). The Company reflected the commitment fee as an expense in Interest expense in the consolidated statements of operations based on the fair value on the issuance date.

Under applicable rules of the NASDAQ Capital Market, the Company cannot issue or sell more than 19.99% of the shares of common stock outstanding immediately prior to the execution of the ELOC Purchase Agreement to the Purchaser under the ELOC Purchase Agreement without stockholder approval.

During the year ended December 31, 2023, excluding the additional commitment shares issued to the Purchaser disclosed above, the Company didnot sell any shares of common stock pursuant to the ELOC Purchase Agreement. Subsequent to December 31, 2023 through the date of this filing, the Company sold 12.0 million shares of common stock at prices ranging between $0.2210 and $0.3430 pursuant to the ELOC Purchase Agreement and received proceeds of $3.1 million.

The Company evaluated the contract that includes the right to require the Purchaser to purchase shares of common stock in the future (“purchased put right”) considering the guidance in ASC 815-40, “Derivatives and Hedging - Contracts on an Entity’s Own Equity” (“ASC 815-40”) and concluded that it is an equity-linked contract that does not qualify for equity classification, and therefore requires fair value accounting as a derivative asset. The Company has analyzed the terms of the freestanding purchased put right and has concluded that it has insignificant value as of December 31, 2023.

Preferred Stock

Workhorse has authorized 75.0 million shares of Series A Preferred Stock, par value $0.001 per share. Our certificate of incorporation provides that shares of preferred stock may be issued from time to time in one or more series. Our Board of Directors is authorized to fix the voting rights, if any, designations, powers, preferences, qualification, limitations and restrictions thereof, applicable to the shares of preferred stock. As of December 31, 2023 and December 31, 2022, there wereno shares of Series A Preferred Stock issued and outstanding.

Common Stock

The Company hasone class of common stock, par value $0.001 per share. Each share of our common stock is entitled toone vote on all matters submitted to stockholders.

On September 1, 2023, we obtained approval from our stockholders to amendment our articles of incorporation to increase the number of shares of common stock, par value $0.001 per share, authorized for issuance thereunder to 450.0 million.

Warrants

In connection with the issuance of debt, common stock and preferred stock, we issued equity-classified warrants to purchase shares of our common stock. As of December 31, 2023 and 2022, there were approximately 1.0 million warrants outstanding.

Success Fees

During the years ended December 31, 2023 and 2022, we issued 344,997 and 244,035 shares of common stock, respectively, for payment of professional service fees, valued at $0.4 million and $0.6 million, respectively.

14. RELATED PARTIES

We obtain our general liability, property and casualty, and directors and officers liability insurance through AssuredPartners NL, LLC (“Assured”). Gerald Budde, a former Director of the Company, is currently the Chief Financial Officer of Accretive Insurance Solutions Inc. (“Accretive”). Assured and Accretive are both subsidiaries of AssuredPartners Capital, Inc. The placement of insurance was completed by an Assured agent and Mr. Budde did not participate in any decisions about insurance, nor was he paid any portion of the brokerage fee. Assured earned brokerage fees of approximately $0.3 millionand $0.3 million for the years ended December 31, 2023 and 2022, respectively.

15. COMMITMENTS AND CONTINGENCIES

General Matters

The Company is party to various negotiations and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.

Legal Proceedings

On October 24, 2022, the Company entered into a binding term sheet to resolve the putative class action (the “Securities Class Action”) brought in the Central District of California (Case No.2:21-cv-02072) on behalf of purchasers of the Company’s securities from March 10, 2020 through May 10, 2021. On January 13, 2023, the parties executed a Stipulation of Settlement setting forth the terms of the settlement of the class action and resolution of all claims.

On July 28, 2023 (the “Judgment Date”), the Court entered an order (the “Order”) granting final approval of the Stipulation of Settlement, resolving the Securities Class Action. Pursuant to the Stipulation of Settlement, in exchange for a release of all claims and dismissal with prejudice of the Securities Class Action, the Company agreed to create a settlement fund with an escrow agent (the “Settlement Fund”), consisting of $15.0 million in cash and $20.0 million in shares of common stock of the Company (the “Settlement Shares”) from which class members will receive payment. The escrow agent may sell the Settlement Shares and deposit the proceeds from such sales into the Settlement Fund or may distribute the Settlement Shares to class members.

Pursuant to the Stipulation of Settlement, the number of Settlement Shares to be issued was based on the VWAP of the Company’s common stock for the 15 trading days immediately preceding the Judgment Date. The VWAP would be adjusted if, at market close on the trading day before the date the Company deposits the Settlement Shares, the market price per share of the Company’s common stock deviated more than 25% above or below the VWAP Price. Upon such deviation, the number of Settlement Shares would be adjusted, upward or downward, such that the aggregate value of the Settlement Shares equals $20.0 million. Consistent with the foregoing, the Company issued 25,380,711 shares of its common stock into the Settlement Fund as Settlement Shares in September 2023, which is considered a non-cash transaction.

For additional information regarding the Securities Class Action, see Note 17, “Commitments and Contingencies – Legal Proceedings – Securities Litigation” included in Item 8, “Financial Statements and Supplementary Data” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

16. SUBSEQUENT EVENTS

The Company has evaluated subsequent events for potential recognition and disclosures through the date the accompanying consolidated financial statements were filed.

Sale of Manufacturing Facility and Campus

On January 31, 2024, a subsidiary of Workhorse entered into a Purchase and Sale Agreement (the “Sale Agreement”) with William Repny LLC (the “Purchaser”) for the sale of its Union City, IN manufacturing facility and campus, excluding any equipment or fixtures used in manufacturing operations (the “Property”), for a purchase price, before fees and expenses, of approximately $34.5 million.

Pursuant to the Sale Agreement, the Company will lease back the Property from the Purchaser under a triple-net lease agreement (the “Lease”) for an initial term of 20 years. The Company will have the option to renew the Lease forthree additional 10-year renewal terms, subject to the terms of the Lease.

Under the Lease, the Company will pay base annual rent of approximately $3.4 million for the Property, subject to an annual increase of 3% during the initial term of the lease and certain additional increases during any renewal term. In addition to rent, the Company will be responsible for all costs and expenses related to the Property, including, without limitation, maintenance, operation, repair and replacement of buildings and improvements, utility charges, insurance premiums and real estate taxes and assessments.

The closing is subject to Purchaser performing satisfactory due diligence on the Property, obtaining financing and other customary closing conditions. There is no assurance at this time that the Purchaser will purchase the Property. The Company plans to use the proceeds for general corporate purposes.

Aero Drone Design and Manufacturing Operations

As previously disclosed in our Quarterly Report on Form 10-Q for the period ended September 30, 2023 filed with the SEC on November 14, 2023, we announced our decision to evaluate a broad range of strategic alternatives for our drone vehicles which may include a sale, strategic partnership, another transaction, or the continued execution of our strategic plan for the drone vehicle production. On February 20, 2024, our Board of Directors approved a plan to cease the production operations of our drone design and manufacturing business and transition to only operating our Drones As A Service business. The decision to cease operation of our drone design and manufacturing product line was not considered a strategic shift having major effects on operations and therefore does not meet the criteria to qualify as a discontinued operation.

First Amendment to Green Senior Secured Convertible Note Due 2026

Subsequent to December 31, 2023, the Company has repaid $7.5 million of the initial principal balance upon request of the holder. On February 29, 2024, the Company entered into a First Amendment to Green Senior Secured Convertible Note Due 2026 (the “2026 Notes Amendment”) with the holder. In connection with the 2026 Notes Amendment, the Company redeemed $10.0 million principal amount of the 2026 Notes, thereby reducing the outstanding principal amount of the 2026 Notes to $2.5 million. The 2026 Notes Amendment also removed the February 15, 2024 and March 1, 2024 partial redemption dates, deleted the minimum liquidity covenant, and amended the 2026 Notes to permit the Company to prepay the 2026 Notes at its option, subject to certain conditions.

Exchange Agreement

In connection with the 2026 Notes Amendment, the Company entered into a letter agreement (the “Exchange Agreement”) to exchange the 2026 Warrants for a total of 8.5 million shares of common stock for a total value of $2.9 million, whereupon the Warrant was cancelled (the “Exchange”). The Company recorded a gain of $2.7 million in connection with the Exchange in the first quarter of 2024.

Additional Cost Reduction Measures

Another vital component of management’s intended plan over the next twelve months to improve our liquidity and working capital requirements is reducing our operating costs to, among other things, reduce demands on the liquidity that is available to us. Accordingly, in the first quarter of 2024 we took the measures described below.

•We are in the process of completing a reduction in force (the “RIF”) pursuant to which we terminated approximately 20% of our total workforce, excluding direct labor. We do not expect to incur material costs in connection with the RIF.

•Each of our executive officers agreed to defer payment of approximately 20% of their cash compensation into the second quarter of 2024.

•As described above, we decided to fully transition our Aero business from a design and manufacturing drone business to Drones as a Service business. This transition has resulted in, among other things, our stopping production and development of both drone product lines and the termination of employees who performed the related work.

Management plans to continue to seek additional opportunities to reduce costs and, in particular, cash expenditures, in a manner intended to minimize their adverse impact on our core operations. Management also plans to significantly reduce capital expenditures and only allocate capital for manufacturing equipment and tooling. There can be no assurance that the measures described above, or any other cost-cutting measures we may implement in the future will be sufficient to address our immediate or longer-term liquidity and working capital needs. Moreover, it is possible that such measures will have an adverse effect on our operations.