Workhorse Group Inc

Notes to Condensed Consolidated Financial Statements

1. SUMMARY OF BUSINESS AND 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.

Liquidity, Capital Resources, and Going Concern

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“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 Condensed 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 Condensed 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 sales of $1.3 million, incurred a net loss of $29.2 million and used $18.0 million of cash in operating activities during the three months ended March 31, 2024. As of March 31, 2024, the Company had $6.7 million of cash and cash equivalents, accounts receivable of $1.8 million, net inventory of $49.9 million and accounts payable of $14.2 million. As of March 31, 2024, the Company had working capital of $24.2 million and an accumulated deficit of $780.7 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 condensed 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 2024 Securities Purchase Agreement (as defined below) and 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 additional variations of our existing vehicles and 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 and debt securities, including the continued access to the additional closings of up to $123.7 million inaggregate principal amount of additional

2024 Notes and, if our share price makes such exercise feasible, the possible receipt of proceeds from the exercise of the corresponding 2024 Warrants pursuant to the 2024 Securities Purchase Agreement, further described below, andthe 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 other 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 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 Condensed 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.

The following subsections provide additional actions by the Company with regards to liquidity and its plans to manage operating capital.

Financings under the Securities Purchase Agreements

As part of management's plan to raise capital to fund operations, the Company has entered into a financing transaction that makes liquidity available both in the short term and over time. On March 15, 2024, we entered into a securities purchase agreement (the “2024 Securities Purchase Agreement”) with an institutional investor (the “Investor”) under which we agreed to issue and sell, in one or more registered public offerings by the Company directly to the Investor in multiple tranches over a period beginning on March 15, 2024, senior secured convertible notes (the “2024 Notes”) for up to an aggregate principal amount of $139.0 million that will be convertible into shares of the Company’s common stock, par value of $0.001 per share (“Common Stock”) and warrants to purchase shares of common stock ( the “2024 Warrants”). On March 15, 2024, the Company issued and sold to the Investor a note (the “Initial 2024 Note”) in original principal amount of $9.0 million and a warrant (the“Initial 2024 Warrant”) to purchase up to 32.0 million shares of common stock pursuant to the 2024 Securities Purchase Agreement and a prospectus supplement filed on March 15, 2024. As of the date hereof, the Initial 2024 Note has been fully converted into shares of our common stock and is no longer outstanding, and no shares have been issued pursuant to the Initial 2024 Warrant.

On May 10, 2024, the Company issued and sold to the Investor a second 2024 Note (the “First Additional 2024 Note”) in the original principal amount of $6.3 million and a 2024 Warrant (the “First Additional 2024 Warrant”) to purchase up to 36.8 million shares of common stock.

The 2024 Securities Purchase Agreement provides for additional closings of up to $123.7 million in aggregate principal amount of additional 2024 Notes and corresponding 2024 Warrants. See Note 7, Debtand Note 16, Subsequent Eventsfor additional discussion related to the 2024 Securities Purchase Agreement. If we are not able to complete the additional closings or find another source of liquidity in the immediate future, we may be unable to continue our operations or may need to substantially reduce them.

Prior to entering the 2024 Securities Purchase Agreement described above, the Company satisfied in full the $20.0 million principal amount of green senior convertible notes (the “2026 Notes”) due October 1, 2026, using $10.0 million of restricted cash, and redeemed the warrant in connection therewith for the payment of cash and exchange of our Common Stock. For further discussion of the 2026 Notes, see the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023

Sale Leaseback

Another strategic opportunity identified by management to raise capital to fund operations was to enter into a sale leaseback for our Union City, Indiana manufacturing facility. As previously reported, on January 31, 2024, a subsidiary of the Company entered into a purchase and sale agreement (the “Purchase and Sale Agreement”) with William Repny LLC (the “Union City Purchaser”) for the sale of the Company’s Union City, Indiana manufacturing facility for a purchase price, before fees and expenses, of approximately $34.5 million, in connection with which the Company would lease the property back from the Union City Purchaser. Although the Purchase and Sale Agreement has not been terminated, the Company does not believe the transaction will be consummated at the current purchase price. Accordingly, the Company is currently discussing alternative sale and leaseback transactions with other potential purchasers, as well as possible changes to the terms of the Purchase and Sale Agreement with the Union City Purchaser or other strategic alternatives. The Company expects that if a sale and leaseback transaction for the Union City facility is consummated, whether with the Union City Purchaser or another party, the purchase price in such transaction will be materially lower than the price provided in the Purchase and Sale Agreement.

As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the SEC on March 12, 2024 (the “Form 10-K”) a vital component of management’s intended plan to improve our liquidity and working capital requirements is reducing our operating costs to, among other things, reduce demands on our available liquidity. During the first quarter of 2024, we initiated a reduction in force (the “RIF”) pursuant to which we terminated approximately 20% of our total workforce, excluding direct labor, and our executive officers agreed to defer approximately 20% of their cash compensation into the second quarter of 2024. In April 2024, the Company furloughed 73 employees at its Union City manufacturing facility without pay. The Company has not incurred, and does not expect to incur, material costs in connection with the RIF and furloughs. The Company is also currently working with certain of its vendors to extend or restructure the payment terms of certain of its accounts payable. The Company currently intends to reinstate all furloughed employees when the Company’s financial and operational position permits. However, there can be no assurance that such furloughed employees will be available and willing to return to work.

Aero Drone Design and Manufacturing Operations

Management's plan also included a decision to cease the production operations of our drone design and manufacturing business and transition exclusively to operating as a Drones as a Service business, as previously disclosed in the Form 10-K. In addition, the Company is currently working with a third party to complete the divestiture of its remaining Aero business. The Company does not expect to realize cash proceeds upon consummation of the sale but expects the transition to a Drones as a Service business and the subsequent divestiture to reduce the operating costs associated with the business. In addition, the Company expects that the final divestiture agreements will include limited earn-out provisions under which the Company would receive a portion of the proceeds if Aero realizes revenues from certain contingent sources. The Company expects to consummate this transaction during the second fiscal quarter of 2024.

Basis of Presentation and Consolidation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and include the accounts and operations of the Company and those of our wholly-owned subsidiaries. Accordingly, they do not include all of the information and footnotes required by GAAP for annual audited financial statements. All intercompany balances and transactions have been eliminated upon consolidation.

In the opinion of our management, the unaudited Condensed Consolidated Financial Statements have been prepared on a basis consistent with the audited consolidated financial statements and include all adjustments necessary for the fair presentation of Workhorse’s financial condition, results of operations and cash flows for the interim periods presented. Such adjustments are of a normal, recurring nature. The results of operations and cash flows for the interim periods presented may not necessarily be indicative of full-year results. Reference should be made to the financial statements contained in our Form 10-K.

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.

2. INVENTORY, NET

Inventory, net consisted of the following:

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.

As of March 31, 2024 and December 31, 2023, we carried inventory reserves of $10.1 million and $8.5 million, respectively. The period over period increase in inventory reserves was primarily attributable to excess inventory due to slower than anticipated vehicle sales.

3. CONTRACT MANUFACTURING SERVICES AND INVESTMENT IN TROPOS

We have a minority ownership investment in Tropos Technologies, Inc. (“Tropos”). The investment was acquired 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 Assembly Services Agreement and, accordingly, the Company continues to perform assembly services and carry the balance of deferred revenue on its Condensed Consolidated Balance Sheets. As of March 31, 2024 and December 31, 2023, deferred revenue related to the Assembly Services Agreement was $4.7 million and $4.7 million, respectively.

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following:

(1)Our prepaid purchases consist of deposits made to our suppliers for non-recurring production parts and engineering costs. As of March 31, 2024 and December 31, 2023, net prepaid purchases primarily consisted of deposits for direct materials associated with our W4 CC and W750 vehicles. The decrease in prepaid purchases as of March 31, 2024 as compared to December 31, 2023 is primarily due to receipts of direct materials associated with our W4 CC and W750 vehicles.

(2) We record reserves on prepaid purchases that are significantly aged and for balances specifically identified as having a carrying value in excess of net realizable value. The reserve represents our best estimate of deposits on orders that we do not expect to recover.

5. REVENUE

The following table provides a summary of sales activity for the periods indicated:

Sales for the three months ended March 31, 2024 consisted primarily of W4 CC vehicle sales. Other sales for the three months ended March 31, 2024 consisted of non-warranty after-sales vehicle services, parts and accessories and revenue generated from operating our Stables by Workhorse route, Drones as a Service, and other service revenue.

Deferred revenue is equivalent to the total service fee allocated to the assembly service performance obligations under the Tropos Assembly Services Agreement that are unsatisfied as of the balance sheet date. Deferred revenue was $4.7 million and $4.7 million as of March 31, 2024 and December 31, 2023, respectively.

Revenue recognized from the deferred revenue balance was $0.0 million for the three months ended March 31, 2024 and $0.1 million for the three months ended March 31, 2023. See Note 3, Contract Manufacturing Services and Investment in Tropos, for further discussion of deferred revenue.

6. ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consisted of the following:

Warranties

Warranty liability activity consisted of the following for the periods indicated:

(1) 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 negative provision in the current period is driven by the expiration of the warranty liability related to non-current truck models.

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 Condensed Consolidated Statements of Operations.

Senior Secured Convertible Notes

2024 Securities Purchase Agreement

On March 15, 2024, we entered into the 2024 Securities Purchase Agreement with the Investor under which the Company agreed to issue and sell, in one or more registered public offerings by the Company directly to the Investor in multiple tranches over a period beginning on March 15, 2024, (i) 2024 Notes for up to an aggregate principal amount of $139.0 million that will be convertible into shares of the Company’s common stock, par value of $0.001 per share (the “Common Stock”) and (ii) 2024 Warrants to purchase shares of Common Stock. As previously disclosed, on March 15, 2024, the Company issued and sold to the Investor (i) the Initial 2024 Note in original principal amount of $9.0 million and (ii) the Initial 2024 Warrant to purchase up to 32.0 million shares of Common Stock pursuant to the 2024 Securities Purchase Agreement and a prospectus supplement filed on March 15, 2024. The Initial 2024 Note was issued pursuant to the Company's Indenture between the Company and U.S. Bank Trust Company, National Association, as trustee (the“Trustee”), dated December 27, 2023 (the “Base Indenture”), and a Second Supplemental Indenture between the Company and the Trustee.

Pursuant to the 2024 Securities Purchase Agreement, on May 10, 2024, the Company issued and sold to the Investor a (i) the First Additional 2024 Note in the original principal amount of $6.3 million and (ii) the First Additional 2024 Warrant to purchase up to 36.8 million shares of Common Stock. The First Additional 2024 Note was issued pursuant to the Base Indenture and a Third Supplemental Indenture between the Company and the Trustee.

Upon our filing of one or more additional prospectus supplements, and our satisfaction of certain other conditions, the 2024 Securities Purchase Agreement contemplates additional closings of up to $123.7 million in aggregate principal amount of additional 2024 Notes and corresponding 2024 Warrants.

No 2024 Note may be converted and no 2024 Warrant may be exercised to the extent that such conversion or exercise would cause the then holder of such 2024 Note or 2024 Warrant to become the beneficial owner of more than 4.99%, or, at the option of such holder,9.99% of the Company’s then outstanding Common Stock, after giving effect to such conversion or exercise (the “Beneficial Ownership Cap”).

Issuances of Common Stock under the 2024 Notes and the 2024 Warrants were also subject to the Exchange Cap (as defined in

the 2024 Notes and the 2024 Warrants) until approved by the Company’s stockholders. On May 14, 2024, the Company’s

stockholders approved issuances of Common Stock under the 2024 Notes and the 2024 Warrants in excess of the Exchange

Cap.

2024 Notes

The 2024 Notes are to be issued with original issue discount of 12.5%, resulting in$7.9 million of proceeds to the Company before fees and expenses with respect to the Initial 2024 Notes and $5.5 million of proceeds to the Company before fees and expenses with respect to the First Additional 2024 Note and are or will be senior, secured obligations of the Company, ranking senior to all other unsecured indebtedness, subject to certain limitations and are unconditionally guaranteed by each of the Company’s subsidiaries, pursuant to the terms of a certain security agreement and subsidiary guarantee.

Each 2024 Note bears interest at a rate of 9.0% per annum, payable in arrears on the first trading day of each calendar quarter, at the Company’s option, either in cash or in-kind by compounding and becoming additional principal. Upon the occurrence and during the continuance of an event of default, the interest rate will increase to 18.0% per annum. Unless earlier converted or redeemed, each 2024 Note will mature on the one-year anniversary of the date hereof, subject to extension at the option of the holders in certain circumstances as provided therein.

All amounts due under any 2024 Note are convertible at any time, in whole or in part, at the option of the holders into shares of Common Stock at a conversion price equal to the lower of $0.1367 for the First Additional 2024 Note (the “Reference Price”) or (b) the greater of (x) $0.0420 for the First Additional 2024 Note (the “Floor Price”) and (y)87.5% of the volume weighted average price of the Common Stock during theten trading days ending and including the trading day immediately preceding the delivery or deemed delivery of the applicable conversion notice, as elected by the converting holder. The Reference Price and Floor Price are subject to customary adjustments upon any stock split, stock dividend, stock combination, recapitalization or similar event. The Reference Price is also subject to full-ratchet adjustment in connection with a subsequent offering at a per share price less than the Reference Price then in effect. Subject to the rules and regulations of Nasdaq, we have the right, at any time, with the written consent of the Investor, to lower the reference price to any amount and for any period of time deemed appropriate by our board of directors. Upon the satisfaction of certain conditions, we may prepay any 2024 Note upon 15 business days’ written notice by paying an amount equal to the greater of (i) the face value of the 2024 Notes at premium of 25% (or 75% premium, during the occurrence and continuance of an event of default, or in the event certain redemption conditions are not satisfied) and (ii) the equity value of the shares of common stock underlying the 2024 Notes. The equity value of our common stock underlying the 2024 Notes is calculated using the two greatest volume weighted average prices of our common stock during the period immediately preceding the date of such redemption and ending on the date we make the required payment.

The 2024 Notes contain customary affirmative and negative covenants, including certain limitations on debt, liens, restricted payments, asset transfers, changes in the business and transactions with affiliates. It also requires the Company to maintain minimum liquidity on the last day of each fiscal quarter in the amount of either (i) $1.5 million if the sale leaseback transaction of Company’s manufacturing facility in Union City, Indiana (the “Sale Leaseback”) has not been consummated and (ii) $4.0 if the Sale Leaseback has been consummated, subject to certain conditions. The 2024 Notes also contain customary events of default.

Under certain circumstances, including a change of control, the holder may cause us to redeem all or a portion of the then-outstanding amount of principal and interest on any 2024 Note in cash at the greater of (i) the face value of the amount of 2024 Note to be redeemed at a 25% premium (or at a 75% premium, if certain redemption conditions are not satisfied or during the occurrence and continuance of an event of default), (ii) the equity value of our Common Stock underlying such amount of 2024 Note to be redeemed and (iii) the equity value of the change of control consideration payable to the holder of our Common Stock underlying such 2024 Note.

In addition, during an event of default, the holder may require us to redeem in cash all, or any portion, of any outstanding 2024 Note at the greater of (i) the face value of our Common Stock underlying such 2024 Note at a 75% premium and (ii) the equity value of our Common Stock underlying such 2024 Note. In addition, during a bankruptcy event of default, we shall immediately redeem in cash all amounts due under the 2024 Notes at a 75% premium unless the holder of such 2024 Note waives such right to receive payment. Further, upon the sale of certain assets, the holder may cause a redemption at a premium, including upon consummation of the Sale Leaseback if the redemption conditions are not satisfied. The 2024 Notes also provide for purchase and participation rights in the event of a dividend or other purchase right being granted to the holders of Common Stock.

As of March 31, 2024, the contractual principal balance of the 2024 Notes was $6.2 million and the fair value was $7.9 million. During the period ended March 31, 2024, the Investor converted $2.8 million of principal into Common Stock and we recorded a $0.2 million fair value adjustment in Interest expense in the statements of operations related to the Initial 2024 Note. No fair value adjustments related to the 2024 Notes attributable to changes in credit risk were recorded during the quarter ended March 31, 2024. 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 Initial 2024 Note upon issuance on March 15, 2024 was $11.4 million. The fair value was computed using a Monte Carlo Simulation Model which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 fair value measurement. The unobservable inputs utilized for measuring the fair value of the Initial 2024 Note reflect our assumptions about the assumptions that market participants would use in valuing the Initial 2024 Note as of the issuance date and subsequent reporting period.

We determined the fair value by using the following key inputs to the Monte Carlo Simulation Model:

As of March 31, 2024, the Company was in compliance with the debt terms and associated covenant under the 2024 Notes. Subsequent to March 31, 2024, the Investor has converted the initial principal balance of the Initial 2024 Note in full.

Warrants Exercisable

On March 15, 2024, as part of the 2024 Securities Purchase Agreement, the Company issued the Initial 2024 Warrant to purchase 32.0 million shares of common stock at an exercise price of $0.3500 per share. The Initial 2024 Warrant may be exercised by the holder immediately upon issuance and prior to March 15, 2034. No fractional shares will be issued upon exercise of the Initial 2024 Warrant. As of March 31, 2024, no shares have been issued pursuant to the Initial 2024 Warrant.

The fair value of the components of the 2024 Securities Purchase Agreement was allocated between the Initial 2024 Note and the Initial 2024 Warrant. As of March 15, 2024 (the initial recognition) and March 31, 2024, the fair value of the Initial 2024 Warrant was $4.7 million and $3.9 million, respectively. During the period ended March 31, 2024, we recorded a $0.8 million fair value adjustment in Interest expense in the Condensed Consolidated Statements of Operations related to the Initial 2024 Note. The fair value of the Initial 2024 Warrant was measured using the Black Scholes model approach. Significant inputs to the model at March 15, 2024 and March 31, 2024 are as follows:

Green Senior Convertible Notes Due 2026

On December 12, 2023, the Company entered into a securities purchase agreement (the “2023 Securities Purchase Agreement”) under which the Company issued, pursuant the Base Indenture and a First Supplemental Indenture between the Company and the Trustee, $20.0 million principal amount of green senior convertible notes (the “2026 Notes”) due October 1, 2026. The 2026 Notes were a senior secured obligation of the Company and ranked senior to all unsecured debt of the Company. The 2026 Notes were guaranteed by all the Company’s current subsidiaries and were 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%.

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.

During the first quarter of 2024, the Company repaid the 2026 Notes in full.

As of March 31, 2024 the contractual principal balance of the 2026 Notes waszero. During the three months ended March 31, 2024, we recorded no fair value adjustment in Other comprehensive loss related to the 2026 Notes. No fair value adjustments related to the 2026 Notes attributable to changes in credit risk were recorded during the three months ended March 31, 2024.

Warrants Under the 2023 Securities Purchase Agreement

On December 12, 2023, as part of the 2023 Securities Purchase Agreement, the Company issued warrants (the “2023 Warrants”) to purchase 25.6 million shares of common stock at an exercise price of $0.4492 per share.

The fair value of the components of the 2023 Securities Purchase Agreement was allocated between the 2026 Notes and the 2023 Warrants. As of December 31, 2023, the fair value of the 2023 Warrants was $5.6 million. During the three months ended March 31, 2024, in connection with a First Amendment to Green Seniro Secured Convertible Note Due 2026, the Company entered into an agreement to exchange the 2023 Warrants for a total of 8.5 million shares of common stock for a total value of $2.9 million, whereupon the 2023 Warrant was cancelled. The Company recorded a gain of $2.7 million in connection with this exchange in interest income in the Condensed Consolidated Statements of Operations related to the 2023 Warrants.

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 provision, 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 record in the Condensed 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 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 the purpose of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain we will exercise such options.

Lease expense for operating leases is recognized on a straight-line basis over the lease term as either cost of sales or operating expenses depending on the nature of the leased asset.

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

Lease liabilities consisted of the following:

9. FAIR VALUE MEASUREMENTS

We estimate the fair value of the 2024 Notes, 2024 Warrants, 2026 Notes and 2023 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:

10. STOCK-BASED COMPENSATION

We maintain, as approved by the board of directors and the stockholders, the 2017 Incentive Stock Plan, the 2019 Incentive Stock Plan, and 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 3.1 million as of March 31, 2024. We have granted new stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), and performance share units (“PSUs”) under the Plans.

Stock-based compensation expense

The following table summarizes stock-based compensation expense for the periods indicated:

Stock options

A summary of stock option activity for the three months ended March 31, 2024 is as follows:

As of March 31, 2024, unrecognized compensation expense was $0.4 million for unvested options which is expected to be recognized over the next 0.4 years.

Restricted stock awards

A summary of restricted stock award activity for the three months ended March 31, 2024 is as follows:

As of March 31, 2024, unrecognized compensation expense was $6.8 million for unvested restricted stock awards which is expected to be recognized over the next 1.2 years.

Restricted stock units

A summary of restricted stock unit activity for the three months ended March 31, 2024 is as follows:

As of March 31, 2024, unrecognized compensation expense was $3.3 million for unvested restricted stock units which is expected to be recognized over the next 2.58 years.

Performance share units

As of March 31, 2024, the number of unvested PSUs was 3.0 million. The vesting of PSUs is conditioned upon achievement of certain performance objectives over a performance period ending December 31, 2024, 2025 and 2026 as defined in each award agreement. For the PSUs issued in 2022 and 2023 with a performance period ending December 31, 2024 and 2025, fifty percent of the PSUs vest based upon the Company’s total shareholder return as compared to a group of peer companies (“TSR PSUs”), andfifty percent of the PSUs vest based upon our performance on certain measures including a cumulative adjusted EBITDA target (“EBITDA PSUs”). For the PSUs issued in 2024 with a performance period ending December 31, 2026, one hundred percent of the PSUs vest based upon our performance on a cumulative revenue target (“Revenue PSUs”). Depending on the actual achievement on the performance objectives, the grantee may earn between 0% and 200% of the target PSUs.

A summary of the activity for PSU awards with total shareholder return performance objectives for the three months ended March 31, 2024 is as follows:

As of March 31, 2024, unrecognized compensation expense was $3.1 million, which is expected to be recognized over the next 1.08 years.

A summary of the PSU awards with cumulative adjusted EBITDA targets for the three months ended March 31, 2024 is as follows:

The fair value of PSUs 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. During the quarter ended March 31, 2024, we recorded an expense of $0.1 million related to unvested 2022 issued EBITDA PSUs. This expense reflects the fair value of the EBITDA PSUs that is expected to vest based on the achievement of the established performance targets. The future stock-based compensation expense for the 2023 issued unvested revenue 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.

As of March 31, 2024, there were no PSU awards with cumulative revenue targets outstanding. 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 revenue-based performance conditions. Future stock-based compensation expense for unvested revenue 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 revenue target condition is not yet defined.

11. STOCKHOLDERS’ EQUITY

At-The-Market Sales Agreement

On March 10, 2022, we established an at-the-market equity program (the “ATM Program”). Under the ATM Program, we may offer and sell shares of our common stock having an aggregate sales price of up to $175.0 million.

During the three months ended March 31, 2024, we issued 9.8 million shares under the ATM Program for net proceeds of$2.7 million. The remaining aggregate sales available under the ATM Program is$95.6 million as of March 31, 2024. Certain of our other existing financing arrangements place certain conditions and restrictions on the use of our ATM Program.

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.

In connection with the ELOC Purchase 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 three months ended March 31, 2024, 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’s other financing arrangements substantially limit our ability to use the ELOC Purchase Agreement in the future.

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 had insignificant value as of March 31, 2024.

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 March 31, 2024, there wereno shares of Series A Preferred Stock issued and outstanding.

Common Stock

We haveone 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. As of March 31, 2024, as approved by our stockholders, our authorized shares of common stock for issuance is 450.0 million with a par value $0.001 per share.

Warrants

In connection with the issuance of debt and common stock, we issued equity-classified warrants to purchase shares of our common stock. As of March 31, 2024 and 2023, there were approximately 1.0 million warrants outstanding. As of March 31, 2024, in connection with the Initial 2024 Warrant, there are 32.0 million warrants outstanding.

12. INCOME TAXES

As of March 31, 2024 and December 31, 2023, our deferred tax liability waszero. Cumulative deferred tax assets are fully reserved as there is not sufficient evidence to conclude it is more likely than not the deferred tax assets are realizable. No current liability for federal or state income taxes has been included in these Condensed Consolidated Financial Statements due to the loss for the periods.

13. LOSS PER SHARE

Basic loss per share of common stock is calculated by dividing net loss by the weighted-average shares outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards and warrants using the treasury stock method, and convertible notes using the if-converted method, 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:

14. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards and Pronouncements Recently Adopted

There are no accounting standards or pronouncements recently adopted impacting the Company.

Accounting Standards and Pronouncements Not Yet Adopted

There are no accounting standards or pronouncements not yet adopted impacting the Company.

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

CSI Litigation

On April 19, 2024, Coulomb Solutions Inc. (“CSI”), a supplier to the Company of certain of the batteries used in its trucks, filed a complaint against the Company in United States District Court for the Eastern District of Michigan concerning late payment for certain products sold by CSI to the Company in the amount of approximately $4 million. The Company is currently in negotiations with CSI to resolve this matter.

16. SUBSEQUENT EVENTS

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

2024 Securities Purchase Agreement

Pursuant to the 2024 Securities Purchase Agreement, on May 10, 2024, the Company issued and sold to the Investor a (i) the First Additional 2024 Note and (ii) the First Additional 2024 Warrant. Refer to the Company’s Current Report on Form 8-K filed on March 15, 2024 for additional information related to the 2024 Securities Purchase Agreement, the 2024 Notes, and the 2024 Warrants. The First Additional 2024 Note was issued pursuant to the Base Indenture and a Third Supplemental Indenture between the Company and the Trustee.

As of the date hereof, the Initial 2024 Note, as described in Note 7, Debt, has been fully converted into shares of our common stock and is no longer outstanding, and no shares have been issued pursuant to the Initial 2024 Warrant. Upon our filing of one or more additional prospectus supplements, and our satisfaction of certain other conditions, the 2024 Securities Purchase Agreement contemplates additional closings of up to $123.7 million in aggregate principal amount of additional 2024 Notes and corresponding 2024 Warrants.

As described under Note 1, Summary - Cost Saving Measures, on April 22, 2024, the Company furloughed 73 employees at its Union City manufacturing facility without pay. The Company has not incurred, and does not expect to incur, material costs in connection with the furloughs. The Company is also currently working with certain of its vendors to extend or restructure the payment terms of certain of its accounts payable. The furloughs and vendor discussions are part of the Company’s previously disclosed strategy to reduce costs, including as described in the Form 10-K. The Company currently intends to reinstate all furloughed employees when the Company’s financial and operational position permits. There can, however, be no assurance that all such furloughed employees will be available and willing to return to work.