ITEM
1. BUSINESS
Overview
We are a technology company focused on providing sustainable
and cost-effective solutions to the commercial transportation sector. As an American manufacturer we design and build high performance
battery-electric vehicles and aircraft that make movement of people and goods more efficient and less harmful to the environment.
As part of our solution, we also develop cloud-based, real-time telematics performance monitoring systems that enable fleet operators
to optimize energy and route efficiency. Although we operate as a single unit through our subsidiaries, we approach our development
through two divisions, Automotive and Aviation.
Automotive
In March of 2013, we purchased the former Workhorse Custom Chassis
assembly plant in Union City, Indiana from Navistar International (NAV: NYSE). With this acquisition, we acquired the capability
to be an Original Equipment Manufacturer (OEM) of Class 3-6 commercial-grade, medium-duty truck chassis, to be marketed under the
Workhorse® brand. All Workhorse last mile delivery vans are assembled in the Union City assembly facility.
We
believe that we are the only medium-duty battery-electric OEM in the U.S. and we will be expanding our product portfolio through
introduction of the N-GEN electric cargo van, as well as the W-15 range-extended electric pickup truck in late 2018 and 2019.
We believe our battery-electric and range-extended battery electric
commercial vehicles offer fleet operators significant benefits, which include:
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Low Total Cost-of-Ownership vs. conventional gas/diesel vehicles
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Competitive advantage to increase brand loyalty and last mile delivery market share
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Improved profitability through:
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Lower maintenance costs
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Increased package deliveries per day through use of more efficient delivery methods
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Decreased vehicle emissions and reduction in carbon footprint
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Improved vehicle safety and driver experience
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The Company currently sells and leases
its vehicles to fleet customers directly and through its primary distributor Ryder System, Inc. Ryder also is the exclusive maintenance
provider for Workhorse, which
provides fleet operators with access to Ryder’s network of 800
maintenance facilities and nearly 6,000 trained service technicians across North America.
Cargo Vans for Last
Mile Delivery and Commercial Work Use
Workhorse E-100
battery-electric and E-GEN range-extended delivery vans are currently in production at our Union City, Indiana plant and are in
use by our customers on daily routes across the United States. To date, we have built and delivered over 360 electric and range
extended medium-duty delivery trucks to our customers. To our knowledge, we are the only American commercial electric vehicle
OEM to achieve such a milestone.
Our delivery customers include companies such as UPS, FedEx
Express, Alpha Baking and Ryder System.
Data from our in-house
developed Metron telematics system demonstrates our vehicles have logged more than 2,000,000 customer miles on the road and are
averaging a 500% increase in fuel economy as compared to conventional gasoline-based trucks of the same size and duty cycle. In
addition to improved fuel economy, we anticipate that the performance of our vehicles on-route will reduce long-term vehicle maintenance
expense by approximately 50% as compared to fossil-fueled trucks. Over a 20-year vehicle life, we estimate that our E-GEN Range-Extended
Electric delivery vans will save over $150,000 in fuel and maintenance savings. Due to this positive return-on-investment, we
charge a premium price for our vehicles when selling to major fleet operators. We expect that fleet operators will be able to
achieve a four-year or better total cost of ownership breakeven (without government incentives), which we believe justifies the
higher acquisition cost of our vehicles.
Our goal is to continue
to increase sales and production of our existing vehicle portfolio, while executing on a cost-down strategy in order to achieve
sustained gross margin profitability of the last mile-delivery van platform. It is our intention that this strategy in combination
with the development and launch of the N-GEN cargo van and W-15 pickup truck platforms, which target high-volume market segments,
will drive further cost-down volume synergies across our supply chain.
U.S. Post Office
Replenishment Program / Next Generation Delivery Vehicle Project
Workhorse, with our partner VT Hackney, is one of five awardees that the United
States Postal Service selected to build prototype vehicles for the USPS Next Generation Delivery Vehicle (NGDV) project. The Post
Office has stated that the number of vehicles to be replaced in the project is approximately 180,000. In September 2017, Workhorse
delivered six vehicles for prototype testing under the NGDV Acquisition Program in compliance with the terms set forth in their
USPS prototype contract. These vehicles continue to undergo testing in the field and at testing facilities. The Post Office has
stated that they intend to test the prototypes and select a winning bid(s) following the testing process.
N-GEN Electric Cargo Van
In 2017, Workhorse announced the development of
its N-GEN electric cargo van, which leverages the existing ultra-low floor, long-life commercial delivery vehicle platform that
was developed for the USPS, as well as our extensive customer experience gained from working with our E-GEN and E-100 customers.
The N-GEN incorporates lightweight materials, all-wheel drive, best in class turning radius, 360
o
cameras, collision
avoidance systems and an optional roof mounted HorseFly delivery drone.
The Workhorse N-Gen electric cargo van platform will be available
in 450, 700 and 1,000 cubic feet configurations. We intend to initially launch the 450 cubic foot and 1,000 cubic foot configurations
with the goal of competing with conventional market leaders, including the Mercedes Sprinter, Ford Transit and Dodge Promaster
gasoline/diesel vans for both last-mile delivery and other service-oriented applications such as telecommunications. We expect
these vehicles to achieve a fuel economy of approximately 60 miles per gallon equivalent (MPGe), and offer fleet operators the
most favorable total cost-of-ownership of any comparable conventional van utilizing an internal combustion engine that is available
today.
W-15 Range-Extended Electric Pickup Truck
In May 2017, we unveiled a working prototype of our W-15 range-extended
electric pickup truck to address the specific needs of commercial fleet work truck operators, including utilities, municipalities,
construction, airports and service businesses. We believe that the W-15 has the potential to transform the pickup truck market
for fleet operators in the United States, estimated at 250,000 new vehicle purchases per year. The performance specifications of
the Workhorse W-15 pickup include a true all-wheel drivetrain and two electric engines that generate up to 460 horsepower and provide
a top acceleration time from 0 to 60 MPH of 5.6 seconds. The W-15 also has a fuel-economy rating of 75 MPGe and a range of 80 miles
in all-electric operation. A gasoline-powered range extender also comes standard on the truck to extend the driving range to 300
miles on a single tank of gas by continuously charging the batteries during operation.
We have secured letters-of-intent for more than
5,500 trucks, amounting to nearly $300 million from corporate fleets representing the utility, municipality and automotive
logistics sectors. We have established a Leadership Council comprised of seasoned fleet experts from our LOI partners, who will
be piloting our production intent vehicles prior to launch in late 2018.
We intend to produce the W-15 at our
existing 250,000 square foot facility in Union City, Indiana. This plant has the capability to produce more than 60,000 vehicles
per year. The battery packs for all Workhorse vehicles will be built in our Loveland, Ohio battery pack plant using Panasonic
cells produced in Japan.
Delivery As A Service
(DAAS) and Future Platform Development
Last mile delivery is considered the
most expensive, inefficient, and pollution generating segment of transport, in addition to being the largest growing segment of
the trucking market, according to Datex Corp. and NTEA (2018). Driven by the growth in e-commerce, this is expected to double
to 26 billion parcels over the next 10 years. McKinsey & Company estimates that 80% of all home deliveries will transition
to driver assisted and autonomous models, driven by driver labor shortages, urban congestion, and consumer demand.
As part of continued efforts to advance our last mile delivery platform technologies, in the fourth quarter
of 2017, Workhorse initiated a pilot of its Delivery As A Service offering, which provides turn-key electric last mile delivery
for conventional brick and mortar and e-commerce businesses. Through our DAAS program, Workhorse electric vehicles, drivers and
dispatchers as well as potentially drones provide an asset-light opportunity for businesses to offer zero-emission last mile delivery
services to their customers. Workhorse’s DAAS is currently operating in one major metropolitan market, with plans to expand
to additional cities in conjunction with our pilot customers, in 2018.
Aviation
Delivery Drones
Our HorseFly™ Delivery Drone is
a custom-designed, purpose-built drone that is fully integrated with our electric trucks. We have a patent pending on this architecture
and we believe we are the only company in the world with a working drone/truck system. The HorseFly delivery drone and truck system
is designed to work within the FAA Rule 107 that permits the use of commercial drones in U.S. airspace under certain conditions.
To date, we have conducted two demonstration
deliveries with large multi-national corporations, including UPS. UPS conducted a successful real-world test with us in February
2017 and it received worldwide news coverage. The knowledge we have gained in building electric delivery trucks for last-mile
delivery has led us to believe that a drone/truck delivery system can have significant cost savings in the growing last mile delivery
market.
UPS has estimated
in a press release dated February 21, 2017 that a reduction of just one mile per driver per day over one year can save UPS up
to $50 million. Rural delivery routes are the most expensive to serve due to the time and vehicle expenses required to
complete each delivery. In this test, the drone made one delivery while the driver continued down the road to make another.
We believe that this truck/drone architecture represents significant cost savings for delivery fleets and that we are first
to market with such a system. We continue to work closely with the FAA as we strive to bring the system to the point of
daily drone deliveries across rural America.
SureFly™ Multicopter
SureFly
is our entry into the emerging vertical take-off and landing (VTOL) market. It is designed to be a two-person, 400-pound payload
aircraft with on a hybrid internal combustion/electric power generation system. Our approach in the design is to build the safest
and simplest to fly rotary wing aircraft in the world. We believe it is a practical answer to personal flight, and has additional
applications in the commercial transportation segments, including air taxi services, agriculture and others.
The FAA to date has granted three separate Experimental Airworthiness
Certifications, registered as N834LW, for the aircraft. These certifications come after an extensive design review and inspection
of the aircraft with each renewed certificate.
Our SureFly Aerospace team continues to further develop the
SureFly platform and routinely performs test cards, including testing the aircraft’s power systems, executing tethered high-power
ground tests and manned flights.
In December 2017, we initiated the process of spinning off our SureFly operations into a separate publicly
traded company, Surefly, Inc.
Surefly, Inc. will encompass all of SureFly’s aerial technology and expertise, including property
related to the personal helicopter, but it will not own the assets related to the package express-related HorseFly drone, which
will be retained by Workhorse. Workhorse granted SureFly a royalty-free, perpetual license to utilize the HorseFly drone except
with respect to deliveries implemented from a ground-based vehicle focused on package express.
The initial steps of the spin-off, which we took in December 2017,
provided for a capital infusion of $5 million into Workhorse in the form of a Senior Secured Note which is expected, although not
guaranteed, to be exchanged into equity of SureFly concurrent with the spin-off.
At the spin-off date, Workhorse
expects to retain a portion of SureFly’s common stock and distribute a portion as a dividend to existing Workhorse shareholders.
After the spin-off, expected during 2018, we intend to evaluate all of our options relating to the SureFly equity we have retained.
To facilitate the spin-off, Workhorse expects to enter into, among
other things, a transition services agreement with SureFly to provide certain services not anticipated to be provided immediately
by employees of SureFly.
The completion of the spin-off will enable us to focus all of our
resources on our core automotive business. We believe the decision to spin-off SureFly into a separate entity will better position
both companies for sustained long-term growth. The spin-off will improve the operational focus and financial outlook for Workhorse's
core business while creating new opportunities for SureFly.
The spin-off transaction will be subject to the receipt of regulatory
approvals, the execution of inter-company agreements, arrangement of adequate debt and/or equity financing, the effectiveness
of a registration statement, final approval by Workhorse's board of directors, and certain other customary conditions. The spin-off
will not require a shareholder vote and is expected to be completed by the end of 2018, but there can be no assurance regarding
the ultimate timing of the spin-off or that the spin-off will ultimately occur.
Technology
Batteries
Are Key
The battery pack is key to the design, development, and manufacture
of advanced electric-vehicle powertrains. Where some other electric vehicle (EV) manufacturers purchase their batteries in a plug-and-play
pack, we build our own battery packs. This keeps the intellectual property related to the design and production of the pack in-house
and avoids the issues that occur when a battery supplier fails. It also enables us to pay less for our battery packs than our competitors,
thus our all-electric truck is less expensive than competitive vehicles. We use the Panasonic 18650 cells and design the pack around
these commodity cells.
In-House
Software Development is Essential
Our
powertrains encompass the complete motor assemblies, computers, and software required for vehicle electrification. We use off-the-shelf
proven components and combine them with our proprietary software.
Innovation
is the Future
Additionally,
we have developed a cloud-based, remote management system to manage and track the performance of all of the vehicles that we deploy
in order to provide a 21st Century solution for fleet managers.
The telematics system and associated hardware installed in
the Workhorse vehicles is designed to monitor the controller area network (CAN) traffic for specific signals. These signals are
uploaded along with GPS data to a Workhorse server facility where the data signals are tracked at ten second intervals while driving
and during the electricity generating process and at sixty seconds during a plug-in charge. The real-time data is stored in a
database as it arrives and delivers updates to clients connected through the web interface.
Clients
are given login credentials (username and password) to the telematics website where they can monitor the performance and location
of the vehicles. Group privileges can be configured to limit access to client-specific vehicles securing the vehicle data so clients
can only view their vehicle data. Administrator privileges allow all data for all clients to be monitored and viewed.
As
a parameter-based system, we can set route-specific parameters to better manage the battery-provided power with the additional
power generated through the E-GEN process (not applicable to E-100). In an upcoming release, we will add the ability to integrate
Metron Telematics with the client’s internal telematics system and automatically update the parameters each day with information
about the route. This enhancement will result in a “SMART-GEN” vehicle that will maximize efficiency by automating
the process to determine the ideal times and locations to use the E-GEN to add electricity to the batteries.
Locations
and Facilities
Our company headquarters and R & D facility is located at
100 Commerce Drive, Loveland, Ohio, a Cincinnati suburb. We occupy a 45,000 sq. ft. facility that allows for the manufacture of
5,000 electric powertrain kits per year. Powertrains are delivered to the Workhorse facility in Indiana or shipped to our dealer
network for onsite installation in conversion vehicles. On October 28, 2016 the Company purchased its operating facilities in Loveland,
Ohio. The total purchase price was $2.5 million with $1.7 million financed with a financial institution. The note carries an interest
rate of 6.5% accruing monthly with a maturity date of November 1, 2026.
Our
truck assembly facility is located in Union City, Indiana. This facility consists of three buildings with 250,000 square feet
of manufacturing and office space on 47 acres.
In
March of 2013, we purchased the former Workhorse Custom Chassis assembly plant in Union City, Indiana. With this acquisition,
we became an Original Equipment Manufacturer (OEM) of Class 3-6 commercial-grade, medium-duty truck chassis marketed under the
Workhorse® brand.
Ownership
and operation of this plant enables us to build new chassis with gross vehicle weight capacity of between 10,000 and 26,000 pounds.
At
the same time, the Company intends to partner with engine suppliers and body fabricators to offer fleet-specific, custom, purpose-built
chassis that provide total cost of ownership solutions that are superior to the competition.
In
addition to building our own chassis, we design and produce battery-electric powertrains that can be installed in new Workhorse
chassis or installed as repower packages to convert used Class 3-6 medium-duty vehicles from diesel or gasoline power to electric
power. Our approach is to provide battery-electric powertrains utilizes proven, automotive-grade, mass-produced parts in its architecture
coupled with in-house control software that it has developed over the last five years.
The Workhorse Custom Chassis acquisition included other important
assets including the Workhorse brand and logo, intellectual property, schematics, logistical support from UpTime Parts (a Navistar
subsidiary).
Marketing
Our sales team is focused on the goal of securing
purchase orders from commercial transportation companies. These purchases will give us additional data toward chassis demand
related to electric and extended range electric vehicles.
Our priority is to establish the commercial delivery van as
our core business. We intend to be the best choice for a vehicle in this segment regardless of the fuel type that the customer
chooses. Our sales plan is to meet with the top potential customers and obtain purchase orders for new electric and extended range
electric vehicles for their production vehicle requirements.
As the last mile delivery service space expands and non-traditional
customers enter, Workhorse is reaching to those potential new customers as part of their supply chain enhancement. This market
is comprised of a higher quantity of smaller delivery vehicles, such as the Workhorse N-GEN platform.
Finally,
since our competitive advantage in the marketplace is our ability to provide purpose-built solutions to customers that have unique
requirements at relatively low-volume, we have submitted proposals to companies for purpose-built vehicle applications.
Strategic
Relationships
Panasonic:
Workhorse Group has signed an agreement with the rechargeable battery division of Panasonic Industrial Devices Sales Co. of
America for the supply of 18650 cylindrical Panasonic lithium-ion batteries for Workhorse’s battery-electric, medium-duty
trucks.
Ryder
:
On
April 27, 2017, the Company entered into an agreement with Ryder to serve as the primary distributor, except with respect to certain
exclusive accounts, in the United States, Mexico and Canada. Ryder will also serve as the sole and exclusive provider of certain
repair services and the sole and exclusive distributor of certain vehicle parts in the United States, Canada and Mexico.
BMW
:
Workhorse
has partnered with BMW where BMW provides the internal combustion engine used in the range extended vehicle applications as a
source for on board battery recharging. BMW provides the engine, service support and technical advice necessary for vehicle certification.
The engine currently used in production is the same engine used in the i3 passenger car.
Prefix
:
Michigan-based
Prefix Corporation began in 1979 developing innovative design and engineering solutions for the automotive industry. Workhorse
relies on Prefix’s complementary capabilities in the areas of complete prototype design, build and finishing to more rapidly
advance product development.
Research
and Development
The
majority of our research and development is conducted in-house at our facilities near Cincinnati, Ohio. Additionally, we contract
with engineering firms to assist with validation and certification requirements as well as specific vehicle integration tasks.
Competitive
Companies
The commercial vehicle market, specifically in the last mile
delivery segment, is highly competitive and we expect it to become even more so in the future as additional companies launch competing
vehicle offerings. The commercial alternative fueled vehicle market, however, is less developed and less competitive. There are
two primary competitors in the medium-duty vehicle segment in the US market: Ford and Freightliner. Neither
has disclosed any plans to offer 100% EVs or electric range extended vehicles (EREV) in this segment. Ford is vertically integrated
building a complete vehicle or chassis including Ford engine and transmission. They provide a chassis as a strip-chassis (which
is similar to the Workhorse product) or they provide it with a cab. Freightliner provides a chassis as a strip-chassis, which is
similar to the Workhorse Truck chassis.
We
believe the most dramatic difference between Workhorse and the other competitors in the medium duty truck market is our ability
to offer customers purpose-built solutions that meet the needs of their unique requirements at a competitive price. While there
are many electric car companies from abroad, there are only a few foreign companies that have vehicles in the category of medium-duty
trucks.
We
believe that the primary competitive factors within the medium-duty commercial vehicle market are:
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the
difference in the initial purchase prices of electric vehicles and comparable vehicles powered by internal combustion engines,
both including and excluding the impact of government and other subsidies and incentives designed to promote the purchase
of electric vehicles;
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the
total cost of vehicle ownership over the vehicle’s expected life, which includes the initial purchase price and ongoing
operational and maintenance costs;
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vehicle
quality, performance and safety;
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government
regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
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the
quality and availability of service for the vehicle, including the availability of replacement parts.
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GOVERNMENT REGULATION
Our electric vehicles are designed to comply with a significant
number of governmental regulations and industry standards, some of which are evolving as new technologies are deployed. Government
regulations regarding the manufacture, sale and implementation of products and systems similar to our electric vehicles are subject
to future change. We cannot predict what impact, if any, such changes may have upon our business.
Emission and fuel economy standards
Government regulation related to climate change is in effect
at the U.S. federal and state levels. The U.S. Environmental Protection Agency (“EPA”) and the National Highway Traffic
Safety Administration, or NHTSA, issued a final rule for greenhouse gas emissions and fuel economy requirements for trucks and
heavy-duty engines on August 9, 2011, which is applicable in model years 2018 through 2020. NHTSA and EPA also issued a final
rule on August 16, 2016 increasing the stringency of these standards for model years 2021 through 2027.
The rules provide emission standards for CO2 and fuel consumption
standards for three main categories of vehicles: (i) combination tractors, (ii) heavy-duty pickup trucks and vans and
(iii) vocational vehicles. We believe that the Workhorse vehicles would be considered “vocational vehicles” and
"heavy-duty pickup trucks and vans" under the rules. According to the EPA and NHTSA, vocational vehicles consist
of a wide variety of truck and bus types, including delivery, refuse, utility, dump, cement, transit bus, shuttle bus, school
bus, emergency vehicles, motor homes and tow trucks, and are characterized by a complex build process, with an incomplete chassis
often built with an engine and transmission purchased from other manufacturers, then sold to a body manufacturer.
The EPA and NHTSA rule also establishes multiple flexibility
and incentive programs for manufacturers of alternatively fueled vehicles, such as the Workhorse vehicles, including an engine
averaging, banking and trading, or ABT, program, a vehicle ABT program and additional credit programs for early adoption of standards
or deployment of advanced or innovative technologies. The ABT programs will allow for emission and/or fuel consumption credits
to be averaged, banked or traded within defined groupings of the regulatory subcategories. The additional credit programs will
allow manufacturers of engines and vehicles to be eligible to generate credits if they demonstrate improvements in excess of the
standards established in the rule prior to the model year the standards become effective or if they introduce advanced or innovative
technology engines or vehicles.
The Clean Air Act requires that we obtain a Certificate of
Conformity issued by the EPA and a California Executive Order issued by CARB with respect to emissions for our vehicles. The Certificate
of Conformity is required for vehicles sold in states covered by the Clean Air Act’s standards and the Executive Order is
required for vehicles sold in states that have sought and received a waiver from the EPA to utilize California standards. The
California standards for emissions control for certain regulated pollutants for new vehicles and engines sold in California are
set by CARB. States that have adopted the California standards as approved by EPA also recognize the Executive Order for sales
of vehicles.
Manufacturers who sell vehicles in states covered by federal
requirements under the Clean Air Act without a Certificate of Conformity may be subject to penalties of up to $44,539 per violation
and be required to recall and remedy any vehicles sold with emissions in excess of Clean Air Act standards. In 2013, we received
approval from CARB to sell the E-100 in California based on our own emissions tests.
Vehicle safety and testing
The National Traffic and Motor Vehicle Safety Act of 1966,
or the Safety Act, regulates motor vehicles and motor vehicle equipment in the United States in two primary ways. First, the Safety
Act prohibits the sale in the United States of any new vehicle or equipment that does not conform to applicable motor vehicle
safety standards established by NHTSA. Meeting or exceeding many safety standards is costly, in part because the standards tend
to conflict with the need to reduce vehicle weight in order to meet emissions and fuel economy standards. Second, the Safety Act
requires that defects related to motor vehicle safety be remedied through safety recall campaigns. A manufacturer is obligated
to recall vehicles if it determines that the vehicles do not comply with a safety standard. Should we or NHTSA determine that
either a safety defect or noncompliance exists with respect to any of our vehicles, the cost of such recall campaigns could be
substantial.
Battery safety and testing
Our battery pack configurations are designed to conform to
mandatory regulations that govern transport of “dangerous goods,” which includes lithium-ion batteries, which may
present a risk in transportation. The governing regulations, which are issued by PHMSA, are based on the UN Recommendations on
the Safe Transport of Dangerous Goods Model Regulations, and related UN Manual of Tests and Criteria. The requirements for shipments
of these goods vary by mode of transportation, such as ocean vessel, rail, truck and air.
Our battery suppliers have completed the applicable transportation
test for our prototype and production battery packs demonstrating our compliance with the UN Manual of Tests and Criteria, including:
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altitude
simulation, which involves simulating air transport;
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thermal cycling,
which involves assessing cell and battery seal integrity;
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vibration,
which involves simulating vibration during transport;
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shock,
which involves simulating possible impacts during transport;
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external
short circuit, which involves simulating an external short circuit; and
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overcharge,
which involves evaluating the ability of a rechargeable battery to withstand overcharging.
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Vehicle
dealer and distribution regulation
Certain states’ laws require motor vehicle manufacturers
and dealers to be licensed in such states in order to conduct manufacturing and sales activities. To date, we are registered as
both a motor vehicle manufacturer and dealer in Indiana and Ohio as well as a dealer in California, New York and Chicago. We have
not yet sought formal clarification of our ability to manufacture or sell our vehicles in any other states.
Intellectual
Property
We have two pending trademark applications and ten issued
trademark registrations (US and foreign). We also intend to pursue additional foreign trademark registrations. We have two
pending (one non-provisional and one provisional) U.S. patent applications, and seven existing patents, two of which are
design patents. We also plan to pursue appropriate foreign patent protection on those inventions, if available. The following
is a summary of our patents:
Country
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Status
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Serial Number
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Application
Date
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Patent
Number
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Issue/Grant
Date
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Expiration
Date
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Title
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United States
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G
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13/283,663
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10/28/2011
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8,541,915
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9/24/2013
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12/16/2031
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DRIVE MODULE AND MANIFOLD FOR ELECTRIC MOTOR DRIVE ASSEMBLY
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Canada
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G
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2523653
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10/17/2005
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2523653
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12/22/2009
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10/17/2025
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VEHICLE CHASSIS ASSEMBLY
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United States
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G
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11/252,220
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10/17/2005
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7,717,464
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5/18/2010
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9/6/2026
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Vehicle Chassis Assembly
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United States
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G
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11/252,219
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10/17/2005
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7,559,578
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7/14/2009
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9/6/2026
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Vehicle Chassis Assembly
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United States
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G
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29/243,074
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11/18/2005
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D561,078
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2/5/2008
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2/5/2022
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Vehicle Header
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United States
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G
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29/243,129
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11/18/2005
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D561,079
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2/5/2008
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2/5/2022
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Vehicle Header
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United States
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G
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14/606,497
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1/27/2015
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9,481,256
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11/1/2016
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5/3/2035
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ONBOARD GENERATOR DRIVE SYSTEM FOR ELECTRIC VEHICLES
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United States
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F
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14/989,870
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1/7/2016
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PACKAGE DELIVERY BY MEANS OF AN AUTOMATED MULTICOPTER UAS/UAV DISPATCHED
FROM A CONVENTIONAL DELIVERY VEHICLE
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United States
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F
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62/513,677
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6/1/2017
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6/1/2018
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AUXILIARY POWER SYSTEM FOR ROTORCRAFT WITH FOLDING PROPELLER ARMS
AND CRUMPLE ZONE LOADING GEAR
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Employees
We
currently have 83 full-time and 9 part-time employees located in Loveland, Ohio and 26 full-time employees located in Union City,
Indiana. We also contract for hire with approximately three outside consultants and contractors.
ITEM
1A. RISK FACTORS
Our
results of operations have not resulted in profitability and we may not be able to achieve profitability going forward.
We have incurred net losses amounting to $105.3 million for
the period from inception (February 20, 2007) through December 31, 2017. We have had net losses in each quarter
since our inception. We expect that we will continue to incur net losses for the foreseeable future. We may incur significant
losses in the future for a number of reasons, including the other risks described in this report, and we may encounter unforeseen
expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not be able to achieve or maintain
profitability. Our management is developing plans to alleviate the negative trends and conditions described above and there is
no guarantee that such plans will be successfully implemented. Our business plan is focused on providing sustainable and cost-effective
solutions to the commercial transportation sector, but is still unproven. There is no assurance that even if we successfully implement
our business plan, that we will be able to curtail our losses. If we incur additional significant operating losses, our stock
price may decline, perhaps significantly.
We
have yet to achieve positive cash flow and, given our projected funding needs, our ability to generate positive cash flow is uncertain.
We have had negative cash flow from operating activities of
$38.7 million and $19.0 million for the years ended December 31, 2017 and 2016, respectively. We anticipate that we
will continue to have negative cash flow from operating and investing activities for the foreseeable future as we expect to incur
increased research and development, sales and marketing, and general and administrative expenses and make significant capital
expenditures in our efforts to increase sales and ramp up operations at our Union City facility. Our business also will at times
require significant amounts of working capital to support our growth, particularly as we acquire inventory to support our existing
production as well as an anticipated increase in production. An inability to generate positive cash flow for the foreseeable future
may adversely affect our ability to raise needed capital for our business on reasonable terms, diminish supplier or customer willingness
to enter into transactions with us, and have other adverse effects that may decrease our long-term viability. There can be no
assurance we will achieve positive cash flow in the foreseeable future.
We
need access to additional financing in 2018 and beyond, which may not be available to us on acceptable terms or at all. If we
cannot access additional financing when we need it and on acceptable terms, our business may fail.
Our business plan to design, produce, sell and service commercial
electric vehicles through our Union City facility will require substantial continued capital investment. Our research and development
activities will also require substantial continued investment. For the year ended December 31, 2017, our independent registered
public accounting firm issued a report on our 2017 financial statements that contained an explanatory paragraph stating that the
lack of sales, negative working capital and stockholders’ deficit, raise substantial doubt about our ability to continue
as a going concern. For example, our existing capital resources will be insufficient to fund our operations through the first
half of 2018. Through December 31, 2018, we expect that we will need funding to be used in our research and development activities,
inventory funding and working capital. The additional funding will allow us to continue to deliver vehicles associated with existing
and expected orders, further develop our N-GEN platform resulting in a “production ready vehicle” and further develop
our W-15 Pickup Truck resulting in a “production intent vehicle”. Unless and until we are able to generate a sufficient
amount of revenue, reduce our costs and/or enter a strategic relationship, we expect to finance future cash needs through public
and/or private offerings of equity securities and/or debt financings. We do not currently have any committed future funding. If
we are not able to obtain additional financing and/or substantially increase revenue from sales, we will be unable to continue
as a going concern. As a result, we may have to liquidate our assets and may receive less than the value at which those assets
are carried on our consolidated financial statements, and investors will likely lose a substantial part or all of their investment.
We cannot be certain that additional financing will be available to us on favorable terms when required, or at all, particularly
given that we do not now have a committed credit facility with any government or financial institution. Further, if there remains
doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional
funding on acceptable terms or at all. If we cannot obtain additional financing when we need it and on terms acceptable to us,
we will not be able to continue as a going concern.
The
development of our business in the near future is contingent upon the implementation of orders from UPS and other key customers
for the purchase of Workhorse vehicles and if we are unable to perform under these orders, our business may fail.
On June 4, 2014, the Company entered into a Vehicle Purchase
Agreement with United Parcel Service Inc. (“UPS”) which outlined the relationship by which the Company would sell
vehicles to UPS. To date, we have received six separate orders totaling up to 1,405 vehicles from UPS. The sixth and most recent
order is from Q1 2018. We have entered into various purchase orders with UPS relating to the delivery of the vehicles ordered.
There is no guarantee that the Company will be able to perform under these orders and if it does perform, that UPS will purchase
additional vehicles from the Company. Also, there is no assurance that UPS will not terminate its agreement with the Company pursuant
to the termination provisions therein. Further, if the Company is not able to raise the required capital to purchase required
parts and pay certain vendors, the Company may not be able to comply with UPS’s deadlines. Accordingly, despite the receipt
of the orders from UPS, there is no assurance, due to the Company’s financial constraints and status as a development stage
company, that the Company will be able to deliver such vehicles or that it will receive additional orders whether from UPS or
other potential customers.
If
we are unable to perform under our orders with UPS, the Company business will be significantly negatively impacted.
Our
limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those
estimates of our future performance
.
While
our revenue has increased from $6.4 million in 2016 to $10.8 million in 2017, a significant portion of our activities are still
focused on research and development. We have a limited operating history and have generated limited, but improving, revenue. As
we begin to fully implement our manufacturing capabilities, it is difficult, if not impossible, to forecast our future results
based upon our historical data. Because of the uncertainties related to our lack of historical operations, we may be hindered
in our ability to anticipate and timely adapt to increases or decreases in revenues or expenses. If we make poor budgetary
decisions as a result of unreliable historical data, we could be less profitable or incur losses, which may result in a decline
in our stock price.
We
offer no financing on our vehicles. As such, our business is dependent on cash sales, which may adversely affect our growth prospects.
While
most of our current customers are well-established companies with significant purchasing power, many of our potential smaller
and medium-sized customers may need to rely on credit or leasing arrangements to gain access to our vehicles. Unlike some of our
competitors who provide credit or leasing services for the purchase of their vehicles, we do not provide, and currently do not
have commercial arrangements with a third party that provides, such financial services. We believe the current limited availability
of credit or leasing solutions for our vehicles could adversely affect our revenues and market share in the commercial electric
vehicle market.
Our
business, prospects, financial condition and operating results will be adversely affected if we cannot reduce and adequately control
the costs and expenses associated with operating our business, including our material and production costs.
We incur significant costs and expenses related
to procuring the materials, components and services required to develop and produce our electric vehicles. We have secured supply
agreements for our critical components including our batteries. However, these are dependent on volume to ensure that they are
available at a competitive price. Thus, our current cost projections are higher than the projected revenue stream that such vehicles
will produce, excluding vehicles purchased under voucher programs, such the Hybrid and Zero-Emission Truck and Bus Voucher Incentive
Project (HVIP) offered in California. As a result, we currently lose money on each medium-duty vehicle sold without an associated
voucher. We continually work on cost-down initiatives to reduce our cost structure so that we may effectively compete. If we do
not reduce our costs and expenses, our net losses will continue which will negatively impact our business and stock price.
Increases
in costs, disruption of supply or shortage of lithium-ion cells could harm our business.
We
may experience increases in the cost or a sustained interruption in the supply or shortage of lithium-ion cells. Any such increase,
supply interruption or shortage could materially and negatively impact our business, prospects, financial condition and operating
results. The prices for these lithium-ion cells can fluctuate depending on market conditions and global demand for these materials
and could adversely affect our business and operating results. We are exposed to multiple risks relating to lithium-ion cells
including:
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the
inability or unwillingness of current battery manufacturers to build or operate battery cell manufacturing plants to supply
the numbers of lithium-ion cells we may require going forward;
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disruption
in the supply of cells due to quality issues or recalls by battery cell manufacturers;
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an
increase in the cost of raw materials used in the cells; and
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fluctuations
in the value of the Japanese yen against the U.S. dollar in the event our purchasers of lithium-ion cells are denominated
in Japanese yen.
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Our
business is dependent on the continued supply of battery cells for the battery packs used in our vehicles. While we believe several
sources of the battery cells are available for such battery cells, we have fully qualified only Panasonic for the supply of the
cells used in such battery packs and have very limited flexibility in changing cell suppliers. Any disruption in the supply of
battery cells could disrupt production of our vehicles until such time as a different supplier is fully qualified. Furthermore,
fluctuations or shortages in petroleum, tariff or trade issues and other economic or tax conditions may cause us to experience
significant increases in freight charges. Substantial increases in the prices for the battery cells or prices charged to us, would
increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased vehicle prices.
Any attempts to increase vehicle prices in response to increased costs in our battery cells could result in cancellations of vehicle
orders and therefore materially and adversely affect our brand, image, business, prospects and operating results.
The
demand for commercial electric vehicles depends, in part, on the continuation of current trends resulting from dependence on fossil
fuels. Extended periods of low diesel or other petroleum-based fuel prices could adversely affect demand for our vehicles, which
would adversely affect our business, prospects, financial condition and operating results.
We
believe that much of the present and projected demand for commercial electric vehicles results from concerns about volatility
in the cost of petroleum-based fuel, the dependency of the United States on oil from unstable or hostile countries, government
regulations and economic incentives promoting fuel efficiency and alternative forms of energy, as well as the belief that climate
change results in part from the burning of fossil fuels. If the cost of petroleum-based fuel decreased significantly, the outlook
for the long-term supply of oil to the United States improved, the government eliminated or modified its regulations or economic
incentives related to fuel efficiency and alternative forms of energy, or if there is a change in the perception that the burning
of fossil fuels negatively impacts the environment, the demand for commercial electric vehicles could be reduced, and our business
and revenue may be harmed.
Diesel
and other petroleum-based fuel prices have been extremely volatile, and we believe this continuing volatility will persist. Lower
diesel or other petroleum-based fuel prices over extended periods of time may lower the perception in government and the private
sector that cheaper, more readily available energy alternatives should be developed and produced. If diesel or other petroleum-based
fuel prices remain at deflated levels for extended periods of time, the demand for commercial electric vehicles may decrease,
which would have an adverse effect on our business, prospects, financial condition and operating results.
Our
future growth is dependent upon the willingness of operators of commercial vehicle fleets to adopt electric vehicles and on our
ability to produce, sell and service vehicles that meet their needs. This often depends upon the cost for an operator adopting
electric vehicle technology as compared to the cost of traditional internal combustion technology. When the price of oil is low,
as it recently has been, it is difficult to convince commercial fleet operations to change to more expensive electric vehicles.
Our
growth is dependent upon the adoption of electric vehicles by operators of commercial vehicle fleets and on our ability to produce,
sell and service vehicles that meet their needs. The entry of commercial electric vehicles into the medium-duty commercial vehicle
market is a relatively new development, particularly in the United States, and is characterized by rapidly changing technologies
and evolving government regulation, industry standards and customer views of the merits of using electric vehicles in their businesses.
This process has been slow as without including the impact of government or other subsidies and incentives, the purchase prices
for our commercial electric vehicles currently is higher than the purchase prices for diesel-fueled vehicles. Our growth has also
been negatively impacted by the relatively low price of oil over the last few years.
If
the market for commercial electric vehicles does not develop as we expect or develops more slowly than we expect, our business,
prospects, financial condition and operating results will be adversely affected.
As
part of our sales efforts, we must educate fleet managers as to the economical savings we believe they will benefit from during
the life of the vehicle. As such, we believe that operators of commercial vehicle fleets should consider a number of factors when
deciding whether to purchase our commercial electric vehicles (or commercial electric vehicles generally) or vehicles powered
by internal combustion engines, particularly diesel-fueled or natural gas-fueled vehicles. We believe these factors include:
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the
difference in the initial purchase prices of commercial electric vehicles and vehicles with comparable GVWs powered by internal
combustion engines, both including and excluding the impact of government and other subsidies and incentives designed to promote
the purchase of electric vehicles;
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the
total cost of ownership of the vehicle over its expected life, which includes the initial purchase price and ongoing operating
and maintenance costs;
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the
availability and terms of financing options for purchases of vehicles and, for commercial electric vehicles, financing options
for battery systems;
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the
availability of tax and other governmental incentives to purchase and operate electric vehicles and future regulations requiring
increased use of nonpolluting vehicles;
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government
regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
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fuel
prices, including volatility in the cost of diesel;
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the
cost and availability of other alternatives to diesel fueled vehicles, such as vehicles powered by natural gas;
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corporate
sustainability initiatives;
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commercial
electric vehicle quality, performance and safety (particularly with respect to lithium-ion battery packs);
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the
quality and availability of service for the vehicle, including the availability of replacement parts;
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the
limited range over which commercial electric vehicles may be driven on a single battery charge;
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access
to charging stations and related infrastructure costs, and standardization of electric vehicle charging systems;
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electric
grid capacity and reliability; and
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macroeconomic
factors.
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If,
in weighing these factors, operators of commercial vehicle fleets determine that there is not a compelling business justification
for purchasing commercial electric vehicles, particularly those that we produce and sell, then the market for commercial electric
vehicles may not develop as we expect or may develop more slowly than we expect, which would adversely affect our business, prospects,
financial condition and operating results.
If
our customers are unable to efficiently and effectively integrate our electric vehicles into their existing commercial fleets
our sales may suffer and our business, prospects, financial condition and operating results may be adversely affected.
Our
sales strategy involves a comprehensive plan for the pilot and roll-out of our electric vehicles, as well as the ongoing replacement
of existing commercial vehicles with our electric vehicles, that is tailored to the individual needs of our customers. If we are
unable to develop and execute fleet integration strategies or fleet management support services that meet our customers’
unique circumstances with minimal disruption to their businesses, our customers may not realize the economic benefits they expect
from our electric vehicles. If this were to occur, our customers may not order additional vehicles from us, which could adversely
affect our business, prospects, financial condition and operating results.
We
currently do not have long-term supply contracts with guaranteed pricing which exposes us to fluctuations in component, materials
and equipment prices. Substantial increases in these prices would increase our operating costs and could adversely affect our
business, prospects, financial condition and operating results.
Because
we currently do not have long-term supply contracts with guaranteed pricing, we are subject to fluctuations in the prices of the
raw materials, parts and components and equipment we use in the production of our vehicles. Substantial increases in the prices
for such raw materials, components and equipment would increase our operating costs and could reduce our margins if we cannot
recoup the increased costs through increased vehicle prices. Any attempts to increase the announced or expected prices of our
vehicles in response to increased costs could be viewed negatively by our customers and could adversely affect our business, prospects,
financial condition and operating results.
If
we are unable to scale our operations at our Union City facility in an expedited manner from our limited low volume production
to high volume production, our business, prospects, financial condition and operating results will be adversely affected.
We
are currently assembling our orders at our Union City facility which has been acceptable for our historical orders. To satisfy
increased demand, we will need to quickly scale operations in our Union City facility as well as scale our supply chain including
access to batteries. Such a substantial and rapid increase in operations will be extremely difficult and will strain our management
capabilities. Our business, prospects, financial condition and operating results could be adversely affected if we experience
disruptions in our supply chain, if we cannot obtain materials of sufficient quality at reasonable prices or if we are unable
to scale our Union City facility.
We
depend upon key personnel and need additional personnel. The loss of key personnel or the inability to attract additional
personnel may adversely affect our business and results of operations.
Our success depends on the continuing services
of our CEO, Stephen Burns and top management. On May 19, 2017, Mr. Burns and the Company entered into an Executive Retention Agreement
whereby Mr. Burns was retained as Chief Executive Officer in consideration of an annual salary of $325,000. Further, the Company
entered Executive Retention Agreements with Duane Hughes as President and Chief Operating Officer, Paul Gaitan as Chief Financial
Officer and Julio Rodriguez as Chief Information Officer. The loss of any of these individuals could have a material and adverse
effect on our business operations. Additionally, the success of our operations will largely depend upon our ability to successfully
attract and maintain competent and qualified key management personnel. As with any company with limited resources, there can be
no guarantee that we will be able to attract such individuals or that the presence of such individuals will necessarily translate
into profitability for our company. Our inability to attract and retain key personnel may materially and adversely affect our
business operations. Any failure by our management to effectively anticipate, implement, and manage the changes required to sustain
our growth would have a material adverse effect on our business, financial condition, and results of operations.
We
face intense competition. Some of our competitors have substantially greater financial or other resources, longer operating histories
and greater name recognition than we do and could use their greater resources and/or name recognition to gain market share at
our expense or could make it very difficult for us to establish market share.
Companies
currently competing in the fleet logistics market offering alternative fuel medium-duty trucks include Ford Motor Company and
Freightliner. Ford and Freightliner are currently selling alternative fuel fleet vehicles including hybrids. Ford and Freightliner
have substantially more financial resources, established market positions, long-standing relationships with customers
and dealers, and who have more significant name recognition, technical, marketing, sales, financial and other resources than we
do. Although we believe that HorseFly, our unmanned aerial system (UAS), is unique in the marketplace in that it currently does
not have any competitors when it comes to a UAS that works in combination with a truck, there are better financed competitors
in this emerging industry, including Google and Amazon. While we are seeking to partner with existing delivery companies to improve
their efficiencies in the last mile of delivery, our competitors are seeking to redefine the delivery model using drones from
a central location requiring extended flight patterns. Our competitors’ new aerial delivery model would essentially eliminate
traditional package delivery companies. Our model is focused on coupling our delivery drone with delivery trucks supplementing
the existing model and providing shorter term flight patterns. Google and Amazon have more significant financial resources, established
market positions, long-standing relationships with customers, more significant name recognition and a larger scope of resources
including technical, marketing and sales than we do.
The
market for personal VTOL (vertical takeoff and landing) aircraft is new, rapidly evolving, characterized by rapidly changing technologies,
price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements
and changing consumer demands and behaviors. The market is highly competitive, and the SureFly design is competing with experimental
aircraft from large original equipment manufacturers, or OEMs, small OEMs, other aviation related companies, technology companies
and entrepreneurs. Currently, there are several VTOL aircraft being developed that have some similarity to SureFly, including
eHang and Volocopter. Many of our competitors are, in some ways, more advanced than we are.
The
resources available to our competitors to develop new products and introduce them into the marketplace exceed the resources currently
available to us. As a result, our competitors may be able to compete more aggressively and sustain that competition over a longer
period than we can. This intense competitive environment may require us to make changes in our products, pricing, licensing, services,
distribution, or marketing to develop a market position. Each of these competitors has the potential to capture significant market
share in our target markets which could have an adverse effect on our position in our industry and on our business and operating
results.
If
we are unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.
There
are companies in the electric vehicle industry that have developed or are developing vehicles and technologies that compete or
will compete with our vehicles. We cannot assure that our competitors will not be able to duplicate our technology or provide
products and services similar to ours more efficiently. If for any reason we are unable to keep pace with changes in electric
vehicle technology, particularly battery technology, our competitive position may be adversely affected. We plan to upgrade or
adapt our vehicles and introduce new models to continue to provide electric vehicles that incorporate the latest technology. However,
there is no assurance that our research and development efforts will keep pace with those of our competitors.
Our
electric vehicles compete for market share with vehicles powered by other vehicle technologies that may prove to be more attractive
than ours.
Our
target market currently is serviced by manufacturers with existing customers and suppliers using proven and widely accepted fuel
technologies. Additionally, our competitors are working on developing technologies that may be introduced in our target market.
If any of these alternative technology vehicles can provide lower fuel costs, greater efficiencies, greater reliability or otherwise
benefit from other factors resulting in an overall lower total cost of ownership, this may negatively affect the commercial success
of our vehicles or make our vehicles uncompetitive or obsolete.
We
currently have a limited number of customers, with whom we do not have long-term agreements, and expect that a significant portion
of our future sales will be from a limited number of customers. The loss of any of these customers could materially harm our business.
A
significant portion of our projected future revenue is expected to be generated from a limited number of fleet customers. Additionally,
much of our business model is focused on building relationships with a few large fleet customers. Currently, we have no contracts
with customers that include long-term commitments or minimum volumes that ensure future sales of vehicles. As such, a customer
may take actions that negatively affect us for reasons that we cannot anticipate or control, such as reasons related to the customer’s
financial condition, changes in the customer’s business strategy or operations or as the result of the perceived performance
or cost-effectiveness of our vehicles. The loss of or a reduction in sales or anticipated sales to our most significant customers
would have a material adverse effect on our business, prospects, financial condition and operating results.
Changes
in the market for electric vehicles could cause our products to become obsolete or lose popularity.
The
modern electric vehicle industry is in its infancy and has experienced substantial change in the last few years. To date, demand
for electric vehicles has been slower than forecasted by industry experts. As a result, growth in the electric vehicle industry
depends on many factors outside our control, including, but not limited to:
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continued
development of product technology, especially batteries;
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the
environmental consciousness of customers;
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the
ability of electric vehicles to successfully compete with vehicles powered by internal combustion; engines
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limitation
of widespread electricity shortages; and
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whether
future regulation and legislation requiring increased use of non-polluting vehicles is enacted.
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We
cannot assume that growth in the electric vehicle industry will continue. Our business will suffer if the electric vehicle industry
does not grow or grows more slowly than it has in recent years or if we are unable to maintain the pace of industry demands.
President Trump’s administration may
create regulatory uncertainty for the alternative energy sector and may materially harm our business, financial condition and
operating results.
President Trump’s administration,
may create regulatory uncertainty in the alternative energy sector. During the election campaign, President Trump made comments
suggesting that he was not supportive of various clean energy programs and initiatives designed to curtail global warming. Since
taking office, President Trump has released his America First Energy Plan which relies on fossil fuels, cancelled U.S. participation
in the Paris Climate Agreement and signed several executive orders relating to oil pipelines. It remains unclear what specifically
President Trump would or would not do with respect to these programs and initiatives, and what support he would have for any potential
changes to such legislative programs and initiatives in the Unites States Congress, regardless of the fact that both the House
of Representatives and Senate are controlled by the Republican Party. If President Trump and/or the United States Congress take
action or publicly speak out about the need to eliminate or further reduce legislation, regulations and incentives supporting
alternative energy or take action to further support the use of fossil fuels, such actions may result in a decrease in demand
for alternative energy in the United States and may materially harm our business, financial condition and operating results.
The
unavailability, reduction, elimination or adverse application of government subsidies, incentives and regulations could have an
adverse effect on our business, prospects, financial condition and operating results.
We
believe that, currently, the availability of government subsidies and incentives including those available in New York, California
and Chicago is an important factor considered by our customers when purchasing our vehicles, and that our growth depends in part
on the availability and amounts of these subsidies and incentives. Any reduction, elimination or discriminatory application of
government subsidies and incentives because of budgetary challenges, policy changes, the reduced need for such subsidies and incentives
due to the perceived success of electric vehicles or other reasons may result in the diminished price competitiveness of the alternative
fuel vehicle industry.
Certain
regulations and programs that encourage sales of electric vehicles could be eliminated or applied in a way that adversely impacts
sales of our commercial electric vehicles, either currently or at any time in the future. For example, the U.S. federal government
and many state governments are experiencing political change and facing fiscal crises, which could result in the elimination of
programs, subsidies and incentives that encourage the purchase of electric vehicles. If government subsidies and incentives to
produce and purchase electric vehicles were no longer available to us or to our customers, or the amounts of such subsidies and
incentives were reduced, our business and results of operations would be adversely affected.
We
may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive
position.
Our
current products are designed for use with, and are dependent upon, existing electric vehicle technology. As technologies change,
we plan to upgrade or adapt our products to continue to provide products with the latest technology. However, our products may
become obsolete or our research and development efforts may not be sufficient to adapt to changes in or to create the necessary
technology. Thus, our potential inability to adapt and develop the necessary technology may harm our competitive position.
The
failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business.
We
have secured supply agreements for our critical components, including our batteries. However, the agreements are dependent on
volume to ensure that they are available at a competitive price. Further, we rely on a small group of suppliers to provide us
with components for our products. If these suppliers become unwilling or unable to provide components or if we are unable to meet
certain volume requirements in our existing supply agreements, there are a limited number of alternative suppliers who could provide
them and the price for them could be substantially higher. Changes in business conditions, wars, governmental changes, and other
factors beyond our control or which we do not presently anticipate could negatively affect our ability to receive components from
our suppliers. Further, it could be difficult to find replacement components if our current suppliers fail to provide the parts
needed for these products. A failure by our major suppliers to provide these components could severely restrict our ability to
manufacture our products and prevent us from fulfilling customer orders in a timely fashion.
Product
liability or other claims could have a material adverse effect on our business.
The
risk of product liability claims, product recalls, and associated adverse publicity is inherent in the manufacturing, marketing,
and sale of electrical vehicles. Although we have product liability insurance for our consumer and commercial products, that insurance
may be inadequate to cover all potential product claims. We also carry liability insurance on our products. Any product recall
or lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our coverage, may have a material
adverse effect on our business and financial condition. We may not be able to secure additional product liability insurance coverage
on acceptable terms or at reasonable costs when needed. A successful product liability claim against us could require us to pay
a substantial monetary award. Moreover, a product recall could generate substantial negative publicity about our products and
business and inhibit or prevent commercialization of other future product candidates. We cannot provide assurance that such claims
and/or recalls will not be made in the future.
We
may have to devote substantial resources to implementing a retail product distribution network.
Dealers
are often hesitant to provide their own financing to contribute to our product distribution network. Thus, we anticipate that
we may have to provide financing or other consignment sale arrangements for dealers. A capital investment such as this presents
many risks, foremost among them being that we may not realize a significant return on our investment if the network is not profitable.
Our inability to collect receivables from dealers could cause us to suffer losses. Additionally, the amount of time that our management
will need to devote to this project may divert them from performing other functions necessary to assure the success of our business.
We recently established a non-exclusive distribution agreement with Ryder to lower this risk.
Regulatory
requirements may have a negative impact upon our business.
While
our vehicles are subject to substantial regulation under federal, state, and local laws, we believe that our vehicles are or will
be materially in compliance with all applicable laws. However, to the extent the laws change, or if we introduce new vehicles
in the future, some or all of our vehicles may not comply with applicable federal, state, or local laws. Further, certain federal,
state, and local laws and industrial standards currently regulate electrical and electronics equipment. Although standards for
electric vehicles are not yet generally available or accepted as industry standards, our products may become subject to federal,
state, and local regulation in the future. Compliance with these regulations could be burdensome, time consuming, and expensive.
Our
products are subject to environmental and safety compliance with various federal and state regulations, including regulations
promulgated by the EPA, NHTSA, FAA and various state boards, and compliance certification is required for each new model year.
The cost of these compliance activities and the delays and risks associated with obtaining approval can be substantial. The risks,
delays, and expenses incurred in connection with such compliance could be substantial.
Our
success may be dependent on protecting our intellectual property rights.
We
rely on trade secret protections to protect our proprietary technology as well as several registered patents and one patent application.
Our patents relate to the vehicle chassis assembly, vehicle header and drive module and manifold for electric motor drive assembly.
Our existing patent applications relates to the onboard generator drive system for electric vehicles, the delivery drone, and
the manned multicopter. Our success will, in part, depend on our ability to obtain additional trademarks and patents. We are working
on obtaining patents and trademarks registered with the United States Patent and Trademark Office but have not finalized any as
of this date. Although we have entered into confidentiality agreements with our employees and consultants, we cannot be certain
that others will not gain access to these trade secrets. Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets.
Our
business may be adversely affected by union activities.
Although
none of our employees are currently represented by a labor union, it is common throughout the automotive industry for many employees
at automotive companies to belong to a union, which can result in higher employee costs and increased risk of work stoppages.
Our employees may join or seek recognition to form a labor union, or we may be required to become a union signatory. Our production
facility in Union City, Indiana was purchased from Navistar. Prior employees of Navistar were union members and our future work
force at this facility may be inclined to vote in favor of forming a labor union. Furthermore, we are directly or indirectly dependent
upon companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes
organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a
work stoppage occurs, it could delay the manufacture and sale of our trucks and have a material adverse effect on our business,
prospects, operating results or financial condition. The mere fact that our labor force could be unionized may harm our reputation
in the eyes of some investors and thereby negatively affect our stock price. Consequently, the unionization of our labor force
could negatively impact our company’s health.
We
may be exposed to liability for infringing upon the intellectual property rights of other companies.
Our
success will, in part, depend on our ability to operate without infringing on the proprietary rights of others. Although we have
conducted searches and are not aware of any patents and trademarks which our products or their use might infringe, we cannot be
certain that infringement has not or will not occur. We could incur substantial costs, in addition to the great amount of time
lost, in defending any patent or trademark infringement suits or in asserting any patent or trademark rights, in a suit with another
party.
Our
electric vehicles make use of lithium-ion battery cells, which, if not appropriately managed and controlled, have occasionally
been observed to catch fire or vent smoke and flames. If such events occur in our electric vehicles, we could face liability for
damage or injury, adverse publicity and a potential safety recall, any of which would adversely affect our business, prospects,
financial condition and operating results.
The
battery packs in our electric vehicles use lithium-ion cells, which have been used for years in laptop computers and cell phones.
On occasion, if not appropriately managed and controlled, lithium-ion cells can rapidly release the energy they contain by venting
smoke and flames in a manner that can ignite nearby materials. Highly publicized incidents of laptop computers and cell phones
bursting into flames have focused consumer attention on the safety of these cells. These events also have raised questions about
the suitability of these lithium-ion cells for automotive applications. There can be no assurance that a field failure of our
battery packs will not occur, which would damage the vehicle or lead to personal injury or death and may subject us to lawsuits.
Furthermore, there is some risk of electrocution if individuals who attempt to repair battery packs on our vehicles do not follow
applicable maintenance and repair protocols. Any such damage or injury would likely lead to adverse publicity and potentially
a safety recall. Any such adverse publicity could adversely affect our business, prospects, financial condition and operating
results.
Our
facilities could be damaged or adversely affected as a result of disasters or other unpredictable events. Any prolonged disruption
in the operations of our facility would adversely affect our business, prospects, financial condition and operating results.
We engineer and perform subassembly of our
electric vehicles in a facility in Loveland, Ohio and do final assembly at our facility in Union City, Indiana. Any prolonged
disruption in the operations of either facility, whether due to technical, information systems, communication networks, accidents,
weather conditions or other natural disaster, or otherwise, whether short or long-term, would adversely affect our business, prospects,
financial condition and operating results
.
We are subject to significant corporate regulation as a
public company and failure to comply with all applicable regulations could subject us to liability or negatively affect our stock
price.
As a publicly traded company, we are subject to a significant body of regulation, including the Sarbanes-Oxley
Act of 2002. While we have developed and instituted a corporate compliance program based on what we believe are the current best
practices in corporate governance and continue to update this program in response to newly implemented or changing regulatory requirements,
we cannot provide assurance that we are or will be in compliance with all potentially applicable corporate regulations. In connection
with management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley
Act of 2002, we identified material weaknesses pertaining to the lack of established adequate financial reporting activities and
the lack of established proper accounting and financing reporting oversight. We cannot provide assurance that, in the future, our
management will not find additional material weakness in connection with its annual review of our internal control over financial
reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We also cannot provide assurance that we will be able to
remediate existing weaknesses and any such additional weakness identified; our failure to do so would prevent our management from
concluding that our internal control over financial reporting as of the end of our fiscal year is effective. If we fail to comply
with any of these regulations, we could be subject to a range of regulatory actions, fines or other sanctions or litigation. If
we must disclose any material weakness in our internal control over financial reporting, our stock price could decline.
Risks
Related to Owning Our Common Stock
If
we fail to continue to meet the listing standards of NASDAQ, our common stock may be delisted, which could have a material
adverse effect on the liquidity of our common stock.
Our
common stock is currently listed on the Nasdaq Capital Market. The NASDAQ Stock Market LLC has requirements that a company must
meet in order to remain listed on NASDAQ. In particular, NASDAQ rules require us to maintain a minimum bid price of $1.00 per
share of our common stock. If the closing bid price of our common stock were to fall below $1.00 per share for 30 consecutive
trading days or we do not meet other listing requirements, we would fail to be in compliance with NASDAQ’s listing
standards. There can be no assurance that we will continue to meet the minimum bid price requirement, or any other requirement
in the future. If we fail to meet the minimum bid price requirement, The NASDAQ Stock Market LLC may initiate the delisting process
with a notification letter. If we were to receive such a notification, we would be afforded a grace period of 180 calendar days
to regain compliance with the minimum bid price requirement. In order to regain compliance, shares of our common stock would need
to maintain a minimum closing bid price of at least $1.00 per share for a minimum of 10 consecutive trading days. In addition,
we may be unable to meet other applicable NASDAQ listing requirements, including maintaining minimum levels of stockholders’
equity or market values of our common stock in which case, our common stock could be delisted. If our common stock were to be
delisted, the liquidity of our common stock would be adversely affected and the market price of our common stock could decrease.
The
trading of our shares of common has been relatively thin and there is no assurance that a liquid market for our shares of common
stock will develop.
Our
common stock has traded on the Nasdaq Capital Market, under the symbol “WKHS”, since January 2016. Since that date,
our common stock has been relatively thinly traded. There can be no assurance that we will be able to successfully develop a liquid
market for our common shares. The stock market in general, and early stage public companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies.
If we are unable to develop a market for our common shares, you may not be able to sell your common shares at prices you consider
to be fair or at times that are convenient for you, or at all.
Our
stock price and trading volume may be volatile, which could result in substantial losses for our stockholders.
The
equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of
equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our
industry or our operating performance and financial condition. In addition, the trading volume in our common stock has been low
and may fluctuate and cause significant price variations to occur. We have experienced significant volatility in the price of
our stock. In addition, the stock markets in general can experience considerable price and volume fluctuations.
We
have not paid dividends in the past and have no immediate plans to pay dividends.
We
plan to reinvest all of our earnings, to the extent we have earnings, in order to develop our products, deliver on our orders
and cover operating costs and to otherwise become and remain competitive. We do not plan to pay any cash dividends with respect
to our securities in the foreseeable future. We cannot assure you that we would, at any time, generate sufficient surplus cash
that would be available for distribution to the holders of our common stock as a dividend. Therefore, you should not expect to
receive cash dividends on our common stock.
Shares
eligible for future sale may adversely affect the market for our common stock.
Of the 41,828,474 shares of our common stock outstanding as
of March 8, 2018, approximately 33.3 million shares are held by “non-affiliates” and are freely tradable without
restriction pursuant to Rule 144. In addition, our Registration Statement on Form S-3 for purposes of registering the resale of
1,033,717 shares of common stock and 1,833,193 shares of common stock issuable upon exercise of stock purchase warrants has been
declared effective. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have
a material adverse effect on the market price of our common stock.
Shareholders
may experience future dilution as a result of future equity offerings.
In
order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible
into or exchangeable for our common stock at prices that may not be the same as the price per share in our prior offerings. We
may sell shares or other securities in any future offering at a price per share that is lower than the price per share paid by
historical investors, which would result in those newly issued shares being dilutive. In addition, investors purchasing shares
or other securities in the future could have rights superior to existing stockholders, which could impair the value of existing
shareholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable
into common stock, in future transactions may be higher or lower than the price per share paid by our historical investors.
Our
charter documents and Nevada law may inhibit a takeover that stockholders consider favorable.
Provisions
of our certificate of incorporation and bylaws and applicable provisions of Nevada law may delay or discourage transactions involving
an actual or potential change in control or change in our management, including transactions in which stockholders might otherwise
receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests.
The provisions in our certificate of incorporation and bylaws:
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limit
who may call stockholder meetings;
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do
not provide for cumulative voting rights; and
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provide
that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.
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There
are limitations on director/officer liability.
As
permitted by Nevada law, our certificate of incorporation limits the liability of our directors for monetary damages for breach
of a director’s fiduciary duty except for liability in certain instances. As a result of our charter provision and Nevada
law, shareholders may have limited rights to recover against directors for breach of fiduciary duty. In addition, our certificate
of incorporation provides that we shall indemnify our directors and officers to the fullest extent permitted by law.