Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
Nature of operations and basis of presentation
Workhorse Group Inc. (“Workhorse”, the “Company”, “we”, “us” or “our”) is a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. As an American manufacturer, we create all-electric delivery trucks and drone systems, including the technology that optimizes the way these mechanisms operate. We are last-mile delivery’s first purpose-built electric mobility solution and we are currently focused on our core competency of bringing the C-Series electric delivery trucks to market and fulfilling our existing backlog of orders. Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
In the opinion of our management, the Unaudited Condensed Consolidated Financial Statements include all adjustments that are necessary for the fair presentation of Workhorse’s financial conditions, 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 Annual Report on Form 10-K for the year ended December 31, 2020.
Principles of consolidation
The condensed consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications were made to the prior year condensed consolidated financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or stockholders' equity.
Impact of COVID-19 Pandemic
In December 2019, a novel coronavirus disease (“COVID-19”) was reported. On January 30, 2020, the World Health Organization (“WHO”) declared COVID-19 a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.
As of June 30, 2021, our locations and primary suppliers continue to operate. The number of COVID-19 cases amongst our employees decreased significantly during the three and six months ended June 30, 2021 as compared to the fourth quarter of 2020. During the first half of 2021, there has been a trend in many parts of the world of increasing availability and administration of the vaccine against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. However, infection rates and regulation continue to fluctuate, and there continues to be global impacts resulting from the pandemic, including increases in costs in connection with logistics services and supply chains, port congestion, supplier delays and shortfalls in microchip supply. We continue to work through supplier constraints caused by the COVID-19 outbreak, as well as the microchip shortage. For further discussion of the possible impact of the COVID-19 pandemic on our business, see “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.
2. INVENTORY, NET
Inventory, net consists of the following:
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June 30, 2021
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|
December 31, 2020
|
Raw materials
|
$
|
44,283,636
|
|
|
$
|
16,759,232
|
|
Work in process
|
6,296,029
|
|
|
422,176
|
|
Finished goods
|
8,478,042
|
|
|
277,419
|
|
|
59,057,707
|
|
|
17,458,827
|
|
Less: inventory reserve
|
(9,552,589)
|
|
|
(1,991,815)
|
|
Inventory, net
|
$
|
49,505,118
|
|
|
$
|
15,467,012
|
|
We write-down inventory for excess or obsolete inventories or when we believe the net realizable value of inventory is less than its carrying value. During the three months ended June 30, 2021 and 2020, we recorded write-downs of approximately $7.2 million and $0.1 million in Cost of Sales, respectively. During the six months ended June 30, 2021 and 2020, we recorded write-downs of $7.6 million and $0.2 million in Cost of Sales, respectively.
3. INVESTMENT IN LMC
As of June 30, 2021 and December 31, 2020, the Company owned approximately 16.5 million shares of Lordstown Motors Corp. (“LMC”) Class A Common Stock (“Investment in LMC”). The investment is measured at fair value, which was approximately $182.3 million and $330.6 million as of June 30, 2021 and December 31, 2020, respectively. The Company recognized the change in fair value of the Investment in LMC in Other Income (Loss) on its Condensed Consolidated Statements of Operations.
As of December 31, 2020, the Company reported the fair value of the Investment in LMC in the non-current assets section of its Consolidated Balance Sheets due to the Company’s intention to hold this investment for purposes of continued affiliation and business advantage. In connection with the merger involving LMC, which closed in October 2020, the Company agreed, subject to certain exceptions, to not sell any of its LMC shares for a period of six months. In April 2021, the six month holding period ended and the Company has the ability and intent to monetize a portion or all of the investment. Therefore, the Company reported the fair value of its Investment in LMC in the current assets section of its Condensed Consolidated Balance Sheets as of June 30, 2021.
See Note 12 for additional information regarding the fair value measurement of the Investment in LMC and Note 14 for additional information regarding certain subsequent events involving the Investment in LMC.
4. REVENUE
Revenue Recognition
Net sales include products and shipping and handling charges, net of estimates for customer allowances. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, with the majority of revenue recognized at the point in time the customer obtains control of the products. We recognize revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. The majority of our contracts have a single performance obligation and are short term in nature.
Revenues related to repair and maintenance services are recognized over time as such services are provided. Payments for products, services, and merchandise are typically received at the point when control transfers to the customer or in accordance with payment terms customary to the business.
Accounts Receivable
Credit is extended based upon an evaluation of the customer’s financial condition. Accounts receivable are stated at their estimated net realizable value. The allowance for credit losses is based on an analysis of customer accounts, which considers history of past write-offs, collections, and current and future credit conditions.
Disaggregation of Revenue
Our revenues related to the following types of business were as follows:
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Three Months Ended June 30,
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|
Six Months Ended June 30,
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2021
|
|
2020
|
|
2021
|
|
2020
|
Automotive
|
$
|
1,120,000
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|
|
$
|
85,000
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|
|
$
|
1,615,000
|
|
|
$
|
85,000
|
|
Aviation
|
—
|
|
|
—
|
|
|
22,400
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|
|
60,783
|
|
Other
|
82,876
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|
|
6,942
|
|
|
86,536
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|
|
30,459
|
|
Total revenues
|
$
|
1,202,876
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|
|
$
|
91,942
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|
|
$
|
1,723,936
|
|
|
$
|
176,242
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|
Automotive - consists of sales of any of our electric delivery truck platforms.
Aviation - consists of sales of our drone systems.
Other - consists of shipping and handling charges, extended vehicle warranties, and non-warranty after-sales vehicle services.
5. CONVERTIBLE NOTES AND PPP TERM NOTE
4.0% Senior Secured Convertible Notes Due 2024 (“2024 Notes”)
The contractual principal balance of the 2024 Notes was $200.0 million as of June 30, 2021 and December 31, 2020, and the fair value of the 2024 Notes was approximately $200.9 million and $197.7 million as of June 30, 2021 and December 31, 2020, respectively.
The following table sets forth a reconciliation of the fair value of the 2024 Notes:
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|
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|
|
June 30, 2021
|
Balance, December 31, 2020
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|
$
|
197,700,000
|
|
Change in fair value (1)
|
|
(15,500,000)
|
|
Change in fair value attributable to credit risk (2)
|
|
—
|
|
Balance, March 31, 2021
|
|
182,200,000
|
|
Change in fair value (1)
|
|
8,500,000
|
|
Change in fair value attributable to credit risk (2)
|
|
10,200,000
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Balance, June 30, 2021
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|
$
|
200,900,000
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(1) The change in fair value of the 2024 Notes was primarily driven by changes in our stock price during the periods presented. The Company recognized the changes in fair value in Interest (Income) Expense.
(2) The change in fair value of the 2024 Notes attributable to credit risk is primarily due to moderate improvements in the Company’s synthetic credit rating. The Company recognized the change in fair value attributable to credit risk in Other Comprehensive Loss.
The 2024 Notes are due October 14, 2024 and are convertible at a rate of $35.29 per share, subject to change for anti-dilution adjustments and adjustments for certain corporate events. No portion of the principal balance was converted during the three and six months ended June 30, 2021.
Interest is payable quarterly beginning January 15, 2021 at a rate of 4.0% per annum. Interest expense for the three and six months ended June 30, 2021 related to the 2024 Notes was $2.0 million and $4.0 million, respectively.
There are no required redemptions of the 2024 Notes, and they will generally not be redeemable at the option of the Company prior to the third anniversary of their issue date. Accordingly, the Company has classified the full balance of the 2024 Notes as long-term debt on its Condensed Consolidated Balance Sheets.
The 2024 Notes include certain covenants, including limitations on liens, additional indebtedness, investments, dividends and other restricted payments, and customary events of default. The Company is also required to have a minimum sales backlog of at least $25.0 million as of the period ending March 31, 2022, $50.0 million as of the period ending June 30, 2022, $75.0 million as of the period ending September 30, 2022 and $100.0 million as of the period ending December 31, 2022. As of June 30, 2021, the Company is not aware of any default or breach of any covenant under the 2024 Notes.
PPP Term Note
On April 14, 2020, the Company entered into a Paycheck Protection Program Term Note (“PPP Term Note”) with PNC Bank, N.A. under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Company received total proceeds of approximately $1.4 million from the PPP Term Note, which was due on April 13, 2022. In accordance with the requirements of the CARES Act, the Company used the proceeds primarily for payroll costs. Interest accrued on the PPP Term Note at the rate of 1.0% per annum. The Company elected to account for the PPP Term Note as debt and accrued interest over the term of the note. The Company did not make any repayments on any amount due on the PPP Term Note.
On January 15, 2021, the outstanding principal and interest accrued on the PPP Term Note were fully forgiven. The Company recognized approximately $1.4 million in gain on the forgiveness of the PPP Term Note, which was recorded in Interest Income for the six months ended June 30, 2021.
6. MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK
On June 5, 2019, the Company closed agreements for the sale of 1,250,000 units consisting of one share of Series B Preferred Stock (the “Preferred Stock”), with a stated value of $20.00 per share (the “Stated Value”) and a common stock purchase warrant to purchase 7.41 shares of the Company’s common stock (the “Warrants”) for an aggregate purchase price of $25.0 million. The Preferred Stock was not convertible and did not hold voting rights.
On September 28, 2020, the Company redeemed its Series B Preferred Stock in full for cash. Dividends on all shares of Series B Preferred Stock were paid in full as of the redemption date and have ceased to accumulate.
The Preferred Stock ranked senior to the Company’s common stock with respect to dividend rights and rights upon liquidation, winding-up or dissolution. The Preferred Stock was entitled to annual dividends at a rate equal to 8.0% per annum on the Stated Value. The Warrants had an exercise price of $1.62 per share and expired seven years from the date of issuance. Accrued dividends were payable quarterly in shares of common stock of the Company based on a fixed share price of $1.62. During the three and six months ended June 30, 2020, the Company issued approximately 0.3 million and 0.6 million shares of common stock to the holders of the Preferred Stock, respectively.
As the Preferred Stock was mandatorily redeemable, it was classified as a liability on the Condensed Consolidated Balance Sheets. All dividends payable on the Preferred Stock were classified as Interest Expense.
The Preferred Stock and Warrants were considered freestanding financial instruments and were accounted for separately. The Warrants were considered equity instruments and not marked-to-market at each reporting period. On the date of issuance, the value of the Warrants was $6.7 million, which was determined using the Black-Scholes valuation model. The fair value of the Warrants was recorded as an increase to Additional Paid-In Capital and a discount of the Preferred Stock. The discount was amortized to Interest Expense using the effective interest method. Amortization of the discount for the three and six months ended June 30, 2020 was approximately $0.4 million and $0.8 million, respectively.
7. STOCK-BASED COMPENSATION
The Company maintains, as approved by the board of directors, the 2019 Stock Incentive Plan (the “Plan”) 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 the Company’s common stock on the grant date. Awards under the Plan may be either vested or unvested options, or unvested restricted stock. The Plan has authorized 8.0 million shares for issuance of stock-based awards. As of June 30, 2021 and June 30, 2020, there were approximately 6.3 million and 6.6 million shares available for issuance of future stock awards, respectively, which includes shares available under the 2019 and 2017 incentive plans.
Stock-based compensation expense
The following table summarizes stock-based compensation expense:
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|
|
|
|
|
|
|
|
Three Months Ended June 30,
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|
Six Months Ended June 30,
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|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
|
|
Stock options
|
$
|
21,210
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|
|
$
|
347,328
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|
|
$
|
91,622
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|
|
$
|
427,758
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|
|
|
|
|
Restricted stock
|
1,118,703
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|
|
822,863
|
|
|
1,940,719
|
|
|
1,601,460
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|
|
|
|
|
Total stock-based compensation
|
$
|
1,139,913
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|
|
$
|
1,170,191
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|
|
$
|
2,032,341
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|
|
$
|
2,029,218
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|
|
|
|
|
Stock options
The following table summarizes option activity:
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Number of Options
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|
Weighted
Average
Exercise Price
per Option
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|
Weighted
Average Grant
Date Fair Value
per Option
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
Balance, December 31, 2020
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|
2,351,240
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|
|
$
|
2.00
|
|
|
|
|
5.5
|
Granted
|
|
—
|
|
|
—
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|
|
—
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|
|
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Exercised
|
|
(770,677)
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|
|
3.11
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|
|
|
|
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|
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|
|
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|
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Forfeited
|
|
—
|
|
|
—
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|
|
|
|
|
Expired
|
|
(29,000)
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|
|
4.99
|
|
|
|
|
|
Balance, June 30, 2021
|
|
1,551,563
|
|
|
$
|
1.40
|
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
Number of options exercisable at June 30, 2021
|
|
1,280,688
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|
|
$
|
1.43
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|
|
|
|
6.2
|
As of June 30, 2021, unrecognized compensation expense was $0.1 million for unvested options which is expected to be recognized over the next 1.7 years.
Restricted stock
The following table summarizes restricted stock activity:
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|
|
Number of Unvested Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
Balance, December 31, 2020
|
|
1,377,889
|
|
|
$
|
2.70
|
|
Granted
|
|
304,164
|
|
|
14.57
|
|
Vested
|
|
(444,843)
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|
|
2.75
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Balance, June 30, 2021
|
|
1,237,210
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|
|
$
|
5.64
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|
As of June 30, 2021, unrecognized compensation expense was $5.4 million for unvested restricted stock awards which is expected to be recognized over the next 2.3 years.
8. INCOME TAXES
As of June 30, 2021 and December 31, 2020, the Company's deferred tax liability was approximately $2.9 million and $21.8 million, respectively. The Company has not generated taxable income since inception and the fair value of our investment in LMC decreased substantially during the three and six months ending June 30, 2021, which resulted in a tax benefit of approximately $1.3 million and $18.9 million, respectively. The cumulative deferred tax assets are fully reserved as of June 30, 2021, as there is not sufficient evidence to conclude that it is more likely than not that deferred tax assets are realizable. No current liability for federal or state income taxes has been included in these Condensed Consolidated Financial Statements.
9. EARNINGS 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:
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|
|
|
|
|
|
|
|
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|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Stock-based awards and warrants
|
3,827,804
|
|
|
24,294,118
|
|
|
3,827,804
|
|
|
24,294,118
|
|
Convertible notes
|
5,667,328
|
|
|
9,958,506
|
|
|
5,667,328
|
|
|
12,488,899
|
|
Excluded from the table above are the warrant shares related to the High Trail Convertible Note, which represented approximately 11.8 million and 13.3 million warrants calculated using the if-converted method for the three and six months ended June 30, 2020. The warrants were issuable at the option of the Company following the full or partial redemption of the High Trail Convertible Note. No warrants were issued in connection with the High Trail Convertible Note and it was fully converted during the year ended December 31, 2020.
10. RECENT ACCOUNTING DEVELOPMENTS
Accounting Standards Recently Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions for recognizing deferred taxes for investments, performing an intra-period allocation, and calculating income taxes in interim periods. The ASU also adds guidance to simplify accounting for income taxes, such as recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. The Company adopted the ASU as of January 1, 2021. The adoption of this guidance did not have a material impact on the Company’s financial condition and operations.
Accounting Standards Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity’s own equity and requires the use of the if-converted method for calculating diluted earnings per share. The ASU removes separation models for convertible debt with a cash conversion feature. Such convertible instruments will be accounted for as a single liability measured at amortized cost. The ASU is effective for interim and annual periods beginning after December 15, 2021, with early adoption permitted after December 15, 2020, which can either be on a modified retrospective or full retrospective basis. Adoption of the ASU is not expected to have a material impact on the Company's financial condition and operations.
11. OTHER TRANSACTION
On October 31, 2019, the Company and ST Engineering Hackney, Inc. (“Hackney”) entered into an Asset Purchase Agreement to purchase certain assets and assume certain liabilities of Hackney. Upon execution of the agreement, the Company deposited $1.0 million in cash and shares of its common stock having a value of $6.6 million into an escrow account. The number of shares held in escrow was subject to adjustment if the value of the shares is less than $5.3 million or greater than $7.9 million on certain dates.
The purchase price for the acquired assets was $7.0 million, $1.0 million of which was released from the escrow account in January 2020 upon satisfaction of certain conditions and accounted for as customer acquisition costs. The remaining $6.0 million was payable in cash within 45 days if additional conditions were met or in shares of common stock held in escrow in the event the payment was not made within 105 days of when the payment was due. The additional conditions were not met and, as a result, the remaining $6.0 million is not due.
12. FAIR VALUE MEASUREMENTS
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 — Quoted market prices in active markets for identical assets or liabilities.
Level 2 — Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 — Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities measured at fair value and fair value measurement level were as follows:
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|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in LMC
|
$
|
182,251,126
|
|
|
$
|
182,251,126
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
330,556,744
|
|
|
$
|
330,556,744
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets at fair value
|
$
|
182,251,126
|
|
|
$
|
182,251,126
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
330,556,744
|
|
|
$
|
330,556,744
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
$
|
200,900,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
200,900,000
|
|
|
$
|
197,700,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
197,700,000
|
|
Total liabilities at fair value
|
$
|
200,900,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
200,900,000
|
|
|
$
|
197,700,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
197,700,000
|
|
Investment in LMC
The Company's investment in LMC is measured at fair value using Level 1 inputs because it is valued using a quoted price in an active market. The Company recognizes changes in fair value of the investment in Other Income (Loss) on the Condensed Consolidated Statements of Operations.
Convertible Notes
The Company's convertible notes are measured at fair value using Level 3 inputs on issuance and at each reporting date. Considerable judgment is 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 include 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 Company recognizes changes in fair value of the convertible notes related to changes in credit risk, if any, in Other Comprehensive Income (Loss) and the remaining changes in fair value in Interest (Income) Expense.
13. COMMITMENTS AND CONTINGENCIES
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.
During the quarter ended June 30, 2021, the Company became aware of an issue regarding our E-Series vehicles that will require retrofitting of such vehicles. Management is currently working on remediation and does not expect the issue to have a material impact on the Company's financial condition and operations.
14. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for potential recognition and disclosures through the date the Condensed Consolidated Financial Statements were filed.
Investment in LMC
During the period beginning July 1, 2021 through August 6, 2021, the Company sold approximately 11.9 million shares of LMC Class A Common Stock at an average price of $6.67 per share for expected net proceeds, after transaction expenses and brokers’ commissions, of approximately $78.8 million. As a result of the sales, the Company recorded a loss of approximately $52.1 million.