Note 1 – Description of Business and Basis of Presentation
Lightning eMotors, Inc. (the “Company”, “Lightning”) is an innovative automotive manufacturing and research company based in Loveland, Colorado. The Company operates in the zero-emission vehicle (“ZEV”) market and manufactures zero-emission Class 3 to 7 Battery Electric Vehicles (“BEV”) and Fuel Cell Electric Vehicles (“FCEV”) for commercial medium duty trucks, buses, vans and motorcoach fleets. The Company also manufactures and sells charging and energy systems to enable accelerated adoption of its commercial vehicles. The Company operates predominately in the United States.
On May 6, 2021 (the “Closing Date”), GigCapital3, Inc. (“Gig”), consummated the previously announced merger pursuant to the Business Combination Agreement, dated December 10, 2020 (the “Business Combination Agreement”), by and among Project Power Merger Sub, Inc., a wholly-owned subsidiary of Gig incorporated in the State of Delaware (“Merger Sub”), and Lightning Systems, Inc., a Delaware corporation (“Lightning Systems”). Pursuant to the terms of the Business Combination Agreement, a business combination between Gig and Lightning Systems was effected through the merger of Merger Sub with and into Lightning Systems, with Lightning Systems surviving as the surviving company and as a wholly-owned subsidiary of Gig (the “Business Combination”).
On the Closing Date, and in connection with the closing of the Business Combination, Gig changed its name to Lightning eMotors, Inc. Lightning Systems was deemed the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in Accounting Standards Codification (“ASC”) 805, Business Combinations. This determination was primarily based on Lightning Systems stockholders prior to the Business Combination having a majority of the voting interests in the combined company, Lightning Systems operations comprising the ongoing operations of the combined company and Lightning Systems senior management comprising the senior management of the combined company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Lightning Systems issuing stock for the net assets of Gig, accompanied by a recapitalization. The net assets of Gig are stated at historical cost, with no goodwill or other intangible assets recorded.
While Gig was the legal acquirer in the Business Combination, Lightning Systems was deemed the accounting acquirer, the historical financial statements of Lightning Systems became the historical financial statements of the combined company, upon the consummation of the Business Combination. As a result, the financial statements included in this report reflect (i) the historical operating results of Lightning Systems prior to the Business Combination; (ii) the combined results of the Company and Lightning Systems following the closing of the Business Combination; (iii) the assets and liabilities of Lightning Systems at their historical cost; and (iv) the Company’s equity structure for all periods presented.
In accordance with guidance applicable to these circumstances, the equity structure has been restated in all comparative periods up to the Closing Date, to reflect the number of shares of the Company’s common stock, $0.0001 par value per share, issued to Lightning Systems stockholders in connection with the recapitalization transaction. As such, the shares and corresponding capital amounts and earnings per share related to Lightning Systems redeemable convertible preferred stock and Lightning Systems common stock prior to the Business Combination have been retroactively restated as shares reflecting the exchange ratio of approximately 0.9406 shares (the “Exchange Ratio”) established in the Business Combination Agreement. Activity within the statement of stockholders’ equity for the issuances and repurchases of Lightning Systems convertible redeemable preferred stock, were also retroactively converted to Lightning Systems common stock. For more details on the reverse recapitalization, see Note 3 to the Company’s notes to consolidated financial statements.
The accompanying consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”). The unaudited financial information reflects, in the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the periods indicated. The results reported for the interim period presented are not necessarily indicative of results that may be expected for the full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated.
Reclassifications
Certain prior period balances in the statements of cash flows have been combined or reclassified to conform to current period presentation. Such reclassifications had no impact on net income (loss) or stockholders’ equity previously reported.
Liquidity and Capital
As of September 30, 2022, the Company had $95,795 in cash and cash equivalents. For the nine months ended September 30, 2022, the net income of the Company amounted to $23,751. Cash flow used in operating activities was $66,986 for the nine months ended September 30, 2022. The Company had positive working capital of $129,317 as of September 30, 2022, primarily as a result of the proceeds received from the Business Combination. The current and historical operating cash flows, current cash and working capital balances, and forecasted obligations of the Company were considered in connection with management’s evaluation of the Company’s ongoing liquidity. As a result of the Business Combination, the Company received net proceeds of $216,812 in cash, after paying off the outstanding working capital facilities, the secured promissory note, and unsecured facility agreements.
On August 30, 2022, the Company entered into an equity line of credit agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”) (“ELOC Agreement”), pursuant to which Lincoln Park committed to purchase up to $50.0 million of shares of the Company’s common stock, subject to certain limitations and conditions set forth in the ELOC Agreement. The Company issued 299,491 shares of its common stock to Lincoln Park as a commitment fee on August 30, 2022. As of September 30, 2022, the Company has not sold any common stock to Lincoln Park under the ELOC Agreement. See Note 10 for additional information regarding the ELOC Agreement.
The Company believes its cash and cash equivalents balance will be sufficient to continue to operate its business over the next twelve-month period from the date the September 30, 2022 financial statements were issued. However, the Company may require additional capital to fund the growth and scaling of its manufacturing facility and operations; further develop its products and services, including those for orders in its order backlog; and fund possible acquisitions. Until the Company can generate sufficient cash flow from operations, the Company expects to finance its operations through a combination of the merger proceeds received from the Business Combination and issuances of common stock under the ELOC Agreement as well as from additional public offerings, debt financings or other capital markets transactions, collaborations or licensing arrangements. The amount and timing of the Company’s future funding requirements depends on many factors, including the pace and results of the Company’s development efforts and the Company’s ability to scale its operations.
The Company cannot provide any assurance that additional capital will be available on commercially acceptable terms, if at all. If the Company is unable to secure additional capital, it may be required to take additional measures to reduce costs in order to conserve its cash in amounts sufficient to sustain operations and meet its obligations. These measures could cause significant delays in the Company’s continued efforts to grow its business, which is critical to the realization of its business plan and the future operations of the Company.
Note 2 – Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company’s most significant estimates and judgments involve deferred income taxes, allowance for doubtful accounts, warranty liability, write downs and write offs of obsolete and damaged inventory and valuations of share-based compensation, warrant liability, convertible note derivative liability and earnout share liability. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates, and such differences could be material to the Company’s financial statements.
Segment information
ASC 280, Segment Reporting, defines operating segments as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company operates as a single operating segment. The Company’s CODM is the Chief Executive Officer, who has ultimate responsibility for the operating performance of the Company and the allocation of resources. The CODM uses Company forecasts, a financial and operations dashboard, and cash flows as the primary measures to manage the business and does not segment the business for internal reporting or decision making.
Concentrations of credit risk
As of September 30, 2022, two customers accounted for 48% and 13% of the Company’s total accounts receivable. As of December 31, 2021, three customers accounted for 40%, 20% and 17% of total accounts receivable. The net sales to the following customers comprised more than 10% of revenues for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net Sales | | % of Net Revenues | | Net Sales | | % of Net Revenues | | Net Sales | | % of Net Revenues | | Net Sales | | % of Net Revenues |
| Customer A | $ | 5,920 | | | 53 | % | | $ | 1,326 | | | 21 | % | | $ | 5,923 | | | 29 | % | | $ | — | | | — | % |
| Customer B | 2,075 | | | 19 | % | | — | | | — | % | | 2,075 | | | 10 | % | | — | | | — | % |
| Customer C | 1,098 | | | 10 | % | | — | | | — | % | | 2,822 | | | 14 | % | | — | | | — | % |
| Customer D | — | | | — | % | | — | | | — | % | | 2,675 | | | 13 | % | | — | | | — | % |
| Customer E | — | | | — | % | | 1,078 | | | 17 | % | | — | | | — | % | | — | | | — | % |
| Customer F | — | | | — | % | | 722 | | | 12 | % | | — | | | — | % | | 6,040 | | | 36 | % |
| Customer G | — | | | — | % | | 682 | | | 11 | % | | — | | | — | % | | — | | | — | % |
| Customer H | — | | | — | % | | 647 | | | 10 | % | | — | | | — | % | | 2,807 | | | 17 | % |
| Total of customers with sales greater than 10% | $ | 9,093 | | | 82 | % | | $ | 4,455 | | | 71 | % | | $ | 13,495 | | | 66 | % | | $ | 8,847 | | | 53 | % |
| Total of customers with sales less than 10% | 2,038 | | | 18 | % | | 1,802 | | | 29 | % | | 6,584 | | | 34 | % | | 7,924 | | | 47 | % |
| Total Revenues | $ | 11,131 | | | 100 | % | | $ | 6,257 | | | 100 | % | | $ | 20,079 | | | 100 | % | | $ | 16,771 | | | 100 | % |
| | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Concentrations of supplier risk
As of September 30, 2022, two suppliers accounted for 56% and 10% of the Company’s total accounts payable. As of December 31, 2021, three suppliers accounted for 20%, 19% and 11% of the Company’s total accounts payable. For the three months ended September 30, 2022, one supplier accounted for 42% of inventory purchases. For the three months ended September 30, 2021, two suppliers accounted for 24% and 13% of inventory purchases. For the nine months ended September 30, 2022, two suppliers accounted for 32% and 19% of inventory purchases. For the nine months ended September 30, 2021, two suppliers accounted for 24% and 12% of inventory purchases.
Cash and cash equivalents
Cash and cash equivalents include cash held in banks and in money market funds. The Company’s cash and cash equivalents are placed with high-credit-quality financial institutions and issuers, and at times exceed federally insured limits. To date, the Company has not experienced any credit loss relating to its cash and cash equivalents. The carrying value of the cash equivalents approximates fair value, which represents a Level 1 input.
Accounts receivable
Accounts receivable are recorded at invoiced amounts, net of discounts, and allowances. The Company grants credit in the normal course of business to its customers. The Company periodically performs credit analyses and monitors the financial condition of its customers to reduce credit risk. The Company reduces the carrying value for estimated uncollectible accounts based on a variety of factors including the length of time receivables are past due, economic trends and conditions affecting the Company’s customer base, and historical collection experience. Specific provisions are recorded for
individual receivables when the Company becomes aware of a customer’s inability to meet its financial obligations. The Company writes off accounts receivable when they are deemed uncollectible. The following table details the change in the allowance for doubtful accounts for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Balance at beginning of period | $ | 3,847 | | $ | 142 | | $ | 3,349 | | $ | — |
Charges to expense (1) | 1,733 | | — | | 2,231 | | 142 |
Deductions (1) | (3,780) | | — | | (3,780) | | — |
| Balance at end of period | $ | 1,800 | | $ | 142 | | $ | 1,800 | | $ | 142 |
(1)The charges to expense and deductions in the allowance for doubtful accounts during the three and nine months ended September 30, 2022 were associated with one customer. The customer was unable to pay, and the Company repossessed the vehicles as collateral for the accounts receivable balance. The charges to expense represent further impairment of the receivable balance down to the net realizable value of the collateral. The deductions represent the write off of the remaining accounts receivable balance after applying the net realizable value of the collateral against the outstanding balance.
Inventories
Inventories consist of raw materials, work in progress, and finished goods and are stated at the lower of cost or net realizable value, with cost determined on the average cost method. A valuation adjustment is made to inventory for any excess, obsolete or slow-moving items based on management’s review of on-hand inventories compared to historical and estimated future sales and usage profiles.
Property and equipment
Property and equipment is stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful asset lives. Leasehold improvements are stated at cost and amortized on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Costs of enhancements or modifications that substantially extend the capacity or useful life of an asset are capitalized and depreciated accordingly. Ordinary repairs and maintenance are expensed as incurred. Depreciation is included in the consolidated statements of operations in “Cost of revenues”, “Research and development” and “Selling, general and administrative”. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the consolidated balance sheets and the resulting gain or loss, if any, is reflected in “Other income, net.” The estimated useful lives of the Company’s major classes of property and equipment are as follows:
| | | | | | | | |
| Major Class of Property and Equipment | | Estimated Useful Lives |
| Machinery and equipment | | 7 years |
| Vehicles | | 5 years |
| Leasehold improvements | | 5 years |
| Computer equipment | | 3 years |
| Software | | 3 years |
| Furniture and fixtures | | 7 years |
Impairment of long-lived assets
Long-lived assets to be held and used in the Company’s operations are evaluated for impairment when events or circumstances indicate the carrying value of a long-lived asset or asset group is less than the undiscounted cash flows from its use and eventual disposition over its remaining economic life. The Company assesses recoverability by comparing the sum of projected undiscounted cash flows from the use and eventual disposition over the remaining economic life of a long-lived asset or asset group to its carrying value, and records a loss from impairment if the carrying value is more than its undiscounted cash flows. Assets or asset groups to be abandoned or from which no future benefit is expected are written
down to zero in the period it is determined they will no longer be used and are removed entirely from service. There were no impairments of long-lived assets recognized during the three and nine months ended September 30, 2022 and 2021.
Redeemable convertible preferred stock
Prior to the Business Combination, the Company had redeemable preferred stock outstanding that was classified as temporary equity in the mezzanine section of the balance sheet due to the contingently redeemable nature of the preferred stock. As described in Note 1, the equity structure has been restated in all comparative periods prior to the Closing Date. For the periods in which the redeemable convertible preferred stock was outstanding, the Company did not believe that the related contingent events and the redemption of the preferred stock was probable to occur and did not accrete the preferred stock to redemption value.
Revenue recognition
Revenue Summary
The following table disaggregates revenue by major source:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| ZEVs | $ | 10,570 | | $ | 5,588 | | $ | 18,633 | | $ | 15,084 |
| Zero-emission powertrains | — | | — | | 336 | | 218 |
| Other | 561 | | 669 | | 1,110 | | 1,469 |
| Total | $ | 11,131 | | $ | 6,257 | | $ | 20,079 | | $ | 16,771 |
The Company manufactures and sells medium and heavy-duty ZEVs, such as delivery trucks and buses. The Company manufactures ZEVs by removing the internal combustion engine and certain associated components (collectively, “decontented parts”) and installing and integrating its internally-developed, zero-emission powertrain into a vehicle chassis supplied by original equipment manufacturer (“OEM”) partners or from the customer. At times, the Company also installs and integrates its zero-emission powertrains into a used vehicle chassis supplied by the customer (“repower”). The Company also manufactures and sells its stand-alone, zero-emission powertrains directly to customers.
The Company recognizes revenue at a point in time when its performance obligation has been satisfied and control of the ZEV or zero-emission powertrain is transferred to the customer, which generally aligns with shipping terms. Contract shipping terms include ExWorks (“EXW”), “FOB Shipping Point” and “FOB Destination” all as defined in the Incoterms. Under EXW (meaning the seller fulfills its obligation to deliver when it makes goods available at its premises, or another specified location, for the buyer to collect), the performance obligation is satisfied and control is transferred at the point when the customer is notified that the ZEV or zero-emission powertrain is available for pickup. Under “FOB Shipping Point,” control is transferred to the customer at the time the good is transferred to the shipper and under “FOB Destination,” at the time the good is delivered to a customer’s specified delivery location. At times, the Company sells ZEVs that require additional upfitting from a third party before the final sale to the customer. The Company is acting as the principal in such transactions and revenue is recognized on a gross basis.
Other revenue primarily includes the sale of charging systems, engineering consulting services, telematics and analytics subscription services and decontented parts. Revenue for chargers and decontented parts is generally recognized based on contract shipping terms. At times, chargers may be drop shipped directly to the customer from the manufacturer, in which revenue is recognized at the time of shipment. The Company is acting as the principal in such transactions and revenue is recognized on a gross basis. Services are recognized as revenue over time as either percentage of completion (i.e. engineering service contracts) or as the service is transferred to the customer (i.e. telematics and analytics subscription services).
The Company made an accounting policy election to account for any shipping and handling costs that occur after control has transferred to the customer as fulfillment costs that are accrued to cost of revenues at the time control transfers. Shipping and handling costs billed to customers are initially recorded in deferred revenue and recognized as revenue once shipping is complete.
The Company often applies for governmental funding programs, including California’s Hybrid and Zero Emission Truck and Bus Voucher Incentive Project (“HVIP”), on behalf of its customers for ZEV sales. Generally, as a condition of the program, the amount billed to the customer must be reduced by the amount that will be funded by the government program, and the Company will receive the funds directly from the government program. However, the discount to the customer is contingent upon the Company’s receipt of the funding. Revenue is recognized on the gross amount of the ZEV at the time substantially all of the conditions of the government program required of the Company have been met and control of the ZEV has transferred to the customer based on shipping terms.
The following economic factors affect the nature, amount, timing, and uncertainty of the Company’s revenue and cash flows as indicated:
•Type of customer: The Company’s sales are directly to commercial fleet customers, OEMs, governments and dealers.
•Type of contract: Sales contracts are for goods or services. The majority of contracts are short term (i.e., less than or equal to one year in duration).
Significant Payment Terms
None of the Company’s contracts have a significant financing component. Any cash that is received prior to revenue recognition is deferred as deferred revenue (a contract liability) until the good is delivered or service is rendered.
Contract Liabilities
Contract liabilities relate to payments received in advance of performance obligations under the contract and are realized when the associated revenue is recognized under the contracts. The Company’s contract liabilities consist of customer deposits and deferred revenue, of which current amounts are included in “Accrued expenses and other current liabilities” and long-term amounts are included in “Other long-term liabilities” on the consolidated balance sheets. Changes in contract liabilities are as follows:
| | | | | |
Balance as of December 31, 2021 | $ | 147 | |
| Revenues recognized | (2,377) | |
| Increase due to billings | 2,822 | |
Balance as of September 30, 2022 | $ | 592 | |
The Company recognized revenue of $90 during the nine months ended September 30, 2022 that was included in the contract liability balance as of December 31, 2021.
Returns and Refunds
Consideration paid for goods and/or services that customers purchase from the Company are nonrefundable. Therefore, at the time revenue is recognized, the Company does not estimate expected refunds for goods or services, nor does the Company exclude any such amounts from revenue.
Transaction Price
The transaction price of a contract is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer. Transaction prices do not include amounts collected on behalf of third parties (e.g., sales taxes). Sales taxes collected on sales are recorded as a sales tax liability and are included in “Accrued expenses and other current liabilities.”
To determine the transaction price of a contract, the Company considers its customary business practices and the terms of the contract. For the purpose of determining transaction prices, the Company assumes that the goods and/or services will be transferred to the customer as promised in accordance with existing contracts and that the contracts will not be canceled, renewed, or modified. The Company’s revenue terms do not include retrospective or prospective volume discounts, rights of return, rebates, performance bonuses or other forms of variable consideration.
The Company’s contracts with customers have fixed transaction prices that are denominated in U.S. dollars and payable in cash.
Future Performance Obligations
The Company has applied the practical expedient to exclude the value of remaining performance obligations for (i) contracts with an original term of one year or less and (ii) contracts for which the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed (i.e. analytical data subscription services).
As of September 30, 2022, the Company had remaining performance obligations related to a non-cancellable (other than for a breach by the Company) minimum-quantity purchase commitment. The customer is obligated to purchase a fixed number of ZEVs through December 31, 2023, however, the price varies based on which year the customer orders each ZEV (in 2022 or 2023). The Company estimates that the future revenues associated with this contract (based on estimated orders from the customer) to be $2,000 in 2022 and $8,800 in 2023. The timing of the revenue associated with these estimates will change if the ZEVs are commissioned and/or shipped subsequent to the year in which they were ordered, as revenue will not be recognized until control of the ZEV transfers to the customer based on the purchase order shipping terms.
As of September 30, 2022, the Company also had $206 of remaining performance obligations related to unsatisfied extended warranty performance obligations the Company expects to recognize ratably from approximately September 2027 through August 2030.
Costs to Obtain or Fulfill a Contract with a Customer
The Company has elected the practical expedient to expense contract acquisition costs, which consist of sales commissions, which are reported within “Selling, general and administrative” expenses.
Warranties
All ZEVs that customers purchase from the Company are covered by five-year and 60-thousand-mile limited product warranties. At the time revenue is recognized, the Company estimates the cost of expected future warranty claims and accrues estimated future warranty costs based upon the history of warranty claims. The Company periodically reviews the adequacy of its product warranties and adjusts, if necessary, the warranty estimate and accrued warranty liability for actual historical experience. The warranty liability is included in “Accrued expenses and other current liabilities” and the cost of warranties is included in “Cost of revenues.”
At times, the Company may sell its ZEVs with an extended product warranty, with coverage beyond the five-year and 60-thousand-mile limited standard warranty. The Company considers these extended warranties to be separate performance obligations. The consideration allocated to the extended warranty is deferred and recognized over the term of the extended warranty. The Company’s deferred revenue associated with extended warranties is currently all classified as long-term within “Other long-term liabilities.”
Fair value, measurements, and financial instruments
A fair value hierarchy was established that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels of the hierarchy and the related inputs are as follows:
•Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company can access at the measurement date.
•Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
•Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:
•Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
•Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).
•Income approach: Techniques to convert future amounts to a single present value amount based upon market expectations (including present value techniques, option pricing and excess earnings models).
The Company believes its valuation methods are appropriate and consistent with other market participants, however, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The Company’s recurring fair value measurements categorized within Level 3 discussed below contain significant unobservable inputs. A change in those significant unobservable inputs could result in a significantly higher or lower fair value measurement at the reporting date.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, warrant liabilities, long-term debt, derivative liabilities and earnout liabilities. The carrying value of cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term nature of those instruments.
Long-term debt is not presented at fair value on the consolidated balance sheets, as it is recorded at carrying value, net of unamortized debt discounts. However, the 7.5% $100,000 convertible senior note (the “Convertible Note”) has an embedded conversion option accounted for as a derivative liability, which is presented at fair value on the consolidated balance sheets. The fair value of the Convertible Note, including the conversion option, was $62,874 and $76,614 as of September 30, 2022 and December 31, 2021, respectively. The Company’s term note and working capital facility (“Facility”) had an outstanding term note with a principal amount of $3,000 as of both September 30, 2022 and December 31, 2021 and a fair value of $3,146 and $4,173 as of September 30, 2022 and December 31, 2021, respectively.
The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were measured at fair value on a recurring basis in the consolidated balance sheets.
| | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 |
As of September 30, 2022 | | | | | |
| Financial assets | | | | | |
| Cash equivalents | $ | 92,762 | | | $ | — | | | $ | — | |
| Financial Liabilities | | | | | |
| Warrant liability | $ | — | | | $ | — | | | $ | 335 | |
| Derivative liability | — | | | — | | | 1,048 | |
| Earnout liability | — | | | — | | | 14,787 | |
As of December 31, 2021 | | | | | |
| Financial assets | | | | | |
| Cash equivalents | $ | 150,022 | | | $ | — | | | $ | — | |
| Financial Liabilities | | | | | |
| Warrant liability | $ | — | | | $ | — | | | $ | 2,185 | |
| Derivative liability | — | | | — | | | 17,418 | |
| Earnout liability | — | | | — | | | 83,144 | |
As of September 30, 2022 and December 31, 2021, the Company had cash equivalents held in a money market account. The Company has concluded that due to the highly liquid nature of the money market account, the carrying value approximates fair value, which represents a Level 1 input.
As a result of the Business Combination, the Company assumed the liability associated with the Gig warrants. The Company accounts for the warrants as liabilities at fair value with subsequent changes in fair value recorded in the statement of operations for each reporting period. The fair value is determined using the Black-Scholes-Merton option-pricing model (“BSM”) where the share price input represents the Company’s stock price as of the valuation date. The BSM is a commonly-used mathematical model for pricing an option or warrant. In particular, the model estimates the variation in value over time of financial instruments. The fair value measurements are considered Level 3 measurements within the fair value hierarchy.
The Company estimates the fair value of its derivative liability associated with the Convertible Note at each reporting date, as well as at each conversion date. The Convertible Note and embedded conversion option are valued using a Binomial Lattice Model designed to capture incremental value attributed to the conversion options in addition to the value of the Convertible Note. The value of the Convertible Note without the conversion feature is valued utilizing the income approach, specifically the discounted cash flow method. Cash flows are discounted utilizing the U.S. Treasury rate and the credit spread to estimate the appropriate risk-adjusted rate. The conversion feature utilizes the Company’s stock price as of the valuation date as the starting point of the valuation. A Binomial Lattice Model is used to estimate a credit spread by solving for a premium to the U.S. Treasury rate that produces a value of the Convertible Note. As of issuance, the value of the Convertible Note and warrants related to the Convertible Note were set to equal $100,000 to solve for the credit spread which is then updated quarterly. The fair value measurements are considered Level 3 measurements within the fair value hierarchy.
As a result of the Business Combination, the Company recognized additional earnout shares with performance conditions as a liability measured at fair value with subsequent changes in fair value recorded in the consolidated statement of operations for each reporting period. The earnout shares are valued using the Company’s stock price as of the valuation date. The valuation methodology used is a Monte Carlo Simulation model (“MCS”) utilizing a Geometric Brownian motion process to capture meeting the various performance conditions. MCS is a technique that uses a stochastic process to create a range of potential future outcomes given a variety of inputs. Stochastic processes involve the use of both predictive assumptions (e.g., volatility, risk-free rate) and random numbers to create potential outcomes of value. MCS assumes that stock prices take a random walk and cannot be predicted; therefore, random number generators are used to create random outcomes for stock prices. The fair value measurements are considered Level 3 measurements within the fair value hierarchy.
Prior to the Business Combination, the Company had common and preferred stock warrants issued in connection with the issuance of debt, the conversion of debt to preferred stock, and the issuance of redeemable convertible preferred stock that were measured and recorded at fair market value as of the date of each transaction. These common and preferred stock warrants were classified in warrant liabilities and were measured and adjusted to their fair market value as of each reporting period as described in the paragraphs below.
The Company estimated the fair value of its common stock, Series C preferred stock, and Series C preferred warrants, which value was used in the determination of the value of warrants issued in connection with certain debt and preferred stock transactions and when measuring at the end of the reporting period. The Company considered the measurement of such liability-classified warrants in Level 3 due to significant unobservable inputs in this valuation.
The valuations were based on a combination of the income and market approach allocated to stockholders using an Option Pricing Model and applying a Discount for Lack of Marketability judgement based on the Finnerty put-option model. The key inputs to the valuation models that were utilized to estimate the fair value of the warrant liabilities included volatility, risk free rate, probability of subsequent funding, and discounts for lack of marketability.
These valuations were determined using a Probability Weighted Expected Return Method (PWERM) and a combination of several income and market approaches to determine the enterprise value of the Company. The enterprise value was adjusted for the probabilities of various scenarios/liquidity events that could have occurred and would have to create an overall weighted value of common stock as of each valuation date. Each liquidity scenario had unique probabilities based on the Company’s opinion, which was based on various discussions with potential investors, advisors, and market participants, which included unique facts and circumstances as of the valuation dates. The scenarios included early liquidation, a private merger and acquisition (“M&A”) transaction, staying a privately held company, and a special purpose acquisition company (“SPAC”) transaction/merger.
Each scenario was based on a different valuation methodology based on the unique risks, opportunities and a likely investor’s or market participant’s perspective. These included (a) Early liquidation: based on an Asset Approach using the
existing equity value as of the valuation date; (b) Private M&A: based on a guideline transaction (market) approach using an assembled group of comparable transactions and trailing revenue metric/multiples; (c) Stay private: based on a discounted cash flow (income) approach using the Company’s non-SPAC forecast and a market-based discount rate; and (d) SPAC transaction: based on a guideline public company (market) approach using an assembled peer group of comparable companies and forward revenue metrics/multiples. Value was allocated to all outstanding securities through the PWERM using capitalization tables unique to each liquidity scenario.
The preliminary valuation was then discounted by applying a Discount for Lack of Marketability (“DLOM”) based on a Finnerty put-option model to determine a non-marketable, minority value of one share of common stock and one share of Series C preferred stock.
The Company’s non-financial assets, which primarily consist of property and equipment, are not required to be carried at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable, these along with other non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value.
Beneficial conversion features
The Company followed the beneficial conversion feature guidance in ASC 470-20, Debt with Conversion and Other Options, which applies to redeemable convertible preferred stock and convertible debt. A beneficial conversion feature is defined as a nondetachable conversion feature that is in the money at the commitment date.
The beneficial conversion feature guidance requires recognition of the conversion option’s in-the-money portion, the intrinsic value of the option, in equity, with an offsetting reduction to the carrying amount of the instrument. The resulting discount is amortized as interest over the life of the instrument. When there is a subsequent change to the conversion ratio based on a future occurrence, the new conversion price may trigger the recognition of an additional beneficial conversion feature on occurrence.
As a result of the Business Combination, the unamortized portion of the beneficial conversion feature was recorded to additional paid-in capital.
Stock-based compensation
The Company accounts for share-based compensation in accordance with ASC 718, Compensation – Stock Compensation, under which share based payments that involve the issuance of common stock to employees and non-employees and meet the criteria for equity-classified awards are recognized in the financial statements as share-based compensation expense based on the fair value on the date of grant. The Company issues stock option awards and restricted stock unit awards to employees and non-employees.
The Company utilizes the Black-Scholes model to determine the fair value of the stock option awards, which requires the input of subjective assumptions. These assumptions include estimating (a) the length of time grantees will retain their vested stock options before exercising them for employees and the contractual term of the option for non-employees (“expected term”), (b) the volatility of the Company’s common stock price over the expected term, (c) expected dividends, and (d) the fair value of a share of common stock prior to the Business Combination. After the closing of the Business Combination, the Company’s board of directors determined the fair value of each share of common stock underlying stock-based awards based on the closing price of the Company’s common stock as reported by the NYSE on the date of grant. The Company has elected to recognize the adjustment to share-based compensation expense in the period in which forfeitures occur.
The assumptions used in the Black-Scholes model are management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment (see Note 11). As a result, if other assumptions had been used, the recorded share-based compensation expense could have been materially different from that recorded in the financial statements.
Warrants and Warrant liabilities
As a result of the Business Combination, the Company assumed the liability associated with the Gig warrants. The Company accounts for the warrants for shares of the Company’s common stock that are not indexed to its own stock as
liabilities at fair value on the consolidated balance sheets. The warrants are subject to remeasurement at each balance sheet date and any change in fair value is recognized as a “(Gain) loss from change in fair value of warrant liabilities” in the consolidated statements of operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the common stock warrants. At that time, the portion of the warrant liability related to the common stock warrants will be reclassified to “Additional paid-in capital”.
The Lightning Systems common and preferred warrants, prior to the Business Combination, were accounted for in accordance with the authoritative guidance which requires that free-standing financial instruments with certain cash settlement features and/or associated with redeemable convertible preferred stock, which is classified as temporary equity, to be recorded at the fair value of the warrants. All outstanding common (with the exception of certain warrants that were issued to vendors discussed below) and all preferred warrants are recorded as “warrant liabilities” based on their fair value on the date of the transaction. See the “Fair value” significant accounting policy for a description of the determination of fair value. Any changes in the fair value of these instruments are reported as “(Gain) loss from change in fair value of warrant liabilities.”
Warrants are separated from the host contract and reported at fair value when the warrant is a freestanding financial instrument that may ultimately require the issuer to settle the obligation by transferring assets. Under certain circumstances, most notably in the case of a deemed liquidation, the warrants issued in conjunction with Lightning Systems’ debt and preferred stock transactions may have been ultimately required to be settled by a transfer of assets, and as a result the warrants are reported as liabilities at fair value each reporting period.
In February 2021, the Company granted common warrants to certain vendors for services provided prior to March 31, 2021. Refer to Note 10 – Capital Structure.
As a result of the Business Combination, the remaining outstanding Lightning Systems warrants were converted to the Company’s common stock based on the Exchange Ratio.
Research and development
Research and development costs are primarily expensed when incurred and consist of personnel-related expenses including salaries, benefits, travel and stock-based compensation for personnel performing research and development activities; expenses related to materials, supplies and testing; and consulting and occupancy expenses. In addition, costs for certain property and equipment utilized for research and development are capitalized and depreciated to “Research and development” over the useful life of the asset based on the property and equipment policy discussed above.
Advertising
Advertising costs are expensed when incurred and are included in “Selling, general and administrative” expenses and total $179 and $64 for the three months ended September 30, 2022 and 2021, respectively, and $422 and $116 for the nine months ended September 30, 2022 and 2021, respectively.
Derivative Liability
The Company accounts for the embedded conversion feature of the Convertible Note as a derivative liability. Pursuant to ASC 815-15, Derivatives and Hedging – Embedded Derivatives, the embedded conversion feature meets all three criteria to be bifurcated and accounted for separately from the host instrument, i.e., the Convertible Notes. Because this feature meets all criteria of a derivative instrument, it was accounted for and recorded as a derivative liability at fair value on the Company’s balance sheet with subsequent changes in fair value recorded in the consolidated statement of operations each reporting period.
Earnout Liability
As a result of the Business Combination, the Company recognized additional earnout shares as a liability. Pursuant to ASC 805, Business Combinations, the initial fair value of the earnout shares was recorded as a liability with the offset going to additional paid-in capital and with subsequent changes in fair value recorded in the consolidated statement of operations for
each reporting period. The following table provides a reconciliation of the beginning and ending balances for the earnout liability measured at fair value using significant unobservable inputs (Level 3):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Balance at beginning of period | $ | 83,144 | | | $ | — | |
| Initial recognition May 6, 2021 | — | | | 78,960 | |
| (Gain) loss | (68,357) | | | 44,164 | |
| Balance at end of period | $ | 14,787 | | | $ | 123,124 | |
Income taxes
Income taxes are accounted for using the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of other assets and liabilities. The Company provides for income taxes at the current and future enacted tax rates and laws applicable in each taxing jurisdiction. The Company uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The Company recognizes interest and penalties related to income tax matters in income tax expense in the consolidated statement of operations.
Earnings per share
Basic earnings (loss) per share (“EPS”) are computed by dividing net earnings (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS attributable to common shareholders is computed by adjusting net earnings by the weighted average number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include shares issuable upon exercise of stock options and vesting of restricted stock awards. Anti-dilutive securities are excluded from diluted EPS.
Recent accounting pronouncements issued and adopted
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models in ASC 470-20, Debt with Conversion and Other Options. Additionally, the ASU requires entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. The ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company adopted this standard on January 1, 2022, and it did not have a material impact on the Company’s financial statements.
Recent accounting pronouncements issued not yet adopted
In June 2016, the FASB issued ASU 2016-13 related to the measurement of credit losses on financial instruments and has since modified the standard with several ASUs (collectively, the “credit loss standard”). The credit loss standard requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The credit loss standard took effect for public entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As amended in ASU 2019-10, for smaller reporting companies, the credit loss standard will take effect for fiscal years beginning after December 15, 2022, and for interim periods within those fiscal years. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018. The adoption of this ASU will require a cumulative-effect adjustment to accumulated deficit as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company expects to adopt this standard on January 1, 2023, and does not anticipate a material impact to the Company’s financial statements.
Note 3 – Reverse Recapitalization
On May 6, 2021, Gig consummated the Business Combination with Lightning Systems, with Lightning Systems surviving the merger as a wholly-owned subsidiary of Gig. In connection with the Business Combination, certain Gig shareholders exercised their right to redeem certain of their outstanding shares for cash, resulting in the redemption of 5,816,664 shares of Gig common stock for gross redemption payments of $58,759. In addition, an investor purchased from the Company 2,500,000 shares of common stock (the “PIPE Shares”), for a purchase price of $10.00 per share and an aggregate purchase price of $25,000 pursuant to a separate subscription agreement dated as of December 10, 2020 (the “PIPE Financing”). The PIPE Financing investment closed simultaneously with the consummation of the Business Combination.
Upon the closing of the Business Combination, Gig’s certificate of incorporation was amended and restated to, among other things, change the name of the corporation to Lightning eMotors, Inc. and to increase the total number of authorized shares of capital stock to 251,000,000, consisting of (a) 250,000,000 of common stock, par value $0.0001 per share and (b) 1,000,000 shares of preferred stock, par value $0.0001 per share.
Immediately prior to the closing of the Business Combination, each issued and outstanding share of Lightning Systems redeemable, convertible preferred stock, was converted into shares of Lightning Systems common stock. This resulted in a conversion of 38,007,793 shares of Lightning Systems redeemable, convertible preferred stock into Lightning Systems common stock. Outstanding Lightning Systems short-term convertible notes were converted into an aggregate of 5,830,723 shares of Lightning Systems common stock. In addition, Lightning Systems had outstanding warrants that converted into 4,379,795 shares of Lightning Systems common stock.
Upon the closing of the Business Combination, Lightning Systems common stock issued and outstanding was canceled and converted into the right to receive Company common stock (the “Per Share Merger Consideration”) based on the Exchange Ratio. In addition, after closing and subject to the terms and conditions defined below, stockholders of the Company who have received, or are entitled to receive, any per share merger consideration (“Stockholder Earnout Group”) have the contingent right to receive an additional 16,463,096 shares of the Company’s common stock to be allocated on a pro rata basis among the members of the Stockholder Earnout Group. One-third of the earnout shares will be released to the Stockholder Earnout Group on a pro rata basis, if on or prior to the fifth anniversary of the closing date the volume weighted average price (“VWAP”) of the Company’s common stock equals or exceed $12.00 per share of twenty of any thirty consecutive trading days. One-third of the earnout shares will be released to the Stockholder Earnout Group on a pro rata basis if on or prior to the fifth anniversary of the closing date the VWAP of the Company’s common stock equals or exceed $14.00 per share of twenty of any thirty consecutive trading days. One-third of the earnout shares will be released to the Stockholder Earnout Group on a pro rata basis if on or prior to the fifth anniversary of the closing date the VWAP of the Company’s common stock equals or exceed $16.00 per share of twenty of any thirty consecutive trading days. If these conditions have not been satisfied following the fifth anniversary of the closing date, any stockholder earnout shares remaining will be canceled. As of September 30, 2022, none of the contingencies under this agreement have been met and, accordingly, no shares of common stock have been issued.
Outstanding stock options, whether vested or unvested, to purchase shares of Lightning Systems common stock under the 2019 Plan (see Note 11) converted into stock options for shares of the Company’s common stock upon the same terms and conditions that were in effect with respect to such stock options immediately prior to the Business Combination, after giving effect to the Exchange Ratio.
The Business Combination was accounted for as a reverse recapitalization in accordance with GAAP. Under this method, Gig was treated as the “acquired” company for financial reporting purposes. See Note 1 for further details. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Lightning Systems issuing stock for the net assets of Gig, accompanied by a recapitalization. The net assets of Gig are stated at historical cost, with no goodwill or intangible assets recorded.
Prior to the Business Combination, Lightning Systems and Gig filed separate standalone federal, state and local income tax returns. As a result of the Business Combination, structured as a reverse acquisition for tax purposes, Lightning Systems became the parent of the consolidated filing group with Gig as a subsidiary.
Unless otherwise indicated, all of the Company’s common stock as well as previously issued stock options and redeemable convertible preferred stock presented in the accompanying retroactively revised consolidated statements of stockholders’ equity (deficit) or in the related notes are presented on an as- or as if-converted basis, converted at the Exchange Ratio of 0.9406 and presented as shares or awards of the Company’s common stock.
The number of shares of Common Stock outstanding immediately following the consummation of the Business Combination:
| | | | | |
| Number of Shares |
| Common stock, outstanding prior to Business Combination | 25,893,479 |
| Less: redemption of Gig shares | (5,816,664) | |
| Common stock Gig | 20,076,815 |
| Shares issued in PIPE Financing | 2,500,000 |
| Business Combination and PIPE Financing shares | 22,576,815 |
Lightning Systems shares (1) | 50,652,890 |
| Total shares of common stock outstanding immediately after Business Combination | 73,229,705 |
(1)The number of Lightning Systems shares were calculated using the Exchange Ratio contemplated in the Business Combination of approximately 0.9406.
Note 4 – Inventories
At September 30, 2022 and December 31, 2021, inventories consist of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Raw materials (1) | $ | 27,300 | | $ | 10,802 |
| Work in progress | 2,995 | | 2,979 |
| Finished goods | 6,477 | | 840 |
| Total inventories | $ | 36,772 | | $ | 14,621 |
The Company reduced the cost of certain inventory to net realizable value by $378 and $0 during the three months ended September 30, 2022 and 2021, respectively, and $1,155 and $98 during the nine months ended September 30, 2022 and 2021, respectively, which was recorded in “Cost of revenues.”
Note 5 – Prepaid Expenses and Other Current Assets
At September 30, 2022 and December 31, 2021, prepaid expenses and other current assets consist of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Vendor deposits | $ | 4,941 | | $ | 2,720 |
| Prepaid insurance | 3,408 | | 1,975 |
| Other prepaid expenses | 2,038 | | 2,324 |
| Other current assets | 31 | | 48 |
| Total prepaid expenses and other current assets | $ | 10,418 | | $ | 7,067 |
Note 6 – Property and Equipment
Cost and accumulated depreciation as of September 30, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Machinery and equipment | $ | 2,444 | | $ | 1,755 |
| Vehicles | 3,352 | | 1,754 |
| Leasehold improvements | 3,214 | | 1,024 |
| Computer equipment | 630 | | 298 |
| Software | 11 | | 798 |
| Furniture and fixtures | 651 | | 331 |
| Capital projects in progress | 1,945 | | 957 |
| Total cost | 12,247 | | 6,917 |
| Accumulated depreciation and amortization | (2,205) | | | (2,026) | |
| Total property and equipment, net | $ | 10,042 | | $ | 4,891 |
Depreciation and amortization expense associated with property and equipment is as follows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Cost of revenues | $ | 127 | | $ | 49 | | $ | 337 | | $ | 136 |
| Research and development | 17 | | — | | 125 | | — |
| Selling, general and administrative | 328 | | 206 | | 754 | | 469 |
| Total depreciation and amortization expense | $ | 472 | | $ | 255 | | $ | 1,216 | | $ | 605 |
Note 7 – Accrued Expenses and Other Current Liabilities
At September 30, 2022 and December 31, 2021, accrued expenses and other current liabilities consist of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Accrued professional services | $ | 2,729 | | $ | 1,645 |
| Accrued interest | 2,603 | | 841 |
| Accrued payroll and benefits | 2,224 | | 1,014 |
| Other accrued expense | 744 | | 368 |
| Warranty liability | 1,227 | | 994 |
| Customer deposits | 198 | | 85 |
| Deferred revenue | 129 | | 62 |
| Current portion of finance lease obligation | 177 | | 36 |
| Total accrued expenses and other current liabilities | $ | 10,031 | | $ | 5,045 |
Changes in warranty liability (included in accrued expenses and other current liabilities) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Balance at beginning of period | $ | 1,212 | | $ | 728 | | $ | 994 | | $ | 455 |
| Charge for the period | 531 | | 377 | | 1,231 | | 968 |
| Utilized during the period | (516) | | | (304) | | | (998) | | | (622) | |
| Balance at end of period | $ | 1,227 | | $ | 801 | | $ | 1,227 | | $ | 801 |
Note 8 – Notes Payable
Notes payable as of September 30, 2022 and December 31, 2021 consist of the following:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Convertible Note | $ | 87,863 | | $ | 87,863 |
| Facility | 3,000 | | 3,000 |
| Total debt principal | 90,863 | | 90,863 |
| Unamortized debt discount - Convertible Note | (20,167) | | | (27,055) | |
| Unamortized debt discount - Facility | (29) | | | (40) | |
| Total long-term debt | $ | 70,667 | | $ | 63,768 |
Convertible Note
In conjunction with the Business Combination, the Company entered into the 7.5% $100,000 Convertible Note and paid issuance costs of $5,000. The Convertible Note has a maturity date of May 15, 2024 and has semi-annual interest payments due May 15 and November 15 of each year starting on November 15, 2021. The Convertible Note has a conversion feature at a conversion price of $11.50 and warrants to purchase up to 8,695,641 shares of common stock for a per share price of $11.50. The Convertible Note has a mandatory conversion option that: a) is exercisable at the option of the Company on or after May 15, 2022; b) occurs when the Company’s stock price (1) is greater than 120% of the conversion price of $11.50, or $13.80 for 20 trading days in a period of 30 consecutive trading days and (2) the 30-day average daily trading volume during the applicable exercise period, i.e., consecutive 30 trading day period, is greater than or equal to $3,000; and c) the Company will make payments in accordance with the interest make-whole (defined below) amount in cash or issuance of additional shares of the Company’s common stock.
The interest make-whole amount means, with respect to the conversion of the Convertible Note, in an amount denominated in U.S. dollars, the sum of all regularly scheduled interest payments, if any, due on such Convertible Note on each interest payment date occurring after the conversion date for such conversion and on or before the maturity date; provided, however, that (A) for these purposes, the amount of interest due on the interest payment date immediately after such conversion date will be deemed to be the following amount: (x) if such conversion date is prior to January 15, 2023, an amount equal to twelve months of interest and (y) if such conversion date is on or after January 15, 2023, any accrued and unpaid interest, if any, at such conversion date, plus any remaining amounts that would be owed to, but excluding, the maturity date in respect of such Convertible Note, including all regularly scheduled interest payments; and (B) if such conversion date occurs after the Company has sent a mandatory conversion notice, then the interest make-whole amount for such conversion shall be the sum of all regularly scheduled interest payments, if any, due on such Convertible Note on each interest payment date occurring after the conversion date for such conversion to, but excluding, the maturity date.
If the Company incurs other unpermitted indebtedness, it is required to redeem the Convertible Notes in full including outstanding principal and accrued and unpaid interest, plus (a) a prepayment premium equal to twelve months of interest on the principal amount of the Convertible Notes if such indebtedness event occurred prior to January 15, 2023; or (b) a prepayment premium equal to the amount of interest which would have accrued on the Convertible Notes through maturity (the “Redemption Feature”). In addition, the Company is required to issue to the holders a fixed number of warrants to purchase shares of Common Stock. The fixed number of warrants will be based on the principal balance of the Convertible Notes, divided by $11.50 (“Redemption Warrants”). The Redemption Warrants will be exercisable from the date of repayment of the Convertible Notes through the original maturity date of the Convertible Notes.
If the number of outstanding shares of Common Stock is increased by a stock split or other similar event, the number of shares issuable on exercise of each warrant shall be increased proportionately and the exercise price shall be decreased proportionately. Consequently, if the number of outstanding shares of Common Stock is decreased by a reverse stock split, consolidation, combination or reclassification of shares of Common Stock or other similar event, the number of shares of Common Stock issuable on exercise of each warrant shall be decreased proportionately and the exercise price shall be increased proportionately.
The Company has identified certain embedded derivatives related to its Convertible Note. Since the Convertible Note has a conversion feature whereby the principal amount will convert into a variable number of shares based on the future trading
price of the Company’s common stock, the conversion feature is recorded as a derivative liability. Therefore, the fair value of the convertible feature at inception on May 6, 2021 in the amount of $17,063 was recorded as a debt discount and an addition to “Derivative liability” on the consolidated balance sheets. The derivative liability is adjusted to fair value each reporting period, with the changes in fair value reported in “(Gain) loss from change in fair value of derivative liability” on the consolidated statements of operations.
During the three and nine months ended September 30, 2021, $12,137 of Convertible Notes were converted into 1,055,388 shares of the Company’s common stock. The Company recognized a gain on extinguishment of $2,194 in “Gain on extinguishment of debt” on the consolidated statement of operations associated with the difference between (1) the sum of the fair value of the common stock issued of $10,089 and cash paid for the remaining annual interest due May 2022 of $668 and (2) the sum of the carrying amount of the converted debt $7,966 and the fair value of the convertible note derivative liability of $4,985.
The following table provides a reconciliation of the beginning and ending balances for the convertible note derivative liability measured at fair value using significant unobservable inputs (Level 3):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Balance at beginning of period | $ | 17,418 | | | $ | — | |
| Initial recognition May 6, 2021 | — | | 17,063 |
| (Gain) Loss | (16,370) | | 9,290 |
| Change resulting from conversions | — | | (4,985) |
| Balance at end of period | $ | 1,048 | | $ | 21,368 |
The Convertible Note warrants are considered free-standing instruments and meet the criteria for equity classification because they are indexed to the Company’s own stock and provide a fixed number of shares. Therefore, the fair value of the Convertible Note warrants on May 6, 2021 in the amount of $14,522 was recorded as a debt discount and an addition to “Additional paid-in capital” on the consolidated balance sheets.
Interest expense for the three months ended September 30, 2022 and 2021 was $4,129 and $3,875, respectively, of which $1,647 and $1,798, respectively, related to contractual interest expense and $2,482 and $2,077, respectively, related to amortization of the discount. Interest expense for the nine months ended September 30, 2022 and 2021 was $11,830 and $6,183, of which $4,942 and $2,887, respectively, related to contractual interest expense and $6,888 and $3,296, respectively, related to amortization of the discount.
Facility
The Facility provides for both term and working capital loans for borrowings up to $13,000 as of September 30, 2022. However, the Company’s Convertible Note requirements limit the Company’s permitted indebtedness to $5,000. Interest is payable quarterly on borrowings at a fixed annual rate of 15%. Borrowings under the Facility are secured by substantially all the Company’s assets, are subject to borrowing base limitations, and require the Company to meet certain covenants. The Facility borrowings, with a maturity date of October 21, 2024, were $3,000 as of September 30, 2022 and December 31, 2021. Interest expense related to the Facility was $118 and $104 for the three months ended September 30, 2022 and 2021, respectively, and $348 and $1,165 for the nine months ended September 30, 2022 and 2021, respectively.
In connection with entering into this Facility, the Company issued warrants in 2020 and 2019, exercisable into 60,241 and 301,205, respectively, shares of Series C preferred stock at the conversion price of $1.66 per share. At the time of issuance, the Company estimated the fair value of the warrants at $6 and $66, respectively, and recorded a debt discount, which is being recognized over the life of the Facility borrowings, and a warrant liability, which was adjusted to fair value each reporting period, with the changes in fair value reported as a component of “Other income, net.” As a result of the Business Combination, the warrants were converted to common stock based on the Exchange Ratio.
Related and Third-party 2020 short-term convertible notes payable
In August and September 2020, the Company borrowed $9,679 in the aggregate under convertible note purchase agreements from third parties ($6,454) and related parties ($3,225). The related parties included officers, a director, and individuals whose companies were represented on the Board of Lightning Systems. These convertible notes bore interest at
8%. Interest was payable monthly, with principal and unpaid interest due June 30, 2021. The notes were convertible into 5,830,723 Series C redeemable convertible preferred shares at the conversion price of $1.66 per share. These notes were subordinate to the Facility and third-party unsecured facility agreement.
The 2020 short-term notes were convertible into shares of Series C redeemable convertible preferred stock upon 1) a change in control having a value in excess of $200,000; 2) a debt or equity financing with aggregated gross proceeds in excess of $10,000; or 3) at maturity. Should the notes be converted at maturity, the debt holders would receive a beneficial conversion feature allowing the conversion at 75% of the lowest issue price. The Company recorded the beneficial conversion feature at its intrinsic value of $3,071. This was recorded as a debt discount and an addition to “Additional paid-in capital”. During the three and nine months ended September 30, 2021, amortization of the debt discount of zero and $1,296, respectively, was recorded to “Interest expense”.
As a result of the Business Combination, these convertible notes were converted to Series C redeemable convertible stock which converted into common stock based on the Exchange Ratio with the balance of $9,679 recorded to “Additional paid-in capital”. In addition, the accrued interest through the date of the closing of the Business Combination was forgiven.
Third party unsecured facility agreement
In March 2015, the Company borrowed $1,500 under an unsecured facility agreement. As a result of the Business Combination, the amount outstanding was paid in full.
Related party 2020 convertible notes payable
In February 2020, the Company borrowed $3,000 under two convertible note payable agreements from companies represented on the Board of Lightning Systems. Theses convertible notes bore interest at 8% and were subject to certain covenants. In May 2020, these notes were subject to a mandatory redemption in connection with a qualified equity offering of $3,000, resulting in a conversion into 2,118,819 shares of Series C preferred stock at a weighted average conversion price of $1.42 per share. The mandatory redemption was treated as a debt extinguishment for accounting purposes. To record the extinguishment, the fair value of consideration received and debt relieved was compared to the fair value of consideration paid and equity instruments issued. The fair value of consideration received was greater than the consideration paid. The excess fair value of $1,844 was recorded as a contribution to “Additional paid-in capital”.
In connection with the redemption, the Company issued short and long-term warrants, exercisable into 3,614,457 and 831,326, respectively, shares of Series C preferred stock at the conversion price of $1.66 per share. The Company estimated the fair value of the warrants at $336. The change in fair value was reported within “(Gain) loss from change in fair value of warrant liabilities.” As a result of the Business Combination, the warrants were converted to common stock based on the Exchange Ratio.
Third-party secured promissory note
In February 2021, the Company borrowed $3,000 by entering into a promissory note with a third-party lender. The note was secured by substantially all the Company’s assets and bore an annual interest rate of 20%, of which 10% was to be paid in cash and 10% was to be paid-in-kind by adding such interest to the principal balance. Interest was to be paid quarterly beginning on April 30, 2021 until the earliest of the following events to occur: the maturity date of February 19, 2022; or 14 days after the closing of the Business Combination. The promissory note was paid upon the closing of the Business Combination.
Debt maturities
The total balance of all debt matures as follows:
| | | | | | | | |
Period Ending December 31, | | Amount |
2022 (remainder of the year) | | $ | — | |
| 2023 | | — | |
| 2024 | | 90,863 | |
| Thereafter | | — | |
| Total | | $ | 90,863 | |
Note 9 – Leases
A contract is or contains a lease when, (1) the contract contains an explicitly or implicitly identified asset and (2) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract in exchange for consideration. The Company assesses whether an arrangement is or contains a lease at inception of the contract. For all leases, other than those that qualify for the short-term recognition exemption, the Company recognizes as of the lease commencement date on the balance sheet a liability for its obligation related to the lease and a corresponding asset representing the Company’s right to use the underlying asset over the period of use.
The Company leases its manufacturing center, distribution center, and office space (collectively “Operating Facility”) and certain information technology (“IT”) equipment under non-cancelable operating leases. The Company also leases equipment utilized in the manufacturing process under non-cancelable financing leases. These financing leases include either a bargain purchase option or the equipment reverts ownership to the Company at the end of the lease term.
The Company assesses the expected lease term at lease inception and discounts the lease using a fully-secured, annual incremental borrowing rate (or rate implicit in the lease, if readily determinable), adjusted for time value corresponding with the expected lease term. The Company elected, for all classes of underlying assets, to not apply the balance sheet recognition requirements of ASC 842, Leases, to leases with a term of one year or less, and instead, recognize the lease payments in the income statement on a straight-line basis over the lease term. The Company also elected, for certain classes of underlying assets, to combine lease and non-lease components. The Company elected to combine lease and non-lease components for its Operating Facility, IT equipment and manufacturing equipment leases.
Right-of-use assets and lease liabilities as of September 30, 2022 and December 31, 2021 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Operating | | Finance | | Operating | | Finance |
| Assets | | | | | | | |
Right-of-use assets, net (1) | $ | 8,046 | | $ | 932 | | $ | 8,742 | | $ | 208 |
| Liabilities | | | | | | | |
Lease obligation - current portion (2) | $ | 1,544 | | $ | 177 | | $ | 1,166 | | $ | 36 |
Lease obligation - long-term portion (3) | 8,176 | | 664 | | 9,260 | | 159 |
| Total lease obligations | $ | 9,720 | | $ | 841 | | $ | 10,426 | | $ | 195 |
| | | | | | | |
| Weighted average remaining lease terms (in years) | 4.4 | | 5.0 | | 5.2 | | 5.0 |
| Weighted average discount rate | 15% | | 4% | | 15% | | 4% |
(1)Finance right-of-use assets, net are included in “Other assets” on the consolidated balance sheets.
(2)Finance lease obligation – current portion is included in “Accrued expenses and other current liabilities” on the consolidated balance sheets.
(3)Finance lease obligation – long-term portion is included in “Other long-term liabilities” on the consolidated balance sheets.
The Company’s lease cost is presented below. The Company does not have any short-term leases or leases with variable lease payments. The financing lease cost for the three and nine months ended September 30, 2022 and 2021 was immaterial.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Operating Lease Cost | | | | | | | |
| Cost of revenues | $ | 356 | | $ | 121 | | $ | 878 | | $ | 410 |
| Research and development | 77 | | 40 | | 232 | | 110 |
| Selling, general and administrative | 230 | | 475 | | 857 | | 1,401 |
| Total operating lease cost | $ | 663 | | $ | 636 | | $ | 1,967 | | $ | 1,921 |
The maturities of the Company’s lease liabilities are as follows:
| | | | | | | | | | | |
| September 30, 2022 |
| Operating | | Finance |
2022 (remainder of year) | $ | 687 | | | $ | 51 | |
| 2023 | 2,912 | | | 205 | |
| 2024 | 2,997 | | | 205 | |
| 2025 | 3,043 | | | 160 | |
| 2026 | 3,105 | | | 128 | |
| Thereafter | 518 | | | 166 | |
| Total future minimum lease payments | 13,262 | | | 915 | |
| Less: imputed interest | (3,542) | | | (74) | |
| Total maturities | $ | 9,720 | | | $ | 841 | |
Note 10 – Capital Structure
For the purpose of this Note 10, the “Equity Line of Credit” and “Warrants” relate to the current capital structure of the Company while the “Redeemable Convertible Preferred Stock – Lightning Systems”, “Warrant Liabilities – Lightning Systems” and “Warrants issued to vendors” relate to the redeemable convertible preferred stock and warrants issued by Lightning Systems that were converted to common stock of the Company as of the date of the Business Combination.
Equity Line of Credit
On August 30, 2022, the Company entered into the ELOC Agreement with Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $50.0 million of shares of the Company’s common stock, subject to certain limitations and conditions set forth in the ELOC Agreement. The Company shall not issue or sell any shares of common stock under the ELOC Agreement which, when aggregated with all other shares of common stock beneficially owned by Lincoln Park, would result in beneficial ownership of more than 9.99% of the Company’s outstanding shares of common stock.
Under the terms of the ELOC Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, shares of its common stock over the period commencing on or about August 30, 2022 (the “Closing Date”) and ending on the first day of the month following the 36-month anniversary of the Closing Date. Purchase notices for regular or accelerated purchases to Lincoln Park include share volume limitations and are at prevailing market prices as defined in the ELOC Agreement.
During the three months ended September 30, 2022 and concurrently with the signing of the ELOC Agreement, the Company issued 299,491 shares of its common stock to Lincoln Park as a commitment fee. The fair value of the shares issued for the commitment fee of $851 was recorded in "Selling, general, and administrative" expense on the Company's consolidated statement of operations.
As of September 30, 2022, the Company had not sold any common stock to Lincoln Park under the ELOC Agreement and has a remaining commitment of $50.0 million.
Warrants
As of September 30, 2022, there are 24,365,719 warrants outstanding, of which 14,999,970 are public warrants, 8,695,641 are Convertible Note warrants and 670,108 are private placement warrants. Each whole warrant entitles the registered holder to purchase one share of Common Stock at a price of $11.50 per share, subject to adjustment as discussed below. Only whole warrants are exercisable. The warrants will expire at 5:00 p.m., New York City time, on May 26, 2026, the fifth anniversary of the completion of the Company’s Business Combination, or earlier upon redemption or liquidation.
The private placement warrants are identical to the public warrants except that such private placement warrants will be exercisable for cash or on a cashless basis, at the holder’s option, and will not be redeemable by the Company, in each case so long as they are still held by the sponsor or its affiliates.
Once the warrants become exercisable, the Company may redeem the outstanding warrants (excluding the private placement warrants):
•in whole and not in part;
•at a price of $0.01 per warrant;
•upon a minimum of 30 days’ prior written notice of redemption, which the Company refers to as the 30-day redemption period; and
•if, and only if, the last reported sale price of the Company’s common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30 trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders.
The fair value of the private placement warrants on May 6, 2021 in the amount of $1,253 was recorded as a “Warrant liability” and a reduction to “Additional paid-in capital” on the consolidated balance sheets. The change in fair value at each reporting date was recognized in “(Gain) loss from change in fair value of warrant liabilities” on the consolidated statements of operations. The fair value of the Convertible Note warrants on May 6, 2021 in the amount of $14,522 was recorded as a debt discount and an addition to “Additional paid-in capital” on the consolidated balance sheets.
Redeemable Convertible Preferred Stock – Lightning Systems
Series A, B and C redeemable convertible preferred shares were eligible for a cumulative annual simple return of 8% (the “preferred return”) on amounts paid to purchase their preferred shares upon a liquidation, winding up or dissolution of Lightning Systems, or if declared by the Board. No preferred dividends had been declared.
Lightning Systems’ preferred shares were not redeemable at the option of the holders. However, the holders of preferred shares could request that Lightning Systems redeem all outstanding preferred shares in accordance with their liquidation preferences in the event of a deemed liquidation in which Lightning Systems did not effect a dissolution of Lightning Systems under Delaware General Corporation Law within 90 days after such deemed liquidation event. Deemed liquidation events are defined to include (i) a merger or consolidation in which Lightning Systems is a constituent party, (ii) sale, lease, exclusive license or other disposition or the sale or disposition of substantially all of Lightning Systems’ assets, or (iii) a “change in control” transaction in which then-current stockholders’ controlled less than 50% of the voting power of the entity resulting from the transaction. Accordingly, these shares were considered contingently redeemable and were classified as temporary equity.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of Lightning Systems, any remaining assets of Lightning Systems were to be distributed as follows: (i) first, to holders of Series C preferred shares, an amount equivalent to 1.25 times the original purchase price per share plus the accrued but unpaid preferred return per share; (ii) second, to holders of Series B preferred shares, an amount equivalent to 1.25 times the original purchase price per share plus the preferred accrued but unpaid return per share; (iii) third, to holders of Series A preferred shares, an amount equivalent to 1.00 times the original purchase price per share plus the accrued but unpaid preferred return per share; and (iv) any remaining assets after satisfying the required distributions to preferred stockholders are distributed pro rata among preferred and common stockholders on an if-converted basis.
Series A, B and C preferred shares were to be convertible into common shares at any time at the option of the holder, and are automatically converted into common shares upon the affirmative election of more than 70% of the Series B and Series C preferred stockholders, or upon the closing of a sale of common shares in an initial public offering (“IPO”) with gross proceeds to Lightning Systems of $50,000 or more accompanied by a listing of such common shares on the Nasdaq’s National Market, the New York Stock Exchange, or another exchange approved by the Board.
See Note 8 for a description of the convertible debt conversion transactions and warrant liabilities under this Note 10 regarding warrants issued in connection with the preferred share purchases.
In connection with the 2019 Series C preferred stock issued for cash, Lightning Systems issued warrants, exercisable into 702,811 shares of Series C preferred stock at the conversion price of $1.66 per share. Lightning Systems estimated the fair value of the warrants at $155 and recorded a warrant liability, which is reported at fair value at each reporting period, with the change in fair value reported as “(Gain) loss from change in fair value of warrant liabilities.”
In connection with the 2020 Series C preferred stock issued in connection with the redemption of related party 2020 convertible notes payable of $3,000 and cash of $3,000, Lightning Systems issued warrants, exercisable into 4,445,783 shares of Series C preferred stock at the weighted average conversion price of $1.42 per share. Lightning Systems estimated the fair value of the warrants at $336 and recorded a warrant liability, which is reported at fair value at each reporting period, with the change in fair value reported as “(Gain) loss from change in fair value of warrant liabilities.”
As a result of the Business Combination, the preferred Series A, B and C shares were converted to common stock based on the Exchange Ratio. As a result, the balances of $18,036, $4,101 and $35,203, respectively, were charged to “Additional paid-in capital”.
Warrant Liabilities – Lightning Systems
Lightning Systems issued warrants that enabled the holder to exercise in exchange for common shares or Series C preferred shares. The warrant agreements were reissued on December 31, 2019 upon Lightning Systems’ conversion from an LLC partnership to a C corporation. All terms remained identical. See Note 8 and under the section redeemable convertible preferred stock of this Note 10 for descriptions of the underlying transactions.
Series C warrants were exercisable by the holder at any time at the stated exercise price, which price is subject to adjustment to provide anti-dilution protection to the holder. Upon the closing of an initial public offering, or a merger, sale or other transaction involving substantially all of the assets of Lightning Systems (a “Deemed Liquidation”) the holder may require Lightning Systems to purchase any unexercised warrants at net value equal to the difference between the exercise price of the warrant and the proceeds the holder would have otherwise received as a result of the Deemed Liquidation or initial public offering. Lightning Systems had no obligation to file for registration of the shares issuable upon exercise of the warrant under the Securities Act. No fractional shares would be issued upon exercise. If upon exercise, the holder would be entitled to a fractional share, the number of shares issued upon exercise would be rounded to the nearest whole share and the difference settled in cash.
As described above in the redeemable convertible preferred stock section of this Note 10, during the three months ended March 31, 2021 one of the preferred warrant holders exercised their warrants to purchase 903,614 shares of Series C preferred stock at an exercise price of $1.66 for cash proceeds of $1,500. At the time of the exercise, the fair value of the warrants was deemed to be $5.87-$5.90 per warrant. In connection with the exercise, the warrant liability was reduced by $5,310 with the offset recorded to Series C redeemable convertible preferred stock in addition to the cash proceeds received. During the three months ended June 30, 2021, one of the preferred warrant holders exercised their warrants to purchase 963,855 shares of Series C preferred stock at an exercise price of $1.66 for cash proceeds of $1,600. At the time of the exercise, the fair value of the warrants was deemed to be $5.87-$5.90 per warrant. In connection with the exercise, the warrant liability was reduced by $5,658 with the offset recorded to Series C redeemable convertible preferred stock in addition to the cash proceeds received.
Warrants issued to vendors – Lightning Systems
In February 2021, the Board of Directors of Lightning Systems authorized the grant of 125,000 warrants to purchase common stock of Lightning Systems to three vendors who provided various sales and marketing related services prior to March 31, 2021. The warrants were immediately exercisable at an exercise price of $6.18 per share and had a contractual life of five years but required conversion upon the completion of the Business Combination. The fair value of the warrants
was deemed to be $3.46 on the date of grant using the Black-Scholes option pricing model with the following inputs: value of common share $6.18; exercise price of $6.18 per share; 5 year term; risk-free interest rate of 0.62%; and volatility of 68%. As the warrants were issued for services already provided, the value of the warrants of $433 was expensed to “Selling, general and administrative” expense, and offset to “Additional paid-in capital” as the warrants were deemed to be equity instruments under ASC 480, Distinguishing Liabilities from Equity. As a result of the Business Combination, the outstanding warrants issued to these vendors were converted to common stock.
The following table presents information for the Common and Series C preferred warrants, that have been converted to common stock as a result of the Business Combination, and outstanding Gig private warrants that were assumed in the Business Combination:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Warrants | | Warrant Fair
Value | | Weighted
Average Exercise
Price | | Weighted
Average
Remaining
Life |
| Warrants to purchase common stock | | | | | | | |
Outstanding at December 31, 2020 (1) | 610,202 | | $ | 2,270 | | $ | 0.27 | | 3.6 |
Exercise of common warrants (1) | (69,232) | | (489) | | 0.27 | | — |
| Change in fair value | — | | 3,102 | | — | | — |
| Issued in connection with the Business Combination as common stock - charged to APIC | (540,970) | | (4,883) | | — | | — |
Outstanding — September 30, 2021 | — | | — | | — | | — |
| Warrants to purchase Series C preferred stock | | | | | | | |
Outstanding at December 31, 2020 (1) | 5,938,193 | | $ | 18,885 | | $ | 1.76 | | 2.6 |
Exercise of warrants to purchase redeemable convertible preferred stock (1) | (1,756,526) | | | (10,968) | | | 1.76 | | — |
| Change in fair value | — | | 24,779 | | — | | — |
| Issued in connection with the Business Combination as common stock - charged to APIC | (4,181,667) | | (32,696) | | — | | — |
Outstanding — September 30, 2021 | — | | — | | — | | — |
| Private warrants assumed through Business Combination | | | | | | | |
Outstanding at December 31, 2020 | — | | $ | — | | $ | — | | — |
| Warrants assumed | 670,108 | | 1,253 | | 11.50 | | 5.0 |
| Change in fair value | — | | 228 | | — | | — |
| Outstanding — September 30, 2021 | 670,108 | | 1,481 | | 11.50 | | 4.6 |
| | | | | | | |
Outstanding — December 31, 2021 | 670,108 | | $ | 2,185 | | $ | 11.50 | | 4.3 |
| Change in fair value | — | | (1,850) | | | — | | — |
Outstanding — September 30, 2022 | 670,108 | | 335 | | 11.50 | | 3.6 |
(1)Warrant amounts have been retroactively restated to give effect to the recapitalization transaction.
Note 11 – Stock-Based Compensation
2021 Equity Incentive Plan
In connection with the Business Combination, the stockholders approved the 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan provides the Company the ability to grant incentive stock options, non-qualified stock options, restricted stock awards, stock appreciation rights, restricted stock units, performance units, performance shares, cash-based awards and other stock-based awards. The purpose of the 2021 Plan is to advance the interests of the Company and its stockholders by providing an incentive to attract, retain and reward persons for performing services and by motivating such persons to
contribute to the growth and profitability of the Company and its subsidiaries. As of September 30, 2022, there were 17,794,239 shares reserved and 13,270,515 shares available for grant under the 2021 Plan.
Prior Lightning Systems 2019 Equity Incentive Plan
The legacy Lightning Systems 2019 Equity Incentive Plan (“2019 Plan”) provided for the grant of incentive stock options, non-qualified stock options, and other awards. As a result of the Business Combination, the 2019 Plan was superseded by the 2021 Plan; therefore, no further awards will be granted under the 2019 Plan. In connection with the Business Combination, awards outstanding were converted into an option exercisable for common stock of the Company based on the Exchange Ratio. As of September 30, 2022, there were 2,330,137 stock options previously granted and unexercised under the 2019 Plan, which remain subject to the terms and conditions of the 2019 Plan.
Compensation Expense
To date, the Company has issued stock option and restricted stock unit (“RSU”) awards. The Company recognizes stock-based compensation expense based on the fair value of the awards issued at the date of grant and amortized on a straight-line basis as the employee renders services over the requisite service period. Forfeitures are accounted for as they occur by reversing the expense previously recognized for non-vested awards that were forfeited during the period. The following table presents the stock-based compensation related to stock option and RSU awards for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Stock options expense | | | | | | | |
| Cost of revenues | $ | 3 | | $ | 14 | | $ | 13 | | $ | 27 |
| Research and development | 5 | | 15 | | 24 | | 37 |
| Selling, general and administrative | 239 | | 335 | | 623 | | 496 |
| Total stock options expense | $ | 247 | | $ | 364 | | $ | 660 | | $ | 560 |
| Restricted stock units expense | | | | | | | |
| Cost of revenues | $ | 98 | | $ | — | | $ | 205 | | $ | — |
| Research and development | 44 | | — | | 123 | | — |
| Selling, general and administrative | 1,081 | | 985 | | 2,890 | | 985 |
| Total restricted stock units expense | $ | 1,223 | | $ | 985 | | $ | 3,218 | | $ | 985 |
| Total stock-based compensation | $ | 1,470 | | $ | 1,349 | | $ | 3,878 | | $ | 1,545 |
The estimated unrecognized expense for stock options and RSUs not vested as of September 30, 2022, which will be recognized over the remaining requisite service period, is as follows:
| | | | | |
| Stock options unrecognized expense | $ | 2,537 | |
| Stock options weighted-average remaining requisite service period (in years) | 2.2 |
| Restricted stock units unrecognized expense | $ | 12,575 | |
| Restricted stock units weighted-average remaining requisite service period (in years) | 2.6 |
Stock Option Awards
Stock option awards are issued to employees with an exercise price equal to the estimated fair market value per share at the date of grant and a term of 10 years. Stock option awards generally vest over 4 years. It is the Company’s policy to issue
new shares upon option exercise. Changes in the Company’s stock options for the nine months ended September 30, 2022 are presented in the table below.
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Options | | Weighted
Average
Exercise Price
per Share | | Aggregate
Intrinsic
Value
(in thousands) | | Weighted
Average
Remaining Life
(in years) |
| Outstanding at January 1, 2022 | 3,209,517 | | $ | 1.66 | | | | |
| Granted | 520,834 | | 3.92 | | | | |
| Exercised | (363,823) | | | 0.32 | | | | |
| Forfeited | (61,436) | | | 1.56 | | | | |
| Expired | (7,061) | | | 4.24 | | | | |
Outstanding at September 30, 2022 | 3,298,031 | | 2.16 | | $ | 2,771 | | 7.4 |
Vested and exercisable at September 30, 2022 | 1,409,707 | | 1.11 | | 1,610 | | 6.0 |
Changes in the status of the Company’s non-vested stock option awards for the nine months ended September 30, 2022 are presented in the table below.
| | | | | | | | | | | |
| Non-vested
Shares Under
Option | | Weighted
Average
Grant Date
Fair Value per
Share |
| Non-vested at January 1, 2022 | 2,137,050 | | $ | 1.21 |
| Granted | 520,834 | | 2.33 |
| Vested | (708,124) | | | 1.08 |
| Forfeited | (61,436) | | | 0.92 |
Non-vested at September 30, 2022 | 1,888,324 | | 1.54 |
The aggregate intrinsic value of options exercised were $113 and $4,109 during the three months ended September 30, 2022 and 2021, respectively, and $1,275 and $8,060 during the nine months ended September 30, 2022 and 2021, respectively.
A Black-Scholes option pricing model with the following assumptions was utilized to determine the fair value of options granted during the nine months ended September 30, 2022.
| | | | | | | |
| Nine Months Ended September 30, | | |
| 2022 | | |
| Expected volatility | 61.0% | | |
| Dividend yield | 0% | | |
| Risk-free interest rate | 2.95% | | |
| Expected term (in years) | 6.25 | | |
The expected volatility was derived from the volatility of historical stock prices of similar publicly traded companies. The dividend yield represents the Company’s anticipated cash dividend over the expected term of the stock options. The risk-free interest rate is based on the U.S. Treasury yield curve rates with maturities consistent with the expected term of the related stock options. The expected term represents the period of time that the Company anticipates the stock options to be outstanding based on historical experience and future expectations.
Restricted Stock Unit Awards
The Company grants RSU awards to employees that generally vest over 3 years. RSU awards are valued based on the closing market price of the Company’s common stock on the grant date.
| | | | | | | | | | | |
| Number of
RSUs | | Weighted
Average
Grant Date
Fair Value per
Share |
| Outstanding at January 1, 2022 | 935,148 | | $ | 7.59 |
| Granted | 2,687,523 | | 3.91 |
| Released | (307,410) | | | 7.10 |
| Forfeited | (142,570) | | | 5.79 |
Outstanding at September 30, 2022 | 3,172,691 | | 4.60 |
Other Employee Benefits - 401(k) Savings Plan
The Company has an employee-directed 401(k) savings plan (the “401(k) Plan”) for all eligible employees over the age of 21. Under the 401(k) Plan, employees may make voluntary contributions based on a percentage of their pretax income, subject to statutory limitations. The Company matches 100% for the first 3% of each employee’s contribution and 50% for the next 2% of each employee’s contribution. The Company’s cash contributions are fully vested upon the date of match. The Company made matching cash contributions of $213 and $106 for the three months ended September 30, 2022 and 2021, respectively, and $578 and $323 for the nine months ended September 30, 2022 and 2021, respectively.
Note 12 – Income Taxes
The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. There is no provision for income taxes because the Company has incurred taxable losses since inception. The Company’s effective income tax rate was 0% for the three and nine months ended September 30, 2022 and 2021 and the realization of any deferred tax assets is not more likely than not.
Note 13 – Earnings (Loss) per Common Share
Basic income or loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted income or loss per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding, plus the issuance of potentially dilutive common shares that could result from the exercise of outstanding stock options and warrants, vesting of restricted stock and conversion of convertible notes. No potentially dilutive common shares are included in the computation of any diluted per share amount when a loss is reported, which was the case for the three months ended September 30, 2022 and the three and nine months ended September 30, 2021. The Company applied the treasury stock method to account for the dilutive impact of its options, warrants and restricted stock units and the if-converted method for its Convertible Note. As a result of the Business Combination, the underlying shares have been retroactively restated to give effect to the recapitalization based on the Exchange Ratio.
The following table reconciles the earnings (loss) and number of common shares used to calculate basic and diluted earnings per common share attributable to the Company’s shareholders:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Basic earnings per common share: | | | | | | | |
| Net income (loss) - basic | $ | (1,231) | | | $ | (49,461) | | | $ | 23,751 | | | $ | (122,955) | |
| Weighted shares outstanding - basic | 75,745,388 | | | 73,740,294 | | | 75,429,444 | | | 55,298,257 | |
| Basic earnings (loss) per common share | $ | (0.02) | | | $ | (0.67) | | | $ | 0.31 | | | $ | (2.22) | |
| | | | | | | |
| Diluted earnings per common share: | | | | | | | |
| Net income (loss) - basic | $ | (1,231) | | | $ | (49,461) | | | $ | 23,751 | | | $ | (122,955) | |
| Add: Convertible Note interest expense, net of tax | | | | | 11,830 | | | |
| Reverse: Change in fair value of derivative liability | | | | | (16,370) | | | |
| Net income (loss) - diluted | $ | (1,231) | | | $ | (49,461) | | | $ | 19,211 | | | $ | (122,955) | |
| Weighted shares outstanding - basic | 75,745,388 | | | 73,740,294 | | | 75,429,444 | | | 55,298,257 | |
| Add: Dilutive effects of stock options and restricted stock units | | | | | 2,304,714 | | | |
| Add: Dilutive effects of if-converted Convertible Note | | | | | 7,640,246 | | | |
| Weighted shares outstanding - diluted | 75,745,388 | | | 73,740,294 | | | 85,374,404 | | | 55,298,257 | |
| Diluted earnings (loss) per common share | $ | (0.02) | | | $ | (0.67) | | | $ | 0.23 | | | $ | (2.22) | |
The calculated amount of anti-diluted shares for the computation of diluted earnings per share for the nine months ended September 30, 2022 was 24,365,719 warrants, 1,189,928 stock options and 602,672 RSUs. The Company also excluded the earnout shares as they are not currently issued and outstanding and will not be issued until satisfaction of the applicable stock price levels as described in Note 3.
All potentially dilutive common shares in the following table were excluded from the computation of diluted loss per share for the three months ended September 30, 2022 and the three and nine months ended September 30, 2021 because including them would have had an anti-dilutive effect due to losses reported during those periods.
| | | | | | | | | | | |
| Outstanding as of September 30, |
| 2022 | | 2021 |
| Convertible notes payable | 7,640,246 | | 7,640,246 |
| Outstanding warrants | 24,365,719 | | 24,365,719 |
| Stock options | 3,298,031 | | 3,410,449 |
| Restricted stock units | 3,172,691 | | 739,824 |
| | | |
| Total anti-dilutive stock | 38,476,687 | | 36,156,238 |
Note 14 – Commitments and Contingencies
Firm Purchase and Other Commitments
The Company is party to firm purchase commitments with some of its suppliers. A firm purchase commitment represents an agreement that specifies all significant terms, including price and timing of the transactions, and includes a disincentive for non-performance that is sufficiently large to make performance probable. This disincentive is generally in the form of a take-or-pay provision, which requires the Company to pay for committed volumes regardless of whether the Company actually acquires the materials. The Company evaluates these agreements and records a loss, if any, on firm purchase commitments using the same lower of cost or market approach as that used to value inventory.
The Company amended certain firm purchase commitments during the three and nine months ended September 30, 2022, which significantly reduced its commitments. Negotiations with other suppliers are still ongoing to blend and extend or terminate other future commitments due to supply chain constraints and cost increases for both parties. The Company has not recognized any losses associated with future penalties, as it is more likely than not that that the Company will not have
to pay penalties resulting from not meeting these firm commitments. However, if negotiations are not successful, the Company may incur losses in future periods.
The Company also has other commitments, including marketing and software subscription agreements and equipment leases. The equipment leases included here only relate to leases for which the equipment had not yet been delivered to the Company as of September 30, 2022. Since the Company did not receive the equipment, the related right-of-use asset and lease liability were not recognized as of September 30, 2022. However, the Company was still committed to the financing arrangement. All other financial commitments under leasing arrangements are described in Note 9.
The amounts in the table below represent the Company’s future minimum commitments.
| | | | | | | | | | | | | | | | | |
| As of September 30, 2022 |
| Firm Purchase | | Other | | Total |
2022 (remainder of the year) | $ | 13,433 | | | $ | 236 | | | $ | 13,669 | |
| 2023 | 58,037 | | | 853 | | | 58,890 | |
| 2024 | — | | | 482 | | | 482 | |
| 2025 | — | | | 203 | | | 203 | |
| 2026 | — | | | 163 | | | 163 | |
| Thereafter | — | | | 12 | | | 12 | |
| Total | $ | 71,470 | | | $ | 1,949 | | | $ | 73,419 | |
Legal Proceedings
Aside from the proceedings described below, the Company may be involved in legal matters arising in the ordinary course of business from time to time. While the Company believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is or could become involved in litigation will not have a material adverse effect on its business, financial condition or results of operations. The Company records an accrual for legal contingencies when it determines that it is probable that it has incurred a liability and it can reasonably estimate the amount of the loss.
On August 4, 2021, a purported stockholder of the Company filed a putative class action complaint in the Delaware Chancery Court, captioned Delman v. GigCapitalAcquisitions3, LLC, et al. (Case No. 2021-0679) on behalf of a purported class of stockholders. The lawsuit names GigCapitalAcquisitions3, LLC and the Company’s former directors Dr. Katz, Dr. Dinu, and Messrs. Betti-Berutto, Mikulsky, Miotto and Wang, as defendants. The lawsuit alleges that the defendants breached their fiduciary duty stemming from Gig’s merger with Lightning Systems and unjust enrichment of certain of the defendants. The lawsuit seeks, among other relief, unspecified damages, redemption rights, and attorneys’ fees. Neither the Company nor any of its current officers or directors are parties to the lawsuit. The Company’s former directors are subject to certain indemnification obligations of the Company.
In addition, on October 15, 2021, the Company and certain of its officers were named as defendants in a putative securities class action. The action is pending in the U.S. District Court for the District of Colorado, and is captioned Shafer v. Lightning eMotors, Inc., et al., Case No. 1:21-cv02774. The lawsuit alleges violations of Sections 10(b), Section 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder for purported false or misleading statements regarding the Company’s business operations and financial condition. A related lawsuit captioned Cohen v. Lightning eMotors, Inc., et al., Case No. 1:21-cv-03215, was filed in the United States District Court for the District of Colorado on December 1, 2021. On December 17, 2021, the Cohen lawsuit was consolidated with the Shafer lawsuit. On April 22, 2022, the court appointed a lead plaintiff in the consolidated lawsuit. The lead plaintiff’s filed a consolidated complaint on May 20, 2022. On July 13, 2022, the Company and the other defendants filed a motion to dismiss the class action. The plaintiffs replied on September 7, 2022, and the motion to dismiss is pending with the court. The plaintiffs seek damages in an unspecified amount, attorneys’ fees, and other remedies. The Company believes the allegations are without merit and intends to defend vigorously against such allegations.
As previously disclosed in the quarterly report on Form 10-Q for the quarter ended June 30, 2022, the Company received a subpoena from the Securities and Exchange Commission (“SEC”) requesting certain information about the Company’s business (including historical and projected performance, among other things) as part of a non-public fact-finding investigation. On September 9, 2022, the SEC informed the Company that it had concluded its investigation, and that it did not intend to recommend an enforcement action against the Company.
Exhibit 10.4