Table of Contents
| | | | | |
1.0 Explanatory Notes | 1 |
2.0 Cautionary Note Regarding Forward-Looking Statements | 1 |
3.0 Market and Industry Data | 3 |
4.0 Corporate Structure | 4 |
5.0 General Development of the Business | 5 |
6.0 Business of the Company | 9 |
7.0 Description of Capital Structure | 22 |
8.0 Dividends | 26 |
9.0 Description of Material Indebtedness | 26 |
10.0 Market for Securities | 30 |
11.0 Directors and Officers | 32 |
12.0 Audit Committee Information | 38 |
13.0 Legal Proceedings and Regulatory Actions | 40 |
| 14.0 Interest of Management and Others in Material Transactions | 41 |
15.0 Transfer Agent and Registrar | 42 |
16.0 Material Contracts | 42 |
17.0 Interest of Experts | 45 |
18.0 Certain United States Federal Income Tax Considerations | 45 |
19.0 Additional Information | 49 |
1.0Explanatory Notes
Unless otherwise noted or the context otherwise requires, the information provided in this annual information form (the “Annual Information Form”) is stated as at February 29, 2024, the date of this Annual Information Form, and references to “Lion”, “we”, “our”, “us”, “the Company” or similar terms refer to The Lion Electric Company and its subsidiaries, on a consolidated basis.
All amounts presented are in United States dollars unless otherwise indicated.
The Company has one reportable operating segment, the manufacturing and sales of electric vehicles in Canada and in the United States.
Certain figures, such as interest rates and other percentages included in this Annual Information Form, have been rounded for ease of presentation. Percentage figures included in this Annual Information Form have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this Annual Information Form may vary slightly from those obtained by performing the same calculations using the figures in the Company’s audited condensed consolidated financial statements for the year ended December 31, 2023 or in the associated text. Certain other amounts that appear in this Annual Information Form may similarly not sum due to rounding.
All references to “fiscal 2023” are to the Company’s fiscal year ended December 31, 2023, to “fiscal 2022” are to the Company’s fiscal year ended December 31, 2022 and to “fiscal 2021” are to the Company’s fiscal year ended December 31, 2021.
2.0Cautionary Note Regarding Forward-Looking Statements
This Annual Information Form contains “forward-looking information” and “forward-looking statements” within the meaning of applicable securities laws and within the meaning of the United States Private Securities Litigation Reform Act of 1995 (collectively, “forward-looking statements”). Any statements contained in this Annual Information Form that are not statements of historical fact, including statements about Lion’s beliefs and expectations, are forward-looking statements and should be evaluated as such.
Forward-looking statements may be identified by the use of words such as “believe,” “may,” “will,” “continue,” “anticipate,” “intend,” “expect,” “should,” “would,” “could,” “plan,” “project,” “potential,” “seem,” “seek,” “future,” “target” or other similar expressions and any other statements that predict or indicate future events or trends or that are not statements of historical matters, although not all forward-looking statements may contain such identifying words. These forward-looking statements include statements regarding the Company’s order book and the Company’s ability to convert it into actual sales, the expected production capacity of the Company’s manufacturing facilities in Saint-Jerome and the United States and the Company’s battery manufacturing plant (the “Battery Plant”) and innovation center in Quebec (the “Innovation Center” and collectively with the Battery Plant, the “Lion Campus”), the certification of the Lion heavy duty (HD) battery packs, the sourcing of lithium-ion battery cells, the Company’s future growth and long-term strategy, the Company’s liquidity and capital requirements and management’s forecasts related thereto, ongoing litigation proceedings, the Company’s expected product pipeline, the implementation by the Company of measures aimed at reducing its vehicle and battery development costs and its inventory levels (including the Company’s fiscal 2024 objectives related thereto), and the development and timing of commercial production of certain platforms and models. Such forward-looking statements are based on a number of estimates and assumptions that Lion believes are reasonable when made, including that Lion will be able to retain and hire key personnel and maintain relationships with customers, suppliers and other business partners, that Lion will continue to operate its business in the normal course, that Lion will be able to implement its growth strategy, that Lion will be able to successfully and timely ramp-up manufacturing capacity at its Saint-Jerome facility, its U.S. manufacturing facility and at the Battery Plant and Innovation Center as required in the future, that Lion will not suffer any supply chain challenges or any material disruption in the supply of raw materials on competitive terms, that Lion will be able to maintain its competitive position, that Lion will continue to
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improve its operational, financial and other internal controls and systems to manage its growth and size, that Lion will be able to benefit, either directly or indirectly (including through applications made by the Company and/or its clients), from governmental programs, subsidies and incentives, that Lion will not incur any material obligations with respect to product warranty claims or product recalls, and that Lion will be able to secure additional funding through equity or debt financing on terms acceptable to Lion and in the amounts needed if and when required in the future. Such estimates and assumptions are made by Lion in light of the experience of management and their perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Lion believes that these risks and uncertainties include the following:
•any adverse changes in U.S. or Canadian general economic, business, market, financial, political or legal conditions, including as a consequence of the ongoing uncertainties relating to inflation and interest rates;
•any unavailability, reduction, discriminatory application, delay in processing or elimination of governmental programs, subsidies or incentives due to policy changes, government regulations or decisions or otherwise;
•any inability to ramp-up the production of Lion's products and meet project construction and other project milestones and timelines;
•any inability to meet the expectations of the Company's customers in terms of products, specifications, and services;
•any inability to successfully and economically manufacture and distribute its vehicles at scale;
•any inability to raise additional funds to meet its capital requirements and pursue its growth strategy when and in the amounts needed, if any;
•any inability to execute the Company's growth strategy;
•any escalation, deterioration and adverse effects of current military conflicts, which may affect economic and global financial markets and exacerbate ongoing economic challenges;
•any unfavorable fluctuations and volatility in the availability or price of raw materials included in components used to manufacture the Company's products, including battery cells, modules and packs;
•the reliance on key suppliers and any inability to maintain an uninterrupted supply of raw materials;
•any inability to reduce total cost of ownership of electric vehicles sold by the Company over time;
•the reliance on key management and any inability to attract and/or retain key personnel;
•labor shortages (including as a result of employee departures, turnover, and demands for higher wages) which may force the Company to operate at reduced capacity, to lower its production and delivery rates or lower its growth plans, and could pose additional challenges related to employee compensation;
•any inability to maintain the Company's competitive position;
•any inability to reduce the Company's costs of supply over time;
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•any inability to maintain and enhance the Company's reputation and brand;
•any significant product repair and/or replacement due to product warranty claims or product recalls;
•any failure of information technology systems or any cybersecurity and data privacy breaches or incidents;
•any inability to secure adequate insurance coverage or a potential increase in insurance costs;
•natural disasters, epidemic or pandemic outbreaks, boycotts and geo-political events such as civil unrest, acts of terrorism, the current ongoing military conflicts or similar disruptions;
•any event or circumstance, including the materialization of any of the foregoing risks and uncertainties, resulting in the Company's inability to convert its order book into actual sales; and
•the outcome of any legal proceedings in which the Company is or may be involved from time to time.
These and other risks and uncertainties related to the business of Lion are described in greater detail in section 23.0 of the Company’s fiscal 2023 management discussion and analysis (“MD&A”) entitled “Risk Factors.” Many of these risks are beyond Lion’s management’s ability to control or predict. All forward-looking statements attributable to Lion or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained herein and the risk factors identified in the Company’s fiscal 2023 MD&A and in other documents filed with the applicable Canadian regulatory securities authorities and the U.S. Securities and Exchange Commission (the “SEC”) which are available on SEDAR+ at www.sedarplus.ca and on EDGAR at www.sec.gov.
Because of these risks, uncertainties and assumptions, readers should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under applicable securities laws, Lion undertakes no obligation, and expressly disclaims any duty, to update, revise or review any forward-looking information, whether as a result of new information, future events or otherwise.
3.0Market and Industry Data
Industry and market data presented in this Annual Information Form was obtained from third-party sources and industry reports, and from publications, websites and other publicly available information, as well as industry and other data prepared by the Company or on their behalf on the basis of the Company’s knowledge of the markets in which it operates, including information provided by suppliers, partners, customers and other industry participants.
The Company believes that the market and economic data presented in this Annual Information Form is accurate and, with respect to data prepared by the Company or on their behalf, that the Company’s estimates and assumptions, as applicable, are currently appropriate and reasonable, but there can be no assurance as to the accuracy or completeness thereof. The accuracy and completeness of the market and economic data presented in this Annual Information Form are not guaranteed. The Company makes no representation or warranty, express or implied, as to the accuracy of such data. The Company’s management estimates are based on internal research, their knowledge of the relevant market and industry and extrapolations from third-party sources. While the Company is not aware of any misstatements regarding the industry and market data presented in this Annual Information Form, such data involve risks and uncertainties and are subject to change based on various factors, including those factors discussed under the section entitled “Cautionary Note Regarding Forward-Looking Statements.” The Company has no intention and undertakes no obligation to update or revise any such information or data, whether as a result of new information, future events or otherwise, except as required by law.
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4.0Corporate Structure
4.1Incorporation and Other Information
The Company was incorporated under the Business Corporations Act (Quebec) (“QBCA”) on July 28, 2008 under the name “Lion Buses Inc.” Over the years, the Company’s articles were amended in order to, among other things, amend the terms and conditions of Lion’s share capital in connection with investments made by investors, including the investment made by Power Energy Corporation (“Power Energy” or “PEC”), a wholly-owned subsidiary of Power Sustainable Capital Inc., in October 2017, which resulted in Lion’s authorized share capital being amended to provide for only one class of common shares. On November 24, 2020, Lion filed articles of amendment to change its name to The Lion Electric Company.
On May 6, 2021, in connection with closing of the Company’s business combination and plan of reorganization (the “Business Combination”), which resulted in a wholly-owned subsidiary of Lion merging with Northern Genesis Acquisition Corp. (“NGA”), a publicly traded special purpose acquisition company, the Company’s articles of incorporation were amended and restated (the “Articles”), the Company adopted new by-laws and the Company completed a share split of 1:4.1289. On May 7, 2021, the common shares of the Company (the “Common Shares”) began trading on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”) under the ticker symbol “LEV.”
The Company’s head and registered office is located at 921 chemin de la Riviere-du-Nord, Saint-Jerome, Quebec, Canada J7Y 5G2, and its telephone number is (450) 432-5466.
4.2Intercorporate Relationships
The following organization chart indicates the inter-corporate relationships of the Company and its material subsidiary entities together with the jurisdiction of formation or incorporation of the various entities as at the date hereof:
Certain subsidiaries of the Company, each of which represented not more than 10% of the consolidated assets and not more than 10% of the consolidated revenue of the Company, and all of which, in the aggregate, represented not more than 20% of the total consolidated assets and the total consolidated revenue of the Company as at the date hereof, have been omitted.
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5.0General Development of the Business
5.1Fiscal 2023 Developments
Operational Highlight - Production Capacity
Over the course of the year, the Company has continued its investments in its manufacturing facilities such that, as of the date hereof, the Company has the infrastructure in place, including in terms of production lines and equipment, to achieve a production capacity of up to 2,500 vehicles and 2,500 buses at its manufacturing facility located in Saint-Jerome, Quebec, Canada, and its manufacturing facility located in Joliet, Illinois, United States (the “Joliet Facility”), respectively. The Company’s Battery Plant and Innovation Center in Mirabel, Quebec, currently has the infrastructure in place, including the production line and equipment, to achieve a production capacity of up to 1.7 GWh on an annual basis. See section 8.0 of the Company’s fiscal 2023 MD&A entitled “Operational Highlights” and section 6.10 of this Annual Information Form entitled “Property, Plants and Equipment” for more information related to the Company’s production capacity.
Final Certification of LionBattery MD Battery Pack
On December 7, 2023, the Company announced the successful final certification of its medium duty (MD) battery pack, the LionBattery MD, a lithium-ion battery pack specifically designed for the Company's medium duty trucks and school buses. The Company, in collaboration with third-party testing partners, conducted stringent testing to fulfill the certification requirements. The LionBattery MD pack is certified to meet the rigorous criteria and safety regulations in the automotive industry. See “Lion Campus” in section 8.0 of the Company’s fiscal 2023 MD&A entitled “Operational Highlights.”
Lion5 Truck Commercial Production
During the quarter ended December 31, 2023, the Company initiated the commercial production of Lion5 units which are mounted with Lion medium duty (MD) battery packs.
Delay of Commercial Production of LionA and LionM
On November 7, 2023, the Company announced its decision to indefinitely delay the start of commercial production of the LionA all-electric mini school bus, which was designed for school transportation and to accommodate passengers with special needs, with a capacity of up to 24 passengers. Such decision will also delay the production of the LionM model, an all-electric minibus designed to be used for paratransit or as a standard shuttle bus, and which leverages the same platform as the LionA. The decision was made to prioritize the commercial production of Lion's other products (including the Lion8T) and the integration of Lion batteries to Lion's existing vehicles.
Executive Changes
On September 11, 2023, the Company announced that Nicolas Brunet had been appointed as President of the Company and that M. Brunet would work alongside Marc Bedard, CEO-Founder, on the elaboration and execution of all strategic aspects of the business, with a focus on accelerating sales across the United States and Canada, and oversee all commercial operations. Prior to that, M. Brunet served as Executive Vice President and Chief Financial Officer since December 2019. Richard Coulombe, who had been serving as Senior Vice President, Strategic Initiatives since November 2021, took over the role of Chief Financial Officer.
Financing Transactions for Aggregate Gross Proceeds of $142 million
On July 19, 2023, the Company closed financing transactions (the “2023 Financing”), resulting in aggregate gross proceeds to the Company of approximately $142 million. The financing consisted in (i) the issuance by way of private placement to a group of subscribers comprised of Investissement Québec, Fonds de solidarité des travailleurs du Québec (F.T.Q.) and Fondaction of 13% senior unsecured debentures that are convertible in accordance with the terms thereof into Common Shares at a
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conversion price of $2.58 (the “2023 Convertible Debentures”), for aggregate gross proceeds to the Company of approximately $74 million, (ii) the issuance by way of private placement to a group of subscribers led by Mach Group and the Mirella & Lino Saputo Foundation of 11% senior secured non-convertible debentures (the “2023 Non-Convertible Debentures”), for aggregate gross proceeds to the Company of C$90 million, and (iii) the issuance by way of private placement to the holders of non-convertible debentures of a number of common share purchase warrants (the “2023 Warrants”) entitling them to purchase in accordance with the terms thereof a total of 22,500,000 Common Shares at an exercise price of C$2.81 per share.
In connection with the 2023 Financing, the Company amended (i) the credit agreement it had previously entered into with a syndicate of lenders represented by National Bank of Canada, as administrative agent and collateral agent, on August 11, 2021, as amended on January 25, 2022 (the “Revolving Credit Agreement”), and (ii) the interest-bearing secured loan agreement it had previously entered into with Investissement Quebec on July 1, 2021, relating to the construction of the Lion Campus (the “IQ Loan”). See “Credit Agreement with Banking Syndicate” and “Financing Agreement with Investissement Quebec” under section 9 of this Annual Information Form entitled “Description of Material Indebtedness.”
Inauguration of Joliet Manufacturing Facility
On July 21, 2023, the Company officially inaugurated its Joliet Facility. See section 8.0 of the Company’s fiscal 2023 MD&A entitled “Operational Highlights” for more information related to the Joliet Facility.
Inauguration of the Battery Plant
On April 17, 2023, the Company officially inaugurated its Battery Plant located in Mirabel, Quebec. See section 8.0 of the Company’s fiscal 2023 MD&A entitled “Operational Highlights” for more information related to the Battery Plant.
5.2Fiscal 2022 Developments
Production of First Lithium-ion Battery Pack
In December 2022, following the completion of the transfer of a first portion of the Company’s battery assembly line from JR Automation’s facility in Troy, Michigan (where the Company had previously produced and tested prototype battery packs) to the Lion Campus, the Company completed production of its first lithium-ion battery pack at the Lion Campus. See “Lion Campus” in section 8.0 of the Company’s fiscal 2023 MD&A entitled “Operational Highlights.”
Assembly and Delivery of First Zero-Emission LionC School Bus from Joliet Facility
On November 2, 2022, following the installation of school bus production stations at its Joliet Facility, the Company completed the assembly of its first zero-emission LionC school bus at its Joliet Facility. Further, on December 19, 2022, the Company completed the delivery of its first LionC bus funded by the U.S. Environmental Protection Agency’s (the “EPA”) Clean School Bus Program to Mount Desert Island Regional School System in Bar Harbor, Maine. Mount Desert received a U.S. manufactured Lion bus built at the Company’s Joliet Facility. See “Joliet Facility” in section 8.0 of the Company’s fiscal 2023 MD&A entitled “Operational Highlights.”
December 2022 Units Offering
On December 16, 2022, the Company closed a public offering (the “December 2022 Offering”) of units in the United States and Canada, pursuant to which the Company issued 19,685,040 units (the “Units”), at a price of $2.54 per Unit. Each Unit consisted of one Common Share and one common share purchase warrant (each, a “2022 Warrant”). Each whole 2022 Warrant entitles the holder thereof to acquire one Common Share at an exercise price of $2.80 per share for a period of five years ending on December 15, 2027, subject to adjustment in certain customary events. On January 17, 2023, the Company announced the full exercise and closing of the underwriters’ over-allotment option, which resulted in the Company issuing and selling to the underwriters an additional 2,952,755 Units at a price of $2.54 per Unit. The
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December 2022 Offering resulted in aggregate gross proceeds to the Company of approximately $57.5 million before underwriting commissions and offering costs.
Multi-Year Cell Supply Agreement
On November 22, 2022, the Company entered into a four-year supply agreement for the supply of lithium-ion battery cells (the “Cell Supply Agreement”) pursuant to which the supplier thereunder has committed to supply, and the Company has committed to purchase, on a non-exclusive basis, lithium-ion battery cells to be used for the manufacturing of batteries for electric vehicles. See “Maturity analysis of contractual obligations” under section 16.0 of the Company’s fiscal 2023 MD&A entitled “Liquidity and Capital Resources” and section 23.0 of the Company’s fiscal 2023 MD&A entitled “Risk Factors.”
Finalta-CDPQ Loan Agreement
On November 8, 2022, the Company entered into a loan agreement (the “Finalta-CDPQ Loan Agreement”) with Finalta Capital Fund, L.P. (“Finalta”), as lender and administrative agent, and Caisse de dépôt et placement du Quebec (through one of its subsidiaries), as lender, to finance certain refundable tax credits and grants under government programs. The Finalta-CDPQ Loan Agreement provides for a loan facility of up to a principal amount of C$30 million ($22.2 million), and bears interest at the rate of 10.95% per annum. See “Loan Agreement with Finalta-CDPQ” under section 9 of this Annual Information Form entitled “Description of Material Indebtedness.”
Filing of Base Shelf Prospectus and Establishment of ATM Program
On June 17, 2022, the Company filed a final short form base shelf prospectus in all provinces and territories of Canada allowing the Company to offer, issue and sell, from time to time, common shares, preferred shares, debt securities, warrants, subscription receipts, and units comprised of one or more of any of the other securities described in the prospectus, or any combination of such securities, for up to an aggregate offering price of $350 million (or its equivalent in Canadian dollars or any other currencies), in one or more transactions during the 25-month period that the prospectus remains effective. In connection therewith, the Company filed a registration statement on Form F-10 with the SEC.
On the same date, the Company established an “at-the-market” equity program (“ATM Program”) that allowed the Company to issue and sell, from time to time in Canada and the United States through a syndicate of agents, newly issued Common Shares, for an aggregate offering amount of up to $125 million (or the Canadian dollar equivalent), at the Company’s discretion. During the year ended December 31, 2023, the Company issued 4,894,060 Common Shares pursuant to the ATM Program for aggregate gross proceeds of $9.4 million. The Company terminated the ATM Program in connection with the closing of the 2023 Financing.
First ESG Report
In May 2022, Lion released its first annual Environmental, Social and Governance (“ESG”) report, a document that provides an overview of the Company’s priorities, as it advances the management of its ESG risks and opportunities. The report contains disclosures recommended in the Industrial Machinery & Goods and Automobiles standards developed by the Sustainability Accounting Standards Board (SASB) and the recommendations by the Task Force on Climate-related Financial Disclosures (TCFD).
Board Changes
During the second quarter of 2022, Ms. Latasha Akoma and Mr. Dane L. Parker were appointed to the Board of Directors of Lion as independent Directors. Ms. Akoma is Operating Partner at GenNx360 Capital Partner, and Mr. Parker is Retired Chief Sustainability Officer and Vice President, Sustainable Workplaces at General Motors. During the first quarter of 2022, Mr. Christopher Jarratt resigned from the Board of Directors of Lion.
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First Amendment to Credit Agreement with Banking Syndicate
On January 25, 2022, the Company amended the Revolving Credit Agreement, in order to, among other things, increase the maximum principal amount available thereunder. See “Credit Agreement with Banking Syndicate” under section 9 of this Annual Information Form entitled “Description of Material Indebtedness.”
5.3Fiscal 2021 Developments
Credit Agreement with Banking Syndicate
On August 11, 2021, the Company entered into the Revolving Credit Agreement with a syndicate of lenders represented by National Bank of Canada, as administrative agent and collateral agent, and including Bank of Montreal and Federation des Caisses Desjardins du Quebec, which provides for a revolving credit facility available for use to finance working capital and for other general corporate purposes. See “Credit Agreement with Banking Syndicate” under section 9 of this Annual Information Form entitled “Description of Material Indebtedness.”
Financing Agreements with Strategic Innovation Fund (SIF) of the Government of Canada and Investissement Quebec
On August 19, 2021, the Company entered into an unsecured non-interest bearing loan agreement with the Strategic Innovation Fund (SIF) of the Government of Canada relating to the construction of the Lion Campus and which provides for financing of up to C$49,950,000, of which up to 30% of the amount disbursed may be forgiven subject to the satisfaction of certain criteria tied to the Company and to the operations of the battery manufacturing plant and innovation center facilities. See “Financing Agreement with Strategic Innovation Fund (SIF) of the Government of Canada” under section 9 of this Annual Information Form entitled “Description of Material Indebtedness.”
On July 1, 2021, the Company entered into the IQ Loan relating to the construction of the Lion Campus and which provides for financing of up to C$50,000,000. See “Financing Agreement with Investissement Quebec” under section 9 of this Annual Information Form entitled “Description of Material Indebtedness.”
Selection of Joliet Facility and Lion Campus
On June 3, 2021, the Company announced that its upcoming battery manufacturing plant and innovation center would be located at the YMX International Aerocity of Mirabel, Quebec. On May 7, 2021, the Company announced that that it had selected Joliet, Illinois for the construction of its U.S. manufacturing facility. See section 8.0 of the Company’s fiscal 2023 MD&A entitled “Operational Highlights.”
Finalta Loan Agreement
On May 6, 2021, Lion entered into a new loan agreement with Finalta amending and restating in their entirety the two loan agreements that had previously been entered into with Finalta, as lender, to finance certain refundable tax credits and grants under government programs. Amounts outstanding under the May 2021 loan agreement, which provided for a combined loan facility of up to a principal amount of approximately C$13.5 million, were repaid in November 2022 using a portion of the advances made under the Finalta-CDPQ Loan Agreement.
Closing of the Business Combination and PIPE Financing
On May 6, 2021, the Company successfully completed its Business Combination and its concurrent private placement of 20,040,200 Common Shares (the “PIPE Financing”), which were initially announced on November 30, 2020. At closing of the Business Combination, each outstanding share of NGA’s common stock held by an NGA stockholder was exchanged on a one-for-one basis for one newly issued Common Share, and each outstanding warrant to purchase common stock of NGA was converted into a warrant to acquire one Common Share (each, a “Business Combination Warrant”). Following the closing of the Business Combination and the PIPE Financing, the Common Shares began trading on the
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TSX and on the NYSE under the new symbol “LEV”, and the Business Combination Warrants began trading on the TSX under the new symbol “LEV.WT” and on the NYSE under the new symbol “LEV WS.” See section 7 of this Annual Information Form entitled “Description of Capital Structure.”
Board Changes
In the third quarter of fiscal 2021, Mr. Lorenzo Roccia, Chair of Transatlantic Holdings, an international financial holding company, was appointed to the Board of Directors of Lion as an independent Director. In the third quarter of fiscal 2021, Mr. Ian Robertson resigned from the Board of Directors of Lion.
6.0Business of the Company
6.1Overview
Lion’s business focuses on the design, development, manufacturing, and distribution of all-electric medium- and heavy-duty urban vehicles (“EV”). Each Lion vehicle is purpose-built for electric and entirely designed and assembled in-house, with its own chassis, truck cabin or bus body, proprietary battery technology with modular energy capacity and Lion software integration. Lion’s vehicles are assembled without relying on traditional combustion-engine vehicle retrofitting or third-party integrators. For certain specialized truck applications, Lion has also established partnerships and other relationships with third-party suppliers to enable it to offer to its clients a variety of vehicle configurations, upfit equipment options and applications which range from classic boxes for box trucks to other specialized applications such as all-electric ambulances and utility trucks.
Lion has more than 13 years of focused all-electric vehicle research and development (“R&D”), manufacturing and commercialization experience. Lion’s vehicles and technology benefit from over 22 million miles (over 36 million kilometers) driven by more than 1,850 of its purpose-built all-electric vehicles that are on the road today, in real-life operating conditions.
Up until fiscal 2023, Lion was solely relying on third-party battery suppliers to source battery cells, modules and packs that it was integrating in its vehicles. In connection with the establishment of its manufacturing operations at the Battery Plant, Lion now manufactures its own battery modules and packs that integrate 21700 cylindrical battery cells sourced from third-party suppliers. While Lion intends to continue in certain instances to rely on third-party suppliers for battery packs, it expects to increase optimization for product design, cost and production efficiency over time by producing battery packs in-house.
Lion achieved successful certification of the LionBattery MD, a lithium-ion battery pack specifically designed for the Company's medium duty trucks and school buses, in December 2023. The certification process for Lion's heavy duty (HD) battery pack is progressing and the Company expects final certification to occur near the middle of fiscal 2024. The Battery Plant currently has the infrastructure in place, including the production line and equipment, to achieve a production capacity of up to 1.7 GWh on an annual basis.
Lion’s medium and heavy-duty EVs are specifically designed to address the needs of the sub-250 mile (or 400-km) mid-range urban market, which is generally viewed as well suited for electrification given vehicles are typically driven over a relatively modest distance and return to base at the end of every workday. Mid-range EV applications require less battery capacity, generally resulting in a lower vehicle cost, allowing for a suitable payload, and avoiding the need for an extensive charging station network alongside vehicle routes, all of which are viewed as contributing to a suitable use case and provide the potential for favorable economics when compared to incumbent diesel solutions.
Lion complements its product offering with various services available on-site at Lion’s Experience Centers, including sales support, full-service training, charging infrastructure assistance and maintenance support. See “The Lion Ecosystem” below.
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6.2Products and Solutions
Urban Trucks
Current Line-Up
Lion’s current line-up of purpose-built all-electric trucks can be divided into four main platforms, based on gross vehicle weight rating (GVWR). For each platform, Lion offers several range options with a view to meet customers’ needs and facilitate route planning.
| | | | | | | | | | | | | | |
| | | | |
|
|
| t | Tractor |
| Lion5 | Lion6 | Lion8 | Lion8T |
GVWR(1) | Up to 22,470 lb | Up to 26,000 lb | Up to 60,000 lb | Up to 110,000 lb |
| Estimated Power and Battery Capacity | Power: Up to 335 HP
Battery: Up to 210 kWh | Power: Up to 335 HP
Battery: Up to 252 kWh | Power: Up to 470 HP
Battery: Up to 252 kWh | Power: Up to 670 HP
Battery: Up to 630 kWh |
| Commercial Production | ✓ | ✓ | ✓ | ×
(Expected near the middle of fiscal 2024)(2) |
Deliveries Made
to Date | ✓ | ✓ | ✓ | × |
(1) Gross vehicle weight rating, which refers to the maximum weight a vehicle is designed to carry including the net weight of the vehicle with accessories, plus the weight of passengers, fuel and cargo. (2) The Company has substantially completed the development phase for the Lion8T. Commercial production, which is expected near the middle of fiscal 2024, remains subject to finalization of key certifications, including with respect to the Lion heavy duty (HD) battery packs, and commencement of vehicle production on the assembly line. Timing of commercial production for the Lion8T may be subject to change or delays. See section 2 of this Annual Information Form entitled “Cautionary Note Regarding Forward-Looking Statements” and section 23.0 of the Company’s MD&A entitled “Risk Factors.” |
The Lion5, Lion6 and Lion8 are all-electric medium- and heavy-duty straight trucks designed to cover a multitude of applications, including the transportation of goods and merchandise (namely through a box, refrigerated box, stake bed or other equipment), as well as for other applications such as ambulance, utility maintenance, through upfit equipment options and applications provided and integrated by third parties. The Lion8 Tractor is an all-electric heavy-duty tractor truck designed to haul semi-trailers and containers.
Specialized Applications and Product Pipeline
Lion’s truck chassis and cabins have been developed to allow the integration of multiple mechanic and electric components and equipment, thereby enabling the design of various specialized trucks. While Lion focuses on the manufacturing of chassis and cabins and does not manufacture such mechanic and electric components and equipment necessary for the final assembly of such specialized trucks, it has established partnerships and other relationships with third-party suppliers to enable it to offer to its clients a variety of vehicle configurations, upfit equipment options and applications which range from classic boxes for box trucks to other specialized applications such as all-electric ambulances, and various utility trucks. Depending on the circumstances, Lion either integrates specialized components and equipment sourced from third-party suppliers or partners and delivers a fully assembled vehicle to its customers, or it sells a truck comprised of a chassis and cabin to its customers which, in turn, coordinate directly with Lion’s suppliers and partners.
Some of the vehicle configurations and upfit equipment options can include dry box, refrigerated and aluminum stake body options provided through partnerships and other contractual relationships with
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upfitters including Fourgons Transit, Morgan Truck Body, Thermo King, Knapheide and CM Truck Beds. In October 2021, Lion entered into a partnership with Demers Ambulances, a leading North American manufacturer of ambulances, for an all-electric and purpose-built ambulance model which will use the Lion 5 chassis and for which the final assembly of the ambulance upfit will be carried out by Demers Ambulances. The Lion Ambulance will be powered by Lion’s MD battery packs. Commercial production of the Lion5 configuration for the Lion Ambulance has already begun and initial deliveries are expected to take place in Q1 2024.
Buses
Lion’s current line-up of all-electric buses consists of Type C and Type D school buses. Lion buses are fully assembled by Lion, with a dedicated purpose-built chassis and body manufactured and assembled by Lion. Lion also incorporates its proprietary battery technology and software into all of its buses. For each model, Lion offers several range options with a view to meet customers’ needs and facilitate school bus route planning.
| | | | | | | | |
| |
|
| |
| LionC | LionD |
| Estimated Power and Battery Capacity | Power: 250 kW – 335 HP Battery Capacity: Up to 210 kWh | Power: 250 kW - 335HP Battery Capacity: Up to 210 kWh |
| Commercial Production | ✓ | ✓ |
| Deliveries Made to Date | ✓ | ✓ |
The LionC consists of a single-speed electric powertrain school bus with a capacity of up to 72 passengers for which the body is installed upon a flat-back cowl chassis and includes a hood and complete front fender. The LionD is a “transit-style” flat-nose school bus with a capacity of up to 83 passengers.
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The Lion Ecosystem
Lion has developed an ecosystem to assist fleet operators with key aspects of fleet electrification, including vehicle selection, purchase and adoption. Through its sales and other teams, Lion can assist its customers with selecting and deploying charging infrastructure, guiding customers through flexible financings solutions, identifying and executing applicable governmental grants, assess energy requirements, providing maintenance and telematics solutions and EV education and training, all of which are designed to facilitate EV transition for Lion’s customers.
1 - LionEnergy
Lion provides charging infrastructure solutions through LionEnergy, Lion’s division that assists customers with selecting, purchasing, project managing and deploying charging infrastructure ahead of vehicle delivery and which generates revenues through the resale of charging stations from global charging infrastructure manufacturers as well as project management and consulting services.
2 - LionCapital Solutions
Through arrangements with third-party financing providers and its division LionCapital Solutions, Lion makes available to its customers financing alternatives specifically designed for Lion school buses, Lion trucks and related charging infrastructure, including loans, sale and leasing financing options as well as other financing solutions relating to the monetization of carbon credits. LionCapital Solutions allows the integration of tailored and competitive financing solutions into Lion’s fleet electrification package, with a view to maximize access to funding through third-party financing providers for Lion’s clients by, among other things, eliminating or reducing upfront capital requirements and simplifying the financing process. The activities of LionCapital Solutions do not generate a significant source of financing income for the Company.
In connection therewith, Lion has entered and may in the future enter into agreements with third parties to provide financing solutions to Lion school bus and truck customers in the United States and Canada through LionCapital Solutions’ vehicle financing program. In certain instances, the third-party financing provider may retain ownership or a collateral interest over the vehicles being financed until payment is completed by Lion’s customer, and Lion has in certain instances undertaken remarketing obligations pursuant to which Lion may be required to assist the third-party financing providers into the sale or re-lease of any vehicles that should come in such financing source’s possession as a result of a customer
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defaulting under any applicable financing arrangement. See section 23.0 of the Company’s fiscal 2023 MD&A entitled “Risk Factors.”
3 - LionGrants
Lion has put in place a dedicated grants assistance team responsible for assisting customers in identifying and applying for grant and subsidy funding opportunities. Lion’s grants assistance team has established lines of communication with various governmental bodies providing grants and subsidies, including the EPA, the California Energy Commission, the California Air Resources Board, Infrastructure Canada and the Ministry of Transport of Quebec, to support its customers in making sure that they benefit from all programs available in their respective jurisdictions. See section 6.9 of this Annual Information Form entitled “Subsidies and Funding Opportunities.”
4 - LionAssistance
LionAssistance consists of a team of professional technicians that offer on-site customer service with the objective of ensuring a smooth transition to electric and maximizing vehicle operation and performance. In addition to providing first line preventive maintenance, diagnostic and troubleshooting services, LionAssistance’s team of professionals offer training programs for end users’ drivers and operational teams. In February 2022, Lion entered into an agreement with Cox Automotive Mobility giving Lion customers access to Cox Automotive Mobility’s 25 maintenance service centers in the United States, expanding coverage of the LionAssistance team and providing more options for convenient, on demand support.
5 - LionBeat
LionBeat is a dedicated EV telematics software solution offered as an aftermarket support solution for Lion vehicles. LionBeat can gather data such as greenhouse gas emissions savings, real-time GPS tracking, speed, odometer readings, charging status, average energy usage, energy usage history, and other relevant maintenance and tracking statistics. Lion also uses data obtained through telematic software solutions to inform product development and assist with service calls.
6 – Direct Sales Approach
Lion’s sales model is generally based on direct-to-customer sales tailored for EVs, with a specialized team focused on EV dedicated to facilitating customers’ EV transition journey.
7 – LionAcademy
From the onset, Lion aims to understand customers’ requirements and help them identify the suitable EV for their needs. Through its LionAcademy offering, during the vehicle selection process, Lion performs analysis of typical customer routes, payload requirements, and ancillary energy consumption to help the customer determine its specific energy requirements. Customers can also visit the Lion factory or one of Lion’s Experience Centers to test drive the product identified in the vehicle selection process.
Warranty
Lion provides a limited warranty against defects for its products, including battery modules and packs, which requires it to repair or replace defective products during the applicable warranty period at no cost to the consumer. Warranty coverage is generally aligned with industry practices and is aligned with coverage provided by the original manufacturer of the applicable component included in Lion’s vehicles, provided that Lion offers extended warranty periods which can be purchased by customers. Warranty period can range from one year to several years depending on various circumstances, including clients and type of component. See section 23.0 of the Company’s fiscal 2023 MD&A entitled “Risk Factors.”
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6.3Principal Markets
Lion’s products are available for purchase in Canada and in the United States. For the year ended December 31, 2023, 65% of Lion’s revenues were generated by sales in Canada and 35% of the revenues were generated by sales in the United States. Lion’s products are distributed by truck and rail in Canada and the United States, either directly to Lion’s customers or to the third-party upfitters Lion partners with.
6.4Marketing Channels
Lion has adopted a sales model that is generally based on direct-to-customer sales tailored for EVs, thereby generally avoiding reliance on third-party dealerships. Lion operates under such model for three key reasons: (i) traditional dealerships are generally not trained to sell and demonstrate EVs and do not have the required resources to do so; (ii) traditional dealerships typically generate a sizeable portion of their overall revenues through service and maintenance and, considering that EVs generally require less service and maintenance than incumbent diesel solutions, traditional dealerships may have less incentives to sell EVs; and (iii) paying third-party dealership margins would make EVs less cost competitive for prospective customers. That said, certain U.S. states have laws that impose or may be interpreted to impose limitations on this direct-to-consumer sales model for manufacturers such that Lion has in certain instances entered into distribution agreements with a select group of third-party dealers to abide by local laws and regulations in certain U.S. states requiring medium and heavy-duty vehicles to be sold through dealerships. In a limited number of instances, Lion may also selectively partner with third-party dealers even when not required by law to do so. See section 23.0 of the Company’s fiscal 2023 MD&A entitled “Risk Factors.”
Lion utilizes strategic marketing to accelerate sales opportunities and build brand awareness. Lion’s current marketing programs primarily target commercial fleet operators and governmental agencies, and include conferences and industry events that Lion participates in or sponsors and exhibits at, press releases, email campaigns, digital advertising, cooperative marketing effects and communications regarding Lion’s differentiated selling points and product features through marketing collateral such as its website, presentation slides, social media, webinars and videos.
As part of its go-to-market strategy, Lion assists its customers through the EV transition journey in all critical aspects of vehicle selection, financing, purchasing and adoption, including EV education and training, and identification and seeking of any applicable governmental grants, energy requirements, charging infrastructure, maintenance, and advanced telematics solutions. To enhance customer experience and help drive repeat purchases, Lion leverages its growing network of experience centers, which are dedicated spaces where prospective customers, policymakers and other transportation industry stakeholders can familiarize themselves with Lion’s EVs, learn about their specifications and advantages, obtain sales support and meet sales representatives, discuss grant and subsidy assistance, obtain charging infrastructure assistance, receive vehicle training, maintenance support and have existing vehicles serviced. Services available on-site at Lion’s experience centers include product demonstrations and sales support, full-service training, charging infrastructure assistance and maintenance support. Lion has experience centers strategically located in key markets in the United States and Canada. Lion currently has 12 experience centers strategically located in key markets.
6.5Intellectual Property
Lion relies on trade secret protection, trademarks, copyrights and contractual restrictions to protect its intellectual property and other proprietary rights. As a matter of course, Lion does not employ a strategy that is focused on the active registration (including through patent application) of intellectual property rights. Lion relies on a number of other measures to protect its intellectual property and other confidential information, including technical data. For instance, Lion takes steps designated to ensure that proprietary technology incorporated in its vehicle systems is difficult to access and/or retrieve, and takes additional steps to mitigate the effect of any such unauthorized access. In addition, Lion enters into confidentiality agreements with suppliers, customers and other third parties with whom it may share information about its
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business and operations, and Lion also requires all of its employees, consultants and other persons who work for it to enter into confidentiality and assignment of intellectual property agreements.
Lion pursues from time to time the registration of domain names, trademarks and service marks in the United States, Canada and in some other locations abroad as it considers necessary. In addition, Lion may in the future file patent applications as it considers appropriate under the circumstances relating to any new technologies that it develops.
Lion cannot be sure that third parties will not independently develop the know-how and trade secrets related to Lion’s proprietary technology, in which case Lion would not be able to prevent such third parties from using such know-how and trade secrets, which may allow competitors to develop similar or better products or manufacturing methods or processes than those offered by Lion. As well, Lion cannot be sure that its own proprietary know-how, trade secrets, copyrights and trademarks do not infringe third-party intellectual property rights. See section 23.0 of the Company’s fiscal 2023 MD&A entitled “Risk Factors.”
6.6Sourcing of Raw Materials
Components in Lion’s vehicles are made of various raw materials, including aluminum, steel, composite, non-ferrous metals (such as copper) and other materials and minerals used to manufacture lithium-ion batteries. The prices for these raw materials fluctuate depending on market conditions and global demand. Lion has, in certain cases, entered into long-term contractual arrangements with suppliers with respect to the supply of certain key components of its vehicles, including lithium-ion batteries and cells. Lion also strives to obtain components from multiple sources whenever possible. However, some of the components used in Lion’s vehicles, including certain key battery system components, are purchased from a single source supplier or limited source suppliers. In such instances, Lion seeks as much as possible to establish alternate supply relationships and obtain or engineer replacement components in order to mitigate supply risk. The Company does not currently hedge its long-term exposure to price fluctuations of raw materials and supplies. See section 23.0 of the Company’s fiscal 2023 MD&A entitled “Risk Factors.”
Prior to the commencement of its manufacturing operations at the Battery Plant, Lion relied only on third-party battery suppliers to source battery cells, modules and packs that it integrated in its vehicles. In connection with the establishment of its manufacturing operations at the Battery Plant, Lion now manufactures its own battery modules and packs that integrate 21700 cylindrical battery cells sourced from third-party suppliers, principally in the short term under the Cell Supply Agreement entered into in November 2022. See “Multi-Year Cell Supply Agreement” under section 5 of this Annual Information Form entitled “General Development of the Business.” While Lion intends to continue in certain instances to rely on third-party suppliers for battery packs, it expects to increase optimization for product design, cost and production efficiency over time by producing battery packs in-house. As previously disclosed, the Company initiated in fiscal 2022 arbitration proceedings with Romeo relating to the multi-year battery pack supply contract entered into with Romeo Systems, Inc. ("Romeo") (who became a subsidiary of Nikola Corporation (''Nikola'')) in November 2020. In light of Romeo’s liquidation proceedings, such arbitration proceedings against Romeo have been terminated during fiscal 2023, and the Company made the decision to mount its Lion8T trucks with the Company’s proprietary battery packs manufactured at the Battery Plant. See section 13 of this Annual Information Form entitled “Legal Proceedings and Regulatory Actions.”
6.7Seasonality
The Company’s sales have historically experienced substantial fluctuations from quarter to quarter, particularly considering that they have been mainly comprised of sales of school buses which are mainly driven by the school calendar. While the Company expects to continue to experience seasonal variations in its sales in the foreseeable future, management believes that the mix of product sales may vary in the future, especially in connection with the Company’s execution of its growth strategy and as sales of trucks become more prevalent and new product features may be introduced. As a result, it is difficult to predict if any historical trends will be reproduced in the future.
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6.8Government Regulation
Vehicle Safety Regulations
The vehicles that Lion manufactures and sells are subject to various and complex safety standards across jurisdictions where Lion operates. In the United States, the National Traffic and Motor Vehicle Safety Act of 1966 (the “Safety Act”) regulates vehicles and vehicle equipment by prohibiting the sale of any new vehicle or equipment that does not conform to applicable vehicle safety standards established by the National Highway Transportation Safety Administration (“NHTSA”). In Canada, the Motor Vehicle Safety Act (the “MVSA”) regulates vehicles, and Transport Canada develops and enforces Motor Vehicle Safety Standards which are generally harmonized with the standards in the United States. Lion is also subject to similar laws and regulations at the U.S. state and Canadian provincial levels in all states and provinces where it sells its vehicles. Meeting or exceeding such safety standards is costly and has continued to evolve alongside developments in technology and safety expectations. Lion continuously evaluates requirements for licenses, approvals, certificates and governmental authorizations with a view to obtain or comply with the various licenses, approvals, certifications and other governmental authorizations necessary to manufacture, sell or service its vehicles in the United States and Canada. Such requirements include rigorous testing and the use of approved materials and equipment. In addition, governmental agencies generally mandate that new all-electric trucks and bus models, and subsequent material changes to those models, be physically tested to meet certain performance standards in order to be eligible to receive governmental funding.
Environment and Other Regulatory Matters
Although Lion’s vehicles qualify as zero emission vehicles (“ZEVs”), they are subject to regulations regarding vehicle emissions. For example, in the United States, every class of heavy-duty engines or vehicles must receive Certificate of Conformity (“COCs”) from the EPA prior to being sold. These COCs must be obtained for each model year of production, and failure to obtain them prior to entering Lion’s vehicles into commerce may result in substantial fines or penalties. In addition, the California Air Resources Board (“CARB”) requires that every model year be zero-emission certified by executive order of the Company. The CARB certification is required to participate in California’s Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project (“HVIP”) described below.
In Canada, the Heavy-duty Vehicle and Engine Greenhouse Gas Emission Regulations adopted under the Canadian Environmental Protection Act, 1999, establish Canadian emission standards and test procedures for Canadian manufacturers, distributors and importers of heavy-duty vehicles. These standards and procedures are aligned with the requirements of the United States Code of Federal regulations for on-road heavy-duty vehicles and engines published by the EPA, parts of which are incorporated by reference in the regulations, However, testing and other requirements to demonstrate compliance may vary, adding to the regulatory complexity of Lion’s operations.
The use, storage, transport, and disposal of Lion’s battery packs is subject to extensive regulation. Lithium-ion cells may be regulated as “hazardous” or “dangerous” goods under several regulatory regimes in both the United States and Canada. For example, Lion’s battery packs are subject to testing requirements before they can be transported, and they must be transported in keeping with various conditions which vary by mode of transportation. Lion may also be responsible for the recycling and proper disposal of expended batteries from its vehicles. In addition to the proper handling, recycling, and disposal of expended batteries, Lion’s operations are subject to a wide range of laws and regulations related to the protection of the environment, including those regulating air emissions, discharges to water, waste management, worker health and safety, and environmental cleanup.
6.9Subsidies and Funding Opportunities
With heightened focus on the global environment, various subsidy and financial incentives programs have been introduced by governmental authorities in Canada and the United States in order to promote the adoption of emissions-free vehicles. Demand for Lion’s vehicles is currently highly influenced by such
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federal, state, provincial and local tax credits, rebates, grants and other government programs and incentives that promote the use of battery electric vehicles1. Additionally, demand for Lion’s vehicles is and is expected to become increasingly influenced by laws, rules, regulations and programs that require reductions in carbon emissions, such as the various measures implemented by lawmakers and regulators in the United States and Canada (notably in the State of California and in the Province of Quebec, among others) designed to increase the use of electric and other zero-emission vehicles, including the establishment of firm goals in certain instances for the number of these vehicles operating on state or provincial roads by specified dates and the enactment of various laws and other programs in support of these goals. See section 23.0 of the Company’s fiscal 2023 MD&A entitled “Risk Factors.”
U.S. Subsidies and Incentive Programs
At the U.S. federal level, the Biden administration signed into law the Bipartisan Infrastructure Law which includes a total of $7.5 billion to build out a national electric vehicle charging infrastructure network and under which the EPA launched its Clean School Bus Program (the “EPA Program”) which is expected to provide $5 billion over the five-year period between 2022 and 2026 to replace existing school buses with zero-emission and low-emission models.
In May 2022, the EPA announced the availability of $500 million under the first round of funding of the EPA Program, which amount was subsequently increased to $945 million. On April 25, 2023, the EPA announced the availability of an additional $400 million of grants through a new 2023 grant funding round (the "2023 grant round") under the EPA Program which was more than doubled in January 2024 as further described below, and on September 28, 2023, the EPA announced additional funding of up to $500 million through a rebate round, in respect of which applications are now closed and awards are expected to be announced in April 2024. Please refer to the EPA's website for additional information on the EPA Program: https://www.epa.gov/cleanschoolbus. On January 8, 2024, the EPA announced that it more than doubled the funding amount initially announced for the 2023 grant round, thereby allocating nearly $1 billion to 67 applicants. Based on the EPA, the awards under the 2023 grant round are expected to facilitate the purchase of over 2,700 clean school buses in 280 school districts serving over 7 million students across 37 states. See section 8.0 of the Company’s fiscal 2023 MD&A entitled “Operational Highlights” for more information on the EPA Program.
The Biden administration also signed into law the Inflation Reduction Act of 2022, which includes a program under which purchases of new Class 4-8 electric vehicles may qualify for a commercial clean vehicle credit of up to $40,000 under the Internal Revenue Code (IRC). Lion has been approved by the Internal Revenue Service as a qualified manufacturer for the commercial clean vehicle credit such that Lion’s all-electric trucks sold in the United States starting January 1, 2023 may be eligible for such clean vehicle credit.
U.S. states and Air Quality Districts have also implemented various programs to offset carbon emissions, such as Zero-Emission Vehicle (ZEV) credit trading mechanisms currently adopted by seven U.S. states and New York City’s plan to electrify its school bus fleet by 2035. Additionally, several states and Washington D.C. have signed the Multi-State Medium and Heavy-Duty Zero Emission Vehicle Memorandum of Understanding, committing to implement the Advanced Clean Truck (ACT) rule which has an objective of having 100% of all new medium and heavy-duty vehicle sales be zero-emission by 2050, with an interim target of 30% zero-emission vehicle sales by 2030.
In California, the California Air Resources Board approved in November 2022 the fiscal 2022-2023 Funding Plan for Clean Transportation Incentives, which includes certain policy changes from previous years and an allocation of over $1.7 billion to be administered by the California’s Hybrid and Zero-
1 As further detailed in the Company’s fiscal 2023 MD&A, substantially all sales and deliveries of Lion vehicles are subject to the granting of such subsidies and incentives. To date, the subsidies and incentive programs Lion’s customers have applied for include Transport Quebec’s School Transport Electrification and Eco-Trucking Programs (Programme d’électrification du transport scolaire et Programme Écocamionnage), the Canadian federal government’s Zero-Emission Transit Fund (ZETF) and Incentives for Medium- and Heavy-Duty Zero-Emission Vehicles (iMHZEV) Program, California’s Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project (HVIP), California Energy Commission – School Bus Replacement Program and the U.S. Environmental Protection Agency Clean School Bus Program. See sections 10.0 and 23.0 of the Company's fiscal 2023 MD&A entitled “Order Book” and “Risk Factors.”
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Emission Truck and Bus Voucher Incentive Project (HVIP). HVIP provides a point-of-sale rebate to organizations that purchase fleets of hybrid and electric trucks and buses. Under the HVIP, at delivery, customers will pay the purchase price of the vehicle minus the voucher amount, and Lion will receive the amount of the voucher directly, subject to and once CARB certification is completed.
Canadian Subsidies and Incentive Programs
In Canada, the Canadian federal government has established the Zero Emission Transit Fund (“ZETF”) through which the Canadian federal government plans on investing C$2.75 billion over five years to support public transit and school bus electrification. December 31, 2025 is the latest date by which claims are required to be made according to the current eligibility criteria of the program, unless otherwise agreed by Infrastructure Canada. Lion and its clients continue to experience delays in the processing of applications filed under the ZETF, and if such delays persist, orders subject to ZETF grants may be cancelled, in whole or in part, or be subject to renegotiation. See sections 10.0 and 23.0 of the Company’s fiscal 2023 MD&A entitled “Order Book” and “Risk Factors.” In addition, the Canada Infrastructure Bank has launched a C$1.5 billion debt funding assistance program to assist public transit and school bus operators in their transition towards electrification.
The Canadian federal government also launched in June 2022 C$547.5 million of funding over four years (or until available funding is exhausted) for the Incentives for Medium- and Heavy-Duty Zero-Emission Vehicles (iMHZEV) Program, which offers Canadian organizations, provinces, territories and municipalities point-of-sale incentives towards the purchase or lease of eligible medium- and heavy-duty zero-emission vehicles and which can be applied in addition to any provincial or territorial incentive.
In Quebec, the provincial government previously announced its Green Economy Plan which includes C$5 billion in funding (including C$246 million towards truck electrification and C$250 million towards school bus electrification) with the objective of electrifying 55% of all transit buses and 65% of all school buses in the province by 2030 as well as the objective of cutting greenhouse gas emissions and banning sales of gasoline-powered consumer and light-duty vehicles by 2035. The Green Economy Plan includes various programs to assist school and transit bus fleets as well as medium and heavy-duty trucks electrification, including Transport Quebec’s School Transport Electrification and Eco-Trucking Programs (Programme d’électrification du transport scolaire et Programme Écocamionnage).
In an effort to phase-out diesel-powered buses, the Quebec provincial government has also banned sales of new diesel-powered school buses in the province. Similar programs have also been established by the British Columbia provincial government called Specialty Use Vehicle Incentive for Utility Vehicles (SUVI) and Commercial Vehicle Pilots Program (CVP).
6.10Property, Plants and Equipment
Lion has one vehicle manufacturing facility in Canada located in Saint-Jerome, Quebec, which is approximately 25 miles (or 40 km) north of Montreal, Quebec. To date, a majority of the vehicles sold by the Company have been produced at its Saint-Jerome facility.
Lion has the Joliet Facility, a manufacturing facility in the United States located in Joliet, Illinois, which is approximately 30 miles (or 45 km) south of Chicago, Illinois and which will support the Company in addressing the increasing demand in the marketplace for “Made in America” zero-emission vehicles.
Lion also has the Lion Campus, which is located at the YMX International Aerocity of Mirabel, Quebec and which consists of the Battery Plant and the Innovation Center. The Innovation Center building is currently being used for various purposes, including as a testing and certification center for vehicles and batteries, a pre-delivery inspection site, a showroom and delivery center, and as warehousing space, in order to leverage space available and optimize operational efficiency.
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Except for the Innovation Center, all of such properties are leased by Lion and Lion does not own any real property.
| | | | | | | | | | | | | | |
| Facility | Principal Production Activity | Approximate Square Footage | Estimated Current Maximum Annual Capacity(1) | Estimated Maximum Annual Capacity at Full Scale(2) |
| Saint-Jerome, Qc Canada | Head Office Manufacturing Facility In-house R&D Testing Center Experience Center | 200,000 | 2,500 vehicles | 2,500 vehicles |
| Joliet, IL, United States | Manufacturing Facility | 900,000 | 2,500 vehicles | 20,000 vehicles(3) |
| Mirabel, Qc, Canada | Battery Manufacturing Facility | 175,000 | 1.7 gigawatt hours | 5 gigawatt hours(4) |
(1) While the Saint-Jerome facility, the Joliet Facility and the Battery Plant currently have infrastructure in place to achieve a production capacity of up to 2,500 vehicles, up to 2,500 buses and up to 1.7 GWh, respectively, on an annual basis, the Company’s operations are currently being conducted on a lower scale and it has limited experience to date in high volume manufacturing. See section 2 of this Annual Information Form entitled “Cautionary Note Regarding Forward-Looking Statements” and section 23.0 of the Company’s fiscal 2023 MD&A entitled “Risk Factors.”
(2) The estimated maximum annual capacity at full scale represents management’s estimates of the projected maximum annual vehicle production capacity at the facility after completion of the production ramp-up and scale-up of manufacturing operations. Management’s expectations with respect to the ramp-up of production and estimated maximum capacity are based on a number of assumptions and may be subject to change, and there is no assurance that the Company’s plan will materialize as expected. See section 2 of this Annual Information Form entitled “Cautionary Note Regarding Forward-Looking Statements” and section 8.0 of the Company’s fiscal 2023 MD&A entitled “Operational Highlights.”
(3) The Joliet Facility currently has the infrastructure in place, including the production line and equipment, to achieve a production capacity of up to 2,500 buses on an annual basis. While the Company initially planned that, at full scale, the production capacity of the Joliet Facility would be principally focused on the production of trucks, as previously disclosed, the Company expects to rely on the truck manufacturing capacity available at its Saint-Jerome manufacturing facility to address current customer demand. See section 8.0 of the Company’s fiscal 2023 MD&A entitled “Operational Highlights” for more information on the Joliet Facility.
(4) See section 8.0 of the Company’s fiscal 2023 MD&A entitled “Operational Highlights” for more information on the Lion Campus.
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Other Facilities
The following table provides a list of the other main facilities currently leased by Lion, together with approximate square footage for each facility:
| | | | | | | | |
| Facility | Principal Activity | Approximate Square Footage |
| Montreal, Qc | Engineering R&D Center | 5,000 |
| Terrebonne, Qc | Administrative Office Experience Center | 45,000 |
| Sainte-Sophie, Qc | Warehouse | 5,000 |
| Moncton, N.B. | Experience Center | 10,000 |
| Richmond, B.C. | Experience Center | 18,000 |
| Auburn, WA | Experience Center | 10,000 |
| Sacramento, CA | Experience Center | 28,000 |
| Los Angeles, CA | Experience Center | 13,000 |
| Jacksonville, FL | Experience Center | 10,000 |
| Shakopee, MN | Experience Center | 3,280 |
| Richmond, VA | Experience Center | 8,000 |
| Milton, VT | Experience Center | 17,000 |
| Denver, CO | Experience Center | 18,000 |
6.11Research and Development
Lion’s team of engineers and other R&D professionals conducts development activities from its three R&D centers in Mirabel, Quebec, Saint-Jerome, Quebec, and Montreal, Quebec.
Lion’s R&D is currently focused on enhancing existing vehicles and features and continuing the development of proprietary battery systems and specialized applications that can be integrated into Lion’s vehicles. Lion’s main R&D costs consist of expenditures towards assembly of prototype vehicles, the design, establishment, purchase, and implementation of equipment, as well as costs relating to its R&D professionals performing development activities.
6.12Employees
The Company currently has approximately 1,350 employees in Canada and the United States across all functions, including manufacturing, R&D, sales & marketing, service, and corporate and administrative.
None of Lion’s employees is a party to a collective bargaining agreement or represented by a labour union.
In November 2023, the International Association of Machinists and Aerospace Workers (“IAM”) filed a petition for an election with the National Labor Relations Board (“NLRB”) to represent the Company’s full time and regular part-time production and warehouse employees at the Joliet Facility, with certain exceptions. The United Automobile Aerospace and Agricultural Workers of America (“UAW”) filed a petition to intervene in the election. The election was held on December 21, 2023 and the results have not yet been finalized in light of certain votes being challenged. A hearing with the NLRB was held in February 2024 to resolve certain challenged ballots and a decision from the NLRB is expected in the near future to determine the outcome of the election. In the event neither the IAM nor the “no union” option receive a majority of the ballots cast, the NLRB will conduct a runoff election between the Company and the IAM.
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The UAW ceased to participate in the process considering that it did not receive a sufficient number of votes. See section 23.0 of the Company’s fiscal 2023 MD&A entitled “Risk Factors”.
6.13Customers
Lion’s vehicles target a wide array of customers including third-party school bus operators, school districts, carriers, consumer goods companies, waste management operators, manufacturers, utilities as well as governmental agencies. Lion is focusing its sales efforts towards medium to large fleet owners via its direct-to-customer sales model.
The customer breakdown for school buses varies across jurisdictions in the United States and Canada but consists mainly of school bus operators and school districts.
6.14Competition
Lion competes in the medium and heavy-duty urban vehicle market, ranging from commercial trucks to buses. The North American medium and heavy-duty urban truck market is highly competitive today and Lion expects it will become even more so in the future. Lion’s competition for their trucks comes from manufacturers of purpose-built all-electric vehicles such as Nikola, BYD, and Xos, manufacturers of hybrid/retrofit EVs such as Workhorse, and manufacturers of trucks with internal combustion engines powered by diesel fuel. Lion cannot assure that customers will choose its vehicles over those of its competitors’ diesel-powered trucks. North American school bus market is mainly concentrated in the hands of three incumbent automotive original equipment manufacturers (“OEMs”) selling both diesel school buses as well as electric school buses: Blue Bird Corporation, Thomas Built Buses (Daimler), and IC Bus (Navistar International, subsidiary of Traton). In addition to the incumbent diesel school bus OEMs, a few early-stage EV OEMs have entered in competition with Lion such as Green Power Motor, which offers purpose-built electric Type D school buses. See section 23.0 of the Company’s fiscal 2023 MD&A entitled “Risk Factors”.
Lion’s management believes the primary competitive factors in both the truck and bus industries include
•total cost of ownership (“TCO”), which is impacted by, among other things, pricing of electric vehicles, available subsidies and incentives, energy costs and maintenance and repair costs over the useful life of a vehicle;
•vehicle range and payload capacity;
•quality and reliability;
•safety;
•customer experience;
•technological innovation and charging expertise; and
•compliance with environmental regulation.
Lion’s management believes that Lion’s truck TCO is favorable to comparable diesel vehicles today in most use cases. Over time, the TCO advantage of electric trucks is expected to further increase as electric vehicle prices reduce, which will in turn further improve the economic benefit and rationale for fleet owners and operators to purchase Lion’s all-electric vehicles. In the school bus market, the lower annual mileage of individual units typically makes it more difficult for the lower energy and maintenance costs to significantly offset the currently higher upfront costs of electric vehicles over incumbent diesel units. As such, at the current time, governmental subsidies and incentives are often required for electric buses to be competitive over diesel units from a pure TCO point of view in this category. Over time, as the cost of the vehicles decreases as a result of, among other things, reduction in battery costs from increased vertical integration in manufacturing of battery systems, increased purchasing power with suppliers through larger volume commitments, increased manufacturing capacity utilization and fixed cost
21 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
absorption, and other productivity gains, the TCO for electric buses is expected to become favorable even in the absence of governmental subsidies and incentives. See section 23.0 of the Company’s fiscal 2023 MD&A entitled “Risk Factors.”
6.15Risk Factors
The Company’s risk factors are discussed starting on page 49 of the Company’s fiscal 2023 MD&A and are incorporated by reference in this document. The Company’s fiscal 2023 MD&A is available on the Company’s website, on SEDAR+ (www.sedarplus.ca) and on EDGAR (www.sec.gov). These risks may not be the only risks the Company faces. Other risks of which management is not aware or which are currently deemed to be immaterial may arise and have a material adverse impact on the Company, its business, results from operations or financial condition.
7.0Description of Capital Structure
The Company’s authorized share capital consists of (i) an unlimited number of Common Shares and (ii) an unlimited number of preferred shares (the “Preferred Shares”), issuable in one or more series. As at February 28, 2024, there were 226,215,913 Common Shares issued and outstanding, and no preferred shares were issued and outstanding. The Company also has four series of warrants to purchase Common Shares outstanding as further described in section 7.3.
The summary below of the rights, privileges, restrictions and conditions attaching to the shares of the Company is subject to, should be read in conjunction with, and is qualified by reference to, the Company’s articles and by-laws, available on the Company’s website at www.thelionelectric.com under the “Investors” section.
7.1Common Shares
Voting Rights
Holders of Common Shares are entitled to one vote for each share held at any meeting of the shareholders of the Company, other than meetings at which only the holders of a particular class or series of shares are entitled to vote due to provisions of the QBCA or the specific attributes of such class or series.
Dividends
Subject to the prior rights of the holders of any Preferred Shares as to dividends, the holders of Common Shares are entitled to receive dividends as and when declared by the Board of Directors out of the funds that are available for the payment of dividends.
Liquidation
Subject to the prior payment to the holders of Preferred Shares, in the event of the Company’s voluntary or involuntary liquidation, dissolution or winding-up or other distribution of the Company’s property and assets among its shareholders for the purposes of winding up the Company’s affairs, the holders of Common Shares are entitled to share pro rata in the distribution of the balance of the Company’s remaining property and assets.
Rights and Preferences
The holders of Common Shares have no preemptive, conversion rights or other subscription rights attaching to the Common Shares. There are no redemption or sinking fund provisions applicable to Common Shares. There is no provision in the Articles requiring the holders of Common Shares to contribute additional capital or permitting or restricting the issuance of additional securities or any other material restrictions. The rights, preferences and privileges of the holders of Common Shares are subject to and may be adversely affected by, the rights of the holders of any series of Preferred Shares that the Company’s Board may designate in the future.
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7.2Preferred Shares
Pursuant to the Articles, the Company’s Board is authorized to issue, without shareholder approval, an unlimited number of Preferred Shares, issuable in one or more series, and, subject to the provisions of the QBCA, having such designations, rights, privileges, restrictions and conditions, as the Company’s Board may determine, and such rights and privileges, including, without limitation, any right to receive dividends (which may be cumulative, non-cumulative or partially cumulative and variable or fixed), the rate or rates, amount or method or methods of calculation of preferential dividends and whether such rate or rates, amount or method or methods of calculation shall be subject to change or adjustment in the future, the currency or currencies of payment, the date or dates and place or places of payment thereof and the date or dates from which such preferential dividends shall accrue, the rights of redemption (if any) and the redemption price and other terms and conditions of redemption, the rights of retraction (if any) and the prices and other terms and conditions of any rights of retraction and whether any additional rights of retraction may be provided to such holders in the future, the voting rights and the conversion or exchange rights (if any) and any sinking fund, purchase fund or other provisions attaching thereto, as the Company’s Board may determine, and such rights and privileges may be superior to those of the Common Shares. Except as otherwise provided by law or in accordance with any voting rights which may from time to time be attached to any series of Preferred Shares, the holder of Preferred Shares as a class are not entitled as such to receive notice of, to attend or to vote at any meeting of the shareholders of the Company.
7.3Warrants to Acquire Common Shares
2023 Warrants
On July 19, 2023, the Company completed the private placement of the 2023 Warrants in connection with the closing of the 2023 Financing. Each whole 2023 Warrant entitles the holder thereof to acquire one Common Share at an exercise price of C$2.81 per Common Share for a period of five years ending July 19, 2028, subject to adjustments in certain customary events. The 2023 Warrants provide for adjustment in the number of Common Shares issuable upon the exercise of the 2023 Warrants and/or the exercise price per Common Share upon the occurrence of certain events.
Upon a change of control of the Company, the Company will have the right to redeem and cancel all of the outstanding 2023 Warrants for a cash purchase price based on the remaining term of the 2023 Warrants and the value of the consideration offered or payable per Common Share in the transaction constituting the change of control (the “Redemption Price”). In addition, upon a change of control of the Company resulting in (or which is reasonably anticipated to result in) the Common Shares ceasing to be listed on a stock exchange, the holders of 2023 Warrants may require the Company to redeem and cancel all 2023 Warrants at the Redemption Price subject to and on the date such transaction resulting in a change of control is completed.
As of February 28, 2024, 22,500,000 2023 Warrants were issued and outstanding.
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2022 Warrants
On December 16, 2022, the Company entered into a warrant indenture (the “2022 Warrant Indenture”) with TSX Trust Company, as warrant agent (the “Warrant Agent”), in connection with closing of the December 2022 Offering. The 2022 Warrant Indenture governs the 2022 Warrants. Each whole 2022 Warrant entitles the holder thereof to acquire one Common Share at an exercise price of $2.80 per Common Share for a period of five years ending December 15, 2027, subject to adjustment in certain customary events. The 2022 Warrant Indenture provides that, subject to compliance with applicable securities legislation and approval of applicable regulatory authorities, the Company is entitled to purchase in the market, by private contract or otherwise, all or any of the 2022 Warrants then outstanding, and any 2022 Warrants so purchased will be cancelled. The 2022 Warrant Indenture provides for adjustment in the number of Common Shares issuable upon the exercise of the 2022 Warrants and/or the exercise price per Common Share upon the occurrence of certain events.
The 2022 Warrants are trading on the NYSE under the symbol “LEV WSA” and on the TSX under the symbol “LEV.WT.A.” As of February 28, 2024, 22,637,795 2022 Warrants were issued and outstanding.
Business Combination Warrants
Upon completion of the Business Combination, 27,111,741 warrants to purchase shares of NGA’s common stock were converted into an equivalent number of warrants to acquire Common Share (each, a “Business Combination Warrant”), 15,972,672 of which were public Business Combination Warrants and 11,139,069 of which were private Business Combination Warrants. The Business Combination Warrants are governed by a warrant agreement dated August 7, 2020 (the “Business Combination Warrant Agreement”), which agreement was assumed by the Company pursuant to a warrant assignment and assumption agreement dated May 6, 2021, between the Company, NGA, American Stock Transfer & Trust Company, LLC, and Continental Stock Transfer & Trust (the “Business Combination Warrant Assignment Agreement”).
Each Business Combination Warrant entitles the holder to acquire one Common Share at an exercise price of $11.50 per Common Share until May 6, 2026, subject to adjustment in certain customary events.
The public Business Combination Warrants may be redeemed by the Company in whole at a price of $0.01 per public Business Combination Warrant, provided that the last reported sales price of the Common Shares equals or exceeds $18.00 per share for any 20 trading days within a 30 trading-day period commencing once the public Business Combination Warrants become exercisable and ending on the third trading day prior to the date on which the Company gives proper notice of such redemption.
Each private Business Combination Warrant may be exercised on a cashless basis and may not be redeemed by the Company for so long as it is held by Northern Genesis Sponsor LLC or any of its permitted transferees. Once transferred to any person that is not Northern Genesis Sponsor LLC or any of its permitted transferees, a private Business Combination Warrant becomes treated as a public Business Combination Warrant.
The Business Combination Warrants are trading on the NYSE under the symbol “LEV WS” and on the TSX under the symbol “LEV.WT.” As of February 28, 2024, 27,111,323 Business Combination Warrants were issued and outstanding.
Specified Customer Warrant
In connection with entering into the MPA, Lion issued on July 1, 2020 a warrant to purchase Common Shares (the “Specified Customer Warrant”) to Amazon.com NV Investment Holdings LLC (the “Specified Warrantholder”) which vests, subject to the terms and conditions contained therein, based on the aggregate amount of spending by the Specified Customer and its affiliates on Lion products or services. At the election of the Specified Warrantholder, any vested portion of the Specified Customer Warrant can be exercised either on a cash basis by the payment of the applicable exercise price or on a net issuance basis based on the in-the-money value of the Specified Customer Warrant. The exercise
24 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
price of the Specified Customer Warrant corresponds to $5.66 per Common Share and the Specified Customer Warrant will be, if and when fully vested, exercisable for 35,350,003 Common Shares upon an exercise on a cash basis. Full vesting of the Specified Customer Warrant requires spending of at least $1.2 billion on Lion products or services over the term of the Specified Customer Warrant, subject to partial or full accelerated vesting upon the occurrence of certain events, including a change of control of Lion (as such term is defined in the Specified Customer Warrant) or a termination of the MPA by the Specified Customer for cause. Pursuant to the Specified Customer Warrant, if Lion or its shareholders propose to initiate a process to explore, or to accept any offer or enter into negotiations with respect to, a change of control of Lion (as defined in the Specified Customer Warrant), Lion must provide written notice thereof to the Specified Warrantholder prior to entering into any definitive agreement or binding letter of intent with respect to any such proposed transaction, and the Specified Warrantholder has the right to enter into non-exclusive, good faith negotiations with Lion and its shareholders in respect of any such proposed transaction.
As of February 28, 2024, (i) the vested portion of the Specified Customer Warrant was exercisable for a number of Common Shares representing approximately 2.3% of all Common Shares issued and outstanding on a partially-diluted basis. The Specified Customer Warrant has a term expiring on July 1, 2028 and the Specified Warrantholder has customary registration and information rights.
The description of the 2022 Warrants, the Business Combination Warrants and the Specified Customer Warrant is only a summary of the material features of the 2022 Warrants, the Business Combination Warrants and the Specified Customer Warrant. This summary should be read in conjunction with, and is qualified in its entirety by reference to, the 2022 Warrant Indenture, the Business Combination Warrant Agreement and Specified Customer Warrant, which are available on the Company’s profiles on SEDAR+ at www.sedarplus.ca and EDGAR at www.sec.gov.
7.4Convertible Debentures
2023 Convertible Debentures
The 2023 Convertible Debentures bear interest at the rate of 13% per annum, compounded monthly on the last day of each month. Prior to any accrual date, the Company has the right, at its discretion, to make an election to pay interest accrued on the principal for the applicable month in cash (in which case any interest so paid shall not be compounded).
The 2023 Convertible Debentures will mature on July 19, 2028 and are convertible at the holders’ option into Common Shares at a conversion price of $2.58 per Common Share. The conversion price is subject to customary adjustments, including for share splits or consolidation, share dividends, rights offerings, asset or other distributions and above market repurchases of shares (including above market exchanges or tender offers), in each case in compliance with the rules and requirements of the TSX relating to anti-dilution mechanisms.
The 2023 Convertible Debentures contain customary covenants and events of default for an instrument of its nature, including covenants relating to compliance with the financial ratios and negative covenants included in the Revolving Credit Agreement (provided (i) that any amendment to the financial ratios to which the lenders under the Revolving Credit Agreement consent will automatically be incorporated in the 2023 Convertible Debentures, and (ii) that a default shall only occur under the 2023 Convertible Debentures if a financial ratio default occurs and is continuing on the date that is fifteen business days following the delivery of the Company's financial statements evidencing such event of default, and only if the lenders under the Revolving Credit Agreement have not waived or tolerated such event of default before the expiry of this fifteen business day period). The 2023 Convertible Debentures also include certain covenants relating to maintaining the current headquarters, employees and facilities of the Company in the province of Quebec and certain covenants limiting the incurrence of capital expenditures over the term of the 2023 Convertible Debentures, including limits on capital expenditures towards increasing production capacity at the Company’s manufacturing facilities beyond certain capacity as well as limits on the incurrence of maintenance and other capital expenditures.
25 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
The 2023 Convertible Debentures contain customary events of default for an instrument of its nature, including, among other things, the occurrence of an event of default under any other debt of the Company with a principal amount exceeding $15,000,000 if such default results in the acceleration of the amounts owed thereunder. Upon the occurrence of an event of default under the 2023 Convertible Debentures or, if later, at the expiry of any agreed-upon period for curing an event of default, as the case may be, holders of 2023 Convertible Debentures will have the right, upon giving written notice to the Company, to (i) require the Company to redeem all of their 2023 Convertible Debentures, or (ii) require that the principal amount of the 2023 Convertible Debentures, plus any accrued, compounded and unpaid interest, be converted into Common Shares, with the number of Common Shares issuable upon such conversion being subject to a grid-based “make-whole” adjustment as set forth below.
Upon the occurrence of a “fundamental change”, including a change of control of the Company or the Company failing to comply with the covenants to maintain the current headquarters, employees and facilities of the Company in the province of Quebec, holders of 2023 Convertible Debentures will either (i) convert all of their 2023 Convertible Debentures, with the number of Common Shares issuable upon such conversion being subject to a grid-based “make-whole” adjustment, or (ii) require the Company to repurchase for cash all of their 2023 Convertible Debentures at a repurchase price equal to 150% of the principal amount and the accrued, compounded and unpaid interest.
In the event holders of 2023 Convertible Debentures elect to convert their 2023 Convertible Debentures upon a fundamental change or an event of default, the number of Common Shares issuable upon such conversion will be subject to a grid-based “make-whole” adjustment pursuant to which the conversion rate determining the number of Common Shares issuable will be increased by a number of Additional Shares, (i) in the case of a conversion in connection with a fundamental change, based on a reference price on the date on which the fundamental change occurs or becomes effective, or (ii) in the case of a conversion following an event of default, based on a reference price on the date on which the holder exercises its conversion right.
8.0Dividends
The Company has never declared or paid any dividends on its Common Shares, and the Company anticipates reinvesting earnings to finance its business and its growth strategy, and does not anticipate declaring any cash dividends to holders of Common Shares in the foreseeable future.
The payment of future dividends, if any, will be reviewed periodically by Lion’s Board of Directors and will depend upon, among other things, conditions then existing including earnings, financial conditions, cash on hand, financial requirements to fund the Company’s commercial activities, contractual restrictions (including under the Revolving Credit Agreement), development and growth, and other factors that the Company’s Board may consider appropriate in the circumstances. See “Credit Agreement with Banking Syndicate” under section 9 entitled “Description of Material Indebtedness” of this Annual Information Form.
9.0Description of Material Indebtedness
Credit Agreement with Banking Syndicate
Lion is a party to the Revolving Credit Agreement which was entered into on August 11, 2021 with a syndicate of lenders represented by National Bank of Canada, as administrative agent and collateral agent, and including Bank of Montreal and Federation des Caisses Desjardins du Quebec, as amended on January 25, 2022, to increase the maximum principal amount that may become available from time to time under the revolving credit facility, subject to the borrowing base and compliance with the covenants contained under the Revolving Credit Agreement, from $100,000,000 to $200,000,000. The Revolving Credit Agreement was further amended on July 19, 2023 (the "July 2023 Amendment") to permit the incurrence of the 2023 Financing, extend the maturity of the Revolving Credit Agreement by one year to
26 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
August 11, 2025, and provide for an availability block and the establishment of an interest reserve account.
The credit facility under the Revolving Credit Agreement is available for use to finance working capital and for other general corporate purposes, and available to be drawn subject to a borrowing base comprised of eligible accounts (including insured or investment grade accounts) and eligible inventory, in each case, subject to customary eligibility and exclusionary criteria, advance rates and reserves.
The credit facility under the Revolving Credit Agreement currently bears interest at a floating rate by reference to the Canadian prime rate or pursuant to banker’s acceptance based on the CDOR rate, if in Canadian dollars, or the U.S. base rate or Term Secured Overnight Financing Rate (SOFR), if in U.S. dollars, as applicable, plus the relevant applicable margin. The Revolving Credit Agreement matures on August 11, 2025. The obligations under the Revolving Credit Agreement are secured by a first priority security interest, hypothec and lien on substantially all of Lion’s and certain of its subsidiaries’ movable property and assets (subject to certain exceptions and limitations). The Revolving Credit Agreement includes certain customary affirmative covenants, restrictions and negative covenants on Lion’s and its subsidiaries’ activities, subject to certain exceptions, baskets and thresholds. The Revolving Credit Agreement also provides for customary events of default, in each case, subject to customary grace periods, baskets and materiality thresholds. Finally, the Revolving Credit Agreement also requires Lion to maintain certain financial ratios and namely, an all times tangible net worth test and a springing fixed charge coverage ratio based on a minimum availability test which may, from time to time, impact the maximum amount available under the revolving credit facility. Further, in accordance with the July 2023 Amendment, the amount available under the revolving credit facility provided under the Revolving Credit Agreement is subject to an availability block of C$10,000,000 which, upon availability dropping below 30% and so long as no default then exist or would result therefrom, may become available and be drawn to fund an interest reserve account to be made subject to the control of the administrative agent and collateral agent under the Revolving Credit Agreement. Such interest reserve account amounts can be used to pay interest under the Non-Convertible Debentures if no default or event of default shall have occurred and be continuing or shall result therefrom.
This description of the Revolving Credit Agreement is only a summary of the material features of the Revolving Credit Agreement. This summary should be read in conjunction with, and is qualified in its entirety by reference to, the Revolving Credit Agreement, which is available on the Company’s profiles on SEDAR+ at www.sedarplus.ca and EDGAR at www.sec.gov.
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Financing Agreement with Investissement Quebec
On July 1, 2021, the Company entered into the IQ Loan with Investissement Quebec relating to the construction of the Lion Campus. The IQ Loan provides for financing of up to C$50,000,000. On July 19, 2023, in connection with the 2023 Debenture Financing, the IQ Loan was amended (the “IQ Loan 2023 Amendment”) to allow holders of the Non-Convertible Debentures to benefit from a second-priority hypothec on substantially all movable/personal property of the Company, subject to certain exceptions in regards to excluded assets, and a first-rank hypothec on each of the immovable/real rights related to the Company’s Innovation Center facility located in Mirabel, Quebec and battery factory equipment financed by Investissement Quebec.
As part of the IQ Loan 2023 Amendment, the potential forgiveness of up to 30% of the IQ Loan subject to certain criteria tied to the Company and to the operations of the facilities, including the creation and maintenance of workforce and certain minimum spending related to R&D activities was replaced with certain financial penalties of up to C$3,000,000 and/or C$15,000,000 for the Company, pro-rated based on the proportion of criteria achieved and the borrowing amount relative to the C$50,000,000 maximum. Funds will be provided to the Company by way of reimbursement of a predetermined percentage of qualified expenditures incurred by the Company, such that the ultimate amount to be received by the Company from Investissement Quebec is dependent upon qualified expenditures being made by the Company in connection with the Lion Campus. The Company will conduct work, incur expenses and fund all costs from its own capital resources, and then submit claims to Investissement Quebec for reimbursement of a predetermined percentage of eligible qualified expenditures up to C$50,000,000. Disbursement by Investissement Quebec is conditional upon, among other things, the Company’s compliance with certain affirmative and negative covenants as set out in the IQ Loan, including covenants relating to Company’s creation and maintenance of workforce, operations and R&D activities.
The IQ Loan bears interest at a fixed rate of 4.41%, and will be repayable over a ten-year term, beginning in June 2027. The IQ Loan contains certain affirmative and negative covenants, including covenants relating to the Company’s workforce, operations and R&D activities and to the location of its head office in the Province of Quebec, as well as certain financial covenants. Following the IQ Loan 2023 Amendment and the purchase of the equipment used in the battery factory of the Company, the obligations under the IQ Loan are secured by a second-priority hypothec on the Company's immovable (real) property rights related to the Innovation Center facility located on the Lion Campus and the equipment used in connection with the battery factory of the Company, and a hypothec on substantially all of the Company’s other movable property and assets (subject to certain exceptions and limitations in regards to excluded assets) ranking after those securing the Revolving Credit Agreement, the Non-Convertible Debentures and the Finalta-CDPQ Loan Agreement.
In connection with the IQ Loan, the Company has undertaken in favour of Investissement Quebec to: (i) maintain its head office and principal decision making center in the Province of Quebec until the earlier of (a) the date on which Investissement Quebec ceases to hold at least 50% of the Common Shares it held as of closing of the Business Combination (including, for greater certainty, the Common Shares acquired in the PIPE Financing and any shares which Investissement Quebec may acquire from time to time through a treasury issuance of Lion), and (b) the date on which, at any time after May 6, 2026, Lion’s Board determines, in good faith, that maintaining Lion’s head office or its principal decision making center in the Province of Quebec would be incompatible with the exercise of its fiduciary duties under applicable laws; (ii) build and operate its first battery manufacturing and development plant in the Province of Quebec; and (iii) invest in its Quebec-based production capacity such that it can satisfy demand originating from Canadian-based clients through its Quebec plant(s).
Financing Agreement with Strategic Innovation Fund (SIF) of the Government of Canada
On August 19, 2021, the Company entered into an unsecured non-interest bearing loan agreement with the Strategic Innovation Fund of the Government of Canada relating to the construction of the Lion Campus (the “SIF Loan”). The SIF Loan provides for financing of up to C$49,950,000, of which up to 30% is expected to be forgiven subject to certain criteria tied to the Company and to the operations of the
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facilities, including the creation and maintenance of workforce and certain minimum spending related to R&D activities. Funds will be provided to the Company by way of reimbursement of a predetermined percentage of qualified expenditures incurred by the Company, such that the ultimate amount to be received by the Company from the SIF is dependent upon qualified expenditures being made by the Company in connection with the Lion Campus. The Company will conduct work, incur expenses and fund all costs from its own capital resources, and then submit claims to the SIF for reimbursement of a predetermined percentage of eligible qualified expenditures up to C$49,950,000. Disbursement by the SIF is conditional upon, among other things, the Company’s compliance with certain affirmative and negative covenants as set out in the SIF Loan, including covenants relating to Company’s creation and maintenance of workforce, operations and R&D activities. The SIF Loan is repayable over a 15-year term beginning in April 2026.
In connection with the SIF Loan, the Company has committed in favour of the Strategic Innovation Fund of the Government of Canada to maintain its headquarters and St-Jerome vehicle production facility and its battery assembly facility in the Province of Quebec, create and maintain a certain number of jobs in Canada, and make a minimum amount of research and development expenditures in Canada.
Loan Agreement with Finalta-CDPQ
On November 8, 2022, Lion entered into the Finalta-CDPQ Loan Agreement with Finalta, as lender and administrative agent, and Caisse de dépôt et placement du Quebec (through one of its subsidiaries), as lender, to finance certain refundable tax credits and grants under government programs. The Finalta-CDPQ Loan Agreement provides for a loan facility of up to a principal amount of C$30 million and bears interest at the rate of 10.95% per annum. The obligations thereunder are secured by a first priority security interest, hypothec and lien in certain tax credits and government grants and a subordinate security interest, hypothec and lien in substantially all other movable property and assets. The Finalta-CDPQ Loan Agreement matures on November 6, 2024. The Finalta-CDPQ Loan Agreement includes certain customary restrictions and negative covenants on Lion’s and its subsidiaries’ activities, subject to certain exceptions, baskets, and thresholds. The Finalta-CDPQ Loan Agreement also provides for customary events of default, in each case, subject to customary grace periods, baskets and materiality thresholds. Upon the occurrence and during the continuance of an event of default, the lenders would be entitled to demand the immediate repayment of all amounts owing to them under the Finalta-CDPQ Loan Agreement and/or the lenders may exercise their other rights, remedies and/or recourses.
2023 Convertible Debenture
On July 19, 2023, as part of the 2023 Financing, the Company issued by way of private placement to a group of subscribers comprised of Investissement Québec, Fonds de solidarité des travailleurs du Québec (F.T.Q.) and Fondaction the 2023 Convertible Debentures, for aggregate gross proceeds to the Company of approximately $74 million. The 2023 Convertible Debentures bear interest at the rate of 13% per annum, compounded monthly on the last day of each month. Prior to any accrual date, the Company has the right, at its discretion, to make an election to pay interest accrued on the principal for the applicable month in cash (in which case any interest so paid shall not be compounded). The 2023 Convertible Debentures will mature on July 19, 2028 and are convertible at the holders’ option into Common Shares at a conversion price of $2.58 per Common Share. See “2023 Convertible Debentures” under section 7 of this Annual Information Form entitled “Description of Capital Structure.”
2023 Non-Convertible Debenture
On July 19, 2023, as part of the 2023 Financing, the Company issued by way of private placement to a group of subscribers led by Mach Group and the Mirella & Lino Saputo Foundation the 2023 Non-Convertible Debentures for aggregate gross proceeds to the Company of C$90 million. The 2023 Non-Convertible Debentures bear interest at the rate of 11% per annum and are payable in cash quarterly. The 2023 Non-Convertible Debentures will mature on July 19, 2028. The Company will have the right, at any time after January 19, 2024, upon 30-day notice, to redeem all or part of the principal amount thereunder, without penalty, at a price equal to one hundred per cent (100%) of the principal amount so redeemed,
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plus accrued and unpaid interest on the principal amount so repaid, accruing to the date of such redemption.
The 2023 Non-Convertible Debentures contain customary covenants for an instrument of its nature, including covenants relating to compliance with the financial ratios and negative covenants included in the Revolving Credit Agreement (provided (i) that any amendment to the financial ratios to which the lenders under the Revolving Credit Agreement consent will automatically be incorporated in the 2023 Non-Convertible Debentures, and (ii) that a default shall only occur under the 2023 Non-Convertible Debentures if a financial ratio default occurs and is continuing on the date that is fifteen business days following the delivery of the Company's financial statements evidencing such event of default, and only if the lenders under the Revolving Credit Agreement have not waived or tolerated such event of default before the expiry of this fifteen business day period), in addition to certain covenants relating to maintaining the current headquarters, employees and facilities of the Company in the province of Quebec.
The 2023 Non-Convertible Debentures contain customary events of default for an instrument of its nature, including, among other things, (i) the occurrence of an event of default under the Revolving Credit Agreement if such default results in the acceleration of the payments owed thereunder and (ii) the occurrence of an event of default under any other debt instrument of the Company with a principal amount exceeding $15,000,000 if such default permits the acceleration of the payment of such debt.
The Non-Convertible Debentures constitute senior secured obligations of the Company and are secured by a hypothec and other liens on substantially all of the Company’s and certain of its subsidiaries’ movable/personal property as well as on the immovable/real rights related to the Company’s innovation center facility located in Mirabel, Quebec and guaranteed by such subsidiaries.
10.0Market for Securities
10.1Trading Price and Volume
Common Shares
The Common Shares are listed for trading on the NYSE and the TSX under the ticker symbol “LEV.” The following table shows the monthly range of high and low prices per share at the close of market on the TSX and on the NYSE for fiscal 2023. The table also shows the total monthly volumes and average daily volumes traded on the TSX and on the NYSE for fiscal 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TSX | NYSE |
| High C$ | | Low C$ | | Volume | | High $ | | Low $ | | Volume |
| 2023 | | | | | | | | | | | |
| January | C$3.73 | | C$2.72 | | 15,553,059 | | $2.79 | | $2.02 | | 28,231,610 |
| February | C$3.80 | | C$2.96 | | 8,793,661 | | $2.85 | | $2.20 | | 14,471,610 |
| March | C$3.25 | | C$2.32 | | 8,892,394 | | $2.39 | | $1.70 | | 21,715,498 |
| April | C$3.45 | | C$2.25 | | 8,803,984 | | $2.58 | | $1.68 | | 18,369,842 |
| May | C$3.23 | | C$2.48 | | 6,562,504 | | $2.42 | | $1.82 | | 14,685,245 |
| June | C$3.02 | | C$2.40 | | 7,065,956 | | $2.27 | | $1.82 | | 14,685,245 |
| July | C$3.53 | | C$2.53 | | 14,159,746 | | $2.68 | | $1.88 | | 23,214,959 |
| August | C$3.53 | | C$2.64 | | 10,451,454 | | $2.66 | | $1.95 | | 18,685,407 |
| September | C$3.08 | | C$2.52 | | 4,975,244 | | $2.27 | | $1.86 | | 11,564,574 |
| October | C$2.71 | | C$2.12 | | 3,917,150 | | $2.00 | | $1.53 | | 12,394,108 |
| November | C$2.58 | | C$2.05 | | 6,455,434 | | $1.88 | | $1.50 | | 11,247,420 |
December | C$2.60 | | C$2.14 | | 5,694,941 | | $1.94 | | $1.58 | | 10,150,920 |
30 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
Business Combination Warrants
The Business Combination Warrants are listed on the NYSE under the symbol “LEV WS” and on the TSX under the symbol “LEV.WT.” The following table shows the monthly range of high and low prices per warrant at the close of market on the TSX and on the NYSE for fiscal 2023. The table also shows the total monthly volumes and average daily volumes traded on the TSX and on the NYSE for fiscal 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TSX | NYSE |
| High C$ | | Low C$ | | Volume | | High $ | | Low $ | | Volume |
| 2023 | | | | | | | | | | | |
| January | C$0.70 | | C$0.41 | | 365,304 | | $0.51 | | $0.30 | | 1,668,707 |
| February | C$0.49 | | C$0.32 | | 115,049 | | $0.40 | | $0.21 | | 1,540,239 |
| March | C$0.44 | | C$0.29 | | 91,587 | | $0.34 | | $0.20 | | 1,604,871 |
| April | C$0.33 | | C$0.15 | | 1,321,805 | | $0.26 | | $0.11 | | 2,594,251 |
| May | C$0.34 | | C$0.25 | | 102,050 | | $0.26 | | $0.16 | | 1,706,121 |
| June | C$0.32 | | C$0.20 | | 128,435 | | $0.24 | | $0.16 | | 771,930 |
| July | C$0.41 | | C$0.20 | | 82,500 | | $0.32 | | $0.16 | | 1,220,049 |
| August | C$0.34 | | C$0.22 | | 98,296 | | $0.28 | | $0.15 | | 725,783 |
| September | C$0.26 | | C$0.16 | | 89,900 | | $0.19 | | $0.12 | | 1,567,752 |
| October | C$0.21 | | C$0.07 | | 104,142 | | $0.16 | | $0.08 | | 627,321 |
| November | C$0.19 | | C$0.09 | | 104,548 | | $0.15 | | $0.06 | | 1,011,285 |
December | C$0.12 | | C$0.06 | | 195,932 | | $0.11 | | $0.04 | | 1,452,960 |
2022 Warrants
The 2022 Warrants are listed on the NYSE under the symbol “LEV.WSA” and on the TSX under the symbol “LEV.WT.A.” The following table shows the monthly range of high and low prices per warrant at the close of market on the TSX and on the NYSE for fiscal 2023. The table also shows the total monthly volumes and average daily volumes traded on the TSX and on the NYSE for fiscal 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TSX | NYSE |
| High C$ | | Low C$ | | Volume | | High $ | | Low $ | | Volume |
| 2023 | | | | | | | | | | | |
| January | C$1.66 | | C$0.83 | | 277,100 | | $1.10 | | $0.61 | | 1,303,690 |
| February | C$1.51 | | C$1.00 | | 70,215 | | $1.08 | | $0.74 | | 414,362 |
| March | C$1.09 | | C$0.65 | | 244,105 | | $0.84 | | $0.50 | | 376,735 |
| April | C$1.09 | | C$0.73 | | 34,500 | | $0.85 | | $0.52 | | 173,746 |
| May | C$0.97 | | C$0.60 | | 89,500 | | $0.77 | | $0.43 | | 413,036 |
| June | C$0.82 | | C$0.51 | | 172,497 | | $0.61 | | $0.42 | | 82,378 |
| July | C$1.03 | | C$0.62 | | 112,300 | | $0.87 | | $0.48 | | 379,115 |
| August | C$1.13 | | C$0.65 | | 58,400 | | $0.81 | | $0.49 | | 152,616 |
| September | C$0.95 | | C$0.63 | | 19,200 | | $0.69 | | $0.45 | | 99,391 |
| October | C$0.72 | | C$0.60 | | 17,400 | | $0.57 | | $0.41 | | 38,197 |
| November | C$0.72 | | C$0.59 | | 18,500 | | $0.55 | | $0.39 | | 48,316 |
December | C$0.59 | | C$0.45 | | 43,375 | | $0.46 | | $0.31 | | 358,126 |
31 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
10.2Prior Sales
The 2023 Convertible Debentures and the 2023 Warrants are not listed or quoted on any marketplace.
On July 19, 2023, the Company issued 13% senior unsecured debentures maturing on July 19, 2028 and that are convertible in accordance with the terms thereof into Common Shares at a conversion price of $2.58. Also on July 19, 2023, the Company issued 22,500,000 Common Shares purchase warrants entitling the holders of the 2023 Non-Convertible Debentures to purchase, in accordance with the terms thereof, a total of 22,500,000 Common Shares at an exercise price of C$2.81 per share for a period of five years ending July 19, 2028. See “General Development of the Business - Financing Transactions for Aggregate Gross Proceeds of $142 million” under section 5 of this Annual Information Form entitled “General Development of the Business” and section 7 of this Annual Information Form entitled “Description of Capital Structure”.
11.0Directors and Officers
11.1Directors and Executive Officers
The following table sets out, as at the date hereof, certain information relating to each director of the Company, including their name, province or state and country of residence, and position(s) with the Company. Directors are elected annually and, unless re-elected, retire from office at the end of the next annual meeting of shareholders.
| | | | | | | | | | | |
| Name | Province or State and Country of Residence | Position(s) with the Company | Independent |
| Latasha Akoma | Florida, United States | Director | Yes |
| Sheila C. Bair | Maryland, United States | Director | Yes |
| Marc Bedard | Quebec, Canada | CEO-Founder and Director | No |
| Pierre Larochelle | Quebec, Canada | Director and Chairman of the Board | No |
| Dane L. Parker | Texas, United States | Director | Yes |
| Ann L. Payne | Florida, United States | Director | Yes |
| Pierre-Olivier Perras | Quebec, Canada | Director | No |
| Michel Ringuet | Quebec, Canada | Lead Director | Yes |
| Lorenzo Roccia | Italy | Director | Yes |
| Pierre Wilkie | Quebec, Canada | Director | Yes |
The Company’s Board has three standing committees: the Audit Committee, the Human Resources and Compensation Committee, and the Nominating and Corporate Governance Committee. Each of the committees operates under its own written charter adopted by the Company’s Board, each of which is available on Lion’s website.
The following table sets out, as at the date hereof, the composition of the committees of the Board of Directors.
| | | | | | | | |
| Human Resources and Compensation Committee | Nominating and Corporate Governance Committee | Audit Committee |
| Sheila C. Bair | Sheila C. Bair (Chair) | Latasha Akoma |
| Dane L. Parker | Dane L. Parker | Ann L. Payne |
| Pierre-Olivier Perras | Ann L. Payne | Michel Ringuet (Chair) |
| Pierre Wilkie (Chair) | Pierre-Olivier Perras | |
| Lorenzo Roccia | |
32 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
The following table sets out, as at the date hereof, certain information relating to each executive officer of the Company, including their name, province or state and country of residence, and position(s) with the Company.
| | | | | | | | | | | |
| Name | Province or State and Country of Residence | Position(s) with the Company | Executive Officer Since |
| Marc Bedard | Quebec, Canada | CEO-Founder and Director | 2008 |
| Nicolas Brunet | Quebec, Canada | President(1) | 2019 |
| Richard Coulombe | Quebec, Canada | Chief Financial Officer | 2023 |
| Dominique Perron | Quebec, Canada | Chief Legal Officer and Corporate Secretary | 2023 |
| Nathalie Giroux | Quebec, Canada | Chief People Officer | 2021 |
| Yannick Poulin | Quebec, Canada | Chief Operating Officer | 2016 |
(1) Mr. Brunet was appointed as President of the Company effective as of September 11, 2023. Prior to that, Nicolas served as Executive Vice President and Chief Financial Officer since December 2019. |
As a group, the directors and executive officers of the Company beneficially owned, or controlled or directed, directly or indirectly, a total of 27,363,965 Common Shares2, representing approximately 12.1% of the Common Shares outstanding, on a non-diluted basis, as at- December 31, 2023.
11.2Biographies
The following are brief profiles of the directors and executive officers of the Company, including a description of each individual’s principal occupation within the past five years.
Non-Executive Directors
Latasha Akoma
Latasha Akoma has served as a member of Lion’s Board since 2022. Ms. Akoma is Operating Partner at GenNx360 Capital Partner, a private equity firm focused on investing in industrial and business services companies in the U.S. middle market. Prior to joining GenNx360 Capital Partner in 2014, she held several executive leadership positions at Harley-Davidson Motor Company, a company she joined in 2009 as the Director of Operations, with responsibility for vehicle assembly and materials management. Prior to that, Ms. Akoma was a Senior Manager of Paint Operations at Chrysler (formerly DaimlerChrysler) where she held a variety of senior leadership positions in operations and general management. Ms. Akoma has over 26 years of managerial experience in all aspects of manufacturing, operations and business strategies. Ms. Akoma holds an MBA from Northwestern’s Kellogg School of Management, an MSc in Engineering Management from the University of Michigan, and a BSc in Mechanical Engineering with a minor in Energy & Robotics from Howard University.
Sheila C. Bair
Sheila C. Bair has served as a member of Lion’s Board since September 2020. She is the chair of the Nominating and Corporate Governance Committee. Ms. Baird is a corporate director. Ms. Bair was President of Washington College from August 2015 to June 2017. Prior to that, she was Senior Advisor to The Pew Charitable Trusts for four years. Ms. Bair was also Senior Advisor to DLA Piper, an international law firm from 2014 to 2015. Ms. Bair was the Chair of the Federal Deposit Insurance Corporation from June 2006 to July 2011. From 2002 to 2006, she was the Dean’s Professor of Financial Regulatory Policy for the Isenberg School of Management at the University of Massachusetts-Amherst. She also served as Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury from 2001 to 2002, Senior Vice President for Government Relations of the New York Stock Exchange from 1995 to 2000,
2 Includes 25,958,653 Common Shares held by 9368-2672 Quebec Inc., a corporation which Marc Bedard has control over, directly and indirectly, of a majority of the voting shares.
33 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
Commissioner of the Commodity Futures Trading Commission from 1991 to 1995, and as counsel to Kansas Republican Senate Majority Leader Bob Dole from 1981 to 1988. She is a frequent commentator and op-ed contributor on financial regulation and the student debt crisis, as well as author of the NY Times Best Seller, Bull by the Horns, her 2012 memoir of the financial crisis. She is also author of Albert Whitman’s Money Tales series for young people. Ms. Bair also serves on the board of directors of Bunge Limited, where she serves on the audit and risk committees. Ms. Bair previously served on the board of director of Thomson Reuters Corporation, where she served as chair of the risk committee, and Host Hotels & Resorts, Inc., where she served on the audit and nominating and corporate governance committees. Ms. Bair holds a bachelor’s degree and law degree from the University of Kansas.
Pierre Larochelle (Chair)
Pierre Larochelle has served as a member of Lion’s Board since October 2017, where he also serves as Chair of the Board. Mr. Larochelle has been an investor and financial advisor for the last 25 years. Since 2022, he is Co-Managing Partner at Idealist Capital. Previously, Mr. Larochelle was President and CEO of Power Energy, a subsidiary of Power Corporation of Canada and Partner, Co-Head of Energy Infrastructure at Power Sustainable Capital Inc., the parent company of Power Energy and a wholly-owned subsidiary of Power Corporation of Canada. Prior to joining Power Corporation of Canada, Mr. Larochelle was President and Chief Executive Officer at Adaltis Inc., a position he held between November 2003 and February 2009. Previously, he also held the positions of Vice-President, Business Development at Picchio Pharma Inc. and Vice-President, Mergers and Acquisitions for Credit Suisse First Boston in London, England. Mr. Larochelle started his career as a lawyer, at the Montreal offices of Ogilvy Renault. Mr. Larochelle also serves on the board of directors of Bellus Health Inc. Mr. Larochelle holds a law degree from Université de Montréal, a master’s degree in international business law from McGill University and an MBA degree from INSEAD in Fontainebleau, France.
Dane L. Parker
Dane L. Parker has served as a member of Lion’s Board since 2022. Mr. Parker is the former Chief Sustainability Officer and Vice President, Sustainable Workplaces at General Motors, where he served in such role from 2015 to 2021. In such a role, Mr. Parker was a leading force behind the company’s plan to become carbon neutral by 2040 and aspiration to have zero-emissions from all new light-duty vehicles by 2035. Mr. Parker also held global responsibilities for facility design, engineering, construction, operations, energy procurement and efficiency, real estate, environmental compliance, as well as workplace strategy. Prior to General Motor, Mr. Parker was Vice President, Global Environment, Health and Safety, Facilities and Real Estate for Dell, Inc. He also spent more than 13 years at Intel Corporation in the Technology and Manufacturing organization in a variety of operational roles, including as Director of Global Environment, Health and Safety. Mr. Parker earned his Bachelor’s in Political Sciences and his Master’s in Business Administration degrees from Brigham Young University.
Ann L. Payne
Ann L. Payne has served as a member of Lion’s Board since 2021. Ms. Payne served as an Audit Partner at PricewaterhouseCoopers LLP (“PwC”), a global accounting firm, from 1993 until her retirement in June 2019 and continued as a consultant until June 2020. At PwC, Ms. Payne provided professional services to domestic and international public and private corporations in the leisure, healthcare, and transportation sectors, led PwC’s first U.S. based audit outsourcing center and provided support services for PwC’s Audit Practice’s National Quality Office. She currently serves as a member of the board of directors of Inspirato Incorporated, a luxury hospitality brand listed on the NASDAQ, where she serves as the Audit Committee Chair and a member of the Nominating and Corporate Governance Committee. Ms. Payne currently holds leadership roles on several non-profit boards. Since September 2020, Ms. Payne has served as Chair of the Foundation Board for St. Thomas Aquinas High School. Since September 1980, Ms. Payne has been involved with and currently serves as the Treasurer and Board Member for Jack & Jill Children’s Center. Since January 1981, Ms. Payne has been a member of the Junior League of Greater Fort Lauderdale where she held numerous positions including President. She is a Certified Public Accountant in the state of Florida and is a member of the American Institute of Certified Public
34 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
Accountants. Ms. Payne holds a B.S., summa cum laude, from Barry University. She also attended Yale University’s Women on Boards Program and earned a Scholar Certificate from the Kellogg School of Management’s Executive Education Program. She earned a CERT - Certificate in Cybersecurity Oversight from Carnegie Mellon University, earned a Certificate from the University of South Florida’s Diversity, Equity, and Inclusion in the Workplace Program, and completed the National Association of Corporate Directors’ Virtual Director Professionalism Program.
Pierre-Olivier Perras
Pierre-Olivier Perras has served as a member of Lion’s Board since January 2021. Since 2019, Mr. Perras serves as President of Power Energy and, since 2020, Mr. Perras serves as Partner, Co-Head of Energy Infrastructure at Power Sustainable Capital Inc. Prior to joining Power Energy, Mr. Perras worked at BMO Capital Markets, for over two decades, where he held various leadership positions in the Investment and Corporate Banking Group, in his last role he was Head of the Power, Utilities and Infrastructure Group, leading an international team across North America and Europe. Prior to joining BMO Capital Markets, Mr. Perras was a senior consultant analyst with an actuarial consultant. As part of his role at Power Energy, Mr. Perras also serves as Chair of the board of directors of Nautilus Solar Energy and sits on the boards of Lumenpulse Inc. and Potentia Renewables Inc. Mr. Perras holds a Master of Business Administration degree from McGill University and a Bachelor of Science in Actuarial Sciences from Laval University. He is a Chartered Financial Analyst (CFA).
Michel Ringuet
Michel Ringuet has served as a member of Lion’s Board since October 2017 and is, since May 2021, the Company’s Lead Director. Mr. Ringuet is also the chair of the Audit Committee. From 2006 to 2016, Mr. Ringuet served as Chief Executive Officer of Master Group Inc., a leader in the distribution of HVAC/R equipment in eastern Canada, where he also served from 1990 to 2006 as Vice-President Finance and Administration. Prior to joining the Master Group, Mr. Ringuet worked in various finance and investment departments at the National Bank of Canada and Bank of Montréal. Mr. Ringuet sits on the board of Lumenpulse Inc., where he previously served on the audit committee while the company was listed on the TSX. Mr. Ringuet holds a bachelor’s degree in administration from Université Laval and an MBA from McGill University.
Lorenzo Roccia
Lorenzo Roccia has served as a member of Lion’s Board since 2021. Mr. Roccia is Chair of Transatlantic Holdings, an international financial holding company with interests in the financial services, logistics, energy, and beer sectors in the United States, Latin America and Europe, since 2009. Additionally, he is a Founder & Chair of Transatlantic Power Holdings and non-executive Director of Skyline Renewables, an independent renewable energy companies in the United States with over 1GW+ of Wind and Solar assets. Mr. Roccia founded Roccia Ventures, L.P. and became a major shareholder and Senior Analyst in the Private Equity Group of Wit Soundview, an internet and technology Investment Bank. Roccia Ventures, L.P. became one of the largest shareholders of the bank along with the Goldman Sachs Group, Draper Fisher Jurvetson and Mitsubishi Corporation. The firm was taken public and subsequently sold to the Charles Schwab Group. Mr. Roccia started his career with Salomon Smith Barney.
Pierre Wilkie
Pierre Wilkie has served as a member of Lion’s Board from 2011 to 2017 and again since May 2019. He is the chair of the Human Resources and Compensation Committee since February 2022. Mr. Wilkie is a serial entrepreneur who has founded or participated in the creation of many enterprises, including in the manufacturing industry. He is currently the co-owner of M.A.C. Métal Architectural Inc. He also serves as the President of Déco Nat Inc. Prior to that, he acted as the co-president of Laboratoire Dr Renaud Inc. Mr. Wilkie holds a bachelor’s degree in Economy and Finance from the École des Hautes Études Commerciales (HEC), Université de Montréal.
35 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
Executive Officers
Marc Bedard (CEO-Founder and Director)
Marc Bedard has served as Lion’s CEO—Founder and as a member of Lion’s Board since Lion’s incorporation in 2008. Prior to founding Lion, Mr. Bedard served as vice-president and chief financial officer of Les Entreprises Barrette Ltée, a leading manufacturer of wood and vinyl products for construction and exterior use in North America, from 2003 to 2007. Previously, Mr. Bedard was a partner at Pricewaterhouse LLP, a national partnership of professional accountants and consultants, from 1996 to 2003. Mr. Bedard is a certified chartered professional accountant and has been a member of the Ordre des comptables professionnels agréées du Quebec since 1987. Mr. Bedard holds a Bachelor of Business Administration from the École des Hautes Études Commerciales (HEC), Université de Montréal.
Nicolas Brunet (President)
Nicolas Brunet is the President of Lion since September 2023. He previously was Executive Vice-President and Chief Financial Officer since 2019. Prior to joining Lion, he was a Managing Director in BMO Capital Markets’ Montréal Investment and Corporate Banking Group, specializing in capital markets advisory and financing solutions. Mr. Brunet held various positions in the field of investment banking from 2004 to 2019, both at BMO Capital Markets and at NM Rothschild & Sons. Since 2022, M. Brunet sits on the Board of the CHU Sainte-Justine Foundation, one of the most important pediatric centers in North America. From 2012 to 2020, he sat on the Board of the Fondation Jeunes en Tête, a non-profit organization focused on the mental well-being of Québec’s youth, and acted as its treasurer from 2015 to 2020. Nicolas holds a Bachelor of Commerce from McGill University.
Richard Coulombe (Chief Financial Officer)
Richard Coulombe is the Chief Financial Officer of Lion since September 2023. He was previously Senior Vice President, Strategic Initiatives since 2021. Prior to joining Lion, Mr. Coulombe held several Senior Executive positions at Alstom, Bombardier Transportation and Pratt & Whitney, where he was involved in all aspects of strategic financial planning, including mergers and acquisitions, auditing and accounting. Mr. Coulombe holds a bachelor's degree in finance from the Université du Québec à Montréal (UQAM).
Nathalie Giroux (Chief People Officer)
Nathalie Giroux is the Chief People Officer of Lion since August 2021. Prior to joining Lion, she served in the same role at Uni-Select, an automotive aftermarket and refinishing specialty company, a company she joined following several years in the aviation industry, having held the position of Vice President of Human Resources, Defense and Security at CAE. Ms. Giroux also previously served in a management role overseeing global rewards at Molson Coors. Her past experience includes membership in several human resources and governance committees in numerous positions, and she has contributed to a number of successful corporate mergers and acquisitions. Mrs. Giroux holds a Bachelor of Science degree with a Minor in Business Studies from Concordia University. She also retains a fellow position at the Canadian Institute of Actuaries and is a Certified Corporate Director, in addition to serving as a Board Member of the Collège André-Grasset Foundation.
Dominique Perron (Chief Legal Officer and Corporate Secretary)
Dominique Perron is the Chief Legal Officer and Corporate Secretary of Lion since June 2023. Prior to joining Lion, Ms. Perron was Vice-President, Legal Affairs at Sagard, a multi-strategy alternative asset management firm, specializing in private equity and venture capital investments. Prior to Sagard, Ms. Perron was a Director, Legal Affairs at PSP Investments, one of Canada’s largest pension investment managers, advising on infrastructure, private equity and real estate transactions. Ms. Perron started her career as an Associate at Stikeman Elliott LLP focusing on mergers and acquisitions, corporate governance and securities law. She serves as a board member of Dress for Success Montreal and previously served as chair and board president for a number of not-for-profit governance, community and
36 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
fundraising initiatives. Ms. Perron holds a Civil Law (LL.L) degree from Laval University and a master’s degree (LL.M) from McGill University. She is also a member of the Quebec bar.
Yannick Poulin (Chief Operating Officer)
Yannick Poulin has served as Lion’s Chief Operating Officer since April 2016. From October 2013 to April 2016, Mr. Poulin held positions of increasing responsibility at Paradox Security Systems, an international security and alarm systems manufacturer and solutions provider, including the position of Chief Operating Officer and Plant General Manager. Previously, Mr. Poulin held various positions related to production and manufacturing at Electrolux, an international home appliance manufacturer. Mr. Poulin holds a Bachelor of Business Administration from the John Molson School of Business, Concordia University.
11.3Cease Trade Orders, Bankruptcies and Securities Penalties or Sanctions
None of the Company’s directors or executive officers is, as at the date of this Annual Information Form, or has been, within the 10 years prior to the date of this Annual Information Form, a director, chief executive officer or chief financial officer of any company (including the Company) that, while such person was acting in that capacity (or after such person ceased to act in that capacity but resulting from an event that occurred while that person was acting in such capacity), was the subject of a cease trade order, an order similar to a cease trade order, or an order that denied the company access to any exemption under securities legislation, in each case, for a period of more than 30 consecutive days.
None of the Company’s directors or executive officers is, as at the date of this Annual Information Form, or has been, within the 10 years prior to the date of this Annual Information Form, a director or executive officer of any company (including the Company), that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or comprise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.
None of the Company’s directors or executive officers has, within the 10 years prior to the date of this Annual Information Form, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or comprise with creditors, or had a receiver, receiver manager or trustee appointed to hold its assets.
No director or executive officer of the Company or shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company, nor any personal holding company of any such person has (i) been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority, or (ii) been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.
11.4Conflicts of Interest
To the best of the Company’s knowledge, there are no known existing or potential conflicts of interest among the Company and its directors, officers or other members of management as a result of their outside business interests except that certain of the Company’s directors and officers serve as directors and officers of other companies, and therefore it is possible that a conflict may arise between their duties to the Company and their duties as a director or officer of such other companies. See section 11 entitled “Directors and Officers” and section 14 entitled “Interest of Management and Others in Material Transactions.”
11.5Indemnification and Insurance
The Company has implemented a director and officer insurance program and has entered into indemnification agreements with each of its directors and executive officers. The indemnification
37 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
agreements generally require that the Company indemnify and hold the indemnitees harmless to the greatest extent permitted by law for liabilities arising out of the indemnitees’ service to the Company as directors and executive officers, provided that the indemnitees acted honestly and in good faith and in a manner the indemnitees reasonably believed to be in or not opposed to the Company’s best interests and, with respect to criminal and administrative actions or proceedings that are enforced by monetary penalty, the indemnitees had no reasonable grounds to believe that his or her conduct was unlawful. The indemnification agreements also provide for the advancement of defence expenses to the indemnitees by the Company.
12.0Audit Committee Information
12.1Charter of the Audit Committee
The Board of Directors has adopted a written charter (the “Charter of the Audit Committee”) describing the mandate of the audit committee (the “Audit Committee”). The Audit Committee’s responsibilities include:
•appointing, compensating, retaining and overseeing the work of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services and reviewing and appraising the audit efforts of the Company’s independent accountants;
•pre-approving audit and permissible non-audit services, and the terms of such services, to be provided by the Company’s independent registered public accounting firm;
•establishing procedures for (i) the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters and (ii) confidential and anonymous submissions by the Company’s employees of concerns regarding questionable accounting or auditing matters;
•engaging independent counsel and other advisers, as necessary and determining funding of various services provided by accountants or advisers retained by the committee;
•reviewing the Company’s financial reporting processes and internal controls;
•establishing, overseeing and dealing with issues related to the Company’s code of ethics for managers and financial officers;
•reviewing and approving related-party transactions or recommending related-party transactions for review by independent members of the Company’s Board; and
•providing an open avenue of communication among the independent accountants, financial and senior management and the Company’s Board.
Additional information relating to the Audit Committee can be found under the Company’s profiles on SEDAR+ at www.sedarplus.ca and on EDGAR at www.sec.gov and on the Company’s website at ir.thelionelectric.com. The text of the Charter of the Audit Committee is attached to this Annual Information Form as Appendix A.
12.2Composition of the Audit Committee
The Company’s Audit Committee is composed of three members, namely Michel Ringuet, Latasha Akoma and Ann L. Payne, with Mr. Ringuet serving as chair of the committee. Lion’s Board has determined that all such directors meet the independence requirements under the NYSE Company Manual, National Instrument 52-110 – Audit Committees (“NI 52-110”) and under Rule 10A-3 of the Exchange Act. Lion complies with NI 52-110 by relying on the exemptions for U.S. listed issuers thereunder. Each member of
38 | THE LION ELECTRIC COMPANY | 2023 Annual Information Form
the Audit Committee is also financially literate within the meaning of NI 52-110. See section 12.3 of this Annual Information Form entitled “Relevant Education and Experience of the Audit Committee Members.”
a.Relevant Education and Experience of the Audit Committee Members
Each member of the Audit Committee has (i) an understanding of the accounting principles used by the Company to prepare its financial statements, (ii) the ability to assess the general application of such accounting principles in connection with the accounting for estimates, accruals and provisions, (iii) experience in the preparation, audit, analysis or evaluation of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements (or experience in actively supervising individuals engaged in same), and (iv) an understanding of the internal controls and procedures necessary for financial reporting.
The education and experience of each Audit Committee member that is relevant to the performance of his or her responsibilities as an Audit Committee member is as follows:
| | | | | |
| Name | Relevant Experience |
Latasha Akoma Director since 2022 | Ms. Akoma is Operating Partner at GenNx360 Capital Partner, a private equity firm focused on investing in industrial and business services companies in the U.S. middle market. Prior to joining GenNx360 Capital Partner, she held several executive leadership positions at Harley-Davidson Motor Company, a company she joined in 2009 as the Director of Operations, with responsibility for vehicle assembly and materials management. Prior to that, Ms. Akoma was a Senior Manager of Paint Operations at Chrysler (formerly DaimlerChrysler) where she held a variety of increasing senior leadership positions in operations and general management. She brings over 26 years of managerial experience in all aspects of manufacturing, operations, and business strategies. Ms. Akoma holds an MBA from Northwestern’s Kellogg School of Management, an MSc in Engineering Management from the University of Michigan, and a BSc in Mechanical Engineering with a minor in Energy & Robotics from Howard University. |
Ann L. Payne Director since 2021 | Ms. Payne served as an Audit Partner at PricewaterhouseCoopers LLP, a global accounting firm, from 1993 until her retirement in June 2019 and continued as a consultant until June 2020. At PwC, Ms. Payne provided professional services to domestic and international public and private corporations in the leisure, healthcare, and transportation sectors, led PwC’s first U.S. based audit outsourcing center and provided support services for PwC’s Audit Practice’s National Quality Office. She currently serves as a member of the board of directors of Inspirato Incorporated, a luxury hospitality brand listed on the NASDAQ, where she serves as the Audit Committee Chair and a member of the Nominating and Corporate Governance Committee. She is a Certified Public Accountant in the state of Florida and is a member of the American Institute of Certified Public Accountants. Ms. Payne holds a B.S., summa cum laude, from Barry University. She also attended Yale University’s Women on Boards Program and earned a Scholar Certificate from the Kellogg School of Management’s Executive Education Program. She earned a CERT - Certificate in Cybersecurity Oversight from Carnegie Mellon University. |
Michel Ringuet Director since 2017 | Michel Ringuet has served as a member of Lion’s Board since October 2017 and is, since May 2021, the Company’s Lead Director. From 2006 to 2016, Mr. Ringuet served as Chief Executive Officer of Master Group Inc., a leader in the distribution of HVAC/R equipment in eastern Canada, where he also served from 1990 to 2006 as Vice-President Finance and Administration. Prior to joining the Master Group, Mr. Ringuet worked in various finance and investment departments at the National Bank of Canada and Bank of Montréal. Mr. Ringuet sits on the board of Lumenpulse Inc., where he previously served on the audit committee while the company was listed on the TSX. Mr. Ringuet holds a bachelor’s degree in administration from Université Laval and an MBA from McGill University. |
12.4Pre-Approval Policies and Procedures
In accordance with the provisions of the Charter of the Audit Committee, the Audit Committee is responsible for the pre-approval of all and any non-audit services to be provided to the Company or its subsidiary entities by the independent auditor, and any new mandates relating to non-audit services for which approval was not previously provided are confirmed with the Chair of the Audit Committee prior to the independent auditor performing any such services. At least annually, the Audit Committee reviews and confirms the independence of the independent auditor by obtaining statements from the independent auditor on any non-audit services.
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12.5External Auditor Service Fees
The Company’s independent auditors are Raymond Chabot Grant Thornton LLP, located at 600 de la Gauchetiere Street West, Suite 2000, Montreal, Quebec, H3B 4L8.
For fiscal 2023 and fiscal 2022, the Company was billed the following fees by its independent auditor, Raymond Chabot Grant Thornton LLP:
| | | | | | | | | | | | | | | | | | | | |
| Fiscal 2023 | | Fiscal 2022 |
Audit Fees(1) | C$607,250 | | C$599,225 |
Audit Related Fees(2) | C$67,250 | | C$86,500 |
Tax Fees(3) | C$96,800 | | C$99,966 |
All Other Fees(4) | C$86,500 | | C$77,000 |
| | | |
| Total Fees Paid | C$857,800 | | C$862,691 |
(1) “Audit Fees” include fees necessary to perform the annual audit or reviews of the consolidated financial statements. This category also includes audit or review fees related to procedures performed in connection with prospectus and registration statement filings. (2) “Audit Related Fees” include fees for assurance and related services by the independent auditor that are reasonably related to the performance of the audit or review of the Company’s financial statements other than those included in “Audit Fees”, such as advisory on accounting and reporting matters. (3) “Tax Fees” include fees for all tax services other than those included in “Audit Fees” and “Audit-Related Fees.” This category includes fees for tax compliance, as well assistance with responding to tax related questions. (4) “All Other Fees” include fees for products and services provided by the independent auditor other than those included above. This category includes fees related to translation services. |
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13.0Legal Proceedings and Regulatory Actions
From time to time, the Company is involved in legal or regulatory proceedings and claims arising in the ordinary course of business. When required, the Company accrues liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Except as described in this section 13 or elsewhere in this Annual Information Form, the Company is not currently, nor since the beginning of its most recently completed financial year has been, a party to any material litigation or regulatory proceeding and is not aware of any pending or threatened litigation or regulatory proceeding against it that could, if determined adversely to it, have a material adverse effect on its business, results of operations or financial condition.
The Company had initiated in fiscal 2022 arbitration proceedings in order to enforce the terms and conditions of the multi-year battery pack supply contract it had entered into with Romeo (who became a subsidiary of Nikola) in Novembre 2020. On June 30, 2023, Nikola announced the liquidation of Romeo's assets through the transfer of ownership of all of its assets for the benefit of its creditors. In light of such liquidation, the Company decided not to pursue its arbitration proceedings against Romeo, and to only maintain its legal proceedings against Nikola as further described below. Romeo’s failure to comply with its obligations under the multi-year battery pack supply contract resulted in delays in the commencement of the commercial production of the Lion8T, which is now expected to commence near the middle of fiscal 2024, and in the Company deciding to mount its Lion8T trucks with the Company’s proprietary battery packs manufactured at the Battery Plant. See “Products and Solutions” under section 6 of this Annual Information Form entitled “Business of the Company.”
In the context of the above-mentioned matter and the acquisition of Romeo by Nikola in the fourth quarter of fiscal 2022, in the beginning of fiscal 2023, the Company also initiated legal proceedings against Nikola, another manufacturer of electric vehicles which is also relying on battery modules and packs, seeking damages against Nikola on the basis that it intentionally interfered in the Company’s contractual
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relationship with Romeo and in the Company’s business expectancy with respect to its relationship with Romeo. Such legal proceedings are still ongoing.
On November 1, 2023, a putative verified class action complaint (the “Complaint”) was filed in the Delaware Court of Chancery against the pre-Business Combination directors and officers of NGA, now a wholly-owned subsidiary of the Company, and Northern Genesis Sponsor, LLC, the sponsor of NGA’s special purpose acquisition company merger with a wholly-owned subsidiary of the Company in May 2021 (the “Defendants”). The Complaint alleges, among other things, that the director and officer defendants and NGA’s sponsor breached their fiduciary duties in connection with the Business Combination as well as a related claim for unjust enrichment as a result of the challenged Business Combination. The Complaint seeks monetary damages, costs of the action, including plaintiffs’ attorneys’ fees and experts’ fees and expenses, and any other relief the court may deem just and proper. On February 9, 2024, the Defendants filed a motion to dismiss the Complaint, and briefing on the Defendants’ motion to dismiss is scheduled to conclude by March 2024. The Defendants consider the claims raised in the Complaint to be without merit and intend to defend against them vigorously. At this time, it is not possible to estimate potential losses, if any, related to the Complaint.
See section 23.0 of the Company's fiscal 2023 MD&A entitled “Risk Factors.”
14.0Interest of Management and Others in Material Transactions
Except as described in this section 14 or elsewhere in this Annual Information Form, none of (i) the directors or executive officers of the Company, (ii) the shareholders who beneficially own or control or direct, directly or indirectly, more than 10% of the voting shares of the Company, or (iii) any associate or affiliate of the persons referred to in (i) and (ii), has or has had any material interest, direct or indirect, in any transaction within the three most recently completed financial years or during the current financial year that has materially affected or is reasonably expected to materially affect the Company.
December 2022 Units Offering
PEC purchased 9,842,519 Units for an aggregate purchase price of approximately $25 million in connection with the December 2022 Offering.
Nomination Rights Agreement
Pursuant to the Nomination Rights Agreement entered into on May 6, 2021 between the Company, PEC and 9368-2672 Quebec Inc. (“9368-2672”), to the extent that any party and its permitted holders (including its affiliates) collectively hold at least 20% of the outstanding Common Shares (on a non-diluted basis), such party is entitled to designate a number of director nominees, between two and four nominees, equal to the product of (rounding to the nearest whole number) (i) the percentage of the outstanding Common Shares held by it (on a non-diluted basis) multiplied by (ii) the size of Lion’s Board. In addition, 9368-2672 will, for so long as it and its affiliates collectively hold at least 5% of the outstanding Common Shares (on a non-diluted basis), be entitled to designate (i) for so long as Marc Bedard serves as chief executive officer of Lion, one director nominee (in addition to Marc Bedard, who will be appointed to Lion’s Board for so long as he serves as chief executive officer thereof) and (ii) at any other time, Marc Bedard as a director nominee. See “Nomination Rights Agreement” under section 16 of this Annual Information Form entitled “Material Contracts.”
Registration Rights Agreement
Effective as of closing of the Business Combination, Lion entered into the Registration Rights Agreement pursuant to which, subject to the terms and conditions contained therein, each of Power Energy, 9368-2672 and the Specified Warrantholder were granted certain rights with respect to the registration or qualification by prospectus in the United States and/or Canada of the sale of the Common Shares held by them. See “Registration Rights Agreement” under section 16 of this Annual Information Form entitled “Material Contracts.”
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PIPE Financing
In connection with the PIPE Financing, Lion entered into subscription agreement with PEC pursuant to which PEC purchased, subject to the terms and conditions contained therein, a total of 1,662,500 Common Shares for a total purchase price of $16,625,000. In addition, Lion entered into subscription agreements with certain of Lion’s shareholders, directors and/or officers pursuant to which such subscribers purchased, directly or indirectly, subject to the terms and conditions contained therein, Common Shares at a purchase price of $10.00 per share. Such Common Shares were acquired upon the same terms and conditions as the Common Shares acquired by all other subscribers in the PIPE Financing.
15.0Transfer Agent and Registrar
The transfer agent and registrar for the Company’s Common Shares in Canada is TSX Trust Company, at its principal offices in Montreal, Quebec and Toronto, Ontario, and in the United States is Equiniti Trust Company, LLC, at its principal office in New York, NY.
The warrant agent for the Business Combination Warrants is Equiniti Trust Company, LLC, at its principal office in New York, NY.
The warrant agent for the 2022 Warrants is TSX Trust Company, at its principal offices in Montreal, Quebec and Toronto, Ontario.
16.0Material Contracts
The following are the only material contracts, other than those contracts entered into in the ordinary course of business, which the Company has entered into since the beginning of the last financial year ended December 31, 2023, or entered into prior to such date, but which are still in effect.
Each of the summaries below describes certain material provisions of the relevant material contract and is subject to, should be read in conjunction with, and is qualified in its entirety by reference to, the relevant material contract, a copy of which is on the Company’s profiles on SEDAR+ at www.sedarplus.ca and EDGAR at www.sec.gov.
Credit Agreement with Banking Syndicate
Lion is a party to the Revolving Credit Agreement which was entered into on August 11, 2021 with a syndicate of lenders represented by National Bank of Canada, as administrative agent and collateral agent, and including Bank of Montreal and Federation des Caisses Desjardins du Quebec, as amended on January 25, 2022, to increase the maximum principal amount that may become available from time to time under the revolving credit facility, subject to the borrowing base and compliance with the covenants contained under the Revolving Credit Agreement, from $100,000,000 to $200,000,000. The Revolving Credit Agreement was further amended on July 19, 2023 to permit the incurrence of the 2023 Financing, extend the maturity of the Revolving Credit Agreement by one year to August 11, 2025, and provide for an availability block and the establishment of an interest reserve account. The credit facility under the Revolving Credit Agreement is available for use to finance working capital and for other general corporate purposes, and available to be drawn subject to a borrowing base comprised of eligible accounts (including insured or investment grade accounts) and eligible inventory, in each case, subject to customary eligibility and exclusionary criteria, advance rates and reserves. See “Credit Agreement with Banking Syndicate” under section 9 of this Annual Information Form entitled “Description of Material Indebtedness.”
Registration Rights Agreement
On May 6, 2021, Lion entered into a registration rights agreement among the Company, PEC, 9368-2672 and the Specified Warrantholder (the “Registration Right Agreement”), pursuant to which, subject to the terms and conditions contained therein, each of PEC, 9368-2672 and the Specified Warrantholder were granted certain rights with respect to the registration or qualification by prospectus in the United States and/or Canada of the sale of the Common Shares held by them.
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Pursuant to the Registration Rights Agreement, to the extent that any party and its permitted transferees (including its affiliates) hold at least 10% of the outstanding Common Shares on a non-diluted basis and provided such Common Shares are “Registrable Securities” as contemplated by the Registration Rights Agreement, such party is entitled to certain demand registration rights which enable them to require Lion to file a registration statement and/or a Canadian prospectus and otherwise assist with underwritten public offerings of Common Shares under the Securities Act and applicable Canadian securities laws, in accordance with the terms and conditions of the Registration Rights Agreement. Each party is also entitled to certain incidental registration rights in connection with demand registrations initiated by another party to the Registration Rights Agreement, as well as to certain “piggy-back” registration rights in the event that Lion proposes to register securities as part of a public offering. All costs and expenses associated with any demand registration or “piggy-back” registration will be borne by Lion other than underwriting discounts, commissions and transfer taxes, if any, attributable to the sale of Common Shares by the applicable selling shareholder. Lion will also be required to provide indemnification and contribution for the benefit of the other parties to the Registration Rights Agreement and their respective affiliates and representatives in connection with any demand registration or “piggy-back” registration.
Nomination Rights Agreement
On May 6, 2021, Lion entered into a nomination rights agreement among the Company, PEC and 9368-2672 (the “Nomination Rights Agreement”) pursuant to which, subject to the terms and conditions contained therein, each of PEC and 9368-2672 were granted certain rights to nominate members of Lion’s Board (including, in certain cases, members of committees of Lion’s Board) for so long as it holds a requisite percentage of the total voting power of Lion.
Pursuant to the Nomination Rights Agreement, to the extent that any party and its permitted holders (including its affiliates) collectively hold at least 20% of the outstanding Common Shares (on a non-diluted basis), such party is entitled to designate a number of director nominees, between two and four nominees, equal to the product of (rounding to the nearest whole number) (i) the percentage of the outstanding Common Shares held by it (on a non-diluted basis) multiplied by (ii) the size of Lion’s Board. In addition, 9368-2672 will, for so long as it and its affiliates collectively hold at least 5% of the outstanding Common Shares (on a non-diluted basis), be entitled to designate (i) for so long as Marc Bedard serves as chief executive officer of Lion, one director nominee (in addition to Marc Bedard, who will be appointed to Lion’s Board for so long as he serves as chief executive officer thereof) and (ii) at any other time, Marc Bedard as a director nominee.
The nomination rights contained in the Nomination Rights Agreement provide that PEC and 9368-2672, at the relevant time, will cast all votes to which they are entitled to elect directors designated in accordance with the terms and conditions of the Nomination Rights Agreement.
The Nomination Rights Agreement further provides that for so long as PEC has the right to designate a director nominee, it shall have the right to designate one of its director nominees as the Chair of Lion’s Board. In the event that such designated director nominee is not an independent director, the remaining directors will select a lead independent director from amongst the independent directors of Lion’s Board.
The foregoing rights of PEC and 9368-2672 to so designate director nominees will be submitted for approval of Lion’s shareholders at the first annual meeting of the shareholders of Lion to be held following the fifth anniversary of the date of the Nomination Rights Agreement (May 6, 2026), and at every fifth annual meeting of the shareholders of Lion shareholders thereafter. Failing approval by the shareholders of Lion, such nomination rights will become void and shall have no further force or effect.
Business Combination Warrant and Business Combination Warrant Assignment Agreement
Upon completion of the Business Combination, each outstanding warrant to purchase shares of NGA’s common stock was converted into a Business Combination Warrant, with each Business Combination Warrant entitling the holder thereof to acquire one Common Share at a price of $11.50 per share. Pursuant the Warrant Assignment Agreement, on May 6, 2021, NGA assigned to Lion all of NGA’s rights,
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interests and obligations in and under the Business Combination Warrant Agreement, and Lion accepted such assignment and assumed all of NGA’s obligations thereunder. See “Business Combination Warrants” under section 7 entitled “Description of Capital Structure” of this Annual Information Form for a description of the terms of the Business Combination Warrants.
Warrant Indenture governing the 2022 Warrants
On December 16, 2022, the Company entered into the 2022 Warrant Indenture with TSX Trust Company, as warrant agent, in connection with closing of the December 2022 Offering. The 2022 Warrant Indenture governs the 2022 Warrants. Each whole 2022 Warrant entitles the holder thereof to acquire one Common Share at an exercise price of $2.80 per Common Share for a period of five years ending December 15, 2027, subject to adjustment in certain customary events. See “2022 Warrants” under section 7 entitled “Description of Capital Structure” of this Annual Information Form for a description of the terms of the Business Combination Warrants.
Master Purchase Agreement with Amazon Logistics, Inc.
Lion entered into a master purchase agreement effective June 29, 2020 and a work order effective July 6, 2020 with the Specified Customer, being Amazon Logistics, Inc., that sets a framework for the purchase by the Specified Customer of Lion6 and Lion8 Tractor all-electric trucks. Under the MPA, Lion is required to, subject to the terms and conditions set out therein, among other things, reserve the necessary manufacturing capacity to meet forecasted volumes and delivery schedules agreed upon with the Specified Customer in accordance with the terms of the MPA. Pursuant to the MPA, Lion may be required to reserve manufacturing capacity in respect of forecasted volumes representing up to 500 trucks per year from 2021 to 2025 and the greater of 500 trucks per year or 10% of Lion’s manufacturing capacity from 2026 to 2030. In addition, Lion is required to provide ongoing maintenance and training assistance to the Specified Customer under the terms of the MPA. Other than vehicles that are subject to an existing purchase order, the Specified Customer is not required to purchase any specified minimum quantity of vehicles from Lion under the MPA. The MPA will remain in force until December 31, 2025, unless terminated earlier in accordance with its terms. Thereafter, the MPA will be automatically renewed on a month-to-month basis until either party terminates the MPA in accordance with its terms. The Specified Customer may terminate the MPA at any time without cause by providing at least six months’ prior written notice to Lion or upon the occurrence of certain events, including a material breach by Lion of the MPA, certain insolvency events and upon a change of control of Lion (as defined in the Specified Customer Warrant). Under the MPA, except in specific circumstances, the Specified Customer may not cancel any previously submitted and accepted purchase order within three (3) months of a scheduled delivery date, and any cancellation occurring during the period from the date that is six (6) months and the date that is three (3) months prior to a scheduled delivery date triggers the payment of a cancellation fee. Any submitted and accepted purchase order may be cancelled by the Specified Customer without penalty prior to the date that is six (6) months prior to a scheduled delivery date.
Specified Customer Warrant
In connection with entering into the MPA, Lion issued on July 1, 2020 the Specified Customer Warrant to the Specified Warrantholder which vests, subject to the terms and conditions contained therein, based on the aggregate amount of spending by the Specified Customer and its affiliates on Lion products or services. At the election of the Specified Warrantholder, any vested portion of the Specified Customer Warrant can be exercised either on a cash basis by the payment of the applicable exercise price or on a net issuance basis based on the in-the-money value of the Specified Customer Warrant. The exercise price of the Specified Customer Warrant corresponds to $5.66 per Common Share and the Specified Customer Warrant will be, if and when fully vested, exercisable for 35,350,003 Common Shares upon an exercise on a cash basis. Full vesting of the Specified Customer Warrant requires spending of at least $1.2 billion on Lion products or services over the term of the Specified Customer Warrant, subject to partial or full accelerated vesting upon the occurrence of certain events, including a change of control of Lion (as such term is defined in the Specified Customer Warrant) or a termination of the MPA by the Specified Customer for cause. See “Specified Customer Warrant” under section 7 entitled “Description of
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Capital Structure” of this Annual Information Form for a description of the terms of the Specified Customer Warrant.
17.0Interest of Experts
The independent auditors of the Company are Raymond Chabot Grant Thornton LLP, an independent registered public accounting firm, located at 600 de la Gauchetiere Street West, Suite 2000, Montreal, Quebec, H3B 4L8. Raymond Chabot Grant Thornton LLP has confirmed that it is independent of the Company within the meaning of the Code of Ethics of Chartered Professional Accountants (Quebec) and of the U.S. Securities Act of 1933, and the applicable rules and regulations thereunder adopted by the SEC and the Public Company Accounting Oversight Board (United States).
18.0Certain United States Federal Income Tax Considerations
The following is a summary of material U.S. federal income tax considerations that are likely to be relevant to the purchase, ownership and disposition of the Common Shares by a U.S. Holder (as defined below).
This summary is based on provisions of the Internal Revenue Code of 1986 (the “Code”), and regulations, rulings and judicial interpretations thereof, in force as of the date hereof, and the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital dated August 16, 1984 (as amended by any subsequent protocols) (the “Treaty”). Those authorities may be changed at any time, perhaps retroactively, so as to result in U.S. federal income tax consequences different from those summarized below.
This summary is not a comprehensive discussion of all of the tax considerations that may be relevant to a particular investor’s decision to purchase, hold, or dispose of Common Shares. In particular, this summary is directed only to U.S. Holders that hold Common Shares as capital assets and does not address particular tax consequences that may be applicable to U.S. Holders who may be subject to special tax rules, such as banks, brokers or dealers in securities or currencies, traders in securities electing to mark to market, financial institutions, life insurance companies, tax-exempt entities, regulated investment companies, entities or arrangements that are treated as partnerships for U.S. federal income tax purposes (or partners therein), holders that own or are treated as owning 10% or more of the Company’s stock by vote or value, persons holding Common Shares as part of a hedging or conversion transaction or a straddle, or persons whose functional currency is not the U.S. dollar. Moreover, this summary does not address state, local or foreign taxes, the U.S. federal estate and gift taxes, or the Medicare contribution tax applicable to net investment income of certain non-corporate U.S. Holders, or alternative minimum tax consequences of acquiring, holding or disposing of Common Shares.
For purposes of this summary, a “U.S. Holder” is a beneficial owner of Common Shares that is for U.S. federal income tax purposes: (i) a citizen or individual resident of the United States; (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) organized under the laws of the United States, any state thereof or the District of Columbia; (iii) an estate whose income is subject to U.S. federal income taxation regardless of its source; or (iv) a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
U.S. Holders should consult their own tax advisors about the consequences of the acquisition, ownership, and disposition of the Common Shares, including the relevance to their particular situations of the considerations discussed below and any consequences arising under foreign, state, local or other tax laws.
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Taxation of Dividends
Subject to the discussion below under “Passive Foreign Investment Company Status,” the gross amount of any distribution of cash or property with respect to Common Shares (including any amount withheld in respect of Canadian taxes) that is paid out of the Company’s current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) will generally be includible in a U.S. Holder’s taxable income as ordinary dividend income on the day on which the U.S. Holder receives the dividend and will not be eligible for the dividends-received deduction allowed to corporations under the Code.
The Company does not expect to maintain calculations of its earnings and profits in accordance with U.S. federal income tax principles. U.S. Holders therefore should expect that distributions generally will be treated as dividends for U.S. federal income tax purposes.
For a U.S. Holder, dividends paid in a currency other than U.S. dollars generally will be includible in income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day the U.S. Holder receives the dividends. Any gain or loss on a subsequent sale, conversion or other disposition of such non-U.S. currency by such U.S. Holder generally will be treated as ordinary income or loss and generally will be income or loss from sources within the United States.
Subject to certain exceptions for short-term positions, the U.S. dollar amount of dividends received by an individual with respect to the Common Shares will be subject to taxation at a preferential rate if the dividends are “qualified dividend income.” Dividends paid on the Common Shares will be treated as qualified dividend income if:
•the Common Shares are readily tradable on an established securities market in the United States or the Company is eligible for the benefits of a comprehensive tax treaty with the United States that the U.S. Treasury determines is satisfactory for purposes of this provision and that includes an exchange of information program; and
•the Company was not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (a “PFIC”).
The Common Shares are listed on the New York Stock Exchange, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. As further discussed below under “— Passive Foreign Investment Company Status”, based on the Company’s financial statements and the Company’s expectations about the nature and amount of its income, assets and activities and the market value of its equity, the Company does not believe that it was a PFIC for its taxable year ending December 31, 2023. U.S. Holders should consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of their own particular circumstances.
Subject to generally applicable limitations and conditions, Canadian dividend withholding tax paid at the appropriate rate applicable to the U.S. Holder may be eligible for a credit against such U.S. Holder’s U.S. federal income tax liability. If the Canadian dividend tax is not a creditable tax for a U.S. Holder or the U.S. Holder does not elect to claim a foreign tax credit for any foreign income taxes paid or accrued in the same taxable year, the U.S. Holder may be able to deduct the Canadian tax in computing such U.S. Holder’s taxable income for U.S. federal income tax purposes. Dividend distributions will constitute “foreign source” income and, for U.S. Holders that elect to claim foreign tax credits, generally will constitute “passive category income” for foreign tax credit purposes.
The availability and calculation of foreign tax credits and deductions for foreign taxes depend on a U.S. Holder’s particular circumstances and involve the application of complex rules to those circumstances. U.S. Holders should consult their own tax advisors regarding the application of these rules to their particular situations.
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Taxation of Dispositions of Common Shares
Upon a sale, exchange or other taxable disposition of the Common Shares, U.S. Holders will realize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the disposition and the U.S. Holder’s adjusted tax basis in the Common Shares as determined in U.S. dollars. Subject to the discussion below under “– Passive Foreign Investment Company Status,” such gain or loss will be capital gain or loss, and will generally be long-term capital gain or loss if the Common Shares have been held for more than one year. Long-term capital gain realized by a U.S. Holder that is an individual generally is subject to taxation at a preferential rate. The deductibility of capital losses is subject to limitations.
Capital gain or loss recognized by a U.S. Holder on the sale or other disposition of the Common Shares generally will be U.S. source gain or loss for U.S. foreign tax credit purposes. U.S. Holders should consult their own tax advisors regarding the application of the foreign tax credit rules to a sale or other disposition of the Common Shares and any Canadian tax imposed on such sale or disposition.
Passive Foreign Investment Company Status
Special U.S. tax rules apply to non-U.S. companies that are considered to be PFICs. The Company will be classified as a PFIC in a particular taxable year if either
•75 percent or more of its gross income for the taxable year is passive income; or
•the average percentage of the value of its assets that produce or are held for the production of passive income is at least 50 percent.
Based on the Company’s financial statements and the Company’s expectations about the nature and amount of its income, assets and activities and the market value of its equity, the Company does not believe that it was a PFIC for its taxable year ending December 31, 2023. The final determination of whether we may be classified as a PFIC for the current taxable year will not be able to be made until after the end of the year and will depend on all of the relevant facts and circumstances available at that time. No assurance can be given that we will not be a PFIC for the current or any future taxable year.
Although our PFIC status is determined annually, an initial determination that we are a PFIC will generally apply for subsequent years to a U.S. Holder who held Common Shares while the Company was a PFIC, whether or not the Company meets the test for PFIC status in those subsequent years. In the event that the Company is classified as a PFIC in any taxable year that is included in the holding period of a U.S. Holder of Common Shares, and the U.S. Holder did not make a timely mark-to-market election or “qualified electing fund” (“QEF”) election (as described below), such U.S. Holder generally would be subject to adverse tax consequences with respect to (i) any gain realized from the sale or other taxable disposition of Common Shares; and (ii) any “excess distribution” made to the U.S Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect of Common Shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the Common Shares).
Under these rules:
•the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the Common Shares;
•the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution, or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we are a PFIC, will be taxed as ordinary income;
•the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and
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•an additional tax equal to the interest charge generally applicable to underpayments of tax will be imposed on the U.S. Holder with respect to the tax attributable to each such other taxable year of the U.S. Holder.
Mark-to-Market Election
In general, if the Company is a PFIC and the Common Shares constitute “marketable stock” (which the Company expects to be the case for so long as Common Shares are listed on the NYSE), and such U.S. Holder, at the close of the first taxable year in which it holds (or is deemed to hold) Common Shares, makes a valid mark- to-market election with respect to such shares for such taxable year, such U.S. Holder generally will not be subject to the PFIC rules described above. Instead, in general, the U.S. Holder will include for each of its taxable years as ordinary income the excess, if any, of the fair market value of its Common Shares at the end of such year over its adjusted basis in its Common Shares. These amounts of ordinary income would not be eligible for the reduced tax rates applicable to qualified dividend income or long-term capital gains. The U.S. Holder also will recognize an ordinary loss in respect of the excess, if any, of its adjusted basis of its Common Shares over the fair market value of its Common Shares at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). A U.S. Holder’s basis in its Common Shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of its Common Shares will be treated as ordinary income. U.S. Holders should consult their tax advisors regarding the availability and tax consequences of a mark-to-market election with respect to their Common Shares under their particular circumstances.
QEF Election
A U.S. Holder generally will not be subject to the PFIC rules described above if such U.S. Holder makes a timely QEF election effective beginning with the first taxable year in the holder’s holding period in which the corporation is a PFIC. However, we currently do not intend to provide U.S. Holders with the information necessary to make a QEF election. U.S. Holders should consult their own tax advisors regarding the rules for making a QEF election.
A U.S. Holder that owns an equity interest in a PFIC must annually file IRS Form 8621. A failure to file one or more of these forms as required may toll the running of the statute of limitations in respect of each of the U.S. Holder’s taxable years for which such form is required to be filed. As a result, the taxable years with respect to which the U.S. Holder fails to file the form may remain open to assessment by the IRS indefinitely, until the form is filed.
The rules dealing with PFICs, the mark-to-market election and the QEF election are very complex and are affected by various factors in addition to those described above. Accordingly, investors should consult their own tax advisors concerning the application of the PFIC rules to Common Shares under their particular circumstances.
Foreign Financial Asset Reporting.
Certain U.S. Holders that own “specified foreign financial assets” with an aggregate value in excess of $50,000 on the last day of the taxable year, or $75,000 at any time during the taxable year, are generally required to file an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer that are not held in accounts maintained by financial institutions. The understatement of income attributable to “specified foreign financial assets” in excess of $5,000 extends the statute of limitations with respect to the tax return to six years after the return was filed.
U.S. Holders who fail to report the required information could be subject to substantial penalties. Prospective investors are encouraged to consult with their own tax advisors regarding the possible application of these rules, including the application of the rules to their particular circumstances.
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Backup Withholding and Information Reporting
Dividends paid on, and proceeds from the sale or other disposition of, the Common Shares to a U.S. Holder generally may be subject to the information reporting requirements of the Code and may be subject to backup withholding unless the U.S. Holder provides an accurate taxpayer identification number and makes any other required certification or otherwise establishes an exemption. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a refund or credit against the U.S. Holder’s U.S. federal income tax liability, provided the required information is furnished to the U.S. Internal Revenue Service in a timely manner.
A holder that is not a U.S. Holder may be required to comply with certification and identification procedures in order to establish its exemption from information reporting and backup withholding.
19.0Additional Information
The Company is required under applicable Canadian and U.S. securities laws to file various documents, including financial statements. Financial information is provided in the audited annual consolidated financial statements of the Company for fiscal 2023, together with the notes thereto, the Report of Independent Registered Public Accounting Firm thereon and the related management’s discussion and analysis. Copies of these documents and additional information concerning the Company can be found under the Company’s profiles on SEDAR+ at www.sedarplus.ca and EDGAR at www.sec.gov and on Lion’s website at www.thelionelectric.com under the “Investors” section. Information on the Company’s website does not form part of and is not incorporated by reference in this Annual Information Form.
Copies of the Company’s audited annual consolidated financial statements and management’s discussion and analysis can also be obtained upon request made to the Vice President, Investor Relations and Sustainable Development of the Company, Ms. Isabelle Adjahi, at the head office: 921, chemin de la Rivière du Nord, Saint-Jerome (Quebec), Canada, J7Y 5G2.
Additional information, including, without limitation, directors’ and officers’ remuneration and indebtedness, principal holders of the Company’s securities and securities authorized for issuance under equity compensation plans, will be contained in the Company’s information circular for its annual meeting of shareholders.
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APPENDIX A
CHARTER OF THE AUDIT COMMITTEE
The purpose of this charter (the “Charter”) is to describe the primary duties and responsibilities of the Audit Committee (the “Committee”) of the board of directors (the “Board”) of The Lion Electric Company (the “Company”), as well as some of the policies and procedures that apply to the Committee in discharging its duties and responsibilities.
Certain aspects of the composition and organization of the Committee are prescribed and/or governed by the Business Corporations Act (Quebec), the constating documents of the Company, applicable securities laws and regulations (including stock exchange rules) and applicable agreements, including the nomination rights agreement dated May 6, 2021 (the “Nomination Rights Agreement”).
PURPOSE
The purpose of the Committee is to assist the Board in fulfilling its oversight responsibilities as they relate to:
•the integrity of the Company’s financial reporting and related financial disclosure;
•the implementation of risk management and internal control over financial reporting and disclosure controls and procedures;
•the Company’s compliance with certain legal and regulatory requirements, including, among other things, reviewing reports or other disclosure required by the applicable rules and regulations of the Securities and Exchange Commission or Canadian securities laws to be included in the Company’s periodic reports and filings within the scope of the authority outlined herein;
•the qualifications and independence of the registered public accounting firm or firms engaged as the Company’s independent outside auditors for the purposes of preparing or issuing an audit report or performing audit, review or attest services (the “Auditors”); and
•the performance of the Auditors and any internal audit function;
While the Committee has the duties and responsibilities set forth in this Charter, the role of the Committee is oversight. The members of the Committee are not employees of the Company, and they do not perform, or represent that they perform, the functions of management or the Auditors. The Committee is not responsible for planning or conducting the audit or determining whether the Company’s financial statements are complete and accurate and in accordance with applicable accounting rules, nor for the preparation of periodic reports and establishing and maintaining of appropriate accounting principles and financial reporting policies and satisfactory internal controls over financial reporting. Such activities are the responsibility of the Company’s Auditors and management. The Committee has direct responsibility for the appointment, compensation, oversight and replacement, if necessary, of the Auditors, including the resolution of disagreements between management and the Auditors regarding financial reporting, and any other registered public accounting firm with respect to which the Committee is required to have such responsibility.
The Committee and each of its members shall be entitled to rely on:
•the integrity of those persons and organizations within and outside of the Company from which it receives information;
•the accuracy of the financial and other information provided to the Committee by such persons or organizations absent actual knowledge to the contrary (which shall be promptly reported to the Board); and
•representations made by management as to any audit and non-audit services provided by the Auditors.
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COMPOSITION AND QUALIFICATIONS
The members of the Committee, including the member to be acting as Chair, shall be appointed by the Board in accordance with any agreement among shareholders of the Company and the Company, including the Nomination Rights Agreement, and applicable securities laws and regulations (including stock exchange rules). The Committee shall be comprised of such number of directors, in no event less than three, as the Board may from time to time by resolution determine. Committee members may be removed by the Board in its discretion.
The Chair and each member of the Committee shall serve until his or her successor is duly appointed by the Board, or until his or her earlier death, resignation or removal by the Board. Resignation or removal of a Committee member from the Board for any reason shall automatically constitute resignation or removal, as applicable, from the Committee. Vacancies occurring on the Committee shall be filled by the Board.
Unless otherwise permitted by any applicable phase-in rules and exemptions, each member of the Committee shall meet (i) the “independence” and financial literacy requirements of Section 10A-3 of the Securities Exchange Act of 1934, as amended, National Instrument 52-110 – Audit Committees of the Canadian Securities Administrators (“NI 52-110”), any stock exchange on which the Company’s securities are listed, and all other applicable laws and regulations, as applicable to the Committee members and in effect from time to time, when and as required by the SEC, NI 52-110 or the rules of any stock exchange on which the Company’s securities are listed, and (ii) any other qualifications as determined by the Board from time to time. The Committee may avail itself of any phase-in rules or other exemptions available to the Company that are afforded by applicable securities laws and regulations or the rules of any stock exchange on which the Company’s securities are listed.
MEETINGS
A.Frequency
The Chair, in consultation with the other members of the Committee, shall determine the schedule and frequency of meetings of the Committee. Meetings of the Committee shall be held at such times and places as the Chair may determine. To the extent possible, advance notice of each meeting will be given to each member unless all members are present and waive notice, or if those absent waive notice before or after a meeting. Members may attend all meetings of the Committee either in person or by telephone, video or other electronic means.
The Committee shall hold regularly scheduled meetings at least quarterly and such special meetings as circumstances dictate. The Chair of the Committee, any member of the Committee, the Auditors, the Chairman of the Board, the Chief Executive Officer (“CEO”) or the Chief Financial Officer (“CFO”) may call a special meeting of the Committee at any time by notifying the Company’s corporate secretary, who will notify the members of the Committee.
B.Agenda and Notice
The Chair of the Committee shall establish the meeting dates of the Committee. To the extent possible, in advance of every regular meeting of the Committee, the Chair shall prepare and distribute, or cause to be prepared and distributed, to the members of the Committee and others as deemed appropriate by the Chair, an agenda of matters to be addressed at the meeting together with appropriate briefing materials. The Committee may require senior executives and other employees of the Company to produce such information and reports as the Committee may deem appropriate in order for it to fulfill its duties.
C.Holding and Recording Meetings
Committee meetings may be held in person, by videoconference or other electronic means or telephonically. Action may be taken by the Committee upon the affirmative vote of a majority of the members. The Committee shall keep written minutes of its meetings and submit such minutes to the Board promptly after each meeting. The Committee may also act by written resolutions and, when it does so, those actions will be filed in the minutes of the Committee.
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D.Quorum
A majority of the members of the Committee shall constitute a quorum. Any actions taken by the Committee during any period in which one or more members fail for any reason to meet the membership requirements set forth under “Composition and Qualifications” above shall be nonetheless duly authorized actions of the Committee for all corporate purposes.
E.Sub-Committees
Subject to applicable law, the Committee shall have the authority to delegate to any of its members, any sub-committees of the Committee or any other person any of the responsibilities of the full Committee.
F.Executive Sessions
Unless otherwise directed by the Committee, each regularly scheduled meeting will include an executive session of the Committee absent any members of management.
The Committee will also meet periodically in separate executive sessions with each of the CFO or any other executive officer, the principal accounting officer and/or any senior internal auditing executive (or any other personnel responsible for any internal audit function), and the Auditors.
COMPENSATION
The compensation of Committee members shall be determined by the Board.
RESPONSIBILITIES AND POWERS OF THE COMMITTEE
A.System of Financial Controls
The Committee shall:
•review the adequacy and effectiveness of the Company’s internal control and management information systems through discussions with senior executives of the Company and the Auditors relating to the maintenance of (i) necessary books, records and accounts in sufficient detail to accurately and fairly reflect the Company’s transactions, (ii) effective internal control over financial reporting; and (iii) adequate processes for assessing the risk of material misstatements in the financial statements and for detecting control weaknesses or fraud;
•as applicable from time to time, the Committee shall assess any requirements or changes with respect to the establishment or operations of an internal audit function having regard to the size and stage of development of the Company at any particular time;
•satisfy itself, through discussions with senior executives of the Company that the adequacy of internal controls, systems and procedures has been periodically assessed in accordance with regulatory requirements and recommendations;
•oversee the work of any internal audit function, including organization, operations and independence;
•review and discuss the Company’s major financial risk exposures and the steps taken to monitor and control such exposures, including the use of any financial derivatives and hedging activities, as applicable;
•review and make recommendations to the Board regarding the adequacy of the Company’s risk management policies and procedures with regard to identification of the Company’s principal risks and implementation of appropriate systems and controls to manage such risks including an assessment of the adequacy of insurance coverage maintained by the Company;
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•review material related party transactions other than those delegated to a special committee or independent committee of the Board against applicable legal and regulatory requirements, review applicable disclosures and report to the Board on any such transactions; and
•review and discuss with the Auditors the Auditors’ evaluation of the Company’s identification of, accounting for, and disclosure of its relationships and transactions with related parties, including any significant matters arising from the audit in connection therewith.
B.Annual Audit Review
The Committee shall review and discuss with management and the Auditors the annual audited financial statements, including the Auditors’ audit and audit report thereon, and the annual management’s discussion and analysis of financial condition and results of operations of the Company proposed to be included in the Company’s annual filings to be filed with applicable securities regulators. In connection with such review, the Committee shall:
•review the scope of the audit, the audit plan and the audit procedures utilized;
•review with the Auditors any audit problems or difficulties encountered during their audit, including any change in the scope of the planned audit, any restrictions placed on the scope of the audit or access to requested information, and any significant disagreements with management, and management’s response to such problems or difficulties;
•resolve any differences in financial reporting between management and the Auditors;
•review and discuss with management and the Auditors reports required to be submitted by the Auditors concerning:
•all critical accounting policies and practices used in the preparation of the Company’s financial statements;
•all alternative treatments of financial information within IFRS that have been discussed with management, ramifications of such alternatives, and the accounting treatment preferred by the Auditors; and
•any other material written communications between the Auditors and management, such as any management letter or schedule of unadjusted differences;
•review and discuss the integrity of the annual audited Company financial statements and quarterly financial statements with management and the Auditors, including the notes thereto and all matters required by applicable auditing standards, and the written disclosures required by applicable auditing standards regarding the Auditors’ independence;
•review and discuss with management and the Auditors:
◦any major issues regarding accounting principles and financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles, and any major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies; and
◦analyses prepared by management and/or the Auditors setting forth any significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analysis of the effects of alternative IFRS methods on the financial statements and the effects of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Company; and
•discuss policies and procedures concerning earnings press releases and review the type and presentation of information to be included in earnings press releases (paying particular attention to any use of “pro forma” and “adjusted” or other non-IFRS information), as well as financial information and earnings guidance provided to analysts and rating agencies.
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C.Quarterly Reviews
The Committee shall review and discuss with management, any internal audit function and the Auditors, as appropriate, the quarterly financial statements, together with the Auditors review thereof pursuant to professional standards and procedures for conducting such reviews, as established by IFRS and applicable securities laws, and the quarterly management’s discussion and analysis of financial condition and results of operations of the Company. In connection with the quarterly reviews, the Committee shall review with management and the Auditors any significant risks or exposures faced by the Company and discuss with management the steps taken to minimize such risk or exposure.
D.Other Financial Information
The Committee shall review and recommend to the Board for approval, where appropriate, financial information contained in any prospectuses, annual information forms and Form 20-F, annual reports to shareholders, management proxy circulars, material change disclosure or Form 6-K of a financial nature and similar disclosure and other documents prior to the filing or public disclosure of such documents or information.
E.Oversight of Independent Auditors
The Company’s Auditors shall report directly to the Committee on a regular basis. In connection with its oversight of the performance and independence of the Auditors, the Committee shall:
•be responsible for the appointment, retention, compensation, oversight of the work of the Auditors and any other auditor preparing or issuing an audit report or performing other audit services or attest services for the Company or any consolidated subsidiary of the Company, where required, and review, report and, where appropriate, provide recommendations to the Board on the appointment, terms and review of engagement, removal, independence and proposed fees of the Auditors;
•have the authority to approve the engagement of the Auditors to perform all audit, audit-related, and other permissible non-audit services proposed to be performed by the Auditors, prior to the commencement of such engagement, including the scope of and plans for the audit and the related fees for such services, and the negotiation and execution, on behalf of the Company, of the Auditors’ engagement letters; such approval to be made in accordance with preapproval policies and procedures established by the Committee consistent with applicable laws and rules, including the delegation of preapproval authority to one or more Committee members so long as any such preapproval decisions are presented to the full Committee at the next scheduled meeting;
•prior to the engagement of any prospective Auditors, obtain confirmation and assurance as to the prospective Auditors’ independence, including ensuring that they submit on a periodic basis (not less than annually) to the Committee a formal written statement delineating all relationships between the Auditors, or their affiliates, and the Company, or persons in financial oversight roles at the Company, that may reasonably be expected to bear on independence;
•at least annually, obtain and review a report by the Auditors describing the firm’s internal quality-control procedures, any material issues raised by the most recent internal quality-control review or peer review of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues;
•review and evaluate the performance of the Auditors, as the basis for a decision to reappoint or replace the Auditors, and every five (5) years conduct a comprehensive review of the performance of the Auditors over multiple years to provide further insight on the Auditors, their independent exercise of professional skepticism and application of protection standards;
•set clear hiring policies for employees or former employees of the Auditors, including as required by all applicable laws and listing rules; and
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•assure the rotation of the lead audit partner as required by applicable law and rules, and consider periodically and, if deemed appropriate, adopt a policy regarding the rotation of auditing firms.
F.Risk Assessment and Management
The Committee shall discuss with management and the Auditors’ the Company’s major business, operational, and financial risk exposures and the guidelines, policies and practices regarding risk assessment and risk management, including derivative policies, insurance programs and steps management has taken to monitor and control major business, operational and financial risks.
G.Legal and Ethical Matters
The Committee shall
•establish, maintain and oversee the Company’s Code of Business Conduct and Ethics (the “Code”), including dealing with issues that may arise under the Code related to executive officers and directors of the Company, be responsible for reviewing and evaluating the Code periodically and recommending any necessary or appropriate changes thereto to the Board for consideration;
•assist the Board with the monitoring of compliance with applicable laws and rules, as well as compliance with Code and consider any waivers of the Code (other than waivers applicable to the directors or executive officers, which shall be subject to review by the Board as a whole);
•establish procedures for (a) receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, (b) the confidential, anonymous submission by directors, officers, employees, consultants and contractors of the Company of concerns regarding questionable accounting or auditing matters, and (c) the investigation of such matters with appropriate follow-up actions;
•on at least an annual basis, review with the Company’s legal counsel and management, all legal and regulatory matters and litigation, claims or contingencies, including tax assessments, license or concession defaults or notifications, health and safety violations or environmental issues, that could have a material effect upon the financial position of the Company, and the manner in which these matters may be, or have been, disclosed in the financial statements;
•consider and review with management and the Auditors, outside counsel, as appropriate, and any special counsel, separate accounting firm or other consultants and advisors as the Committee deems appropriate, any correspondence with regulators or governmental agencies and any published reports that raise material issues regarding the Company’s financial statements or accounting policies; and
•monitor developments in accounting rules and practices and other legal and regulatory requirements that affect matters within the scope of the Committee’s authority and responsibilities.
H.Other Responsibilities
The Committee shall perform such other duties as may be required by law or requested by the Board or deemed appropriate by the Committee in order to discharge any of the foregoing. The Committee shall discharge its responsibilities, and shall assess the information provided to the Committee, in accordance with its business judgment. The Committee shall have the authority to conduct or authorize investigations into any matters within the scope of its responsibilities as it shall deem appropriate.
Members are entitled to rely, absent knowledge to the contrary, on the integrity of the persons and organizations from whom they receive information, and on the accuracy and completeness of the information provided. Nothing in this Charter is intended or may be construed as imposing on any member of the Committee or the Board a standard of care or diligence that is in any way more onerous or extensive than the standard to which the directors are subject under applicable law. This Charter is not intended to change or interpret the constating documents of the Company or applicable law or stock exchange rule to which the Company is subject, and this Charter should be interpreted in a manner consistent with all such applicable laws and rules
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The Board may, from time to time, permit departures from the terms of this Charter, either prospectively or retrospectively. This Charter is not intended to give rise to civil liability on the part of the Company or its directors or officers to shareholders, security holders, customers, suppliers, competitors, employees or other persons, or to any other liability whatsoever on their part.
COMMITTEE ADMINISTRATIVE MATTERS
A.Independent Advisors
The Committee shall have authority to engage, provide appropriate funding for and cause the Company to pay the compensation to obtain advice and assistance from outside legal, accounting or other advisors to carry out its responsibilities.
B.Funding
The Company shall provide appropriate funding, as determined by the Committee, for payment of compensation to the Auditors or any other registered public accounting firm engaged for the purpose of rendering or issuing an audit report or performing other audit, review or attest services for the Company; to any other advisors engaged by the Committee; and for ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.
C.Access to Records and Personnel
The Committee shall have full access to any relevant records of the Company that it deems necessary to carry out its responsibilities. The Committee may request that any officer or other employee of the Company or any advisor to the Company meet with members of the Committee or its advisors, as it deems necessary to carry out its responsibilities.
D.Reports to Board of Directors
The Committee shall report regularly to the Board with respect to the Committee’s activities any material issues that arise regarding the quality or integrity of the Company’s financial statements, the Company’s compliance with legal or regulatory requirements and its conclusions with respect to the Auditors, the performance of any internal audit function or such other matters as the Committee deems appropriate, with such recommendations to the Board as the Committee deems appropriate.
E.Education and Orientation
Members of the Committee shall be provided with appropriate and timely training to enhance their understanding of auditing, accounting, regulatory and industry issues applicable to the Company.
New Committee members shall be provided with an orientation program to educate them on the Company’s business, their responsibilities and the Company’s financial reporting and accounting practices.
F.Review of This Charter
The Committee shall review and reassess annually the adequacy of this Charter and recommend any proposed changes to the Board for approval.
G.Evaluation of Committee
The Committee is responsible for developing and conducting an annual self-assessment of its performance. The Committee shall report to the full Board on the results of its assessment each year and shall make any appropriate recommendations to further enhance the Committee’s performance.
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Table of Contents
1.0Preface
The following management’s discussion and analysis (“MD&A”) provides information concerning the financial condition and results of operations of The Lion Electric Company (the “Company” or “Lion”) for the years ended December 31, 2023 and 2022 and the three months ended December 31, 2023. This MD&A should be read in conjunction with the audited annual consolidated financial statements of the Company and the related notes for the years ended December 31, 2023 and 2022. Some of the information contained in this MD&A contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from underlying forward-looking statements as a result of various factors, including those described in section 3.0 of this MD&A entitled “Caution Regarding Forward-Looking Statements” and in section 23.0 entitled “Risk Factors” of this MD&A. The audited annual consolidated financial statements and this MD&A were reviewed by Lion's Audit Committee, and were approved and authorized for issuance by Lion's Board of Directors on February 28, 2024.
2.0Basis of Presentation
The Company’s fiscal year is the twelve-month period ending December 31 of each year. This MD&A is based on the Company’s audited annual consolidated financial statements and accompanying notes thereto for the years ended December 31, 2023 and 2022, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards
Board (the “IASB”).
All amounts presented are in United States dollars unless otherwise indicated.
Lion has one reportable operating segment, the manufacturing and sale of electric vehicles in Canada and in the United States.
Certain figures, such as interest rates and other percentages included in this MD&A, have been rounded for ease of presentation. Percentage figures included in this MD&A have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this MD&A may vary slightly from those obtained by performing the same calculations using the figures in Lion’s audited annual consolidated financial statements or in the associated text. Certain other amounts that appear in this MD&A may similarly not sum due to rounding.
All references to “fiscal 2023” are to the Company’s fiscal year ending December 31, 2023 and to “fiscal 2022” are to the Company’s fiscal year ended December 31, 2022.
3.0Caution Regarding Forward-Looking Statements
This MD&A contains "forward-looking information" and "forward-looking statements" within the meaning of applicable securities laws and within the meaning of the United States Private Securities Litigation Reform Act of 1995 (collectively, "forward-looking statements"). Any statements contained in this MD&A that are not statements of historical fact, including statements about Lion’s beliefs and expectations, are forward-looking statements and should be evaluated as such.
Forward-looking statements may be identified by the use of words such as “believe,” “may,” “will,” “continue,” “anticipate,” “intend,” “expect,” “should,” “would,” “could,” “plan,” “project,” “potential,” “seem,” “seek,” “future,” “target” or other similar expressions and any other statements that predict or indicate future events or trends or that are not statements of historical matters, although not all forward-looking statements may contain such identifying words. These forward-looking statements include statements regarding the Company’s order book and the Company's ability to convert it into actual sales, the expected production capacity of the Company’s manufacturing facilities in Saint-Jerome and the United States and the Company’s battery manufacturing plant (the "Battery Plant") and innovation center in Quebec (the "Innovation Center" and collectively with the Battery Plant, the "Lion Campus"), the certification of the Lion heavy duty (HD) battery packs, the sourcing of lithium-ion battery cells, the Company's future growth and long-term strategy, the Company’s liquidity and capital requirements and
management’s forecasts related thereto, ongoing litigation proceedings, the Company’s expected product pipeline, the implementation by the Company of measures aimed at reducing its vehicle and battery development costs and its inventory levels (including the Company’s fiscal 2024 objectives related thereto), and the development and timing of commercial production of certain platforms and models. Such forward-looking statements are based on a number of estimates and assumptions that Lion believes are reasonable when made, including that Lion will be able to retain and hire key personnel and maintain relationships with customers, suppliers and other business partners, that Lion will continue to operate its business in the normal course, that Lion will be able to implement its growth strategy, that Lion will be able to successfully and timely ramp-up manufacturing capacity at its Saint-Jerome facility, its U.S. manufacturing facility and at the Battery Plant and Innovation Center as required in the future, that Lion will not suffer any supply chain challenges or any material disruption in the supply of raw materials on competitive terms, that Lion will be able to maintain its competitive position, that Lion will continue to improve its operational, financial and other internal controls and systems to manage its growth and size, that Lion will be able to benefit, either directly or indirectly (including through applications made by the Company and/or its clients), from governmental programs, subsidies and incentives, that Lion will not incur any material obligations with respect to product warranty claims or product recalls, and that Lion will be able to secure additional funding through equity or debt financing on terms acceptable to Lion and in the amounts needed if and when required in the future. Such estimates and assumptions are made by Lion in light of the experience of management and their perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Lion believes that these risks and uncertainties include the following:
•any adverse changes in U.S. or Canadian general economic, business, market, financial, political or legal conditions, including as a consequence of the ongoing uncertainties relating to inflation and interest rates;
•any unavailability, reduction, discriminatory application, delay in processing or elimination of governmental programs, subsidies or incentives due to policy changes, government regulations or decisions or otherwise;
•any inability to ramp-up the production of Lion's products and meet project construction and other project milestones and timelines;
•any inability to meet the expectations of the Company's customers in terms of products, specifications, and services;
•any inability to successfully and economically manufacture and distribute its vehicles at scale;
•any inability to raise additional funds to meet its capital requirements and pursue its growth strategy when and in the amounts needed, if any;
•any inability to execute the Company's growth strategy;
•any escalation, deterioration and adverse effects of current military conflicts, which may affect economic and global financial markets and exacerbate ongoing economic challenges;
•any unfavorable fluctuations and volatility in the availability or price of raw materials included in components used to manufacture the Company's products, including battery cells, modules and packs;
•the reliance on key suppliers and any inability to maintain an uninterrupted supply of raw materials;
•any inability to reduce total cost of ownership of electric vehicles sold by the Company over time;
•the reliance on key management and any inability to attract and/or retain key personnel;
•labor shortages (including as a result of employee departures, turnover, and demands for higher wages) which may force the Company to operate at reduced capacity, to lower its production and delivery rates or lower its growth plans, and could pose additional challenges related to employee compensation;
•any inability to maintain the Company's competitive position;
•any inability to reduce the Company's costs of supply over time;
•any inability to maintain and enhance the Company's reputation and brand;
•any significant product repair and/or replacement due to product warranty claims or product recalls;
•any failure of information technology systems or any cybersecurity and data privacy breaches or incidents;
•any inability to secure adequate insurance coverage or a potential increase in insurance costs;
•natural disasters, epidemic or pandemic outbreaks, boycotts and geo-political events such as civil unrest, acts of terrorism, the current ongoing military conflicts or similar disruptions;
•any event or circumstance, including the materialization of any of the foregoing risks and uncertainties, resulting in the Company's inability to convert its order book into actual sales; and
•the outcome of any legal proceedings in which the Company is or may be involved from time to time.
These and other risks and uncertainties related to the business of Lion are described in greater detail in section 23.0 of this MD&A entitled “Risk Factors”. Many of these risks are beyond Lion’s management’s ability to control or predict. All forward-looking statements attributable to Lion or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained and risk factors identified in this MD&A and in other documents filed with the applicable Canadian regulatory securities authorities and the U.S. Securities and Exchange Commission (the "SEC'').
Because of these risks, uncertainties and assumptions, readers should not place undue reliance on these forward-looking statements. Furthermore, forward-looking statements speak only as of the date they are made. This MD&A reflects information available to the Company as of February 28, 2024, the date of this MD&A. Except as required under applicable securities laws, Lion undertakes no obligation, and expressly disclaims any duty, to update, revise or review any forward-looking information, whether as a result of new information, future events or otherwise.
4.0Non-IFRS Measures and Other Performance Metrics
This MD&A makes reference to Adjusted gross profit (loss), Adjusted gross margin, and Adjusted EBITDA, which are non-IFRS financial measures, as well as other performance metrics, including the Company’s order book, which are defined below. These measures are neither required nor recognized measures under IFRS, and, as a result, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of the Company’s results of operations from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of the Company’s financial information reported under IFRS. Lion compensates for these limitations by relying primarily on Lion's IFRS results and using Adjusted gross profit (loss), Adjusted gross margin, Adjusted EBITDA, and order book on a supplemental basis. Readers should not rely on any single financial measure to evaluate Lion's business.
Adjusted Gross Profit (Loss) and Adjusted Gross Margin
Adjusted gross profit (loss) is defined as gross profit (loss) before the impact of a non-cash charge to gross profit (loss) resulting from the inventory write-down recorded by the Company in connection with its decision to indefinitely delay the start of commercial production of the LionA and LionM minibuses, as described in section 8.0 of this MD&A entitled "Operational Highlights" and section 13.0 of this MD&A entitled “Results of Operations”. Adjusted gross margin is calculated as Adjusted gross profit (loss) divided by revenue. The Company has elected to introduce Adjusted gross profit (loss) and Adjusted gross margin in order to measure its performance at the gross margin level without the impact of this non-cash charge, which can affect the comparability of its financial results and could potentially distort the analysis of trends in its business performance. The Company believes that these measures are useful to
management and investors as they facilitate period-to-period comparisons of the Company’s costs of sales and gross profit, including how efficiently the Company uses labor and materials for manufacturing goods sold to its customers, by excluding the impact of a non-cash charge that is not directly related to its operating performance. However, readers should be aware that when evaluating Adjusted gross profit (loss) and Adjusted gross margin, Lion may incur other charges similar to that excluded when calculating Adjusted gross profit (loss) in the future, and the exclusion of this charge should not be construed as an inference that a charge of a similar nature will not occur in the future. Readers should review the reconciliation of gross profit (loss), the most directly comparable IFRS financial measure, to Adjusted gross profit (loss) and Adjusted gross margin, which is presented by the Company under section 13.0 of this MD&A entitled "Results of Operations - Reconciliation of Adjusted Gross Profit (Loss) and Adjusted Gross Margin."
Adjusted EBITDA
“Adjusted EBITDA” is defined as net earnings (loss) before finance costs, income tax expense or benefit, and depreciation and amortization, adjusted to exclude restructuring costs, share-based compensation, change in fair value of conversion options on convertible debt instruments, change in fair value of share warrant obligations, foreign exchange (gain) loss and transaction and other non-recurring expenses. Adjusted EBITDA also excludes the impact of a non-cash impairment charge relating to intangible assets and property, plant and equipment resulting from the write-down of previously capitalized vehicle development costs and property, plant and equipment as well as the impact of a non-cash charge related to the inventory write-down referred to above, all of which were recorded by the Company in connection with its decision to indefinitely delay the start of commercial production of the LionA and LionM minibuses. Lion uses adjusted EBITDA to facilitate a comparison of the profitability of its business on a consistent basis from period-to-period and to provide a further understanding of factors and trends affecting its business. The Company also believes this measure is useful for investors to assess the Company's profitability, its cost structure and its ability to service debt and to meet other payment obligations. However, readers should be aware that when evaluating Adjusted EBITDA, Lion may incur future expenses similar to those excluded when calculating Adjusted EBITDA. In addition, Lion’s presentation of these measures should not be construed as an inference that Lion’s future results will be unaffected by unusual or non-recurring items. Readers should review the reconciliation of net earnings (loss), the most directly comparable IFRS financial measure, to Adjusted EBITDA presented by the Company under section 13.0 of this MD&A entitled "Results of Operations - Reconciliation of Adjusted EBITDA."
Order Book
This MD&A also makes reference to the Company’s "order book" with respect to vehicles (trucks and buses) as well as charging stations. The Company’s vehicles and charging stations order book is determined by management based on purchase orders that have been signed, orders that have been formally confirmed by clients, or products in respect of which formal joint applications for governmental programs, subsidies or incentives have been made by the applicable clients and the Company. The order book is expressed as a number of units or a total dollar value, which dollar value is determined based on the pricing of each unit included in the order book as further explained under “Pricing” in section 10.0 of this MD&A entitled “Order Book”. The vehicles included in the vehicle order book as of February 28, 2024 provided for a delivery period ranging from a few months to the end of the year ending December 31, 2026, with substantially all of such vehicles currently providing for deliveries before the end of the year ending December 31, 2025. In addition, substantially all deliveries are subject to the granting of subsidies and incentives with processing times that are subject to important variations. There has been in the past and the Company expects there will continue to be variances between the expected delivery periods of orders and the actual delivery times, and certain delays could be significant. Also, there has been in the past and the Company expects there will continue to be variances in the eligibility criteria of the various programs, subsidies and incentives introduced by governmental authorities, including in their interpretation and application. Such variances or delays could result in the loss of a subsidy or incentive and/or in the cancellation of certain orders, in whole or in part.
The Company’s presentation of the order book should not be construed as a representation by the Company that the vehicles and charging stations included in its order book will translate into actual sales. See section 10.0 of this MD&A entitled "Order Book" for a full description of the methodology used by the Company in connection with the order book and certain important risks and uncertainties relating to such methodology and the presentation of the order book.
5.0Company Overview
General
Lion's business focuses on the design, development, manufacturing and distribution of all-electric medium- and heavy-duty urban vehicles (“EV”). Each Lion vehicle is purpose-built for electric and entirely designed and assembled in-house, with its own chassis, truck cabin or bus body, proprietary battery technology with modular energy capacity and Lion software integration. Lion’s vehicles are assembled without relying on traditional combustion-engine vehicle retrofitting or third-party integrators. For certain specialized truck applications, Lion has also established partnerships and other relationships with third-party suppliers to enable it to offer to its clients a variety of vehicle configurations, upfit equipment options and applications which range from classic boxes for box trucks to other specialized applications such as all-electric ambulances and utility trucks.
Lion has more than 13 years of focused all-electric vehicle research and development (“R&D”), manufacturing and commercialization experience. Lion’s vehicles and technology benefit from over 22 million miles (over 36 million kilometers ) driven by more than 1,850 of its purpose-built all-electric vehicles that are on the road today, in real-life operating conditions.
Lion’s medium and heavy-duty EVs are specifically designed to address the needs of the sub-250 mile (or 400 km) mid-range urban market, which is generally viewed as well suited for electrification given vehicles are typically driven over a relatively modest distance and return to base at the end of every workday.
Lion’s current line-up of purpose-built all-electric trucks can be divided into four main platforms based on gross vehicle weight rating ("GVWR"), namely the Lion5, the Lion6, the Lion8 and the Lion8 Tractor trucks, and its current line-up of all-electric buses can be divided into two main platforms, namely the LionC and LionD buses, all of which are offered in several range and configuration options with a view to meet customers' needs and route planning. Lion complements its product offering with various services, including sales support, full-service training, charging infrastructure assistance and maintenance support, all of which are available on-site at Lion’s Experience Centers, as well as financing, and identification and seeking of any applicable governmental grants.
Lion has a vehicle manufacturing facility in Canada located in Saint-Jerome, Quebec, which is approximately 25 miles (or 40 km) north of Montreal, Quebec, and a manufacturing facility in the United States located in Joliet, Illinois (the "Joliet Facility"), which supports the Company in addressing the increasing demand in the marketplace for “Made in America” zero-emission vehicles. Lion also has the Battery Plant and Innovation Center in Canada which is located at the YMX International Aerocity of Mirabel, Quebec. Except for the Innovation Center building forming part of the Lion Campus, all of such properties are leased by Lion and Lion does not own any real property.
See section 8.0 entitled "Operational Highlights" for more information, including with respect to the Joliet Facility and the Lion Campus.
6.0Research and Development
Lion’s team of engineers and other R&D professionals conducts development activities from its three R&D centers in Mirabel, Quebec, Saint-Jerome, Quebec, and Montreal, Quebec.
Lion’s R&D is currently focused on enhancing existing vehicles and features and continuing the development of proprietary battery systems and specialized applications that can be integrated into Lion’s
vehicles. Lion’s main R&D costs consist of expenditures towards assembly of prototype vehicles, the design, establishment, purchase, and implementation of equipment, as well as costs relating to its R&D professionals performing development activities.
7.0Financial Highlights
For the three months ended December 31, 2023 (Q4 2023), the Company's financial performance was the following when compared to the three months ended December 31, 2022 (Q4 2022):
•Revenue of $60.4 million, up $13.7 million, as compared to $46.8 million in Q4 2022.
•Delivery of 188 vehicles, an increase of 14 vehicles, as compared to the 174 delivered in Q4 2022.
•Gross loss of $9.1 million as compared to a gross loss of $4.8 million in Q4 2022.
•Adjusted gross profit1 of $0.8 million as compared to adjusted gross loss of $4.8 million in Q4 2022.
•Net loss of $56.5 million in Q4 2023, as compared to net loss of $4.6 million in Q4 2022.
•Adjusted EBITDA2 of negative $6.3 million, as compared to negative $13.9 million in Q4 2022.
•Additions to property, plant and equipment related to the Joliet Facility and the Lion Campus, amounted to $13.7 million, down $25.4 million, as compared to $39.1 million in Q4 2022. See section 8.0 of this MD&A entitled "Operational Highlights" for more information related to the Joliet Facility and the Lion Campus.
•Additions to intangible assets, which mainly consist of vehicle and battery development activities, amounted to $17.8 million, down $3.5 million as compared to $21.3 million in Q4 2022.
•Impairment of intangible assets and property, plant and equipment of $36.0 million and write-down of inventory of $9.8 million related to the LionA and LionM minibuses for which the Company made the decision to indefinitely delay the start of commercial production, as announced on November 7, 2023.
For the year ended December 31, 2023 (fiscal 2023), the Company's financial performance was the following when compared to the year ended December 31, 2022 (fiscal 2022):
•Delivery of 852 vehicles, an increase of 333 vehicles, as compared to the 519 delivered in fiscal 2022.
•Revenue of $253.5 million, up $113.6 million, as compared to $139.9 million in fiscal 2022.
•Gross loss of $5.5 million, as compared to gross loss of $12.9 million in fiscal 2022.
•Adjusted gross profit of $4.3 million as compared to adjusted gross loss of $12.9 million in fiscal 2022.
•Net loss of $103.8 million, as compared to net earnings of $17.8 million in fiscal 2022.
•Adjusted EBITDA of negative $34.3 million, as compared to negative $54.8 million in fiscal 2022.
•Additions to property, plant and equipment related to the Joliet Facility and the Lion Campus, amounted to $72.2 million, down $75.8 million, as compared to $148.0 million in fiscal 2022. See section 8.0 of this MD&A entitled "Operational Highlights" for more information related to the Joliet Facility and the Lion Campus.
•Additions to intangible assets, which mainly consist of vehicle and battery development activities, amounted to $67.2 million, down $11.9 million, as compared to $79.1 million in fiscal 2022.
•Impairment of intangible assets and property, plant and equipment of $36.0 million and write-down of inventory of $9.8 million related to the LionA and LionM minibuses for which the
1 Adjusted gross profit (loss) is a non-IFRS financial measure. See section 4.0 of this MD&A entitled “Non-IFRS Measures and Other Performance Metrics,” and section 13.0 of this MD&A entitled "Results of Operations - Reconciliation of Adjusted Gross Profit (Loss) and Adjusted Gross Margin" for a reconciliation of gross profit (loss), the most directly comparable IFRS financial measure, to Adjusted gross profit (loss).
2 Adjusted EBITDA is a non-IFRS financial measure. See section 4.0 of this MD&A entitled “Non-IFRS Measures and Other Performance Metrics,” and section 13.0 of this MD&A entitled "Results of Operations - Reconciliation of Adjusted EBITDA" for a reconciliation of net earnings (loss), the most directly comparable IFRS financial measure, to Adjusted EBITDA.
Company made the decision to indefinitely delay of the start of commercial production, as announced on November 7, 2023.
8.0Operational Highlights
Joliet Facility
During the quarter ended December 31, 2023, the Company initiated the commercial production of LionD units which led to the completion of first deliveries to customers in January 2024.
As of December 31, 2023, additions to property, plant and equipment incurred by the Company since the beginning of the project totaled approximately $106 million, including approximately $6 million incurred during the fourth quarter of fiscal 2023, and approximately $21 million during fiscal 2023. All of such additions to property, plant and equipment related mostly to tenant improvements and the purchase of equipment, including bus line production equipment.
The Joliet Facility currently has the infrastructure in place, including the production line and equipment, to achieve a production capacity of up to 2,500 buses on an annual basis. While the Company initially planned that, at full scale, the production capacity of the Joliet Facility would be principally focused on the production of trucks, as previously disclosed, the Company currently expects to rely on the truck manufacturing capacity available at its Saint-Jerome manufacturing facility to address current customer demand. As a result, the Company does not expect to incur any material capital expenditures related to the Joliet Facility in the short term. With respect to its operations at the Joliet Facility, the Company will however be required to incur operational expenditures in the future, more particularly if and when it accelerates its production cadence. Such expenditures, which could be significant, will be largely impacted by the production cadence, which, in turn, will be dependent upon a variety of factors, including, to a larger extent, the demand for the Company's products as well as the economic environment and the Company's liquidity profile, all of which have been and will continue to be reassessed by management on a continuous basis. See section 16.0 of this MD&A entitled “Liquidity and Capital Resources.”
Lion Campus
During the quarter ended December 31, 2023, the Company successfully completed the final certification for its medium duty (MD) battery pack, the LionBattery MD, a lithium-ion battery pack specifically designed for the Company's medium duty trucks and school buses. In addition, the Company continued to ramp up the production of lithium ion battery packs at its Battery Plant. The certification process for Lion's heavy duty (HD) battery pack is progressing and the Company expects final certification to occur near the middle of fiscal 2024. The Company is continuing activities to integrate the Lion battery pack technology into its vehicles. In parallel, the Innovation Center building is currently being used for various purposes, including as a testing and certification center for vehicles and batteries, a pre-delivery inspection site, a showroom and delivery center, and as warehousing space, in order to leverage space available and optimize operational efficiency.
As of December 31, 2023, additions to property, plant and equipment (mostly related to the purchase of battery production equipment, property construction, and property improvements) and additions to intangible assets (consisting mainly of battery development and integration activities) incurred by the Company since the beginning of the Lion Campus project (exclusive of capitalized interest) totaled approximately $125 million, including $9 million incurred during the fourth quarter of fiscal 2023, and approximately $47 million ($36 million of additions to property, plant and equipment and $11 million of additions to intangible assets) during fiscal 2023.
The Battery Plant currently has the infrastructure in place, including the production line and equipment, to achieve a production capacity of up to 1.7 GWh on an annual basis.
As previously disclosed, the Company does not expect to incur any material capital expenditures related to the Lion Campus in the short term. With respect to its operations at the Lion Campus, the Company will however be required to incur operational expenditures in the future, more particularly if and
when it accelerates its production cadence. Such expenditures, which could be significant, will be largely impacted by the production cadence, which, in turn, will be dependent upon a variety of factors, including, to a larger extent, the demand for the Company's products as well as the economic environment and the Company's liquidity profile, all of which have been and will continue to be reassessed by management on a continuous basis. See section 16.0 of this MD&A entitled “Liquidity and Capital Resources.”
U.S. Environmental Protection Agency (EPA) Clean School Bus Program (the "EPA Program") Update
In May 2022, the EPA announced the availability of $500 million under the first round of funding of the EPA Program (the "2022 rebate round"), which amount was subsequently increased to $945 million. On April 25, 2023, the EPA announced the availability of an additional $400 million of grants through a new 2023 grant funding round (the "2023 grant round") under the EPA Program which was more than doubled in January 2024 as further described below. Rebates under the 2022 rebate round and grants under the 2023 grant round have been awarded. On September 28, 2023, the EPA announced additional funding of up to $500 million through a rebate round (the "2023 rebate round"), in respect of which applications are now closed and awards are expected to be announced in April 2024. Please refer to the EPA's website for additional information on the EPA Program: https://www.epa.gov/cleanschoolbus.
Lion all-electric school buses are eligible under all of the foregoing rounds of the EPA program. Under the 2022 rebate round, Lion all-electric school buses were eligible for up to $375,000 per bus for priority districts ($250,000 for other eligible districts). In addition, subsidies of up to $20,000 were available for charging infrastructure under the 2022 rebate round. Under the 2023 grant round, an aggregate total of $395,000 in funding is available for priority districts (other eligible districts can receive an aggregate total of $250,000) for all-electric buses and charging infrastructure. Under the 2023 rebate round, an aggregate total of $345,000 in funding is available for priority districts (other eligible districts can receive an aggregate total of $200,000) for all-electric buses and charging infrastructure, and stacking with certain other state programs and tax credits is permitted.
In order to benefit from vouchers granted under the EPA Program, applicants which are selected are granted vouchers and must submit a payment request once a purchase order for all-electric school buses has been signed. Under the 2022 rebate round in which Lion participated directly and indirectly through school districts, once the EPA reviewed and was satisfied with a payment request, the EPA issued an initial upfront payment to the applicant selected, such that payments made under the EPA Program were generally made before the actual delivery of the applicable school bus. During fiscal 2023, the Company received initial upfront payments from the EPA of approximately $80 million under the 2022 rebate round, of which approximately $16 million was recorded as deferred revenue and other deferred liabilities as of December 31, 2023, as the related vehicles had not yet been delivered.
As the EPA may issue initial upfront payments before the actual delivery of the applicable school buses, any upfront payment received by Lion remains subject to delivery of the applicable school buses by Lion in accordance with the terms and conditions of the EPA Program and the applicable purchase orders. In the event that a given order is not ultimately fulfilled and that the delivery of any applicable school buses is not ultimately completed, any initial upfront payment received is required to be repaid to the EPA. As of December 31, 2023, no amounts were repaid to the EPA. See section 3.0 of this MD&A entitled “Caution Regarding Forward-Looking Statements.” Also see Section 10.0 of this MD&A entitled “Order Book” for additional information with respect to purchase orders obtained and payment requests submitted by the Company with respect to school buses subject to awards under the 2022 rebate round, as well as a full description of the methodology used by the Company in connection with the order book and certain important risks and uncertainties relating to such methodology and the presentation of the order book.
On January 8, 2024, the EPA announced that it more than doubled the funding amount initially announced for the 2023 grant round, thereby allocating nearly $1 billion to 67 applicants. Based on the EPA, the awards under the 2023 grant round are expected to facilitate the purchase of over 2,700 clean school buses in 280 school districts serving over 7 million students across 37 states. Lion estimates that approximately 70% of all units awarded under the 2023 grant round have been directly granted to school
districts, financial entities and third-party contractors. Lion was awarded a grant for 97 school buses and related charging infrastructure, representing a total of $38 million, as part of the 2023 grant round. Lion’s applications submitted in connection with this 2023 grant round were prepared in collaboration with selected school districts. Lion will continue to work closely with the applicable school districts in order to complete the milestones required under the program and execute purchase orders with such school districts.
Lion5 Truck Commercial Production
During the quarter ended December 31, 2023, the Company initiated the commercial production of Lion5 units which are mounted with Lion medium duty (MD) battery packs.
Workforce Reduction
On November 27, 2023, the Company announced a workforce reduction aimed at rationalizing its cost structure. The reduction affected 150 employees in production overhead, manufacturing, product development and administrative functions, both in Canada and the United States.
Delay of Commercial Production of LionA and LionM
On November 7, 2023, the Company announced its decision to indefinitely delay the start of commercial production of the LionA all-electric mini school bus, which was designed for school transportation and to accommodate passengers with special needs, with a capacity of up to 24 passengers. Such decision will also delay the production of the LionM model, an all-electric minibus designed to be used for paratransit or as a standard shuttle bus, and which leverages the same platform as the LionA. The decision was made to prioritize the commercial production of Lion's other products (including the Lion8T) and the integration of Lion batteries to Lion's existing vehicles.
Order for 50 LionC School Buses
On November 3, 2023, Lion announced that it received a conditional purchase order for 50 all-electric LionC school buses from Highland Electric Fleets, a leading provider of Electrification-as-a-Service for school districts, governments, and fleet operators in North America. The purchase order is conditional upon the satisfactory grant of non-repayable contributions to Highland Electric Fleets under the ZETF program. See Section 10.0 of this MD&A entitled “Order Book” for additional information with respect to purchase orders obtained by the Company.
9.0Recent Developments
As of February 28, 2024, the Company decided to proceed with the temporarily lay off of approximately 100 employees, mostly impacting the nightshift production workforce at its Saint-Jerome manufacturing facility. The measure aims at further rationalizing the Company’s cost structure in the context of prolonged challenges experienced by the Company, including delays and challenges associated with the processing and granting of various governmental subsidies and incentives, notably the ZETF program, which continue to negatively impact the Company’s scheduled deliveries and sales efforts, and at further aligning its production workforce with current production requirements. The Company will reassess its production needs in the context of any future developments, including any developments relating to the foregoing challenges. See Section 10.0 of this MD&A entitled “Order Book” for additional information.
10.0Order Book3
As of February 28, 2024, Lion’s vehicle order book stood at 2,076 all-electric medium- and heavy-duty vehicles, consisting of 285 trucks and 1,791 buses, representing a combined total order value of approximately $500 million as calculated per management's methodology further described below.
3 See section 4.0 of this MD&A entitled “Non-IFRS Measures and Other Performance Metrics”.
Additionally, LionEnergy, Lion’s division that assists customers with selecting, purchasing, project managing and deploying charging infrastructure ahead of vehicle delivery and which generates revenues through project management and consulting services as well as the resale of charging stations from global charging infrastructure manufacturers, had an order book of 132 charging stations, representing a combined total order value of approximately $4 million, as of February 28, 2024 as calculated per management's methodology further described below. The decrease in the vehicle order book of 156 vehicles (representing a total value order of approximately $25 million) as compared to the vehicle order book of 2,232 vehicles (representing a combined total order value of approximately $525 million) as previously disclosed on November 7, 2023 is mainly due to deliveries made since November 7, 2023 as well as the delays and challenges experienced with various governmental subsidies and incentives, including as described below under in respect of the ZEFT Program, which created uncertainty and negatively impacted the Company's sales efforts. See section 23.0 of this MD&A entitled "Risk Factors".
ZETF Program Delays
Lion and its clients continue to experience delays and challenges in the processing of applications filed under the Federal’s Infrastructure Canada’s Zero-Emission Transit Fund (“ZETF”). Lion is actively engaged in discussions with the Canadian Federal government regarding the application of the program. As previously indicated and described in the disclosure relating to the management’s methodology below, more than half of the vehicles included in the Company’s order book are contingent upon grants under the ZETF. If the above-mentioned delays persist, the orders relating to such vehicles may be cancelled, in whole or in part, or be subject to renegotiation. See section 23.0 of this MD&A entitled “Risk Factors”.
Order Book Methodology
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General Principle:
| The Company’s vehicle and charging stations order book is determined by management based on purchase orders that have been signed, orders that have been formally confirmed by clients or products in respect of which formal joint applications for governmental programs, subsidies or incentives have been made by the applicable clients and the Company. The order book is expressed as a number of units or a total dollar value, which dollar value is determined based on the pricing of each unit included in the order book as further explained below under the section entitled “Pricing”.
The vehicles included in the vehicle order book as of February 28, 2024 provided for a delivery period ranging from a few months to the end of the year ending December 31, 2026, with substantially all of such vehicles currently providing for deliveries before the end of the year ending December 31, 2025. In addition, substantially all of the vehicle orders included in the order book are subject to the granting of governmental subsidies and incentives, including programs in respect of which applications relating to vehicles of Lion have not yet been fully processed to date. The processing times of governmental programs, subsidies and incentives are also subject to important variations. As further described below under the sections entitled “Delivery Periods” and “Ongoing Evaluation; Risk Factors”, there has been in the past and the Company expects there will continue to be variances between the expected delivery periods of orders and the actual delivery times, and certain delays could be significant. Also, there has been in the past and the Company expects there will continue to be variances in the eligibility criteria of the various programs, subsidies and incentives introduced by governmental authorities, including in their interpretation and application. Such variances or delays could result in the loss of a subsidy or incentive and/or in the cancellation of certain orders, in whole or in part.
The Company’s presentation of the order book should not be construed as a representation by the Company that the vehicles and charging stations included in its order book will translate into actual sales.
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Delivery Periods:
| The Company’s order book refers to products that have not yet been delivered but which are reasonably expected by management to be delivered within a time period that can be reasonably estimated and includes, in the case of charging stations, services that have not been completed but which are reasonably expected by management to be completed in connection with the delivery of the product.
Purchase orders and applications relating to vehicles of Lion generally provide for a time period during which the client expects delivery of the vehicles. Such period can vary from a specific date, a number or range of months after the issuance of the order or application, or a calendar year. The vehicles included in the vehicle order book as of February 28, 2024 provided for a delivery period, subject to the satisfaction of the conditions set forth in each order (which, in substantially all cases as further discussed herein, relate to the approval of governmental subsidies and grants), ranging from a few months to the end of the year ending December 31, 2026, with substantially all of such vehicles currently providing for deliveries before the end of the year ending December 31, 2025 (which corresponds to the latest date by which claims are required to be made according to the current eligibility criteria of the ZETF, unless otherwise agreed by Infrastructure Canada). Delivery periods are disclosed from time to time by the Company when available in respect of material orders. Delivery periods should not be construed as a representation or a guarantee by the Company that the actual delivery time will take place as scheduled. Given the nature of the business and the products of the Company, the implied lead time for the production and delivery of a vehicle (which may be impacted, among other things, by supply chain challenges or changes in specifications), the nature of certain customers of the Company (in many cases, fleet owners operating capital intensive operations which require financing and ongoing scheduling flexibility), and the fact that, as further described herein, substantially all of the vehicle orders included in the order book are subject to the granting of governmental subsidies and incentives, actual delivery times may be subject to important variations or delays. Please refer to the section entitled “Ongoing Evaluation; Risk Factors” below regarding the potential impact of variations or delays in deliveries.
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Pricing:
| When the Company’s order book is expressed as an amount of sales, such amount has been determined by management based on the current specifications or requirements of the applicable order, assumes no changes to such specifications or requirements and, in cases where the pricing of a product or service may vary in the future, represents management’s reasonable estimate of the prospective pricing as of the time such estimate is reported. A small number of vehicles included in the order book have a pricing that remains subject to confirmation based on specifications and other options to be agreed upon in the future between the applicable client and the Company. For purposes of the determination of the order book and the value allocated to such orders, management has estimated the pricing based on its current price lists and certain other assumptions relating to specifications and requirements deemed reasonable in the circumstances.
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| Performance Metric: | The order book is intended as a supplemental measure of performance that is neither required by, nor presented in accordance with, IFRS, and is neither disclosed in nor derived from the financial statements of the Company. The Company believes that the disclosure of its order book provides an additional tool for investors to use in evaluating the Company’s performance, market penetration for its products, and the cadence of capital expenditures and tooling.
The Company’s computation of its order book is subject to the specific methodology described herein and may not be comparable to other similarly entitled measures computed by other companies, because all companies may not calculate their order book in the same fashion. Other companies also sometimes refer to or use “order backlog” or “order intake” as performance metrics, which are most likely not calculated on the same basis as the Company’s order book. In addition, as explained above, the Company’s presentation of the order book is calculated based on the orders and the applications made as of the time that the information is presented, and it is not based on the Company’s assessment of future events and should not be construed as a representation by the Company that the vehicles and charging stations included in its order book will translate into actual sales.
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| Ongoing Evaluation; Risk Factors: | A portion of the vehicles or charging stations included in the Company’s order book may be cancellable in certain circumstances (whether by reason of a delivery delay, unavailability of a program, subsidy or incentive or otherwise) within a certain period. Management reviews the composition of the order book every time it is reported in order to determine whether any orders should be removed from the order book. For purposes of such exercise, management identifies orders that have been or are reasonably likely to be cancelled and examines, among other things, whether conditions attaching to the order are reasonably likely to result in a cancellation of the order in future periods as well as any other available information deemed relevant, including ongoing dialogue with clients. Such exercise may result from time to time in orders that have previously been included in the order book being removed even if they have not been formally canceled by the client. See the first paragraph of this section 10.0 entitled "Order Book" for a presentation of the variance in the total number of units and the total dollar value of the vehicles and charging stations included in the Company's order book since November 6, 2023, being the last date on which such information was presented.
The Company cannot guarantee that its order book will be realized in full, in a timely manner, or at all, or that, even if realized, revenues generated will result in profits or cash generation as expected, and any shortfall may be significant. The Company’s conversion of its order book into actual sales is dependent on various factors, including those described below and under section 23.0 of this MD&A entitled “Risk Factors”. For instance, a customer may voluntarily or involuntarily default on an order, may become subject to bankruptcy or insolvency or cease its business operations. In addition, substantially all of the vehicle orders included in the order book are subject to conditions relating to the granting of governmental subsidies or incentives or a specified timing for the delivery of the vehicle and, in a limited number of cases, the availability of certain specifications and options or the renewal of certain routes by governmental or school authorities. As a result, the Company’s ability to convert its order book into actual sales is highly dependent on the granting and timing of governmental subsidies and incentives, most notably subsidies and incentives under the Quebec government’s 2030 Plan for a Green Economy (the “Quebec Green Economy Plan”), Federal Infrastructure Canada's ZETF, the Government of Canada Incentives for Medium- and Heavy-Duty Zero-Emission Vehicles (iMHZEV) Program, the U.S. Environmental Protection Agency Clean School Bus Program and California’s Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project (HVIP). More than half of the vehicles included in the order book are contingent upon grants under the ZETF, in respect of which applications relating to vehicles of Lion have not yet been fully processed to date and December 31, 2025 is the latest date by which claims are required to be made according to the current eligibility criteria of the ZETF program, unless otherwise agreed by Infrastructure Canada. In addition, purchase orders obtained in connection with the first round of funding under the EPA Program, require, among other things, that vehicles be delivered on or prior to October 2024.
Any termination, modification, delay or suspension of any governmental programs, subsidies and incentives, including, most importantly as of the date hereof, the ZETF, the Quebec Green Economy Plan or the EPA Program could result in delayed deliveries or the cancellation of all or any portion of orders, which, in turn, could have a material and adverse effect on the Company’s business, results of operations or financial condition.
The Company’s conversion of its order book into actual sales is also dependent on its ability to economically and timely manufacture its vehicles, at scale. The Company delivered 519 vehicles during the year ended December 31, 2022 and 852 vehicles during the year ended December 31, 2023. As of February 28, 2024, the Company’s vehicle order book stood at 2,076 vehicles. The execution of the Company’s growth strategy and the conversion of its order book, which currently provides for deliveries ranging from a few months to the end of the year ending December 31, 2026, will require that the Company accelerates its production cadence. While the Saint-Jerome facility and Joliet Facility currently have the infrastructure in place, including in terms of production lines and equipment, to achieve a production capacity of up to 2,500 vehicles and 2,500 buses, respectively, on an annual basis (see section 8.0 of this MD&A entitled “Operational Highlights” and “Product Development and Manufacturing” under section 11.0 of this MD&A entitled “Key Factors Affecting Lion's Performance” for further details), the Company's operations are currently being conducted on a lower scale and it has limited experience to date in high volume manufacturing. In addition, as of February 28, 2024, 166 units included in the order book, consisting of trucks and representing a combined total order value of approximately $60 million, related to products which had been developed and were being sold, but that were not currently in commercial production. See “Products and Solutions” in section 6.2 of the Company’s Annual Information Form for the year ended December 31, 2023 entitled “Business of the Company”. Any failure by the Company to successfully develop its vehicles, source its key components, and scale its manufacturing processes within projected costs and timelines could have a material adverse effect on its business, results of operations or financial condition. As a result, the Company’s realization of its order book is subject to a number of risks and uncertainties, including the risks described in section 3.0 of this MD&A entitled “Caution Regarding Forward-Looking Statements” and section 23.0 of this MD&A entitled “Risk Factors”, and there can be no assurance that the Company will be successful in converting all or a significant portion of its order book into actual sales.
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11.0 Key Factors Affecting Lion’s Performance
Lion believes that its performance and future success are dependent on multiple factors that present significant opportunities, but also pose risks and challenges, including those discussed below and in section 23.0 of this MD&A entitled “Risk Factors”.
Regulatory Landscape and Government and Economic Incentives
Lion competes in an industry that is subject to environmental regulations across the various jurisdictions in which it sells its products. While regulations are expected to continue to become increasingly stringent over time, especially with respect to the use of diesel vehicles, various programs, subsidies and incentives have been introduced by governmental authorities in Canada and the United States in order to promote the adoption of emissions-free vehicles. Demand for Lion’s vehicles is currently highly influenced by such federal, state, provincial and local tax credits, rebates, grants and other government programs and incentives that promote the use of battery electric vehicles. Substantially all of the vehicle orders included in Lion’s order book are subject to the granting of governmental subsidies and incentives, including programs in respect of which applications relating to vehicles of Lion have not yet been fully processed to date. The application, treatment, and processing times of governmental programs, subsidies and incentives are also subject to important variations. As further described under "ZETF Program Delays", “Delivery Periods” and “Ongoing Evaluation; Risk Factors” in section 10.0 of this MD&A entitled “Order Book,” there has been in the past and the Company expects there will continue to be variances between the expected delivery periods of orders and the actual delivery times, and certain delays could be significant. Also, there has been in the past and the Company expects there will continue to be variances in the eligibility criteria and processing times of the various programs, subsidies and incentives introduced by governmental authorities, including in their interpretation and application. Such variances or delays could result in the loss of a subsidy or incentive and/or in the cancellation of certain orders, in whole or in part. See section 23.0 entitled “Risk Factors” of this MD&A.
Additionally, demand for Lion’s vehicles may be influenced by laws, rules, regulations and programs that require reductions in carbon emissions, such as the various measures implemented by lawmakers and regulators in California and Quebec, among others, designed to increase the use of electric and other zero-emission vehicles, including the establishment of firm goals in certain instances for the number of these vehicles operating on state roads by specified dates and the enactment of various laws and other programs in support of these goals.
Although Lion’s vehicles qualify as zero emissions vehicles (“ZEVs”), they are subject to regulations regarding vehicle emissions. For example, in the United States, every class of heavy-duty engines or vehicles must receive Certificate of Conformity (“COCs”) from the EPA prior to being sold. These COCs must be obtained for each model year of production, and failure to obtain them prior to entering Lion’s vehicles into commerce may result in substantial fines or penalties. In addition, the EPA and California Air Resources Board (“CARB”) have annual certification greenhouse gas emissions requirements related to Lion’s vehicles. The CARB certification is required to participate in California’s HVIP. In Canada, the Heavy-duty Vehicle and Engine Greenhouse Gas Emission Regulations adopted under the Canadian Environmental Protection Act, 1999, establish Canadian emission standards and test procedures for Canadian manufacturers, distributors and importers of heavy-duty vehicles. These standards and procedures are aligned with the requirements of the United States Code of Federal regulations for on-road heavy-duty vehicles and engines published by the EPA, parts of which are incorporated by reference in the regulations. However, testing and other requirements to demonstrate compliance may vary, adding to the regulatory complexity of Lion’s operations. In addition, the use, storage, transport, and disposal of Lion’s battery packs is subject to extensive regulation. Lithium-ion cells may be regulated as “hazardous” or “dangerous” goods under several regulatory regimes in both the United States and Canada. In addition to the proper handling, recycling, and disposal of expended batteries, Lion’s operations are subject to a wide range of laws and regulations related to the protection of the environment, including those regulating air emissions, discharges to water, waste management, worker health and safety, and environmental cleanup.
Customer Demand for Electrification
The demand for Lion's vehicles is highly dependent upon the general customer demand for electric vehicles. The electrification of medium and heavy-duty commercial vehicles continues to gain momentum as users and governmental authorities are looking for novel solutions to reduce greenhouse gas (“GHG”) emissions and atmospheric pollution generally while the cost competitiveness of electric vehicles continues to improve. While Lion anticipates that an increasing number of fleet owners and operators will seek all-electric alternatives to reduce the carbon footprint of their diesel fleets, its performance and future success will be largely influenced by the rates of adoption of electric vehicles by customers in markets in which it operates. Lion intends to leverage its broad offering of electric vehicles available for purchase today in order to benefit from the growing customer demand for electric vehicles.
Supply Chain
The Company’s supply, notably in respect of battery cells, battery packs and modules and other raw materials is critical in allowing the Company to scale its operations and execute on its growth strategy, such that any supply delay or vulnerability in the supply chain may cause delays in the availability of the Company’s products. Global supply chain challenges may be caused by labor shortages or other global economic uncertainties and events, including inflationary pressures and military conflicts. Disruptions, including port congestion, rail and weather disruptions, trucker shortages and intermittent supplier shutdowns and delays, may result in component shortages, extended lead times for delivery of parts and raw materials, as well as, in certain cases, additional costs and production slowdowns. In addition, while the Company obtains components from multiple sources whenever possible, some of the components used in its vehicles are purchased from a single source and sometimes require custom design tailored to Lion vehicles such that there could be challenges in securing alternative supply sources for such components. The Company has from time-to-time experienced, and may experience in the future, shortages of raw materials, components and labor resulting in production slowdowns. Supply chain challenges have in certain cases contributed and may contribute in the future to delays in the rollout of certain products, resulting in the loss of a given subsidy or incentive for a client, or forcing a client to reallocate annual spending, therefore contributing to the cancellation of certain orders. In other cases, such challenges have required, and may require in the future, the Company to collaborate with its clients to agree on updated delivery periods or otherwise negotiate revised terms and conditions or enter into new purchase orders. See section 10.0 of this MD&A entitled “Order Book.” In its efforts to mitigate the impact of any supply chain challenges, the Company continues to focus on the management of inventory for critical components such as batteries and motors and to increase its reliance on local sourcing in order to develop a supply chain that is as close as possible to its manufacturing facilities. In addition, the Company has increased its supplier redundancy for specific parts. From a manufacturing standpoint, the Company has also increased in-house fabrication and re-designed certain sub-assemblies to circumvent parts that may be most affected by supply chain challenges, such as connectors used in the fabrication of low and high voltage wiring harnesses. The Company is continuously monitoring its supply chain and expects to continue implementing measures to mitigate identified or potential issues. In addition, the Company continues to monitor market dynamics to roll out, as deemed necessary, price increases in certain markets.
Reduction in Total Cost of Ownership
The total cost of ownership (“TCO”), along with vehicle range and payload capacity, quality and reliability, safety, customer experience, technological innovation, charging expertise and compliance with environmental regulation are the primary drivers of truck and bus purchasing decisions for fleet owners and operators.
Lion’s management believes that Lion’s truck TCO is currently favorable to comparable diesel vehicles in most use cases. Over time, the TCO advantage of electric trucks is expected to further increase as electric vehicle prices reduce, which will in turn further improve the economic benefit and rationale for fleet owners and operators to purchase Lion’s all-electric vehicles. In the school bus market, the lower annual mileage of individual units typically makes it more difficult for the lower energy and
maintenance costs to significantly offset the currently higher upfront costs of electric vehicles over incumbent diesel units. As such, at the current time, governmental subsidies and incentives are often required for electric buses to be competitive over diesel units from a pure TCO point of view in this category. Over time, as the cost of the vehicles decreases as a result of, among other things, reduction in battery costs from increased vertical integration in manufacturing of battery systems, increased purchasing power with suppliers through larger volume commitments, increased manufacturing capacity utilization and fixed cost absorption, and other productivity gains, the TCO for electric buses is expected to become favorable even in the absence of governmental subsidies and incentives. However, if the cost of electric vehicles does not decrease over time, or if subsidies or incentives are reduced, eliminated or expire, Lion’s future sales could be negatively impacted. See section 23.0 entitled “Risk Factors” of this MD&A.
Product Development and Manufacturing
Lion’s success will depend on its ability to economically develop, manufacture and sell its vehicles at scale and meet its customers’ business needs. Lion’s current line-up of purpose-built all-electric vehicles consists of trucks, which can be divided into four main platforms, and all-electric buses, which can be divided into two main platforms. Lion has also established partnerships and other relationships with third-party suppliers to enable it to offer to its clients a variety of vehicle configurations, upfit equipment options and applications. Although Lion has developed and manufactured specialized chassis for such applications that can fit all-electric battery packs, the electrification and final configuration of certain of the specialized applications offered by Lion and its partners require input from upfitters and their ultimate customers and, in certain instances, Lion is still in the process of finalizing testing and integration with its partners and customers. Lion has also developed, and may in the future develop, additional products, specialized applications and services. Lion continuously assesses the timing and allocation of resources with respect to the development of other products and/or integration of specialized applications. See “Products and Solutions” in section 5.4 entitled “Business of the Company” of the Company’s Annual Information Form for the year ended December 31, 2023, for a description of Lion’s products and solutions and product development pipeline. See also “Delay of Commercial Production of LionA and LionM” in section 8.0 of this MD&A entitled “Operational Highlights.” In addition, vehicle manufacturers often experience, and the Company has in the past experienced delays in the design, production and launch of new products. Any delay in the design, production and launch of new models or in doing so cost-effectively and with high quality, or any failure by the Company to satisfy the needs and requirements of its customers in terms of products, specifications and services, could harm the Company’s reputation and brand.
The Saint-Jerome facility and Joliet Facility currently have the infrastructure in place, including in terms of production lines and equipment, to achieve a production capacity of up to 2,500 vehicles and 2,500 buses, respectively, on an annual basis. Lion also has the Lion Campus, which is located at the YMX International Aerocity of Mirabel, Quebec, and consists of the Company’s Battery Plant and Innovation Center. The majority of the vehicles delivered by the Company during the year ended December 31, 2023 were manufactured in Saint-Jerome. With respect to the estimated annual capacity at full scale at the Saint-Jerome manufacturing facility of 2,500 vehicles and at the Joliet Facility of 2,500 buses, the Company does not expect that any significant capital expenditure will be required to achieve such production capacity, which would require mostly operational expenditures and could be achieved through additional workforce and certain optimization of production lines. The Company has not to date produced at such level and has limited experience to date in high volume manufacturing of its vehicles. Any failure by the Company to successfully develop its vehicles, source its key components, and scale its manufacturing processes within projected costs and timelines could have a material adverse effect on its business, results of operations or financial condition.
Costs of Raw Materials and Supplies
Components in Lion’s vehicles are made of various raw materials, including aluminum, steel, composite, non-ferrous metals (such as copper) and other materials and minerals used to manufacture lithium-ion batteries. The prices for these raw materials fluctuate depending on market conditions, global demand and other factors, including inflation. While Lion has, in certain cases, entered into long-term contractual arrangements with suppliers with respect to the supply of certain key components of its vehicles, including lithium-ion batteries and battery cells, it remains exposed to multiple risks relating to price fluctuations and other factors which could impact supply. In particular, the inability of the Company’s current or future suppliers of key parts to sustainably meet the Company’s timelines, or cost, quality and volume needs may negatively impact the Company, force the redesign of certain of its models or translate in the cancellation of orders or the loss of certain clients or sales.
Prior to the commencement of its manufacturing operations at the Battery Plant, Lion relied only on third-party battery suppliers to source battery cells, modules and packs that it integrated in its vehicles. In connection with the establishment of its manufacturing operations at the Battery Plant, Lion now manufactures its own battery modules and packs that integrate 21700 cylindrical battery cells sourced from third-party suppliers. While Lion intends to continue in certain instances to rely on third-party suppliers for battery packs, it expects to increase optimization for product design, cost and production efficiency over time by producing battery packs in-house.
As previously disclosed, the Company initiated in fiscal 2022 arbitration proceedings in order to enforce the terms and conditions of the multi-year battery pack supply contract it had entered into with Romeo Systems, Inc. ("Romeo") (who became a subsidiary of Nikola Corporation (''Nikola'')) in November 2020. On June 30, 2023, Nikola announced the liquidation of Romeo's assets for the benefit of its creditors. In light of such liquidation, the Company decided not to pursue its arbitration proceedings against Romeo, and to only maintain its legal proceedings against Nikola. Romeo’s failure to comply with its obligations under the multi-year battery pack supply contract resulted in delays in the commencement of the commercial production of the Lion8T, which is now expected to commence near the middle of fiscal 2024, and in the Company deciding to mount its Lion8T trucks with the Company’s proprietary battery packs manufactured at the Battery Plant. See section 13.0 of the Company’s Annual Information Form entitled “Legal Proceedings and Regulatory Actions.”
The Company does not currently hedge its long-term exposure to price fluctuations of raw materials and supplies. Therefore, an increase in prices of raw materials and supplies could negatively impact the Company’s operating results if its suppliers are unable or unwilling to fulfill purchase orders submitted by the Company and/or if the Company is not able to find other manufacturing or supply alternatives or transfer these cost increases to customers.
Foreign Exchange
The Company’s revenues are reported in U.S. dollars but its functional currency is the Canadian dollar and the majority of its transactions are in Canadian dollars. The Company's main manufacturing operations are currently located in Canada. Suppliers of the Company are located in Canada, the United States and other foreign jurisdictions. The Company’s current indebtedness is denominated in both Canadian and U.S. dollars. Therefore, the Company’s revenues, gross profit and net income (loss) reported in U.S. dollars are and are expected to continue to be exposed to foreign exchange fluctuations.
Seasonality
The Company’s sales have historically experienced substantial fluctuations from quarter to quarter, particularly considering that they have been mainly comprised of sales of school buses which are mainly driven by the school calendar. While the Company expects to continue to experience seasonal variations in its sales in the foreseeable future, management believes that the mix of product sales may vary in the future, especially in connection with the Company’s execution of its growth strategy and as sales of trucks may become more prevalent and new products and applications may be introduced. As a result, it is difficult to predict if any historical trends will be reproduced in the future.
12.0 Components of Results of Operations
Revenues
To date, Lion has primarily generated revenues from the sale of its all-electric school buses. Over time, Lion anticipates a significant proportion of its revenues to be generated from the sale of all-electric trucks.
Cost of Sales
Lion’s cost of sales includes material costs, transportation costs, labor, manufacturing overhead, and other direct costs related to electric vehicle production.
Administrative Expenses
Administrative expenses consist of non-manufacturing facility leasing, share-based compensation, as well as employee benefits for management, information technology, human resources, accounting, legal, investor relations, and other general administrative functions. Administrative expenses also include professional fees, non-manufacturing depreciation expense, and non-manufacturing related insurance costs (including director and officer insurance).
Selling Expenses
Selling expenses consist of salaries and other similar expenses related to Lion’s bus and truck sales force and employee benefit costs, sales commissions, share-based compensation, business development, aftermarket sales and advertising, marketing and communications.
Restructuring Costs
Restructuring costs are comprised mainly of severance costs recognized in connection with the workforce reduction announced on November 27, 2023.
Impairment of Intangible Assets and Property, Plant and Equipment
Impairment of intangible assets and property, plant and equipment relates to the write-down of previously capitalized vehicle development costs and property, plant and equipment which resulted from the Company’s decision to indefinitely delay the start of the commercial production of the LionA and LionM minibuses, as announced on November 7, 2023.
Finance Costs
Finance costs consists primarily of interest paid on Lion’s outstanding debts, legal and other costs related to debt and share warrant financing activities, interest on lease liabilities, accretion expense on convertible and non-convertible debentures, and non-cash accretion and revaluation expenses on the balance of purchase price payable related to the acquisition of dealership rights.
Foreign Exchange (Gain) Loss
Foreign exchange gains and losses represent the gains and losses on instruments such as cash balances, accounts receivable, accounts payable, debt balances and other accounts that are denominated in foreign currencies to the functional currencies of the related Lion entities, as a result of changes in foreign currency rates.
Change in Fair Value of Conversion Options on Convertible Debt Instruments
The Convertible Debentures issued on July 19, 2023 are, subject to their terms and conditions, convertible at the holders’ option into Common Shares. Their conversion price is also subject to customary adjustments and, upon the occurrence of certain events, including a “fundamental change”, holders of Convertible Debentures will either (i) convert all of their Convertible Debentures, with the number of Common Shares issuable upon such conversion being subject to a grid-based “make-whole”
adjustment, or (ii) require the Company to repurchase for cash all of their Convertible Debentures at a given repurchase price. See “Convertible Debentures” in section 16.0 of this MD&A entitled “Liquidity and Capital Resources" for further details regarding the terms and conditions of the convertible Debentures.
Lion determined that since the conversion options are financial instruments that do not meet the “Fixed for Fixed” criteria under IAS 32, the conversion options are derivative instruments and are classified as a liability in accordance with IAS 32 - Financial Instruments: Presentation and IFRS 9 - Financial Instruments, and are each initially recorded at fair value and then revalued at each reporting date.
Change in Fair Value of Share Warrant Obligations
On July 1, 2020, in connection with the entering into of a master purchase agreement and a work order (collectively, the “MPA”) with Amazon Logistics, Inc. (the "Specified Customer"), the Company issued warrants to purchase common shares of the Company (the “Specified Customer Warrant”) to Amazon.com NV Investment Holdings LLC (the “Warrantholder”) which vests, subject to the terms and conditions contained therein, based on the aggregate amount of spending by Amazon.com, Inc. and its affiliates on Lion’s products or services.
At the election of the Warrantholder, any vested portion of the Specified Customer Warrant can be exercised either on a cash basis by the payment of the applicable exercise price or on a net issuance basis based on the in-the-money value of the Specified Customer Warrant. The exercise price of the Specified Customer Warrant corresponds to $5.66. The Specified Customer Warrant grants the Warrantholder the right to acquire up to 35,350,003 common shares of Lion.
There was an initial vesting of a portion of the Specified Customer Warrant which is exercisable for 5,302,511 common shares of Lion. The remaining portion of the Specified Customer Warrant vests in three tranches based on the aggregate amount of spending by Amazon.com, Inc. and its affiliates on Lion’s products or services. The Specified Customer Warrant has a term of 8 years ending on July 1, 2028. Full vesting of the Specified Customer Warrant requires spending of at least $1.2 billion on Lion’s products or services over the term of the Specified Customer Warrant, subject to accelerated vesting upon the occurrence of certain events, including a change of control of Lion or a termination of the MPA for cause.
Lion determined that the Specified Customer Warrant is a derivative instrument and is classified as a liability in accordance with IAS 32 - Financial Instruments: Presentation and IFRS 9 - Financial Instruments. The vested portion of the Specified Customer Warrant is initially recorded at fair value as a share warrant obligation and then revalued at each reporting date, with a corresponding contract asset recognized at inception. The corresponding contract asset recognized at inception will be amortized as a reduction of revenues on a percentage per dollar of revenue generated with Amazon.com, Inc. and its affiliates.
Upon completion of the Company's business combination and plan of reorganization (the ''Business Combination''), which resulted in a wholly-owned subsidiary of Lion merging with Northern Genesis Acquisition Corp. (''NGA''), each outstanding warrant to purchase shares of NGA’s common stock ("NGA Warrant" was converted into a warrant to acquire one common share of Lion (a “Business Combination Warrant”), at a price of $11.50 per share. A total of 27,111,741 NGA Warrants were converted into 27,111,741 Business Combination Warrants, 15,972,672 of which were public Business Combination Warrants and 11,139,069 of which were private Business Combination Warrants.
Each Business Combination Warrant entitles the holder to acquire one common share of Lion at an exercise price of $11.50 per share until May 6, 2026, subject to adjustment in certain customary events. The public Business Combination Warrants may be redeemed by the Company in whole at a price of $0.01 per public Business Combination Warrant, provided that the last reported sales price of the Company’s common shares equals or exceeds $18.00 per share for any 20 trading days within a 30 trading-day period commencing once the public Business Combination Warrants become exercisable and
ending on the third trading day prior to the date on which the Company gives proper notice of such redemption.
Each private Business Combination Warrant may be exercised on a cashless basis and may not be redeemed by the Company for so long as it is held by Northern Genesis Sponsor LLC or its permitted transferees. Once transferred to any person that is not Northern Genesis Sponsor LLC or any of its permitted transferees, a private Business Combination Warrant becomes treated as a public Business Combination Warrant.
In connection with the December 2022 Offering (as defined below), the Company issued 22,637,795 ''2022 Warrants''. Each whole 2022 Warrant entitles the holder to purchase one common share for a price $2.80 per share for a period of five years ending December 15, 2027, subject to adjustment in certain customary events.
In connection with the 2023 Debenture Financing, the Company issued the July 2023 Warrants to holders of Non-Convertible Debentures entitling them to purchase, at any time after six (6) months following the issuance thereof until July 19, 2028, 22,500,000 common shares in the aggregate at an exercise price of C$2.81 per common share. The exercise price of the July 2023 Warrants is subject to customary adjustments.
The Company determined that the Business Combination Warrants, the 2022 Warrants, and the July 2023 Warrants are derivative instruments and are classified as a liability in accordance with IAS 32 - Financial Instruments: Presentation and IFRS 9 - Financial Instruments. The Business Combination Warrants, the 2022 Warrants, and the July 2023 Warrants are each initially recorded at fair value and then revalued at each reporting date.
13.0 Results of Operations
Comparison of Annual Results
Lion’s results of operations for the years ended December 31, 2023, 2022 and 2021 are presented below:
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| Years ended | | | | | | | | |
| Dec 31, 2023 | | Dec 31, 2022 | | Dec 31, 2021 | | Variation 2023-2022 | | % Change 2023-2022 | | Variation 2022-2021 | | % Change 2022-2021 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Revenue | $253,496 | | $139,914 | | $57,710 | | $113,582 | | 81% | | $82,204 | | 142% |
| Cost of sales | $259,020 | | $152,862 | | $57,665 | | $106,158 | | 69% | | $95,197 | | 165% |
| Gross profit (loss) | $(5,524) | | $(12,947) | | $45 | | $7,423 | | n.a. | | $(12,993) | | n.a. |
| Gross margin | (2.2)% | | (9.3)% | | —% | | n.a. | | 7.1% | | n.a. | | (9.3)% |
| | | | | | |
| |
| | | | |
Adjusted gross profit (loss) (1) | $4,285 | | $(12,947) | | $45 | | $17,232 | | n.a | | $(12,993) | | n.a |
Adjusted gross margin (1) | 1.7% | | (9.3)% | | —% | | n.a | | 11.0% | | n.a | | (9.3)% |
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | |
| Administrative expenses | $51,479 | | $44,843 | | $78,423 | | $6,636 | | 15% | | $(33,580) | | (43)% |
| Selling expenses | $19,650 | | $22,974 | | $27,720 | | $(3,324) | | (14)% | | $(4,746) | | (17)% |
| Transaction costs | $— | | $— | | $13,655 | | $0 | | n.m. | | $(13,655) | | (100)% |
| Restructuring costs | $1,426 | | $— | | $— | | $1,426 | | n.m. | | n.m. | | n.m. |
| Impairment of intangible assets and property, plant and equipment | $35,998 | | $— | | $— | | $35,998 | | n.m | | n.m. | | n.m. |
| Operating loss | $(114,079) | | $(80,764) | | $(119,752) | | $(33,315) | | 41% | | $38,988 | | (33)% |
| | | | | | | | | | | | | |
| Finance costs | $17,892 | | $955 | | $8,332 | | $16,937 | | 1774% | | $(7,377) | | (89)% |
| Foreign exchange (gain) loss | $(2,260) | | $1,973 | | $1,037 | | $(4,233) | | (215)% | | $936 | | 90% |
| Change in fair value of conversion options on convertible debt instruments and interest paid in kind | $(4,982) | | $— | | $— | | $(4,982) | | n.m. | | $— | | n.m. |
| Change in fair value of share warrant obligations | $(20,963) | | $(101,468) | | $(85,796) | | $80,505 | | (79)% | | $(15,672) | | 18% |
| Net earnings (loss) | $(103,766) | | $17,776 | | $(43,325) | | $(121,542) | | n.m. | | $61,101 | | n.m. |
| | | | | | | | | | | | | |
| Foreign currency translation adjustment | $6,947 | | $(18,310) | | $321 | | $25,257 | | n.m. | | $(18,631) | | n.m. |
| | | | | | | | | | | | | |
| Comprehensive loss | $(96,819) | | $(534) | | $(43,004) | | $(96,285) | | n.m. | | $42,470 | | n.m. |
| | | | | | | | | | | | | |
Basic earnings (loss) per share | $(0.46) | | $0.09 | | $(0.27) | | $(0.55) | | n.m. | | $0.36 | | n.m. |
| | | | | | | | | | | | | |
Diluted earnings (loss) per share | $(0.46) | | $0.09 | | $(0.27) | | $(0.55) | | n.m. | | $0.36 | | n.m. |
| | | | | | | | | | | | | |
| Basic weighted average number of common shares outstanding | 224,311,227 | | 193,113,983 | | 162,245,092 | | 31,197,244 | | n.a. | | 30,868,891 | | n.a. |
| | | | | | | | | | | | | |
| Diluted weighted average number of common shares outstanding | 224,311,227 | | 200,591,663 | | 162,245,092 | | 23,719,564 | | n.a. | | 38,346,571 | | n.a. |
(1) Adjusted gross profit (loss) and Adjusted gross margin are non-IFRS financial measures. See section 4.0 of this MD&A entitled “Non-IFRS Measures and Other Performance Metrics,” and section 13.0 of this MD&A entitled "Results of Operations - Reconciliation of Adjusted Gross Profit (Loss) and Adjusted Gross Margin" for a reconciliation of gross profit (loss), the most directly comparable IFRS financial measure, to Adjusted gross profit (loss).
n.a. = not applicable
n.m. = not meaningful
Revenue
Fiscal 2023 compared to Fiscal 2022
For the year ended December 31, 2023, revenue amounted to $253.5 million, an increase of $113.6 million, compared to the year ended December 31, 2022. The increase in revenue was primarily due to an increase in vehicle sales volume of 333 units, from 519 units (409 school buses and 110 trucks; 471 vehicles in Canada and 48 vehicles in the U.S.) for the year ended December 31, 2022, to 852 units (771 school buses and 81 trucks; 625 vehicles in Canada and 227 vehicles in the U.S.) for the year ended December 31, 2023. Revenues for the year ended December 31, 2023 were positively impacted by the impact of a higher proportion of U.S. vehicle sales as compared to fiscal 2022, however were negatively impacted by delays in the processing and granting of subsidies, which resulted in the postponement of deliveries of vehicles which were ready for delivery.
Fiscal 2022 compared to Fiscal 2021
For the year ended December 31, 2022, revenue amounted to $139.9 million, an increase of $82.2 million, compared to the year ended December 31, 2021. The increase in revenue was primarily due to an increase in vehicle sales volume of 323 units, from 196 units (151 school buses and 45 trucks; 134 vehicles in Canada and 62 vehicles in the U.S.) for the year ended December 31, 2021, to 519 units (409 school buses and 110 trucks; 471 vehicles in Canada and 48 vehicles in the U.S.) for the year ended December 31, 2022. Revenues for the year ended December 31, 2022 were impacted by global supply chain challenges, which required the Company to delay the final assembly of certain vehicles and resulted in increased inventory levels, as well as challenges associated with the production ramp-up and the development of certain models.
Cost of Sales
Fiscal 2023 compared to Fiscal 2022
For the year ended December 31, 2023, cost of sales amounted to $259.0 million, representing an increase of $106.2 million, compared to the year ended December 31, 2022. The increase was primarily due to increased sales volumes and higher production levels, increased fixed manufacturing and inventory management system costs related to the ramp-up of production capacity, higher raw material and commodity costs, and the impact of the inflationary environment. In addition, cost of sales were impacted by the $9.8 million write-down of inventory to net realizable value as a result of the decision to indefinitely delay the commercial production of the LionA and LionM minibuses.
Fiscal 2022 compared to Fiscal 2021
For the year ended December 31, 2022, cost of sales amounted to $152.9 million, representing an increase of $95.2 million, compared to the year ended December 31, 2021. The increase was primarily due to increased sales volumes and higher production levels, increased fixed manufacturing and inventory management system costs related to the ramp-up of production capacity, higher raw material and commodity costs, and the impact of global supply chain challenges and the inflationary environment.
Gross Loss
Fiscal 2023 compared to Fiscal 2022
For the year ended December 31, 2023, gross loss improved by $7.4 million to negative $5.5 million, compared to negative $12.9 million for the year ended December 31, 2022. The improvement was primarily due to the positive impact of increased sales volumes, favorable product mix, and higher manufacturing throughput, partially offset by higher raw material and commodity costs, higher inventory management system costs related to the ramp-up of production capacity, and the impact of the inflationary environment. Gross loss for the year ending December 31, 2023 was also negatively impacted by the $9.8 million write-down of inventory to net realizable value as a result of the decision to indefinitely delay the commercial production of the LionA and LionM minibuses.
Fiscal 2022 compared to Fiscal 2021
For the year ended December 31, 2022, gross profit decreased by $13.0 million to negative $12.9 million, compared to nil for the year ended December 31, 2021. The decrease was primarily due to the impact of increased fixed manufacturing costs and inventory management system costs related to the ramp-up of production capacity, higher raw material and commodity costs, product mix, and the impact of global supply chain challenges and the inflationary environment, partially offset by the positive impact of increased sales volumes.
Administrative Expenses
Fiscal 2023 compared to Fiscal 2022
For the year ended December 31, 2023, administrative expenses increased by $6.6 million, from $44.8 million for the year ended December 31, 2022, to $51.5 million. Administrative expenses for the year ended December 31, 2023 included $5.0 million of non-cash share-based compensation, compared to $9.5 million for the year ended December 31, 2022. Excluding the impact of non-cash share-based compensation, administrative expenses increased from $35.3 million for the year ended December 31, 2022, to $46.5 million for year ended December 31, 2023. The increase was mainly due to an increase in expenses and a higher headcount, both resulting from the expansion of Lion’s head office and general corporate capabilities. As a percentage of sales, administrative expenses represented 20% of net sales for the year ended December 31, 2023, compared to 32% for the year ended December 31, 2022.
Fiscal 2022 compared to Fiscal 2021
For the year ended December 31, 2022, administrative expenses decreased by $33.6 million, from $78.4 million for the year ended December 31, 2021, to $44.8 million. Administrative expenses for the year ended December 31, 2022 included $9.5 million of non-cash share-based compensation, compared to $56.7 million for the year ended December 31, 2021. Excluding the impact of non-cash share-based compensation, administrative expenses increased from $21.7 million for the year ended December 31, 2021, to $35.3 million for year ended December 31, 2022. The increase was mainly due to an increase in expenses reflecting Lion’s transition to being a public company in May 2021, an increase in expenses resulting from the expansion of Lion’s head office and general corporate capabilities in anticipation of an expected increase in business activities, as well as professional fees related to supply chain and strategic project optimization initiatives.
Selling Expenses
Fiscal 2023 compared to Fiscal 2022
For the year ended December 31, 2023, selling expenses decreased by $3.3 million, from $23.0 million for the year ended December 31, 2022, to $19.7 million. Selling expenses for the year ended December 31, 2023 included $0.2 million of non-cash share-based compensation, compared to $2.9 million for the year ended December 31, 2022. Excluding the impact of non-cash share-based compensation, selling expenses decreased from $20.1 million for the year ended December 31, 2022, to $19.5 million for year ended December 31, 2023. The slight decrease was primarily due to streamlined selling related expenses, including lower headcount and marketing costs, partially offset by higher sales commissions related to higher revenue.
Fiscal 2022 compared to Fiscal 2021
For the year ended December 31, 2022, selling expenses decreased by $4.7 million, from $27.7 million for the year ended December 31, 2021, to $23.0 million. Selling expenses for the year ended December 31, 2022 included $2.9 million of non-cash share-based compensation, compared to $14.4 million for the year ended December 31, 2021. Excluding the impact of non-cash share-based compensation, selling expenses increased from $13.3 million for the year ended December 31, 2021, to $20.1 million for year ended December 31, 2022. The increase was primarily due to Lion expanding its
sales force in anticipation of the ramp-up of production capacity, and an increase in expenses as a result of the opening and operations of new Experience Centers.
Restructuring Costs
Restructuring costs of $1.4 million for the year ended December 31, 2023 are comprised mainly of severance costs related to the workforce reduction announced on November 27, 2023. No such restructuring costs were incurred in fiscal 2022 or 2021.
Impairment of Intangible Assets and Property, Plant and Equipment
Impairment of intangible assets and property, plant and equipment of $36.0 million for the year ended December 31, 2023 relates to the write-down of previously capitalized vehicle development costs and property, plant and equipment related to the Lion A and Lion M minibuses for which the Company made the decision to indefinitely delay the start of commercial production, as announced on November 7, 2023. No such impairment was recorded in fiscal 2022 and 2021.
Transaction Costs
Transaction costs of $13.7 million for the year ended December 31, 2021 were incurred in the second quarter of 2021 and related to the completion of the Business Combination pursuant to which Lion became a public company, and were mainly composed of legal, banking, and other professional fees. No such transaction costs were incurred in fiscal 2022 and 2023.
Finance Costs
Fiscal 2023 compared to Fiscal 2022
For the year ended December 31, 2023, finance costs increased by $16.9 million, from $1.0 million for the year ended December 31, 2022, to $17.9 million for the year ended December 31, 2023. Finance costs for the year ended December 31, 2023 were net of $6.5 million of capitalized borrowing costs, compared to $5.1 million for the year ended December 31, 2022. Excluding the impact of capitalized borrowing costs, finance costs increased by $18.3 million compared to the year ended December 31, 2022. The increase was driven primarily by higher interest expense on long-term debt, due to higher average debt outstanding during the year relating to borrowings made under the Revolving Credit Agreement, the IQ Loan, the SIF Loan, the Finalta-CDPQ Loan Agreement, and the Supplier Credit Facility (as such terms are defined below), interest and accretion expense as well as financing costs related to the Convertible Debentures and Non-Convertible Debentures issued in July 2023, and an increase in interest costs related to lease liabilities, including for the Battery Plant. In addition, finance costs for the year ended December 31, 2022 included a gain of $2.1 million on the derecognition of the financial liability occurred as a result of the termination of an agreement maturing on May 7, 2022 granting a private company with dealership rights in certain regions in the United States.
Fiscal 2022 compared to Fiscal 2021
For the year ended December 31, 2022 finance costs decreased by $7.4 million, from $8.3 million for the year ended December 31, 2021, to $1.0 million for the year ended December 31, 2022. Finance costs for the year ended December 31, 2022 were net of $5.1 million of capitalized borrowing costs. Excluding the impact of capitalized borrowing costs, finance costs decreased by $2.2 million compared to the year ended December 31, 2021. The decrease was driven primarily by lower interest expense on long-term debt, the non-recurrence of interest expense on convertible debt instruments that was repaid in fiscal 2021 and accretion expense on retractable common shares which were repaid on May 6, 2021, and the $2.1 million gain on the derecognition of a financial liability (which occurred as a result of the termination of an agreement maturing on May 7, 2022 granting a private company with dealership rights in certain regions in the United States), partially offset by an increase in financing costs related to the establishment of the ATM Program, the issuance of the 2022 Warrants, and interest on lease liabilities, including for the Joliet Facility.
Foreign Exchange Loss (Gain)
Fiscal 2023 compared to Fiscal 2022
Foreign exchange loss (gain) relates primarily to the revaluation of net monetary assets denominated in foreign currencies to the functional currencies of the related Lion entities. For the year ended December 31, 2023, foreign exchange gain was $2.3 million, compared to a loss of $2.0 million in the prior year, related primarily to the impact of changes in foreign currency rates, related primarily to the impact of changes in the Canadian dollar relative to the U.S. dollar.
Fiscal 2022 compared to Fiscal 2021
Foreign exchange losses and gains for both periods relate primarily to the revaluation of net monetary assets denominated in foreign currencies to the functional currencies of the related Lion entities. For the year ended December 31, 2022, foreign exchange loss was $2.0 million, compared to a loss of $1.0 million in the prior year, and related primarily to the impact of changes in foreign currency rates, related primarily to the impact of changes in the Canadian dollar relative to the U.S. dollar.
Change in Fair Value of Conversion Options on Convertible Debt Instruments
For the year ended December 31, 2023, change in fair value of conversion options on convertible debt instruments was a gain of $5.0 million, and was related to the revaluation of the conversion options on the Convertible Debentures issued in July 2023.
Change in Fair Value of Share Warrant Obligations
Fiscal 2023 compared to Fiscal 2022
Change in fair value of share warrant obligations moved from a gain of $101.5 million for the year ended December 31, 2022, to a gain of $21.0 million, for the year ended December 31, 2023. The gain for the year ended December 31, 2023 was related to the Specific Customer Warrants, the public and private Business Combination Warrants, the 2022 Warrants, and the July 2023 Warrants, and resulted mainly from the decrease in the market price of Lion equity as compared to the previous valuations.
Fiscal 2022 compared to Fiscal 2021
Change in fair value of share warrant obligations resulted in a gain of $101.5 million for the year ended December 31, 2022, compared to a gain of $85.8 million for the year ended December 31, 2021, related to the Specific Customer Warrants, the public and private Business Combination Warrants, and the 2022 Warrants. The gain for the year ended December 31, 2022 results mainly from the decrease in the market price of Lion equity as compared to the previous valuations.
Net Earnings (Loss)
Fiscal 2023 compared to Fiscal 2022
The net loss of $103.8 million for the year ended December 31, 2023 as compared to the net earnings of $17.8 million for the prior year was largely due to an improvement in gross loss, inclusive of the impact of the inventory write-down related to the delay of the start of commercial production of the LionA and LionM minibuses, more than offset by higher administrative and selling expenses, the impairment charge related to the delay of the start of commercial production of the LionA and LionM minibuses, higher finance costs, and lower gains related to non-cash decrease in the fair value of share warrant obligations.
Fiscal 2022 compared to Fiscal 2021
For year ended December 31, 2022, net earnings increased by $61.1 million, from a net loss of $43.3 million for the year ended December 31, 2021, to net earnings of $17.8 million. The improvement in net earnings for the year ended December 31, 2022, as compared to the year ended December 31, 2021,
was largely due to lower non-cash share-based compensation, lower transaction and finance costs, and the higher gain on the fair value of share warrant obligations during discussed in “Change in fair value of share warrant obligations” in fiscal 2022, partially offset by higher gross loss and higher administrative and selling expenses (excluding share-based compensation).
Comparison of Fourth Quarter Results for Fiscal 2023 and Fiscal 2022
Lion’s results of operations for the three months ended December 2023 and 2022 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Unaudited - three months ended |
| Dec 31, 2023 | | Dec 31, 2022 | | Variation | | % Change |
| (dollar amounts in thousands, except share and per share data) |
| | | | | | | |
| Revenue | $60,429 | | $46,769 | | $13,660 | | 29% |
| Cost of sales | $69,480 | | $51,533 |
| $17,946 | | 35% |
| Gross loss | $(9,051) | | $(4,765) | | $(4,286) | | n.a. |
| Gross margin | (15.0)% | | (10.2)% | | n.a | | (5)% |
|
|
|
|
|
|
|
|
Adjusted gross profit (loss) (1) | $758 | | $(4,765) | | $5,523 | | n.a |
Adjusted gross margin (1) | 1.3% | | (10.2)% | | n.a | | 11% |
| | | | | | | |
| Operating expenses: | | | | | | | |
| Administrative expenses | $13,011 | | $9,997 | | $3,014 | | 30% |
| Selling expenses | $3,147 | | $5,643 | | $(2,496) | | (44)% |
| | | | | | | |
| Restructuring costs | $1,426 | | $— | | $1,426 | | n.a. |
| Impairment of intangible assets and property, plant and equipment | $35,998 | | $— | | $35,998 | | n.a. |
| Operating loss | $(62,634) | | $(20,405) | | $(42,229) | | n.m. |
| | | | | | | |
| Finance costs (income) | $6,743 | | $(891) | | $7,634 | | (856)% |
| Foreign exchange (gain) loss | $(2,155) | | $559 | | $(2,714) | | n.m. |
| Change in fair value of conversion options on convertible debt instruments | $(1,626) | | $— | | $(1,626) | | n.m. |
| Change in fair value of share warrant obligations | $(9,052) | | $(15,434) | | $6,382 | | n.m. |
| Net loss | $(56,543) | | $(4,638) | | $(51,905) | | n.m. |
| | | | | | | |
| Foreign currency translation adjustment | $5,786 | | $3,523 | | $2,263 | | n.m. |
| | | | | | | |
| Comprehensive loss | $(50,757) | | $(1,115) | | $(49,642) | | n.m. |
| | | | | | | |
Basic earnings loss per share | $(0.25) | | $(0.02) | | $(0.23) | | n.m. |
| | | | | | | |
Diluted earnings (loss) per share | $(0.25) | | $(0.02) | | $(0.23) | | n.m. |
| | | | | | | |
| Basic weighted average number of common shares outstanding | 226,184,932 | | 200,557,268 | | – | | n.a. |
| | | | | | | |
| Diluted weighted average number of common shares outstanding | 226,184,932 | | 200,557,268 | | – | | n.a. |
(1) Adjusted gross profit (loss) and Adjusted gross margin are non-IFRS financial measures. See section 4.0 of this MD&A entitled “Non-IFRS Measures and Other Performance Metrics,” and section 13.0 of this MD&A entitled "Results of Operations - Reconciliation of Adjusted Gross Profit (Loss) and Adjusted Gross Margin" for a reconciliation of gross profit (loss), the most directly comparable IFRS financial measure, to Adjusted gross profit (loss).
n.a. = not applicable
n.m. = not meaningful
Revenue
For the three months ended December 31, 2023, revenue amounted to $60.4 million, an increase of $13.7 million, compared to the corresponding period in the prior year. The increase in revenue was primarily due to an increase in vehicle sales volume of 14 units, from 174 units (139 school buses and 35 trucks; 160 vehicles in Canada and 14 vehicles in the U.S.) for the three months ended December 31, 2022, to 188 units (178 school buses and 10 trucks; 107 vehicles in Canada and 81 vehicles in the U.S.) for the three months ended December 31, 2023, including the impact of a higher proportion of U.S. vehicle sales than in the corresponding period in the prior year.
Cost of Sales
For the three months ended December 31, 2023, cost of sales amounted to $69.5 million, representing an increase of $17.9 million compared to $51.5 million in the corresponding period in the prior year. The increase was primarily due to the $9.8 million write-down of inventory to net realizable value as a result of the decision to indefinitely delay the start of commercial production of the LionA and LionM minibuses, increased sales volumes and higher production levels, increased fixed manufacturing and inventory management system costs related to the ramp-up of production capacity, higher raw material and commodity costs, and the impact of the inflationary environment.
Gross Loss
For the three months ended December 31, 2023, gross loss increased by $4.3 million, from a gross loss of $4.8 million for the corresponding period in the prior year, to a gross loss of $9.1 million for the three months ended December 31, 2023. The increase in gross loss was primarily due to the negative impact of the $9.8 million write-down of inventory to net realizable value as a result of the decision to indefinitely delay the start of commercial production of the LionA and LionM minibuses, increased fixed manufacturing costs and inventory management system costs related to the ramp-up of future production capacity, higher raw material and commodity costs, product mix, and the impact of continuing global supply chain challenges and inflationary environment, partially offset by the positive gross profit impact of increased sales volumes.
Administrative Expenses
For the three months ended December 31, 2023, administrative expenses increased by $3.0 million, from $10.0 million for the three months ended December 31, 2022, to $13.0 million for the three months ended December 31, 2023. Administrative expenses for the three months ended December 31, 2023 included $1.4 million of non-cash share-based compensation, compared to $2.1 million for the three months ended December 31, 2022. Excluding the impact of non-cash share-based compensation, administrative expenses increased from $7.9 million for the three months ended December 31, 2022, to $11.6 million for the three months ended December 31, 2023. The increase was mainly due to an increase in expenses, including higher headcount, resulting from the expansion of Lion’s head office and general corporate capabilities.
Selling Expenses
For the three months ended December 31, 2023, selling expenses decreased by $2.5 million, from $5.6 million for the three months ended December 31, 2022, to $3.1 million for the three months ended December 31, 2023. Selling expenses for the three months ended December 31, 2023 included a recovery of $1.0 million of non-cash share-based compensation, compared to a charge of $0.4 million for the three months ended December 31, 2022. Excluding the impact of non-cash share-based compensation, selling expenses decreased from $5.2 million for the three months ended December 31, 2022, to $4.1 million for the three months ended December 31, 2023. The decrease was primarily due to streamlined selling related expenses and lower marketing costs, partially offset by higher sales commissions related to higher revenue.
Restructuring Costs
Restructuring costs of $1.4 million for the three months ended December 31, 2023 are comprised mainly of severance costs related to the workforce reduction announced on November 27, 2023. No such restructuring costs were incurred in the three months ended December 31, 2022.
Impairment of Intangible Assets and Property, Plant and Equipment
Impairment of intangible assets and property, plant and equipment of $36.0 million for the three months ended December 31, 2023 relates to the write-down of previously capitalized vehicle development costs and property, plant and equipment which resulted from the Company’s decision to indefinitely delay the start of the commercial production of the LionA and LionM minibuses, as announced on November 7, 2023. No such impairment was recorded in the three months ended December 31, 2022.
Finance Costs (Income)
For the three months ended December 31, 2023, finance costs increased by $7.6 million compared to the corresponding period in the prior year. Finance costs for the three months ended December 31, 2023 were net of $1.8 million of capitalized borrowing costs, compared to $5.1 million for the three months ended December 31, 2022. Excluding the impact of capitalized borrowing costs, finance costs increased by $4.3 million compared to the three months ended December 31, 2022. The increase was driven primarily by higher interest expense on long-term debt, due to higher average debt outstanding during the quarter relating to borrowings made under the Revolving Credit Agreement, the IQ Loan, the SIF Loan, the Finalta-CDPQ Loan Agreement, and the Supplier Credit Facility, interest and accretion expense as well as financing costs related to the Convertible Debentures and Non-Convertible Debentures issued in July 2023, and an increase in interest costs related to lease liabilities, including for the Battery Plant.
Foreign Exchange (Gain) Loss
Foreign exchange gains (loss) for both periods relate primarily to the revaluation of net monetary assets denominated in foreign currencies to the functional currencies of the related Lion entities. For the three months ended December 31, 2023, foreign exchange gain was $2.2 million, compared a loss of $0.6 million in the corresponding period in the prior year, related primarily to the impact of changes in the Canadian dollar relative to the U.S. dollar.
Change in Fair Value of Conversion Options on Convertible Debt Instruments
For the three months ended December 31, 2023, change in fair value of conversion options on convertible debt instruments was a gain of $1.6 million, and was related to the revaluation of the conversion options on the Convertible Debentures issued in July 2023.
Change in Fair Value of Share Warrant Obligations
Change in fair value of share warrant obligations moved from a gain of $15.4 million for the three months ended December 31, 2022, to a gain of $9.1 million, for the three months ended December 31, 2023. The gain for the three months ended December 31, 2023, was related to the Specific Customer Warrants, the public and private Business Combination Warrants, the 2022 Warrants, and the July 2023 Warrants, and resulted mainly from the decrease in the market price of Lion equity as compared to the previous valuations.
Net Loss
The net loss for the three months ended December 31, 2023 as compared to the net loss for the corresponding prior period is higher as it includes the impacts of the inventory write-down and the impairment charge related to the delay of start of commercial production of the LionA and LionM minibuses, and it reflects higher administrative and selling expenses and finance costs, and lower gains related to non-cash decrease in the fair value of share warrant obligations, as compared to the comparative period in the prior year.
Summary of Quarterly Results
The table below sets forth certain summarized unaudited quarterly financial data for the eight most recently completed quarters. This quarterly information has been prepared in accordance with IFRS. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended
(amounts in thousands, except per share amounts or otherwise indicated) - Unaudited | Dec 31, 2023 | Sep 30, 2023 | Jun 30, 2023 | Mar 31, 2023 | Dec 31, 2022 | Sep 30, 2022 | Jun 30, 2022 | Mar 31, 2022 |
| | | | | | | | |
| Revenue | $60,429 | $80,348 | $58,016 | $54,703 | $46,769 | $40,978 | $29,521 | $22,647 |
| Net earnings (loss) | $(56,543) | $(19,853) | $(11,788) | $(15,583) | $(4,638) | $(17,200) | $37,511 | $2,102 |
| Net earnings (loss) per share | | | | | | | | |
| Basic | (0.25) | (0.09) | (0.05) | (0.07) | (0.02) | (0.09) | 0.20 | 0.01 |
| Diluted | (0.25) | (0.09) | (0.05) | (0.07) | (0.02) | (0.09) | 0.19 | 0.01 |
Weighted average number of shares outstanding (in thousands)
| | | | | | | | |
| Basic | 226,185 | 226,134 | 224,068 | 220,778 | 200,557 | 191,792 | 190,003 | 190,003 |
| Diluted | 226,185 | 226,134 | 224,068 | 220,778 | 200,557 | 191,792 | 196,667 | 198,499 |
See “Seasonality” in section 11.0 of this MD&A entitled “Key Factors Affecting Lion’s Performance.”
Reconciliation of Adjusted Gross Profit (Loss) and Adjusted Gross Margin
The following table reconciles gross profit (loss) and gross margin to Adjusted gross profit (loss) and Adjusted gross margin for the three months ended December 2023 and 2022, and the years ended December 31, 2023, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended December 31, | | Year ended December 31, |
| 2023 | | 2022 | | 2023 | | 2022 | | 2021 |
| (in thousands) | | (in thousands) |
| Revenue | $60,429 | | $46,769 | | $253,496 | | $139,914 | | $57,710 |
| Cost of sales | $69,480 | | $51,533 | | $259,020 | | $152,862 | | $57,665 |
| Gross profit (loss) | $(9,051) | | $(4,765) | | $(5,524) | | $(12,947) | | $45 |
Inventory write-down related to the delay of start of commercial production of LionA and LionM minibuses (1) | $9,809 | | $— | | $9,809 | | $— | | $— |
| Adjusted gross profit (loss) | $758 | | $(4,765) | | $4,285 | | $(12,947) | | $45 |
| | | | | | | | | |
| Gross margin | (15.0)% | | (10.2)% | | (2.2)% | | (9.3)% | | 0.1% |
| Adjusted gross margin | 1.3% | | (10.2)% | | 1.7% | | (9.3)% | | 0.1% |
(1)During the fourth quarter of fiscal 2023, the Company decided to indefinitely delay the start of commercial production of the LionA all-electric mini school bus, which is designed for school transportation and to accommodate passengers with special needs, with a capacity of up to 24 passengers. Such decision has also delayed the start of commercial production of the LionM model, an all-electric minibus designed to be used for paratransit or as a standard shuttle bus, and which leverages the same platform as the LionA. The decision was made to prioritize the commercial production of its other products (including the Lion8T) and the integration of Lion batteries to its existing vehicles.
Reconciliation of Adjusted EBITDA
The following table reconciles net earnings (loss) to Adjusted EBITDA for the three months ended December 31, 2023 and 2022, and the years ended December 31, 2023, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended December 31, | | Year ended December 31, |
| 2023 | | 2022 | | 2023 | | 2022 | | 2021 |
| (in thousands) | | (in thousands) |
| | | | | | | | | |
| Revenue | $60,429 | | $46,769 | | $253,496 | | $139,914 | | $57,710 |
| | | | | | | | | |
| Net earnings (loss) | $(56,543) | | $(4,638) | | $(103,766) | | $17,776 | | $(43,325) |
Restructuring costs(1) | $1,426 | | $— | | $1,426 | | $— | | $— |
Impairment of intangible assets and property, plant and equipment(2) | $35,998 | | $— | | $35,998 | | $— | | $— |
Inventory write-down related to the delay of start of commercial production of LionA and LionM minibuses(3) | $9,809 | | $— | | $9,809 | | $— | | $— |
| Finance costs | $6,743 | | $(891) | | $17,892 | | $955 | | $8,332 |
| Depreciation and amortization | $8,359 | | $3,724 | | $26,075 | | $11,492 | | $5,260 |
Share-based compensation(4) | $409 | | $2,522 | | $5,204 | | $12,362 | | $71,081 |
Change in fair value of conversion options on convertible debt instruments(5) | $(1,626) | | $— | | $(4,982) | | $— | | $— |
Change in fair value of share warrant obligations(6) | $(9,052) | | $(15,434) | | $(20,963) | | $(101,468) | | $(85,796) |
Foreign exchange loss (gain)(7) | $(2,155) | | $559 | | $(2,260) | | $1,973 | | $1,037 |
Transaction and other non-recurring expenses(8) | $312 | | $245 | | $1,262 | | $2,140 | | $15,815 |
| | | | | | | | | |
| Adjusted EBITDA | $(6,320) | | $(13,915) | | $(34,305) | | $(54,770) | | $(27,596) |
(1)Represents the restructuring costs (mainly severance costs) recognized in connection with workforce reduction announced on November 27, 2023, as described in note 17 to the annual audited consolidated financial statements as at December 31, 2023 and for the years ended December 31, 2023, and 2022. See also “Workforce Reduction” in section 8.0 of this MD&A entitled “Operational Highlights.”
(2)Represents impairment of previously capitalized vehicle development costs and property, plant and equipment related to the LionA and LionM minibuses for which the Company made the decision to indefinitely delay of the start of commercial production, as announced on November 7, 2023, as described in Notes 6 and 8 to the annual audited consolidated financial statements as at December 31, 2023 and for the years ended December 31, 2023, and 2022.
(3)Represents the write-down of inventory to net realizable value as a result of the decision to indefinitely delay the start of commercial production of the LionA and LionM minibuses as described in Note 5 to the annual audited consolidated financial statements as at December 31, 2023 and for the years ended December 31, 2023, and 2022.
(4)Represents non-cash expenses recognized in connection with the issuance of stock options, restricted share units, and deferred share units issued under Lion's omnibus incentive plan as described in Note 16 to the annual audited consolidated financial statements as at December 31, 2023 and for the years ended December 31, 2023, and 2022.
(5)Represents non-cash change in the fair value of the conversion options on convertible debt instruments as described in Note 13 to the annual audited consolidated financial statements as at December 31, 2023 and for the years ended December 31, 2023, and 2022.
(6)Represents non-cash change in the fair value of the share warrant obligations as described in Note 14 to the annual audited consolidated financial statements as at December 31, 2023 and for the years ended December 31, 2023, and 2022.
(7)Represents losses (gains) relating to foreign exchange translation.
(8)For the years ended December 31, 2023, and 2022, represents non-recurring professional, legal and consulting fees.
14.0 Financial Position
The following table sets out selected information related to the financial position of Lion as of December 31, 2023 and December 31, 2022 as well as explanations for variations:
| | | | | | | | | | | | | | | | | | | | | | | |
| dollar amounts in thousands - unaudited | Dec 31, 2023 | | Dec 31, 2022 | | Variation | | Explanation of Variation |
| $ | $ | | | | |
| Cash | 29,893 | | 88,267 | | (58,374) | | See section 16.0 of this MD&A entitled "Liquidity and Capital Resources" |
| Inventories | 249,607 | | 167,192 | | 82,415 | | Mainly due to higher volumes of raw materials, work in process and finished goods inventories in line with the Company's ramp-up of manufacturing activities, as well as the impact of delays in the processing and granting of subsidies, which resulted in the postponement of deliveries of vehicles which were ready for delivery, partially offset by the write-down of inventory related to the delay of start of commercial production of the LionA and LionM minibuses. |
| Accounts receivable | 75,642 | | 62,972 | | 12,670 | | Mainly due to higher sales volumes in fiscal 2023 as compared to fiscal 2022. |
| Current assets | 356,695 | | 323,498 | | 33,197 | | Mainly due to lower cash offset by increases in inventories and accounts receivable as explained above. |
| Property, plant and equipment | 198,537 | | 160,756 | | 37,780 | | Mainly due to spending related to the Joliet Facility and Lion Campus projects as described in section 8.0 of this MD&A entitled “Operational Highlights'' partially offset the sale of the Battery Plant building and depreciation. |
| Right-of-use assets | 89,663 | | 60,508 | | 29,155 | | Mainly due to the addition related to the Battery Plant building lease and the manufacturing equipment lease in Joliet, partially offset by depreciation. |
| Intangible assets | 175,703 | | 151,364 | | 24,339 | | Mainly due to development costs capitalized related to enhancing existing vehicles and features, developing additional purpose-built electric vehicle platforms and continuing to develop battery systems, partially offset by amortization and impairment related to delay of the start of production of the LionA and LionM minibuses. |
Total assets(1) | 841,121 | | 710,411 | | 130,710 | | Mainly due to factors explained above |
| Trade and other payables | 92,425 | | 75,222 | | 17,203 | | Mainly due to the increase in purchases of raw materials, property, plant and equipment, and intangible assets, and a higher allowance for warranties. |
| Deferred revenue and other deferred liabilities | 18,267 | | 635 | | 17,632 | | Mainly due to deferred revenue related to initial upfront rebate payments from the EPA Clean School Bus Program |
| Current liabilities | 145,733 | | 81,092 | | 64,641 | | Mainly due to higher trade and other payables mainly resulting from the ramp-up of manufacturing activities, deferred revenues related to initial upfront rebate payments from the EPA, and the classification of the Finalta-CDPQ Loan Agreement as current due to its November 2024 maturity date. |
| Lease liabilities | 83,972 | | 58,310 | | 25,662 | | Mainly due to the addition related to the Battery Plant building lease and the manufacturing equipment lease in Joliet, partially offset by lease payments |
| | | | | | | | | | | | | | | | | | | | | | | |
Non-current financial liabilities(2) | 252,502 | | 133,892 | | 118,610 | | Mainly due to the Convertible Debentures, the conversion options on convertible debt instruments, the Non-Convertible Debentures, and the July 2023 Warrants issued as part of the 2023 Debenture Financing, the issuance of 2022 Warrants through the exercise of the over-allotment option, and higher debt outstanding related to the SIF Loan, the IQ Loan and the Supplier Credit Facility, partially offset by classification of the Finalta-CDPQ Loan Agreement as current due to its November 2024 maturity date, and the impact of the market price of Lion equity as compared to the previous valuations of outstanding share warrant obligations. |
| Non-current liabilities | 336,474 | | 192,202 | | 144,272 | | Mainly due to factors explained above |
| Total liabilities | 482,207 | | 273,294 | | 208,913 | | Mainly due to factors explained above |
| Total shareholders’ equity | 358,914 | | 437,117 | | | (78,203) | | Due to net proceeds from the December 2022 Offering through the exercise of the over-allotment option, the issuance of common shares under the ATM Program, share-based compensation expense, foreign currency translation adjustment, more than fully offset by the net loss for the year ended December 31, 2023. |
(1) Total assets were $590.6 million as at December 31, 2021.
(2) Represents financial liabilities related to long-term debt, convertible debt instruments, and share warrant obligations. Non-current financial liabilities were $106.3 million as at December 31, 2021.
15.0 Cash Flows
The following table provides a summary of Lion’s operating, investing, and financing cash flows for the years ended December 31, 2023, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Unaudited) | | |
| Three months ended | | Year ended |
| December 31, 2023 | | December 31, 2022 | | December 31, 2023 | | December 31, 2022 | | December 31, 2021 |
| (in thousands) | | (in thousands) | | |
| | | | | | | | | |
| Cash flows used in operating activities | $(23,790) | | $(30,606) | | $(110,036) | | $(119,553) | | $(130,969) |
| Cash flows used in investing activities | $(27,150) | | $(57,221) | | $(123,506) | | $(204,607) | | $(62,599) |
| Cash flows from financing activities | $45,509 | | $108,852 | | $175,454 | | $172,802 | | $434,697 |
| Effect of exchange rate changes on cash held in foreign currency | $(344) | | $629 | | $(286) | | $(2,078) | | $663 |
| Net decrease in cash | $(5,776) | | $21,654 | | $(58,374) | | $(153,435) | | $241,793 |
| Cash, end of year | $29,893 | | $88,267 | | $29,893 | | $88,267 | | $241,702 |
Cash Flows Used in Operating Activities
For the year ended December 31, 2023, cash flows used in operating activities was $110.0 million, and was composed of Lion’s net loss of $103.8 million driven by the factors discussed in section 13.0 of this MD&A, entitled "Results of Operations", and by net changes in non-cash working capital of $58.0 million, partially offset by net non-cash items of $55.5 million. Non-cash items were mainly composed of $26.1 million for depreciation and amortization, $5.7 million for accretion expense on the Convertible Debentures and the Non-Convertible Debentures, and $5.2 million for share-based compensation
expense, partially offset by the $21.0 million gain related to the change in fair value of share warrant obligations and the $5.0 million gain related to the change in fair value of conversion options on convertible debt instruments. The increase in non-cash working capital was primarily driven by increases in inventories and accounts receivable, partially offset by increases in trade and other payables and by initial upfront rebate payments received from the EPA.
For the year ended December 31, 2022, cash flows used in operating activities was $119.6 million, and was composed of Lion’s net earnings of $17.8 million driven by the factors discussed in section 13.0 of this MD&A, entitled "Results of Operations," net changes in non-cash working capital of $59.0 million, and net non-cash items of $78.4 million. Non-cash items were mainly composed of the $101.5 million gain related to the change in fair value of share warrant obligations, partially offset by $12.4 million for share-based compensation expense and $11.5 million for depreciation and amortization. The increase in non-cash working capital was primarily driven by increases in inventories and accounts receivable, partially offset by increases in trade and other payables.
Cash Flows Used in Investing Activities
Cash flows used in investing activities primarily relates to capitalized development costs for vehicles and battery systems, capital expenditures for equipment and machinery, leasehold improvements, and office furniture as Lion invested in its business infrastructure and made progress with the ramp-up of its manufacturing operations. Acquisitions of property, plant and equipment for the year ended December 31, 2023, and the year ended December 31, 2022, related primarily to the Joliet Facility and Lion Campus, as well as the ramp-up of Lion's current manufacturing operations. The majority of the additions to intangible assets were related to capitalized development costs for vehicles and battery systems.
For the year ended December 31, 2023, cash flows used in investing activities related to capital expenditures of $78.3 million and the addition of intangible assets of $75.2 million, partially offset by net proceeds of $20.5 million received as part of sale and leaseback of the Battery Plant building. In addition, the Company received government assistance of $9.5 million relating to vehicle development projects and the government grant portion of the SIF Loan.
For the year ended December 31, 2022, cash flows used in investing activities related to capital expenditures of $129.6 million and the addition of intangible assets of $78.3 million, partially offset by government assistance of $3.2 million relating to the government grant portion of the SIF Loan.
Cash Flows from Financing Activities
Cash flows from financing activities were $175.5 million for the year ended December 31, 2023 and were primarily due to proceeds of $142.9 million from the 2023 Debenture Financing (gross of the of $3.8 million for finance costs attributable to the conversion option on the convertible debt and the share warrants issued with the non-convertible debt), borrowings of $21.5 million in the aggregate made under the SIF Loan and IQ Loan, the exercise of the over-allotment option of the December 2022 Offering of $7.1 million, net proceeds from the issuance of common shares under the Company's ATM Program of $8.6 million, and proceeds of $4.4 million from the Supplier Credit Facility (as defined below), partially offset by net repayments of $2.5 million under the Revolving Credit Agreement and the repayment of lease liabilities of $6.5 million. See section 16.0 entitled "Liquidity and Capital Resources".
Cash flows from financing activities were $172.8 million for the year ended December 31, 2022 and was primarily due to net proceeds relating to the December 2022 Offering of $47.2 million, borrowings made under the Revolving Credit Agreement in the amount of $71.9 million, and borrowings made under the IQ Loan and the SIF Loan in the aggregate amount of $16.6 million (net of $3.2 million recorded as a government grant related to investments at the Lion Campus), borrowings made under the Finalta-CDPQ Loan Agreement of $22.2 million, and net proceeds from the issuance of common shares under the Company's ATM program of $29.4 million, partially offset by the repayment of the Previous Finalta Credit Facilities (as defined below) in the amount of $9.8 million, and repayment of lease liabilities of $5.0 million. See section 16.0 entitled "Liquidity and Capital Resources".
16.0 Liquidity and Capital Resources
Liquidity and Capital Management
As of December 31, 2023, Lion had a cash balance of $29.9 million ($88.3 million as at December 31, 2022). Lion incurred an operating loss of $114.1 million for the year ended December 31, 2023, of which $36.0 million related to impairment of intangible assets and property, plant and equipment $9.8 million for the write-down of inventory related to the decision to indefinitely delay the start of commercial production of the LionA and LionM minibuses, $5.2 million related to non-cash share-based compensation, and an operating loss of $80.8 million for the year ended December 31, 2022, of which $12.4 million related to non-cash share-based compensation. Further, the Company had negative cash flows from operating activities of $110.0 million and of $119.6 million in each of the years ended December 31, 2023, and 2022, respectively. These operating losses and negative cash flows were mainly the result of the substantial investments made by the Company to grow its business and scale its manufacturing operations. While the material capital expenditures relating to the Joliet Facility and the Lion Campus were, as previously disclosed, completed in fiscal 2022 and 2023 and the Company expects that its capital expenditures (additions to property, plant and equipment) for fiscal 2024 will relate mostly to its ongoing operations and be less than $10 million, the Company will continue to be required to incur operational expenditures in the future, more particularly if and when it accelerates its production cadence. Such expenditures, which could be significant, will be largely impacted by the production cadence, which, in turn, will be dependent upon a variety of factors, including, to a larger extent, the demand for the Company's products as well as the economic environment and the Company's liquidity profile, all of which have been and will continue to be reassessed by management on a continuous basis. See section 8.0 of this MD&A entitled “Operational Highlights.” As a result, despite its continuous efforts to achieve profitability and implement various initiatives to improve its performance, the Company may continue to incur operating losses and have negative cash flows in the short term. Lion’s primary sources of liquidity used in the funding of its operations and the execution of its growth strategy (which includes the ramp-up of manufacturing capacity at its manufacturing facilities) are currently its cash on hand, including funds raised under prior financing transactions such as the 2023 Debenture Financing, cash it generates from the sale of its products and services, its working capital (defined as accounts receivable and inventories, less trade and other payables), funds available under its existing credit facilities and other borrowings, and debt capital as described in the section entitled “Capital Resources” below.
Lion manages its liquidity risk through cash flow forecasting. Management monitors forecasts of the Company’s liquidity requirements to ensure it has sufficient cash to meet its operational needs through maintaining sufficient cash and/or availability under its sources of liquidity, including its credit facilities and other borrowings. Such forecasting involves a significant degree of judgment and takes into consideration the Company’s current liquidity level, its current and projected performance, its cash collection efforts and the terms and conditions of the Company’s financing instruments, including required covenant compliance. There is a risk that such liquidity forecasts may not be achieved and that currently available credit facilities and other borrowings may no longer be available to the Company. In the short term, Lion will continue to closely monitor market conditions and its liquidity and working capital requirements as well as the cadence of its operational and other expenditures and, in parallel, evaluate different opportunities that may enable it to strengthen its financial position and continue to pursue its business strategy. Over the past few months, Lion has implemented a number of cost reduction measures, which included certain workforce reductions and other operational initiatives aimed at optimizing its production cadence with demand. In the future, Lion expects to continue to evaluate other measures and initiatives that may become available to it. Notably, in fiscal 2024, Lion also expects to implement various initiatives aimed at reducing its vehicle and battery development costs and its inventory level, with the objective of reducing its annual vehicle and battery development costs by up to 30% as compared to fiscal 2023 and reducing its inventory levels by up to $50 to $75 million as compared to the level that existed as at the end of fiscal 2023. That being said, the implementation of the foregoing initiatives will be subject to a number of risks and uncertainties and there can be no assurance that Lion will be able to successfully implement, in full or in part, such measures or initiatives, including as they relate to the reduction of vehicle and battery development costs and inventory level. With respect to financing opportunities, while the Company has
been successful in securing financing in the past, including through private or public issuance of equity or other form of equity-related or debt securities or through obtaining credit from government or financial institutions, the availability of additional funds to Lion will depend on a variety of factors, some of which are outside of its control, including dynamics impacting the industries in which Lion operates, and the fact that Lion has raised substantial amounts of capital in the past. Additional funds may not be available to Lion on commercially reasonable terms or at all, when needed. See section 23.0 of this MD&A entitled “Risk Factors”.
Capital Resources
Convertible Debentures
The Convertible Debentures, with a principal amount of approximately $74 million bear interest at the rate of 13% per annum, compounded monthly on the last day of each month. Prior to any accrual date, the Company has the right, at its discretion, to make an election to pay interest accrued on the principal for the applicable month in cash (in which case any interest so paid shall not be compounded).
The Convertible Debentures will mature on July 19, 2028, and are convertible at the holders’ option into Common Shares at a conversion price of $2.58 per Common Share. The conversion price is subject to customary adjustments, including for share splits or consolidation, share dividends, rights offerings, asset or other distributions and above market repurchases of shares (including above market exchanges or tender offers), in each case in compliance with the rules and requirements of the TSX relating to anti-dilution mechanisms.
The Convertible Debentures contain customary covenants and events of default for an instrument of its nature, including covenants relating to compliance with the financial ratios and negative covenants included in the Revolving Credit Agreement (as defined below) (provided (i) that any amendment to the financial ratios to which the lenders under the Revolving Credit Agreement consent will automatically be incorporated in the Convertible Debentures, and (ii) that a default shall only occur under the Convertible Debentures if a financial ratio default occurs and is continuing on the date that is fifteen business days following the delivery of the Company's financial statements evidencing such event of default, and only if the lenders under the Revolving Credit Agreement have not waived or tolerated such event of default before the expiry of this fifteen business day period). The Convertible Debentures also include certain covenants relating to maintaining the current headquarters, employees and facilities of the Company in the province of Quebec and certain covenants limiting the incurrence of capital expenditures over the term of the Convertible Debentures, including limits on capital expenditures towards increasing production capacity at the Company’s manufacturing facilities beyond certain capacity as well as limits on the incurrence of maintenance and other capital expenditures.
The Convertible Debentures contain customary events of default for an instrument of its nature, including, among other things, the occurrence of an event of default under any other debt of the Company with a principal amount exceeding $15,000,000 if such default results in the acceleration of the amounts owed thereunder. Upon the occurrence of an event of default under the Convertible Debentures or, if later, at the expiry of any agreed-upon period for curing an event of default, as the case may be, holders of Convertible Debentures will have the right, upon giving written notice to the Company, to (i) require the Company to redeem all of their Convertible Debentures, or (ii) require that the principal amount of the Convertible Debentures, plus any accrued, compounded and unpaid interest, be converted into Common Shares, with the number of Common Shares issuable upon such conversion being subject to a grid-based “make-whole” adjustment as set forth below.
Upon the occurrence of a “fundamental change”, including a change of control of the Company or the Company failing to comply with the covenants to maintain the current headquarters, employees and facilities of the Company in the province of Quebec, holders of Convertible Debentures will either (i) convert all of their Convertible Debentures, with the number of Common Shares issuable upon such conversion being subject to a grid-based “make-whole” adjustment, or (ii) require the Company to
repurchase for cash all of their Convertible Debentures at a repurchase price equal to 150% of the principal amount and the accrued, compounded and unpaid interest.
In the event holders of Convertible Debentures elect to convert their Convertible Debentures upon a fundamental change or an event of default, the number of Common Shares issuable upon such conversion will be subject to a grid-based “make-whole” adjustment pursuant to which the conversion rate determining the number of Common Shares issuable will be increased by a number of Additional Shares, (i) in the case of a conversion in connection with a fundamental change, based on a reference price on the date on which the fundamental change occurs or becomes effective, or (ii) in the case of a conversion following an event of default, based on a reference price on the date on which the holder exercises its conversion right.
In connection with the Financing, the Company issued 258,155 Closing Fee Shares to the holders of Convertible Debentures, representing 0.75% of the principal amount of Convertible Debentures.
Non-Convertible Debentures
The Non-Convertible Debentures with a principal amount of C$90.9 million (approximately $68 million) bear interest at the rate of 11% per annum and are payable in cash quarterly. The Non-Convertible Debentures will mature on July 19, 2028. The Company will have the right, at any time after January 19, 2024, upon 30-day notice, to redeem all or part of the principal amount thereunder, without penalty, at a price equal to one hundred per cent (100%) of the principal amount so redeemed, plus accrued and unpaid interest on the principal amount so repaid, accruing to the date of such redemption.
The Non-Convertible Debentures contain customary covenants for an instrument of its nature, including covenants relating to compliance with the financial ratios and negative covenants included in the Revolving Credit Agreement (as defined below) (provided (i) that any amendment to the financial ratios to which the lenders under the Revolving Credit Agreement consent will automatically be incorporated in the Non-Convertible Debentures, and (ii) that a default shall only occur under the Non-Convertible Debentures if a financial ratio default occurs and is continuing on the date that is fifteen business days following the delivery of the Company's financial statements evidencing such event of default, and only if the lenders under the Revolving Credit Agreement have not waived or tolerated such event of default before the expiry of this fifteen business day period), in addition to certain covenants relating to maintaining the current headquarters, employees and facilities of the Company in the province of Quebec.
The Non-Convertible Debentures contain customary events of default for an instrument of its nature, including, among other things, (i) the occurrence of an event of default under the Revolving Credit Agreement if such default results in the acceleration of the payments owed thereunder and (ii) the occurrence of an event of default under any other debt instrument of the Company with a principal amount exceeding $15,000,000 if such default permits the acceleration of the payment of such debt.
The Non-Convertible Debentures constitute senior secured obligations of the Company and are secured by a hypothec and other liens on substantially all of the Company’s and certain of its subsidiaries’ movable/personal property as well as on the immovable/real rights related to the Company’s innovation center facility located in Mirabel, Quebec and guaranteed by such subsidiaries.
July 2023 Warrants
In connection with the 2023 Debenture Financing, the Company issued July 2023 Warrants to holders of Non-Convertible Debentures entitling them to purchase, at any time after six (6) months following the issuance thereof until July 19, 2028, 22,500,000 Common Shares in the aggregate at an exercise price of C$2.81 per Common Share. The exercise price of the July 2023 Warrants is subject to customary adjustments, including for share splits or consolidation, share dividends, rights offerings, asset or other distributions and above market repurchases of shares (including above market exchanges or tender offers), in each case in compliance with the rules and requirements of the TSX relating to anti-dilution mechanisms.
Upon a change of control of the Company, the Company will have the right to redeem and cancel all of the outstanding July 2023 Warrants for a cash purchase price based on the remaining term of the July 2023 Warrants and the value of the consideration offered or payable per Common Share in the transaction constituting the change of control. In addition, upon a change of control of the Company resulting in (or which is reasonably anticipated to result in) the Common Shares ceasing to be listed on a stock exchange, the holders of July 2023 Warrants may require the Company to redeem and cancel all July 2023 Warrants at the Redemption Price subject to and on the date such transaction resulting in a change of control is completed.
December 2022 Unit Offering
On December 16, 2022, the Company closed the “December 2022 Offering”, pursuant to which the Company issued 19,685,040 units (each, a ''Unit'') at a price of $2.54 per Unit. Each Unit consisted of one Common Share and one 2022 Warrant. Each whole 2022 Warrant entitles the holder thereof to acquire one Common Share at an exercise price of $2.80 per share for a period of five years ending on December 15, 2027, subject to adjustment in certain customary events. On January 17, 2023, the Company announced full exercise and closing of the underwriters’ over-allotment option, which resulted in the Company issuing and selling to the underwriters 2,952,755 additional Units at a price of $2.54 per Unit. The December 2022 Offering resulted in aggregate gross proceeds to the Company of approximately $57.5 million, or net proceeds of $52.3 million after deducting underwriting commissions of approximately $2.9 million and other offering costs (including legal expenses) relating to the December 2022 Offering. The 2022 Warrants are trading on the NYSE under the symbol “LEV WS.A” and on the TSX under the symbol “LEV.WT.A.”
Please refer to section 17.0 of this MD&A entitled “Use of Proceeds from Public Offerings” for additional details regarding the use of proceeds from the December 2022 Offering.
ATM Program
On June 17, 2022, the Company established an ATM program (the "ATM Program") that allowed the Company to issue and sell, from time to time through a syndicate of agents, newly issued common shares of the Company, for an aggregate offering amount of up to $125 million (or the Canadian dollar equivalent).
In connection with the 2023 Debenture Financing closed on July 19, 2023, the Company terminated its ATM Program which was set to expire in July 2024 and will therefore no longer make any sales thereunder.
Please refer to section 17.0 of this MD&A entitled “Use of Proceeds from Public Offerings” for additional details regarding the use of proceeds from the ATM Program.
Credit Agreement with Banking Syndicate
Lion is a party to a credit agreement (the “Revolving Credit Agreement”) which was entered into on August 11, 2021 with a syndicate of lenders represented by National Bank of Canada, as administrative agent and collateral agent, and including Bank of Montreal and Federation des Caisses Desjardins du Quebec, as amended on January 25, 2022, to increase the maximum principal amount that may become available from time to time under the revolving credit facility, subject to the borrowing base and compliance with the covenants contained under the Revolving Credit Agreement, from $100,000,000 to $200,000,000. The Revolving Credit Agreement was further amended on July 19, 2023 (the "July 2023 Amendment") to permit the incurrence of the 2023 Debenture Financing, extend the maturity of the Revolving Credit Agreement by one year to August 11, 2025, and provide for an availability block and the establishment of an interest reserve account.
The credit facility under the Revolving Credit Agreement is available for use to finance working capital and for other general corporate purposes, and available to be drawn subject to a borrowing base comprised of eligible accounts (including insured or investment grade accounts) and eligible inventory, in
each case, subject to customary eligibility and exclusionary criteria, advance rates and reserves. The credit facility under the Revolving Credit Agreement currently bears interest at a floating rate by reference to the Canadian prime rate or pursuant to banker’s acceptance based on the CDOR rate, if in Canadian dollars, or the U.S. base rate or Term Secured Overnight Financing Rate ("SOFR"), if in U.S. dollars, as applicable, plus the relevant applicable margin. The Revolving Credit Agreement matures on August 11, 2025. The obligations under the Revolving Credit Agreement are secured by a first priority security interest, hypothec and lien on substantially all of Lion’s and certain of its subsidiaries’ movable property and assets (subject to certain exceptions and limitations). The Revolving Credit Agreement includes certain customary affirmative covenants, restrictions and negative covenants on Lion’s and its subsidiaries’ activities, subject to certain exceptions, baskets and thresholds. The Revolving Credit Agreement also provides for customary events of default, in each case, subject to customary grace periods, baskets and materiality thresholds. Finally, the Revolving Credit Agreement also requires Lion to maintain certain financial ratios and namely, an all times tangible net worth test and a springing fixed charge coverage ratio based on a minimum availability test which may, from time to time, impact the maximum amount available under the revolving credit facility. Further, in accordance with the July 2023 Amendment, the amount available under the revolving credit facility provided under the Revolving Credit Agreement is subject to an availability block of C$10,000,000 which, upon availability dropping below 30% and so long as no default then exist or would result therefrom, may become available and be drawn to fund an interest reserve account to be made subject to the control of the administrative agent and collateral agent under the Revolving Credit Agreement. Such interest reserve account amounts can be used to pay interest under the Non-Convertible Debentures if no default or event of default shall have occurred and be continuing or shall result therefrom.
As at December 31, 2023, $70.0 million was drawn under the Revolving Credit Agreement, at weighted average all-in interest rate of 6.96%. As of the same date, the Company estimates that the total borrowing base under the Revolving Credit Agreement corresponded to approximately $153 million, which translated, after the application of the 12.5% minimum availability test related to a springing fixed charge coverage ratio, in a total remaining availability of approximately $63 million. For further details regarding the terms and conditions of the Revolving Credit Agreement, please refer to the copy of the Revolving Credit Agreement which has been made available on SEDAR+ at www.sedarplus.ca and on EDGAR at www.sec.gov.
Financing Agreement with Investissement Quebec
On July 1, 2021, the Company entered into an interest-bearing secured loan agreement with Investissement Quebec (the “IQ Loan”) relating to the construction of the Lion Campus. The IQ Loan provides for financing of up to C$50,000,000. On July 19, 2023, in connection with the 2023 Debenture Financing, the IQ Loan was amended (the “IQ Loan 2023 Amendment”) to allow holders of the Non-Convertible Debentures to benefit from a second-priority hypothec on substantially all movable/personal property of the Company, subject to certain exceptions in regards to excluded assets, and a first-rank hypothec on each of the immovable/real rights related to the Company’s Innovation Center facility located in Mirabel, Quebec and battery factory equipment financed by Investissement Quebec.
As part of the IQ Loan 2023 Amendment, the potential forgiveness of up to 30% of the IQ Loan subject to certain criteria tied to the Company and to the operations of the facilities, including the creation and maintenance of workforce and certain minimum spending related to R&D activities was replaced with certain financial penalties of up to C$3,000,000 and/or C$15,000,000 for the Company, pro-rated based on the proportion of criteria achieved and the borrowing amount relative to the C$50,000,000 maximum. Funds will be provided to the Company by way of reimbursement of a predetermined percentage of qualified expenditures incurred by the Company, such that the ultimate amount to be received by the Company from Investissement Quebec is dependent upon qualified expenditures being made by the Company in connection with the Lion Campus. The Company will conduct work, incur expenses and fund all costs from its own capital resources, and then submit claims to Investissement Quebec for reimbursement of a predetermined percentage of eligible qualified expenditures up to C$50,000,000. Disbursement by Investissement Quebec is conditional upon, among other things, the Company's
compliance with certain affirmative and negative covenants as set out in the IQ Loan, including covenants relating to Company's creation and maintenance of workforce, operations and R&D activities.
The IQ Loan bears interest at a fixed rate of 4.41%, and will be repayable over a ten-year term, beginning in June 2027. The IQ Loan contains certain affirmative and negative covenants, including covenants relating to the Company’s workforce, operations and R&D activities and to the location of its head office in the Province of Quebec, as well as certain financial covenants. Following the IQ Loan 2023 Amendment and the purchase of the equipment used in the battery factory of the Company, the obligations under the IQ Loan are secured by a second-priority hypothec on the Company's immovable (real) property rights related to the Innovation Center facility located on the Lion Campus and the equipment used in connection with the battery factory of the Company, and a hypothec on substantially all of the Company’s other movable property and assets (subject to certain exceptions and limitations in regards to excluded assets) ranking after those securing the Revolving Credit Agreement, the Non-Convertible Debentures and the Finalta-CDPQ Loan Agreement. As at December 31, 2023, $23.6 million was drawn under the IQ Loan.
Financing Agreement with Strategic Innovation Fund (SIF) of the Government of Canada
On August 19, 2021, the Company entered into an unsecured non-interest bearing loan agreement with the Strategic Innovation Fund of the Government of Canada relating to the construction of the Lion Campus (the “SIF Loan”). The SIF Loan provides for financing of up to C$49,950,000, of which up to 30% is expected to be forgiven subject to certain criteria tied to the Company and to the operations of the facilities, including the creation and maintenance of workforce and certain minimum spending related to R&D activities. Funds will be provided to the Company by way of reimbursement of a predetermined percentage of qualified expenditures incurred by the Company, such that the ultimate amount to be received by the Company from the SIF is dependent upon qualified expenditures being made by the Company in connection with the Lion Campus. The Company will conduct work, incur expenses and fund all costs from its own capital resources, and then submit claims to the SIF for reimbursement of a predetermined percentage of eligible qualified expenditures up to C$49,950,000. Disbursement by the SIF is conditional upon, among other things, the Company's compliance with certain affirmative and negative covenants as set out in the SIF Loan, including covenants relating to Company's creation and maintenance of workforce, operations and R&D activities.
The SIF Loan is repayable over a 15-year term beginning in April 2026. The SIF Loan contains certain affirmative and negative covenants, including relating to the Company’s workforce, operations and R&D activities and to the location of its head office. As at December 31, 2023, $22.0 million was drawn under the SIF Loan, of which $15.1 million was recorded as long-term debt.
Finalta-CDPQ Loan Agreement
On November 8, 2022, Lion entered into the Finalta-CDPQ Loan Agreement with Finalta, as lender and administrative agent, and Caisse de dépôt et placement du Quebec (through one of its subsidiaries), as lender, to finance certain refundable tax credits and grants under government programs. The Finalta-CDPQ Loan Agreement provides for a loan facility of up to a principal amount of C$30 million ($22.2 million) and bears interest at the rate of 10.95% per annum. The obligations thereunder are secured by a first priority security interest, hypothec and lien in certain tax credits and government grants and a subordinate security interest, hypothec and lien in substantially all other movable property and assets. The Finalta-CDPQ Loan Agreement matures on November 6, 2024. The Finalta-CDPQ Loan Agreement includes certain customary restrictions and negative covenants on Lion’s and its subsidiaries’ activities, subject to certain exceptions, baskets, and thresholds. The Finalta-CDPQ Loan Agreement also provides for customary events of default, in each case, subject to customary grace periods, baskets and materiality thresholds. Upon the occurrence and during the continuance of an event of default, the lenders would be entitled to demand the immediate repayment of all amounts owing to them under the Finalta-CDPQ Loan Agreement and/or the lenders may exercise their other rights, remedies and/or recourses. As of December 31, 2023, $22.7 million (C$30 million) was drawn under the Finalta-CDPQ Loan Agreement.
Equipment Financing
On September 27, 2022, Lion entered into a lease financing agreement with BMO Harris Bank N.A. to finance a portion of the purchase of the Company's automated guided vehicles (AGVs) for the Joliet Facility. The lease financing is for a maximum principal amount of $10 million and bears interest at a rate of 6.4% per year. It also provides for a five-year lease term beginning in 2023 and it includes an early purchase option after year four.
Credit Facility for the Supplier Payment Program
On February 8, 2023, the Company entered into a financing offer with National Bank of Canada with respect to a credit facility (the "Supplier Credit Facility") to finance the Company's accounts payable related to goods or services purchased in the normal course of its operations. The Supplier Credit Facility is insured by Export Development Canada ("EDC") and provides for financing of up to $5,000,000. Each term loan drawn under the Supplier Credit Facility has a period of minimum 30 days and a maximum of 120 days. The Supplier Credit Facility is subject to an annual review and may be cancelled by National Bank of Canada at any time. The Supplier Credit Facility bears interest at a floating rate by reference to SOFR for a comparable period, plus the relevant credit adjustment spread. As at December 31, 2023, $4.4 million was drawn under the Supplier Credit Facility.
Off-Balance Sheet Arrangements
During the periods presented, Lion did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements.
Maturity analysis of contractual obligations
Lion enters into contractual obligations that will require it to disburse cash over future periods. In the normal course of business, the Company enters into purchasing agreements with suppliers related to raw material used in the manufacturing of vehicles, including purchase commitments to third-party suppliers related to raw material and components used in the manufacturing of vehicles (including commitments under a four-year supply agreement entered into by Lion in November 2022 for the supply of lithium-ion battery cells). The following table sets forth the contractual undiscounted cash flows and maturity of the Company's significant contractual obligations by period as at December 31, 2023 (amounts in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying amount | | Undiscounted contractual cash flows | | Less than 1 year | | Between 1 and 3 years | | Between 4 and 5 years | | More than 5 years |
| $ | | $ | | $ | | $ | | $ | | $ |
| Trade and other payables | 71,857 | | | 71,857 | | | 71,857 | | | — | | | — | | | — | |
| Long-term debt and other debts(1) | 224,942 | | | 322,891 | | | 37,572 | | | 85,120 | | | 154,644 | | | 45,555 | |
| Purchase and other obligations(2) | — | | — | | 72,782 | | | 58,682 | | — | 14,100 | | — | — | | — | — | |
| Lease obligations(3) | 91,957 | | | 133,667 | | | 12,903 | | | 23,301 | | | 25,085 | | | 72,379 | |
| Total contractual obligations | 388,756 | | 601,197 | | 181,013 | | 122,521 | | 179,729 | | 117,934 |
(1) Represents the amounts outstanding under the Company's long-term debt and other debt (including, as applicable, current portion and interest), and includes, among others, amounts outstanding under the Revolving Credit Agreement, the Convertible Debentures (not taking into account any potential conversion), the Non-Convertible Debentures, the IQ Loan, the SIF Loan (not taking into account any potential forgiveness), and the Finalta-CDPQ Loan Agreement which matures on November 6, 2024 ($22.7 million drawn thereunder as of December 31, 2023).
(2) Represents purchase and other obligations and includes, among others, purchase commitments to third party suppliers related to raw material and components used in the manufacturing of vehicles (including commitments under the Cell Supply Agreement). These agreements are usually entered into before production begins and may specify a fixed or variable quantity of material to be purchased, at a fixed or variable price. Due to the uncertainty as to the amount and pricing of material that may be purchased, the Company is generally not able to determine with precision its commitments in connection with these supply agreements. Figures included above under “Purchase and other obligations” have therefore been estimated by management based on the information available as at December 31, 2023. Amounts also include Lion's purchase commitments related to capital expenditures.
(3) Represents lease obligations for the rental of premises and rolling stock and includes, among others, lease obligations under the lease for the Joliet Facility, Battery Plant, and the Saint-Jerome facility.
Disclosure of Outstanding Share Data
As of February 28, 2024, the Company had the following issued and outstanding shares, warrants, convertible debentures, stock options, restricted share units (“RSUs”), and deferred share units ("DSUs"):
•226,215,913 common shares, which are listed on the TSX and on the NYSE under the symbol LEV;
•27,111,323 Business Combination Warrants, which are listed on the TSX and on the NYSE under the symbols "LEV.WT" and “LEV WS,” respectively;
•22,637,795 2022 Warrants, which are listed on the TSX and on the NYSE under the symbols "LEV.WT.A" and “LEV WSA,” respectively;
•22,500,000 July 2023 Warrants, entitling the holder to purchase, until July 19, 2028, 22,500,000 common shares in the aggregate at an exercise price of C$2.81 per common share;
•the Specified Customer Warrant which, if and when fully vested, will be exercisable for up to 35,350,003 common shares upon an exercise on a cash basis (see section 13.0 of this MD&A, entitled “Components of Results of Operations—Change in Fair Value of Share Warrant Obligations”). The portion of the Specified Customer Warrant which was vested as of February 28, 2024, was exercisable for 5,302,511 common shares;
•Convertible Debentures with an aggregate principal amount of $74,005,000, bearing interest at 13% per annum compounded on a monthly basis when not paid in cash (otherwise not compounded), convertible at any time until July 19, 2028 into common shares at a conversion price of $2.58 per common share;
•stock options to purchase 10,759,583 common shares;
•897,240 RSUs and 779,975 DSUs, each of which can be settled in cash and/or in common shares purchased on the open market or issued from treasury, at the discretion of Lion’s Board of Directors.
17.0 Use of Proceeds from Public Offerings
The December 2022 Offering resulted in aggregate net proceeds to the Company of approximately $52.3 million ($45.3 million in December 2022 and $6.8 million in January 2023 as a result of the exercise of the over-allotment option which closed on January 17, 2023). In addition, the Company has raised approximately $38.0 million on a net basis under its ATM Program following the implementation of the Program in June 2022 (including approximately $8.6 million in the year ended December 31, 2023). See “Liquidity and Capital Resources” under section 16.0 of this MD&A entitled “Liquidity and Capital Management.”
As per the disclosure made in the Company’s prospectus supplements dated December 12, 2022 and June 15, 2022, the principal reasons for the sale of securities under the December 2022 Offering and the ATM Program were to increase the Company’s cash balance and financial flexibility, and the net proceeds were intended to be used to strengthen the Company’s financial position, and allow it to continue to pursue its growth strategy, including the Company’s capacity expansion projects in Joliet, Illinois and Mirabel, Quebec.
Since the December 2022 Offering and the establishment of the ATM Program, no changes were made to the intended use of the net proceeds from the December 2022 Offering and the ATM Program described in the Company’s prospectus supplements dated December 12, 2022 and June 15, 2022, and all of the net proceeds were deployed in accordance with such intended use.
In connection with the closing of the 2023 Debenture Financing, in July 2023, the Company terminated its ATM Program which was set to expire in July 2024 and will therefore no longer make any sales thereunder.
18.0 Financial Risk Management
Lion's financial instruments, divided into financial assets and financial liabilities, are measured at the end of each period at fair value or amortized costs using the effective interest method depending on their classification determined by IFRS. By nature, financial liabilities are exposed to liquidity risk whereas financial assets are exposed to credit risk. Additionally, Lion's financial instruments and transactions could be exposed to currency and interest rate risk. While Lion may enter into hedging contracts from time to time to reduce exposure to certain of these risks, any change in the fair value of the contracts could be offset by changes in the underlying value of the transactions being hedged. Lion does not actively engage in the trading of financial assets for speculative purposes, nor does it write options. Furthermore, Lion does not currently have foreign-exchange hedging contracts in place with respect to all currencies in which it does business.
Liquidity Risk
Liquidity risk is the risk that Lion might be unable to meet its obligations related to its financial liabilities. During fiscal 2022 and the first half of fiscal 2023, Lion explored and evaluated different financing alternatives to strengthen its financial position and allow it to continue to pursue its growth strategy, which ultimately resulted in the Company establishing its ATM Program in June 2022 and raising funds under the December 2022 Offering and the 2023 Debenture Financing. Lion will continue to closely monitor market conditions and its liquidity and working capital requirements as well as the cadence of its operational and other expenditures and, and in parallel, evaluate different opportunities that may enable it to strengthen its financial position and continue to pursue its business strategy. Over the past few months, Lion has implemented a number of cost reduction measures, which included certain workforce reductions and other operational initiatives aimed at optimizing its production cadence with demand. In the future, Lion expects to continue to evaluate other measures and initiatives that may become available to it. In fiscal 2024, Lion also expects to implement various initiatives aimed at reducing its vehicle and battery development costs and its inventory levels. With respect to financing opportunities, while the Company has been successful in securing financing in the past, the availability of additional funds to Lion will depend on a variety of factors, some of which are outside of its control, including dynamics impacting the industries in which Lion operates, and the fact that Lion has raised substantial amounts of capital in the past. Additional funds may not be available to the Company on commercially reasonable terms or at all when needed, and if capital is not available to Lion when and in the amounts needed, Lion could be required to delay, scale back or abandon all or part of its growth strategy, including ramp-up of production at its manufacturing facilities. See section 16.0 of this MD&A entitled “Liquidity and Capital Resources” and section 23.0 of this MD&A entitled “Risk Factors”.
Credit Risk
Lion is exposed to credit risk by granting payment terms to its customers. With respect to customers, Lion’s maximum exposure to credit risk is limited to the carrying amount of financial assets recognized on the consolidated statement of financial position. Lion continuously monitors defaults of customers and other counterparties, identified either individually or by group, and incorporates this information into its credit risk controls. Where available at reasonable cost, external credit ratings and/or reports on customers and other counterparties are obtained and used. Lion’s policy is to deal only with creditworthy counterparties. Lion’s management considers that all the financial assets that are not impaired or past due are of good credit quality. Lion has not experienced material credit losses to date.
Currency Risk
While Lion presents its financial statements in U.S. dollars, the functional currency of the parent company and its subsidiaries is the Canadian dollar, except for Northern Genesis Acquisition Corp., The
Lion Electric Co USA Inc., and Lion Electric Manufacturing USA Inc., whose functional currencies are the US dollar. Lion is exposed to currency risk due to cash, trade and other receivables, borrowings, warrant liabilities, and trade and other payables denominated in a foreign currency, being primarily the U.S. dollar.
Interest Rate Risk
Lion is exposed to interest rate risk with respect to financial assets and liabilities bearing fixed and variable interest rates as described in section 16.0 of this MD&A entitled "Liquidity and Capital Resources."
19.0 Accounting Policies, Accounting Estimates and Judgments, and New Accounting Standards Not Yet Applied
Lion's significant accounting policies are described in Note 3 to its annual audited consolidated financial statements for the years ended December 31, 2023 and 2022. The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Significant Management Judgments in Applying Accounting Policies
The following are significant judgments that management has made in the process of applying accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements:
•Capitalization of internally developed intangible assets; and
•Recognition of deferred tax assets.
Key Sources of Estimation Uncertainty
Key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities are as follows:
•Tax credits receivable;
•Impairment of non-financial assets;
•Leases;
•Useful lives of depreciable assets;
•Inventories; and
•Fair value measurement of share-based compensation, share warrant obligations and conversion options on convertible debt instruments.
For a more detailed discussion on these areas requiring the use of management estimates and judgments, please refer to Note 3 to Lion's annual audited consolidated financial statements for the years ended December 31, 2023 and 2022.
Initial application of new accounting standards and interpretations in the reporting standards
Amendments to IAS 1, Presentation of Financial Statements an IFRS Practice Statement 2, Making Materiality Judgements
On February 11, 2021, the IASB issued amendments to IAS 1, Presentation of Financial Statements and IFRS Practice Statement 2, Making Materiality Judgements, to provide guidance in determining which accounting policies to disclose. The amendments require entities to disclose material accounting policies rather than significant policies. The amendments clarify that accounting policy information is material if users of an entity’s financial statements would need it to understand other material information in the financial statements. In assessing the materiality of accounting policy information, entities need to consider both size of the transaction, other events or conditions and the nature of them, even if the
related amounts are immaterial. The adoption of the amendments as of January 1, 2023 did not have an impact on the Company’s financial statements.
Amendments to IAS 8, Accounting Policies, Change in Accounting Estimates and Errors
On February 11, 2021, the IASB issued amendments to IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, to clarify how to distinguish changes in accounting policies, which must be applied retrospectively, from changes in accounting estimate, which are accounted for prospectively. The amendments clarify the definition of accounting estimates as "monetary amounts in the financial statements that are subject to measurement uncertainty". The amendments clarify that a change in accounting estimate is a change in input or a change in a measurement technique used to develop an accounting estimate, if they do not result in the correction of a prior period error. The adoption of the amendments as of January 1, 2023 did not have an impact on the Company’s financial statements.
Amendments to IAS 12, Income Taxes
On May 6, 2021, the IASB released Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (Amendments to IAS 12). The amendment relates to the recognition of deferred tax when an entity accounts for transactions, such as leases or decommissioning obligations, by recognizing both an asset and a liability. The objective of this amendment is to narrow the initial recognition exemption in paragraphs 15 and 24 of IAS 12, so that it would not apply to transactions that give rise to both taxable and deductible temporary differences, to the extent the amounts recognized for the temporary differences are the same. The adoption of the amendments as of January 1, 2023 did not have an impact on the Company’s financial statements.
Amendments to IFRS 16, Leases
On September 22, 2022, the IASB issued an amendment to IFRS 16, Leases to clarify how a seller-lessee subsequently measures sale and leaseback transactions that satisfy the requirements in IFRS 15 to be accounted for as a sale. The amendment requires a seller-lessee to subsequently measure lease liabilities arising from a leaseback in a way that it does not recognize any amount of the gain or loss that relates to the right of use it retains. The early adoption of the amendments as of January 1, 2023 did not have an impact on the Company’s financial statements.
Amendments to IAS 7, Statement of Cash Flow and IFRS 7, Financial Instruments : Disclosures
On May 25, 2023, the IASB issued an amendment to IAS 7, Statement of Cash Flow and IFRS 7, Financial Instruments: Disclosures to add qualitative and quantitative disclosure requirements to allow users to assess how supplier finance arrangements affect an entity’s liabilities, cash flows and liquidity risk. The amendments to IAS 7 will become effective for annual reporting periods beginning on or after January 1, 2024 and the amendments to IFRS 7 when it applies the amendments to IAS 7. Earlier application is permitted. The Company made the election to early adopt the amendments as of June 30, 2023 and disclose the additional information in the Company's financial statements.
New Accounting Standards Not Yet Applied
New accounting standards not yet applied are described in Note 3 to the Company's annual audited consolidated financial statements for the years ended December 31, 2023 and 2022.
At the date of authorization of the audited annual consolidated financial statements, several other new, but not yet effective, standards and amendments to existing standards, and interpretations have been published by the IASB. None of these standards or amendments to existing standards have been adopted early by the Company.
Management anticipates that all relevant pronouncements will be adopted for the first period beginning on or after the effective date of the pronouncement. New standards, amendments and interpretations not adopted in the current period have not been disclosed as they are not expected to have a material impact on the Company’s financial statements.
20.0 Emerging Growth Company Status
As defined in Section 101(a)(19) of the Jumpstart Our Business Startups Act, or JOBS Act, Lion qualifies as an emerging growth company (“EGC”). As such, Lion is eligible for and relies on certain exemptions and reduced reporting requirements provided by the JOBS Act, including the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act.
Lion will remain an EGC under the JOBS Act until the earliest of (i) the last day of the fiscal year in which it has total annual gross revenue of $1.235 billion or more during such fiscal year (as indexed for inflation), (ii) the date on which it has issued more than $1 billion in non-convertible debt in the prior three-year period, (iii) the last day of the fiscal year following the fifth anniversary of the date of the closing of the Business Combination or (iv) when it has qualified as a “large accelerated filer,” which refers to when it (1) has an aggregate worldwide market value of voting and non-voting shares of common equity securities held by non-affiliates of $700 million or more, as of the last business day of its most recently completed second fiscal quarter, (2) has been subject to the requirements of Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), for a period of at least twelve calendar months, (3) has filed at least one annual report pursuant to Section 13(a) or 15(d) of the Exchange Act, and (4) is not eligible to use the requirements for “smaller reporting companies,” as defined in the Exchange Act.
21.0 Internal Control over Financial Reporting
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Founder and its Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2023, the end of the periods covered by this MD&A. Based on this evaluation, the Company's Chief Executive Officer and Founder and Chief Financial Officer have concluded that as of December 31, 2023, the end of the periods covered by this report, the Company's disclosure controls and procedures were effective.
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings, or other reports filed or submitted by it under securities legislation is recorded, processed, summarized, and reported within the time periods specified in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed by an issuer is accumulated and communicated to the issuer’s management, including its certifying officers, as appropriate to allow timely decisions regarding required disclosure.
Management’s Assessment on Internal Control over Financial Reporting
The Company's management, under the supervision and with the participation of its Chief Executive Officer and Founder and its Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act and under National Instrument 52-109.
Internal control over financial reporting refers to a process designed by, or under the supervision of, an issuer’s certifying officers, and effected by the issuer’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets; (2) are designed to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board, and that the Company's receipts and expenditures are being made only in accordance with authorization of the Company's management and directors; and (3) are designed to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the annual financial statements or interim financial reports.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of certain events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. As a result, due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of the Company's Chief Executive Officer and Founder and its Chief Financial Officer, management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting, as at December 31, 2023, based on the framework set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation under this framework, management, including the Company's Chief Executive Officer and its Chief Financial Officer concluded that the Company's internal control over financial reporting was effective as of December 31, 2023.
Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of the Company's Chief Executive Officer and its Chief Financial Officer, management has determined that there have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
22.0 Foreign Private Issuer Status
Lion qualifies as a “foreign private issuer” as defined under SEC rules. As long as Lion continues to qualify as a foreign private issuer under SEC rules (even if Lion no longer qualifies as an EGC), Lion will be exempt from certain SEC rules that are applicable to U.S. domestic public companies, including:
•the rules requiring domestic filers to issue financial statements prepared under U.S. GAAP;
•the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;
•the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time;
•the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial statements and other specified information, and current reports on Form 8-K upon the occurrence of specified significant events; and
•the selective disclosure rules by issuers of material non-public information under Regulation FD.
Lion may take advantage of these exemptions until such time as Lion no longer qualifies as a foreign private issuer. Lion would cease to be a foreign private issuer at such time as more than 50% of its outstanding voting securities are held by U.S. residents and any of the following three circumstances applies: (i) the majority of its executive officers or directors are U.S. citizens or residents, (ii) more than 50% of its assets are located in the United States or (iii) its business is administered principally in the United States.
Foreign private issuers are also exempt from certain more stringent executive compensation disclosure rules. In addition, because Lion qualifies as a foreign private issuer under SEC rules, Lion is
permitted to follow the corporate governance practices of Canada (the jurisdiction in which Lion is organized) in lieu of certain NYSE corporate governance requirements that would otherwise be applicable to Lion, including with respect to certain independence criteria as well as the composition of board committees.
23.0 Risk Factors
In addition to the risks previously described in this MD&A, including under the sections “Financial Risk Management”, and “Accounting Estimates and Judgments,” this section describes the principal risks and challenges that could have a material and adverse effect on Lion's business, results of operations or financial condition, and consequently the trading price of its common shares, and that could cause actual results to differ materially from underlying forward-looking statements included in this MD&A. The risks listed below are not the only risks that could affect the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial may also materially and adversely affect its financial condition, results of operations, cash flows, or business.
Lion’s success will depend on its ability to economically develop, manufacture, market and sell its vehicles at scale and meet its customers’ business needs.
Lion’s business depends in large part on its ability to economically develop, manufacture, market and sell its vehicles at sufficient capacity to meet the transportation demands of its customers. Lion’s execution of its business strategy and the satisfaction of its customers’ needs will require it to further scale its manufacturing capacity, most notably its production cadence, at its Saint-Jerome facility, its Joliet Facility and its Battery Plant, and to improve its absorption of fixed costs and its operational margins. Although Lion has experience in developing and manufacturing buses and trucks, its operations have historically been conducted on a lower scale, and Lion has limited experience to date in high volume manufacturing of its vehicles. Lion does not know whether it will be able to develop efficient, automated, low-cost manufacturing capabilities and processes, or whether it will be able to maintain its existing or secure new reliable sources of component supply, in each case that will enable it to meet the quality, price, engineering, design, and production standards, as well as the production volumes, required to successfully mass market its vehicles and meet its business objectives and customer needs. While Lion’s manufacturing facilities currently have the infrastructures in place to achieve an annual production capacity of up to 2,500 vehicles at the St-Jerome facility, up to 2,500 buses at the Joliet Facility and up to 1.7 GWh at the Battery Plant, the Company has not produced at such levels to date and there is no assurance the Company will be able to do so in the short term or at all. Ramping up production at Lion’s Saint-Jerome facility, Joliet Facility and Battery Plant will require Lion to incur operational expenditures as further described below, and management resources and may not meet Lion’s expectations with respect to increasing current capacity, efficiency and satisfying additional demand. For example, if there are delays in the manufacturing facilities achieving target yields and output, Lion may not meet its target for adding capacity, which would limit its ability to meet customers’ demand or increase sales and result in lower than expected sales and higher than expected costs and expenses. Further, Lion’s experience with developing and implementing manufacturing innovations outside of its Saint-Jerome facility remains relatively recent. Even if Lion is successful, when necessary, in ramping-up manufacturing activities and production cadence and developing high-volume manufacturing capability and processes and can reliably source component supplies in sufficient volume, it does not know whether it will be able to do so in a manner that avoids significant delays and cost overruns, including as a result of factors beyond its control such as problems with suppliers or disruptions in the global supply chain, or in time to meet the commercialization schedules of future vehicles or to satisfy the requirements of its customers.
Lion’s operations, which involve the development, design, manufacturing, sale and servicing of all electric-vehicles, are capital-intensive in nature, which may impact Lion’s ability to effectively reduce its cost structure over time. In addition, with respect to Lion's Saint-Jerome facility, Joliet Facility and Battery Plant, the Company will be required to incur operational expenditures in the future, if and when it accelerates its production cadence. Such expenditures, which could be significant, will be largely impacted by the production cadence, which, in turn, will be dependent upon a variety of factors, including,
to a larger extent, the demand for the Company's products as well as the economic environment and the Company's liquidity profile, all of which have been and will continue to be reassessed by management on a continuous basis. As a result, Lion cannot provide any assurance that it will realize, in full or in part, the anticipated benefits it expects to generate from its growth strategy, including as it relates to the Joliet Facility and the Battery Plant. Failure to realize or efficiently manage any of the above or otherwise execute on its growth strategy, or Lion’s inability to enhance and scale its manufacturing capabilities and processes in accordance with its projected costs and timelines, could have a material adverse effect on Lion’s business, results of operations or financial condition.
Even if it can achieve the above benefits and successfully implement its growth strategy, any failure to manage its growth effectively, including with respect to the management of its operational costs and the quality of its products, could materially and adversely affect Lion’s business, results of operations or financial condition. In the longer term, to the extent that demand for its vehicles increases, Lion intends to expand its operations, which will further exacerbate the foregoing risks as it will require it to, among other things, further hire and train new employees, secure sufficient supply in light of forecasted demand, production and revenue, control expenses and investments in anticipation of expanded operations, establish new or expand current design, production, and sales and service facilities, and enhance administrative infrastructure, systems and processes. Failure to efficiently manage any of the above could have a material adverse effect on Lion’s business, results of operations or financial condition. In addition, failure to satisfy customers’ demands may result in a loss of market share to competitors, damage Lion’s relationships with its key customers and suppliers, a loss of business opportunities or otherwise materially adversely affect its business, results of operations or financial condition.
The unavailability, reduction, delay in processing, discriminatory application or elimination of governmental programs, subsidies or incentives due to policy changes, government regulation or otherwise, could result in the cancellation of certain orders for Lion vehicles or have a material adverse effect on Lion’s business, results of operations or financial condition.
Demand for Lion’s vehicles is currently highly influenced by federal, state, provincial and local tax credits, rebates, grants and other government programs, subsidies and incentives that promote the use of battery electric vehicles. Any unavailability, reduction, delay in processing, discriminatory application or elimination of government subsidies and economic incentives because of policy changes, the reduced need for such subsidies and incentives due to the perceived success of the electric vehicle industry or other reasons may result in the diminished competitiveness of the electric vehicle industry generally or Lion’s vehicles. While certain subsidies, rebate vouchers, tax credits and other incentives for electric vehicles have been available in the past, there is no guarantee these incentives will be available in respect of Lion’s vehicles or otherwise to Lion’s customers in the future, on the same terms and conditions or at all. The unavailability, reduction, discriminatory application or elimination of current governmental programs, subsidies or incentives could significantly affect Lion’s ability to market or sell its products or materially adversely affect Lion’s business, results of operations or financial condition.
In addition, substantially all of the vehicle orders included in Lion’s order book4 are subject to the granting of governmental subsidies and incentives, including programs in respect of which applications relating to vehicles of Lion have not yet been fully processed to date. The processing times of governmental programs, subsidies and incentives are also subject to important variations. As a result, the Company’s ability to convert its order book into actual sales is highly dependent on the granting and timing of governmental subsidies and incentives, most notably subsidies and incentives under the Quebec Green Economy Plan, the Federal Infrastructure Canada's ZETF, the Government of Canada Incentives for Medium- and Heavy-Duty Zero-Emission Vehicles (iMHZEV) Program, the U.S. Environmental Protection Agency Clean School Bus Program and California’s Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project (HVIP). Also, there has been in the past and the Company expects there will continue to be variances in the eligibility criteria of the various programs, subsidies and incentives introduced by governmental authorities, including in their interpretation and application. Such variances
4 See section 10.0 of this MD&A entitled “Order Book” for a full description of the methodology used by the Company in connection with the order book.
or delays could result in the loss of a subsidy or incentive and/or in the cancellation of certain orders, in whole or in part.
More than half of the vehicles included in the order book are contingent upon grants under the ZETF, in respect of which applications relating to vehicles of Lion have not yet been fully processed to date and December 31, 2025 is the latest date by which claims are required to be made according to the current eligibility criteria of the ZETF program, unless otherwise agreed by Infrastructure Canada. Lion and its clients continue to experience delays and challenges in the processing of applications filed under the ZETF and Lion is actively engaged in discussions with the Canadian Federal government regarding the application of the program. See “ZETF Program Delays” under section 10.0 of this MD&A entitled “Order Book”. In addition, purchase orders obtained in connection with the first round of funding under the EPA Program, require, among other things, that vehicles be delivered on or prior to October 2024. Any termination, modification, delay or suspension of any governmental programs, subsidies and incentives, including, most importantly as of the date hereof, the ZETF, the Quebec Green Economy Plan or the EPA Program could result in delayed deliveries or the cancellation of all or any portion of orders, which, in turn, could have a material and adverse effect on the Company’s business, results of operations or financial condition. In addition, the timing of and the aforementioned challenges associated with such governmental programs, subsidies or incentives have caused and may in the future continue causing volatility in the pacing of new purchase orders, which could materially adversely affect Lion’s business, results of operations or financial condition.
Additionally, demand for Lion’s vehicles may be influenced by laws, rules, regulations and programs that require reductions in carbon emissions, such as the various measures implemented by lawmakers and regulators in California and Quebec, among others, designed to increase the use of electric and other zero-emission vehicles, including the establishment of firm goals in certain instances for the number of these vehicles operating on state roads by specified dates and the enactment of various laws and other programs in support of these goals. These programs and regulations, which have the effect of encouraging the use of battery electric vehicles, could expire or be repealed or amended for a variety of reasons. For example, parties with an interest in gasoline and diesel, hydrogen or other alternative vehicles or vehicle fuels, including lawmakers, regulators, policymakers, environmental or advocacy organizations, OEMs, trade groups, suppliers or other groups, may invest significant time and money in efforts to delay, repeal or otherwise negatively influence regulations and programs that promote the use of battery electric vehicles. Many of these parties have substantially greater resources and influence than Lion has. Further, changes in federal, state, provincial or local political, social or economic conditions, including a lack of legislative focus on these programs and regulations, could result in their modification, delayed adoption or repeal. Any failure to adopt, delay in implementation, expiration, repeal or modification of these programs and regulations, or the adoption of any programs or regulations that encourage the use of other alternative fuels or alternative vehicles over battery electric vehicles, would reduce the market for battery electric vehicles and could materially adversely affect Lion’s business, results of operations or financial condition.
Lion’s inability to obtain or agree on acceptable terms and conditions for all or a significant portion of the government grants, loans or other incentives for which it may apply could have a material adverse effect on its business, results of operations or financial condition.
Lion has applied, and expects in the future to apply, for federal, state and provincial grants, loans and tax incentives under government programs designed to stimulate the economy and support the production of battery electric vehicles and related technologies. Lion anticipates that in the future there will be new opportunities to apply for grants, loans and other incentives from federal, state, provincial and foreign governments. Lion’s ability to obtain funds or incentives from government sources is subject to the availability of funds under applicable government programs and approval of Lion’s applications to participate in such programs. Lion cannot assure that it will be successful in obtaining any of these additional grants, loans and other incentives, and Lion’s inability to obtain or agree on acceptable terms and conditions for all or a significant portion of the government grants, loans and other incentives for
which it may apply could have a material adverse effect on its business, results of operations or financial condition.
Lion may in the future need to raise additional funds to meet its capital requirements and pursue its growth strategy, and such funds may not be available to Lion on commercially reasonable terms or at all when it needs them, which could materially adversely affect Lion’s business, results of operations or financial condition.
As of December 31, 2023, Lion had a cash balance of $29.9 million ($88.3 million as at December 31,
2022). The development, design, manufacturing, sale and servicing of Lion’s battery electric vehicles is capital-intensive, and the Company continues to face a challenging environment with recurring operating losses and negative cash flows from operating activities. In addition, with respect to its operations at its Saint-Jerome facility, its Joliet Facility and its Battery Plant, the Company will be required to incur operational expenditures in the future, if and when it accelerates its production cadence. Such expenditures, which could be significant, will be largely impacted by the production cadence, which, in turn, will be dependent upon a variety of factors, including the demand for the Company's products, the economic environment and the Company's liquidity profile, all of which have been and will continue to be reassessed by management on a continuous basis. In addition, despite management’s foregoing efforts to make adjustments on an ongoing basis, Lion’s operations are capital-intensive in nature, and Lion’s ability to reduce or defer certain expenses is constrained by its need to continue making significant investments in its working capital to secure sufficient supply, meet its current contractual obligations (as described under “Maturity analysis of contractual obligations” in section 16.0 of this MD&A entitled “Liquidity and Capital Resources”), maintain the workforce required for the planned production and meet customer demand. The Company's liquidity may also be impacted from time to time by the terms and conditions of the Revolving Credit Agreement which requires, among other things, Lion to maintain certain financial ratios and namely, an all times tangible net worth test and a springing fixed charge coverage ratio based on a minimum availability test and provides for an availability block of C$10,000,000 which can be triggered upon availability dropping below 30%. Based on the foregoing and considering that the Company’s sales are largely dependent upon the funding of subsidies and incentives with processing times that are subject to important variations, the specific timing of the Company’s cash inflows and outflows may fluctuate substantially from period to period and Lion may in the future need to raise additional funds.
Management forecasts the Company’s liquidity requirements to ensure it has sufficient cash to meet its operational needs through maintaining sufficient cash and/or availability under its sources of liquidity, including its credit facilities and other borrowings. Such forecasting involves a significant degree of judgment and takes into consideration the Company’s current liquidity level, its current and projected performance, its cash collection efforts and the terms and conditions of the Company’s financing instruments, including required covenant compliance. There is a risk that such liquidity forecasts may not be achieved and that currently available credit facilities and other borrowings may no longer be available to the Company. In the short-term, Lion will continue to closely monitor market conditions and its liquidity and working capital requirements as well as the cadence of its operational and other expenditures and, in parallel, evaluate different opportunities that may enable it to strengthen its financial position and continue to pursue its business strategy. Over the past few months, Lion has implemented a number of cost reduction measures, which included certain workforce reductions and other operational initiatives aimed at optimizing its production cadence with demand. In the future, Lion expects to continue to evaluate other measures and initiatives that may become available to it. In fiscal 2024, Lion also expects to implement significant reductions in its vehicle and battery development costs and its inventory levels. With respect to financing opportunities, while the Company has been successful in securing financing in the past, including through private or public issuance of equity or other form of equity-related or debt securities or through obtaining credit from government or financial institutions, the availability of additional funds to Lion will depend on a variety of factors, some of which are outside of its control, including dynamics impacting the industries in which Lion operates, and the fact that Lion has raised substantial amounts of capital in the past. Additional funds may not be available to Lion on commercially reasonable terms or at all, when needed, and if capital is not available to Lion when and in the amounts needed, Lion could be
required to delay, scale back or abandon all or part of its growth strategy, including ramp-up of production at its manufacturing facilities, which could materially adversely affect its business, results of operations or financial condition.
In addition, management retains broad discretion in the application of the available funds, and shareholders of Lion will be relying on management’s judgment regarding such application. If additional funds are raised by issuing equity securities, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common shares, Lion’s existing shareholders may incur dilution and the market price of Lion’s common shares could decline.
Lion has a history of losses and negative cash flows from operating activities and there is no guarantee it will achieve or sustain profitability.
Lion incurred an operating loss of approximately $114 million for the year ended December 31, 2023, and approximately $81 million for the year ended December 31, 2022. Further, Lion had negative cash flows from operating activities of approximately $110 million for the year ended December 31, 2023, and approximately $120 million for the year ended December 31, 2022. These operating losses and negative cash flows were mainly the result of the substantial investments Lion made to grow its business and scale its manufacturing operations as well as, for the year ended December 31, 2023, the impact of the decision to indefinitely delay the start of commercial production of the LionA and LionM minibuses in fiscal 2023. While Lion has taken a number of measures to rationalize its cost structure, including the workforce reduction announced in November 2023, and it expects to evaluate other opportunities which may help improve its liquidity, Lion nonetheless expects to continue to incur significant expenditures in the future, including to support its manufacturing operations, both in the United States and Canada, and the purchase of inventories of parts and components for its vehicles, including battery cells, and in connection with the design, development and production of its products. Lion also expects to continue spending on technical and other operational enhancements to its business and to continue to invest in development activities. As a result, it will remain very challenging for Lion to achieve profitability and positive cash flow and Lion cannot guarantee it will achieve either in the near or medium term, or at all. If Lion is unable to generate adequate revenue growth and manage its expenses, it may continue to incur losses and have negative cash flows from operating activities, which could materially adversely affect Lion’s business, results of operations or financial condition. In addition, Lion may make decisions that could reduce its short-term operating results if it believes those decisions will improve the quality of its products or services or improve its operating results, business or prospects over the long-term. These decisions may not be consistent with the expectations of investors and may not produce the long-term benefits that Lion expects, in which case Lion’s business, results of operations or financial condition may be materially and adversely affected.
There is no guarantee that Lion will have sufficient cash flow from its business to pay its indebtedness or meet its other contractual obligations or that Lion will not incur additional indebtedness.
As of December 31, 2023, Lion had approximately $225 million in aggregate outstanding principal amount of indebtedness, including $22.7 million (C$30 million) drawn under the Finalta-CDPQ Loan Agreement which matures in November 2024. In addition, as of December 31, 2023, Lion had other important contractual obligations as described under “Maturity analysis of contractual obligations” in section 16.0 of this MD&A entitled “Liquidity and Capital Resources”. Lion’s indebtedness and significant contractual commitments, including contractual obligations to be met during fiscal 2024, may increase Lion's vulnerability to any generally adverse economic and industry conditions. Lion may, subject to the limitations in the terms of its existing and future indebtedness, incur additional debt, secure existing or future debt or recapitalize its debt.
Lion’s ability to make scheduled payments of the principal and interest on its indebtedness when due or to refinance its indebtedness as it may need or desire will depend on the future performance of the Company, which is subject to economic, financial, competitive and other factors beyond Lion’s control as well as the other risks described in this section 23.0 of the MD&A entitled “Risk Factors”. Lion’s business
may not continue to generate cash flow from operations in the future sufficient to satisfy its obligations under its existing indebtedness and any future indebtedness Lion may incur. If Lion is unable to generate such cash flow, Lion may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be highly onerous or dilutive. Lion’s ability to refinance existing or future indebtedness will depend on the capital markets and its financial condition at such time. Lion’s ability to make payments may be limited by law, by regulatory authority or by agreements governing Lion’s current or future indebtedness. Lion may not be able to engage in these activities on desirable terms or at all. In addition, Lion’s ability to finance its operations, capital expenditures and working capital needs could be impacted by a rise in interest rates, as any such increase in interest rates would lead to higher costs of borrowing for the Company. Lion may not be able to effectively manage its borrowing costs and may lack alternative sources of funding to mitigate risks associated with a rise in interest rates. Any of the foregoing could materially adversely affect Lion’s business, results of operations or financial condition.
Lion is dependent on its manufacturing facilities. If one or more of its current manufacturing facilities becomes inoperable, capacity constrained or if operations are disrupted, Lion’s business, results of operations or financial condition could be materially adversely affected.
Lion’s business is and will be dependent on the continued operations and ramp-up of its Saint-Jerome facility, its Joliet Facility and its Battery Plant, all of which rely on complex machinery and equipment, including in connection with automated production lines. Such complex machinery and equipment may involve a significant degree of uncertainty and risk in terms of operational performance and costs and may suffer unexpected malfunctions from time to time and will depend on repairs and spare parts to resume operations, which may not be available when needed. To the extent that Lion experiences any operational challenges or future risks relating to such facilities, including, among other things, any of its current manufacturing facilities becoming capacity constrained, failures to comply with applicable regulations and standards, fire and explosions, severe weather and natural disasters (such as floods and hurricanes), failures in water supply, major power failures, equipment failures, work stoppages or slowdowns, Lion will be required to make capital and/or other expenditures even though it may not have available resources at such time. In addition, manufacturing of Lion’s vehicles requires it to store a significant number of lithium-ion cells at its facility. Any mishandling of battery cells may cause disruption to the operation of Lion’s facilities. While Lion has implemented safety procedures related to the handling of the cells, a safety issue or fire related to the cells could disrupt Lion’s operations. Such damage or injury could lead to adverse publicity, potential safety recalls and materially adversely affect Lion’s business, results of operations or financial condition. Additionally, Lion may not be adequately covered by its insurance policies to cover for such disruptions on capital or other expenditures. As a result, Lion’s insurance coverage and available resources may prove to be inadequate for events that may cause significant disruption to its operations. Any disruption in Lion’s manufacturing processes could result in delivery delays, scheduling problems, increased costs, or production interruption, which, in turn, may result in its customers deciding to cancel existing orders or purchase products from its competitors. If one or more of Lion’s manufacturing facilities becomes inoperative, capacity constrained or if operations are disrupted, its business, results of operations or financial condition could be materially adversely affected.
Increases in costs, disruption of supply or shortage of raw materials, particularly lithium-ion battery cells and battery modules and packs, could impact Lion’s ability to execute its growth strategy or materially adversely affect Lion’s business, results of operations or financial condition.
Lion has experienced and may, from time to time experience, increases in costs or shortages of raw materials, components and labor, including as a result of global supply chain disruptions or other factors which may or may not be specific to Lion. Any such increase in cost or supply interruption or shortage could result in production slowdowns and increase Lion’s operating costs, which in turn, could materially adversely affect Lion’s business, results of operations or financial condition. Components in Lion’s vehicles are made of various raw materials, and the prices for these raw materials may fluctuate depending on a variety of factors, including market conditions, global supply and demand for these
materials, global economic conditions, geopolitical risks (including as a result of military conflicts) and related sanctions, export controls or other actions that may be initiated by nations, and could materially affect Lion’s business, results of operations or financial condition.
Although Lion has, in certain cases, entered into long-term contractual arrangements with suppliers with respect to the supply of certain key components of its vehicles, including lithium-ion batteries and cells, Lion is nevertheless exposed to multiple risks relating to such supply, including: the inability or unwillingness of current lithium-ion battery cell manufacturers to build or operate battery cell manufacturing plants to supply the numbers of lithium-ion cells required to support the growth of the electric vehicle industry as demand for such cells increases; disruptions in the supply of cells, modules or packs that could arise due to, among other things, quality issues or recalls by battery cells, modules or packs manufacturers, suppliers favoring larger volume customers over Lion, the acquisition of suppliers by Lion’s competitors, any key or other supplier of Lion becoming economically distressed, insolvent or bankrupt; increased regulation of supply chains; and an increase in the cost of raw materials, such as cobalt. Any disruption in the supply of battery cells, modules or packs or other key vehicle components such as motors, fiberglass, composite panels and harnesses could temporarily disrupt production of Lion’s vehicles or result in delays in respect of the deliveries of certain orders until a different supplier is identified and fully qualified, which could result in the cancellation of existing orders for its vehicles. Moreover, manufacturers of battery cells, modules or packs or other components may refuse to supply electric vehicle manufacturers if they have concerns about the use of their supplies. Furthermore, various fluctuations in market and economic conditions may cause Lion to experience significant increases in freight charges and raw material costs. Substantial increases in the prices for raw materials would also increase Lion’s operating costs and could reduce Lion’s margins if the increased costs cannot be recouped through increased vehicle prices. In addition, as pricing of Lion’s products is determined at the time an order is passed and generally cannot be subsequently adjusted at the time of delivery and payment to take into account any increase in the price of raw materials, any delay by Lion in producing and delivering vehicles increases Lion’s exposure to the risk of an increase in such costs, which increase will ultimately needs to be absorbed by Lion and could reduce Lion’s margins.
Prior to the commencement of its manufacturing operations at the Battery Plant, Lion relied only on third-party battery suppliers to source battery cells, modules and packs that it integrated in its vehicles. In connection with the establishment of its manufacturing operations at the Battery Plant, Lion now manufactures its own battery modules and packs that integrate 21700 cylindrical battery cells sourced from third-party suppliers. While Lion intends to continue in certain instances to rely on third-party suppliers for battery packs, it expects to increase optimization for product design, cost and production efficiency over time by producing battery packs in-house. However, Lion’s efforts to develop, manufacture and optimize such battery modules and packs have required significant expenditures, and the Company will be required to incur operational expenditures in the future, if and when it accelerates its production cadence at the Lion Campus and such acceleration may not meet Lion’s expectations with respect to increasing current capacity, efficiency and satisfying additional demand. See “Lion Campus” in section 8.0 of this MD&A entitled “Operational Highlights”. There can be no assurance that Lion will realize, in full or in part, the anticipated benefits it expects to generate from producing battery modules and packs in-house at the Battery Plant. If Lion cannot ramp-up production at the Battery Plant, or if it cannot do so in a cost-effective or timely manner, Lion could have to curtail its planned vehicle production or procure additional battery modules and packs from suppliers at potentially greater costs, either of which could materially adversely affect Lion’s business, results of operations or financial condition. In addition, even if Lion can ramp-up production at the Battery Plant, failure to meet the quality, engineering, design, and production standards for its proprietary battery modules and packs, as well as the necessary production volumes, could materially adversely affect Lion’s business, results of operations or financial condition.
As previously disclosed, the Company initiated in fiscal 2022 arbitration proceedings in order to enforce the terms and conditions of the multi-year battery pack supply contract in had entered into with Romeo (who became a subsidiary of Nikola) in November 2020 which arbitration proceedings have since then been terminated such that only the proceedings against Nikola are still ongoing as described in section 11.0 of this MD&A entitled “Key Factors Affecting Lion's Performance”. Romeo’s failure to comply
with its obligations under the multi-year battery pack supply contract resulted in delays in the commencement of the commercial production of the Lion8T, which is now expected to commence near the middle of fiscal 2024, and in the Company deciding to mount its Lion8T trucks with the Company’s proprietary battery packs manufactured at the Lion Campus battery plant. Mounting Lion8T truck with the Company’s proprietary battery packs may result in higher costs to Lion and there can be no assurance that Lion will realize, in full or in part, the anticipated benefits it expects to generate from doing so. See “Products and Solutions” under section 6 of the Company’s Annual Information Form entitled “Business Overview” and see section 13 of the Company’s Annual Information Form entitled “Legal Proceedings and Regulatory Actions.” Any similar contractual or other dispute with one of the Company’s suppliers could temporarily disrupt production of Lion’s vehicles or result in delays in respect of the deliveries of certain orders, which could, in turn, materially adversely affect Lion’s business, results of operations or financial condition.
Lion is dependent on third-party suppliers, some of which are single-source suppliers, and Lion expects to continue to rely on third-party suppliers. The inability of any such supplier to deliver necessary parts or components according to Lion’s schedule and at prices, volumes or quality levels acceptable to it, or the termination or interruption of any supply arrangement could materially adversely affect Lion’s business, results of operations or financial condition.
Each Lion vehicle is designed and assembled in-house, using parts and components sourced from third-party suppliers such that Lion is dependent on its third-party suppliers, some of which are single or limited source suppliers, and such suppliers’ ability to supply and manufacture parts and components included in Lion’s vehicles. Lion expects to continue to rely on third parties to supply and manufacture such parts and components in the future, as well as to maintain and grow its supply chain for its manufacturing operations in both Canada and the United States. While Lion obtains components from multiple sources whenever possible, some of the components used in its vehicles, including certain key battery system components, are purchased from a single source and sometimes require custom design tailored to Lion vehicles. While Lion believes that it may be able to establish alternate supply relationships and can obtain or potentially engineer replacement components for some of its single source components, it may be unable to do so in the short term or at all, or at prices, volumes or quality levels that are acceptable to it. Although Lion has, in certain cases, entered into long-term contractual arrangements with suppliers with respect to the supply of certain key components of its vehicles, Lion does not have long-term agreements with all of its suppliers which, may exacerbate risks related to the supply of such components not subject to a long-term supply arrangement. In addition, the inability of any of Lion’s suppliers to deliver necessary parts or components according to Lion’s schedule and at prices, volumes or quality levels acceptable to Lion, or the termination or interruption of any material supply arrangement could materially adversely affect Lion’s business, results of operations or financial condition. Also, if any of Lion’s suppliers become economically distressed or go bankrupt, or is acquired by a competitor of Lion, or if there is a dispute between Lion and one of its suppliers, Lion may be required to, as applicable, provide substantial financial support or take other measures to ensure supplies of components or materials, which could increase its costs, affect its liquidity or cause production disruptions, all of which could materially adversely affect Lion’s business, results of operations or financial condition.
In addition, Lion operates in multiple jurisdictions where it is party to certain agreements with suppliers, vendors, and other third parties located in jurisdictions that could impact enforcement of judgments against such third parties. These agreements may contain provisions that limit such third parties’ liability, require arbitration or litigation in a specific jurisdiction, or provide for indemnification against certain claims. Any limitation in Lion enforcing its rights of judgments against suppliers or other third parties could materially adversely affect Lion’s business, results of operations or financial condition.
Lion may not be able to adequately forecast its inventory and supply requirements, its manufacturing capacity and its profitability under customer orders, which could result in a variety of inefficiencies in its business and hinder its business and could materially adversely affect Lion’s business, results of operations or financial condition.
It is difficult to predict Lion’s future sales. In addition, the vehicles included in Lion’s vehicle order book as of February 28, 2024 provided for a delivery period ranging from a few months to the end of the year ending December 31, 2026, with substantially all of such vehicles currently providing for deliveries before the end of the year ending December 31, 2025. In addition, substantially all deliveries are subject to the granting of subsidies and incentives with processing times that are subject to important variations. There has been in the past and Lion expects there will continue to be variances between the expected delivery periods of orders and the actual delivery times and certain delays could be significant. As a result, it is difficult for Lion to appropriately budget for Lion’s expenses, and Lion may have limited insight into trends that may emerge and affect its business. Lion is required to forecast its demand and its deliveries in order to build its inventory and save supply several months prior to the scheduled delivery of products to customers. Currently, there remains limited historical basis for making judgments on future demand and pace of delivery for Lion’s vehicles or its ability to mass develop, manufacture and deliver vehicles at scale, or Lion’s profitability in the future. If Lion fails to accurately predict its manufacturing requirements, it could incur additional costs or experience delays. If Lion overestimates manufacturing requirements, it or its suppliers may have excess inventory, which indirectly could increase Lion’s costs. For example, in fiscal 2023, the Company’ decision to delay of the start of commercial production of the LionA and LionM resulted in a write-down of inventory of $9.8 million which negatively impacted the Company’s operating losses. If Lion underestimates manufacturing requirements, it or its suppliers may have inadequate inventory, which could interrupt manufacturing of Lion’s vehicles and result in delays in revenues. In addition, lead times for materials and components that Lion’s suppliers order may vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. If Lion fails to order sufficient quantities of product components in a timely manner, the delivery of vehicles to its customers could be delayed, which could result in the cancellation of existing orders or materially adversely affect its business, results of operations or financial condition.
In addition, the MPA with the Specified Customer requires Lion to reserve necessary manufacturing capacity to deliver up to 500 trucks per year between now and 2025 and the greater of 500 trucks per year or 10% of Lion’s manufacturing capacity from 2026 to 2030, which could hinder Lion’s ability to capitalize on future business opportunities. While the Specified Customer has placed a limited number of orders to date, any significant order placed by the Specified Customer could potentially disrupt Lion’s manufacturing operations and impact the delivery schedule of existing orders. Almost all of Lion’s customers operate on a purchase order basis, which means such customers are not required to purchase any specified minimum quantity of vehicles beyond the quantities in an existing purchase order and may in certain circumstances cancel or reschedule purchase orders on relatively short notice, including as a result of the loss or delay in processing of a governmental incentive or subsidy on which an order is conditioned upon, the Company not delivering the vehicle in accordance with the delivery period provided for in the applicable purchase order or otherwise. In additions, delay in the processing of governmental incentives or subsidies have required and may require in the future the Company to reschedule delivery periods under existing purchase orders, which if unsuccessful, can result in the cancellation of orders. Cancellations or a rescheduling of customer orders could result in the delay or loss of anticipated sales without allowing sufficient time to reduce, or delay the incurrence of, corresponding inventory and operating expenses, which could materially adversely affect Lion’s business, results of operations or financial condition.
Lion may not succeed in establishing, maintaining and strengthening its brand, which would materially and adversely affect customer acceptance of its vehicles, which could materially adversely affect its business, results of operations or financial condition.
Lion’s business heavily depends on its ability to develop, maintain and strengthen the Lion brand. If it is unable to establish, maintain and strengthen its brand, Lion may lose the opportunity to build and
maintain a critical mass of customers. Lion’s ability to develop, maintain and strengthen the Lion brand will depend heavily on the success of its sales and marketing efforts, and doing so may be challenging due to Lion’s limited operating history relative to established competitors, customer unfamiliarity with its products, any delays it may experience in scaling manufacturing, delivery and service operations to meet demand, competition and uncertainty regarding the future of electric vehicles, Lion’s production and sales performance compared with market expectations, and other factors including some over which Lion has no control. In addition, it will remain very challenging for Lion to achieve profitability and positive cash flow
and Lion cannot guarantee it will achieve either in the near or medium term, or at all, which could make it more difficult for Lion to develop, maintain and strengthen the Lion brand and negatively impact confidence among customers and analysts within its industry. The all-electric vehicle industry, and the alternative fuel vehicle industry in general, are highly competitive, and Lion may not be successful in building, maintaining and strengthening its brand. Many of Lion’s current and potential competitors, particularly manufacturers headquartered in the United States, Japan and the European Union, have greater name recognition, broader customer relationships and substantially greater resources than Lion. Failure to develop and maintain a strong brand would materially and adversely affect customer acceptance of Lion’s vehicles, could result in suppliers and other third parties being less likely to invest time and resources in developing business relationships with Lion, and could materially adversely affect Lion’s business, results of operations or financial condition.
In addition, Lion’s brand is dependent on the quality and performance characteristics of Lion’s vehicles, including battery life and range, which may vary or decline over time including due to factors outside of Lion’s control. Driver behavior, usage, speed, terrain, time and stress patterns may impact the ability of the batteries incorporated into Lion vehicles’ (whether purchased from third party suppliers or produced in-house) to hold a charge, which would decrease Lion’s vehicles’ range before needing to recharge. Such battery deterioration and the related decrease in range may negatively influence potential customer decisions and Lion’s brand, and could materially adversely affect Lion’s business, results of operations or financial condition. Lion cannot guarantee that battery life and range deterioration will not be greater than what is currently anticipated. Any battery life and range deterioration greater than what’s currently anticipated or any other quality issues, could harm Lion’s reputation and brand, result in customers purchasing vehicles from other manufacturers or in the cancellation of certain orders for Lion vehicles, which could have a material adverse effect on Lion’s business, results of operations or financial condition. In addition, media and other reports on the performance or reliability of Lion’s products, whether founded or unfounded, may negatively influence potential customer decisions and Lion’s brand, and could materially adversely affect Lion’s business, results of operations or financial condition.
Lion is also working with third-party suppliers to enable it to offer a variety of vehicle configurations, upfit equipment options and applications, some of which are still in the process of being developed and/or integrated into Lion’s vehicles. Vehicle manufacturers often experience, and the Company has in the past experienced delays in the design and launch of new products. Any delay in the financing, design, regulatory approval, production and launch of new products, specialized applications or solutions, or in doing so cost-effectively and with high quality, could harm Lion’s reputation and brand or materially adversely affect its business, results of operations or financial condition.
Lion’s growth will depend on its ability to successfully attract new customers and to retain existing customers. Failure to increase sales to both new and existing customers could have a material adverse effect on Lion’s business, results of operations or financial condition.
Lion’s success, and its ability to increase revenue and operate profitably, depends in part on its ability to identify new customers and, its ability to retain existing customers, and its ability to meet current and new customers business needs. Failure to achieve any of the foregoing could materially and adversely affect Lion’s business, results of operations or financial condition. Lion may fail to attract new customers or retain existing customers, retain revenue from existing customers or increase sales to both new and existing customers as a result of a number of other factors, including:
•reductions in Lion’s existing or potential customers’ spending levels, including as a result of any reduction, elimination or discriminatory application of government subsidies and economic incentives because of policy changes;
•increases to customer borrowing costs as a result of higher inflation level or an increase in interest rates;
•competitive factors affecting the battery electric vehicles industry, including the introduction of other alternative fuel vehicles or other technologies; discount, pricing and other strategies that may be implemented by its competitors;
•its ability to execute on its growth strategy;
•a decline in its customers’ level of satisfaction with its vehicles and services;
•changes in its relationships with third parties, including its suppliers and other partners;
•the timeliness and success of new products it may offer in the future; and
•its focus on long-term value over short-term results, meaning that Lion may make strategic decisions that may not maximize its short-term revenue or profitability if it believes that the decisions are consistent with its vision and will improve its financial performance over the long-term.
The electric vehicle industry is highly competitive and Lion is likely to face competition from a number of sources. Lion may not be successful in competing in this industry, which may materially adversely affect its business, results of operations or financial condition.
The North American medium and heavy-duty urban truck market is highly competitive today and Lion expects it will become even more so in the future. Lion’s competition for their trucks comes from manufacturers of purpose-built all-electric vehicles such as Nikola, BYD, and Xos, manufacturers of hybrid/retrofit EVs such as Workhorse, and Hyliion, and manufacturers of trucks with internal combustion engines powered by diesel fuel, which includes Traton, Daimler, Volvo, PACCAR, Hino (Toyota), and other automotive manufacturers. Lion cannot assure that customers will choose its vehicles over those of its competitors’ diesel-powered trucks. As of February 28, 2024, few class 5 to 8 electric trucks or battery electric buses are being sold in the United States or Canada. However, Lion expects that an increasing number of competitors will enter the electric truck market within the next several years.
The North American school bus market is mainly concentrated in the hands of three incumbent automotive original equipment manufacturers (“OEMs”) selling both diesel school buses as well as electric school buses: Blue Bird Corporation, Thomas Built Buses (Daimler), and IC Bus (Navistar International, subsidiary of Traton). In addition to the incumbent diesel school bus OEMs, a few early-stage EV OEMs have entered in competition with Lion such as Green Power Motor, which offers purpose-built electric Type D school buses.
Some of Lion’s current and potential competitors may also have greater financial resources (in part due to their traditional diesel offering), more extensive development, manufacturing, technical, marketing and service capabilities, greater brand, customer and industry recognition, a larger number of managerial and technical personnel or a lower cost of funds than Lion does or other competitive advantages relative to Lion. Many of Lion’s current and potential competitors may also be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products.
Lion expects competition in its industry to intensify in the future in light of increased demand for electric and other alternative fuel vehicles and continuing globalization. Factors affecting competition include total cost of ownership, product quality and features, innovation and development time, pricing, availability, reliability, safety, fuel economy, customer service (including breadth of service network) and financing terms. Increased competition may lead to lower vehicle unit sales and increased inventory, which may result in a further downward price pressure and adversely affect Lion’s business, financial condition and results of operation. There can be no assurances that Lion will be able to compete successfully in the markets in which it operates. If Lion’s competitors introduce new vehicles or services that compete with or surpass the quality, price, performance or availability of Lion’s vehicles or services, Lion may be unable to satisfy existing customers or attract new customers at the prices and levels that
would allow it to generate attractive rates of return on its investment. Increased competition could result in price reductions and revenue shortfalls, loss of customers and loss of market share, which could materially adversely affect Lion’s business, results of operations or financial condition.
The use of lithium-ion cells may become disfavored as a result of the availability, or perceived superiority of, other types of batteries or technologies, and the occurrence of certain unforeseen events could result in negative public perception of lithium-ion cells.
Lion’s vehicles use lithium-ion cells, which Lion believes currently represent the industry standard for battery technology for electric vehicles. It is possible, however, that other types of batteries or technologies may become favored in the future, such as lithium-iron phosphate, hydrogen or solid state. While Lion believes that its products and services based on the lithium-ion cells that it has chosen for its vehicles present advantages with respect to ease of integration and underlying performance, it is possible that Lion’s customers and partners may deem other technologies as sufficient or superior for their purposes and decide to partner with other manufacturers who employ such technologies. It is possible that the performance, safety features or characteristics, reliability or cost-effectiveness of another form of battery or technology could improve in the future such that the lithium-ion cells used in Lion’s vehicles could become, or be perceived as, inferior or obsolete. In the event that a new form of battery or technology emerges or is deemed to exhibit better performance, operate at lower cost or exhibit better safety features, Lion could be compelled to attempt to integrate those new types of batteries into its vehicles, which may not be possible or feasible at a price that could be attractive to its customers. Any developments with respect to new battery technology, or new electrification technologies that are based on unforeseen developments in cell technology, or the perception that they may occur, may prompt the Company to invest heavily in additional research to compete effectively with these advances, which research and development may not be effective. Any failure by Lion to successfully react to changes in existing technologies could materially adversely affect Lion’s business, results of operations or financial condition.
In addition, negative public perceptions regarding the suitability of lithium-ion cells for automotive applications, the social and environmental impacts of cobalt mining could materially adversely affect Lion’s business, results of operations or financial condition.
Lion’s vehicles use lithium-ion cells which have been observed to catch fire or vent smoke and flame.
The battery packs within Lion’s vehicles use lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. While the battery pack is designed to contain any single cell’s release of energy without spreading to neighboring cells, a field or testing failure of Lion’s vehicles could occur, which could result in bodily injury or death and could subject Lion to lawsuits, product recalls, or redesign efforts, all of which could be time consuming and expensive, and materially adversely affect Lion’s business, results of operations or financial condition. Also, any future incident involving lithium-ion cells, such as a vehicle or other fire, even if such incident does not involve Lion’s vehicles, could seriously harm Lion's business and prospects.
Failure to carry adequate insurance coverage may have a material adverse effect on Lion’s business, results of operations or financial condition.
Lion maintains liability insurance, property and business interruption insurance, cargo insurance, cybersecurity insurance, automotive liability insurance and directors' and officers' insurance, and such insurance coverage reflects deductibles, self-insured retentions, limits of liability and similar provisions. However, there is no guarantee that Lion’s insurance coverage will be sufficient, or that insurance proceeds will be paid to Lion in a timely manner. In addition, there are types of losses Lion may incur but against which it cannot be insured or which it believes are not economically reasonable to insure, such as losses due to acts of war and certain natural disasters. Additionally, manufacturing of Lion’s vehicles requires it to store a significant number of lithium-ion cells at its facility, and Lion has and may in the future
have difficulties in obtaining and maintaining insurance policies covering such risk, whether at reasonable costs, on acceptable terms or with adequate coverage or at all. As a result, Lion may also decide not to insure a portion of its battery cells, modules or packs inventory and manage the risk relating to the storage of battery cells, modules or packs differently, such as diversifying storage solutions and locations. If Lion incurs any material losses in connection with the foregoing, its business, results of operations or financial condition could be materially adversely affected. Moreover, Lion may not be able to maintain insurance policies in the future at reasonable costs, on acceptable terms or with adequate coverage for certain specific risks or types of assets, such as batteries, which in turn may adversely affect the Company’s business, results of operations or financial condition.
Unfavorable economic conditions may have a material adverse effect on Lion’s business, results of operations and financial condition.
Lion’s business may be affected by global economic markets and levels of customer comfort and spend, including recessions, slow economic growth, economic and pricing instability (including the current inflationary environment), increase of interest rates and credit market volatility, all of which could impact demand in the worldwide transportation industries or otherwise have a material adverse effect on Lion’s business, operating results and financial condition. In addition, unforeseen events such as the global COVID-19 pandemic and geopolitical risks (including as a result of military conflicts) have resulted and may in the future result, in widespread disruptions to economic markets, manufacturing operations, supply chains, employment and customer behavior or governmental spending (as a result of a reduction or different allocation in spending or otherwise). Lion has already experienced, and may continue to experience, adverse effects as a result of these events, including supply chain disruptions and labor shortages. The impact of these and any future unforeseen events on Lion’s business, results of operations and financial condition is yet unknown and varied across geographic regions. Lion’s ability to accurately project supply and demand, infrastructure requirements and pace of delivery for Lion’s vehicles and allocate resources accordingly is critical. If current global market conditions continue or worsen, including further pandemic-related disruptions, geopolitical risks (including as a result of military conflicts), or other unforeseen events, Lion’s business, results of operations and financial condition could be materially adversely affected.
Increased freight and shipping costs or disruptions in transportation and shipping infrastructure could materially adversely impact Lion’s business, results of operations or financial condition.
Lion uses external freight shipping and transportation services to transport and deliver its vehicles as well as subcomponents and raw materials incorporated therein. Adverse fluctuations in freight costs, limitations on shipping and receiving capacity, and other disruptions in the transportation and shipping infrastructure at important shipping and delivery points for Lion’s products and subcomponents incorporated in Lion’s vehicles have affected and could materially adversely affect Lion’s business, financial condition and results of operations. For example, from time to time, global supply chain disruptions have resulted in delivery delays and increases in transportation costs which negatively affected Lion’s sales, cost of sales and gross profits. Any further delivery delays and increases in transportation costs (including through increased fuel or other energy costs, increased carrier rates or driver wages as a result of driver shortages, a decrease in transportation capacity, or work stoppages or slowdowns) could significantly decrease Lion’s ability to make sales and earn profits. Labor shortages or work stoppages in the transportation industry or long-term disruptions to the national and international transportation infrastructure that lead to delays or interruptions of deliveries or which could necessitate Lion securing alternative shipping suppliers has increased in the past and could also increase Lion’s costs or otherwise materially adversely affect its business, results of operations or financial condition.
Significant product repair and/or replacement due to product warranty claims or product recalls could have a material adverse impact on Lion’s business, results of operations or financial condition.
Lion generally provides a limited warranty against defects for all of its products, and customers may in certain instances purchase extended warranties. In addition, Lion has in the past been required to
proceed to certain product recalls. Lion may also in the future be required to make product recalls or could be held liable in the event that some of its products do not meet safety standards or statutory requirements on product safety, even if the defects related to any such recall or liability are not covered by Lion’s limited warranty. Although Lion employs quality control procedures, products manufactured by it will need repair or replacement or may be recalled. Lion’s standard warranties generally require it to repair or replace defective products during such warranty periods at no cost to the customer. Lion records provisions based on an estimate of product warranty claims, but there is the possibility that actual claims may exceed these provisions and therefore negatively impact Lion’s results of operations of financial condition. Lion has made in the past, and may in the future make, product recalls, or could be held liable in the event that some of its products do not meet safety standards or statutory requirements on product safety. In addition, the risks associated with product recalls may be aggravated if production volumes increase significantly, supplied goods do not meet Lion’s standards, Lion fails to perform its risk analysis systematically or product-related decisions are not fully documented. The repair and replacement costs that Lion could incur in connection with a recall could have a material adverse effect on its business, results of operations or financial condition. Product recalls could also harm Lion’s reputation and cause it to lose customers, particularly if recalls cause customers to question the safety or reliability of its products, which could have a material adverse effect on its business, results of operations or financial condition.
In addition, purchase agreements with Lion’s customers may from time to time contain, in addition to Lion’s limited warranty, undertakings related to certain specific levels of performance and availability for the vehicles sold thereunder or other specific indemnity provisions. Failure by Lion to provide the required levels of performance and availability, even if such failure is the result of factors outside of Lion’s control, could result in Lion being liable or provide indemnification under such contractual arrangements or allow customers to terminate their arrangements with Lion, which could have a material adverse effect on its business, results of operations or financial condition.
An adverse determination in any significant product liability claim against Lion could materially adversely affect its business, results of operations or financial condition.
The development, manufacturing, sale and usage of Lion’s vehicles expose Lion to significant risks associated with product liability claims. The automotive industry in particular experiences significant product liability claims, and Lion may face inherent risk of exposure to claims in the event its vehicles do not perform or are claimed to not have performed as expected. If Lion’s products are defective, malfunction or are used incorrectly by its customers, it may result in bodily injury, property damage or other injury, including death, which could give rise to product liability claims against Lion. Changes to Lion’s manufacturing processes, including as a result of the ramp-up of production capacity at the Joliet Facility and Battery Plant, and the production of new products and applications could result in product quality issues, thereby increasing the risk of litigation and potential liability. Any losses that Lion may suffer from any liability claims and the effect that any product liability litigation may have upon the brand image, reputation and marketability of Lion’s products could have a material adverse impact on Lion’s business, results of operations or financial condition.
Although Lion maintains insurance with respect to future claims in amounts it believes to be appropriate, no assurance can be given that material product liability claims will not be made in the future against Lion, or that claims will not arise in the future in excess or outside the coverage of Lion’s indemnities and insurance. When required, Lion records provisions for known potential liabilities, but there is the possibility that actual losses may exceed these provisions and therefore negatively impact earnings. Also, Lion may not be able in the future to obtain adequate product liability insurance or the cost of doing so may be prohibitive. Adverse determinations of material product liability claims made against Lion could also harm its reputation and cause it to lose customers and could have a material adverse effect on its business, results of operations or financial condition.
Lion is highly dependent on the services of Marc Bedard, its CEO—Founder and the rest of its senior management team. Lion’s inability to retain Mr. Bedard or attract and retain management or other employees who possess specialized market knowledge and technical skills could affect its ability to compete, manage or scale operations effectively or develop new products or otherwise materially adversely affect its business, results of operations or financial condition.
Lion’s success depends, in part, on its ability to retain its key personnel, in particular management and other employees who possess specialized market knowledge and technical skills. Lion is highly dependent on the services of Marc Bedard, its CEO—Founder and second largest shareholder. Mr. Bedard is the source of many of the innovative ideas driving Lion and their execution. If Mr. Bedard were to discontinue his service for Lion due to death, disability or any other reason, Lion could be significantly disadvantaged. The unexpected loss of or failure to retain one or more of Lion’s key employees could adversely affect Lion’s business, results of operations or financial condition. Lion does not currently maintain key man life insurance policies with respect to Mr. Bedard or any other officer.
Lion’s business plans, including the ramp-up of its manufacturing operations at its Saint-Jerome facility, its Joliet Facility and its Battery Plant, are highly dependent on the Company’s continuing ability to identify, hire, attract, train, develop and retain additional employees across all divisions, including highly qualified personnel with specialized market knowledge and technical skills. Experienced and highly skilled employees are in high demand and competition for these employees can be intense, and Lion’s ability to hire, attract and retain them depends on Lion’s ability to provide competitive compensation. Lion may not be able to attract, assimilate, develop or retain qualified personnel in the future, and Lion’s failure to do so could materially adversely affect its business, results of operations or financial condition. In addition, global labor shortages have exacerbated and may continue to exacerbate in the future Lion’s exposure to such risk. Any failure by Lion’s management team and employees to perform as expected may have a material adverse effect on its business, results of operations or financial condition.
Any deterioration in the labor environment or relationships with Lion’s employees, work stoppage or similar difficulties could have a material adverse effect on Lion’s business, results of operations or financial condition.
Although none of Lion’s employees are currently represented by a labor union, an election to determine whether the International Association of Machinists and Aerospace Workers will represent certain of the Joliet Facility employees is ongoing as further discussed in section 6.12 of the Company’s Annual Information Form for fiscal 2023 entitled “Employees”. It is common throughout the vehicle manufacturing industry for employees to belong to a union, which could result in increased employee costs, operational restrictions and potential disruptions to operations. The maintenance of a productive and efficient labor environment and, in the event of unionization of employees, the successful negotiation of a collective bargaining agreement, cannot be assured. A deterioration in relationships with employees or in the labor environment could result in work interruptions or other disruptions, or cause management to divert time and resources from other aspects of Lion’s business, any of which could have a material adverse effect on Lion’s business, results of operations or financial condition. The Company may also directly and indirectly depend upon other companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on Lion’s business, results of operations or financial condition.
The terms of Lion’s debt instruments contain, and the terms of its future indebtedness may contain, certain covenants that restrict its ability to engage in certain transactions.
The instruments governing Lion’s indebtedness contain restrictive covenants that may limit its discretion with respect to certain business matters and require it to meet certain financial ratios and financial condition tests. Lion may also incur future indebtedness that might subject it to additional covenants and restrictions that could affect its financial and operational flexibility. The restrictions in the instruments governing Lion’s indebtedness may prevent it from taking actions that it believes could be in the best interest of its business and may make it difficult for it to execute its business strategy successfully or effectively compete with companies that are not similarly restricted. Such restrictions may include
restrictions relating to Lion’s ability to engage in certain transactions, including potential mergers, acquisitions, or other change of control transactions, which could limit its ability to pursue strategic opportunities. Further, the IQ Loan, the SIF Loan, the Convertible Debentures and the Non-Convertible Debentures contain certain affirmative and negative covenants, including, as applicable as further described in section 9 of the Company’s Annual Information Form for fiscal 2023 entitled “Description of Material Indebtedness”, certain covenants relating to Lion’s workforce, operations, and R&D activities, and to the location of its head office, all of which could restrict Lion in the manner in which it wishes to conduct its business.
Lion’s ability to comply with the covenants and restrictions contained in the instruments governing its indebtedness may be affected by economic, financial and industry conditions beyond its control. A breach of any of these covenants or restrictions could result in a default under the applicable debt instrument that would permit applicable lender(s) to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest, or cause cross-defaults under Lion’s other debt instruments. If Lion is unable to repay its indebtedness, or otherwise defaults under its indebtedness, lenders could intent proceedings or proceed against the collateral securing any debt. In any such case, Lion may be unable to borrow under the agreements under which such other indebtedness is issued, which could have a material adverse effect on its business, results of operations or financial condition.
Fluctuations in foreign currency exchange rates could result in declines in reported sales and net earnings.
Lion reports its financial results in U.S. dollars and a material portion of its sales and operating costs are realized in currencies other than the U.S. dollar. For the year ended December 31, 2023, approximately 65% of Lion’s revenues were realized in Canada. Lion is also exposed to other currencies such as the Euro, and may in the future be exposed to other currencies. If the value of any currencies in which sales are realized, particularly the Canadian dollar, depreciates relative to the U.S. dollar, Lion’s foreign currency revenue will decrease when translated to U.S. dollars for reporting purposes. In addition, any depreciation in foreign currencies could result in higher local prices, which may negatively impact local demand and have a material adverse effect on Lion’s business, results of operations or financial condition. Alternatively, if the value of any of the currencies in which operating costs are realized appreciates relative to the U.S. dollar, Lion’s operating costs will increase when translated to U.S. dollars for reporting purposes. Although these risks may sometimes be naturally hedged by a match in sales and operating costs denominated in the same currency, fluctuations in foreign currency exchange rates, particularly the U.S.-Canadian dollar exchange rate, could create discrepancies between Lion’s sales and operating costs in a given currency that could have a material adverse effect on its business, results of operations or financial condition. Fluctuations in foreign currency exchange rates could also have a material adverse effect on the relative competitive position of Lion’s products in markets where it faces competition from manufacturers who are less affected by such fluctuations in exchange rates, especially in the U.S. market.
While Lion actively manages its exposure to foreign-exchange rate fluctuations and may enter into hedging contracts from time to time, such contracts hedge foreign-currency denominated transactions and any change in the fair value of the contracts could be offset by changes in the underlying value of the transactions being hedged. Furthermore, Lion currently does not have foreign-exchange hedging contracts in place with respect to all currencies in which it does business. As a result, there can be no assurance that Lion’s approach to managing its exposure to foreign-exchange rate fluctuations will be effective in the future or that Lion will be able to enter into foreign-exchange hedging contracts as deemed necessary on satisfactory terms.
Natural disasters, unusually adverse weather, epidemic or pandemic outbreaks, boycotts and geo-political events could materially adversely affect Lion’s business, results of operations or financial condition.
The occurrence of one or more natural disasters, such as hurricanes and earthquakes, unusually adverse weather, epidemic or pandemic outbreaks, such as the COVID-19 pandemic, boycotts and geo-
political events, such as civil unrest and acts of terrorism, military conflicts or similar disruptions could materially adversely affect Lion’s business, results of operations or financial condition. Some of these events could result in physical damage to property, an increase in energy prices and raw materials, potential supply chain disruptions, temporary or permanent closure of one or more of Lion’s current or planned facilities, temporary lack of an adequate workforce in a market, temporary or long-term disruption in the supply of raw materials, product parts and components, temporary disruption in transport from overseas, or disruption to Lion’s information systems. Lion may incur expenses or delays relating to such events outside of its control, which could have a material adverse impact on its business, operating results and financial condition.
Lion has limited experience servicing a large fleet of trucks. Lion’s inability to address the servicing requirements of its customers and leverage vehicle and customer data could materially adversely affect its business, results of operations or financial condition.
Lion has limited experience in servicing a large fleet of trucks and it expects to be required to increase its servicing capabilities as it scales its operations and continues to grow. Lion may have to build new experience centers in the United States and in Canada and expand services and coverage at its current experience centers to increase such servicing capabilities. In addition, as Lion increases deliveries and Lion vehicles are operated in additional locations in Canada in the United States, Lion will increasingly be required to provide servicing capabilities in locations where it does not have an experience center, including, in certain instances, remote locations.
Lion has partnered, and may from time to time in the future partner, with third-parties, where possible, to perform some or all of the servicing on its vehicles, and there can be no assurance that Lion will be able to enter into effective arrangement with any such third-party provider. Although such servicing partners may have experience in servicing other vehicles, they will initially have limited experience in servicing Lion vehicles. There can be no assurance that service arrangements with third-parties will adequately address the service requirements of Lion’s customers to their satisfaction, or that Lion and its servicing partners will have sufficient resources, experience or inventory to meet these service requirements in a timely manner.
Servicing electric vehicles is different than servicing vehicles with internal combustion engines and requires specialized skills, including high voltage training and servicing techniques. Although Lion believes the experience it has gained servicing its electric buses and in the initial deliveries of urban trucks positions it well to service its urban trucks and future products, Lion has limited after-sale experience of maintaining and servicing a large fleet of urban trucks for its customers, including with respect to charging infrastructure solutions and there is no guarantee Lion will be able to do so. Failure to address the servicing requirements of its customers could harm Lion’s reputation or materially adversely affect its business, results of operations or financial condition. If the Company experiences delays in adding such servicing capacity or servicing its vehicles efficiently, or experience unforeseen issues with the reliability of its vehicles, particularly higher-volume and relatively newer additions to its product offering, it could overburden its servicing capabilities and parts inventory.
Lion’s customers will also depend on Lion’s customer support team to resolve technical and operational issues relating to the software integrated in its vehicles. Lion’s ability to provide effective customer support is largely dependent on its ability to attract, train and retain qualified personnel with experience in supporting customers on platforms such as Lion’s platform. As it continues to grow, additional pressure may be placed on Lion’s customer support team, and Lion may be unable to respond quickly enough to accommodate short-term increases in customer demand for technical support. Lion may also be unable to modify the future scope and delivery of its technical support to compete with changes in the technical support provided by its competitors. Increased customer demand for support, without corresponding revenue, could increase costs and negatively affect Lion’s results of operation. If Lion is unable to successfully address the servicing requirements of its customers or establish a market perception that it maintains high-quality support, it may be subject to claims from its customers, including
for loss of revenue or damages, and its business, results of operations or financial condition may be materially and adversely affected.
In addition, Lion relies on data collected from the use of its fleet of vehicles, including vehicle data and data related to battery usage statistics. Lion uses this data in connection with the servicing and normal course software updates of its products, its software algorithms and the research, development and analysis of its vehicles. Lion’s inability to obtain this data or the necessary rights to use this data or Lion’s inability to properly analyze or use this data could result in Lion’s inability to adequately service its vehicles or delay or otherwise negatively impact its research and development efforts. Any of the foregoing could materially adversely affect Lion’s business, results of operations or financial condition.
Lion’s future growth is dependent upon the trucking and busing industries’ and Lion’s other customers’ willingness to adopt all-electric vehicles and specifically Lion’s vehicles.
Lion’s future growth is highly dependent upon the adoption by the commercial trucking and busing industries and Lion’s other target customers of, and Lion is subject to an elevated risk of any reduced demand for, alternative fuel vehicles in general and electric vehicles in particular. If the market for electric vehicles does not develop at the rate or in the manner or to the extent that Lion expects, or if critical assumptions Lion has made regarding the efficiency of its vehicles are incorrect or incomplete, Lion’s business, results of operations or financial condition may be adversely materially affected. The market for alternative fuel vehicles is relatively new, rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing customer demands and behaviors. Factors that may influence the adoption of alternative fuel vehicles, and specifically electric vehicles, include:
•perceptions about electric vehicle quality, safety (in particular with respect to lithium-ion battery cells, modules and packs), design, performance and cost;
•perceptions about vehicle safety in general, including the use of advanced technology, such as vehicle electronics, alternative fuel and regenerative braking systems;
•the limited range over which electric vehicles may be driven on a single battery charge;
•the decline of an electric vehicle’s range resulting from deterioration over time in the battery’s ability to hold a charge or short-term declines resulting from adverse weather conditions;
•the availability of service and charging stations for electric vehicles;
•concerns about electric grid capacity and reliability, which could derail past, present and future efforts to promote electric vehicles as a practical solution to vehicles which require gasoline;
•the availability of alternative fuel vehicles;
•improvements in the fuel economy of the internal combustion engine;
•the introduction of other alternative fuel vehicles or other technologies;
•the environmental consciousness of the trucking and busing industries and Lion’s other target customers;
•volatility in the cost of oil and gasoline;
•government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
•the availability of tax and other governmental incentives to purchase and operate electric vehicles or future regulation;
•perceptions about and the actual cost of alternative fuel, as well as hybrid and electric vehicles; and
•macroeconomic factors.
It is unknown to what extent any possible decreases in the cost of diesel fuel or the introduction of new technologies may impact the market for all-electric vehicles. The battery electric vehicle industry and its technology are rapidly evolving and may be subject to unforeseen changes. Lion may be unable to keep up with changes in electric vehicle technology or alternatives to electricity as a fuel source and, as a result, its competitiveness may suffer. Developments in alternative or analogous technologies, such as advanced diesel, hydrogen, ethanol, fuel cells, or compressed natural gas, or improvements in the fuel economy of the internal combustion engine, may harm Lion’s competitive position and growth prospects
or materially and adversely affect Lion’s business, results of operations or financial condition, including in ways which it currently does not anticipate. In addition, even if the trucking and busing industries and Lion’s other target customers adopt all-electric vehicles, Lion may be unable to maintain or improve its competitive position and market share, which could adversely affect Lion’s business, results of operations or financial condition.
Inadequate access to charging stations could impact the demand for all-electric vehicles, and failure by Lion to meet user expectations related to, or other difficulties in providing, charging solutions could harm Lion’s reputation or materially adversely affect its business, results of operations or financial condition.
Demand for Lion’s vehicles will depend in part upon the availability of a charging infrastructure. The Company markets its ability to provide its customers with comprehensive charging solutions. The Company has limited experience in the actual provision of its charging solutions to customers and providing these services is subject to challenges, which include:
•successful integration with existing third-party charging networks;
•inadequate capacity or over capacity in certain areas, security risks or risk of damage to vehicles charging equipment or real or personal property;
•access to sufficient charging infrastructure;
•availability of reliable and sufficient sources of electrical power;
•obtaining any required permits, land use rights and filings;
•the potential for lack of customer acceptance of Lion’s charging solutions; and
•the risk that government support for electric vehicles and infrastructure may not continue.
While the prevalence of charging stations generally has been increasing, charging station locations are significantly less widespread than gas stations. Some potential customers may choose not to purchase Lion’s vehicles because of the lack of a more widespread charging infrastructure. Further, to provide its customers with access to sufficient charging infrastructure, the Company will rely on the availability of, and successful integration of its vehicles with, third-party charging networks. Any failure of third-party charging networks to meet customer expectations or needs, including quality of experience, could impact the demand for all-electric vehicles, including Lion’s. In addition, given Lion’s limited experience in providing charging solutions, there could be unanticipated challenges, which may hinder its ability to provide its solutions or make the provision of its solutions costlier than anticipated. To the extent the Company is unable to meet user expectations or experience difficulties in providing charging solutions, its reputation could be harmed, and its business, results of operations or financial condition could be materially adversely affected.
Lion’s distribution model is different from the typical distribution model for most vehicle manufacturers and may limit Lion’s ability to sell its vehicles directly to customers in certain states in the United States or provide service from a location in every state.
Lion operates under a distribution model pursuant to which it sells vehicles directly to customers where possible. That said, certain U.S. states have laws that impose or may be interpreted to impose limitations on this direct-to-customer sales model for manufacturers such that Lion has in certain instances entered into distribution agreements with a select group of third-party dealers to abide by local laws and regulations in certain states requiring medium and heavy-duty vehicles to be sold through dealerships. The application of these state laws to Lion’s operations is complex and may be difficult to predict. Laws in some states may limit Lion’s ability to obtain dealer licenses from state motor vehicle regulators or to own or operate its own service centers. In addition, certain of the distribution agreements entered into with such third-party dealers may impose restrictions on the conduct of Lion's business in the applicable state, which could interfere with Lion's sales and marketing efforts in a particular state. As a result, the Company may not be able to sell directly to customers in each state in the United States or provide service from a location in every state. Continued regulatory limitations and other obstacles interfering with Lion’s ability to sell vehicles directly to customers could materially adversely affect Lion’s business, results of operations or financial condition.
Lion’s vehicles are subject to numerous mandated safety standards. Lion may be unable to comply with such safety standards, or could incur significant costs in order to do so, which could in each case materially adversely affect its business, results of operations or financial condition.
The vehicles that Lion manufactures and sells are subject to various and complex safety standards across jurisdictions where Lion operates. For example, in the United States, the National Traffic and Motor Vehicle Safety Act of 1966 regulates vehicles and vehicle equipment by prohibiting the sale of any new vehicle or equipment that does not conform to applicable vehicle safety standards established by the National Highway Transportation Safety Administration, while in Canada, the Motor Vehicle Safety Act regulates vehicles and Transport Canada develops and enforces Motor Vehicle Safety Standards which are generally harmonized with the standards in the United States. Meeting or exceeding such safety standards is costly and has continued to evolve alongside developments in technology and safety expectations. Although Lion continuously evaluates requirements for licenses, approvals, certificates and governmental authorizations necessary to manufacture, sell or service its vehicles in the United States and Canada, it may experience difficulties in obtaining or complying with various licenses, approvals, certifications and other governmental authorizations necessary to manufacture, sell or service its vehicles, especially for future vehicles. For example, in the United States, every class of heavy-duty engines or vehicles must receive Certificate of Conformity (“COCs”) from the EPA prior to being sold. These COCs must be obtained for each model year of production, and failure to obtain them prior to entering Lion’s vehicles into commerce may result in substantial fines or penalties. In addition, the EPA and California Air Resources Board (“CARB”) requires that every model year be zero-emission certified by executive order of the Company. Rigorous testing and the use of approved materials and equipment are among the requirements for achieving federal certification. Similar regulations exist in other jurisdictions, including Canada. Failure by Lion to maintain or obtain any necessary approval for, or otherwise satisfy motor vehicle standards with respect to, its existing or future electric vehicles, or the incurrence of material unexpected costs in connection therewith, could have a material adverse effect on Lion’s business, results of operations or financial condition.
In addition, certain governmental incentives or subsidies are conditional upon vehicles meeting certain standards and certifications. For example, the CARB certification is required to participate in California’s Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project (HVIP). Failure by Lion to maintain or obtain any necessary approval for, or otherwise satisfy motor vehicle standards with respect to, its existing or future electric vehicles could therefore result in the loss of governmental incentives or subsidies in respect to Lion products, including in certain instances in respect of existing orders, which could materially adversely affect Lion’s business, results of operations or financial condition.
Lion is subject to substantial laws, regulations and standards, including related to product safety, health and safety and environmental matters, each of which could impose substantial costs, legal prohibitions or unfavorable changes upon its operations or products, and any failure to comply with these laws, regulations or standards could materially adversely affect its business, results of operations and financial condition.
As a manufacturing company, including with respect to the Saint-Jerome facility, the Joliet Facility and the Battery Plant, Lion is subject to complex environmental, manufacturing, health and safety laws and regulations at numerous jurisdictional levels in the United States and Canada, including laws relating to the use, handling, storage, recycling, disposal and human exposure to hazardous materials and with respect to constructing, operating and maintaining its facilities. The costs of compliance, including remediating contamination if any is found on Lion’s properties, or at sites where Lion has sent wastes for disposal, and any changes to Lion’s operations mandated by new or amended laws, may be significant. Lion may also face unexpected delays in obtaining permits and approvals required by such laws in connection with its facilities, which would hinder operation of these facilities and Lion’s ability to operate its business or execute its growth strategy. Such costs and delays may materially adversely impact Lion’s business, results of operations or financial condition. Furthermore, any violations of these laws may result in substantial fines and penalties, remediation costs, third party damages, or a suspension or cessation of Lion’s operations. In addition, battery electric vehicles are subject to substantial regulation under
international, federal, state, provincial and local laws and implementing regulations, and these requirements are subject to change. For example, several jurisdictions have adopted, or are considering adopting, laws related to supply chain sustainability. Lion incurs significant costs in complying with applicable laws and regulations and may be required to incur additional costs to comply with any changes to such laws or regulations, and any failures to comply could result in significant expenses, delays or fines, or otherwise materially adversely affect Lion’s business, results of operations or financial condition.
Unfavorable changes in U.S. or Canadian laws or regulations and trade policy, including the imposition of tariffs or quotas, or changes in any free-trade arrangements such as the CUSMA could adversely affect Lion’s business, results of operations or financial condition.
While Lion began manufacturing vehicles at the Joliet Facility in November 2022, the majority of its vehicles are currently manufactured in, and distributed from, its Saint-Jerome facility. For the years ended December 31, 2023 and 2022, Lion’s total sales outside Canada represented approximately 35% and 13%, respectively, of its total sales, and Lion intends to continue to expand its operations and promote its brand and vehicles in the United States. The U.S. market has been and is expected to continue generating sales growth. Several factors, including weakened international economic conditions, the introduction of new trade restrictions, increased protectionism or changes in free-trade arrangements such as the Canada-United States-Mexico Agreement (CUSMA), tariffs or negative geo-political events could adversely affect such growth. The resulting environment could have a material adverse effect on Lion’s business, results of operations or financial condition.
Lion has incurred significant capital expenditures in connection with the construction of its Joliet Facility, which is expected to support the Company in addressing the increasing demand in the marketplace for “Made in America” zero-emission vehicles. Ramping up production at Lion’s Joliet Facility will require Lion to incur operational expenditures in the future, if and when it accelerates its production cadence at the Joliet Facility. If eligibility criteria for “Made in America” vehicles set forth in the Buy America Act were to change, or if other trade protection measures were to be implemented by the United States or any other jurisdiction in which the Company operates, Lion could have to incur significant cost to adjust its operations in order to ensure eligibility and compliance thereunder or Lion could potentially no longer be eligible under certain programs, which could result in a material adverse effect on Lion’s business, results of operations or financial condition.
Tax matters and changes in tax laws could materially adversely affect Lion’s business, results of operations or financial condition.
Lion conducts operations, directly and through its U.S. subsidiaries, in Canada and the United States and is therefore subject to income taxes in Canada and the United States. Lion’s effective income tax rate could be adversely affected by a number of factors, including changes in the valuation of deferred tax assets and liabilities, changes in tax laws, changes in accounting and tax standards or practices, changes in the composition of operating income by tax jurisdiction, changes in Lion’s operating results before taxes, and the outcome of income tax audits in Canada, the United States, or other jurisdictions. Lion regularly assesses all of these matters to determine the adequacy of its tax liabilities. If any of Lion’s assessments turn out to be incorrect, Lion’s business, results of operations, or financial condition could be materially adversely affected.
Lion generally conducts business in the United States through its U.S. subsidiaries. Due to the complexity of multinational tax obligations and filings, Lion may have a heightened risk related to audits or examinations by federal, state, provincial, and local taxing authorities in the jurisdictions in which it operates. Outcomes from these audits or examinations could have a material adverse effect on Lion’s business, results of operations, or financial condition.
The tax laws of Canada and the United States as well as potentially any other jurisdiction in which Lion may operate in the future, have detailed transfer pricing rules that require that all transactions with non-resident related parties satisfy arm’s length pricing principles. Although Lion believes that its transfer pricing policies have been reasonably determined in accordance with arm’s length principles, the taxation
authorities in the jurisdictions where Lion carries on business could challenge its transfer pricing policies. International transfer pricing is a subjective area of taxation and generally involves a significant degree of judgment. If any of these taxation authorities were to successfully challenge Lion’s transfer pricing policies, Lion could be subject to additional income tax expenses, including interest and penalties. Any such increase in Lion’s income tax expense and related interest and penalties could have a material adverse effect on its business, results of operations, or financial condition.
In addition, Lion is also entitled to claim certain expenses and tax credits, including research and development expenses and Scientific Research and Experimental Development tax credits. Although Lion believes that the claims or deductions have been reasonably determined, there can be no assurance that Canadian or other relevant foreign taxation authorities will agree. If a taxation authority were to successfully challenge the correctness of such expenses or tax credits claimed, or if a taxation authority were to reduce any tax credit either by reducing the rate of the grant or the eligibility of some research and development expenses in the future, Lion’s business, results of operations, or financial condition could be materially adversely affected.
Lion may also be adversely affected by changes in the relevant tax laws and tax rates, treaties, regulations, administrative practices and principles, judicial decisions, and interpretations thereof, in each case, possibly with retroactive effect. These changes could adversely affect Lion’s taxation, especially as Lion expands its relationships and operations internationally and could have a material adverse effect on Lion’s business, results of operations, or financial condition.
Lion’s employees and independent contractors may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements, which could have a material adverse effect on its business, results of operations or financial condition.
Lion is exposed to the risk that its employees, independent contractors or other parties it collaborates with may engage in misconduct or other illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other activities that violate laws and regulations, including production standards, federal, state and provincial fraud, abuse, data privacy and security laws, other similar laws or laws that require the true, complete and accurate reporting of financial information or data. It is not always possible to identify and deter misconduct by employees and other third parties, and the precautions Lion takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting it from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. In addition, Lion is subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against Lion and it is not successful in defending itself or asserting its rights, those actions could have a material adverse effect on its business, results of operations or financial condition, including, without limitation, by way of imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, integrity oversight and reporting obligations to resolve allegations of non-compliance, imprisonment, other sanctions, contractual damages, reputational harm, diminished profits and future earnings and curtailment of its operations.
Lion is subject to information technology and cybersecurity risks, including potential breaches or interruptions to operational and security systems, infrastructure, software, and customer data processed by it or third-parties suppliers, and such risks may have a material adverse effect on Lion’s business, results of operations or financial condition.
Lion is at risk for interruptions, outages and breaches of: (i) operational systems, including business, financial, accounting, product development, data processing or production processes, owned by it or its third-party suppliers; (ii) facility security systems, owned by it or its third-party suppliers; (iii) transmission control modules or other in-product technology, owned by it or its third-party suppliers; (iv) the integrated software in Lion’s vehicles; or (v) customer or driver data that Lion processes or Lion’s third-party suppliers process on its behalf. Such cyber incidents could materially disrupt operational systems, result in loss of intellectual property, trade secrets or other proprietary or competitively sensitive information, compromise certain information of customers, employees, suppliers, drivers or others, jeopardize the
security of Lion’s facilities, or affect the performance of transmission control modules or other in-product technology and the integrated software in Lion’s vehicles. A cyber incident could be caused by disasters, insiders (through inadvertence or with malicious intent) or malicious third parties (including nation-states or nation-state supported actors or terrorist groups) using sophisticated, targeted methods to circumvent firewalls, encryption and other security defenses, including hacking, fraud, viruses, trickery, denial or degradation of service attacks, ransomware, social engineering schemes or other forms of deception. The techniques used by cyber attackers change frequently and may be difficult to detect for long periods of time.
Although Lion maintains information technology measures designed to protect it against intellectual property theft, data breaches and other cyber incidents, such measures will require updates and improvements, and there is no guarantee that such measures will be adequate to detect, prevent or mitigate cyber incidents. Any implementation, maintenance, segregation and improvement of Lion’s systems may require significant management time, support and cost. Moreover, there are inherent risks associated with developing, improving, expanding and updating current systems, including the disruption of Lion’s data management, procurement, production execution, finance, supply chain and sales and service processes. These risks may affect Lion’s ability to manage its data and inventory, procure parts or supplies or produce, sell, deliver and service its vehicles, adequately protect its intellectual property or achieve and maintain compliance with, or realize available benefits under, applicable laws, regulations and contracts. Lion cannot be sure that these systems upon which it relies, including those of its third-party suppliers, will be effectively implemented, maintained or expanded as planned. If Lion does not successfully implement, maintain or expand these systems as planned, its operations may be disrupted, Lion’s ability to accurately and timely report its financial results could be impaired, and deficiencies may arise in Lion’s internal control over financial reporting, which may impact Lion’s ability to certify its financial results. Moreover, Lion’s proprietary information or intellectual property could be compromised or misappropriated, and its reputation may be adversely affected. If these systems do not operate as expected, Lion may be required to expend significant resources to make corrections or find alternative sources for performing these functions.
A significant cyber incident could impact Lion’s manufacturing capacity or production capability, harm its reputation, cause Lion to breach its contractual arrangements with other parties or subject Lion to regulatory actions or litigation, any of which could materially affect its business, results of operations or financial condition. In addition, Lion’s insurance coverage for cyberattacks may not be sufficient to cover all the losses it may experience as a result of a cyber incident.
Lion also collects, uses, discloses, stores, transmits and otherwise processes customer, driver and employee and others’ data as part of its business and operations, which may include personal data or confidential or proprietary information. Lion also works with partners and third-party service providers that may in the course of their business relationship with Lion collect, store and process such data on Lion’s behalf and in connection with Lion’s products and services. There can be no assurance that any security measures that Lion or its third-party service providers or suppliers have implemented will be effective against current or future security threats. While Lion has developed systems and processes designed to protect the availability, integrity, confidentiality and security of Lion’s, Lion’s customers’, drivers’ and employees’ and others’ data, such security measures or those of its third-party service providers, suppliers could fail and result in unauthorized access to or disclosure, acquisition, encryption, modification, misuse, loss, destruction or other compromise of such data. If a compromise of such data were to occur, Lion may become liable under its contracts with other parties and under applicable law for damages and incur penalties and other costs to respond to, investigate and remedy such an incident.
Collection, use, disclosure, storage, transmission or other processing of Lion’s customers’, employees’ and others’ information in conducting Lion’s business may subject it to various legislative and regulatory burdens related to data privacy and security that could require notification of data breaches, restrict or impose burdensome conditions on Lion’s use of such information and hinder Lion’s ability to acquire new customers or market to existing customers. Laws in the United States and Canada require Lion to provide notice to individuals, customers, regulators and others when certain sensitive information
has been compromised as a result of a security breach or where a security breach creates a real risk of significant harm to an individual. Such laws are inconsistent and compliance in the event of a widespread data breach could have serious negative consequences for Lion’s business, including possible fines, penalties and damages, reduced customer demand for its vehicles and harm to its reputation and brand. Depending on the facts and circumstances of such an incident, these damages, penalties, fines and costs could be significant. Customers may also object to Lion’s or its third party service providers’ collection or processing of certain information, including personal data. Any such event could harm Lion’s reputation and result in litigation against it, or otherwise materially adversely affect its business, results of operations or financial condition.
Any unauthorized control or manipulation of the information technology systems in Lion’s vehicles could result in loss of confidence in Lion and its vehicles and harm its reputation, which could materially adversely affect its business, results of operations or financial condition.
Lion’s vehicles contain complex information technology systems and built-in data connectivity to accept and install periodic remote updates to improve or update functionality. Lion has designed, implemented and tested security measures intended to prevent unauthorized access to its information technology networks and its vehicles and related systems. However, hackers may attempt to gain unauthorized access to modify, alter and use such networks, vehicles and systems to gain control of or to change Lion’s solutions’ functionality, user interface and performance characteristics, or to gain access to data stored in or generated by the vehicles. Future vulnerabilities could be identified and Lion’s efforts to remediate such vulnerabilities may not be successful. Any unauthorized access to or control of Lion’s vehicles, or any loss of customer data, could result in legal claims or proceedings and remediation of such problems could result in significant, unplanned capital expenditures. In addition, regardless of their veracity, reports of unauthorized access to its technology systems or data, as well as other factors that may result in the perception that Lion’s vehicles, technology systems or data are capable of being “hacked,” could materially negatively affect Lion’s brand and harm Lion’s business, results of operations or financial condition.
Lion has and may in the future make strategic alliances, partnerships or investments or acquisitions, all of which could divert management’s attention, result in Lion incurring significant costs or operating difficulties and dilution to its shareholders and otherwise disrupt its operations and materially adversely affect its business, results of operations or financial condition.
As part of its growth strategy, Lion may from time to time explore or enter into strategic alliances, partnerships or investments or acquisitions and/or other inorganic growth opportunities. There are risks associated with the foregoing, including:
•the sharing of confidential information;
•the diversion of management’s time and focus from operating its business;
•the use of resources that are needed in other areas of its business;
•unforeseen costs or liabilities;
•adverse effects to Lion’s existing business relationships with partners and suppliers;
•litigation or other claims arising in connection with the acquired company, investment, partnership or joint venture;
•the possibility of adverse tax consequences;
•in the case of an acquisition, implementation or remediation of controls, procedures and policies of the acquired company;
•in the case of an acquisition, difficulty integrating the accounting systems and operations of the acquired company; and
•in the case of an acquisition, retention and integration of employees from the acquired company, and preservation of its corporate culture.
Lion may have limited ability to monitor or control the actions of any third party involved in any such transaction and, to the extent any of these strategic third parties suffers negative publicity or harm to their reputation from events relating to their business, Lion may also suffer negative publicity or harm to its
reputation by virtue of its association with any such third party. Participation in strategic alliances, partnerships or investments or acquisitions may also result in dilutive issuances of equity securities, which could adversely affect the price of the common shares of the Company, or result in issuances of securities with superior rights and preferences to the common shares of the Company or the incurrence of debt with restrictive covenants that limit Lion’s future uses of capital in pursuit of business opportunities. Lion may also not be able to identify opportunities for strategic partnerships or arrangements, acquisition or investments that meet its strategic objectives, or to the extent such opportunities are identified, may not be able to negotiate terms with respect to such opportunity that are acceptable to it. At this time Lion has made no commitments or agreements with respect to any such material transactions.
Lion’s vehicles, as well as the maintenance and repair services it offers to its customers, rely on software and hardware that is highly technical, and if these systems contain errors, bugs or vulnerabilities, or if Lion is unsuccessful in addressing or mitigating technical limitations in its systems, Lion’s business, results of operations or financial condition could be materially adversely affected.
Lion’s vehicles rely on software and hardware, including software and hardware developed or maintained by third parties, that is highly technical and complex and require modification and updates over the life of the vehicle. In addition, the performance of the software solutions included in Lion’s vehicles depends on the ability of such software and hardware to store, retrieve, process and manage immense amounts of data. Lion’s software and hardware may contain errors, bugs or vulnerabilities, and its systems are subject to certain technical limitations that may compromise Lion’s ability to meet its objectives. Some errors, bugs or vulnerabilities inherently may be difficult to detect and may only be discovered after the code has been released for external or internal use. Errors, bugs, vulnerabilities, design defects or technical limitations may be found within Lion’s software and hardware. Although Lion attempts to remedy any issues it observes in its vehicles and software as effectively and rapidly as possible, such efforts may not be timely, may hamper production or may not be to the satisfaction of Lion’s customers, and any deployment of software updates may result in significant costs to Lion. Additionally, if Lion is able to deploy updates to the software addressing any issues, but such updates cannot or are not installed by its customers, such customers’ software will be subject to these vulnerabilities until they install such updates. If Lion is unable to prevent or effectively remedy errors, bugs, vulnerabilities or defects in its software and hardware, Lion may suffer damage to its reputation, loss of customers, loss of revenue or liability for damages, any of which could materially adversely affect Lion’s business, results of operations or financial condition.
Lion relies on unpatented proprietary know-how, trade secrets and contractual restrictions, and not patents, to protect its intellectual and other proprietary rights. Failure to adequately protect, enforce or otherwise manage Lion’s intellectual and other proprietary rights may undermine its competitive position and could materially adversely affect its business, results of operations or financial condition.
Protection of proprietary technology, processes, methods and other intellectual property related to Lion is critical to its business. Lion relies on unpatented proprietary know-how, trade secrets, trademarks, copyrights and contractual restrictions to protect its intellectual property and other proprietary rights and Lion does not hold any patents related to its business. As a matter of course, Lion employs numerous measures to protect its intellectual property and other confidential information, including technical data. For instance, Lion has implemented procedures designed to make the proprietary technology incorporated in its vehicle systems very difficult to access and/or retrieve and imposes consequences for users that seek to obtain unauthorized access to such technology. In addition, Lion enters into confidentiality agreements with suppliers, vendors, service providers, customers and other third parties with whom it may share information about its business and operations, and Lion also requires all of its employees, consultants and other persons who work for it to enter into confidentiality and assignment of intellectual property agreements. However, failure to adequately protect Lion’s intellectual property rights could result in Lion’s competitors offering similar products, potentially resulting in the loss of some of
Lion’s competitive advantage and a decrease in revenue which would adversely affect Lion’s business, results of operations or financial condition.
As well, there can be no assurance that competitors and other third parties will not independently develop the know-how and trade secrets related to Lion’s proprietary technology, in which case Lion would not be able to prevent such third parties from using such know-how and trade secrets, or develop better products or manufacturing methods or processes than it.
Further, Lion may not be able to deter current and former employees, consultants, suppliers and customers as well as other parties from breaching confidentiality agreements and misappropriating proprietary information and it is possible that third parties may copy or otherwise obtain and use Lion’s information and proprietary technology without authorization or otherwise infringe on Lion’s intellectual property and other proprietary rights. Lion may in the future need to rely on litigation to enforce its intellectual property rights and contractual rights, and, if not successful, may not be able to protect the value of its intellectual property. Any litigation could be protracted and costly and have a material adverse effect on Lion’s business, results of operations or financial condition regardless of the outcome.
As well, in some cases the costs associated with such litigation could make enforcement impracticable. Further, intellectual property and contract laws vary throughout the world. Some foreign countries do not protect intellectual property rights to the same extent as do the laws of Canada. Policing the unauthorized use of Lion’s intellectual property in foreign jurisdictions may be difficult. Therefore, Lion’s intellectual property rights may not be as strong or as easily enforced outside of Canada. Failure to adequately enforce Lion’s intellectual property rights could result in its competitors offering similar products, potentially resulting in the loss of some of Lion’s competitive advantage and a decrease in its revenue, which would adversely affect its business, results of operations or financial condition.
Lion may need to defend itself against intellectual property infringement or trade secret misappropriation claims, which may be time-consuming, could cause it to incur substantial costs and could prevent Lion from developing or commercializing future products.
Companies, organizations or individuals, including Lion’s competitors, may own or obtain patents, trademarks or other intellectual property or proprietary rights that would prevent or limit Lion’s ability to make, use, develop or sell its vehicles or components, which could make it more difficult for Lion to operate its business. Lion may receive inquiries from owners of intellectual property rights inquiring whether it infringes their proprietary rights. Lion may also be the subject of allegations that it has misappropriated a third party’s trade secrets or other proprietary rights. Companies owning patents or other intellectual property rights relating to the operation of Lion’s business, including in respect of battery packs, electric motors, fuel cells or electronic power management systems may allege infringement or misappropriation of such rights. Some of these companies or competitors may be bigger than Lion and therefore have greater resources to dedicate to initiate or defend against those claims, whether founded or unfounded. In response to a determination that Lion has infringed or misappropriated upon a third party’s intellectual property rights, Lion may be required to do one or more of the following: (i) cease development, sales, or use of vehicles that incorporate the asserted intellectual property, (ii) establish and maintain alternative branding for its products and services, (iii) pay substantial damages, (iv) obtain a license from the owner of the asserted intellectual property right, which license may not be available on commercially reasonable terms or at all; or (v) redesign one or more aspects or systems of its vehicles.
Any litigation or claims against Lion, whether valid or invalid, could result in substantial costs and diversion of resources or otherwise materially adversely affect its business, results of operations and financial condition.
Lion also licenses patents and other intellectual property from third parties, including its third-party suppliers, and Lion may face claims that the use by it of this in-licensed technology infringes the intellectual property rights of others. In such cases, Lion would seek indemnification from its licensors. However, Lion’s rights to indemnification may be unavailable or insufficient to cover Lion’s costs and losses, which could materially adversely affect Lion’s business, results of operations and financial
condition. As well, Lion cannot be certain that such licensed intellectual property will afford protection against competitors with similar technology as the scope of protection of issued patent claims is often difficult to determine. The claims under any licensed patents may not be broad enough to prevent others from developing technologies that are similar or that achieve results similar to the patented technology.
The share price of the Company’s common shares has been and may continue to be volatile.
In recent years, the securities markets have experienced a high level of price and volume volatility, and the market price of securities of many companies has experienced wide fluctuations, which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. The market price of the Company’s common shares and other listed securities has and could be further subject to significant fluctuations. Some of the factors that may cause the market price of the Company’s common shares to fluctuate include:
•volatility in the market price and trading volume of comparable companies;
•actual or anticipated changes or fluctuations in Lion’s operating results or in the expectations of market analysts;
•short sales, hedging and other derivative transactions in the Company’s common shares;
•publication of research reports or news stories about Lion, its competitors or its industry;
•litigation or regulatory action against Lion;
•positive or negative recommendations or withdrawal of research coverage by securities analysts;
•the impact of any public announcements made in regard to any transactions;
•adverse market reaction to any indebtedness it may incur or additional securities it may issue in the future;
•investors’ general perception of Lion and the public’s reaction to its press releases, other public announcements and filings with U.S. and Canadian securities regulators, including its financial statements;
•changes in general political, economic, industry and market conditions and trends;
•sales of the Company’s common shares by existing shareholders;
•recruitment or departure of key personnel;
•significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving Lion or its competitors; and
•the other risk factors described in this section of this MD&A
Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. Certain institutional investors may base their investment decisions on consideration of Lion’s environmental, governance and social practices and performance against such institutions’ respective investment guidelines and criteria, and failure to satisfy such criteria may result in limited or no investment in the Company’s common shares by those institutions, which could materially adversely affect the trading price of the Company’s common shares. There can be no assurance that fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue for a protracted period of time, Lion’s business, results of operations or financial condition and the trading price of Lion’s common shares may be materially adversely affected.
In addition, broad market and industry factors may harm the market price of the Company’s common shares. Hence, the price of the Company’s common shares could fluctuate based upon factors that have little or nothing to do with it, and these fluctuations could materially reduce the price of the Company’s common shares regardless of Lion’s operating performance. In the past, following a significant decline in the market price of a company’s securities, there have been instances of securities class action litigation having been instituted against that company. If Lion is involved in any similar litigation, it could incur substantial costs, its management’s attention and resources could be diverted and Lion’s business, results of operations and financial condition could be materially adversely affected.
The Business Combination with NGA increases the potential for shareholder litigation.
Lion went public via the Business Combination with NGA, a special purpose acquisition company (“SPAC”). Through the Business Combination, a wholly-owned affiliate of Lion merged with NGA, which resulted in NGA becoming a wholly-owned subsidiary of Lion. The popularity of going public in recent years via a merger with a SPAC has resulted in heightened regulatory, activist or other public scrutiny and a corresponding increase in the number of shareholder lawsuits. The Company is therefore subject to an increased risk of shareholder litigation relating to NGA’s directors and officers in connection with the Business Combination. For example, on November 1, 2023, a putative verified class action complaint (the “Complaint”) was filed in the Delaware Court of Chancery against the pre-Business Combination directors and officers of NGA, now a wholly-owned subsidiary of the Company, and Northern Genesis Sponsor, LLC, the sponsor of NGA’s special purpose acquisition company merger with a wholly-owned subsidiary of the Company in May 2021 alleging, among other things, that the director and officer defendants and NGA’s sponsor breached their fiduciary duties in connection with the Business Combination as well as a related claim for unjust enrichment as a result of the challenged Business Combination, as further described in section 13 of the Company’s Annual Information Form entitled “Legal Proceedings and Regulatory Actions.” These sorts of lawsuits, proceedings or other disputes, regardless of merit, can involve substantial costs, including the costs associated with investigation, litigation and possible settlement, judgment, penalty or fines. In addition, lawsuits and other legal proceedings may be time-consuming and cause management to divest time and attention from other aspects of Lion’s business, all of which could, alone or in combination with the impact on the Company's manufacturing operations described above, materially adversely affect Lion’s business, results of operations or financial condition.
Certain of Lion’s existing shareholders have significant influence over Lion.
As of February 28, 2024, PEC, directly or indirectly, owns or controls approximately 34.1% of Lion’s issued and outstanding common shares, and 9368-2672, directly or indirectly, owns or controls approximately 11.5% of Lion’s issued and outstanding common shares, in each case, on a non-diluted basis. Each of PEC and 9368-2672 may therefore have significant influence over Lion’s management and affairs, which could limit a shareholder’s ability to influence the outcome of matters submitted to shareholders for a vote, including election of directors and significant corporate transactions. In addition, Lion has entered into a Nomination Rights Agreement, pursuant to which, subject to the terms and conditions contained therein, each of PEC and 9368-2672 are granted certain rights to nominate members of Lion’s Board of Directors (including, in certain cases, members of committees of Lion’s Board of Directors) for so long as it holds a requisite percentage of the total voting power of Lion. See section 14 of the Company’s Annual Information Form for the year ended December 31, 2023 entitled “Interest of Management and Others in Material Transactions” for a summary description of the Nomination Rights Agreement. The market price of Lion’s common shares could be adversely affected due to the significant influence and voting power of PEC and 9368-2672. Moreover, the significant influence and voting interest of PEC and 9368-2672 may discourage transactions involving a change of control, including transactions in which an investor, as a holder of Lion’s common shares, might otherwise receive a premium for Lion’s common shares over the then-current market price, or discourage competing proposals if a going private transaction is proposed.
Additionally, PEC’s interests may not align with the interests of Lion’s other shareholders. PEC (or its affiliates or related entities) is in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with Lion. PEC (or its affiliates or related entities) may also pursue acquisition opportunities that may be complementary to Lion’s business, and, as a result, those acquisition opportunities may not be available to Lion.
Future sales (or the perception of future sales) of Lion’s securities by existing shareholders or by Lion could cause the market price of Lion’s common shares to drop significantly, even if its business is doing well.
The Company may issue additional securities to finance future activities. Sales of a substantial number of Lion’s common shares in the public market could occur at any time. These sales, or the
perception in the market that the holders of a large number of Lion’s common shares or securities convertible into Lion’s common shares intend or that Lion intends to sell common shares or securities convertible into common shares, could reduce the market price of Lion’s common shares. A decline in the market prices of the common shares could impair Lion’s ability to raise additional capital through the sale of securities should Lion desire to do so.
Lion entered into a registration rights agreement pursuant to which, subject to the terms and conditions contained therein, each of PEC, 9368-2672 and the Warrantholder were granted certain rights with respect to the registration or qualification by prospectus in the United States and/or Canada of the sale of common shares of the Company held by them.
The Specified Customer Warrant entitles the Specified Warrantholder to acquire, subject to the terms thereof (including applicable vesting conditions) up to 35,350,003 common shares of Lion at an exercise price of $5.66 per share, the whole as described in section 12.0 of this MD&A entitled “Components of Results of Operations”. In addition, as of February 28, 2024, the Company had outstanding 27,111,323 Business Combination Warrants, with each warrant entitling the holder thereof to acquire, subject to the terms thereof, one common share of Lion at an exercise price of $11.50 per share until May 6, 2026, 22,637,795 2022 Warrants, with each warrant entitling the holder thereof to acquire, subject to the terms thereof, one common share of Lion at an exercise price of $2.80 per share for a period of five years until December 16, 2027, and 22,500,000 July 2023 Warrants, with each warrant entitling the holder thereof to acquire, subject to the terms thereof, one common share of Lion at an exercise price of C$2.81 per share for a period of five years until July 14, 2023. The Company also issued in July 2023 approximately $74 million aggregate principal amount of Convertible Debentures, which Convertible Debentures will mature on July 19, 2028 and are convertible at the holders’ option into common shares of Lion at a conversion price of $2.58 per share. Any exercise by the Specified Warrantholder, any holder of Business Combination Warrants, the 2022 Warrants or the 2023 Warrants of its right to acquire common shares of the Company pursuant to the Specified Customer Warrant, the Business Combination Warrants, the 2022 Warrants or the July 2023 Warrants as applicable, or any exercise by any holder of Convertible Debentures of its right to convert its Convertible Debentures into common shares will dilute the ownership interests of Lion’s then-existing shareholders and reduce Lion’s earnings per share. In addition, any sales in the public market of any Lion’s common shares issuable upon the exercise of the Specified Customer Warrant, Business Combination Warrants, 2022 Warrants, or July 2023 Warrants or conversion of Convertible Debentures could adversely affect prevailing market prices of Lion’s common shares. Further, the Company cannot predict the size of future issuances of Lion’s common shares or the effect, if any, that future issuances and sales of Lion’s common shares will have on the market price of common shares. Sales of a substantial number of Lion’s common shares, or the perception that such sales could occur, may adversely affect prevailing market prices for Lion’s common shares.
If securities or industry analysts do not publish or cease publishing research or reports about Lion, its business or market, or if they change their recommendations regarding the Company’s common shares adversely, the price and trading volume of the Company’s common shares could decline.
The trading market for the Company’s common shares is influenced by the research and reports that industry or securities analysts publish about Lion, its business, its market or its competitors. If any of the analysts who cover Lion or may cover Lion in the future change their recommendation regarding the Company’s common shares adversely, or provide more favorable relative recommendations about its competitors, the price of the Company’s common shares would likely decline. If any analyst who covers Lion or may cover it in the future were to cease coverage of Lion or fail to regularly publish reports on it, Lion could lose visibility in the financial markets, which in turn could cause the price or trading volume of the Company’s common shares to decline.
Lion does not expect to declare any dividends in the foreseeable future.
The Company has never declared or paid any dividends on its common shares, and the Company anticipates reinvesting earnings to finance its business and its growth strategy, and does not anticipate
declaring any cash dividends to holders of Lion’s common shares in the foreseeable future. Consequently, investors may need to rely on sales of their shares after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
The payment of future dividends, if any, will be reviewed periodically by Lion’s Board of Directors and will depend upon, among other things, conditions then existing including earnings, financial conditions, cash on hand, financial requirements to fund our commercial activities, development and growth, and other factors that our board of directors may consider appropriate in the circumstances.
Lion is a foreign private issuer within the meaning of the SEC rules, and as such is exempt from certain provisions applicable to U.S. domestic public companies and is permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NYSE Listed Company Manual.
Because Lion qualifies as a foreign private issuer under the Exchange Act, Lion is exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including: the rules requiring domestic filers to issue financial statements prepared under U.S. GAAP; the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and the selective disclosure rules by issuers of material non-public information under Regulation FD. Lion is required to file an annual report on Form 40-F at the time of filing of its annual information form in Canada. In addition, Lion publishes its results on a quarterly basis as press releases distributed pursuant to the rules and regulations of the New York Stock Exchange. Press releases and disclosure documents prepared in accordance with Canadian requirements relating to financial results and material events are furnished to the SEC on Form 6-K. However, the information Lion is required to file with or furnish to the SEC may be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, holders of the Company’s common shares may not be afforded the same protections or information that would be made available to them were they investing in a U.S. domestic issuer.
In addition, as a corporation incorporated under the Business Corporations Act (Quebec) listed on the NYSE, Lion is subject to the NYSE Listed Company Manual. However, the NYSE Listed Company Manual permits a foreign private issuer like Lion to follow certain of the corporate governance practices of its home country. Certain corporate governance practices in Canada, which is Lion’s home country, may differ significantly from the NYSE Listed Company Manual. Lion may rely on home country practice with respect to its corporate governance, and Lion is currently doing so with respect to certain corporate governance requirements. As a result, holders of the Company’s common shares may be afforded less protection than they otherwise would enjoy under the NYSE Listed Company Manual applicable to U.S. domestic issuers.
Any issuance of preferred shares could make it difficult for another company to acquire Lion or could otherwise adversely affect holders of the Company’s common shares, which could depress the price of the Company’s common shares.
Lion’s Board of Directors has the authority to issue preferred shares of the Company and to determine the preferences, limitations and relative rights of such preferred shares and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by its shareholders. Any such preferred shares of the Company could be issued with liquidation, dividend and other rights superior to the rights of the Company’s common shares. The potential issuance of preferred shares may delay or prevent a change in control of Lion, discourage bids for the Company’s common shares at a premium over the market price and adversely affect the market price and other rights of the holders of the Company’s common shares.
Lion’s constating documents and certain Canadian legislation contain provisions that may have the effect of delaying or preventing certain change in control transactions or shareholder proposals.
Certain provisions of Lion’s By-laws (as defined below) and certain Canadian legislation, together or separately, could discourage or delay certain change in control transactions or shareholder proposals. Lion’s By-laws contain provisions that establish certain advance notice procedures for nomination of candidates for election as directors at shareholders’ meetings. The Business Corporations Act (Quebec) requires that any shareholder proposal that includes nominations for the election of directors must be signed by one or more holders of shares representing in the aggregate not less than 5% of the shares or 5% of the shares of a class or series of shares of the corporation entitled to vote at the meeting to which the proposal is to be presented. The Investment Canada Act requires that a non-Canadian must file an application for review with the Minister responsible for the Investment Canada Act and obtain approval of the Minister prior to acquiring control of a “Canadian business” within the meaning of the Investment Canada Act, where prescribed financial thresholds are exceeded. Furthermore, limitations on the ability to acquire and hold common shares of the Company may be imposed by the Competition Act (Canada). This legislation permits the Commissioner of Competition, or Commissioner, to review any acquisition or establishment, directly or indirectly, including through the acquisition of shares, of control over or of a significant interest in Lion. Any of these provisions may discourage a potential acquirer from proposing or completing a transaction that may have otherwise presented a premium to Lion’s shareholders.
Lion’s constating documents provide that any derivative actions, actions relating to breach of fiduciary duties and other matters relating to its internal affairs will be required to be litigated in Canada, other than complaints asserting a cause of action arising under the Securities Act or the Exchange Act, and that the U.S. federal district courts will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act or the Exchange Act, which could limit shareholders’ ability to obtain a favorable judicial forum for disputes with Lion
Lion’s By-laws include a forum selection provision that provides that, unless Lion consents in writing to the selection of an alternative forum, the Superior Court of Justice of the Province of Quebec, Canada and the appellate courts therefrom, will be the sole and exclusive forum for (i) any derivative action or proceeding brought on Lion’s behalf; (ii) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any of Lion’s directors, officers, or other employees to Lion; (iii) any action or proceeding asserting a claim arising pursuant to any provision of the Business Corporations Act (Quebec) or Lion’s By-laws; or (iv) any action or proceeding asserting a claim otherwise related to the relationships among Lion, its affiliates and their respective shareholders, directors and/or officers, but excluding claims related to Lion’s business or such affiliates. The forum selection provision also provides that Lion’s securityholders are deemed to have consented to personal jurisdiction in the Province of Quebec and to service of process on their counsel in any foreign action initiated in violation of the foregoing provisions.
In addition, Lion’s By-laws provide that the U.S. federal district courts will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the U.S. Securities Act of 1933, as amended (the “Securities Act”) and the Exchange Act. The enforceability of similar exclusive forum provisions (including exclusive federal forum provisions for actions, suits or proceedings asserting a cause of action arising under the Securities Act) in other companies’ organizational documents has been challenged in legal proceedings, and there is uncertainty as to whether courts would enforce the exclusive forum provisions in Lion’s By-laws. Additionally, Lion’s securityholders cannot waive compliance with the U.S. federal securities laws and the rules and regulations thereunder. The forum selection provision may impose additional litigation costs on shareholders in pursuing any such claims. Additionally, the forum selection provision may limit shareholders’ ability to bring a claim in a judicial forum that they find favorable for disputes with Lion or its directors, officers or employees, which may discourage the filing of lawsuits against Lion and its directors, officers and employees, even though an action, if successful, might benefit its shareholders. The courts of the Province of Quebec may also reach different judgments or results than would other courts, including courts where a shareholder considering an action may be
located or would otherwise choose to bring the action, and such judgments may be more or less favorable to Lion than to its shareholders. If a court were to find either choice of forum provision contained in Lion’s By-laws to be inapplicable or unenforceable in an action, Lion may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect Lion’s business, results of operations and financial condition.
Investors may be subject to adverse U.S. federal income tax consequences if the Company is or becomes a passive foreign investment company for U.S. federal income tax purposes.
A non-U.S. corporation will be considered a passive foreign investment company (“PFIC”), for U.S. federal income tax purposes in any taxable year in which either (i) 75% or more of its gross income is passive income or (ii) the average percentage of the value of its assets that produce or are held for the production of passive income is at least 50 percent.
Based on Lion’s financial statements and its expectations about the nature and amount of its income, assets and activities and the market value of its equity, Lion does not believe that it was a PFIC for its taxable year ended December 31, 2023. No assurance can be given that Lion will not be a PFIC for the current or any future taxable year. If Lion is a PFIC for any taxable year during which a U.S. Holder (as defined under “Certain United States Federal Income Tax Considerations” in section 19 of the Company's Annual Information Form for the year ended December 31, 2023 entitled “Certain United States Federal Income Tax Considerations”) holds common shares of the Company, the U.S. Holder might be subject to increased U.S. federal income tax liability and to additional reporting obligations. See “Passive Foreign Investment Company Status” in section 19 of the Company's Annual Information Form for the year ended December 31, 2023 entitled “Certain United States Federal Income Tax Considerations”. Prospective investors are encouraged to consult their own tax advisors regarding the applicability of the PFIC rules to their purchase, ownership and disposition of common shares or warrants.
Additional Information
Additional information relating to Lion is available on SEDAR+ at www.sedarplus.ca and on Edgar at www.sec.gov.
