Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to help the reader understand LiveWire, our financial condition and results of operations, and our present business environment. The following discussion and analysis should be read together with the Consolidated financial statements and related notes included elsewhere in this Form 10-K. The following discussion may contain forward-looking statements. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this Form 10-K, particularly in “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” discussions.
Overview and 2022 Highlights
LiveWire is an industry-leading all-electric vehicle brand with a mission to pioneer the rapidly growing two-wheel electric motorcycle space. The Company operates in two segments: Electric Motorcycles and STACYC.
LiveWire’s Electric Motorcycles segment sells electric motorcycles, related parts and accessories and apparel in the United States, while the STACYC segment sells electric balance bikes, related parts and accessories and apparel in the United States and certain international markets. H-D introduced its first electric motorcycle in late 2019 as the “Harley-Davidson LiveWire.” In 2021, building on early success and the continued growth in the global market demand for electric vehicles, H-D launched LiveWire as a standalone electric vehicle division, with the first LiveWire-branded product, the LiveWire ONE, debuting in
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July 2021, followed by a special launch edition of 100 S2 Del Mars in May 2022. In 2019, H-D acquired STACYC Inc. and began selling electric balance bikes.
Electric motorcycles are sold at wholesale to a network of independent retail partners, at retail through a Company-owned dealer, and through online sales. Electric balance bikes are sold at wholesale to independent dealers and independent distributors, as well as direct to consumers online. LiveWire is focused on innovating and developing technology in the electric vehicle market. LiveWire’s vision is to create the next generation of electric motorcycles with products and experiences that merge the power and technology of electric with the unique soulful connection that comes from an analog machine. As discussed below, on September 26, 2022 as part of the Business Combination, LiveWire, which included LiveWire branded electric motorcycles and STACYC, became a separate, publicly traded company.
LiveWire’s net loss for 2022 was $78,938 thousand compared to $68,292 thousand in 2021. LiveWire’s net losses reflect the start-up nature of LiveWire’s business including investments in product development as LiveWire continues to focus on technological innovation that will support future products and growth, and investments in talent and capabilities to support the new company. The Electric Motorcycles segment operating losses were partially offset by favorable operating income at STACYC.
The Electric Motorcycles segment operating loss for 2022 was $89,105 thousand, compared to an operating loss of $70,297 thousand in 2021. The operating loss was driven by the cost of standing up a new organization, including growing headcount and back-office support, increased costs to advance our electric vehicle systems, and increased product development costs to deliver our S2 platform in 2023. Refer to the Electric Motorcycles segment analysis below for further discussion.
The STACYC segment operating income for 2022 was $4,150 thousand, as compared to $2,115 thousand in 2021. The improvement in operating income was driven by increased revenue and margin mix. Refer to the STACYC segment analysis below for further discussion.
Recent Developments
Business Combination
On December 12, 2021, H-D entered into the Business Combination Agreement with ABIC, to effect the separation of its electric vehicle business. On September 16, 2022, the Business Combination was approved in an ABIC shareholder vote, and it closed on September 26, 2022.
The Business Combination was accounted for as a reverse recapitalization. Under this method of accounting, ABIC was treated as the “acquired” company for financial reporting purposes. Accordingly, the Business Combination was treated as the equivalent of LiveWire issuing stock for the net assets of ABIC, accompanied by a recapitalization. The net assets of ABIC were stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination are those of Legacy LiveWire.
Upon closing of the Business Combination and PIPE Investments, the most significant change in the Company’s future reported financial position and results was an increase in cash due to net proceeds received of approximately $293.7 million, including a $100 million investment from the Legacy LiveWire Equityholder and a $100 million investment from certain members of the KYMCO Group, through a PIPE. Additionally, the increase in cash reflects the amount of cash released from ABIC’s trust account of $13.6 million (net of the SPAC share redemption amount) and the $100 million equity backstop (the “H-D Backstop Amount”) provided by H-D in exchange for 10,000,000 shares of Common Stock for a purchase price of $10.00 per share pursuant to the terms of the Business Combination Agreement.
See Note 4, Business Combination, in the Consolidated financial statements for further detail related to the Business Combination.
2023 Outlook
For 2023, LiveWire's focus continues to be on our investment into product development, including advancing the technologies, platforms and products that will further our position as pioneers of the industry. LiveWire plans to expand the LiveWire brand globally in 2023 with the introduction of the LiveWire ONE electric motorcycle to the European market and the launch of the S2 platform.
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Basis of Presentation
Refer to Note 1, Description of Business and Basis of Presentation, in the Consolidated financial statements for a discussion of the underlying basis used to prepare the Consolidated financial statements.
Key Business Metrics
To analyze LiveWire’s business performance, determine financial forecasts and help develop long-term strategic plans, management reviews the following key business metrics, which are important measures that represent the growth of the business:
•Wholesale motorcycle unit sales – LiveWire defines wholesale motorcycle unit sales as the number of electric motorcycles sold by LiveWire to independent dealers for which LiveWire recognized revenue during the period.
•Company retail motorcycle unit sales – LiveWire defines Company retail motorcycle unit sales as the number of new electric motorcycles sold at retail by LiveWire through its Company-owned dealer or through online sales for which LiveWire recognized revenue during the period. LiveWire began selling electric motorcycles direct to retail consumers in the third quarter of 2021.
•Independent retail motorcycle unit sales – LiveWire defines independent retail motorcycle unit sales as the number of new electric motorcycles sold at retail by independent retail partners. These unit sales do not generate revenues for LiveWire but generate revenues for individual retail partners. The data source for electric motorcycle retail sales figures is new sales warranty and registration information provided by independent retail partners and compiled by LiveWire. LiveWire must rely on information that its independent retail partners supply concerning new retail sales, and LiveWire does not regularly verify the information that its independent retail partners supply. This information is subject to revision.
•Retail motorcycle unit sales – LiveWire defines retail motorcycle unit sales as the sum of Company retail motorcycle unit sales and independent retail motorcycle unit sales.
•Company-owned dealer – Dealer owned and operated by LiveWire to sell electric motorcycles, related products, and services.
•Independent retail partners (Electric Motorcycles) – Retail partners owned and operated by independent entities under contract with LiveWire to sell LiveWire electric motorcycles, related products and services.
•Electric balance bike unit sales (STACYC) – LiveWire defines electric balance bike unit sales as the number of electric balance bikes sold by LiveWire for which LiveWire recognized revenue during the period.
•Independent retail partners (STACYC) – Retail partners owned and operated by independent entities under contract with LiveWire to sell STACYC electric balance bikes, related products and services.
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The following table details the key business metric amounts for the periods indicated:
Year Ended
Wholesale motorcycle unit sales:
Total wholesale motorcycle unit sales 444 432
Company retail motorcycle unit sales – US 153 29
Total LiveWire motorcycle unit sales 597 461
Retail motorcycle unit sales:
Company retail motorcycle unit sales (2) 153 29
Independent retail partners (3) 534 933
Total retail motorcycle unit sales 687 962
Retail motorcycle unit sales:
Total Retail motorcycle unit sales 687 962
Electric balance bike unit sales:
Total electric balance bike unit sales 48,091 48,283
(1) International wholesale motorcycle unit sales represent sales of H-D branded LiveWire motorcycles prior to the Business Combination.
(2) Data source for Company retail motorcycle unit sales figures shown above is LiveWire’s records.
(3) Data source for independent retail motorcycle unit sales figures shown above is new sales warranty and registration information provided by retail partners and compiled by LiveWire. LiveWire must rely on information that its independent retail partners supply concerning new retail sales, and LiveWire does not regularly verify the information that its independent retail partners supply. This information is subject to revision.
The following table details the number of retail partners:
As of As of
Electric Motorcycles
Company-owned dealer 1 1
Independent retail partners:
International — —
Total Electric Motorcycles Independent Retail Partners 75 44
Total Electric Motorcycles Retail Partners 76 45
STACYC
Independent retail partners:
Total STACYC Independent Retail Partners 2,106 1,978
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The Electric Motorcycles retail partners shown above include those that have been contracted by LiveWire to sell LiveWire motorcycles. As of December 31, 2022 and December 31, 2021, this total includes 13 and 27 partners, respectively, that were actively working to complete the licensing required to sell LiveWire motorcycles as of the end of the period. LiveWire intends to grow this network as it expands its distribution capabilities. The Harley-Davidson LiveWire motorcycles produced in 2019 and 2020 have been or will be retailed through the H-D dealership network until the remaining inventory of H-D branded LiveWire motorcycles is depleted. After the Business Combination, any remaining inventory of H-D branded LiveWire motorcycles is owned by H-D, and any related sales are recognized by H-D.
LiveWire believes these key business metrics provide useful information to help investors understand and evaluate LiveWire’s business performance. Wholesale motorcycle unit shipments and Company retail motorcycle unit sales are key drivers of revenue and profit for the Electric Motorcycles segment. Retail motorcycle unit sales made through both the Company-owned dealer and independent retail partners are a key measure of consumer demand and market share for LiveWire’s electric motorcycles. Total electric balance bike unit sales is a key driver of revenue and profit for STACYC.
Results of Operations
The following table presents consolidated results of operations for the years ended December 31, 2022 and 2021 (in thousands):
Year Ended December 31,
Change in fair value of warrant liabilities 5,033 — 5,033 nm
Other comprehensive loss:
Foreign currency translation adjustments (145) (85) (60) 70.6 %
Net loss per share, basic and diluted $ (0.46) $ (0.42) $ (0.04) 9.5 %
*nm - not meaningful
Operating Income (Loss)
The Company reported an operating loss of $84,955 thousand for the year ended December 31, 2022 compared to an operating loss of $68,182 thousand for the year ended December 31, 2021. The Electric Motorcycles segment reported an operating loss of $89,105 thousand for the year ended December 31, 2022, as compared to an operating loss of $70,297 thousand for the year ended December 31, 2021. Operating income from the STACYC segment was $4,150 thousand for the year ended December 31, 2022, compared to operating income of $2,115 thousand for the year ended December 31, 2021. Refer to the Electric Motorcycles and STACYC Segment discussions for a more detailed analysis of the factors affecting operating results.
Other Income, Net
Other income, net for the year ended December 31, 2022 was $235 thousand compared to $302 thousand for the year ended December 31, 2021. The change was primarily driven by a reduction in net periodic benefit plan income.
Interest Expense Related Party
Interest expense related party for the year ended December 31, 2022 increased by $182 thousand, to $475 thousand from $293 thousand for the year ended December 31, 2021 due to an increase in related party notes payable prior to their settlement on June 24, 2022.
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Interest Income
Interest income for the year ended December 31, 2022 was $1,191 thousand compared to $19 thousand for the year ended December 31, 2021. The change was primarily driven by interest income earned on money market fund investments entered into using funds from the Business Combination. The Company had an investment of $257,000 thousand in money market funds as of December 31, 2022.
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities for the year ended December 31, 2022 was $5,033 thousand. The warrant liabilities were recorded as part of the Business Combination and therefore did not exist in the prior year results for LiveWire. The income recognized was due to the decrease in the estimated fair value of the warrants between September 26, 2022, the closing date of the Business Combination, and December 31, 2022, due to fluctuations in the market price of the warrants. See Note 10, Warrant Liabilities, in the Consolidated financial statements for further discussion.
Income Tax (Benefit) Provision
The income tax benefit for the year ended December 31, 2022 was $33 thousand, as compared to income tax expense of $138 thousand for the year ended December 31, 2021. The tax benefit was driven by the reduction in the net deferred tax liability position. The reduction of the net deferred tax liability was the result of the requirement to capitalize research and experimental expenditures starting in tax years beginning after December 31, 2021. The capitalization of these expenditures for the year ended December 31, 2022 resulted in a deferred tax asset that will reverse and offset additional deferred tax liabilities in future periods.
Segment Results
Electric Motorcycles
The following table presents consolidated results of operations for the Electric Motorcycles segment for the years ended December 31, 2022 and 2021 (in thousands):
Revenue:
Operating expenses:
Revenue
Revenue for the year ended December 31, 2022 increased by $4,294 thousand, or 44.2%, to $13,999 thousand from $9,705 thousand for the year ended December 31, 2021. The increase was primarily due to higher revenue from electric motorcycles of $4,465 thousand, and was partially offset by decreases in parts and accessories and apparel revenues. The increase in revenues from electric motorcycles was primarily driven by an increase of 30% in unit sales volumes along with a $2,917 thousand decrease in sales promotions.
Cost of Goods Sold
Cost of goods sold for the year December 31, 2022 increased by $1,262 thousand, or 5.7%, to $23,268 thousand from $22,006 thousand for the year ended December 31, 2021. The increase was primarily due to increased shipments of electric motorcycles, in alignment with the increased revenue described above, partially offset by prior year non-cash reserve adjustments on the H-D branded motorcycles.
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Selling, Administrative and Engineering Expense
Selling, administrative and engineering expense for the year ended December 31, 2022 increased by $21,840 thousand, or 37.7%, to $79,836 thousand from $57,996 thousand for the year ended December 31, 2021. The increase was primarily due to increases in product development costs incurred to deliver our S2 platform in 2023 and advance our electric vehicle systems, and increases in personnel costs primarily related to higher headcount to support the stand-up of the new LiveWire organization.
STACYC
The following table presents consolidated results of operations for the STACYC segment for the years ended December 31, 2022 and 2021 (in thousands):
Revenue:
Operating expenses:
Selling, administrative and engineering expense 8,023 7,612 411 5.4 %
Revenue
Revenue for the year ended December 31, 2022 increased by $6,733 thousand, or 25.8%, to $32,834 thousand from $26,101 thousand for the year ended December 31, 2021. The increase was primarily due to higher revenue from electric balance bikes of $6,539 thousand and parts, accessories and apparel of $194 thousand. The increase in revenue from electric balance bikes was driven by a shift in product mix from the launch of new 18- and 20-inch electric balance bikes and higher pricing of $6,862 thousand, which was partially offset by lower shipment volumes of $323 thousand. The increase in revenue from parts, accessories and apparel was driven by higher shipment volumes of $674 thousand, which was partially offset by an increase in promotional discounts on batteries in 2022.
Cost of Goods Sold
Cost of goods sold for the year December 31, 2022 increased by $4,287 thousand, or 26.2%, to $20,661 thousand from $16,374 thousand for the year ended December 31, 2021. The increase was primarily due to a shift in product mix from the launch of new 18- and 20-inch electric balance bike, which was partially offset by slightly lower shipment volumes, in alignment with the increased revenue described above.
Selling, Administrative and Engineering Expense
Selling, administrative and engineering expense for the year ended December 31, 2022 increased by $411 thousand, or 5.4%, to $8,023 thousand from $7,612 thousand for the year ended December 31, 2021. The increase was primarily due to an increase in advertising costs online and at motocross races to support increased revenue.
Results of Operations 2021 Compared to 2020
Refer to“Management's Discussion and Analysis of Financial Condition and Results of Operations” within our final prospectus filed on December 16, 2022 with the SEC pursuant to Rule 424(b) under the Securities Act for a detailed discussion of the results of operations for 2021 compared to 2020.
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Liquidity and Capital Resources
As of December 31, 2022 and 2021, LiveWire’s cash and cash equivalents were $265,240 thousand and $2,668 thousand, respectively.
LiveWire historically managed liquidity risk by effectively managing its working capital, capital expenditures and cash flows. As an early growth company, LiveWire does not expect to generate positive cash flow from operations over the next twelve months. Prior to the Business Combination, H-D supported LiveWire’s operating, investing and financing activities. Following the Business Combination, LiveWire received net proceeds of approximately $293.7 million as more fully described below.
On September 26, 2022, LiveWire consummated the Merger with ABIC resulting in net proceeds of approximately $293.7 million, including a $100 million investment from H-D and a $100 million investment from KYMCO through a PIPE. Additionally LiveWire received ABIC’s cash held in trust account of $13.6 million and the $100 million equity backstop provided by the H-D Backstop Amount in exchange for 10,000,000 shares of Common Stock for a purchase price of $10.00 per share pursuant to the terms of the Business Combination Agreement.
In the event of the exercise of any of Warrants for cash, LiveWire will receive the proceeds from such exercise. Assuming the exercise in full of all of Warrants for cash, LiveWire would receive an aggregate of approximately $350.8 million, but would not receive any proceeds from the sale of the shares of Common Stock issuable upon such exercise. To the extent any of the Warrants are exercised on a “cashless basis,” LiveWire will not receive any proceeds upon such exercise. LiveWire expects to use any proceeds it receives from Warrant exercises for general corporate and working capital purposes, which would increase its liquidity. LiveWire believes the likelihood that warrant holders will exercise their Warrants, and therefore the amount of cash proceeds LiveWire would receive, is dependent upon the trading price of its Common Stock. As of December 31, 2022, the reported sales price of Common Stock was $4.85 per share. If the trading price of Common Stock is less than the $11.50 exercise price per share of the Warrants, LiveWire expects that warrant holders will not exercise their Warrants. There is no guarantee the Warrants will be in the money following the time they become exercisable and prior to their expiration, and as such, the Warrants may expire worthless and LiveWire may receive no proceeds from the exercise of Warrants. As a result, LiveWire does not expect to rely on the cash exercise of Warrants to fund its operations and LiveWire does not believe that it needs such proceeds to support working capital and capital expenditure requirements for the next twelve months. LiveWire will continue to evaluate the probability of Warrant exercises and the merit of including potential cash proceeds from the exercise of the Warrants in its future liquidity projections. LiveWire instead currently expects to rely on the sources of funding described below, if available on reasonable terms or at all.
Management believes that cash on hand, including the proceeds received from the Business Combination, will provide sufficient liquidity to meet LiveWire’s projected obligations, including those related to existing contractual obligations, for at least the next twelve months.
LiveWire plans to use its current cash on hand, including the financing raised through the Business Combination and PIPE Financing, to support its core business operations and strategic plan, invest in new product development, and enhance its global manufacturing and distribution capabilities. LiveWire expects its capital expenditures and working capital requirements to increase substantially in the near future, as it grows the business, develops its customer support and marketing infrastructure and expands its research and product development efforts. LiveWire had $20,517 thousand of purchase order commitments related to capital expenditures as of December 31, 2022 to be purchased in fiscal year 2023.
LiveWire’s material contractual operating cash commitments at December 31, 2022 relate to leases as discussed further in Note 9, Leases, in the Consolidated financial statements. In addition, as a result of the Business Combination completed on September 26, 2022, LiveWire may be subject to certain payments in the event minimum purchase commitments under the Contract Manufacturing Agreement with H-D are not met beginning in the year 2024.
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Cash Flow Activity
The following table presents condensed highlights from our Consolidated statements of cash flows for the years ended December 31, 2022 and 2021 (in thousands):
Net cash used by operating activities $ (89,681) $ (74,539)
Net cash used by investing activities (14,081) (9,951)
Net cash provided by financing activities 366,334 84,757
Net increase in cash, cash equivalents and restricted cash $ 262,572 $ 267
The overall increase in cash during the year ended December 31, 2022 was due primarily to an increase in cash resulting from the Business Combination.
Operating Activities
LiveWire had negative cash flow from operating activities during 2022 and 2021. Net cash used in operating activities increased by $15,142 thousand to $89,681 thousand for the year ended December 31, 2022 compared to $74,539 thousand for the year ended December 31, 2021. The increase in negative cash flow from operating activities was primarily driven by increases in product development costs and costs to advance our electric vehicle systems, and increases in personnel costs primarily related to higher headcount to support the stand-up of the new LiveWire organization. The overall growth of the business also resulted in increases in net operating assets, primarily inventory, and offsetting increases in operating liabilities, primarily payables and accrued expenses.
Investing Activities
Net cash used in investing activities increased by $4,130 thousand to $14,081 thousand for the year ended December 31, 2022 compared to $9,951 thousand for the year ended December 31, 2021. The decrease was due to higher capital expenditures related to investments to support the product development and engineering of future products.
LiveWire expects to fund future cash flows used in investing activities with the financing raised through the Business Combination and PIPE Financing. LiveWire estimates capital expenditures to be between $20 million and $25 million in 2023.
Financing Activities
Net cash provided by financing activities increased by $281,577 thousand to $366,334 thousand for the year ended December 31, 2022 compared to $84,757 thousand for the year ended December 31, 2021. The increase was primarily due to an increase in cash from the Business Combination of $293.7 million and an increase in proceeds from borrowing on notes payable to related party of $13,233 thousand. This was partially offset by decreased cash transfers from H-D prior to the separation of $26,442 thousand.
Commitments and Contingencies
The Company is subject to lawsuits and other claims related to product, commercial, employee, environmental and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter. Refer to Note 14, Commitments and Contingencies, in the Consolidated financial statements for a discussion of the Company's commitments and contingencies.
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Other Matters
Critical Accounting Policies and Estimates
LiveWire’s financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Management believes that the following are some of the more critical judgment areas in the application of accounting policies that currently affect LiveWire’s financial condition and results of operations.
Product Warranty and Recalls - LiveWire provides a limited warranty on the new electric motorcycles for a period of two years, except for the battery which is covered for five years. LiveWire also provides limited warranties on parts and accessories and electric balance bikes. Estimated warranty costs are recorded at the time of sale and are based primarily on historical LiveWire claim and industry information. In the case of both warranty and recall costs, as actual experience becomes available it is used to update the accruals.
Additionally, LiveWire may from time to time initiate certain voluntary recall campaigns. The estimated costs associated with voluntary recalls are recorded when the liability is both probable and estimable. This generally occurs when LiveWire’s management approves and commits to a recall. The accrued cost of a recall is based on an estimate of the cost to repair each affected vehicle and the number of vehicles expected to be repaired based on historical data concerning the percentage of affected customers that take advantage of recall offers. In the case of both warranty and recall costs, as actual experience becomes available it is used to update the accruals.
The factors affecting actual warranty and recall costs can be volatile. As a result, actual warranty claims experience and recall costs may differ from estimates, which could lead to material changes in our accrued warranty and recall costs. LiveWire’s warranty and recall liabilities are discussed further in Note 12, Product Warranty and Recall Campaigns, in the Consolidated financial statements.
Income Taxes - LiveWire’s income taxes as presented are calculated on a separate tax return basis. LiveWire’s operations have historically been and continue to be included in H-D’s U.S. federal and state tax returns or non-U.S. jurisdictions tax returns. LiveWire accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. LiveWire reviews its deferred income tax asset valuation allowances on a quarterly basis or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or combined group recording the net deferred income tax asset is considered, along with any positive or negative evidence including tax law changes. Since future financial results and tax law may differ from previous estimates, periodic adjustments to LiveWire’s valuation allowances may be necessary. LiveWire has generated operating losses in each of the years presented, however, any hypothetical net operating loss attributes generated (and related valuation allowances) utilized by H-D are not recorded on the balance sheet.
LiveWire is subject to income taxes in the U.S. and potentially other jurisdictions. These tax laws and regulations are complex and significant judgment is required in determining LiveWire’s provision for income taxes and recording the related deferred tax assets and liabilities.
In the ordinary course of LiveWire’s business, there are transactions and calculations where the ultimate tax determination is uncertain. Accruals for unrecognized tax benefits are provided for in accordance with the requirements of ASC 740. An unrecognized tax benefit represents the difference between the recognition of benefits related to items for income tax reporting purposes and financial reporting purposes. Any unrecognized tax benefit is not included within the combined balance sheets as any benefit would reside with H-D. H-D is regularly audited by tax authorities as a normal course of business. Although the outcome of tax audits is always uncertain, LiveWire believes that it has appropriate support for the positions taken had LiveWire filed its own tax returns and that its annual tax provision includes amounts sufficient to pay any assessments. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year and would be the obligation of H-D.
Refer to Note 5, Income Taxes, in the Consolidated financial statements for further discussion regarding LiveWire’s income taxes.
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Corporate Allocations - Historically, prior to the Business Combination, LiveWire had been managed and operated in the normal course of business by H-D. Accordingly for carve-out financial statement purposes, certain shared costs have been allocated to LiveWire and are reflected as expenses in the accompanying Consolidated financial statements prior to the Business Combination. Management considers the expense methodology and resulting allocation to be reasonable for all periods presented; however, the allocations may not be indicative of actual expenses that would have been incurred had LiveWire operated as an independent, publicly traded company for the periods presented prior to the Business Combination. See Note 16, Related Party Transactions, in the Consolidated financial statements for further details.
Valuation of Warrant Liabilities - Upon consummation of the Business Combination, the Company assumed 30,499,990 warrants to purchase LiveWire's Common Stock, comprised of 19,999,990 public warrants, originally issued by ABIC as part of its IPO of units (the “Public Warrants”) and 10,500,000 of outstanding warrants originally issued in a private placement in connection with the IPO of ABIC (the “Private Placement Warrants”, collectively with the Public Warrants, the “Warrants”). LiveWire accounts for its Warrants assumed as part of the Business Combination in accordance with the guidance contained in ASC 815-40 under which the Warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, LiveWire classifies the Warrants as liabilities at their fair value and adjust the Warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our Consolidated statements of operations and comprehensive loss. The fair value of the Public Warrants was determined using the quoted market price as of the valuation date. The fair value of the Private Placement Warrants was determined by using the quoted market price of the Public Warrants as the Private Warrants have terms and provisions that impact the fair value assessment that are identical to those of the Public Warrants, including the exercise price, exercisability and exercise period. See Note 10, Warrant Liabilities, in the Consolidated financial statements for more information concerning accounting for the Warrant liabilities.
Emerging Growth Company Status
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.
LiveWire is an “emerging growth company” as defined in Section 2(a) of the Securities Act and has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards, although it may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare LiveWire’s financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.
New Accounting Standards Issued But Not Yet Adopted
For a discussion of recent accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the Consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2022, LiveWire’s cash and cash equivalents amounted to $265,240 thousand. LiveWire manages its liquidity risk by effectively managing its working capital, capital expenditures and cash flows.
Financial instruments that potentially subject LiveWire to concentrations of credit risk principally consist of accounts receivable. LiveWire limits its credit risk with respect to accounts receivable by performing credit evaluations and requiring collateral to secure amounts owed to LiveWire by its customers, each when deemed necessary.
Inflationary factors, such as cost increases for logistics, manufacturing, raw materials and purchased components, may adversely affect LiveWire’s operating results. Although LiveWire does not believe inflation has had a material impact on its financial condition given its lower production volumes, a high rate of inflation in the future may have an adverse effect on LiveWire’s ability to maintain and increase its gross margin or decrease its operating expenses as a percentage of its revenues if the selling prices of its products do not increase as much or more than its increase in costs.
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LiveWire is also exposed to possible disruption of supply or shortage of materials, in particular for lithium-ion battery cells and key semiconductor chip components necessary for electric vehicles, and any inability to purchase raw materials and components could negatively impact LiveWire’s operations.
LiveWire sells its electric motorcycles, electric balance bikes and related products internationally, and in most markets, those sales are made in the foreign country’s local currency. As a result, LiveWire’s operating results are affected by fluctuations in the values of the U.S. dollar relative to foreign currencies, however, the impact of such fluctuations on LiveWire’s operations to date are not material given the majority of LiveWire’s sales are currently in the U.S. LiveWire plans to expand its business and operations internationally and expects its exposure to currency rate risk to increase as it grows its international presence.
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Item 8. Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42) 73
Consolidated Statements of Operations and Comprehensive Loss 74
Consolidated Balance Sheets 75
Consolidated Statements of Cash Flows 76
Consolidated Statements of Shareholders’ Equity 77
Notes to Consolidated Financial Statements 78
1. Description of Business and Basis of Presentation 78
2. Summary of Significant Accounting Policies 80
4. Business Combination 84
5. Income Taxes 86
6. Earnings Per Share 88
7. Additional Balance Sheet Information 89
8. Goodwill and Intangible Assets 90
10. Warrant Liabilities 92
12. Product Warranty and Recall Campaigns 95
13. Employee Benefit Plans and Other Postretirement Benefits 95
14. Commitments and Contingencies 96
15. Share-Based Awards 96
16. Related Party Transactions 98
17. Reportable Segments and Geographic Information 103
18. Restatement of Unaudited Interim Financial Statements 104
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of LiveWire Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LiveWire Group, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2021
Milwaukee, Wisconsin
March 6, 2023
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LIVEWIRE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
Years Ended
Costs and expenses:
Interest expense related party (475) (293) (186)
Change in fair value of warrant liabilities 5,033 — —
Income tax (benefit) provision (33) 138 357
Other comprehensive loss:
Foreign currency translation adjustments (145) (85) 236
Net loss per share, basic and diluted $ (0.46) $ (0.42) $ (0.48)
The accompanying notes are integral to the Consolidated financial statements.
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LIVEWIRE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
ASSETS
Current assets:
Accounts receivable from related party 525 124
Deferred tax assets — 72
Other long-term assets 5,044 —
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable to related party 5,733 —
Current portion of contingent consideration liability — 2,180
Current portion of notes payable to related party — 103
Current portion of lease liabilities 1,312 1,146
Long-term supplier liability — 5,330
Long-term portion of lease liabilities 1,913 2,423
Deferred tax liabilities 15 186
Long-term portion of notes payable to related party — 5,699
Warrant liabilities 8,388 —
Other long-term liabilities 246 375
Commitments and contingencies (Note 14)
Shareholders' equity:
Additional paid-in-capital 329,218 —
Accumulated deficit (22,438) —
Accumulated other comprehensive income — 145
Net Parent company investment — 19,780
Total liabilities and shareholders' equity $ 351,805 $ 61,952
The accompanying notes are integral to the Consolidated financial statements.
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LIVEWIRE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities
Change in valuation of contingent consideration liability — 49 788
Change in fair value of warrant liabilities (5,033) — —
Provision for doubtful accounts 145 55 4
Loss on disposal of property, plant, and equipment — 850 —
Cloud computing arrangements development costs (4,894) — —
Changes in current assets and liabilities:
Accounts receivable from related party (593) (89) 4,117
Accounts payable to related party 6,269 — —
Cash flows from investing activities:
Cash flows from financing activities:
Repayment on notes payable to related party (Note 16) — (1,000) (1,500)
Cash and cash equivalents:
Cash and cash equivalents—beginning of period $ 2,668 $ 2,401 $ 1,054
The accompanying notes are integral to the Consolidated financial statements.
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LIVEWIRE GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share and per share amounts)
Issuedshares Balance
Other comprehensive income, net of tax — — — — 236 — 236
Other comprehensive loss, net of tax — — — — (85) — (85)
Net loss prior to the Business Combination — — — — — (56,500) (56,500)
Net loss post Business Combination — — — (22,438) — — (22,438)
Other comprehensive loss, net of tax — — — — (154) — (154)
Share-based compensation expense — — 565 — — — 565
The accompanying notes are integral to the Consolidated financial statements.
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LIVEWIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Basis of Presentation
LiveWire Group, Inc., a Delaware corporation, and its consolidated subsidiaries are referred to in these Consolidated financial statements and notes as “we,” “our,” “us,” the “Company,” or “LiveWire.” The Company is focused on pioneering the rapidly growing two wheel electric motorcycle market. We design and sell electric motorcycles and electric balance bikes with related electric motorcycle parts, accessories, and apparel.
LiveWire was a direct, wholly owned subsidiary of AEA-Bridges Impact Corp (“ABIC”), which was originally incorporated as a Cayman Islands exempted company on July 29, 2020 as a special purpose acquisition company (“SPAC”) with the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses or entities.
On September 26, 2022, the Company consummated a previously announced business combination pursuant to a business combination agreement, dated as of December 12, 2021 (the “Business Combination Agreement”), by and among ABIC, LiveWire Group Inc., (formerly known as LW EV Holdings, Inc.), LW EV Merger Sub, Inc., a Delaware corporation (“Merger Sub”), Harley-Davidson, Inc., a Wisconsin corporation (H-D), and LiveWire EV, LLC (“Legacy LiveWire”), a wholly-owned subsidiary of H-D.
Pursuant to the terms of the Business Combination Agreement: (a) on September 23, 2022, ABIC migrated to and domesticated as a Delaware corporation (“Domesticated ABIC”) (the “Domestication”), in connection with which all of the ABIC’s (i) outstanding ordinary shares were converted, on a one-for-one basis, into common stock, par value $0.0001 per share, of Domesticated ABIC, (ii) outstanding warrants were converted, on a one-for-one basis, into warrants to acquire one share each of common stock of Domesticated ABIC and (iii) outstanding units were canceled and instead entitle the holder thereof to, per unit, one share of common stock of Domesticated ABIC and one-half of one warrant of Domesticated ABIC; (b) on September 26, 2022, H-D and Legacy LiveWire consummated the separation of the Legacy LiveWire business and the other transactions contemplated by the Separation Agreement (the “Separation Agreement”), by and between H-D and Legacy LiveWire, dated as of September 26, 2022 (the “Separation”); (c) following the Domestication and immediately following the Separation, Merger Sub merged with and into Domesticated ABIC, with Domesticated ABIC surviving as a direct, wholly owned subsidiary of LiveWire (the “Merger”), and LiveWire continuing as the public company in the Merger, with each share of common stock of Domesticated ABIC being converted into the right of the holder thereof to receive one share of common stock, par value $0.0001 (“Common Stock”); (d) immediately following the Merger, H-D caused all of the membership interests of Legacy LiveWire (“Legacy LiveWire Equity”) held by ElectricSoul, LLC (the “Legacy LiveWire Equityholder”), a Delaware limited liability company and a subsidiary of H-D, to be contributed to LiveWire in exchange for 161,000,000 shares of Common Stock and the right to receive up to an additional 12,500,000 shares of Common Stock in the future (the “Earn-Out Shares”, and the transactions contemplated by this clause (d), collectively, the “Exchange”), and as a result of the Exchange, Legacy LiveWire became a direct, wholly owned subsidiary of LiveWire; (e) immediately following the consummation of the Exchange, LiveWire contributed 100% of the outstanding equity interests of Legacy LiveWire to Domesticated ABIC (clauses (a) through (e) collectively, the “Business Combination”).
Holders of 36,597,112 of ABIC’s Class A Ordinary Shares sold in its initial public offering (the “Initial Shares”) properly exercised their right to have such shares redeemed for a full pro rata portion of the trust account holding the proceeds from ABIC’s initial public offering, calculated as of two business days prior to the consummation of the Business Combination, which was approximately $10.06 per share, or $368.1 million in the aggregate.
An aggregate of $368.1 million was paid from the ABIC’s trust account to holders who properly exercised their right to have their Initial Shares redeemed, and the remaining balance immediately prior to the Closing of approximately $34 million remained in the trust account and was used to fund the Business Combination.
In connection with the Business Combination, the AEA-Bridges Impact Sponsor, LLC, a Cayman Islands limited liability company (the “Sponsor”), forfeited an aggregate of 2,000,000 Class B Ordinary Shares of ABIC in accordance with the Investor Support Agreement, dated as of December 12, 2021 (the “Investor Support Agreement”), by and among the Sponsor, LiveWire, ABIC, John Garcia, John Replogle and George Serafeim. The remaining Class B Ordinary Shares of ABIC held by the Sponsor automatically converted to 7,950,000 shares of Common Stock.
Pursuant to investment agreements entered into in connection with the Business Combination Agreement, Kwang Yang Motor Co., Ltd., KYMCO Capital Fund I Co., Ltd., SunBright Investment Co., Ltd., CycleLoop Co., Ltd. and Kwang Yang Holdings
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Limited (collectively, “KYMCO Group”) agreed to subscribe for an aggregate of 10,000,000 newly-issued shares of Common Stock at a purchase price of $10.00 per share for an aggregate purchase price of $100 million (the “KYMCO PIPE Investment”).
Pursuant to the Business Combination Agreement, and an investment agreement entered into prior to the Closing, the Legacy LiveWire Equityholder agreed to subscribe for an aggregate of 10,000,000 newly-issued shares of Common Stock at a purchase price of $10.00 per share for an aggregate purchase price of $100 million (the “Legacy LiveWire Equityholder PIPE Investment” and, together with the KYMCO PIPE Investment, the “PIPE Investments”). At the closing of the Business Combination, LiveWire consummated the PIPE Investments.
Pursuant to the Business Combination Agreement, H-D caused the Legacy LiveWire Equityholder to pay and deliver to LiveWire an amount in cash equal to $100 million, which is the H-D Backstop Amount (as defined in the Business Combination Agreement) in exchange for 10,000,000 shares of Common Stock (the “H-D Backstop Shares”) at a purchase price of $10.00 per H-D Backstop Share. Additionally, H-D was reimbursed for $20.1 million of transaction costs and advisory fees incurred through a reduction of the proceeds provided.
After giving effect to the Business Combination, the redemption of Initial Shares as described above, the issuance of the H-D Backstop Shares and the consummation of the PIPE Investments, there were 202,402,888 shares of Common Stock issued and outstanding.
The Business Combination was accounted for as a reverse recapitalization. See Note 4, Business Combination, for more information. Throughout the notes to the Consolidated financial statements, unless otherwise noted, the “Company,” “we,” “us” or “our” and similar terms refer to Legacy LiveWire and its subsidiaries prior to the consummation of the Business Combination, and LiveWire and its subsidiaries after the consummation of the Business Combination. References to ABIC refer to the SPAC entity prior to consummation of the Business Combination. Operating results for the periods presented prior to the consummation of the Business Combination represent those of Legacy LiveWire.
Subsequent to the Business Combination, based upon management reporting changes, including reviewing the financial information of the Electric Motorcycles and STACYC businesses separately, the Company assessed that it has two reportable segments: LiveWire Electric Motorcycles (“Electric Motorcycles”) and STACYC. The Company's reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations. The Electric Motorcycles segment primarily focuses on the designing and selling of electric motorcycles and also sells motorcycle parts, accessories, and apparel. Electric Motorcycles are sold at wholesale to a network of independent dealers and at retail through a Company-owned dealer and through online sales. The STACYC segment primarily focuses on the designing and selling of electric balance bike for kids. The STACYC segment products are sold at wholesale to independent dealers and independent distributors, as well as direct to consumers online.
Basis of Presentation
On September 26, 2022, the Company consummated the Separation and Business Combination and became a standalone publicly traded company, and its financial statements are now presented on a Consolidated basis. Prior to the Separation and Business Combination on September 26, 2022, the Company's historical combined financial statements were prepared on a standalone carve-out basis and were derived from H-D's Consolidated financial statements and accounting records. The financial statements for all periods presented, including historical periods prior to September 26, 2022, are now referred to as “Consolidated financial statements”, and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
Periods prior to the Separation
Prior to the Separation, the Company’s financial information is presented as consolidated carve-out financial information using the historical results of operations and the historical bases of assets and liabilities of H-D, Legacy LiveWire's parent company. Intercompany transactions within the Company have been eliminated in preparing the Consolidated financial statements.
Management of the Company believes assumptions underlying the historical Consolidated financial statements are reasonable. However, the Consolidated financial statements may not be indicative of the consolidated financial position, results of operations, and cash flows of the Company in the future or if it had operated independently from H-D. Actual costs that would have been incurred if the Company had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, primarily including technology support, marketing, finance, engineering, usage of shared assets, and other general corporate and administrative costs, such as treasury, human
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resources, and others. The Company also may incur additional costs associated with being a standalone, publicly listed company that were not included in the expense allocations and, therefore, may result in additional costs that are not reflected in the historical results of operations, financial position, and cash flows. Principal assumptions underlying the Consolidated financial statements for periods prior to the Separation include:
•The Consolidated statements of operations and comprehensive loss include all revenues and costs directly attributable to the Company as well as an allocation of expenses from H-D related to shared manufacturing costs; engineering expenses, selling expenses, general and administrative expenses, marketing expenses, employee-related expenses, charges for use of shared assets, and other expenses related to H-D’s corporate functions that provide support to the Company. H-D allocated these costs to the Company using methodologies that management believes are appropriate and reasonable. Costs are generally attributed based on specific identification, legal obligation, or in another manner that best reflects the nature of how the expense is incurred, such as gross revenue, wholesale motorcycle shipments, standard cost, production units, and other allocation methods as deemed appropriate.
•The Consolidated balance sheets include the attribution of certain assets and liabilities that have historically been held at the corporate level by H-D, but which are specifically identifiable or attributable to the Company. H-D’s cash management and financing activities are centralized. Accordingly, no cash has been attributed to the Consolidated financial statements, except for certain cash accounts legally held by entities included in the Consolidated financial statements.
•Net Parent company investment in the Consolidated statements of shareholders' equity and the Consolidated balance sheets represents the accumulation of the Company’s net loss over time and the net effect of transactions with and allocations from H-D.
•Transactions between H-D and the Company are generally considered to be effectively settled in cash at the time the transaction is recorded except for the Notes payable to related party and Accounts receivable from related party (see disclosure in Note 16, Related Party Transactions). The net effect of the settlement of transactions with H-D is reflected in the Consolidated statements of cash flows as a financing activity and in the Consolidated balance sheets as “Net Parent company investment.”
•Within the Consolidated financial statements and tables presented, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes.
•Certain comparative amounts have been reclassified to conform to the current year presentation.
2. Summary of Significant Accounting Policies
Principles of Consolidation – The Consolidated financial statements include the accounts of LiveWire Group, Inc. and its subsidiaries, all of which are wholly-owned. All intercompany accounts and material intercompany transactions have been eliminated.
Use of Estimates – The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the Consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents – The Company considers all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents.
Concentrations of Credit Risk – Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company limits its credit risk with respect to cash by maintaining cash and cash equivalents with high quality financial institutions. At times, the Company’s cash and cash equivalents may exceed federally insured limits. Concentrations of credit risk with respect to receivables are limited due to our large number of customers and their dispersion across geographic areas. We perform periodic credit evaluations of our customers’ financial condition and generally do not require collateral. At December 31, 2022, and 2021, 36.2% and 23.3%, respectively, of our net accounts receivable balance was due from the KTM customer group, driven by sales through the STACYC segment. No other single customer or customer group represented 10% or greater of net accounts receivable.
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Accounts Receivable, net – Accounts receivable primarily relate to sales of electric balance bikes to independent dealers and independent distributors and are presented in Accounts receivable, net on the Consolidated balance sheets. All sales of electric motorcycles and related products to independent dealers in the U.S. and Canada are financed by the purchasing independent dealers through Harley-Davidson Financial Services, Inc. (“HDFS”), a wholly owned subsidiary of H-D; therefore, accounts receivable related to these sales are recorded in Accounts receivable from related party on the Consolidated balance sheets. The allowance for doubtful accounts deducted from total accounts receivable was $211 thousand and $66 thousand as of December 31, 2022, and 2021, respectively. The Company’s evaluation of the allowance for doubtful accounts includes a review to identify non-performing accounts which are evaluated individually. The remaining accounts receivable balances are evaluated in the aggregate based on an aging analysis. The allowance for doubtful accounts is based on factors including past loss experience, the value of collateral, and if applicable, reasonable and supportable economic forecasts. Accounts receivables are written down once management determines that the specific customer does not have the ability to repay the balance in full.
Inventories, net – Total inventories are valued at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method for electric motorcycles and related products and average costing method for electric balance bikes. The Company’s determination of net realizable value considers the impact of sales incentives and excess and obsolete inventory based upon an assessment of historical trends, current market conditions and forecasted product demand.
Property, Plant and Equipment, net – Property, plant and equipment is recorded at cost, net of accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of each class of property, plant and equipment generally consist of 7 years for leasehold improvements, 5 to 10 years for machinery and equipment, and 3 to 7 years for tooling and software.
Goodwill – Goodwill represents the excess of acquisition cost over the fair value of the net assets purchased. Goodwill is tested for impairment, based on financial data related to the reporting unit to which it has been assigned, at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value, limited to the total goodwill allocated to the reporting unit. During 2022 and 2021, the Company tested its goodwill balances for impairment and no impairment charges were recorded to goodwill as a result of those impairment tests.
Intangible Assets – Intangible assets are comprised of trademarks, patents, distributor relationships, and non-compete agreements. Intangible assets are amortized over their useful lives in a manner that reflects the pattern in which the economic benefit of the intangible assets is consumed. Intangible assets are assessed for impairment when a triggering event occurs.
Cloud Computing Arrangements – The Company incurs costs to implement cloud computing arrangements that are hosted by a third party vendor. Implementation costs incurred during the application development stage are capitalized and amortized over the term of the hosting arrangement on a straight-line basis. The Company capitalized $4,930 thousand of costs during 2022 to implement cloud computing arrangements. Capitalized cloud computing arrangement costs are included within Other long-term assets on the Consolidated balance sheets. Amortization expense totaled $35 thousand for 2022 and is presented within Selling, administrative and engineering expense on the Consolidated statements of operations and comprehensive loss. There were no cloud computing arrangement costs capitalized and no amortization expense incurred in 2021 and 2020.
Impairment of Long-Lived Assets – The Company periodically evaluates the carrying value of long-lived assets, which consist of property, plant and equipment, intangible assets, and cloud computing arrangements, to be held and used when events and circumstances indicate the carrying amount may not be recoverable. Such events and circumstances include significant decreases in the market price for similar assets, significant adverse changes to the extent and manner in which the asset is used, an adverse change in legal factors or business climate, an accumulation of costs that exceed the estimated cost to acquire or develop a similar asset, and continuing losses that exceed forecasted costs. When the carrying value of a long-lived asset is not recoverable based on the existence of one or more of the above indicators, recoverability is determined by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate. An impairment charge would then be recognized equal to the amount by which the carrying amount exceeds the fair value of the asset. The Company also reviews the useful life of its long-lived assets when events and circumstances indicate that the actual useful life may be shorter than originally estimated. In the event the actual useful life is deemed to be shorter than the original useful life, depreciation is adjusted prospectively so that the remaining book value is depreciated over the revised useful life.
Research and Development Expenses – Expenditures for research activities relating to product development are charged against income as incurred. Research and development expenses were $35,612 thousand, $35,308 thousand and $23,036 thousand for 2022, 2021 and 2020, respectively, and presented within Selling, administrative and engineering expense on the Consolidated statements of operations and comprehensive loss.
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Advertising Costs – The Company expenses the production cost of advertising the first time the advertising takes place within Selling, administrative and engineering expense on the Consolidated statements of operations and comprehensive loss. Advertising costs relate to the Company’s efforts to promote its products and brands through the use of media and other means. During 2022, 2021 and 2020, the Company incurred $7,940 thousand, $5,344 thousand and $2,602 thousand in advertising costs, respectively.
Shipping and Handling Costs – The Company classifies shipping and handling costs as a component of Cost of goods sold.
Income Taxes – LiveWire’s income taxes as presented are calculated on a separate tax return basis. LiveWire’s operations have historically been and continue to be included in H-D’s U.S. federal and state tax returns or non-U.S. jurisdictions tax returns. LiveWire accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (“ASC740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. LiveWire reviews its deferred income tax asset valuation allowances on a quarterly basis or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or combined group recording the net deferred income tax asset is considered, along with any positive or negative evidence including tax law changes. Since future financial results and tax law may differ from previous estimates, periodic adjustments to LiveWire’s valuation allowances may be necessary. LiveWire has generated operating losses in each of the years presented, however, any hypothetical net operating loss attributes generated (and related valuation allowances) utilized by H-D are not recorded on the balance sheet.
Warrant Liabilities - The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued share purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC Topic 815, Derivatives and Hedging (“ASC 815”). The Company accounts for the Public Warrants and Private Placement Warrants, both further describedin Note 10, Warrants Liabilities, in accordance with the guidance contained in ASC 815 under which the Public and Private Warrants (collectively, the “Warrants”) do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company classifies the Warrants as liabilities at their fair value and adjusts the Warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Consolidated statements of operations and comprehensive loss.
New Accounting Standards
Recently Issued Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
3. Revenue
The Company recognizes revenue when it satisfies a performance obligation by transferring control of a good or service to a customer. Revenue is measured based on the consideration that the Company expects to be entitled to in exchange for the goods or services transferred. Taxes that are collected from a customer concurrent with revenue-producing activities are excluded from revenue.
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Disaggregated revenue, net by major source was as follows for the years ended December 31, (in thousands):
Electric Motorcycles
STACYC (1)
(1) Prior year amounts have been reclassified to conform to current year presentation.
Revenue from the sale of electric motorcycles, electric balance bikes as well as parts and accessories and apparel are recorded when control is transferred to the customer, generally at the time of shipment to independent dealers and distributors or at the time of delivery to retail customers.
The Company offers sales incentive programs to independent dealers and retail customers designed to promote the sale of its products. The Company estimates its variable consideration related to its sales incentive programs using the expected value method. The Company accounts for consideration payable to a customer as part of its sales incentives as a reduction of revenue, which is accrued at the later of the date the related sale is recorded or the date the incentive program is both approved and communicated.
During 2020, the Company made a sales concession to certain of its independent dealers related to retail store investments they had made for the sale and service of Harley-Davidson branded electric motorcycles. At the end of 2020, the Company was in the process of re-evaluating its long-term strategic direction for its electric vehicle operations, including the distribution strategy. Given the critical importance of the relationship between the Company and its dealers, the Company made a one-time concession payment, which was based on the investments the dealers had made. There were no commitments for future purchases from the dealers in exchange for the payment. As a result of this concession, the Company recorded a reduction to revenue of $15,271 thousand during 2020 for the change in the transaction consideration on previously recognized revenue related to electric vehicles sold by the Company to independent dealers through December 31, 2020. The Company has not historically offered similar concessions, did not offer similar concessions during 2022 or 2021, and it does not anticipate similar concessions in the future.
The Company offers the right to return eligible parts and accessories and apparel. When the Company offers a right to return, it estimates returns based on an analysis of historical trends and records revenue on the initial sale only in the amount that it expects to be entitled. The remaining consideration is deferred in a refund liability account. The refund liability is remeasured for changes in the estimate at each reporting date with a corresponding adjustment to revenue.
Variable consideration related to sales incentives and rights to return is adjusted at the earliest of when the amount of consideration the Company expects to receive changes, or the consideration becomes fixed. Adjustments for variable consideration related to previously recognized sales were not material during 2022, 2021 and 2020.
Shipping and handling costs associated with freight after control of a product has transferred to a customer are accounted for as fulfillment. The Company accrues for the shipping and handling in the same period that the related revenue is recognized.
The Company offers standard, limited warranties on its motorcycles, electric balance bikes, and parts and accessories. These warranties provide assurance that the product will function as expected and are not separate performance obligations. The Company accounts for estimated warranty costs as a liability when control of the product transfers to the customer.
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Contract Liabilities
The Company maintains certain deferred revenue balances related to payments received at contract inception in advance of the Company’s performance under the contract that generally relates to customer deposits for electric balance bikes and electric motorcycles. Deferred revenue is recognized as revenue once the Company performs under the contract. Deferred revenue of $163 thousand and $1,644 thousand was included in Accrued liabilities in the Company's Consolidated balance sheetsas of December 31, 2022 and December 31, 2021, respectively.
Previously deferred revenue recognized as revenue in 2022 and 2021 was $1,644 thousand and $149 thousand, respectively. The Company expects to recognize all $163 thousand of the remaining unearned revenue in 2023.
4. Business Combination
As discussed in Note 1, Description of Business and Basis of Presentation, the Company completed the previously announced Business Combination on September 26, 2022. The Business Combination is accounted for as a reverse recapitalization, in accordance with GAAP. Under this method of accounting, ABIC has been treated as the acquired company for financial reporting purposes. The net assets of ABIC were stated at carrying value, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination are those of Legacy LiveWire. Legacy LiveWire was determined to be the accounting acquirer based on evaluation of the following facts and circumstances:
•Legacy LiveWire’s majority shareholder, the Legacy LiveWire Equityholder, has the largest voting interest in the combined company
•Legacy LiveWire’s executive management makes up the majority of the management of the combined company;
•Legacy LiveWire’s majority shareholder, the Legacy LiveWire Equityholder, has the ability to designate the majority of the initial LiveWire Board and subsequent decisions on the LiveWire Board will be based on shareholder vote, of which the Legacy LiveWire Equityholder has the largest voting interest;
•the combined company assumed the name “LiveWire Group Inc.”; and
•Legacy LiveWire is the larger entity based on revenue. Additionally, Legacy LiveWire has a larger employee base and substantive operations.
The Business Combination resulted in net proceeds of approximately $293.7 million, which included: i) $100 million PIPE investment from H-D; ii) $100 million PIPE investment from KYMCO, iii) ABIC’s remaining cash held in trust account and operating cash in aggregate of $13.8 million (net of the SPAC share redemption amount of $368.1 million and payment of transaction costs incurred by ABIC of $20.6 million); and iv) the $100 million H-D Backstop Amount pursuant to the terms of the Business Combination Agreement and as a result of public shareholders exercising their redemption rights with respect to 36,597,112 shares of ABIC Class A common stock for $368.1 million in the aggregate, at a redemption price of approximately $10.06 per share. These proceeds were net of $20.1 million of transaction costs and advisory fees incurred by H-D. After giving effect to the business combination, the redemption of ABIC Class A common stock as described above, the issuance of the H-D Backstop Shares and the consummation of the PIPE Investments, were 202,402,888 shares of Common Stock issued and outstanding as of the closing date. The Company also assumed the Public Warrants and Private Warrants upon consummation of the Business Combination. See further detail in Note 10, Warrant Liabilities.
As discussed in Note 1, Description of Business and Basis of Presentation, in connection with the Business Combination, H-D has the right to receive up to an additional 12,500,000 shares of the Company's Common stock as Earn-Out Shares upon the occurrence of certain triggering events: (i) a one-time issuance of 6,250,000 Earn Out Shares if the volume-weighted average price (“VWAP”) of Common Stock is greater than or equal to $14.00 over any 20 trading days within any 30 consecutive trading day period; and (ii) a one-time issuance of 6,250,000 Earn Out Shares if the VWAP of Common Stock is greater than or equal to $18.00 over any 20 trading days within any 30 consecutive trading-day period ((i) and (ii) each, a “Triggering Event”), in each case, during a period beginning 18 months from the Closing Date and expiring five years thereafter (the “Earn Out Period”).
Additionally, if there is a change of control of the Company prior to the expiration of the Earn Out Period that will result in the holders of Common Stock receiving a price per share equal to or in excess of the applicable share price of LiveWire in connection with a Triggering Event, then immediately prior to the consummation of such change of control, any Triggering
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Event that has not occurred will be deemed to have occurred, LiveWire will issue the applicable Earn Out Shares to H-D and H-D will be eligible to participate in such change of control.
The total number of shares of the Company’s common stock outstanding immediately following the Business Combination was comprised as follows:
Shares
ABIC public shares, prior to redemptions 40,000,000
Less: redemption of ABIC public shares (36,597,112)
LiveWire public stockholders 3,402,888
(1) Excludes 12,500,000 Common Stock in estimated potential earn out shares as the price threshold for each tranche has not yet been triggered.
(2) Shares presented are net of 2,000,000 Sponsor forfeited shares and includes 25,000 shares of Common Stock held by John Replogle and 25,000 shares of Common Stock held by George Serafeim, each in his individual capacity.
In connection with the Business Combination, H-D incurred transaction fees and other costs considered direct and incremental, consisting of legal, accounting, financial advisory and other professional fees. These amounts were reimbursed by the Company as a reduction of the proceeds received and are deducted from the Company’s additional paid-in capital. The following table reconciles the elements of the Business Combination to the Consolidated statement of cash flows for the year ended December 31, 2022 and the Consolidated statement of shareholders’ equity for the year ended December 31, 2022 (in thousands):
Cash - Legacy LiveWire Equityholder PIPE Investment 100,000
Cash - KYMCO PIPE Investment 100,000
Less: transaction costs and advisory fees incurred by H-D (20,132)
Net cash proceeds from Business Combination 293,717
Net equity infusion from Business Combination $ 280,297
(1) Proceeds from ABIC consisted of the $34,230 thousand of cash in the ABIC trust account and $240 thousand of cash in an ABIC operating bank account, less $20,621 thousand of ABIC transaction costs.
On September 26, 2022, prior to the consummation of the Business Combination, the Company consummated the Separation subject to the terms of the Separation Agreement. As a result, certain assets and liabilities were retained and settled by H-D and did not transfer to the Company. As of September 25, 2022, the value of assets and liabilities and related tax effects to be retained by H-D at Separation was $8,192 thousand and $13,375 thousand, respectively. Adjustments for transfers and separations are reflected in the Company's Consolidated financial statements for the year ended December 31, 2022 and were comprised of the retention of assets and liabilities by H-D including Accounts receivable, net of $339 thousand, Inventories, net of $7,576 thousand, Other current assets of $205 thousand, Deferred tax assets of $72 thousand, Accounts payable of $4,427 thousand, Accrued liabilities of $5,184 thousand, Deferred tax liabilities of $46 thousand, Long-term supplier liability of $3,435 thousand and Other long-term liabilities of $283 thousand. The net balance of separation-related adjustments of $5,183 thousand was transferred to Additional paid-in capital prior to the consummation of the Business Combination, as represented in the Consolidated statements of shareholders’ equity.
The most significant assets retained by the Parent included materials that relate to the manufacture of LiveWire One electric motorcycles. The most significant liabilities retained and settled by the Parent included employee liabilities related to service
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rendered prior to the closing of the business combination, accounts payable outstanding for amounts owed to suppliers to manufacture electric motorcycles, a supplier liability for an excess firm purchase commitment, and certain warranty liabilities associated with the Harley-Davidson branded LiveWire motorcycle (see disclosure in Note 12, Product Warranty and Recall Campaigns).
5. Income Taxes
Theincome tax (benefit) provision has been calculated using the separate return method, which is meant to reflect how taxes would have been recorded, had the Company filed its own tax return.
The income tax (benefit) provision for the years ended December 31, consists of the following (in thousands):
Current:
Current income tax provision $ 66 $ 160 $ 259
Deferred:
Foreign — (2) (70)
Deferred income tax (benefit) provision (99) (22) 98
Total income tax (benefit) provision $ (33) $ 138 $ 357
The components ofloss before income taxes for the years ended December 31, were as follows (in thousands):
The reconciliation of the (benefit) provision for income taxes at the U.S. federal statutory income tax rate of 21% to the Company’s income tax (benefit) provision for the years ended December 31, is shown below (in thousands):
Foreign rate differential 5 8 5
Nondeductible expenses 43 420 —
Unrecognized tax benefits including interest and penalties — 6 11
Change in value of warrants (1,144) — —
Income tax (benefit) provision $ (33) $ 138 $ 357
The Company generated operating losses in each of the years presented. The income tax benefit recognized related to these losses was zero for each of the years ended December 31, 2022, 2021, and 2020 due to the recognition of a valuation allowance. Operating results of the Company are included in the consolidated federal and combined state tax returns of H-D and the resulting tax attributes have been fully utilized by H-D and are no longer available to the Company for future use. Future income tax (benefits) provisions may be impacted by future changes in the realizability of the hypothetical net operating loss deferred tax assets. The difference between the benefit at the statutory rate and the income tax (benefit) provision related to these operating losses is reflected in the table above as unbenefited losses.
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After an assessment of the positive and negative evidence regarding the realizability of the separate state NOLs reflected in the financials, it was determined a valuation allowance was required. Additionally, it was necessary to assess the positive and negative evidence of the realizability of the U.S. federal and consolidated state net deferred tax asset balance for the periods ended December 31, 2022 and 2021. After such an assessment, it was determined a valuation allowance was required. The difference between the benefit at the statutory rate and the income tax (benefit) provision related to these valuation allowances is reflected in the table above as valuation allowance.
The principal components of the Company’s deferred income tax assets and liabilities as of December 31, include the following (in thousands):
Deferred tax assets:
Capitalized research & experimental expenditures $ 7,158 $ —
Accruals not yet tax deductible 615 2,379
Net operating loss and credit carryforwards — 1
Amortization, book in excess of tax 946 258
Deferred tax assets before valuation allowance 9,977 3,874
Less: Valuation allowance (8,312) (915)
Deferred tax liabilities:
Depreciation, tax in excess of book $ (620) $ (2,283)
Amortization, tax in excess of book (349) —
Total deferred liabilities (1,680) (3,073)
Net deferred tax liability $ (15) $ (114)
The net deferred tax liability balance decreased from December 31, 2021 to December 31, 2022 primarily due to an increase in the deferred tax asset balance related to capitalized research and experimental expenses, which will reverse in future periods against a significant portion of the deferred tax liabilities.
The tax operating loss and tax credit carryforwards, calculated on the separate return method for allocating tax expense, have been utilized by H-D in the consolidated tax return, and therefore are not available to the Company in future periods. Under the terms of the Company’s Tax Matters Agreement with H-D, LiveWire will receive no compensation from H-D for the use of such attributes. In addition, these tax loss and credit carryforwards would not have been realized on a separate return basis. As a result, consistent with prior periods, neither the deferred tax assets nor the full valuation allowances have been recorded for these hypothetical attributes. The realizability of the hypothetical attributes will continue to be monitored on a separate return basis. Any change to the realizability of these hypothetical attributes on a separate return basis will be booked as a deferred income tax benefit or expense with an offset to equity. For the period from the close of the Business Combination and effective date of the Tax Matters agreement, the tax net operating loss and tax credit carryforward, and offsetting full valuation allowance, was $3,764 thousand.
The Company recognizes interest and penalties related to unrecognized tax benefits in the income tax (benefit) provision. Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):
Unrecognized tax benefits, beginning of period $ — $ —
Unrecognized tax benefits, end of period $ 162 $ —
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There were no unrecognized tax benefits as of December 31, 2022 and 2021, respectively, that, if recognized, would affect the effective tax rate, due to the NOL and valuation allowance positions.
There were zero gross benefits related to interest and penalties associated with unrecognized tax benefits recognized in the Consolidated statements of operations and comprehensive loss during 2022, 2021, and 2020, respectively, due to the NOL and valuation allowance positions.
There were zero gross interest and penalties associated with unrecognized tax benefits recognized in the Consolidated balance sheets at December 31, 2022 and 2021, respectively, due to the NOL and valuation allowance positions.
The Company expects the total amount of unrecognized tax benefits, related to continuing operations during the fiscal year ending December 31, 2023, to reduce to zero. The current year reserve will reverse when the Company files a method change in 2023.
The Company did not make any income tax payments for the years ended December 31, 2022, 2021, and 2020.
6 . Earnings Per Share
The Company computes earnings per share (“EPS”) in accordance with ASC 260, Earnings per Share. Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding. Diluted EPS is computed using the weighted average number of shares of common stock, plus the effect of potentially dilutive securities. The Company applies the treasury method to calculate the dilution impact of share-based awards —restricted stock units, and performance share units. Because we have reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share as all of the potentially dilutive shares were antidilutive in those periods.
Computation of basic and diluted earnings per share for the years ended December 31, was as follows (in thousands, except per share amounts):
Effect of dilutive securities – Warrants — — —
Effect of dilutive securities – employee stock compensation plan — — —
Earnings per share:
Prior to the Business Combination date, LiveWire did not have any issued and outstanding common stock or any common share equivalents. Accordingly, for 2021 and 2020, the net loss per share was calculated based on the 161,000,000 shares of Common Stock distributed to H-D in exchange for the membership interests of Legacy LiveWire. At the time of the Business Combination, additional shares of Common Stock were issued, which are reflected in the weighted-average shares outstanding as of December 31, 2022.
Diluted net loss per share is computed by giving effect to all potential shares of common stock, to the extent dilutive, including unvested restricted stock units (“RSUs”), unvested performance share units (“PSUs”), and Warrants. Potential shares of common stock are excluded from the computation of diluted net loss per share if their effect would have been anti-dilutive for the periods presented or if the issuance of shares is contingent upon events that did not occur by the end of the period. For 2022, employee stock compensation plan awards representing 19 thousand underlying common shares were excluded from the computation of diluted net loss per share because the effect would have been anti-dilutive. For 2022, warrants representing 51,788 thousand underlying common shares were excluded from the computation of diluted net loss per share because the effect would have been antidilutive. There were no anti-dilutive employee stock compensation awards or warrants for 2021 and 2020. Additionally, the Company has not included the impact of the Earn-Out Shares, discussed in Note 1, Description of Business and Basis of Presentation, in the calculation EPS as the triggering events have not occurred.
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7. Additional Balance Sheet Information
Inventories, net consisted of the following as of December 31, (in thousands):
Raw materials and work in process $ 48 $ 5,233
Electric motorcycles and electric balance bikes 25,291 8,636
Parts and accessories and apparel 3,876 2,928
Inventory valuation reserves deducted from cost were $1,320 thousand and $7,021 thousand as of December 31, 2022 and 2021, respectively.
Other current assets primarily include prepaid expenses of $3,700 thousand as of December 31, 2022. As of December 31, 2021, Other current assets included $3,025 thousand of prepaid supplier deposits relating to future inventory purchases.
Property, plant and equipment, net consisted of the following as of December 31, (in thousands):
Property, plant and equipment, net $ 31,567 $ 17,894
Depreciation was $3,939 thousand, $4,256 thousand and $3,480 thousand for the years ending December 31, 2022, 2021 and 2020, respectively. Software, net of accumulated amortization, included in Property, plant and equipment, net, was $1,309 thousand and $2,242 thousand as of December 31, 2022 and 2021, respectively. The Company had $7,748 thousand related to purchases of property, plant and equipment included in Accrued liabilities as of December 31, 2022, and $3,651 thousand and $2,461 thousand related to purchases of property, plant and equipment included in Accounts payable as of December 31, 2021 and 2020, respectively.
Other long-term assets consisted primarily of capitalized implementation costs incurred in connection with cloud computing arrangements that do not include a license to internal-use software in accordance with Accounting Standards Update 2018-15.
Accrued liabilities consisted of the following as of December 31, (in thousands):
Payroll and employee benefits $ 4,641 $ 6,129
Sales incentives — 795
Accrued capital expenditures 7,748 —
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Prior to consummation of the Business Combination, the Company has a liability related to an excess firm purchase commitment to a supplier on a carve-out accounting basis. This liability remained with H-D as part of the Separation Agreement in connection with the Business Combination. The total obligation was $5,330 thousand as of December 31, 2021, all recorded as a non-current liability in Long-term supplier liability on the Consolidated balance sheets. The Company did not have any excess firm purchase commitment liabilities as of December 31, 2022.
8. Goodwill and Other Intangible Assets
Goodwill includes the cost of acquired businesses in excess of the fair value of the tangible and other intangible net assets acquired. The carrying amount of goodwill was $8,327 thousand as of both December 31, 2022 and 2021.
Intangible assets, net, excluding goodwill, consisted of trademarks, patents, distributor relationships, and non-compete agreements with estimated remaining useful lives ranging from 5 to 10 years. Intangible assets are amortized on a straight-line basis and the weighted-average amortization period for all amortizable intangibles on a combined basis is 8.5 years. The weighted average amortization period for trademarks, non-compete agreement, and other intangibles is 10 years, 5 years, and 5.5 years, respectively.
Intangible assets at December 31, were as follows (in thousands):
Amortization of intangible assets, net, excluding goodwill, recorded in Selling, administrative and engineering expenseon the Consolidated statements of operations and comprehensive loss was $462 thousand for 2022, 2021 and 2020, respectively. Future amortization of the Company's intangible assets as of December 31, 2022 is as follows (in thousands):
The Company assesses for impairment of intangible assets with definite lives only if events occur that indicate that the carrying amount of an intangible asset may not be recoverable. The Company assesses goodwill for impairment annually, or more frequently if events occur that indicate an asset may be impaired.
For goodwill, the reporting units used in assessing impairment is the same as the Company’s two operating segments and reportable segments as described in Note 17, Reportable Segments and Geographic Information. Our assessment for impairment of goodwill utilized a discounted cash flow analysis and a guideline public company market approach to determine the fair value of the reporting unit for comparison to the corresponding carrying value, and a reconciliation of the Company’s concluded values for each reporting unit to the Company’s market capitalization. Based upon the Company’s fiscal year 2022 annual goodwill impairment analysis, the Company concluded that it is more likely than not that the fair value of goodwill exceeded its carrying value and there were no impairments to goodwill for any periods presented.
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9. Leases
The Company determines if an arrangement is or contains a lease at contract inception.
Right of Use (“ROU”) assets represent the Company’s right to use an underlying asset over the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. The ROU asset also includes prepaid lease payments and initial direct costs and is reduced for lease incentives paid by the lessor. The discount rate used to determine the present value is generally H-D’s incremental borrowing rate, as allowed under GAAP for subsidiaries, because the implicit rate in the lease is not readily determinable. The lease term used to calculate the ROU asset and lease liabilities includes periods covered by options to extend or terminate when the Company is reasonably certain the lease term will include these optional periods.
In accordance with ASC Topic 842, Leases, (“ASC 842”) the Company elected the short-term lease practical expedient that allows entities to recognize lease payments on a straight-line basis over the lease term for leases with a term of 12 months or less. The Company has also elected the practical expedient under ASC 842 allowing entities to not separate non-lease components from lease components, but instead account for such components as a single lease component for all leases except leases involving assets used in manufacturing and distribution processes.
The Company has operating lease arrangements for real estate. The Company’s leases have a remaining lease term of 1 to 5 years. The Company’s leases do not contain any material residual value guarantees or material restrictive covenants.
Balance sheet information related to the Company's leases at December 31, was as follows (in thousands):
Assets:
Liabilities:
Current portion of lease liabilities $ 1,312 $ 1,146
Long-term portion of lease liabilities 1,913 2,423
The following table presents the components of lease costs as of December 31, (in thousands):
Future maturities of the Company's operating lease liabilities as of December 31, 2022 were as follows (in thousands):
Future lease payments:
Thereafter —
Present value discount (128)
Lease liabilities $ 3,225
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Other lease information surrounding the Company's operating leases as of December 31, was as follows (dollars in thousands):
ROU assets obtained in exchange for lease obligations $ 910 $ 3,940 $ —
Lease modifications $ — $ — $ (83)
Weighted-average remaining lease term (in years) 2.80 3.26 0.74
Weighted-average discount rate 2.35 % 1.29 % 3.66 %
10. Warrant Liabilities
Upon consummation of the Business Combination (see Note 4, Business Combination), the Company assumed 30,499,990 Warrants to purchase LiveWire's Common Stock, comprised of 19,999,990 public warrants, originally issued by ABIC as part of ABIC’s IPO of units (the “Public Warrants”) and 10,500,000 of outstanding warrants originally issued in a private placement in connection with the IPO of ABIC (the “Private Placement Warrants”). The Warrants expire five years from the completion of the Business Combination. At December 31, 2022, there were 19,999,990 Public Warrants and 10,500,000 Private Warrants outstanding.
Each Warrant entitles the registered holder to purchase one share of Common Stock at a price of $11.50 per share. A Warrant holder may exercise its Warrants only for a whole number of shares of Common Stock. This means only a whole Warrant may be exercised at a given time by a Warrant holder. No fractional Warrants were issued upon separation of the units and only whole warrants trade. The Company will receive the proceeds from the exercise of any warrants in cash. The Warrants will expire five years after the completion of the Business Combination, or earlier upon redemption or liquidation.
Public Warrants
Redemption of warrants when the price per Common Stock share equals or exceeds $18.00: The Company may redeem the outstanding warrants (except as described with respect to the Private Placement Warrants):
•in whole and not in part;
•at a price of $0.01 per warrant;
•upon not less than 30 days’ prior written notice of redemption; and
•if, and only if, the reported last sales price of the Company’s Common Stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders.
Redemption of warrants when the price per Common Stock share equals or exceeds $10.00: Once the warrants become exercisable, the Company may redeem the outstanding warrants:
•in whole and not in part;
•at a price equal to a number of the Company's Common Stock to be determined, based on the redemption date and the fair market value of the Company’s Common Stock;
•upon a minimum of 30 days’ prior written notice of redemption;
•if, and only if, the last reported sale price of the Company’s Common Stock equals or exceeds $10.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) on the trading day prior to the date on which the Company sends the notice of redemption to the warrant holders; and
•if, and only if, the Private Placement Warrants are also concurrently exchanged at the same price (equal to a number of Class A ordinary shares) as the outstanding Public Warrants
•can be exercised on a cashless basis
Private Placement Warrants
The Private Placement Warrants have terms and provisions that are similar to those of the Public Warrants, including as to the exercise price, exercisability and exercise period. The Private Placement Warrants will not be redeemable by the Company so long as they are held by the initial purchasers of the Private Placement Warrants or its permitted transferees and the reference value exceeds $18.00 per share. The initial Private Placement Warrant purchasers, or its permitted transferees, has the option to exercise the Private Placement Warrants on a cashless basis if the reference value is between $10.00 and $18.00. If the Private
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Placement Warrants are held by holders other than the Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by the Company in all redemption scenarios and exercisable by the holders on the same basis as the Public Warrants.
There were no exercises or redemptions of the Public or Private Warrants during the year ended December 31, 2022.
The Company recognized income of $5,033 thousand as a change in fair value of warrant liabilities in the Consolidated statements of operations and comprehensive loss for year ended December 31, 2022. The Company determined the Public Warrants and Private Placement Warrants do not meet the criteria to be classified in stockholders’ equity and the fair value of the warrants should be classified as a liability. At December 31, 2022, the Company’s Warrant liability was $8,388 thousand.
11. Fair Value
The Company assesses the inputs used to measure fair value using a three-tier hierarchy.
•Level 1 inputs include quoted prices for identical instruments and are the most observable.
•Level 2 inputs include quoted prices for similar assets and observable inputs.
•Level 3 inputs are not observable in the market and include the Company’s judgments about the assumptions market participants would use in pricing the asset or liability.
The Company’s assets and liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, were as follows as of December 31, (in thousands):
Level 1 Level 2 Level 3 Total
Assets:
Liabilities:
Private Placement Warrants — 2,888 — 2,888
Share-based awards settled in cash 1,618 — — 1,618
Level 1 Level 2 Level 3 Total
Liabilities:
Contingent consideration liability $ — $ — $ 2,180 $ 2,180
There were no significant assets or liabilities on the Company’s Consolidated balance sheets measured at fair value on a nonrecurring basis.
Recurring Fair Value Measurements
Money Market Funds
Money market funds include highly liquid investments with an original maturity of three or fewer months, and are presented within Cash and cash equivalents in the Consolidated balance sheets. They are valued using quoted market prices in active markets and are classified under Level 1 within the fair value hierarchy.
Warrant Liabilities
The Warrants were accounted for as liabilities in accordance with ASC 815 and are presented within Warrant liabilities in the accompanying Consolidated balance sheets. The Warrant liabilities are measured at fair value at inception and on a recurring
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basis, with changes in fair value presented within Change in fair value of warrant liabilities in the Consolidated statements of operations and comprehensive loss.
The Public Warrants are publicly traded under the symbol “LVWR WS”, and the fair value of the Public Warrants at a specific date is determined by the closing price of the Public Warrants as of that date. As such, the Public Warrants are classified within Level 1 of the fair value hierarchy. The fair value of the Private Placement Warrants was determined using the closing price of the Public Warrants as the Private Placement Warrants have terms and provisions that are economically similar to those of the Public Warrants. The Private Placement Warrants are classified as Level 2 of the fair value hierarchy due to the use of an observable market quote for a similar asset in an active market.
Share-based awards settled in cash
Share-based awards settled in cash represent grants of share-based awards that will be settled with employees in cash, and are presented within Accrued liabilities and Other long-term liabilities in the Consolidated balance sheets. They are valued using the market price of the Company’s stock and are remeasured at each balance sheet date, and are classified under Level 1 under the fair value hierarchy.
Contingent Consideration Liability
In connection with H-D’s 2019 acquisition of STACYC, Inc., the Company had a contingent consideration obligation related to an aggregate earnout payment. The aggregate earnout payment had a potential payout ranging from $0 to $6,540 thousand based on the achievement of sales volume targets during the twelve-month performance periods beginning in June 2019, 2020, and 2021, respectively. The Company recorded a liability of $4,978 thousand at the acquisition-date for the fair value based on the likelihood of contingent earn-out payments as part of the total consideration.
The contingent consideration liability related to the STACYC acquisition was considered a Level 3 liability. As of December 31, 2020, the fair value was estimated using a Monte Carlo simulation with significant unobservable inputs, including the discount rate, revenue volatility and risk premium. In both 2021 and 2020, the Company made payments of $2,180 thousand during each period based on the full achievement of performance targets for the first two annual performance periods. As of December 31, 2021, the Company determined the maximum remaining payout of $2,180 thousand approximated fair value. The final payment in 2022 of $2,180 thousand settled the Company’s contingent consideration obligation related to acquisition of STACYC.
The following table presents the changes in the contingent consideration liability during the years ended December 31, 2022, 2021 (in thousands):
Remeasurement of contingent consideration liability 49
Remeasurement of contingent consideration liability —
Balance as of December 31, 2022 $ —
The change in fair value recognized in net loss is recorded in Selling, administrative and engineering expense in the Consolidated statements of operations and comprehensive loss. During 2021 and 2020, the Company remeasured the contingent consideration liability and recorded an increase of $49 thousand and $788 thousand, respectively, due to an increased likelihood of the actual achievement for milestones being reached.
Other Fair Value Measurements
The fair value of financial instruments classified as Cash and cash equivalents, Accounts receivable, net, and Accounts payable on the Consolidated balance sheets approximate carrying value due to the short-term nature and the relative liquidity of the instruments.
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12. Product Warranty and Recall Campaigns
The Company provides a limited warranty on new electric motorcycles for a period of two years, except for the battery which is covered for five years. The Company also provides limited warranties on parts and accessories and electric balance bikes. The warranty coverage for the retail customer generally begins when the product is sold to the retail customer. The Company accrues for future warranty claims at the time of sale using an estimated cost based primarily on historical Company claim information. In the case of both warranty and recall costs, as actual experience becomes available it is used to update the accruals.
Additionally, the Company may from time-to-time initiate certain voluntary recall campaigns. The Company records estimated recall costs when the liability is both probable and estimable. This generally occurs when the Company’s management approves and commits to a recall. The warranty and recall liability are included in Accrued liabilities and Other long-term liabilitieson the Consolidated balance sheets.
Changes in the Company’s warranty and recall liability were as follows as of December 31, (in thousands):
Balance, beginning of period $ 1,095 $ 778
Warranties issued during the period 714 575
Settlements made during the period (616) (933)
Currency Translation Adjustments (76) (1)
Recalls and changes to pre-existing warranty liabilities 236 676
Transaction related adjustment (1) (787) —
Balance, end of period $ 566 $ 1,095
(1) In connection with the Separation and Business Combination, $787 thousand of warranties and recall liabilities were retained by H-D related to pre-transaction claims for certain H-D branded electric motorcycles.
The liability for recall campaigns was $269 thousand at December 31, 2021. There was no liability for recall campaigns as of December 31, 2022, as the liability related to pre-transaction recall campaigns related to certain H-D branded electric motorcycles and was retained by H-D.
13. Employee Benefit Plans and Other Postretirement Benefits
Defined Benefit Plans and Other Postretirement Benefit Plans
H-D sponsors a qualified pension plan and a postretirement healthcare plan which cover certain eligible Company employees and retirees. These defined benefit plans include both Company eligible employees and other employees of H-D (“Shared” plans) and are accounted for as multiemployer benefit plans and the related net benefit plan assets and obligations are not included in the Company’s Consolidated balance sheets. Prior to the Separation and Business Combination, a portion of the related net periodic benefit plan cost has been allocated to the Company based on an estimated cost per plan participant and allocations of corporate and other shared functional personnel. The Company recorded expense of $45 thousand, income of $11 thousand, and expense of $123 thousand for the years ended December 31, 2022, 2021 and 2020, respectively, for the Company’s allocation of net periodic pension and healthcare plan costs related to the Company’s employees. In 2021, the allocation of net periodic pension costs includes a curtailment gain recorded in connection with H-D’s decision to cease benefit accruals for salaried employees after December 31, 2022. The Company is not required to make any contributions to the plans sponsored by H-D. Subsequent to the Business Combination, the Company does not have any expense allocation related to H-D’s qualified pension plan and a postretirement healthcare plan.
Defined Contribution Plans
On March 1, 2022, the Company established a LiveWire 401(k) plan for the benefit of the Company's employees. In connection with the establishment of the LiveWire 401(k) plan, H-D made all employer contributions to its 401(k) plan on behalf of the Company's employees, prorated for the portion of the plan year ending March 1, 2022. Upon establishment of the LiveWire 401(k) plan, each of the Company's employees then-participating in H-D's 401(k) plan became fully vested in his or her account balance under H-D's 401(k) plan and their account balances under H-D's 401(k) plan were transferred to the LiveWire 401(k) plan.
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The Company expensed $2,143 thousand, $903 thousand and $674 thousand for the years ended December 31, 2022, 2021 and 2020, respectively, related to defined contribution benefits plans contributions.
14. Commitments and Contingencies
Contingencies – The Company is subject to claims related to product and other commercial matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The Company accrues for matters when losses are both probable and estimable. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter. Refer to Note 7, Additional Balance Sheet Information, for a discussion of a supplier liability and Note 12, Product Warranty and Recall Campaigns, for a discussion of warranty and recall liabilities. The Company had no product liability claims as of December 31, 2022, 2021 and 2020.
Litigation and Other Claims – The Company from time to time may be subject to lawsuits and other claims related to product, commercial, employee, environmental and other matters in the normal course of business. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The Company accrues for matters when losses are both probable and estimable. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter. The Company, through H-D, also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and there are no material exposures to loss in excess of amounts accrued and insured for losses related to these matters.
15. Share-Based Awards
LiveWire Share-Based Awards
Our long-term incentive plans provide for the grant of various forms of share-based awards to our directors, officers and other eligible employees under which our Board of Directors may grant to employees share-based awards including restricted stock units and performance share units. A maximum of 29,293,509 shares were authorized for awards under the long-term incentive plans.
The Company recognizes the cost of its share-based awards in the Consolidated statements of operations and comprehensive loss. The cost of each share-based equity award is based on the grant date fair value and the cost of each share-based cash-settled award is based on the settlement date fair value. Share-based award expense is recognized on a straight-line basis over the service or performance periods of each separately vesting tranche within the awards. Forfeitures are recognized as incurred. The expense recognized reflects the number of awards that are ultimately expected to vest based on the service and, if applicable, performance requirements of each award. Total compensation expense related to LiveWire share-based awards was $579 thousand for the year ended December 31, 2022 and zero for both the years ended December 31, 2021 and 2020.
See separate discussion below related to historical H-D Share-Based Awards for description of awards and related expense.
Restricted Stock Units - Settled in Stock and Cash
Certain directors, executive officers and other eligible employees have been granted time-based restricted stock units (the “Time-Based RSUs”) and performance-based restricted stock units (the “Performance RSUs,” collectively with the Time-Based RSUs, the “RSUs”). The Time-Based RSUs generally vest ratably over a three-year period, starting on the anniversary date of the grant. Time-Based RSUs for directors vest over a one-year period.
The Company recognized $416 thousand for the year ended December 31, 2022 in share-based compensation expense related to the Time-Based RSUs. There were no Time-Based RSUs outstanding prior to fiscal year 2022 and therefore no share-based compensation expense was recorded in 2021 and 2020 related to the Time-Based RSUs.
During the year ended December 31, 2022, the Company granted Performance RSUs to certain executive officers and other eligible employees. These Performance RSUs awards vest at the end of a three-year performance period contingent on our achievement of certain total shareholder return performance (“TSR”) targets during the performance period. The grant date fair value of the Performance RSUs was estimated using a Monte-Carlo simulation. The Company recognized $163 thousand of share-based compensation expense for the year ended December 31, 2022 for the Performance RSUs. There were no Performance RSUs outstanding prior to fiscal year 2022 and therefore no share-based compensation expense was recorded in 2021 and 2020 related to the Performance RSUs.
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Restricted Stock Units - Settled in Stock – The fair value of the Time-Based RSUs settled in stock is determined based on the market price of the Company’s stock on the grant date. The Performance RSUs settled in stock granted in 2022 contain TSR market conditions. The Company estimated the fair value of the TSR component using a Monte Carlo simulation. Expected volatility is calculated using the historical volatility of public companies similar to LiveWire Group, Inc. The risk-free rate for periods within the contractual life of the grant is based on the U.S. Treasury rates at the time of grant.
Assumptions used to calculate the grant date fair value of the performance shares granted during 2022 were as follows:
Expected volatility 76.76 %
Risk-free interest rate 3.89 %
The activity for these awards for the year ended December 31, 2022 was as follows (in thousands, expect for per share amounts):
Nonvested, beginning of period — — — $ —
Vested — — — $ —
Forfeited — — — $ —
As of December 31, 2022, there was $17,810 thousand of unrecognized compensation cost related to RSUs settled in stock that is expected to be recognized over a weighted-average period of 2.83 years.
Restricted Stock Units - Settled in Cash – Time-Based RSUs and Performance RSUs settled in cash are recorded in the Consolidated balance sheets as a liability until vested. The fair value is determined based on the market price of the Company’s stock and is remeasured at each balance sheet date.
The activity for these awards for the year ended December 31, 2022 was as follows (in thousands, except for per share amounts):
Nonvested, beginning of period — — — $ —
Vested — — — $ —
Forfeited — — — $ —
As of December 31, 2022, there was $521 thousand of unrecognized compensation cost related to RSUs settled in cash that is expected to be recognized over a weighted-average period of 2.92 years.
Historical H-D Share-Based Awards
Prior to consummation of the Business Combination, certain employees of the Company participated in H-D’s share-based compensation plan under which H-D’s Board of Directors may grant to employees share-based awards, including RSUs and performance shares. Prior to consummation of the Business Combination, as employees transferred from H-D to the Company, any outstanding share-based awards previously granted have been retained by the employees and have been transferred to the Company. All awards granted under the plans are based on H-D’s common shares and, as such, were reflected in the Consolidated balance sheets as Net Parent company investment and Accrued liabilities for equity-classified awards and liability-classified awards, respectively. Share-based compensation included in the Consolidated statements of operations and comprehensive loss includes expense attributable to the Company based on the awards and terms previously granted to the Company’s employees. Total share-based award compensation expense recognized by the Company for the years ended
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December 31, 2022, 2021 and 2020 was $1,694 thousand, $786 thousand and $188 thousand, respectively. The cost of each equity-classified award is based on the fair value as of the grant date. The cost of each liability-classified award is based on the fair value at the grant date, subsequently remeasured at each reporting date until the date of settlement. Share-based award expense is recognized on a straight-line basis over the service periods. The expense recognized reflects the number of awards that are ultimately expected to vest based on service.
During 2022, the Company elected to cancel and convert outstanding RSUs held by 91 of the Company's employees into the right to receive cash payments (each, an “RSU Payment”) on the date which the RSU award would otherwise become vested in accordance with the vesting schedule applied to such award immediately prior to cancellation of the award. The cancellation of the equity-classified awards resulted in a reduction to Net Parent company investment and share-based expense of $171 thousand. The conversion to RSU Payments, which are liability-classified awards, resulted in an increase to Accrued liabilities and shared-based award expense of $474 thousand. The incremental compensation cost resulting from the modification of the RSUs was immaterial. As of December 31, 2022, the accrued liability for the cash awards was $1,603 thousand.
Each RSU Payment is a liability-classified award, which will (i) be in amount equal to (x) the number of shares of H-D's common stock subject to such RSU award that would have otherwise become vested on the applicable RSU vesting date in accordance with the applicable RSU vesting schedule, multiplied by (y) the closing trading price of a share of H-D's common stock on such RSU vesting date and (ii) be paid to the applicable employee of the Company on or within 30 days following the applicable RSU vesting date, subject to and conditioned upon such employee's continued employment or service as applicable, to the Company through the applicable vesting date.
The activity for these awards for the year ended December 31, 2022 was as follows (in thousands, except for per share amounts):
Shares & Units Weighted-Average Fair Value Per Share
Nonvested, beginning of period — $ —
Awards transferred to cash payment 76 $ 33
Nonvested, end of period 73 $ 38
As of December 31, 2022, there was $1,941 thousand of unrecognized compensation cost related to liability-classified awards, net of estimated forfeitures, that is expected to be recognized over a weighted-average period of 1.14 years.
The total income tax benefit associated with share-based compensation recorded in the Company's Consolidated statements of operations and comprehensive loss was $670 thousand for the year ended December 31, 2022 and zero for both the years ended December 31, 2021 and 2020.
16. Related Party Transactions
In connection with the Business Combination, we entered into a number of agreements with H-D to govern the Separation and provide a framework for the relationship between the parties going forward pursuant to which we and/or H-D have continuing obligations to each other. All transactions with H-D subsequent to the Business Combination are considered related party transactions. Agreements that the Company entered into in connection with the Separation include:
Transition Services Agreement
On September 26, 2022, we entered into a Transition Services Agreement with H-D (the “Transition Services Agreement”) pursuant to which H-D provides to us various services and support on a transitional basis to allow LiveWire to develop the capability to support ourselves or to engage a third-party provider to provide those services and support.
The charges for the services are on a cost-plus basis (with a mark-up to reflect the management and administrative cost of providing the services). The services generally commenced on the date of the Separation and are intended to terminate between six and twelve months of the date of the Separation. We generally have the ability to (i) extend the term that a service is provided for by up to six months, subject to a maximum aggregate service term of 18 months; and (ii) terminate any or all
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services early subject to a 45-day notice period. H-D has the right to terminate the Transition Services Agreement for our non-payment of charges.