Item 7. Management’s Discussion and Analysis
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
2022 2021
Wholesale motorcycle unit sales:
US 394 119
International (1)
50 313
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:
US 459 566
International 228 396
Total Retail motorcycle unit sales 687 962
Electric balance bike unit sales:
US 29,281 37,878
International 18,810 10,405
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
December 31, 2022 December 31, 2021
Electric Motorcycles
Company-owned dealer 1 1
Independent retail partners:
U.S. 75 44
International — —
Total Electric Motorcycles Independent Retail Partners 75 44
Total Electric Motorcycles Retail Partners 76 45
STACYC
Independent retail partners:
U.S. 1,979 1,851
International 127 127
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,
2022 2021 $ Change % Change
Operating loss from Electric Motorcycles $ (89,105) $ (70,297) $ (18,808) 26.8 %
Operating income from STACYC 4,150 2,115 2,035 96.2 %
Total operating loss (84,955) (68,182) (16,773) 24.6 %
Other income, net 235 302 (67) (22.2) %
Interest expense related party (475) (293) (182) 62.1 %
Interest income 1,191 19 1,172 nm
Change in fair value of warrant liabilities 5,033 — 5,033 nm
Loss before income taxes (78,971) (68,154) (10,817) 15.9 %
Income tax (benefit) provision (33) 138 (171) (123.9) %
Net loss (78,938) (68,292) $ (10,646) 15.6 %
Other comprehensive loss:
Foreign currency translation adjustments (145) (85) (60) 70.6 %
Comprehensive loss $ (79,083) $ (68,377) $ (10,706) 15.7 %
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):
2022 2021 $ Change % Change
Revenue:
Electric motorcycles $ 13,171 $ 8,706 $ 4,465 51.3 %
Parts, accessories and apparel 828 999 (171) (17.1) %
Revenue, net 13,999 9,705 4,294 44.2 %
Cost of goods sold 23,268 22,006 1,262 5.7 %
Gross profit (9,269) (12,301) 3,032 (24.6) %
Operating expenses:
Selling, administrative and engineering expense 79,836 57,996 21,840 37.7 %
Operating loss $ (89,105) $ (70,297) $ (18,808) 26.8 %
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):
2022 2021 Increase
(Decrease) %
Change
Revenue:
Electric balance bikes $ 29,669 $ 23,130 $ 6,539 28.3 %
Parts, accessories and apparel 3,165 2,971 194 6.5 %
Revenue, net 32,834 26,101 6,733 25.8 %
Cost of goods sold 20,661 16,374 4,287 26.2 %
Gross profit 12,173 9,727 2,446 25.1 %
Operating expenses:
Selling, administrative and engineering expense 8,023 7,612 411 5.4 %
Operating income $ 4,150 $ 2,115 $ 2,035 96.2 %
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):
2022 2021
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.