UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
OR
For the fiscal year ended December 31 , 2023
OR
OR
Commission file number 001-40649
(Exact name of registrant as specified in its charter)
Not Applicable (Translation of Registrant’s name into English) | (Jurisdiction of incorporation or organization) | |||||||
(Address of principal executive offices)
REE Automotive Ltd.
Tel: +972 (77) 899-5200
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2023, the registrant had 8,452,260 Class A Ordinary Shares, without par value, outstanding and 2,780,570 Class B Ordinary Shares, without par value, outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | x | Non-accelerated filer | o | |||||||||||||
| Emerging growth company | |||||||||||||||||
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on an attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15U.S.C. 7762(b)) by the registered public accounting firm that prepared or issued its audit report. o
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
x | International Financial Reporting Standards | o | Other | o | |||||||||||||
| issued by the International Accounting Standards Board | |||||||||||||||||
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
TABLE OF CONTENTS
| Page | ||||||||
Insider Trading Policy | ||||||||
INTRODUCTION
In this annual report on Form 20-F for the year ended December 31, 2023, or this Annual Report, the terms “REE,” “we,” “us,” “our” and “the company” refer to REE Automotive Ltd. and its subsidiaries.
We define certain terms used in this Annual Report as follows:
“10X Capital” means 10X Capital Venture Acquisition Corp.
“Class A Ordinary Shares” means the Class A ordinary shares, without par value, of REE, having one vote per share.
“Class B Ordinary Shares” means the Class B ordinary shares, without par value, of REE, having 10 votes per share.
“Code” means the Internal Revenue Code of 1986, as amended.
4
"Companies Law” means Israeli Companies Law, 5759-1999, as amended.
“Effective Time” means the effective time of the Merger pursuant to the Merger Agreement.
“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.
“Founders” means Daniel Barel and Ahishay Sardes, the founders of REE.
“Israeli Securities Law” means the Israeli Securities Law, 5728-1968, as amended.
“MaaS” means Mobility-as-a-Service.
“Merger” means the merger of Merger Sub with and into 10X Capital, with 10X Capital surviving the merger and becoming a wholly-owned subsidiary of REE, along with the other transactions contemplated by the Merger Agreement.
“Merger Agreement” means the Agreement and Plan of Merger, dated as of February 3, 2021, by and among 10X Capital, REE and Merger Sub, as such agreement may be amended or otherwise modified from time to time in accordance with its terms.
“Merger Sub” means Spark Merger Sub Inc.
“Nasdaq” means the Nasdaq Stock Market.
“NIS” means New Israeli Shekels.
“Ordinary Shares” means the Class A Ordinary Shares together with the Class B Ordinary Shares.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the U.S. Securities Act of 1933, as amended.
“UK” means the United Kingdom.
“U.S.” means the United States of America.
“U.S. dollar,” “USD,” “US$” and “$” mean the legal currency of the United States.
“U.S. GAAP” means generally accepted accounting principles in the United States.
“Warrant” means a warrant of REE that entitles the holder thereof to purchase one Class A Ordinary Share originally for $11.50 per share.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report and the documents incorporated by reference herein include certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Forward-looking statements include, but are not limited to, statements regarding REE or its management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “appear,” “approximate,” “believe,” “continue,” “could,” “expect,” “foresee,” “intends,” “may,” “will,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “estimate”, “seek,” “should,” “would,” “target” and similar expressions (or the negative version of such words or expressions) may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. All statements, other than statements of historical facts, may be forward-looking statements. Forward-looking statements in this Annual Report may include, among other things, statements about REE’s strategic and business plans, technology, relationships, objectives and
5
expectations for REE’s business, the impact of trends on and interest in our business, intellectual property or product and its future results, operations and financial performance and condition.
These forward-looking statements are based on information available as of the date of this Annual Report and current expectations, forecasts and assumptions. Although REE believes that the expectations reflected in forward-looking statements are reasonable, such statements involve an unknown number of risks, uncertainties, judgments and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. These factors are difficult to predict accurately and may be beyond REE’s control. Forward-looking statements in this Annual Report speak only as of the date made and REE undertakes no obligation to update its forward-looking statements, whether as a result of new information, future developments or otherwise, should circumstances change, except as otherwise required by securities and other applicable laws. In light of these risks and uncertainties, investors should keep in mind that results, events or developments discussed in any forward-looking statement made in this communication may not occur.
Some factors that could cause actual results to differ include:
•REE’s ability to raise sufficient capital to finance its future tooling projects and production plan;
•REE’s ability to commercialize its strategic plan;
•REE’s ability to maintain and advance relationships with current Tier 1 suppliers and strategic partners;
•development of REE’s advanced prototypes into marketable products;
•REE’s ability to grow and scale manufacturing capacity through relationships with Tier 1 suppliers;
•REE’s estimates of unit sales, expenses and profitability and underlying assumptions;
•REE’s reliance on its UK Engineering Center of Excellence, or the UK Engineering Center, for the design, validation, verification, testing and homologation of its products;
•REE’s limited operating history;
•risks associated with building out of REE’s supply chain;
•risks associated with plans for REE’s initial commercial production;
•REE’s dependence on suppliers, some of which are or will be single or limited source;
•development of the market for commercial electric vehicles, or EVs;
•risks associated with data security breach, failure of information security systems and privacy concerns;
•future sales of our securities by existing material shareholders or by us could cause the market price for the Class A Ordinary Shares to decline;
•potential disruption of shipping routes due to accidents, political events, international hostilities and instability, piracy or acts by terrorists;
•intense competition in the e-mobility space, including with competitors who have significantly more resources;
•risks related to the fact that REE is incorporated in Israel and governed by Israeli law;
•REE’s ability to make continued investments in its platform;
•the global economic environment;
•general market, political and economic conditions in the countries in which we operate, including those related to recent unrest and actual or potential armed conflict in Israel and other parts of the Middle East, such as the recent attack by Hamas and other terrorist organizations from the Gaza Strip and Israel’s war against them;
•fluctuations in interest rates and foreign exchange rates;
6
•the need to attract, train and retain a highly-skilled technical workforce;
•changes in laws and regulations that impact REE;
•REE’s ability to enforce, protect and maintain intellectual property rights and to defend itself from claims that it infringed on third party intellectual property rights;
•REE’s ability to retain engineers and other highly qualified employees to further its goals; and
•other risks and uncertainties set forth in the section “Item 3.D. Risk Factors” in this Annual Report.
MARKET AND INDUSTRY DATA
This Annual Report includes market and industry data and forecasts that we have derived from publicly available information, various industry publications, other published industry sources and internal data and estimates. Industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable. Internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Any estimates underlying such market-derived information and other factors could cause actual results to differ materially from those expressed in the independent parties’ estimates and in our estimates.
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
This Annual Report contains references to trademarks, trade names and service marks belonging to other entities. Solely for convenience, trademarks, trade names and service marks referred to in this Annual Report may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that the applicable licensor will not assert, to the fullest extent under applicable law, its rights to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
7
Part I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. [Reserved]
B. Capitalization and indebtedness.
Not applicable.
C. Reasons for the offer and use of proceeds.
Not applicable.
D. Risk factors
You should carefully consider the risks described below, together with all of the other information in this Annual Report on Form 20-F. The risks and uncertainties described below are those significant risk factors, currently known and specific to us, that we believe are relevant to an investment in our securities. Additional risks and uncertainties not currently known to us or that we now deem immaterial may also harm us. If any of these risks materialize, our business, results of operations or financial condition could suffer, and the price of our Ordinary Shares could decline substantially.
Summary Risk Factors
Investing in our Class A Ordinary Shares involves a high degree of risk, as fully described below. The principal factors and uncertainties that make investing in our Ordinary Shares risky, include, among others:
•REE’s limited operating history may make evaluation of its business and future prospects difficult, increasing the risk of investment in REE.
•Projecting REE’s operational or financial performance relies in large part upon assumptions and analyses that are inherently uncertain and subject to risk, and that if proven incorrect could result in significantly lower actual results.
•REE may not succeed in controlling the costs associated with its operations.
•If the market for commercial EVs does not develop as REE expects or develops slower than REE expects, its business prospects, financial condition, and operating results may be adversely affected.
•Adverse conditions in the automotive industry could have adverse effects on REE’s results of operations.
•REE’s business model has not been proven, and any failure to obtain significant orders for its products would have an adverse effect on its operating results, business, or reputation, resulting in substantial liabilities that may exceed its resources.
•REE’s marketing and sales model may fail to achieve market success or acceptance, which may cause REE not to achieve profitability.
8
•REE’s agreements with potential customers, suppliers, dealers and strategic partners are preliminary in nature.
•REE’s ability to make additional sales following sales of demo vehicles to customers depends in part on REE’s ability to prove that REE’s products are to the full satisfaction of such customers and to establish and maintain confidence in REE’s business prospects among such customers and others within its industry.
•REE may not succeed in establishing, maintaining and strengthening the “Powered by REETM” brand.
•REE is subject to risks associated with strategic alliances.
•REE operates in a highly competitive market and may not be able to compete successfully in the market as a result of rapid changes in EV technology and the entrance of new and existing, larger manufacturers into the EV space.
•REE is subject to risks associated with the anticipated timing of REE’s initial commercial production and subsequent increased commercial production.
•REE’s development of an outsourced manufacturing business model may not be successful.
•REE is reliant on its UK Engineering Center and REE’s Integration Center at Coventry, UK for the design, validation, verification, testing and homologation of its products.
•REE will depend on its suppliers, and the inability of such suppliers to deliver the components of REE’s products in a timely manner or at all and at prices and volumes acceptable to it could have a material adverse effect on its business, prospects and operating results.
•REE’s business could be harmed by increases in costs, disruption of supply or shortage of materials, in particular for lithium-ion battery cells.
•REE’s production targets are subject to a variety of risks, including the completion of REE’s production tooling investment plan, sourcing materials and components from its suppliers on its agreed upon deadlines and securing sufficient funding.
•REE targets customers, some which are large corporations with substantial negotiating power, exacting product, quality and warranty standards and potentially competitive internal solutions.
•Discontinuation, lack of commercial success, or loss of business with respect to a particular product model for which REE is a significant supplier could reduce REE’s sales and adversely affect its profitability.
•Pricing pressures, automotive OEM cost reduction initiatives and the ability of automotive OEMs to re-source or cancel vehicle or technology programs may result in lower than anticipated margins, or losses, which may adversely affect REE’s business.
•REE may become subject to product liability claims.
•REE does not currently have extensive experience servicing its products.
•REE may be subject to risks associated with autonomous driving and EV technology.
•REE is dependent on its founders Daniel Barel and Ahishay Sardes.
9
•REE’s success depends, in part, on its ability to attract and recruit key employees and hire qualified employees and management.
•Financial results may vary significantly from period to period due to fluctuations in REE’s operating costs and other factors, which may or may not be foreseeable.
•REE will need to improve its operational and financial systems to support its expected growth.
•REE expects that it will need to raise additional funds.
•REE may not be able to continue as a going concern based on REE’s business plan to start mass production in late 2024 and early 2025 if REE is unable to obtain sufficient additional funding or does not have access to capital to finance its current business plan, and REE may be forced to change its business plan as a result.
•REE’s financial and operational projections rely in part on existing and future regulations and incentive programs supporting EV adoption.
•REE may encounter obstacles outside of its control that slow the adoption of EVs in the market, including but not limited to regulatory requirements or infrastructure limitations.
•REE is subject to various environmental laws and regulations that could impose substantial costs on its business and cause delays in building its manufacturing facilities.
•REE may become involved in legal and regulatory proceedings and commercial or contractual disputes.
•REE’s management has limited experience operating a public company, and thus its success in such endeavors cannot be guaranteed.
•If REE is unable for any reason to meet the continued listing requirements of Nasdaq, such action or inaction could result in a delisting of the Class A Ordinary Shares.
•REE is subject to cybersecurity risks to its various systems and software, and any material failure, weakness, interruption, cyber event, incident or breach of security could prevent REE from effectively operating its business or may cause harm to its business that may or may not be reparable.
•REE may incur significant costs and expenses in connection with the protection and enforcement of its intellectual property rights, including but not limited to litigation costs.
•Lawsuits alleging infringement or misappropriation of intellectual property rights of third parties could be both costly and time consuming and could prevent REE from developing or commercializing its future products.
•The dual class structure of our Ordinary Shares has the effect of concentrating voting power.
•Conditions in Israel, including the recent attack by Hamas and other terrorist organizations from the Gaza Strip and Israel’s war against them, may affect REE’s operations.
10
Risks Related to REE’s Business
REE’s limited operating history may make evaluation of its business and future prospects difficult, increasing the risk of investment in REE.
REE faces risks and challenges as an early stage company with a limited operating history. REE has a limited operating history in the automotive industry on which investors can base an evaluation of its business, operating results and prospects. Since REE is in the early stages of commercializing its automotive products, it is difficult to predict REE’s future revenues and expenses, and REE has limited insight into trends that may emerge and affect its business. There can be no assurance that customers and potential customers will purchase REE’s automotive products at any level or at a level that is profitable for REE. Market conditions, many of which are outside of REE’s control and subject to change, including general economic conditions, the availability and terms of financing, civil discourse throughout the globe, effects and impact of climate change and global warming, regulatory requirements and incentives, competition and the pace and extent of vehicle electrification generally, could impact demand for REE’s products and ultimately REE’s success.
Projecting REE’s operational or financial performance relies in large part upon assumptions and analyses that are inherently uncertain and subject to risk, and, that if proven incorrect could result in significantly lower actual results.
Any forecasts provided by us reflect management’s estimate of future performance when such forecasts are provided and involve risks, assumptions and uncertainties, projected operating expense, including the level of demand for REE’s products, the performance of REE’s products, the projected bill of materials for REE’s products, the projected gross margin achievable upon sale of REE’s products, the development and commercialization of REE’s products, potential market and sector opportunities, the roll out of REE’s future facilities to assemble REE products, or Integration Centers, the production capacity of REE’s UK Integration Center and any future Integration Centers, the selection of REE’s products by customers and by segment, and growth in the various markets REE is targeting. These assumptions represent REE’s best estimates and there can be no assurance that the actual results will be in line with REE’s expectations. In addition, whether actual operating and financial results and business development will be consistent with REE’s expectations and assumptions as reflected in forecasts depends on a number of factors, many of which are outside REE’s control, including, but not limited to:
•the extent to which projections of operating expense and unit sales will reflect the actual operating expense and sale of REE products in the future;
•the extent to which REE can actualize the value proposition of REE products including, but not limited to, cost efficiencies related to its business model with limited capital expenditure requirements and projected total cost of ownership, and the availability of mission-specific vehicles that maximize cabin and storage space on a smaller overall footprint;
•there is no guarantee that REE will be able to successfully outsource manufacturing and utilize future Integration Centers for the assembly of REE products beyond our first Integration Center in Coventry, United Kingdom, or the UK Integration Center;
•the extent to which growth of e-mobility markets and continued shift in consumer preference will conform with projections;
•although REE is focusing on Class 3 through 5 platform models for the P7 EV platform, REE’s ability to validate, verify and test other REE products compatible with the Class 1 through Class 6 platform, which the failure to do so with respect to any class would reduce REE’s projected total addressable market;
•the extent to which REE’s projected bill of materials conform with the actual bill of materials upon start of production, deviation from which could negatively impact the projected total cost of ownership or projected gross margin;
•supply chain disruptions and shortages of raw materials, parts, components and systems used in our production process;
•the projected total cost of ownership is based upon a number of projected factors based on management expectations, the deviation from which could negatively impact the actual total cost of ownership offered to potential customers;
11
•homologation of full vehicles;
•certification of X-by-Wire technology;
•top-hat partnerships to build full EVs;
•whether REE can obtain sufficient capital to sustain and grow its business; and
•the timing and costs of new and existing marketing and promotional efforts, including with respect to the “Powered by REETM” brand.
Other unknown or unpredictable factors could also adversely impact REE’s financial or operating performance, and REE undertakes no obligation to update or revise any projections, whether as a result of new information, future events, or otherwise. In the event that actual results differ from REE’s projected financial information or if REE adjusts its projections in future periods, REE’s share price could be materially adversely affected.
REE may not succeed in controlling the costs associated with its operations.
REE will require significant capital to develop and grow its business, including developing and assembling REE products, building future Integration Centers, maintaining the current UK Integration Center and developing REE’s intellectual property portfolio and brand. REE has incurred, and expects to continue to incur, significant expenses that have and will impact its profitability, including research and development expenses, sales and distribution expenses as REE builds its brand and markets its products, and general and administrative expenses as it scales its operations. REE’s ability to become profitable in the future will not only depend on its ability to successfully market its products, but also to control its costs. If REE is unable to efficiently design, assemble, market, sell and distribute its products, then we may not be able to achieve profitable operations.
During February 2023, we took steps to lower our expenses through a targeted reduction in headcount of approximately 11% of the Company’s workforce. To date, the adjustments that we have made to our headcount have had a limited impact on our overall business plan and we are able to continue our focus on producing mission-specific Class 1 through Class 6 EVs, focusing primarily on Class 3 through 5 platform models on the P7 EV platform. If we are unsuccessful in generating orders for our products or are unable to raise additional capital, we may need to further reduce our expenses.
If the market for commercial EVs does not develop as REE expects or develops slower than REE expects, its business prospects, financial condition, and operating results may be adversely affected.
REE’s growth depends upon the adoption of EVs by original equipment manufacturers, or OEMs, delivery and logistic fleets, dealers, e-commerce retailers, new mobility players, Mobility-as-a-Service, or MaaS, providers and autonomous drive companies and on REE’s ability to produce, assemble and sell products that meet their needs. The entry of EV products into the commercial EV market is a relatively new development and is characterized by rapidly changing technologies and evolving government regulation, industry standards and customer views of the merits of using EVs in their businesses. This process has been slow to date. As part of REE’s sales efforts, REE must demonstrate to OEMs, delivery and logistic fleets, dealers, e-commerce retailers, new mobility players, MaaS providers and autonomous drive companies the savings during the life of the vehicle and the lower total cost of ownership, or TCO, of vehicles built on the REE products. REE believes that OEMs, delivery and logistic fleets, dealers, e-commerce retailers, new mobility players, MaaS providers and autonomous drive companies consider many factors when deciding whether to purchase REE’s products (or EVs generally) over vehicles powered by internal combustion engines, particularly diesel-fueled or natural gas-fueled vehicles. REE believes these factors include:
•the difference in the initial purchase prices of EVs with comparable vehicles powered by internal combustion engines, both including and excluding the effect of government and other subsidies and incentives designed to promote the purchase of EVs;
•the TCO of the vehicle over its expected life, which includes the initial purchase price and ongoing operating and maintenance costs;
•the availability and terms of financing options for purchases of vehicles and, for EVs, financing options for battery or fuel cell systems;
•the availability of tax and other governmental incentives to purchase and operate EVs and future regulations requiring increased use of nonpolluting vehicles;
•government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
12
•fuel prices, including volatility in the cost of diesel or a prolonged period of low gasoline and natural gas costs that could decrease incentives to transition to EVs;
•the cost and availability of other alternatives to diesel fueled vehicles, such as vehicles powered by natural gas;
•corporate sustainability initiatives;
•EV quality, performance and safety (particularly with respect to lithium-ion battery packs or fuel cells);
•the quality and availability of service for the vehicle, including the availability of replacement parts;
•the limited range over which EVs may be driven on a single charge;
•increased competition with other companies also developing zero-emission electric and autonomous vehicles;
•access to charging stations and related infrastructure costs, and standardization of EV charging systems;
•electric grid capacity and reliability; and
•macroeconomic factors.
If, in weighing these factors, OEMs, delivery and logistic fleets, dealers, e-commerce retailers, new mobility players, MaaS providers and autonomous drive companies determine that there is not a compelling business justification for purchasing EVs, particularly those built on products by REE, then the market for EVs may not develop as REE expects or may develop more slowly than REE expects, which would adversely affect REE’s business, prospects, financial condition and operating results.
In addition, the reduction, elimination or selective application of tax and other governmental incentives and subsidies resulting from policy changes, or the reduced need for such subsidies and incentives due to the perceived success of the EV, fiscal tightening or other reasons may result in the diminished competitiveness of the EV industry generally or EVs built on the REE products in particular, which could in turn adversely affect REE’s business, prospects, financial condition and operating results. Further, REE cannot assure that the current governmental incentives and subsidies available for purchasers of EVs will remain available.
Adverse conditions in the automotive industry could have adverse effects on REE’s results of operations.
REE’s business is directly affected by and significantly dependent on business cycles and other factors affecting the global automobile industry. Automotive production and sales are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences, changes in interest rates and credit availability, consumer confidence, fuel costs, fuel availability, environmental impact, governmental incentives and regulatory requirements and political volatility, especially in energy-producing countries and growth markets. In addition, automotive production and sales may be affected by REE’s current and potential customers’, suppliers’, dealers’ and strategic partners’ ability to continue operating in response to challenging economic conditions and in response to regulatory requirements and other factors. The volume of global automotive production has fluctuated, sometimes significantly, from year to year, and REE expects any such fluctuations to give rise to fluctuations in the demand for its products. Specific to the electric vehicle segment in the automotive industry, challenges have arisen due to a variety of factors, including an increase in the costs of certain components or parts of electric vehicles, such as batteries, caused by supply chain disruptions and shortages of raw materials, market participants over-promising and under-delivering on their production capabilities and the slow deployment and resulting availability of charging networks for electric vehicles. Any significant adverse change in any of these factors may result in a reduction in automotive sales and production by REE’s current and potential customers, suppliers, dealers and strategic partners and could have a material adverse effect on REE’s business, results of operations and financial condition.
REE’s future sales and operations in international markets may expose it to operational, financial and regulatory risks, including but not limited to unfavorable regulatory, political, tax and labor conditions which could negatively impact the business.
REE faces risks associated with its international operations, including possible unfavorable regulatory, political, tax and labor conditions, which could harm its business. REE has operations or subsidiaries in Israel, the U.S., the UK, Germany, and Japan that are subject to the legal, political, regulatory and social requirements and economic conditions in these jurisdictions. Additionally, as part of its growth strategy, REE intends to expand its manufacturing partnerships, assembly facilities and sales activity internationally. However, such expansion would require REE to make significant expenditures, including the hiring of local employees and establishing facilities, in advance of generating any revenue. REE is subject to
13
a number of risks associated with international business activities that may increase its costs, impact its ability to sell its products and require significant management attention. These risks include:
•conforming REE’s products to various international regulatory requirements where its products are sold, or homologation;
•development and construction of its future Integration Center network;
•maintenance and ability to produce REE’s products in REE’s UK Integration Center;
•difficulty in staffing and managing foreign operations;
•difficulties securing customers in new jurisdictions;
•foreign government taxes, regulations and permit requirements, including foreign taxes that REE may not be able to offset against taxes imposed upon it in Israel, and foreign tax and other laws limiting REE’s ability to repatriate funds to Israel;
•fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities REE undertakes;
•interruptions in shipments;
•Israel and foreign government trade restrictions, tariffs and price or exchange controls;
•foreign labor laws, regulations and restrictions; changes in diplomatic and trade relationships;
•political instability, natural disasters, war or events of terrorism; and
•the strength of international economies.
If REE fails to successfully address these risks, its business, prospects, operating results and financial condition could be materially harmed.
Adverse global conditions, including macroeconomic and geopolitical uncertainty, may negatively impact our financial results.
Global conditions, dislocations in the financial markets, or inflation could adversely impact our business. In addition, the global macroeconomic environment has been and may continue to be negatively affected by, among other things, instability in global economic markets, increased trade tariffs and trade disputes, rising inflation, instability in the global credit markets, banks and financial institutions entering receivership or becoming insolvent, supply chain weaknesses, instability in the geopolitical environment and increasing tensions between China and Taiwan, uncertainty surrounding future elections and the outcome of proposed judicial reform in Israel, and other political tensions, and foreign governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies and in global financial markets, which may adversely affect our business. For additional information, see “Item 3. Key Information – D. Risk Factors – Risks Related to REE’s Incorporation and Location in Israel – Political, economic and military conditions in Israel could adversely affect REE’s business; REE conducts certain operations in Israel. Conditions in Israel, including the recent attack by Hamas and other terrorist organizations from the Gaza Strip and Israel’s war against them, may adversely affect its operations.”
In addition, REE may not be able to access a portion of its existing cash, cash equivalents and investments due to market conditions. For example, on March 10, 2023, the Federal Deposit Insurance Corporation took control and was appointed receiver of Silicon Valley Bank. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, REE’s ability to access its existing cash, cash equivalents and investments may be threatened and could have a material adverse effect on its business and financial condition.
The conflict between Russia and Ukraine has, and is likely to continue to, generate uncertain geopolitical conditions, including sanctions that could adversely affect REE’s business prospects and results of operations.
Russia and Ukraine are not REE markets, and there are no plans to launch in either market in the near future. Nevertheless, the uncertain geopolitical conditions, sanctions, and other potential impacts on the global economic environment resulting from Russia’s invasion of Ukraine may impact customer behavior and disrupt the manufacturing, delivery and overall supply chain or our ability to commercialize REE’s products, which could make it difficult for REE to forecast its financial
14
results. The uncertainty surrounding these conditions and the current, and potentially expanded, scope of international sanctions against Russia may cause unanticipated changes in customers behavior and may impact operations of our suppliers. Sanctions have also created supply constraints and driven inflation that has impacted, and may continue to impact, REE’s operations and could create or exacerbate risks facing REE’s business.
While REE understands that its products do not have any “Tier 1” suppliers from Russia, vehicle production is a complex process, with thousands of components sourced from all over the world. There can be no assurance, therefore, that there will not be some components sourced from suppliers subject to sanctions against Russia nor that the resulting disruption to the supply chain will not have an adverse impact on REE’s business and results of operations.
In the event geopolitical tensions deteriorate further or fail to abate, additional governmental sanctions may be enacted that could adversely impact the global economy, banking and monetary systems, markets, and the operations of REE and its suppliers.
Risks Related to REE’s Strategy
REE’s business model has not been proven and any failure to obtain significant orders for its products would have an adverse effect on its operating results, business, or reputation, resulting in substantial liabilities that may exceed its resources.
REE’s business model is unique because REE can market and sell our products individually or as “Powered by REE™” in a full vehicle solution. This approach depends in large part on REE’s ability to maintain existing agreements or enter into definitive agreements that formalize its relationship with customers, suppliers, dealers and strategic partners, as well as retaining and growing customer orders following trials of initial test fleets. Investors should be aware of the difficulties normally encountered by a new player in the EV industry, many of which are beyond REE’s control, including substantial risks and expenses in the course of establishing or entering new markets, organizing operations and undertaking marketing activities. The likelihood of REE’s success must be considered in light of these risks, expenses, complications, delays and the competitive environment in which REE operates. In addition, REE’s plan to outsource manufacturing to suppliers and strategic partners and to utilize its current and future Integration Centers for the assembly of REE products is a novel business strategy and REE cannot guarantee that the strategy will be successful or profitable. REE may be unable to generate sufficient revenues, raise additional capital or operate profitably or to meet projected gross margins, EBITDA and cash flows. REE will continue to encounter risks and difficulties frequently experienced by companies in the early stages of commercialization, including scaling up REE’s infrastructure, commercialization and headcount, and may encounter unforeseen expenses, difficulties or delays in connection with its growth. In addition, REE expects to continue to sustain substantial operating expenses without generating sufficient revenues to cover expenditures. Any investment in REE is therefore highly speculative and could result in the loss of an investor’s entire investment.
REE’s marketing and sales model is different from predominant and current models in the automobile industry, making evaluation of its business, operating results and future prospects difficult. Should such a model fail to achieve market acceptance, REE may not be able to achieve profitability.
REE plans to conduct product marketing and sales directly to delivery and logistic fleets, dealers, e-commerce retailers, new mobility players, MaaS providers and autonomous drive companies by its internal business development and marketing teams. REE’s business development and marketing teams continue to focus on expanding relationships with OEMs, delivery and logistic fleets, dealers, e-commerce retailers, new mobility players, MaaS providers and autonomous drive companies and to expand its market to other industries. If REE is unable to achieve this, it could have a material adverse effect on its business, prospects, financial results and results of operations.
Certain of REE’s agreements with potential customers, suppliers, dealers and strategic partners are preliminary in nature.
REE’s existing agreements with customers, potential customers, suppliers and strategic partners are pursuant to MOUs or strategic alliance and development agreements, pursuant to which the parties are entering into discussions to evaluate or agree upon a development and strategic plan or to purchase a limited number of test vehicles. Such strategic collaborations are generally non-binding and subject to cancellation by either party or require the achievement of development milestones as a precursor to entering into a further definitive agreement. There can be no guarantee that any of REE’s strategic collaborations, suppliers or strategic partners will become customers and failure to do so would have a material adverse effect on REE’s business, prospects, financial results and results of operations.
15
REE’s ability to make additional sales following sales of test vehicles to customers depends in part on its ability to prove that REE’s products are to the full satisfaction of such customers and to establish and maintain confidence in REE’s business prospects among such customers and others within its industry.
REE recently started receiving initial orders for both the P7-C. Such orders present an opportunity for potentially receiving additional orders in the future that could be more meaningful and impactful from a financial perspective. Customers, suppliers, dealers and strategic partners may be less likely to purchase REE’s products if it does not timely deliver products in accordance with the technical specifications or if the customers do not believe that REE’s business will succeed or that its operations, including providing such partners with maintenance and service through qualified supplier support operations, which has yet to be established, for many years. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing business relationships with REE if they are not convinced that its business will succeed. Accordingly, to build, maintain and grow its business, REE must establish and maintain confidence among customers, dealers, suppliers, analysts and other parties with respect to its ability to execute, its liquidity and business prospects. Maintaining such confidence may be particularly difficult as a result of many factors, including REE’s limited operating history, others’ unfamiliarity with its products, uncertainty regarding the future of electric vehicles, any delays in scaling production, delivery and service operations to meet demand, competition and REE’s production and sales performance compared with market expectations. Many of these factors are largely outside of REE’s control, and negative perceptions about REE’s business prospects, would likely harm its ability to receive additional orders. In addition, a significant number of new electric vehicle companies have recently entered the automotive industry, which is an industry that has historically had significant barriers to entry and a high rate of failure. If these new entrants or other manufacturers of electric vehicles go out of business, produce vehicles that do not perform as expected or otherwise fail to meet expectations, such failures may have the effect of increasing scrutiny of others in the industry, including REE, and further challenging customer, dealer, supplier and analyst confidence in REE’s business prospects.
REE may not succeed in establishing, maintaining and strengthening the “Powered by REETM” brand, which could materially and adversely affect customer acceptance of its vehicles and components, thus negatively impacting its business, prospects and projected revenue.
REE intends to market its products as both an individual product and as a full vehicle solution under the “Powered by REETM” brand. The “Powered by REETM” approach reflects REE’s mission to become the cornerstone upon which mobility players can build their mission-specific vehicle needs with the goal of completing rather than competing with other market participants. REE’s business and prospects are heavily dependent on its ability to develop, maintain and strengthen the “Powered by REETM” brand and the REE brand generally. If REE does not continue to establish, maintain and strengthen its brand, it may lose the opportunity to build a critical mass of customers. Promoting and positioning its brand will likely depend significantly on REE’s ability to provide high quality products and engage with its potential customers as intended, and REE has limited experience in these areas. In addition, REE’s ability to develop, maintain and strengthen the “Powered by REETM” brand and the REE brand generally will depend heavily on the success of its customer development and branding efforts. REE’s novel technology and design may not align with existing or potential consumer preferences and consumers may be reluctant to acquire a vehicle built upon a new and unproven EV platform. In addition, REE could be subject to adverse publicity related to REE’s potential customers who build vehicles on REEplatformsTM whether or not such publicity related to such potential customers’ “Powered by REETM” vehicles, any negative publicity, whether true or not, could quickly proliferate and harm consumer perceptions and confidence in the “Powered by REETM” brand and the REE brand generally. If REE does not develop and maintain a strong brand, its business, prospects, financial condition and operating results will be materially and adversely impacted.
REE is subject to risks associated with strategic alliances.
REE’s existing agreements and REE’s ability to engage with definitive agreements with current and potential suppliers, dealer or strategic partners are and will be subject to a number of risks with respect to operations that are outside REE’s control, any of which may materially and adversely affect REE’s business and prospects. REE could experience delays to the extent its current and potential suppliers, dealers or strategic partners do not continue doing business with REE, meet agreed upon timelines, experience capacity constraints or otherwise are unable to deliver components or manufacture products as expected. There is risk of disputes with current and potential suppliers, dealers and strategic partners, and REE could be affected by adverse publicity related to its current and potential suppliers, dealers or strategic partners whether or not such publicity is related to their collaboration with REE. REE’s ability to successfully build a premium brand could also be adversely affected by perceptions about the quality of REE’s suppliers, dealers or strategic partner’s products or other products manufactured by the same suppliers or strategic partners. In addition, although REE intends to be involved in material decisions in the supply chain and manufacturing process, given that REE also will rely on its current and potential suppliers, dealers and strategic partners to meet its quality standards, there can be no assurance that REE will be
16
able to maintain high quality standards for its products. Furthermore, REE will also be exposed to risk associated with sharing its proprietary information with any such third party.
REE operates in a highly competitive market against a large number of both established competitors and new market entrants, and many market participants have substantially greater resources than REE.
Both the automobile industry generally, and the EV segment in particular, are highly competitive, and REE will be competing for sales with both internal combustion engine, or ICE, vehicles and EVs. Many of REE’s current and potential competitors have significantly greater financial, technical, manufacturing, marketing and other resources than REE does and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. REE expects competition for EVs to intensify due to increased demand and a regulatory push for alternative fuel vehicles, continuing globalization, and consolidation in the worldwide automotive industry. Factors affecting competition include product quality and features, innovation and development time, pricing, reliability, safety, fuel economy, customer service, and financing terms. Increased competition may lead to lower vehicle unit sales and increased inventory, which may result in downward price pressure and adversely affect REE’s business, financial condition, operating results, and prospects.
REE may not be able to compete successfully in the market as a result of rapid changes in EV technology and the entrance of new and existing, larger manufacturers into the EV space.
REE’s products are being designed for use with, and depend upon, existing vehicle technology. As new companies and larger, existing vehicle manufacturers enter the EV space, REE may lose any technological advantage it may have had in the marketplace and suffer a decline in its position in the market. As technologies change, REE plans to upgrade or adapt its products to continue to provide products with the latest technology. However, REE’s products may become obsolete or REE’s research and development efforts may not be sufficient to adapt to changes in or to create the necessary technology to effectively compete. As a result, REE’s potential inability to adapt and develop the necessary technology may harm REE’s competitive position.
Risks Related to Development and Production of REE’s Products
REE’s products are in various stages of development and there are risks associated with developing existing advanced prototypes into marketable products.
REE’s products are in various stages development. In order to reach the delivery stage REE’s products remain subject to further design, validation, verification and testing, as well as product homologation. There is no guarantee that REE will be successful in reaching the delivery stage on the projected timeline, or at all. The establishment of the UK Engineering Center alongside REE’s first UK Integration Center at our Coventry, UK campus coupled with the continued partnership at the MIRA Technology Park has provided REE with a proving ground for physical testing and validation of REE products. However, there can be no guarantee that the testing of REE’s products will proceed according to schedule or that the REE products will withstand rigorous additional testing. The development of REE’s products is and will be subject to risks including, but not limited to, risks associated with:
•REE’s ability to validate final marketable products;
•REE’s ability to complete the final marketable product design process on time, if at all;
•the ability for REE’s products to meet the stringent level of functional safety required for X-by-Wire;
•the ability for REE’s products to withstand rigorous testing and validation;
•the ability for REE’s products to satisfy testing and validation standards set by external assessors;
•the ability of REE’s products to meet existing or future automotive industry standards;
•REE’s ability to successfully develop and validate true X-by-Wire Control capabilities; and
•the ability of X-by-Wire Control technology to obtain additional regulatory approval and achieve widespread market acceptance.
17
REE is subject to risks associated with the anticipated timing of REE’s initial commercial production and subsequent increased commercial production.
REE does not know whether its suppliers or strategic partners will be able to develop efficient, automated, low-cost production capabilities and processes and reliable sources of component supply, that will enable REE to meet the quality, price, engineering, design and production standards, as well as the production volumes, required to successfully mass market REE’s products on its anticipated timeframe. Even if REE and its suppliers and strategic partners are successful in developing the initial production processes, developing future high volume production capability, and reliably sourcing the component supply, REE does not know whether it will be able to do so in a manner that avoids significant delays and cost overruns, including those that result from factors beyond its control such as problems with suppliers and strategic partners or dealing with force majeure events, or that meets its products commercialization schedules or that satisfies the requirements of its potential customer base. Any failure to develop such production processes and capabilities within REE’s projected costs and timelines could have a material adverse effect on its business, prospects, financial condition and operating results.
REE’s development of an outsourced manufacturing business model may not be successful, which could harm its ability to deliver products and recognize revenue.
REE’s business depends in large part on its ability to develop, manufacture and assemble its products. Initially, REE plans to outsource the manufacturing of its products in collaboration with at least one supplier or strategic partner. REE plans to assemble its products at REE’s current and future Integration Centers. REE has not yet executed supply or manufacturing agreements with suppliers and strategic partners for volume production of REE’s products or any of its other future product offerings. See “Item 4.B. Business Overview — REE’s Manufacturing Approach” for more information. If REE is unable to negotiate and finalize all of such definitive agreements it will not be able to produce any products and will not be able to generate any revenue, or the products may become more expensive to deliver with a higher bill of materials, which would have a material adverse effect on its business, prospects, operating results and financial condition. In addition, the utilization of future Integration Centers for the assembly of REE products is an untested business strategy and there is no guarantee that the strategy will be successful or profitable.
If REE’s suppliers and strategic partners were to experience delays, disruptions, capacity constraints or quality control problems in their manufacturing operations, product shipments could be delayed or rejected or REE’s potential customers and dealers could consequently elect to change product demand. These disruptions would negatively impact REE’s revenues, competitive position and reputation. In addition, REE’s suppliers and strategic partners may rely on certain state tax incentives that may be subject to change or eliminated in the future, which could result in additional costs and delays in production. Further, if REE is unable to successfully manage its relationship with its suppliers and strategic partners, the quality and availability of its products may be harmed. REE’s suppliers, dealers and strategic partners could, under some circumstances, decline to accept new purchase orders from or otherwise reduce their business with REE. If REE’s suppliers and strategic partners stopped manufacturing REE’s products for any reason or reduced manufacturing capacity, REE may be unable to replace the lost manufacturing capacity on a timely and comparatively cost-effective basis, which would adversely impact its operations.
REE’s reliance on its suppliers and strategic partners, as well as the establishment and operation of REE’s current and future Integration Centers, exposes it to a number of risks that are outside its control, including:
•the manufacture of certain components that will require significant costs related to non-recurring engineering and tooling costs incurred by REE’s suppliers and strategic partners the extent of which is currently unknown;
•its inability to control manufacturing yield and unexpected increases in manufacturing costs;
•interruptions in shipments if a suppliers or strategic partners are unable to complete production in a timely manner;
•its inability to control quality of finished products;
•its inability to control delivery schedules;
•its inability to control production levels and to meet minimum volume commitments to REE’s potential customer base;
•its inability to maintain adequate manufacturing capacity;
•its inability to secure adequate volumes of acceptable components at suitable prices or in a timely manner;
18
•its inability to establish new Integration Centers at the projected cost of $15 million to $30 million (based on whether such Integration Center is only producing REEcorners™ or is also producing the REEplatformTM) per Integration Center or due to lack of market demands;
•inability to accurately assemble products within specified design tolerances;
•delays by REE in delivering final component designs to its suppliers and strategic partners;
•its inability to implement a sufficient number of future Integration Centers in order to meet demand for REE products in time;
•inability to implement a network of future integration;
•inability to effectively manage a global network of Integration Centers; and
•other delays, backlog in manufacturing and research and development of new models, and cost overruns.
REE’s ability to develop, manufacture and obtain required regulatory approvals for products of sufficient quality and appeal to its current and potential customer base on schedule and on a large scale is unproven, and the business plan is still evolving. REE may be required to introduce new products models and enhanced versions of existing models. To date, REE has limited experience, as a company, designing, testing, manufacturing, marketing and selling or leasing its electric products and therefore cannot assure you that it will be able to meet customer expectations. Any failure to develop such manufacturing processes and capabilities within REE’s projected costs and timelines would have a material adverse effect on its business, prospects, operating results and financial condition.
REE does not currently have any plans to establish manufacturing facilities of its own, so failure to establish sufficient agreements with suppliers and strategic partners would significantly hinder REE’s ability to manufacture its products. In addition, the manufacturing facilities of REE’s potential and strategic partners may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, flooding, fire and power outages, or by health epidemics, such as the recent COVID-19 pandemic, which may render it difficult or impossible for REE to manufacture its products for some period of time. The inability to manufacture REE’s products or the backlog that could develop if the manufacturing facilities of its suppliers and strategic partners are inoperable for even a short period of time may result in the loss of potential customers or harm REE’s reputation.
REE is reliant on its UK Engineering Center and REE’s UK Integration Center in Coventry, UK for the design, validation, verification, testing and homologation of its products.
In 2022, REE built its first UK Integration Center and highly automated launch factory in Coventry, United Kingdom. The new UK Integration Center and the existing UK Engineering Center, which are strategically located next to each other, are intended to expedite REE’s strategic plans to meet anticipated global demand. The UK Engineering Center is spearheading REE product design, validation, verification and testing, as well as product homologation. REE also has access to world-class test facilities and a proving ground for physical testing and validation of the REE products at the UK Integration Center and the UK Engineering Center. The UK Integration Center, alongside the UK Engineering Center, and the facilities available therein, are integral to REE’s ability to develop its products. Any loss of access or disputes related to the UK Integration Center or the UK Engineering Center have the potential to adversely impact REE’s ability to develop its products on time to meet commercialization timeline, or at all.
REE’s utilization of its UK Integration Center and the UK Engineering Center are and will be subject to risks, including with respect to:
•REE’s ability to maintain arrangements on reasonable terms with third parties for the provision of testing facilities and testing services with respect to REE products;
•REE’s ability to attract, recruit, hire, retain and train a sufficient number of skilled employees to effectively staff the UK Integration Center and the UK Engineering Center; and
•REE’s reliance on outside contractors for the provision of certain services and associated risks related to monitoring and protecting IP, contractual disputes and certain inherent cybersecurity risks.
The testing facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, flooding, fire and power outages, or by health epidemics, such as the recent COVID-19 pandemic, which may render it difficult or impossible for REE to validate, verify and test REE products for some period of time. The inability to validate, verify and test REE products or the resulting delay to REE’s commercialization schedule if the testing facilities are inoperable for even a short period of time may result in the loss of potential customers or harm REE’s reputation.
19
REE’s products will make use of lithium-ion battery cells, which can be dangerous in certain circumstances, including but not limited to the possibility that such cells may catch fire or vent smoke and flame.
The fuel source for REE products will make use of lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. While REE has taken measures to enhance the safety of its designs, a field or testing failure of its products could occur in the future, which could subject REE to lawsuits, product recalls, or redesign efforts, all of which would be time-consuming and expensive. Also, negative public perceptions regarding the suitability of lithium-ion cells for automotive applications or any future incident involving lithium-ion cells such as a vehicle or other fire, even if such incident does not involve REE’s products, could seriously harm its business.
In addition, REE’s suppliers and strategic partners are expected to store a significant number of lithium-ion cells at their facilities. Any mishandling of battery cells may cause disruption to the operation of such facilities. A safety issue or fire related to the cells could disrupt operations or cause manufacturing delays. Such damage or injury could lead to adverse publicity and potentially a safety recall. Moreover, any failure of a competitor’s EV or energy storage product may cause indirect adverse publicity for REE and its products. Such adverse publicity could negatively affect REE’s brand and harm its business, prospects, financial condition and operating results.
The efficiency of battery usage in EVs declines over time, which may negatively impact potential customers’ decisions with regards to purchasing REE’s products.
REE anticipates that the range of its products will decline over time as the batteries deteriorate. Other factors such as usage, time and stress patterns may also impact the battery’s ability to hold a charge, which would decrease REE’s products’ range before needing to refuel. Such battery deterioration and the related decrease in range may negatively influence potential customer decisions, which would negatively affect REE’s operating results and financial condition.
Risks Related to REE’s Suppliers
REE depends on its suppliers, including but not limited to body manufacturers and battery providers, some of which will be single or limited source suppliers, and the inability of such suppliers to deliver the components of REE’s products in a timely manner or at all and at prices and volumes acceptable to it could have a material adverse effect on its business, prospects and operating results.
REE relies on suppliers and strategic partners for the provision and development of many of the components and materials used in its products. While REE plans to obtain components from multiple suppliers and strategic partners whenever possible, some of the components used in its products may be purchased by REE from a single source. REE’s suppliers and strategic partners may not be able to meet their product specifications and performance characteristics, which would impact REE’s ability to achieve its product specifications and performance characteristics as well. Additionally, REE’s suppliers and strategic partners may be unable to obtain required certifications for their products for which REE plans to use or provide warranties that are necessary for REE’s solutions. If REE is unable to obtain components and materials used in its products from its suppliers or if its suppliers decide to create or supply a competing product, REE’s business could be adversely affected. REE has less negotiating leverage with suppliers than larger and more established automobile manufacturers and may not be able to obtain favorable pricing and other terms. While REE believes that it may be able to establish alternate supply relationships and can obtain or engineer replacement components for its single source components, REE may be unable to do so in the short term, or at all, at prices or quality levels that are favorable to REE, which could have a material adverse effect on its business, prospects, financial condition and operating results.
REE expects to purchase various types of equipment, raw materials and manufactured component parts from its suppliers or strategic partners. If these suppliers or strategic partners experience substantial financial difficulties, cease operations, or otherwise face business disruptions, REE may be required to provide substantial financial support to ensure supply continuity or would have to take other measures to ensure components and materials remain available. Any disruption could affect’s REE’s ability to deliver products and could increase REE’s costs and negatively affect its liquidity and financial performance.
20
REE’s business could be harmed by increases in costs, disruption of supply or shortage of materials, in particular for lithium-ion battery cells.
REE and its suppliers may experience increases in the cost of or a sustained interruption in the supply or shortage of commodities, raw materials and other inputs used by REE and its suppliers in their businesses and products, such as steel, lithium-ion battery cells and semiconductors, which could adversely affect REE’s future profitability or REE’s ability to timely execute its business plan. The prices for these materials fluctuate and the available supply of these materials may be unstable, depending on market conditions, fluctuations in global demand, including as a result of increased production of EVs by REE’s competitors, geopolitical risk and other economic and political factors. In particular, a global semiconductor supply shortage has had, and is continuing to have, wide-ranging effects across multiple industries, particularly the automotive industry. Any such increase, supply interruption or shortage could materially and negatively impact REE’s business, prospects, financial condition and operating results.
REE’s production plan is focused on scaling up production in two phases. Phase 1 of the production plan relates to producing low hundreds of vehicles in the U.S. with targeting Bill of Material, or BOM, break even, and phase 2 of the production plan relates to producing low thousands of vehicles in the following year after completion of phase 1 . Such target is subject to a variety of risks, including the completion of REE’s production tooling investment plan, sourcing materials and components from REE’s suppliers on its agreed upon deadlines and securing sufficient funding.
REE’s business plan includes scaling up the production of low hundreds of trucks in the U.S. (phase 1) and low thousands in the following year after completion of phase 1. However, this production plan relies on our ability to complete REE’s production tooling investment plan, securing materials from REE’s suppliers on its agreed upon deadlines and securing funding primarily for working capital purposes. If REE is unable to complete its production tooling investment plan, or if its suppliers face delays in delivering materials to REE from its expected timelines, REE may not meet its production plan timing. In addition, REE’s production plan relies on its ability to finance the required working capital needs by raising sufficient funds therefore, if REE is unable to secure sufficient funding, REE may not meet our production targets. Not meeting its 2024 or 2025 production targets could materially and negatively impact REE’s business, prospects, financial condition and operating results.
Risks Related to REE’s Future Sales
REE targets customers, some of which are large corporations with substantial negotiating power, exacting product, quality and warranty standards and potentially competitive internal solutions.
Many of REE’s existing and potential customers are large, multinational corporations with substantial negotiating power relative to it and, in some instances, may have internal solutions that are competitive to REE’s products. These large, multinational corporations also have significant development resources that may allow them to acquire or develop independently, or in partnership with others, competitive technologies. Meeting the technical requirements and securing design wins with any of these companies will require a substantial investment of REE’s time and resources. REE cannot assure you that its products will secure design wins from these or other companies or that it will generate meaningful revenue from the sales of its products to these key customers. If REE’s products are not selected by these large corporations or if these corporations develop or acquire competitive technology, it will have an adverse effect on REE’s business. In addition, if REE is unable to sell its products to such customers on certain terms, its prospects and results of operations may be adversely affected.
Discontinuation, lack of commercial success, or loss of business with respect to a particular product model for which REE is a significant supplier could reduce REE’s sales and adversely affect its profitability.
If REE is able to secure design wins and its products are included in EV products, it expects to enter into supply agreements with the relevant customers. Market practice dictates that these supply agreements typically require REE to supply a customer’s requirements for a particular vehicle model or product. These contracts can have short terms and/or can be subject to renegotiation, sometimes as frequently as annually, all of which may affect product pricing, and may be terminated by REE’s potential customers at any time. Therefore, even if REE is successful in obtaining design wins and the systems into which its products are integrated are commercialized, the discontinuation of, the loss of business with respect to, or a lack of commercial success of a particular vehicle model for which REE is a significant supplier could mean that the expected sales of REE’s products will not materialize, which may materially and adversely affecting its business.
21
Pricing pressures, automotive OEM cost reduction initiatives and the ability of automotive OEMs to re-source or cancel vehicle or technology programs may result in lower than anticipated margins, or losses, which may adversely affect REE’s business.
Cost-cutting initiatives adopted by REE’s customer base often result in increased downward pressure on pricing. REE expects that its future agreements with automotive OEMs may require step-downs in pricing over the term of the agreement or, if commercialized, over the period of production. In addition, REE’s automotive OEM customers are expected to reserve the right to terminate their supply contracts for convenience, which enhances their ability to obtain price reductions. Automotive OEMs also possess significant leverage over their suppliers, including REE, because the automotive component supply industry is highly competitive, serves a limited number of customers and has a high fixed cost base. Accordingly, REE expects to be subject to substantial continuing pressure from automotive OEMs and Tier 1 suppliers to reduce the price of its products. It is possible that pricing pressures beyond REE’s expectations could intensify as automotive OEMs pursue restructuring, consolidation and cost-cutting initiatives. If REE is unable to generate sufficient production cost savings in the future to offset price reductions, its gross margin and profitability would be adversely affected.
The average selling prices of REE’s products could decrease rapidly over the life of the products, which may negatively affect REE’s revenue and gross margin.
REE expects the average selling prices of its products generally to decline as its customer base seeks to commercialize EVs built on the REE products at prices low enough to achieve market acceptance. In order to sell products that have a falling average unit selling price and maintain margins at the same time, REE will need to continually reduce products and manufacturing costs. To manage manufacturing costs, REE must engineer the most cost-effective design for its products. In addition, REE will continuously promote initiatives to reduce labor cost, improve worker efficiency, reduce the cost of materials, use fewer materials and further lower overall product costs by carefully managing component prices, inventory and shipping cost. REE also needs to continually introduce new products with higher sales prices and gross margin in order to maintain its overall gross margin. If REE is unable to manage the cost of older products or successfully introduce new products with higher gross margin, its revenue and overall gross margin would likely decline.
Risks Related to REE’s Quality
REE’s products rely on software and hardware that is highly technical, and if these systems contain errors, bugs or vulnerabilities, or if REE is unsuccessful in addressing or mitigating technical limitations in its systems, REE’s business could be adversely affected.
REE’s products rely on software and hardware that is highly technical and complex that will require modification and updates over the life of the products. In addition, REE’s products depend on the ability of such software and hardware to store, retrieve, process and manage large amounts of data. REE’s software and hardware may contain, errors, bugs or vulnerabilities, and REE’s systems are subject to certain technical limitations that may compromise REE’s ability to meet its objectives. Some errors, bugs or vulnerabilities inherently may be difficult to detect and may only be discovered after the code has been released for external or internal use. Errors, bugs, vulnerabilities, design defects or technical limitations may be found within REE’s software and hardware. Although REE attempts to remedy any issues it observes in its products as effectively and rapidly as possible, such efforts may not be timely, may hamper production or may not be to the satisfaction of REE’s potential customer base. Additionally, if REE is able to deploy updates to the software addressing certain issues and REE’s over-the-air update procedures fail to properly update the software, REE’s customer base would then be responsible for installing such updates to the software and their software will be subject to these vulnerabilities until they do so. If REE is unable to prevent or effectively remedy errors, bugs, vulnerabilities or defects in its software and hardware, REE may suffer damage to its reputation, loss of customers, loss of revenue or liability for damages, any of which could adversely affect REE’s business and financial results.
REE may become subject to product liability claims, which could harm its financial condition and liquidity if it is not able to successfully defend or insure against such claims.
REE may become subject to product liability claims, even those without merit, which could harm its business reputation, prospects, operating results, and financial condition. The automobile industry experiences significant product liability claims and REE faces inherent risk of exposure to claims in the event its products do not perform as expected or malfunction in a manner that causes personal injury or death. REE’s risks in this area are particularly pronounced given it has limited field experience with its products. A successful product liability claim against REE could require REE to pay a
22
substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about REE’s products and business and inhibit or prevent commercialization of other future product, which would have a material adverse effect on REE’s brand, business, prospects and operating results. To the extent that REE has insurance coverage, it might not be sufficient to cover all potential product liability claims. Any lawsuit seeking significant monetary damages either in excess of REE’s coverage, or outside of REE’s coverage, may have a material adverse effect on REE’s reputation, business and financial condition. REE may not be able to secure additional product liability insurance coverage on commercially acceptable terms or at reasonable costs when needed, particularly if it does face liability for its products and is forced to make a claim under its policy.
REE does not currently have extensive experience servicing its products. If REE is unable to address the service requirement of its potential customer and dealer base, its business may be materially adversely affected.
REE plans to work with strategic partners to provide predictive maintenance scheduling through smart service and maintenance artificial intelligence, or AI, in combination with over-the-air updates that seek to ensure maintenance is not performed on a standard schedule, but rather before a part will fail, which is expected to offer significant savings for unnecessary part replacements and drastically reduce downtime. There is no guarantee that REE will be successful in developing the necessary technology to actualize predictive maintenance scheduling. In addition, REE servicing may primarily be carried out through third parties certified by REE. Although such potential servicing partners may have experience in servicing other products, they will initially have limited experience in servicing REE products. There can be no assurance that REE service arrangements will adequately address the service requirements of its potential customer and dealer base to their satisfaction, or that REE and its potential servicing partners will have sufficient resources to meet these service requirements in a timely manner as the volume of products REE deliver increases. In addition, if REE is unable to roll out and establish a widespread service network that complies with applicable laws, user satisfaction could be adversely affected, which in turn could materially and adversely affect REE’s reputation, sales, results of operations, and prospects.
REE may be subject to risks associated with autonomous driving and EV technology, including but not limited to technical malfunctions, regulatory obstacles, and/or product liability.
REE’s products are being designed to be compatible with autonomous control. Autonomous driving technologies are subject to risks and there have been accidents and fatalities associated with such technologies. The safety of such technologies depends in part on users, as well as other drivers on the roadways, who may not be accustomed to using or adapting to such technologies. To the extent accidents associated with REE’s products that are used with autonomous controls occur, REE could be subject to liability, negative publicity, government scrutiny and further regulation. Any of the foregoing could materially and adversely affect REE’s results of operations, financial condition and growth prospects.
Autonomous driving technology is also subject to considerable regulatory uncertainty as the law evolves to catch up with the rapidly evolving nature of the technology itself, all of which are beyond REE’s control. REE’s products also may not achieve the requisite level of autonomous compatibility required for certification and rollout to consumers or satisfy changing regulatory requirements which could require REE to redesign, modify or update its products.
Risks Related to REE’s Employees
REE is dependent on its founders Daniel Barel and Ahishay Sardes.
REE is dependent on the services of Daniel Barel, co-founder, director and Chief Executive Officer, and Ahishay Sardes, its co-founder, director and Chief Technology Officer. Mr. Barel and Mr. Sardes are significant influences and drivers of REE’s business plan. If either Mr. Barel or Mr. Sardes were to discontinue his service to REE, REE would be significantly disadvantaged.
REE’s success depends, in part, on its ability to attract and recruit key employees and hire qualified employees and management.
REE’s success depends, in part, on its ability to retain its key personnel. The unexpected loss of or failure to retain one or more of its key employees could affect its business. REE’s success also depends, in part, on its continuing ability to identify, hire, attract, train and develop other highly qualified personnel. Because REE’s products are based on different technology than traditional internal combustion engines, individuals with sufficient training in alternative fuel, technology or EVs may not be available, and as a result, REE will need to expend significant time and expense training the employees it hires. Competition for individuals with experience designing, manufacturing and servicing EVs or their related
23
technology, parts and products is intense, and REE may not be able to attract, integrate, train, motivate or retain additional highly qualified personnel in the future. In addition, sustained declines in our share price or lower share performance relative to competitors could negatively impact REE’s appeal as an employer, harm employee morale, increase employee turnover and/or reduce the retention value of REE’s share-based compensation. The failure to attract, integrate, train, motivate and retain these additional employees could materially adversely harm its business and prospects.
REE’s business may be adversely impacted by the labor and union activities of its own employees, as well of those of any of its potential affiliates, business partners, suppliers, or otherwise related entities.
Although none of REE’s employees are currently represented by a labor union, it is common throughout the automobile industry for many employees to belong to a union, which can result in higher employee costs and increased risk of work stoppages. REE may also directly and indirectly depend upon other companies with unionized work forces, such as parts suppliers, trucking and freight companies, shipping yards, and docks, and work stoppages or strikes organized by such unions could have a material adverse impact on REE’s business, financial condition or operating results.
Risks Related to REE’s Finances
REE may not be able to continue as a going concern based on REE’s business plan to start mass production in late 2024 and early 2025 if REE is unable to obtain sufficient additional funding or does not have access to capital to finance its current business plan, and REE may be forced to change its business plan as a result.
REE’s ability to successfully carry out its business plan is primarily dependent upon its ability to raise sufficient additional capital. There are no assurances, however, that REE will be successful in obtaining an adequate level of financing needed to support its operations. If REE is unable to maintain sufficient financial resources its business, financial condition and results of operations will be materially and adversely affected.
As an early-stage growth company, REE’s ability to access capital is critical. Until REE can generate sufficient revenue to cover REE’s operating expenses, working capital and capital expenditures, REE will need to raise additional capital. Additional equity financing may not be available on favorable terms, or at all, and could be dilutive to current stockholders. Debt financing, if available, may involve restrictive covenants and dilutive financing instruments.
If capital is not available to REE when, and in the amounts needed, REE could be required to delay, scale back, or abandon some or all of our development programs and operations, which could materially harm REE’s business, financial condition and results of operations.
REE is an early stage company with a history of losses, and expects to incur significant expenses and continuing losses for the foreseeable future.
Since inception, REE has incurred, and REE expects it will continue to incur, losses and negative cash flow, either or both of which may be significant. The working capital funding necessary to start a new EV product manufacturing company is significant, and other companies have tried and failed over the last several years with billions of investment capital. While REE expects to benefit from its management’s experience, the technology it has developed to date, and the advantages offered by its UK Integration Center, REE does not expect to be profitable in the near term as REE invests in its business, builds capacity and ramps up operations, and REE cannot assure you that REE will ever achieve or be able to maintain profitability in the future. Failure to become profitable may materially and adversely affect the value of your investment. If REE achieves profitability, it will be dependent upon the successful development and commercial introduction and acceptance of EV products like Class 3 through 5 platform models for the P7 EV platform, which may not occur.
Financial results may vary significantly from period to period due to fluctuations in REE’s operating costs and other factors, which may or may not be foreseeable.
REE expects its period-to-period financial results to vary based on its operating costs, which REE anticipates will fluctuate as the pace at which it continues to design, develop and produce new products and increase production capacity. Additionally, REE’s revenues from period to period may fluctuate as it develops and introduces new products or introduces existing products to new markets for the first time. As a result of these factors, REE believes that quarter-to-quarter comparisons of its financial results, especially in the short term, are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. Moreover, REE’s financial results may not meet expectations of equity research analysts, ratings agencies or investors, who may be focused only on quarterly financial results. If any of this occurs, the trading price of our Class A Ordinary Shares could fall substantially, either suddenly or over time.
24
REE may not be able to accurately estimate demand for its products, which could result in a variety of inefficiencies in its business and hinder its ability to generate revenue. If REE fails to accurately predict its manufacturing requirements, it could incur additional costs or experience delays.
It is difficult to predict REE’s future revenues and appropriately budget for its expenses, and REE may have limited insight into trends that may emerge and affect its business. REE will be required to provide forecasts of its demand to its suppliers several months or years prior to the scheduled delivery of products to its customers. Currently, there is no historical basis for making judgments on the demand for REE’s products or its ability to develop, produce, and deliver products, or REE’s profitability in the future. If REE overestimates its requirements, its suppliers may have excess inventory, which indirectly would increase REE’s costs. If REE underestimates its requirements, its suppliers may have inadequate inventory, which could interrupt manufacturing of its products and result in delays in shipments and revenues. In addition, lead times for materials and components that REE’s suppliers order may vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. If REE fails to order sufficient quantities of product components in a timely manner, the delivery of products to its potential customer base could be delayed, which would harm REE’s business, financial condition and operating results.
REE will need to improve its operational and financial systems to support its expected growth, increasingly complex business arrangements and rules governing revenue and expense recognition and any inability to do so will adversely affect REE’s billing and reporting.
To manage the expected growth of its operations and increasing complexity, REE will need to improve its operational and financial systems, procedures, and controls and continue to increase systems automation to reduce reliance on manual operations. Any inability to do so may affect REE’s billing and reporting. REE’s current and planned systems, procedures and controls may not be adequate to support its complex arrangements and the rules governing revenue and expense recognition for its future operations and expected growth. Delays or problems associated with any improvement or expansion of REE’s operational and financial systems and controls could adversely affect REE’s relationships with its potential customer base, cause harm to its reputation and brand and could also result in errors in its financial and other reporting.
REE expects that it will need to raise additional funds and these funds may not be available to it when it needs them, or may only be available on unfavorable terms. As a result, REE may be unable to meet its future capital requirements, which could limit its ability to grow and jeopardize its ability to continue its business operations.
In the future, REE expects that it will need to raise additional capital to respond to customer demands, business opportunities, challenges, technological advancements, competitive dynamics or technologies, acquisitions or unforeseen circumstances and it may determine to engage in equity or debt financings or enter into credit facilities. In order to further business relationships with its potential customer base or partners, REE may issue equity or equity-linked securities to potential customers or partners. REE may not be able to timely secure additional debt or equity financing on favorable terms, or at all. If REE raises additional funds through the issuance of equity or convertible debt or other equity-linked securities or if it issues equity or equity-linked securities to potential customers to further business relationships, its existing stockholders could experience significant dilution. Any debt financing obtained by REE in the future could involve restrictive covenants relating to its capital raising activities and other financial and operational matters, which may make it more difficult for REE to obtain additional capital and to pursue business opportunities, including potential acquisitions. If REE is unable to obtain adequate financing or financing on terms satisfactory to REE, when REE requires them, REE’s ability to continue to grow or support its business and to respond to business challenges could be significantly limited.
REE’s insurance strategy may not be adequate to protect it from all liabilities business risks.
In the ordinary course of business, REE may be subject to losses resulting from products liability, accidents, acts of God and other claims against REE, for which REE may have no insurance coverage. While REE currently carries commercial general liability, workers’ compensation and directors’ and officers’ insurance policies, REE may not maintain as much insurance coverage as other EV market participants do, and in some cases, REE may not maintain any at all. Additionally, the policies that REE does have may include significant deductibles, and REE cannot be certain that its insurance coverage will be sufficient to cover all future claims against REE. A loss that is uninsured or exceeds policy limits may require REE to pay substantial amounts, which could adversely affect REE’s financial condition and operating results.
25
The successful assertion of one or more large claims against REE that exceeds its available insurance coverage, or results in changes to its insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on its business. In addition, REE cannot be sure that its existing insurance coverage will continue to be available on acceptable terms or that REE’s insurers will not deny coverage for future claims.
Risks Related to Regulation
REE’s financial and operational projections rely in part on existing and future regulations and incentive programs supporting EV adoption.
There has been a significant growth in the adoption of environmentally driven regulations and incentive programs with low and zero emission targets with the automotive industry being among the most impacted industries. Such measures encourage local and national governments to implement various forms of rebates and credits for the purchase of an EV. In addition, regulations in many cities, states and countries are also encouraging a shift away from — or in some cases banning entirely — fossil fuel-powered vehicles, with many of the earliest of these regulations targeted at buses, trucks and delivery vehicles. REE’s financial and operational projections include the continued growth in existing and similar regulations and incentive programs to accelerate the adoption of EV technology into the wider market. There is no guarantee that such regulations and incentive programs will be successful in encouraging adoption of EV technology, and there is no guarantee that new regulations and incentive programs will be adopted or that existing regulations and incentive programs will remain in place. For example, the development of an alternative fuel besides electricity that results in low or no emissions may shift the focus of such regulations and incentive programs away from EV technology. If new regulations and incentive programs fail to be adopted as expected or if existing regulations and incentive programs are terminated, the growth of the EV market generally and REE’s business, prospects, financial condition and operating results could be materially and adversely affected.
REE may encounter obstacles outside of its control that slow the adoption of EVs in the market, including but not limited to regulatory requirements or infrastructure limitations.
While REE’s products are subject to substantial regulation under federal, state and local laws, REE believes that its products will be in compliance with all applicable laws when they are offered to potential customers. Compliance with these regulations could be burdensome, time consuming, and expensive. However, to the extent the laws change, new laws are introduced, or if REE introduces new products in the future, some or all of its products may not continue to comply with applicable international, federal, state or local laws, and require change.
REE’s products are subject to environmental and safety federal and state regulations, including regulations promulgated by the Environmental Protection Agency, the National Highway Traffic and Safety Administration and various state agencies, and certification required for each new model year in some cases. The risks, delays, and expenses incurred in connection with these compliance activities and with obtaining approval can be substantial.
In addition, REE’s products involve a novel design and new technology, including locating critical vehicle components (steering, braking, suspension, powertrain and control) into the area between the chassis and the wheel and X-by-Wire control technology, which may not meet existing safety standards or require modification in order to comply with various regulatory requirements. In particular, X-by-Wire technology in general has not received significant regulatory attention globally (including in the U.S.). There is no guarantee that REE’s X-by-Wire technology will receive regulatory approval generally, and there is no guarantee that REE’s X-by-Wire control technology will comply with any relevant regulation that is put in place in the future. Compliance with regulatory requirements is expensive, at times requiring the replacement, enhancement or modification of equipment, facilities or operations. There can be no assurance that REE will be able to maintain its profitability by offsetting any increased costs of complying with future regulatory requirements.
REE is subject to various environmental laws and regulations that could impose substantial costs on its business and cause delays in building its manufacturing facilities.
REE’s operations are and will be subject to international, federal, state and local environmental laws and regulations, including laws relating to the use, handling, storage, disposal of and human exposure to hazardous materials. Environmental and health and safety laws and regulations can be complex, and REE has limited experience complying with them. Moreover, REE expects that it will be affected by future amendments to such laws or other new environmental and health and safety laws and regulations, which may require REE to change its operations, potentially resulting in a material adverse effect on its business, prospects, financial condition and operating results. These laws can give rise to liability for
26
administrative oversight costs, cleanup costs, property damage, bodily injury, fines and penalties. Capital and operating expenses needed to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties, third-party damages, suspension of production or a cessation of REE’s operations.
Contamination at properties REE will own or operate, REE formerly owned or operated or to which hazardous substances were sent by REE, may result in liability for REE under environmental laws and regulations, including, but not limited to, the United States Comprehensive Environmental Response, Compensation, and Liability Act, which can impose liability for the full amount of remediation-related costs without regard to fault, for the investigation and cleanup of contaminated soil and ground water, for building contamination and impacts to human health and for damages to natural resources. The costs of complying with environmental laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future, could have a material adverse effect on REE’s financial condition or operating results.
REE and its suppliers and strategic partners are or may be subject to substantial regulation and unfavorable changes to, or failure by REE or its suppliers and strategic partners to comply with any such regulations could substantially harm REE’s business and operating results.
REE’s products, and the sale of motor vehicles including EVs in general, are subject to substantial regulation under international, federal, state, and local laws. REE expects to incur significant costs in complying with these regulations. Regulations related to the EV industry and alternative energy are currently evolving and REE faces risks associated with changes to these regulations.
To the extent the laws change, REE’s products may not comply with applicable international, federal, state or local laws, which would have an adverse effect on its business. Compliance with changing regulations could be burdensome, time consuming, and expensive. To the extent compliance with new regulations is cost prohibitive, REE’s business, prospects, financial condition and operating results would be adversely affected.
Internationally, there may be laws in jurisdictions REE has not yet entered or laws it is unaware of in jurisdictions it has entered that may restrict its sales or other business practices. Even for those jurisdictions REE has analyzed, the laws in this area can be complex, difficult to interpret and may change over time. Continued regulatory limitations and other obstacles interfering with REE’s ability to sell products could have a negative and material impact on its business, prospects, financial condition and results of operations.
REE may become involved in legal and regulatory proceedings and commercial or contractual disputes, which could have an adverse effect on its profitability and consolidated financial position.
REE may be, from time to time, involved in litigation, regulatory proceedings and commercial or contractual disputes that may be significant. These matters may include, without limitation, disputes with REE’s suppliers and strategic partners and its customer and dealer base, intellectual property claims, stockholder litigation, government investigations, class action lawsuits, personal injury claims, environmental issues, customs and VAT disputes and employment and tax issues. In addition, REE could face in the future a variety of labor and employment claims against it, which could include but is not limited to general discrimination, wage and hour, privacy, ERISA or disability claims. In such matters, government agencies or private parties may seek to recover from REE very large, indeterminate amounts in penalties or monetary damages (including, in some cases, treble or punitive damages) or seek to limit REE’s operations in some way. These types of lawsuits could require significant management time and attention or could involve substantial legal liability, adverse regulatory outcomes, and/or substantial expenses to defend. Often these cases raise complex factual and legal issues and create risks and uncertainties. For example, in December 2022, a lawsuit was filed alleging that REE and its U.S. based subsidiaries stole certain trade secrets and requested, inter alia, monetary damages in an amount of no less than US$2.6 billion and exemplary damages in the amount of no less than US$5.2 billion. For more information, see “Item 8: Financial Information—Legal Proceedings”. This lawsuit, if successful, would have a material adverse impact on REE’s operating results and consolidated financial position.
REE is subject to U.S. and foreign anti-corruption and anti-money laundering laws and regulations. As a result, REE may face criminal liability and other serious consequences for violations of such laws, which could harm its business.
REE is or will be subject to anti-corruption, anti-bribery, anti-money laundering, financial and economic sanctions and similar laws and regulations in various jurisdictions in which it conducts or in the future may conduct activities, including the U.S. Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act 2010, and other anti-corruption laws and regulations. The FCPA and the U.K. Bribery Act 2010 prohibit REE and its officers, directors, employees and business
27
partners acting on its behalf, including agents, from corruptly offering, promising, authorizing or providing anything of value to a “foreign official” for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. The FCPA also requires companies to make and keep books, records and accounts that accurately reflect transactions and dispositions of assets and to maintain a system of adequate internal accounting controls. The U.K. Bribery Act also prohibits non-governmental “commercial” bribery and soliciting or accepting bribes. A violation of these laws or regulations could adversely affect REE’s business, results of operations, financial condition and reputation. REE’s policies and procedures designed to ensure compliance with these regulations may not be sufficient and its directors, officers, employees, representatives, consultants, agents, and business partners could engage in improper conduct for which it may be held responsible.
Non-compliance with anti-corruption, anti-bribery, anti-money laundering or financial and economic sanctions laws could subject REE to whistleblower complaints, adverse media coverage, investigations, and severe administrative, civil and criminal sanctions, collateral consequences, remedial measures and legal expenses, all of which could materially and adversely affect REE’s business, results of operations, financial condition and reputation. In addition, changes in economic sanctions laws in the future could adversely impact REE’s business and investments in its shares.
The intended tax effects of REE’s corporate structure and intercompany arrangements depend on the application of the tax laws of various jurisdictions and on how REE operates its business.
REE is incorporated in and a tax resident in Israel. REE currently has subsidiaries in the UK, Germany, the U.S. and Japan. If REE succeeds in growing its business, REE expects to conduct increased operations through its subsidiaries in various countries and tax jurisdictions, in part through intercompany service agreements between REE and its subsidiaries. In that case, REE’s corporate structure and intercompany transactions, including the manner in which REE develops and uses its intellectual property, will be organized so that REE can achieve its business objectives in a tax-efficient manner and in compliance with applicable transfer pricing rules and regulations. If two or more affiliated companies are located in different countries or tax jurisdictions, the tax laws and regulations of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arm’s length and that appropriate documentation be maintained to support the transfer prices. While REE believes that it operates in compliance with applicable transfer pricing laws and intends to continue to do so, its transfer pricing procedures are not binding on applicable taxing authorities.
Significant judgment is required in evaluating REE’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, REE’s effective tax rates could be adversely affected by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. In addition, its effective tax rate and the availability of any tax holidays could be adversely affected if REE does not obtain favorable tax rulings from certain taxing authorities. As REE intends to operate in various countries and taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by taxing authorities of these jurisdictions. It is not uncommon for taxing authorities in different countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arm’s length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property.
In addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. REE continues to assess the impact of such changes in tax laws and interpretations on its business and may determine that changes to its structure, practice, tax positions or the manner in which it conducts its business are necessary in light of such changes and developments in the tax laws of the jurisdictions in which REE operates. Such changes may nevertheless be ineffective in avoiding an increase in its consolidated tax liability, which could adversely affect its financial condition, results of operations and cash flow.
If taxing authorities in any of these countries were to successfully challenge REE’s transfer prices as not reflecting arm’s length transactions, they could require REE to adjust its transfer prices and thereby reallocate its income to reflect these revised transfer prices, which could result in a higher tax liability to REE. In addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, potentially resulting in double taxation. If taxing authorities were to allocate income to a higher tax jurisdiction, subject REE’s income to double taxation or assess interest and penalties, it would increase REE’s consolidated tax liability, which could adversely affect its financial condition, results of operations and cash flow.
28
Risks Related to Being a Public Company
REE’s management has limited experience operating a public company, and thus its success in such endeavors cannot be guaranteed.
REE’s executive officers have limited experience managing a publicly traded company, interacting with public company investors and complying with the complex laws pertaining to public companies in the United States. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could require the devotion of a significant amount of their time to these activities, which will result in less time being devoted to the management and growth of the company, and could also result in increased costs due to hiring consultants to assist with compliance of public company laws, rules and regulations. REE has hired additional employees since becoming a public company has upgraded its finance and accounting systems to an enterprise system suitable for a public company, and a delay could impact its ability or prevent it from timely reporting its operating results, timely filing required reports with the SEC and complying with Section 404 of the Sarbanes-Oxley Act. The development and implementation of the standards and controls necessary for REE to achieve the level of accounting standards required of a public company in the U.S. may require costs greater than expected. REE may not yet have adequate personnel with the appropriate level of knowledge, experience and training in the accounting policies, practices or internal control over financial reporting required of public companies in the U.S., and it is possible that REE will be required to further expand its employee base and hire additional employees to support its operations as a public company which will increase its operating costs in future periods.
If REE is unable for any reason to meet the continued listing requirements of Nasdaq, such action or inaction could result in a delisting of the Class A Ordinary Shares.
On November 10, 2022, REE announced that it received an initial notification letter from Nasdaq’s Listing Qualifications Department notifying REE that it had 180 days to regain compliance with the minimum bid price requirement set forth in Nasdaq’s continued listing rules. Nasdaq’s continued listing rules require that listed securities maintain a minimum bid price of $1.00 per share, and that a failure to meet the minimum bid price requirement exists if the
deficiency continues for a period of 30 consecutive business days or more. On November 1, 2023, REE received a notification letter from Nasdaq Listing Qualifications staff notifying REE that it had regained compliance with the minimum bid price requirement set forth in the Nasdaq Listing Rule 5550(a)(2).
If REE fails to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist the Class A Ordinary Shares. Such a delisting would likely have a negative effect on the price of the Class A Ordinary Shares and would impair your ability to sell or purchase the Class A Ordinary Shares when you wish to do so. In the event of a delisting, REE can provide no assurance that any action taken by it to restore compliance with listing requirements would allow its Class A Ordinary Shares to become listed again.
If securities and industry analysts do not publish research or reports about REE’s business or publish negative reports about its business, REE’s share price and trading volume may suffer.
The trading market for the Class A Ordinary Shares is and will be influenced by the research and reports that securities or industry analysts publish about REE or its business. REE does not have any control over such analysts and cannot provide any assurance that analysts will continue to cover REE or provide favorable coverage. If one or more of the analysts who cover REE downgrade REE’s shares or change their opinion of REE’s shares, REE’s share price would likely decline. If one or more of these analysts cease coverage of REE or fail to regularly publish reports on REE, REE could lose visibility in the financial markets, which could cause its share price or trading volume to decline.
As REE grows rapidly and expands into multiple global markets, there is a risk that it will fail to maintain an effective system of internal controls and its ability to produce timely and accurate financial statements or comply with applicable regulations could be adversely affected. REE may identify material weaknesses in its internal controls over financing reporting which it may not be able to remedy in a timely manner.
As a public company, REE operates in an increasingly demanding regulatory environment, which requires it to comply with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the regulations of Nasdaq, the rules and regulations of the SEC, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for REE to produce reliable financial reports and are important to help prevent financial fraud. Commencing with its fiscal
29
year ended December 31, 2021, REE performed system and process evaluation and testing of its internal controls over financial reporting to allow management to report on the effectiveness of its internal controls over financial reporting in its Form 20-F filing for that year, as required by Section 404 of the Sarbanes-Oxley Act.
The process of building and maintaining its accounting and financial functions and infrastructure requires significant additional professional fees, internal costs and management efforts. REE has implemented a new internal system to combine the management of its financial, accounting, human resources and other functions. However, such a system requires REE to complete many processes and procedures for the effective use of the system or to run its business using the system, which may result in substantial costs. Any disruptions or difficulties using the system could adversely affect REE’s controls and harm its business. Moreover, such disruption or difficulties could result in unanticipated costs and diversion of management’s attention. In addition, REE may discover additional weaknesses in its system of internal financial and accounting controls and procedures that could result in a material misstatement of its financial statements. REE’s internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
If REE is unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if it is unable to maintain proper and effective internal controls, REE may not be able to produce timely and accurate financial statements. If REE cannot provide reliable financial reports or prevent fraud, its business and results of operations could be harmed, investors could lose confidence in its reported financial information and REE could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.
REE has incurred and expects to continue to incur increased costs as a result of its operation as a public company, and its management will be required to devote substantial time and resources to employing new compliance initiatives in order to confirm with the regulatory requirements applicable to public companies.
REE has incurred and expects to continue to incur significant legal, accounting and other expenses as a public company that it did not incur as a private company, and these expenses may increase even more after REE is no longer an emerging growth company, as defined in Section 2(a) of the Securities Act. As a public company, REE is subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules adopted, and to be adopted, by the SEC and Nasdaq. REE’s management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, REE expects these rules and regulations to substantially increase its legal and financial compliance costs and to make some activities more time-consuming and costly. The increased costs will increase REE’s net loss. For example, REE expects these rules and regulations to make it more difficult and more expensive for it to obtain director and officer liability insurance and it may be forced to accept reduced policy limits or incur substantially higher costs to maintain the same or similar coverage. REE cannot predict or estimate the amount or timing of additional costs it may incur to respond to these requirements. The impact of these requirements could also make it more difficult for REE to attract and retain qualified persons to serve on its board of directors, its board committees or as executive officers.
Risks Related to REE’s Information Security
In order to enter into production of its products, REE must develop complex software and technology systems in coordination with its suppliers and strategic partners. REE can provide no guarantee that such systems will be successfully developed.
REE’s products will use a substantial amount of third-party and in-house software codes and complex hardware to operate. The development of such advanced technologies are inherently complex, and REE will need to coordinate with its suppliers and strategic partners in order to reach production for its products. Defects and errors may be revealed over time and REE’s control over the performance of third-party services and systems may be limited. Thus, REE’s potential inability to develop the necessary software and technology systems may harm its competitive position.
REE is relying on suppliers and strategic partners to develop a number of emerging technologies for use in its products, including lithium-ion battery technology. These technologies are not today, and may not ever be, commercially viable. There can be no assurances that REE’s suppliers and strategic partners will be able to meet the technological requirements, production timing, and volume requirements to support its business plan. In addition, the technology may not comply with the cost, performance useful life and warranty characteristics REE anticipates in its business plan. As a result, REE’s
30
business plan could be significantly impacted and REE may incur significant liabilities under warranty claims which could adversely affect its business, prospects, and results of operations.
REE is subject to stringent and changing privacy laws, regulations and standards, information security policies and contractual obligations related to data privacy and security. REE’s actual or perceived failure to comply with such obligations could harm its business. Such legal requirements are evolving, uncertain and may require improvements in, or changes to, REE’s policies and operations.
REE expects to face significant challenges with respect to information security and privacy, including the storage, transmission and sharing of confidential information. In the future, REE plans to transmit and store confidential and private information of its business customers, such as personal information, including names, accounts, user IDs and passwords, and payment or transaction related information.
REE has adopted strict information security policies and deployed advanced measures to implement the policies, including, among others, advanced encryption technologies, and plans to continue to deploy additional measurers as REE grows. However, advances in technology, an increased level of sophistication and diversity of REE’s products and services, an increased level of expertise of hackers, new discoveries in the field of cryptography or others can still result in a compromise or breach of the measures that REE uses. If REE is unable to protect its systems, and hence the information stored in its systems, from unauthorized access, use, disclosure, disruption, modification or destruction, such problems or security breaches could cause a loss, give rise to REE’s liabilities to the owners of confidential information or even subject it to fines and penalties. In addition, complying with various laws and regulations could cause REE to incur substantial costs or require it to change its business practices, including its data practices, in a manner adverse to REE’s business.
In addition, REE will need to comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S., Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation, or GDPR, which became effective on May 25, 2018 and the State of California adopted the California Consumer Privacy Act of 2018, or CCPA, which became effective in January 2020. Both the GDPR and the CCPA impose additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored. Compliance with existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under the GDPR) and regulations can be costly and may place restrictions REE’s business and the manner in which it interacts with its customers. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against REE, and misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against REE by governmental entities or others, and damage to its reputation and credibility, and could have a negative impact on revenues and profits.
Significant capital and other resources may be required to protect against information security breaches or to alleviate problems caused by such breaches or to comply with REE’s privacy policies or privacy-related legal obligations. The resources required may increase over time as the methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Any failure or perceived failure by REE to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other customer data, could cause REE’s potential customer base to lose trust in REE and could expose REE to legal claims. Any perception by the public that online transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks could inhibit the growth of online retail and other online services generally and decrease demand in the last-mile and mid-market delivery markets, which may reduce the number of orders REE receives.
The global data protection landscape is rapidly evolving, and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. REE may not be able to monitor and react to all developments in a timely manner. For example, California adopted the CCPA, which became effective in January 2020. The CCPA establishes a privacy framework for covered businesses, including an expansive definition of personal information and data privacy rights for California residents. The CCPA includes a framework with potentially severe statutory damages and private rights of action. The CCPA requires covered businesses to provide new disclosures to California residents, provide them new ways to opt-out of certain disclosures of personal information, and allow for a new cause of action for data breaches. As REE expands its operations, the CCPA may increase REE’s compliance costs and potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States. Other states have begun to propose similar laws. Compliance with any applicable privacy and data security
31
laws and regulations is a rigorous and time-intensive process, and REE may be required to put in place additional mechanisms to comply with such laws and regulations.
REE publishes privacy policies and other documentation regarding its collection, processing, use and disclosure of personal information and/or other confidential information. Although REE endeavors to comply with its published policies and other documentation, REE may at times fail to do so or may be perceived to have failed to do so. Moreover, despite its efforts, REE may not be successful in achieving compliance if REE’s employees, contractors, service providers or vendors fail to comply with its published policies and documentation. Such failures can subject REE to potential local, state and federal action if they are found to be deceptive, unfair, or misrepresentative of its actual practices. Claims that REE has violated individuals’ privacy rights or failed to comply with data protection laws or applicable privacy notices even if REE is not found liable, could be expensive and time-consuming to defend and could result in adverse publicity that could harm its business.
REE is subject to cybersecurity risks to its various systems and software and any material failure, weakness, interruption, cyber event, incident or breach of security could prevent REE from effectively operating its business, or may cause harm to its business that may or may not be reparable.
REE is at risk for interruptions, outages and breaches of its: (a) operational systems, including business, financial, accounting, product development, data processing or production processes, owned by REE or its suppliers and strategic partners; (b) facility security systems, owned by REE or its suppliers and strategic partners; (c) transmission control modules or other in-product technology, owned by REE or its suppliers and strategic partners; (d) the integrated software in REE’s products; or (e) customer data that REE processes or its suppliers and strategic partners process on its behalf. Such incidents could: materially disrupt REE’s operational systems; result in loss of intellectual property, trade secrets or other proprietary or competitively sensitive information; compromise certain information of employees, potential customers, suppliers and strategic partners, or others; jeopardize the security of REE’s facilities; or affect the performance of in-product technology and the integrated software in REE’s products.
REE plans to include in-vehicle services and functionality that utilize data connectivity to monitor performance and timely capture opportunities to enhance on-the-road performance and for safety and cost-saving preventative maintenance. The availability and effectiveness of REE’s services depend on the continued operation of information technology and communications systems. REE’s systems will be vulnerable to damage or interruption from, among others, physical theft, fire, terrorist attacks, natural disasters, power loss, war, telecommunications failures, viruses, denial or degradation of service attacks, ransomware, social engineering schemes, insider theft or misuse or other attempts to harm REE’s systems. REE intends to use its in-vehicle services and functionality to log information about each vehicle’s use in order to aid REE in vehicle diagnostics and servicing. REE’s potential customer base may object to the use of this data, which may increase REE’s vehicle maintenance costs and harm its business prospects.
Moreover, there are inherent risks associated with developing, improving, expanding and updating REE’s current systems, such as the disruption of REE’s data management, procurement, production execution, finance, supply chain and sales and service processes. These risks may affect REE’s ability to manage its data and inventory, procure parts or supplies or assemble, deploy, deliver and service its products, adequately protect its intellectual property or achieve and maintain compliance with, or realize available benefits under, applicable laws, regulations and contracts. REE cannot be sure that these systems upon which it relies, including those of its suppliers and strategic partners, will be effectively implemented, maintained or expanded as planned. If REE does not successfully implement, maintain or expand these systems as planned, its operations may be disrupted, its ability to accurately and timely report its financial results could be impaired, and deficiencies may arise in its internal control over financial reporting, which may impact REE’s ability to certify its financial results. Moreover, REE’s proprietary information or intellectual property could be compromised or misappropriated and its reputation may be adversely affected. If these systems do not operate as REE expects them to, REE may be required to expend significant resources to make corrections or find alternative sources for performing these functions.
Any unauthorized control or manipulation of the information technology systems in REE’s products could result in loss of confidence in REE and its products and harm REE’s business.
REE’s products contain complex information technology systems. For example, REE’s products are outfitted with built-in data connectivity to accept and install periodic remote updates from REE to improve or update the functionality of its products. REE has designed, implemented and tested security measures intended to prevent cybersecurity breaches or unauthorized access to its information technology networks, its products and their systems, and intends to implement
32
additional security measures as necessary. However, hackers may attempt in the future, to gain unauthorized access to modify, alter and use such networks, products and systems to gain control of, or to change, REE’s products’ functionality, user interface and performance characteristics, or to gain access to data stored in or generated by the products. Vulnerabilities could be identified in the future and REE’s remediation efforts may not be successful. Any unauthorized access to or control of REE’s products or their systems or any loss of data could result in legal claims or proceedings. In addition, regardless of their veracity, reports of unauthorized access to REE’s products, their systems or data, as well as other factors that may result in the perception that REE’s products, their systems or data are capable of being “hacked,” could negatively affect REE’s brand and harm its business, prospects, financial condition and operating results.
REE intends to retain certain personal information about its products, customers, employees and others that, if compromised, could have a material, adverse impact on REE’s financial performance and results of operations or prospects.
REE plans to collect, store, transmit and otherwise process data from products, customers, employees and others as part of its business and operations, which may include personal data or confidential or proprietary information. REE also works with suppliers and strategic partners that collect, store and process such data on its behalf and in connection with its products. There can be no assurance that any security measures that REE or its suppliers and strategic partners have implemented will be effective against current or future security threats. If a compromise of data were to occur, REE may become liable under its contracts with other parties and under applicable law for damages and incur penalties and other costs to respond to, investigate and remedy such an incident. REE’s systems, networks and physical facilities could be breached or personal information could otherwise be compromised due to employee error or malfeasance, if, for example, third parties attempt to fraudulently induce REE’s employees or REE’s customers to disclose information or user names and/or passwords. Third parties may also exploit vulnerabilities in, or obtain unauthorized access to, products, systems, networks and/or physical facilities utilized by REE’s service providers and vendors.
Risks Related to REE’s Intellectual Property
REE may incur significant costs and expenses in connection with the protection and enforcement of its intellectual property rights, including but not limited to litigation costs.
REE relies on a combination of patents, trade secrets (including know-how), employee and third-party nondisclosure agreements, copyrights, trademarks, intellectual property licenses, and other contractual rights to establish and protect its rights in its technology. Despite REE’s efforts to protect its proprietary rights, third parties may attempt to copy or otherwise obtain and use REE’s intellectual property or seek court declarations that they do not infringe upon its intellectual property rights. Monitoring unauthorized use of REE’s intellectual property is difficult and costly, and the steps REE has taken or will take will prevent misappropriation. From time to time, REE may have to resort to litigation to enforce its intellectual property rights, which could result in substantial costs and diversion of its resources.
The protection of REE’s intellectual property rights is important to its future business opportunities. However, the measures REE takes to protect its intellectual property from unauthorized use by others may not be effective for various reasons, including the following:
•as noted below, some of the patent applications REE files may not result in the issuance of patents at least in some of the applicable jurisdictions;
•the scope of REE’s patents that may subsequently be granted may not be broad enough to protect its proprietary rights;
•patents are territorial and provide rights only in jurisdictions in which patents are granted;
•REE’s issued patents may be challenged or invalidated by third parties;
•REE’s employees or business partners may breach their confidentiality, non-disclosure and non-use obligations to REE;
•third parties may independently develop technologies that are the same or similar to REE’s;
•the costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may make enforcement impracticable; and
•current and future competitors may circumvent or otherwise design around REE’s patents.
33
Patent, trademark, and trade secret laws vary significantly throughout the world. For example, a number of countries do not protect intellectual property rights to the same extent as the laws of the United States. Failure to adequately protect REE’s intellectual property rights could result in its competitors offering similar products, potentially resulting in the loss of some of REE’s competitive advantage and a decrease in its revenue which, would adversely affect its business, prospects, financial condition and operating results.
Also, while REE has registered and applied for trademarks in an effort to protect its investment in its brand and goodwill with customers, competitors may challenge the validity of those trademarks and other brand names in which REE has invested. Such challenges can be expensive and may adversely affect REE’s ability to maintain the goodwill gained in connection with a particular trademark.
Lawsuits alleging infringement or misappropriation of intellectual property rights of third parties could be both costly and time consuming and could prevent REE from developing or commercializing its future products.
Companies, organizations, or individuals, including REE’s competitors, may hold or obtain patents, trademarks or other proprietary rights that would prevent, limit or interfere with REE’s ability to make, use, develop, sell, lease or market its products which could make it more difficult for REE to operate its business. From time to time, REE may receive communications from holders of patents or trademarks regarding their proprietary rights. Companies holding patents or other intellectual property rights may bring suits alleging infringement of such rights or otherwise assert their rights and urge REE to take licenses. For example, in December 2022, a lawsuit was filed alleging that the REE and its U.S. based subsidiaries have stolen certain trade secrets and requested, inter alia, monetary damages in an amount of no less than US$2.6 billion and exemplary damages in the amount of no less than US$5.2 billion. For more information, see “Item 8: Financial Information—Legal Proceedings”. REE’s applications and uses of trademarks relating to its design, software or artificial intelligence technologies could be found to infringe upon existing trademark ownership and rights. In addition, if REE is determined to have infringed upon a third party’s intellectual property rights, it may be required to do one or more of the following:
•cease selling, licensing, or incorporating certain components into, or using products or offering goods or services that incorporate or use the challenged intellectual property;
•pay substantial damages;
•seek a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, or at all;
•redesign its products or other goods or services; or
•establish and maintain alternative branding for its products and services.
In the event of a successful claim of infringement against REE and REE’s failure or inability to obtain a license to the infringed technology or other intellectual property right, REE’s business, prospects, operating results and financial condition could be materially and adversely affected. In addition, any litigation or claims, whether or not valid, could result in substantial costs, negative publicity and diversion of resources and management attention.
Patent applications submitted by REE to the relevant authorities may not result in granted patents or may require modification in order to obtain approval.
REE cannot be certain that it is the first inventor of the subject matter to which it has filed a particular patent application, or if it is the first party to file such a patent application. If another party has disclosed the same subject matter, REE may not be entitled to the protection sought by the patent application. Further, the scope of protection of issued patent claims is often difficult to determine. As a result, REE cannot be certain that the patent applications that it files will issue, or that its issued patents will afford protection against competitors with similar technology. In addition, REE’s competitors may design around REE’s issued patents, which may adversely affect its business, prospects, financial condition or operating results.
REE cannot assure that it will be granted patents pursuant to its pending applications. Even if REE’s patent applications succeed and it is issued patents, it is still uncertain whether these patents will be contested, circumvented or invalidated in the future. In addition, the rights granted under any issued patents may not provide REE with meaningful protection or competitive advantages. The claims under any patents that issue from REE’s patent applications may not be broad enough to prevent others from developing technologies that are similar or that achieve results similar to REE’s. The intellectual property rights of others could also bar REE from licensing and exploiting any patents that issue from its pending applications. Numerous patents and pending patent applications owned by others exist in the fields in which REE has
34
developed and are developing its technology. These patents and patent applications might have priority over REE’s patent applications and could subject its patent applications to invalidation. Finally, in addition to those who may claim priority, any of REE’s existing or pending patents may also be challenged by others on the basis that they are otherwise invalid or unenforceable.
REE may be subject to damages resulting from claims that either it or any of its employees wrongfully used or disclosed alleged trade secrets of their employees’ former employers or that they allegedly violated certain covenants, such as non-compete agreements, to which REE or its employees may have been previously or currently bound.
Many of REE’s employees were previously employed by other technology or automotive companies or their suppliers. REE may be subject to damages resulting from claims that it or these employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. For example, in December 2022, a lawsuit was filed alleging that the REE and its U.S. based subsidiaries have stolen certain trade secrets and requested, inter alia, monetary damages in an amount of no less than US$2.6 billion and exemplary damages in the amount of no less than US$5.2 billion. For more information, see “Item 8: Financial Information—Legal Proceedings”. Litigation may be necessary to defend against these claims. If REE fails in defending such claims, in addition to paying monetary damages, it may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent REE’s ability to commercialize its products, which could severely harm its business. Even if REE is successful in defending against these claims, litigation could result in substantial costs and demand on management resources.
In addition to patented technology, REE relies on its unpatented proprietary technology, trade secrets, processes and knowledge.
REE relies on proprietary information (such as trade secrets, know-how and confidential information) to protect intellectual property that may not be patentable or subject to copyright, trademark, trade dress or service mark protection, or that REE believes is best protected by means that do not require public disclosure. REE generally seeks to protect this proprietary information by entering into confidentiality agreements, or consulting, services or employment agreements that contain non-disclosure and non-use provisions with its employees, consultants, contractors and third parties. However, REE may fail to enter into the necessary agreements, and even if entered into, these agreements may be breached or may otherwise fail to prevent disclosure, third-party infringement or misappropriation of its proprietary information, may be limited as to their term and may not provide an adequate remedy in the event of unauthorized disclosure or use of proprietary information. REE has limited control over the protection of trade secrets used by its suppliers and strategic partners and could lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, REE’s proprietary information may otherwise become known or be independently developed by its competitors or other third parties. To the extent that its employees, consultants, contractors, advisors and other third parties use intellectual property owned by others in their work for REE, disputes may arise as to the rights in related or resulting know-how and inventions. Costly and time-consuming litigation could be necessary to enforce and determine the scope of REE’s proprietary rights, and failure to obtain or maintain protection for its proprietary information could adversely affect its competitive business position. Furthermore, laws regarding trade secret rights in certain markets where REE operates may afford little or no protection to its trade secrets.
REE also relies on physical and electronic security measures to protect its proprietary information, but it cannot provide assurance that these security measures will not be breached or provide adequate protection for its property. There is a risk that third parties may obtain and improperly utilize REE’s proprietary information to its competitive disadvantage. REE may not be able to detect or prevent the unauthorized use of such information or take appropriate and timely steps to enforce its intellectual property rights.
The terms of grants received from the Israeli government require us to satisfy specified conditions in order to transfer outside of Israel the manufacture of products based on know-how funded by the Israel Innovation Authority or to transfer outside of Israel the know-how itself.
Under the Israeli Encouragement of Research, Development and Technological Innovation in Industry Law, 5744-1984, or the Innovation Law, research and development programs that meet specified criteria and are approved by a committee of the Israel Innovation Authority of the Israeli Ministry of Economy and Industry, or IIA (formerly known as Office of Chief Scientist), are eligible for grants from the IIA. The grant amounts are determined by the research committee and are typically a percentage of the project’s expenditures. Under most programs, the grantee is required to pay royalties to the State of Israel from the sale of products developed under the program.
35
REE’s research and development efforts in relation to its Softwheel products have been partially financed through royalty-bearing and non-royalty bearing grants from the IIA in the total amount of $1,215,000. As of December 31, 2023, REE’s remaining contingent obligation with respect to royalty-bearing participation received or accrued, net of royalties paid or accrued, totaled approximately $733,000.
Under the research and development agreements with the IIA and pursuant to applicable laws, REE is required to pay royalties at the rate of 3-5% sales of products that incorporate know-how developed with the IIA-funded, royalty-bearing grants. Such royalties are due up to an amount equal to 100% of the IIA grants received, linked to the U.S. dollar plus interest. Until October 25, 2023, the interest was calculated at a rate based on 12-month LIBOR applicable to U.S. Dollar deposits. However, on October 25, 2023, the IIA published a directive concerning changes in royalties to address the expiration of the LIBOR. Under such directive, regarding IIA grants approved by the IIA prior to January 1, 2024 but which are outstanding thereafter, as of January 1, 2024 the annual interest is calculated at a rate based on 12-month SOFR, or at an alternative rate published by the Bank of Israel plus 0.72%; and, for grants approved on or following January 1, 2024 the annual interest shall be the higher of (i) the 12 months SOFR interest rate, plus 1%, or (ii) a fixed annual interest rate of 4%. If REE returns to production of these products outside of Israel and generates sales, the ceiling will increase based on the percentage of production that is outside of Israel, up to a maximum of 300% of the IIA grants, linked to the dollar and bearing interest as noted above.
•Local Manufacturing Obligation. The terms of the grants under the Innovation Law require that REE manufacture the products developed with these grants in Israel (but do not restrict the sale of products that incorporate the know-how). Under the regulations promulgated under the Innovation Law, the products may be manufactured outside Israel by REE or by another entity only if prior approval is received from the IIA (such approval is not required for the transfer of up to 10% of the manufacturing capacity in the aggregate, in which case a notice must be provided to the IIA and not objected to by the IIA within 30 days of such notice).
•Know-How transfer limitation
◦The Innovation Law restricts the ability to transfer know-how funded by the IIA outside of Israel. Transfer of IIA funded know-how outside of Israel requires prior approval of the IIA and may be subject to payments to the IIA, calculated according to formulae provided under the Innovation Law. If REE wishes to transfer IIA funded know-how, the terms for approval will be determined according to the nature of the transaction and the consideration paid to REE in connection with such transfer.
◦Approval of transfer of IIA funded know-how to another Israeli company may be granted only if the recipient abides by the provisions of the Innovation Law and related regulations, including the restrictions on the transfer of know-how and manufacturing rights outside of Israel.
•Change of Control. Any non-Israeli citizen, resident or entity that, among other things, (i) becomes a holder of 5% or more of REE’s share capital or voting rights, (ii) is entitled to appoint one or more of REE’s directors or our chief executive officer or (iii) serves as one of REE’s directors or as its chief executive officer (including holders of 25% or more of the voting power, equity or the right to nominate directors in such direct holder, if applicable) is required to notify the IIA and undertake to comply with the rules and regulations applicable to the grant programs of the IIA, including the restrictions on transfer described above.
Approval to manufacture products outside of Israel or consent to the transfer of IIA funded know-how, if requested, is within the discretion of the IIA. Furthermore, the IIA may impose certain conditions on any arrangement under which it permits us to transfer IIA funded know-how or manufacturing out of Israel. The consideration available to REE’s shareholders in a future transaction involving the transfer outside of Israel of know-how developed with IIA funding (such as a merger or similar transaction) may be reduced by any amounts that REE is required to pay to the IIA.
Risks Related to REE’s Dual Class Structure
The dual class structure of our Ordinary Shares has the effect of concentrating voting power with REE’s Founders, who serve as its Chief Executive Officer and Chief Technology Officer, which limits an investor’s ability to influence the outcome of important transactions, including a change in control.
The Class B Ordinary Shares have 10 votes per share, while shares of Class A Ordinary Shares have one vote per share. REE’s Founders, Daniel Barel and Ahishay Sardes, hold all Class B Ordinary Shares granting each of them, when combined with each of their holdings of Class A Ordinary Shares, approximately 38.2% of voting power and together approximately 76.4% of the voting power of REE as of March 12, 2024. See “Item 7A. Major shareholders”. As a result, if they act together, they will be able to control matters submitted to REE’s shareholders for approval, including the election
36
of directors, amendments of its organizational documents and any merger, consolidation, sale of all or substantially all of its assets or other major corporate transactions (although neither Founder individually has a majority of the voting power). REE’s Founders may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. While the Class B Ordinary Shares do not have any economic rights, this concentrated control may have the effect of delaying, preventing or deterring a change in control of REE, could deprive its shareholders of an opportunity to receive a premium for their shares as part of a sale of REE, and might ultimately affect the market price of shares of Class A Ordinary Shares.
REE cannot predict the impact REE’s dual class structure may have on the stock price of Class A Ordinary Shares.
REE cannot predict whether REE’s dual class structure will result in a lower or more volatile market price of Class A Ordinary Shares or in adverse publicity or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indexes. In July 2017, FTSE Russell and S&P Dow Jones announced that they would cease to allow most newly public companies utilizing dual or multi-class capital structures to be included in their indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up the S&P Composite 1500. Beginning in 2017, MSCI, a leading stock index provider, opened public consultations on their treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from certain of its indices; however, in October 2018, MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. Under the announced policies, REE’s dual class capital structure makes REE ineligible for inclusion in certain indices, and as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track those indices will not be investing in its shares. These policies are still fairly new and it is as of yet unclear what effect, if any, they will have on the valuations of publicly traded companies excluded from the indices, but it is possible that they may depress these valuations compared to those of other similar companies that are included. Because of REE’s dual class structure, REE will likely be excluded from certain of these indexes and REE cannot assure you that other stock indexes will not take similar actions. Given the sustained flow of investment funds into passive strategies that seek to track certain indexes, exclusion from stock indexes would likely preclude investment by many of these funds and could make Class A Ordinary Shares less attractive to other investors. As a result, the market price of Class A Ordinary Shares could be adversely affected.
Risks Related to REE’s Incorporation and Location in Israel
Political, economic and military conditions in Israel could adversely affect REE’s business.
REE is incorporated under the laws of the State of Israel, and its principal research and development facilities, including REE’s major data centers, are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect its business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its neighboring countries, as well as terrorist acts committed within Israel by hostile elements. In recent years, Israel has been engaged in sporadic armed conflicts with Hamas, an Islamist terrorist group that controls the Gaza Strip, with Hezbollah, an Islamist terrorist group that controls large portions of southern Lebanon, and with Iranian-backed military forces in Syria. In addition, Iran has threatened to attack Israel and may be developing nuclear weapons. Some of these hostilities were accompanied by missiles being fired against civilian targets in various parts of Israel, including areas in which our employees, and some of our consultants are located, and negatively affected business conditions in Israel.. In the event that REE’s facilities are damaged as a result of hostile action or hostilities otherwise disrupt the ongoing operation of its facilities, its ability to deliver products to its customer could be materially adversely affected. Any hostilities, armed conflicts, terrorist activities involving Israel or the interruption or curtailment of trade between Israel and its trading partners, or any political instability in the region could adversely affect business conditions and our results of operations and could make it more difficult for us to raise capital. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements. Continued hostilities between Israel and its neighbors and any future armed conflict, terrorist activity or political instability in the region could adversely affect our operations in Israel and adversely affect the market price of our Class A Ordinary Shares. An escalation of tensions or violence might result in a significant downturn in the economic or financial condition of Israel, which could have a material adverse effect on our operations in Israel and our business.
REE’s commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli government currently covers the reinstatement under the Property Tax and Compensation Fund Law, 1961, the reinstatement is limited and partial compensation value of direct damages that are caused by terrorist attacks or
37
acts of war, REE cannot assure you that this government coverage will be maintained or that it will sufficiently cover REE’s potential damages. Any losses or damages incurred by REE could have a material adverse effect on its business.
Several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or increases. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturn in the economic or financial condition of Israel, could adversely affect REE’s operations and product development, and could cause its sales to decrease.
In addition, many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. REE’s operations could be disrupted by such call-ups, particularly if such call-ups include the call-up of members of REE’s management. Such disruption could materially adversely affect its business, financial condition and results of operations.
Israel’s most recent general elections were held on April 9, 2019, September 17, 2019, March 2, 2020, March 23, 2021 and November 1, 2022. In addition, proposed judicial reform has sparked widespread protests across Israel. Uncertainty surrounding future elections and the outcome of the judicial reform in Israel may continue and the political situation in Israel may further deteriorate. Actual or perceived political instability in Israel or any negative changes in the political environment, may individually or in the aggregate adversely affect the Israeli economy and, in turn, our business, financial condition, results of operations and growth prospects.
Investors’ rights and responsibilities of REE’s shareholders are governed by Israeli law, which may differ in some respects from the rights and responsibilities of shareholders of non-Israeli companies.
Because REE was incorporated under Israeli law, the rights and responsibilities of its shareholders are governed by its Amended and Restated Articles and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders of U.S. and other non-Israeli corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association, an increase of the company’s authorized share capital, a merger of the company and approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of an office holder in the company has a duty to act in fairness towards the company. These provisions may be interpreted to impose additional obligations and liabilities on REE’s shareholders that are not typically imposed on shareholders of U.S. corporations.
Provisions of Israeli law and REE’s Amended and Restated Articles may delay, prevent or make undesirable an acquisition of all or a significant portion of its shares or assets.
Provisions of Israeli law and REE’s Amended and Restated Articles could have the effect of delaying or preventing a change in control and may make it more difficult for a third-party to acquire REE or its shareholders to elect different individuals to REE’s board of directors, even if doing so would be considered to be beneficial by some of REE’s shareholders, and may limit the price that investors may be willing to pay in the future for the Class A Ordinary Shares. Among other things:
•Israeli corporate law regulates mergers and requires that a tender offer be effected when more than a specified percentage of shares in a company are purchased;
•Israeli corporate law requires special approvals for certain transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions;
•Israeli corporate law does not provide for shareholder action by written consent for public companies, thereby requiring all shareholder actions to be taken at a general meeting of shareholders;
•the Amended and Restated Articles generally require a vote of a simple majority of the voting power represented at a general meeting of shareholders in person or by proxy and voting thereon, as one class;
38
•the Amended and Restated Articles generally do not permit a director to be removed except by a vote of the holders of (i) so long as any Class B Ordinary Shares remain outstanding, a simple majority of the voting power represented at a general meeting of shareholders in person or by proxy and voting thereon, as one class, and (ii) if no Class B Ordinary Shares remain outstanding, a supermajority of at least sixty-five percent (65%) of the voting power represented at a general meeting of shareholders in person or by proxy and voting thereon; and
•the Amended and Restated Articles generally provide that director vacancies may be filled by REE’s board of directors.
Further, Israeli tax considerations may make potential transactions undesirable to REE or some of its shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including, a holding period of two years from the date of the transaction during which certain sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.
The tax benefits that are available to REE require it to continue to meet various conditions and may be terminated or reduced in the future, which could increase REE’s costs and taxes. REE may be eligible for certain tax benefits provided to “Preferred Technological Enterprises” under the Israeli Law for the Encouragement of Capital Investments, 1959, referred to as the Investment Law. In order to remain eligible for the tax benefits for “Preferred Technological Enterprises” it must continue to meet certain conditions stipulated in the Investment Law and its regulations, as amended. If these tax benefits are reduced, cancelled or discontinued, REE’s Israeli taxable income from the approved enterprise would be subject to regular Israeli corporate tax rates. The current standard corporate tax rate for Israeli companies is 23%. Additionally, if REE increases its activities outside of Israel through acquisitions, for example, its expanded activities might not be eligible for inclusion in future Israeli tax benefit programs. See “Item 10.E. Taxation – Certain Material Israeli Tax Considerations.”
REE’s Amended and Restated Articles provide that unless REE consents otherwise, the competent courts of Tel Aviv, Israel shall be the sole and exclusive forum for substantially all disputes between REE and its shareholders’ under the Companies Law and the Israeli Securities Law, which could limit its shareholders ability to bring claims and proceedings against, as well as obtain favorable judicial forum for disputes with, REE, its directors, officers and other employees.
The competent courts of Tel Aviv, Israel shall be the exclusive forum for (i) any derivative action or proceeding brought on behalf of REE, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of REE to REE or REE’s shareholders, or (iii) any action asserting a claim arising pursuant to any provision of the Companies Law or the Israeli Securities Law. This exclusive forum provision is intended to apply to claims arising under Israeli Law and would not apply to claims brought pursuant to the Securities Act or the Exchange Act or any other claim for which federal courts would have exclusive jurisdiction. Such exclusive forum provision in the Amended and Restated Articles will not relieve REE of its duties to comply with federal securities laws and the rules and regulations thereunder, and shareholders of REE will not be deemed to have waived REE’s compliance with these laws, rules and regulations. This exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum of its choosing for disputes with REE or its directors or other employees which may discourage lawsuits against REE, its directors, officers and employees.
REE is a foreign private issuer and, as a result, it is not subject to U.S. proxy rules and is subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a U.S. domestic public company.
REE reports under the Exchange Act as a non-U.S. company with foreign private issuer status. Because REE qualifies as a foreign private issuer under the Exchange Act, it is exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including (1) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act, (2) the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time and (3) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, although it is subject to Israeli laws and regulations with regard to certain of these matters and intends to furnish comparable quarterly information
39
on Form 6-K. In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year and U.S. domestic issuers that are large accelerated filers are required to file their annual report on Form 10-K within 60 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation FD, which is intended to prevent issuers from making selective disclosures of material information. As a result of all of the above, you may not have the same protections afforded to shareholders of a company that is not a foreign private issuer.
As REE is a “foreign private issuer” and follows certain home country corporate governance practices, its shareholders may not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements.
As a foreign private issuer, REE is permitted to follow certain home country corporate governance practices rather than those otherwise required by Nasdaq rules, provided that it discloses the requirements it is not following and describes the equivalent home country practices it follows instead. REE relies on this “foreign private issuer exemption” with respect to the Nasdaq rules for director nomination procedures and shareholder meeting quorums. REE may in the future elect to follow home country practices with regard to other matters. As a result, its shareholders will not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements.
REE may lose its foreign private issuer status in the future, which could result in significant additional costs and expenses.
As discussed above, REE is a foreign private issuer, and therefore is not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to REE on June 30, 2024. In the future, REE would lose its foreign private issuer status if (1) more than 50% of its outstanding voting securities are owned by U.S. residents and (2) a majority of its directors or executive officers are U.S. citizens or residents, or it fails to meet additional requirements necessary to avoid loss of foreign private issuer status. If REE loses its foreign private issuer status, it will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. REE would also have to comply with U.S. federal proxy requirements, and its officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, it would lose its ability to rely upon exemptions from certain corporate governance requirements under the listing rules of Nasdaq. As a U.S. listed public company that is not a foreign private issuer, REE would incur significant additional legal, accounting and other expenses that it will not incur as a foreign private issuer.
REE conducts its operations in Israel. Conditions in Israel, including the recent attack by Hamas and other terrorist organizations from the Gaza Strip and Israel’s war against them, may affect its operations.
REE’s executive offices where most of our employees are employed, are located in Kibbutz Glil-Yam, Israel. In addition, the majority of REE’s key employees, officers, and directors are Israeli citizens. Accordingly, political, economic, and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and groups in its neighboring countries, Hamas (an Islamist militia and political group that has controlled the Gaza Strip) and Hezbollah (an Islamist militia and political group based in Lebanon). These conflicts have involved missile strikes, hostile infiltrations and terrorism against civilian targets in various parts of Israel, which have negatively affected business conditions in Israel.
On October 7, 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive rocket attacks on Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in other areas within the State of Israel. Following the attack, Israel’s security cabinet declared war against Hamas and the Israeli military began to call-up reservists for active duty. Moreover, the clash between Israel and Hezbollah in Lebanon may escalate in the future into a greater regional conflict. In the months since the initial attack by Hamas, clashes with Hezbollah on Israel’s northern border with Lebanon and attacks on Israeli-controlled or owned ships in the Red Sea by members of the Houthi Movement in Yemen have taken place. It is possible that other terrorist organizations, including Palestinian military organizations in the West Bank, as well as other hostile countries, such as Iran, will join the hostilities and that such clashes may escalate in the future into a greater regional conflict.
40
Any hostilities involving Israel, terrorist activities, political instability or violence in the region, or the interruption or curtailment of trade or transport between Israel and its trading partners could make it more difficult for REE to raise capital and may adversely affect REE’s operations and results of operations and the market price of REE’s Ordinary Shares. At this time, it is not possible to predict the intensity or duration of the war, nor can REE predict how this war will ultimately affect Israel’s economy in general, which may involve additional credit rating agencies downgrading Israel’s credit rating score after Moody’s downgrading of Israel’s credit rating from A1 to A2 and outlook rating from “stable” to “negative”, and REE continues to monitor the situation closely and examine the potential disruptions that could adversely affect REE’s operations.
REE’s commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, REE cannot assure you that this government coverage will be maintained or, if maintained, will be sufficient to compensate REE fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on REE’s business, financial condition, and results of operations.
Further, majority of the members of REE’s management and employees are located and reside in Israel. Shelter-in-place and work-from-home measures, government-imposed restrictions on movement and travel and other precautions taken to address the ongoing conflict may temporarily disrupt REE’s management and employees’ ability to effectively perform their daily tasks.
Further, many Israeli citizens are obligated to perform several days, and in some cases, more, of annual military reserve duty each year until they reach the age of 40 (or older for certain reservists) and, in the event of a military conflict, may be called to active duty. In response to the series of attacks on civilian and military targets in October 2023, there have been significant call-ups of military reservists. Although many such military reservists have been discharged, they may be called up again depending on how events unfold. As of March 24, 2024, 2 out of 244 total employees have been called to service. This number may change from time to time.
It is currently not possible to predict the duration or severity of the ongoing conflict or its effects on our business, operations and financial condition. The ongoing conflict is rapidly evolving and developing, and could disrupt REE’s business and operations, and adversely affect REE’s ability to raise additional funds or sell our securities, among other impacts.
Political instability in Israel, originating before October 2023, could also disrupt REE’s operations. Having held five general elections between 2019 and 2022, government policy is subject to regular disruptive changes. The current government of Israel has pursued extensive changes to Israel’s judicial system. In response to the foregoing developments, individuals, organizations and institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment in Israel including reluctance of foreign investors to invest or transact business in Israel as well as increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in securities markets, and other changes in macroeconomic conditions within Israel. Currently, the proposed judicial reforms been put on hold due to the ongoing focus on the war, while the Supreme Court of Israel ruled that the judicial reform passed into legislation relating to reasonability is unconstitutional. If such changes to the judicial system resume and take effect, however, there may be an adverse effect on REE’s business, results of operations and ability to raise additional funds.
Risks Related to Ownership of the Class A Ordinary Shares
REE may issue additional Class A Ordinary Shares or other securities without shareholder approval, which would dilute existing ownership interests and may depress the market price of Class A Ordinary Shares.
REE may issue additional Class A Ordinary Shares or other equity securities of equal or senior rank in the future in connection with, among other things, REE’s equity incentive plan, without shareholder approval, in a number of circumstances. REE’s issuance of additional Class A Ordinary Shares or other equity securities of equal or senior rank would have the following effects:
•REE’s legacy shareholders’ proportionate ownership interest in REE may decrease;
•the amount of cash available per share, including for payment of dividends in the future, may decrease;
41
•the relative voting strength of each previously outstanding Class A Ordinary Share may be diminished; and
•the market price of Class A Ordinary Shares may decline.
As of December 31, 2023, REE had 346,883 Class A Ordinary Shares available for future grant under the 2021 Plan and 154,284 shares available under the Employee Stock Purchase Plan. There were 3,525,594 Class A Ordinary Shares underlying outstanding options under its equity incentive plans, at a weighted average exercise price of $5.02 per share, 3,288,211 of which were vested and exercisable. Additionally, there were 822,241 Class A Ordinary Shares underlying outstanding RSUs under its equity incentive plan
Future sales of large amounts of shares into the public markets may adversely affect the market price of Class A Ordinary Shares.
Pursuant to the Investors’ Rights Agreement between REE, 10X Capital and certain of REE’s shareholder, the Sponsor can demand that REE register its registrable securities under certain circumstances and also has piggyback registration rights for these securities in connection with certain registrations of securities that REE undertakes. REE is also required to use its commercially reasonable effort to maintain the effectiveness of a registration statement under the Securities Act covering such securities and certain other securities of REE, including those held by PIPE Investors. The registration of these securities permits the public sale of such securities. In addition, 5,904,403 shares held by REE’s legacy shareholders became eligible for sale under Rule 144 of the Securities Act upon the expiration of a 180-day lock-up agreement on January 18, 2022. The availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of REE’s Class A Ordinary Shares.
On July 14, 2023, we entered into an At the Market Offering Agreement, or the HCW Agreement, with H.C. Wainwright & Co., LLC, or HCW, pursuant to which we may offer and sell, at our option, up to $35.0 million of our Class A Ordinary Shares through an “at-the-market” equity program under which HCW agreed to act as sales agent. As of the date of this Annual Report, we have sold 120,880 of our Class A Ordinary Shares under the HCW Agreement for total gross proceeds of approximately $908,509.
The IRS may not agree that REE should be treated as a non-U.S. corporation for U.S. federal income tax purposes.
Although REE is incorporated and tax resident in Israel, the IRS may assert that it should be treated as a U.S. corporation for U.S. federal income tax purposes pursuant to Section 7874 of the Internal Revenue Code of 1986, as amended (the “Code”). For U.S. federal income tax purposes, a corporation is generally considered a U.S. “domestic” corporation if it is created or organized in or under the laws of the U.S., any state thereof, or the District of Columbia. Because REE is not so created or organized (but is instead incorporated only in Israel), it would generally be classified as a foreign corporation (that is, a corporation other than a U.S. “domestic” corporation) under these rules. Section 7874 of the Code provides an exception under which a corporation created or organized only under foreign law may, in certain circumstances, be treated as a U.S. corporation for U.S. federal income tax purposes.
Based on the terms of the Merger Agreement and the rules for determining share ownership under Code Section 7874 and the Treasury regulations promulgated under Code Section 7874 (the “Section 7874 Regulations”), REE is not expected to be treated as a U.S. corporation for U.S. federal income tax purposes under Code Section 7874 after the Merger. However, the application of Section 7874 of the Code is complex, is subject to detailed regulations (the application of which is uncertain in various respects and would be impacted by changes in such U.S. tax laws and regulations with possible retroactive effect) and is subject to certain factual uncertainties. Accordingly, there can be no assurance that the IRS will not challenge the status of REE as a foreign corporation under Code Section 7874 or that such challenge would not be sustained by a court.
If the IRS were to successfully challenge under Code Section 7874 REE’s status as a foreign corporation for U.S. federal income tax purposes, REE and certain REE shareholders could be subject to significant adverse tax consequences, including a higher effective corporate income tax rate on REE and future withholding taxes on certain REE shareholders, depending on the application of any income tax treaty that might apply to reduce such withholding taxes. In particular, holders of Class A Ordinary Shares and/or Warrants would be treated as holders of stock and warrants of a U.S. corporation. See “Item 10.E. Taxation – Certain Material U.S. Tax Considerations – U.S. Federal Income Tax Treatment of REE” for a more detailed discussion.
Code Section 7874 may limit the ability of 10X Capital to use certain tax attributes following the Merger, increase REE’s U.S. affiliates’ U.S. taxable income or have other adverse consequences to REE and REE’s shareholders.
42
Following the acquisition of a U.S. corporation by a foreign corporation, Code Section 7874 can limit the ability of the acquired U.S. corporation and its U.S. affiliates to use U.S. tax attributes (including net operating losses and certain tax credits) to offset U.S. taxable income resulting from certain transactions, as well as result in certain other adverse tax consequences, even if the acquiring foreign corporation is respected as a foreign corporation for purposes of Code Section 7874. In general, if a foreign corporation acquires, directly or indirectly, substantially all of the properties held directly or indirectly by a U.S. corporation, and after the acquisition the former shareholders of the acquired U.S. corporation hold at least 60% (by either vote or value) but less than 80% (by vote and value) of the shares of the foreign acquiring corporation by reason of holding shares in the acquired U.S. corporation, subject to other requirements, certain adverse tax consequences under Section 7874 of the Code may apply.
If these rules apply to the Merger, REE and certain of REE’s shareholders may be subject to adverse tax consequences including, but not limited to, restrictions on the use of tax attributes with respect to “inversion gain” recognized over a 10-year period following the transaction, disqualification of dividends paid from preferential “qualified dividend income” rates and the requirement that any U.S. corporation owned by REE include as “base erosion payments” that may be subject to a minimum U.S. federal income tax any amounts treated as reductions in gross income paid to certain related foreign persons. Furthermore, certain “disqualified individuals” (including officers and directors of a U.S. corporation) may be subject to an excise tax on certain stock-based compensation held thereby at a rate of 20%.
Based on the terms of the Merger Agreement and the rules for determining share ownership under Section 7874 of the Code and the Section 7874 Regulations, REE is not expected to be subject to these rules under Code Section 7874 after the Merger. The above determination, however, is subject to detailed regulations (the application of which is uncertain in various respects and would be impacted by future changes in such U.S. Treasury regulations, with possible retroactive effect) and is subject to certain factual uncertainties. Accordingly, there can be no assurance that the IRS will not challenge whether REE is subject to the above rules or that such a challenge would not be sustained by a court.
However, even if REE is not subject to the above adverse consequences under Section 7874, REE may be limited in using its equity to engage in future acquisitions of U.S. corporations over a 36-month period following the Merger. If REE were to be treated as acquiring substantially all of the assets of a U.S. corporation within a 36-month period after the Merger, the Section 7874 Regulations would exclude certain shares of REE attributable to the Merger for purposes of determining the Section 7874 Percentage (as defined below in “Item 10.E. Taxation – U.S. Federal Income Tax Treatment of REE”) of that subsequent acquisition, making it more likely that Code Section 7874 will apply to such subsequent acquisition. See “Item 10.E. Taxation – Certain Material U.S. Tax Considerations – U.S. Federal Income Tax Treatment of REE” for a more detailed discussion.
U.S. Holders of Class A Ordinary Shares may suffer adverse tax consequences if REE is treated as a passive foreign investment company.
A non-U.S. corporation generally will be treated as a “passive foreign investment company,” or a PFIC, for U.S. federal income tax purposes, in any taxable year if either (1) at least 75% of its gross income for such year is passive income (such as interest, dividends, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of assets giving rise to passive income) or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce or are held for the production of passive income. Based on the current and anticipated composition of the income, assets and operations of REE and its subsidiaries, there is a significant risk that REE was a PFIC for U.S. federal income tax purposes for 2023, and REE may be a PFIC for U.S. federal income tax purposes for the current or future taxable years. This is a factual determination that depends on, among other things, the composition of REE’s income and assets, and the market value of its shares and assets, including the composition of income and assets and the market value of shares and assets of its subsidiaries, from time to time, and thus a complete determination can only be made annually after the close of each taxable year. Furthermore, the value of our gross assets is likely to be determined in part by reference to our market capitalization, which may fluctuate significantly. Thus, no assurance can be given as to whether REE will be a PFIC in the current or any future taxable year. In addition, REE’s U.S. counsel expresses no opinion with respect to REE’s PFIC status for 2023, current, or future taxable years.
If REE is a PFIC for any taxable year, a U.S. Holder of Class A Ordinary Shares and/or Warrants may be subject to adverse tax consequences and may incur certain information reporting obligations. Under the PFIC rules, unless such U.S. Holder makes an election available under the Code (which election could itself have adverse consequences for such U.S. Holder), such U.S. Holder may be subject to U.S. federal income tax at the then prevailing maximum rates on ordinary income and possibly an “interest” charge, in respect of “excess distributions” and upon any gain from the disposition of
43
Class A Ordinary Shares and/or Warrants, as if the excess distribution or gain had been recognized ratably over such U.S. Holder’s holding period of the Class A Ordinary Shares and/or Warrants. Certain elections (including a qualified electing fund election (or a QEF election) or a mark-to-market election) that may be available to U.S. Holders of Class A Ordinary Shares to mitigate some of the adverse tax consequences resulting from PFIC treatment, however, are not available with respect to the Warrants. Additionally, there can be no assurance that REE will have timely knowledge of its status as a PFIC in the future or that REE will timely provide information that would be required in order for a U.S. Holder to make a QEF election. See “Item 10.E. Taxation – Certain Material U.S. Tax Considerations – U.S Federal Income Tax Consequences of the Ownership and Disposition of Class A Ordinary Shares and Warrants to U.S. Holders – Passive Foreign Investment Company Rules” for further discussion. U.S. Holders of Class A Ordinary Shares and/or Warrants are strongly encouraged to consult their own advisors regarding the potential application of these rules to REE and the ownership of Class A Ordinary Shares and/or Warrants.
Item 4. Information on the Company
A. History and development of the company
REE Automotive Ltd. was incorporated on January 16, 2011, as a company limited by shares under the laws of the State of Israel. We are registered under the Israeli Companies Law and registered with the Israeli Registrar of Companies under registration number 51-455733-9. REE’s principal executive offices are located at Kibbutz Glil-Yam 4690500, Israel, and our telephone number is +972 (77) 899-5200. Our registered agent for service of process is Puglisi & Associates located at 850 Library Avenue, Newark, Delaware 19711, and its telephone number is +1 (302) 738-6680.
Our website is www.ree.auto which we use as a channel of distribution of company information. The information we post through this channel may be deemed material. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.
Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report and is not incorporated by reference herein. We have included our website in this Annual Report solely for informational purposes. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC using its EDGAR system.
Capital Expenditures
For a description of our capital expenditures, see “Item 5.B. Operating and Financial Review and Prospects-Liquidity and Capital Resources.”
B. Business Overview
Company Overview
REE is an automotive technology company focused on building commercial electric vehicles controlled fully by wire, what REE calls X-by-Wire. Unbound by legacy thinking, we created the world’s first certified, software-driven, fully by-wire electric vehicle, built around its proprietary REEcorner™, which packs critical vehicle components into a single compact module positioned between the chassis and the wheel.
The REEcornerTM, our proprietary by-wire technology for drive, steer and brake control, enables X-by-Wire vehicle control and is designed to allow for key benefits for building commercial electric trucks, such as reduction in total cost of ownership, or TCO, operational efficiency, and many other benefits as described below.
REE’s technology, which is patent protected, and design make it possible for OEMs, delivery and logistics fleets, dealers, e-commerce retailers, Mobility-as-a-Service providers and others, to build any size or shape of electric vehicle. With the first Federal Motor Vehicle Safety Standards, or FMVSS, certified full by-wire electric vehicle, we are currently focused primarily on the North American medium-duty truck segment due to the large total addressable market, increased tax incentives for customers, and strong demand from fleets to electrify their fleets.
We are targeting delivery and logistic fleets, dealers, e-commerce retailers, new mobility players, MaaS providers and autonomous drive companies. Our business plan is geared to allow these companies to build entire fleets based on REEcornerTM technology and Powered by REE™ platforms. We aim to offer many customer benefits including reduction in TCO, lower maintenance and spare-part inventory management costs, higher active and passive safety, improved vehicle efficiency, advanced driver-assistance systems, or ADAS, compatibility.
44
By completing and not competing, we can partner with other vehicle manufacturers in the automotive industry where electric and autonomous vehicles will be “powered by REE™”, allowing faster and larger adaption of our X-by-Wire technology and electrification scale.
In 2023, we continued to make progress on the following main business fronts:
•Increasing our North American footprint though our Authorized Dealer Network;
•Growing our initial orderbook value; and
•Lowering our customer acquisition costs
Increasing REE’s North American footprint through its Authorized Dealer Network
REE is focused on commercializing the high value add portion of the commercial EV value chain with the REEcornerTM. To do this, we built out an extensive network of carefully curated authorized dealers, focusing on dealers that have proven to embrace the EV future of commercial vehicles and that are in areas of high demand. In many cases, our dealers are also located in states that provide incentives in addition to incentives provided by the federal government.
In 2023, we continued to expand our Authorized Dealership Network across the U.S. and Canada by 900% year-over-year, or YoY. Each of our Authorized Dealers has placed initial orders.
As of March 25, 2024, we had over twenty customers in various industries, including vehicle rental and leasing, shipping and logistics and commercial vehicle dealers, and an initial order book value of approximately $50 million. As of March 25, 2024 our Authorized Dealer Network consists of, among other dealers: Pritchard EV, Tom's Truck Center, Industrial Power & Truck Equipment, New England Truck Solutions, FMI Truck Sales & Services The Truck Shop, Monarch Truck Center, Ry-Den Truck Center, Jim Reed’s Truck Sales, Inc., Fleet Direct Sales, Specialty Vehicles & Equipment Ltd., McCandless Truck Centers, Lynch Truck Centers, C&M Motors, Inc., Midwest Transit Equipment, LLC, XPO Auto Sales, Inc. and Harris Auto Group (BC).
In 2023, we achieved United States Environmental Protection Agency, or EPA, approval for our P7-C electric trucks. In January 2024, and following months of testing together with a third party, we became the first OEM to certify a commercial truck controlled fully by-wire to the FMVSS standards. In addition, subsequent to year end, we achieved CARB certification – a key milestone that provides for state incentives on top of applicable federal incentives.
Shortly after reaching FMVSS certification and EPA approval, we began customer deliveries of its P7-C demonstration trucks for fleet evaluations in North America through REE’s Authorized Dealer Network. Our demo program is intended to allow potential fleet customers the opportunity to experience the benefits of its P7-C commercial vehicle in multiple top-hat configuration based on several partnerships with leading upfitters in North America.
We believes that, through our demo program and as we deliver additional trucks from our current backlog, our customers have the potential to order significant volumes of vehicles in addition to their initial orders.
Subsequent to year end, we were selected by, and delivered a prototype vehicle to, Airbus UpNext, a wholly owned innovation subsidiary of Airbus SE, to provide technological know-how based upon the REEcorner and full-by-wire control systems.
Growing REE’s initial order book value
We believe there is strong demand for electric trucks in general, and for Powered by REE trucks in particular, from leading fleets and dealers in both the U.S. and Canada. In our view, the commercial trucks market, and in particular the class 3-5 market, is ready to electrify as the current demand outpaces the supply. This demand is partly driven by incentive programs, both federal and state, that can accumulate over $100,000 per truck. We designed the P7-C to qualify for such incentives, including, among others, IRA-45 and CARB.
Nonetheless, we believe that our technological advantage, combined with our competitive market offering, is pushing the demand for its Powered by REE trucks even further, resulting in the increase of our initial orderbook value by 900% YoY, now reaching approximately $50 million. We believe this current backlog is sufficient for us to reach positive breakeven on
45
COGS, since our production plan is tightly aligned with our order book to help ensure successful scaling to mass production.
Unlike others in the space, and in order to maximize capital efficiency, we build to order and have aligned our production plan with our order trajectory. In tandem with growth in our dealer network and their local fleet relationships, we are also growing our upfitter network with the aim of facilitating rapid, cost-efficient upfitting for specific use cases.
Lowering REE’s customer acquisition costs
Further, with capital efficiency in mind, we “complete not compete”. In order to provide the highest level of customer service, we are leveraging our dealer network to provide after-sales parts and service. Dealers look to parts and service revenues to help drive profitability and are trusted partners to the fleets in their service areas. We have started training our authorized dealers to certify technicians to provide service on our vehicles, facilitating adoption by fleets. As we seek to further expand our dealer network in North America, we offer financing solutions for our dealers through an agreement with Mitsubishi HC Capital America. This agreement is designed to streamline the process of obtaining the financing required for the purchase of our vehicles.
We leverage third parties to allow us to focus on its core competencies and value add around the REEcorner, while lowering capital requirements. For example, we work with Tier 1 suppliers that build components and subsystems to our specification and design, and we carefully built, and are still building, a dealer and service network. Subsequent to year end, we were selected by, and delivered a prototype vehicle to, Airbus UpNext, a wholly-owned innovation subsidiary of Airbus SE, to support their need in a research & technology demonstrator. Over time, we believe that our unique autonomous readiness will drive increased interest in its technology and vehicles.
Additionally, we are pursuing multiple go-to-market paths to significantly accelerate the adoption of EVs by commercial fleet owners and operators. This includes collaborations with partners not only to develop full vehicle offerings, such as leading upfitters, but also to provide a comprehensive ecosystem of enabling capabilities and services, such as vehicle financing, batteries, charging infrastructure, after-sales, service and Data-as-a-Service, or DaaS, for a full turn-key solution intended to enable and expedite a smooth transition for our potential customers from internal combustion engine, or ICE, vehicles to EV fleets.
We are taking a measured approach to allow time for customer feedback, stabilizing production processes and, most importantly, optimizing our bill of material and production costs.
Market Opportunity
We believe the shift to electric vehicles in the North American commercial vehicle market continues to grow driven by the maturity of electric trucks offerings yielding lower operating costs, the reduction in battery costs and improvement in charging infrastructure as well as strong regulatory and incentives tailwinds to support the growth in e-commerce, government regulations on carbon emissions and public policy, and consumer preference. We believe that the global commercial EV industry is growing rapidly and undergoing massive transformation, and will continue, driven by the following factors:
•Product Maturity – We believe that the recent increased product maturity in the EV commercial truck space is driving better charging infrastructure, TCO, and regulatory incentives. We believe that the increased maturity of electric commercial vehicles, especially the Powered by REE vehicles, has driven demand by offering potential end users a lower TCO and, therefore, higher margins per commercial vehicle. In addition, as electric commercial vehicles become more mainstream, we believe that charging infrastructure in the U.S. will also increase, creating a positive feedback loop of more electric vehicles and better charging infrastructure. Finally, as electric commercial vehicles mature, we believe that federal and state governments will continue to offer strong incentives to purchase such vehicles.
•Environmental and Zero-Emission Regulations Drive Market Opportunity. Rising environmental consciousness and increased awareness of the impact of global climate change have gained prominence in local and global politics. This has resulted in significant growth in the adoption of environmentally driven regulations and incentive programs with low and zero-emission targets, with the automotive industry being among the most impacted industries. These measures encourage local and national governments to implement various forms of rebates and credits for the purchase of an EV. In addition, regulations in many cities, states and countries are encouraging a shift away from — or in some cases banning entirely — fossil fuel-powered vehicles, with many of
46
the earliest of these regulations targeted at buses, trucks and delivery vehicles. These legislative tailwinds have already moved some legacy OEMs towards electrification and are expected to accelerate the rise of e-mobility and the push for zero emission vehicles.
•Consumer Preferences Driving EV Adoption. The shift in consumer preference is attributable to consumers’ rising environmental consciousness and increased awareness of the impact of global climate change, improvement in battery technology, the continuing build-out of electric charging infrastructure, increased offerings from automotive manufacturers that are better aligned with consumer demand and the growing comfort with EV range capabilities that is easing “range anxiety” and facilitating adoption. Furthermore, EVs present ongoing energy cost reductions as compared to ICE vehicles, which is of utmost concern with at a time of gas price volatility.
•Significant Growth Anticipated in Last-Mile and Mid-Mile Delivery Market. The rise of e-commerce has led to growth in the transportation services and logistics providers that provide e-commerce services. There is also an increase in demand for delivery vehicles with increased productivity and efficiencies. According to Statista, global retain ecommerce sales are projected to grow by 56% reaching about $8.1 trillion by 2026, proving that ecommerce is becoming an increasingly lucrative option for businesses.
REE’s Technological Differentiation
We believe that the automotive industry is at an inflection point.
Industry approaches and their limitations
The design of the average ICE vehicle has remained relatively unchanged over the last century. The typical format of the ICE vehicle has become ubiquitous and consists of an engine positioned between the front or back wheels, with most other critical vehicle systems such as steering, braking, suspension, powertrain and control likewise located centrally between the vehicle wheels. Most EVs in the market locate these components similarly. While this vehicle format is familiar, it is subject to an inherent limitation with respect to compartment space, vehicle function, maintenance and modularity.
We believe that ICE vehicles and EV manufacturers employ a correspondingly similar strategy to development of new vehicle platforms: vehicle functionality is determined by the OEM mindset trying to forecast and influence future market trends. This means that, during development, most ICE vehicle and EV manufacturers will design and produce individual new vehicle platforms with vehicle models being restricted as to size, shape or functionality. This creates a less nimble development process than is required to respond quickly and effectively to changing market demand and customer preferences unless such demand corresponds with existing “off-the-shelf” offerings. As a result, in trying to address these changes in market preference, ICE vehicle and EV manufacturers are burdened by extremely high capital costs and long development cycles inherent in designing and engineering vehicles.
We believe that consumer preference has continued to shift toward environmentally conscious and low emissions vehicle offerings. However, many OEMs have traditionally viewed reduced and zero-emissions vehicles as “compliance cars,” adding minimal volumes and models to their portfolios for the lowest possible overall costs (including investment and variable per-unit costs) necessary to achieve fleet compliance. This has resulted in scarce alternative powertrain resources to be dedicated to plug-in hybrid vehicles, or PHEVs, and other hybrid powertrain or low-demand battery electric vehicles variants. Lacking internal know-how and experience in electrification, many OEMs are now being forced to look beyond their internal EV technology to meet increasing consumer demand for EVs and to satisfy expanding regulatory requirements.
REE’s technology approach
Innovation is at the core of our DNA. This is what drives us throughout the development process all the way down to the architecture of every detail of our design. We have designed REEcorner™ by-wire steering, braking and drive to deliver better stability and greater maneuverability, designed for better performance and safety overall.
As a technology focused full-flag OEM, we became the first in the world to achieve FMVSS certification of a software driven, full by wire vehicle. We also achieved EPA certification and, in 2024, we achieved CARB certification – a key milestone that unlocks state incentives on top of applicable federal incentives as a qualified manufacturer for IRS 45W federal tax credits.
47
Our X-by-Wire technology and progressive iterations of the REEcorner, each followed by rigorous testing and validation, make such regulatory certifications and milestones possible.
We completed winter testing for the second consecutive year in cold conditions of minus 30 degrees Celsius, taking our trucks to the limits, testing safety, vehicle dynamics and battery performance to help ensure that we deliver a great product to our customers.
REEcornersTM are our IP-protected foundational technology and key differentiator, designed to allow Powered by REE vehicles to deliver greater efficiency, lower TCO and complete design flexibility, all while being autonomous ready. REEcornersTM integrate steering, braking, suspension, powertrain, and control into a single module. Each REEcornerTM is independent with redundancies for enhanced fail-operation. Our proprietary X-by-Wire system provides full steer, brake, and drive-by-wire control - replacing traditional mechanical & hydraulic systems including braking, throttle, and steering.
We believe that this approach differentiates us from other EV players, who often must substantially redesign and reengineer their vehicles in order to meet market demand, typically resulting in significant expenses of time and capital on architecture integration, unique performance requirements, different market requirements and full crash structure development and testing.
Our Competitive Strengths
We believe that our disruptive technology and business model are unique to the EV industry and will offer a number of competitive strengths.
Attractive customer value proposition and superior total cost of ownership
EVs aim to have lower TCO than ICE vehicles. We believe EVs built on its products will have a lower TCO than those of our EV competitors. Our TCO advantages are expected to derive from its asset-light manufacturing model, low costs of operations due to anticipated greater cargo volume and lower maintenance costs due to the REEcorner’sTM durable design. We plan to work with strategic partners to provide preventative maintenance services through smart service and artificial intelligence in combination with over-the-air updates that seek to ensure maintenance is performed before a part may fail. This is expected to offer significant savings by eliminating unnecessary part replacements and drastically reduce downtime.
We have designed a fully flat EV platform, purposefully engineered with a goal of maximum space efficiency and modularity to support a wide range of vehicle applications in the business-to-business, or B2B, market. We believe that platforms using REEcornersTM will present significant functional and operational advantages over conventional EV “skateboards” currently available in the market and will enable superior vehicle specifications for cargo volume/length, payload, maneuverability and battery capacity. Our technology is also designed to enable enhanced operational efficiencies due to low center of gravity, high durability, long lifecycle and superior product ergonomics (low step-in height affords easy and fast embarking and disembarking from vehicle, high driver visibility thanks to enhanced field of vision and optimal driver ergonomics).
Our development of FMVSS, EPA, and CARB certified X-By-Wire control technology challenges century-old automotive concepts. We expect that our X-By-Wire control technology will enable lower TCO through expedient REEcornerTM replacement, referred to as the Quick REEcorner swap, smart preventative maintenance and over-the-air updates, and improved residual value per truck given our efforts to future proof each vehicle through, among other capabilities, autonomous driving ready capabilities. REE’s data analytics capabilities may be used to further reduce total cost of ownership via intelligent preventative maintenance features.
Our track record of invention and early development of our products has afforded us many years to innovate across hardware and software, which we believe has created substantial advantages in its targeted markets as a result of its industry know-how and proprietary trade secrets. Our research and development efforts have resulted in a strong intellectual property portfolio, and we have filed for patent protection for several of our key inventions across key markets of the world, resulting in, as of December 31, 2023, approximately 176 active or pending patent applications for EV products, component systems, testing and enhanced product manufacturability, of which approximately 57 are granted patents and 119 pending applications. Granted patents are related to corner modules encompassing entire vehicle sub-systems for controlling the operation of the vehicle, such as unique suspension, steering, powertrain, and in-corner brake systems, installation and swapping of corner modules and communication and control systems for operating individual corner modules and vehicle platform.
CapEx light and flexible manufacturing approach
48
We are currently manufacturing, and plan to continue to manufacture, our products in two locations via a global network of leading suppliers. The REEcornerTM is produced in our Global Integration Center in Coventry, UK, then shipped to a contract manufacturing in the U.S, for full vehicle assembly.
Our Integration Center is designed to produce up to 40,000 REEcorners (the equivalent of 10,000 vehicle sets) a year, and we expect to maintain a comparatively asset-light enterprise that can further help to increase global growth and market penetration.
REE’s Go-To-Market Strategy
We aim to provide potential customers with EV solutions to fulfill their needs. We plan to provide REEcorner™ technology and Powered by REE™ EV platforms on top of which companies can then build their ideal vehicles customized to their specific requirements based on our disruptive tech.
Additionally, we aim to provide complete commercial EVs through partnerships with industry-leading companies, OEMs and top-hat upfitters. For example, after year end, through its partnership with Knapheide, After year end, our Class 4 P7-C demo electric cab chassis was upfitted with Knapheide’s KUV body, aimed to provide a turnkey solution with advantages including low load floor, greater driver maneuverability and comfort and high driver visibility.
We believe we are well positioned in the growing in the electric commercial vehicle market relative to its competitors because of its technologically, superior product offering, and better unit economics.
Our market growth strategy has two phases. In the first phase, we believe our market growth will rely on our ability to bring our Powered by REE electric trucks to the market as a vehicle manufacturer, which we started after year end 2023. We are targeting cumulative sales of 6,000 Powered by REE trucks in the first phase, between 2024-2026, representing approximately 1% of its total addressable market in class 3-5 commercial vehicles in the U.S. alone.
We believe that our market growth in phase two is reliant upon our collaboration with other vehicle manufactures, or OEMs, and providing such OEMs with the REEcornersTM and the Powered by REE technology to power the next generation electric vehicles. We have discussed this strategy with, and has provided several prototypes to, several global OEMs.
Although, we believe the second phase of our growth will allow for significantly higher margins and stronger growth in North America, we recognize the importance of controlling our own destiny as a vehicle manufacturer capable of bringing a full by wire vehicle controlled to the market. And to effectively go-to-market, over the next few years, we believe that we must continue to develop and grow our customer and dealer base by signing additional collaboration, sales and distribution agreements with leading customers and dealers in multiple addressable market segments, convert our existing purchase orders into scale orders, advance our collaboration and distribution agreements into test fleet purchase orders followed by scale orders when it becomes commercially advantageous to do so, increase our execution capabilities by expanding our relationships with suppliers, establish a partnership with a leading contract manufacturer, building out our Integration Centers, subject to market conditions, and develop a support network capable of servicing REE-powered vehicles in the field.
We are initially targeting commercial and MaaS markets served by our P7 EV platforms, followed by additional market segments. By focusing product designs on the needs of these markets, we seek to build strong customer relationships with fleet operators and capture a significant market opportunity as the broad trend of vehicle electrification continues. Within this trend, we believe that fleet operators will be drawn to the reliability of operations, the lower TCO and high uptime of EVs, particularly as EVs achieve cost parity with ICEs. Furthermore, we believe that fleet operators will be drawn to the customizable design of our products, which seek to facilitate mission-specific vehicles to optimize fleet utilization. Fleet usage, which most times may involve multiple shorter trips within range of a central base rather than long-distance travel, can reduce the “range anxiety” that has also been a limiting factor in EV adoption.
In 2023, we completed certain development activities in connection with its production timeline, including physically testing and validating our products at the MIRA Technology Park. In 2024, we became the first company to achieve FMVSS certification on a vehicle controlled fully by wire. Additionally in 2024, we achieved CARB certification. We also obtained EPA certification for its P7-C chassis cab and P7-S stripped chassis products in 2023.
As of year end 2023, we completed all P7 concept validation of both corner and platform design. To support this we built and tested a range of engineering vehicles and continued to mature the production intent designs with feedback from this testing. Design for manufacturing activities has been run in parallel to ensure the Integration Center assembly line is ready
49
to support volume production timelines. In 2024, we began customer deliveries of its P7-C demonstration trucks for fleet evaluations in North America through our Authorized Dealer Network. We plan to scale production and deliveries to the low hundreds of vehicles in the fourth quarter of 2024 and early 2025.
As of December 31, 2023, our team of 244 employees, including engineers, scientists, technicians and staff is committed to achieving the necessary milestones to meet its current production and commercialization timelines. In February 2023, we took steps to lower our expenses through a targeted reduction in headcount of approximately 11% of our workforce.
REE’s Products
We have developed core innovations which make up the foundation of our products. Our products contain a number of key technological advancements and critical design functions, which we believe provide distinct advantages over competitor offerings:
1.REEcorner™ - Our revolutionary, award-winning REEcorner™ is a compact module that integrates critical vehicle drive components (steering, braking, suspension, powertrain and control) into the area between the chassis and the wheel. Each REEcorner™ is an independent assembly controlled by its own ECU, which controls corner level functions. REEcorner™ can be integrated into full vehicles or chassis and our approach can meet the electrification needs across a diverse set of potential customers. REEcorner technology leverages X-By-Wire control technology to control each REEcorner™ of the vehicle, eliminating all mechanical connections between the REEcorners and the steering wheel and pedals in the passenger compartment and the wheels and braking systems. Steering, braking and acceleration is performed entirely through electrical control and is fully redundant facilitating fail-operational function of each REEcorner™ (hardware and software). By controlling each REEcorner™ independently we aim to provide a more reliable and safer ride as well as facilitate vehicle maneuverability in the most suitable manner depending on road conditions and drive requirements. REE’s X-By-Wire control technology design also offers weight savings and safety advantages. Eliminating the steering column removes a common source of serious injury in frontal collisions. This technology should also offer customers a more responsive and smoother driving experience, Lastly, X-By-Wire control technology will be essential for our longer-term vehicle strategy, paving the way for advanced autonomous driving (autonomous level 4/5), wherein a mechanical steering column will no longer serve a central function.
2.REEplatformTM – REEplatformsTM are built on top of the REEcorners. Fully-flat from end-to-end, REE’s EV platforms can carry more passengers, cargo and batteries as compared to traditional platform builds of both ICE vehicles and conventional EVs. The unique design of the REEplatformTM allows for the addition of a modular and customizable top hat/cabin design based on customer specifications, without requiring significant modification to the platform. The smaller footprint and lower center of gravity is expected to also allow for taller body designs yielding more volumetric efficiency and lower step-in height.
3.P7-S Strip Chassis – Fully flat from end-to-end, the P7 modular platform, or the P7 Platform, is designed for commercial delivery vehicles and walk-in vans. The P7 Platform enables efficiencies for fleets, offering a low, fully flat chassis for vehicles in Classes 3-5, and approximately 35% more cargo space for a given footprint than comparable commercial vehicles, all with optimized TCO. EVs and AVs built on top of P7 Platforms are designed to achieve driving ranges of up to 370 miles with max speeds of 80 mph and supporting payload of 8,000 lbs. Upfitters and other manufacturers looking for full design freedom can also take REE’s stripped chassis or chassis cabs for maximum dimensional flexibility for specialty equipment.
4.P7-C Chassis Cab and Cutway Chassis – The P7-C is a class 4 chassis cab, a fully electric commercial truck, available in regular bulkhead, walk-through, and cutaway variants. Used for applications such as delivery and a broad range of vocational applications, it is the first fully by-wire vehicle to obtain FMVSS certification. Powered by REE P7-C vehicles have a 126 kWh battery, 6,000 lbs payload and 150 miles of range. Enabled by REEcorner and by-wire control, P7-C vehicles are designed to provide major advantages to fleet owners such as reduced TCO, safety and efficiency. Partnerships with bodybuilders for P7-C are aimed to ensure that full-vehicle solutions for box trucks, service bodies, platform bodies and more can be offered to fleets by dealers.
5.P7-B Box Truck – A class 3 box truck built on a P7 cab chassis with our all-wheel drive and all-wheel steer for exceptional vehicle control, leading to better handling and safety in adverse conditions. The driver-focused cabin is designed for optimal commercial usage, durability and productivity. The P7-B aims to reduce TCO to help facilitate fleets’ transition to EVs. The all-by-wire electric truck targets the important and growing commercial EV
50
mid- and last-mile delivery market, with applications such as 16-foot vans and delivery trucks. It was built in response to market needs and represents a potential opportunity for us to present fleets with complete vehicles.
Each of the component systems that form our REEcorners™ and platforms are being engineered for optimal performance. We place a strong emphasis on functional integration, allowing for increased modularity. This is aimed to reduce the total number of parts, platform size and weight, ultimately providing more useable interior space in the vehicle cabin and a more overall cost-effective EV offering. By leveraging our modular REE products, along with our efficient design and streamlined production process, we anticipate that new vehicle models can be developed and produced in as little as 18 to 24 months. We are developing the technology for the core hardware and software for its REEcorner™ in house and pursuant to development agreements with certain strategic partners, with the goal of achieving superior vehicle dynamics while setting the highest bar for safety.
Competition
We believe that our business model differentiates us from competitors because we can market and sell its products individually or as “Powered by REE™” in a full vehicle solution. As the EV industry is becoming increasingly more competitive, we expect competition from established automobile manufacturers with ICE vehicles and established and new automobile manufacturers with alternative fuel and EV vehicles including hybrids, battery electric vehicles and full cell electric vehicles. As many traditional and new players enter the EV market, we believe the primary competitive factors in the EV market will revolve around, but not be limited to, the following key differentiation factors:
•technological innovation;
•product quality and reliability;
•safety features;
•market adoption;
•service options;
•product performance;
•design and styling;
•product price; and
•manufacturing efficiency.
We believe our products will strongly compete based on these factors.
Environmental, Social and Governance (ESG) Practices
As an automotive technology company with a vision to become the cornerstone of tomorrow’s zero-emission EVs, we are committed to operating in an ethical and sustainable manner while maximizing our ability to positively impact our environment and society. We are building the foundation of a leading environmental, social, and governance, or ESG, program that benefits all our stakeholders including, customers, partners, employees, and the communities where we work. We are committed to aligning with leading industry best practices and are establishing company-wide policies that outline the Company’s standards for all business operations. As we grow our ESG program, we are also developing our internal data collection and disclosure capabilities to ensure we can meet investor expectations and comply with regulatory bodies’ proposed ESG tracking and reporting obligations.
REE’s Manufacturing Approach
We are manufacturing, and plan to continue to manufacture, our products via a global network of Tier 1 partners and suppliers. In doing so, we seek to reduce our up-front capital investment and eliminate recurring fixed costs and overhead that would be required for us to own and operate our own product assembly facilities. We believe this will enable us to remain a comparatively asset-light enterprise, which will further help to increase our operating margin and overall return on investment.
REEcorners were designed for ease of manufacture, and we benefit from our capex light strategy through our fully commissioned production line located in Coventry, UK. This product line has thirteen robotic stations, is run by only seven operators, and has production capacity of 40,000 REEcorners (10,000 vehicles) annually based on a single shift per day. Our production line has been commissioned at above the current required capacity and can be duplicated rapidly in almost any location to support any future expansion needs.
51
Unique to our industry, we believe that our manufacturing strategy, capex light approach and bill of material, or BOM, and cost trajectory will allow us to generate BOM parity with low hundreds of vehicles sold and EBITDA break even with low thousands of vehicles sold.
In the future, leveraging the flexibility inherent in the REEcorner design, we have the ability to scale up or down from the class 3 – 5 market REE serves today.
Operational Developments
We have built our first UK Integration Center and highly automated launch factory in Coventry, UK in 2022 for product assembly and validation. All major equipment is in place, and we have production capacity for 10,000 vehicles sets annually. We plan to build Integration Centers in the United States and Asia, which are planned to be completed in the future based on a variety of factors, including our production plans, as part of our global manufacturing strategy. Our CapEx-light manufacturing approach and Integration Centers are designed to enable us to remain a comparatively asset-light enterprise, helping to increase operating margins and return on investment and reduce the carbon footprint of our operations by leveraging our global network of Tier 1 partners’ manufacturing capacity, with full point-of-sale component assembly and testing set to take place in our Integration Centers. Our UK Integration Center and UK Engineering Center, as well as our headquarters and research and development center in Israel, are ISO-9001 certified.
In 2023, REE completed certain development activities in connection with its production timeline, including physically testing and validating its products at the MIRA Technology Park. In 2024, REE became the first company to achieve FMVSS certification on a vehicle controlled fully by wire and began customer deliveries of its P7-C demonstration trucks for fleet evaluations.
As of March 2024, we have deployed all CAPEX tooling for the scale production of its REEcorner which is expected to come online in late 2024 or beginning of 2025. We intend for this production tooling to enable us to reach compelling unit economics in the production of its REEcorners.
Intellectual Property
General
Our ability to protect our intellectual property is paramount to our business. We rely upon a combination of protections afforded to owners of patents, designs, copyrights, trade secrets, and trademarks, along with employee and third-party non-disclosure agreements and other contractual restrictions to establish and protect REE’s intellectual property rights. In addition, industry know-how and unpatented trade secrets in the fields of research, development and engineering are an important aspect of our business by ensuring that its technology and strategic business assets remain confidential. We pursue patent protection when we develop a patentable invention and the benefits of obtaining a patent outweigh the risks of making the invention public through patent filings.
Patents
As of December 31, 2023, we had approximately 176 pending and registered patents in the U.S. and globally, of which approximately 57 are granted utility patents. In addition, we have families of design patents registered globally. Our patent applications are directed to, among other things, EV products, component systems and enhanced product manufacturability, for example, corner modules, flat chassis, electrical and control systems, brake systems, wheel assemblies, and testing. We regularly review our development efforts to assess the existence and patentability of new inventions, and we are prepared to file additional patent applications when we determine it would benefit our business to do so.
Trademarks and Service Marks
We pursue global registration of our domain names and products and services trademarks. We use registrations to protect trademarks used in our business as well as claim common law protections for other marks we use in our business. Competitors and other companies could adopt similar marks or try to prevent us from using our marks, consequently impeding our ability to build brand identity and possibly leading to customer confusion. As of December 31, 2023, we successfully registered trademarks for “REE” and “R3E” in 13 jurisdictions and also have trademarks for “REEcorner” and “Powered by REE” pending or registered globally.
Government Regulation
52
Some of our products are subject to, and we are required to comply with, the U.S. National Traffic and Motor Vehicle Safety Act, as amended, and numerous regulatory requirements established by the National Highway Traffic Safety Administration, or NHTSA, an operating administration of the U.S. Department of Transportation, or DOT, including applicable FMVSS standards. In 2023, we became the first company to achieve FMVSS certification on a vehicle controlled fully by-wire. Additionally, there are regulatory changes being considered for several FMVSSs, and while we anticipate being in compliance with the proposed changes, there is no assurance until final regulation changes are enacted.
Numerous FMVSSs apply to our products, such as braking requirements. We are also required to comply with other federal and state laws and regulations, including, among other regulations, ensuring its products do not contain defects related to motor vehicle safety, recall requirements, GHG and electric vehicle reporting, reporting required notices, bulletins, and other communications, Early Warning Information reporting, foreign recall reporting and owner’s manual requirements.
The P7-C is also subject to EPA and California Air Resources Board certification for vehicle greenhouse gases and zero emission powertrains. We obtained the EPA certification in late 2023 and achieved CARB certification in early 2024.
The battery modules on Powered by REE vehicles conform to mandatory regulations that govern transport of “dangerous goods,” defined to include lithium-ion batteries, which may present a risk in transportation. The governing regulations, which are issued by the Pipeline and Hazardous Materials Safety Administration, are based on the UN Recommendations on the Safe Transport of Dangerous Goods Model Regulations and related UN Manual Tests and Criteria. The regulations vary by mode of shipping transportation, such as by ocean vessel, rail, truck or air. We use lithium-ion cells in the high voltage battery packs in Powered by REE vehicles. The use, storage, and disposal of the battery modules is regulated under federal law.
Additionally, Powered by REE vehicles are not currently subject to non-U.S. safety, environmental and other regulations. Many of those regulations are different from those applicable in the U.S. and may require redesign and/or retesting. For example, the E.U. has established new approval and oversight rules requiring that a national authority certify compliance with heightened safety rules, emissions limits and production requirements before vehicles can be sold in each E.U. member state. These changes could impact the rollout of new features in Europe.
Similarly, as a global company deploying cutting-edge technology, we are also subject to trade, export controls, customs product classification and sourcing regulations. Our operations also are subject to various federal, state and local laws and regulations governing the occupational health and safety of our employees and wage regulations. We are subject to the requirements of the federal Occupational Safety and Health Act, as amended, and comparable state laws that protect and regulate employee health and safety.
Like all companies operating in similar industries, we are subject to environmental regulation, including water use; air emissions; use of recycled materials; energy sources; the storage, handling, treatment, transportation and disposal of hazardous materials; and the remediation of environmental contamination. Compliance with these rules may include the need to obtain permits and licenses and to allow inspections of our facilities and products.
C. Organizational Structure
53
| Name of Subsidiary | Country of Incorporation and Place of Business | Proportion of Ordinary Shares Held by REE | ||||||
| REE Automotive UK Limited | United Kingdom | 100% | ||||||
| REE Automotive USA Inc. | United States | 100% | ||||||
| REE Automotive GmbH | Germany | 100% | ||||||
| REE Automotive Japan K.K. | Japan | 100% | ||||||
D. Property, plants, and equipment
Our principal executive offices are located at Kibbutz Glil-Yam 4690500, Israel, where we occupy an office space totaling approximately 35,520 square feet (3,300 square meters), under a lease agreement that expires in 2026, with an option to extend the lease until 2031.
In addition, we have the following facilities that we consider to be material as well as certain immaterial facilities:
1.In February 2022, REE entered into a lease agreement for its UK Engineering Centre and Launch Factory, which is located in Coventry, UK. The facility is approximately 130,000 square feet (approximately 12,077 square meters), under a lease agreement that expires in 2032. REE utilizes this facility for engineering, process validation activities, along with product assembly operations.
2.REE’s operates a testing facility in MIRA Technology Park in the UK for an approximately 4,693 square foot (436 square meter) facility. REE utilizes this facility for product engineering design, validation, verification and testing, as well as product homologation. REE’s lease for this facility expires in April 2025 and REE has no plans to extend the term of such lease.
3.In March 2022, REE entered into a lease agreement for its Austin, Texas headquarters. The facility is approximately 118,132 square feet (10,975 square meter), under a lease agreement that expires in 2032. REE intends to use this facility in the future for accelerating mass production phase in the U.S. and is currently exploring other uses for this facility until such time.
Item 4A. Unresolved Staff Comments
Not applicable.
Item 5. Operating and Financial Review and Prospects
The following discussion and analysis should be read in conjunction with the section titled “Key Components of Statements of Operations” of this Annual Report and our consolidated financial statements and the related notes contained elsewhere in this Annual Report. This discussion and analysis may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in “Item 3.D. Risk Factors” of this Annual Report.
A. Operating results.
The information contained in this section should be read in conjunction with our audited financial statements for the years ended December 31, 2023 and 2022 and related notes and the information contained elsewhere in this Annual Report. Our financial statements have been prepared in accordance with U.S. GAAP.
For a discussion of our consolidated statements of operations for the years ended December 31, 2022 and 2021 and our cash flows for the years then ended, see the section “Operating and Financial Review and Prospects” in our Annual Report on Form 20-F (File No. 001-40649), as filed with the SEC on March 28, 2023.
Key Factors Affecting Operating Results
54
REE is an early-stage growth company in the early commercialization stage and believes that its performance and future success depend on several factors that present significant opportunities for it, but also pose risks and challenges, including those discussed in the section of this Annual Report titled “Item 3.D. Risk Factors”.
Recent Developments
Reverse Share Split
On November 10, 2022, REE announced that it received an initial notification letter from Nasdaq’s Listing Qualifications Department notifying REE that it had 180 days, or the Initial Period, to regain compliance with the minimum bid price requirement set forth in Nasdaq’s Listing Rule 5550(a)(2). Nasdaq’s continued listing rules require that listed securities maintain a minimum bid price of $1.00 per share, and that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days or more. REE did not regain compliance with the minimum bid price per share requirement during the Initial Period. On May 9, 2023 REE received a letter from Nasdaq notifying REE that it is eligible for an additional 180-day compliance period to cure the deficiency, until November 6, 2023.
On October 18, 2023, REE effected a reverse share split of REE’s Class A Ordinary Shares and Class B Ordinary Shares at the ratio of 1-for-30, such that (i) each thirty (30) Class A Ordinary Shares, without par value, were consolidated into one (1) Class A ordinary share, without par value and (2) each thirty (30) Class B Ordinary Shares, without par value, were consolidated into one (1) Class B ordinary share, without par value. As a result, all Ordinary Class A shares, Ordinary Class B shares, options for Ordinary Class A Shares, exercise price and net loss per share amounts were adjusted retroactively for all periods presented herein as if the stock reverse split had been in effect as of the date of these periods. For more information see the Company’s 6-K filed with SEC on October 16, 2023.
On November 1, 2023, REE received a notification letter from Nasdaq Listing Qualifications staff notifying REE that it had regained compliance with the minimum bid price requirement set forth in the Nasdaq Listing Rule 5550(a)(2).
March 2024 Public Offering
On March 1, 2024, REE executed an underwriting agreement, or the Underwriting Agreement, between the Company and Roth Capital Partners LLC, or Roth, pursuant to which the Company conducted an underwritten public offering, or the Public Offering, of 2,000,000 Class A Ordinary Shares at a purchase price of $6.50 per share, for aggregate gross proceeds of approximately $13 million. Pursuant to the terms of the Underwriting Agreement, the Company also granted the Roth a 20-day option to purchase Class A Ordinary Shares of up to 300,000 Ordinary Shares, or 15% of the number of Ordinary Shares sold in the Public Offering, solely to cover over-allotments. On March 4, 2024 Roth exercised its overallotment option to purchase an additional 300,000 Class A Ordinary Shares in full. The Public Offering, including the shares issuable upon the exercise of the overallotment option, closed on March 5, 2024.
At closing, REE issued 2,300,000 Class A Ordinary Shares, for aggregate net proceeds of approximately $14.15 million to REE, after deducting the underwriting discounts and commissions and other estimated offering expenses payable by REE. REE intends to use the net proceeds from the Public Offering for general working capital purposes.
Market Trends
REE’s strategic plan is based on what it believes is a market shift to electric vehicles. REE has observed increase support for EVs in recent years as Tesla has become a dominant player in a once insular automotive industry. Additionally, in 2021 traditional OEMs have announced that they will transition their resources to producing EVs. Whereas EVs were traditionally marketed to niche areas, we now see traditional OEM’s establishing waiting list for customers who want to purchase the electric version of their mainstream vehicles.
In REE’s view, this trend is driven by several factors. A rising environmental consciousness is encouraging customers to weigh their emission footprint. As a zero-emission alternative to traditional ICE options, an EV that can match or exceed an ICE in performance is a natural choice. Assisting with that choice, local and national governments are implementing both various forms of rebates and credits for the purchase of an EV and prohibitive ICE regulations to expedite the rise of e-mobility by accelerating the push for zero emission vehicles and increased awareness of the impacts of global warming. As EV sales grow, EV components become more prevalent, allowing automakers to purchase parts at greater availability
55
and lower costs, further accelerating the switch to electric. Additionally, the continuing improvement in battery technology and continuing build-out of electric charging infrastructure are decreasing range anxiety, increasing comfort with EV range capabilities and facilitating EV adoption. Lastly, particularly in the United States market, customers must deal with increased gas cost resulting from civil unrest and wars in countries on which they depend for gas.
Regulatory Concerns
REE operates in an industry that is subject to extensive environmental regulation, which has become more stringent over time. The laws and regulations to which REE is subject govern, among others, vehicle emissions and the storage, handling, treatment, transportation and disposal of hazardous materials and the remediation of environmental contamination. Compliance with such laws and regulations at an international, regional, national, provincial and local level is an important aspect of REE’s ability to continue its operations. These requirements create additional costs and possibly production delay in connection with design, testing and assembling of REE’s platforms. See “Item 4.B. Business Overview – Government Regulations” for a more detailed discussion.
Key Components of Statements of Operations
Revenue
REE has not begun significant commercial operations and currently has no significant revenues. Once REE reaches commercialization and commences production and sales of our products, we expect that the significant majority of our revenue will be derived from direct sales to OEMs, dealers, logistics and technology companies and, thereafter, other related products and services within the REE ecosystem. In 2023, REE recognized revenues with respect to previously deferred revenues following a termination of a strategic development agreement with a customer and in respect to sale of EV prototypes.
Cost of Revenues
Cost of revenues primarily comprised from the cost of EVs and includes direct parts, material and labor costs, share-based compensation expenses, manufacturing overhead (e.g., depreciation of machinery and tooling), shipping and logistics costs, and reserves including for estimated warranty costs related to the production of EVs and adjustments to write down the carrying value of inventory when it exceeds its estimated net realizable value, or NRV. In 2023, cost of revenues also included expensing of deferred expenses related to the strategic development agreement with a customer which was terminated as described above.
Research and Development Expenses, Net
Research and development, or R&D, expenses consist of costs associated with the employment of REE’s engineering staff, including share based compensation, third-party engineering consultants, development projects such as corners programs and component programs and program consumables, costs associated with REE’s properties, and depreciation of REE’s fixed assets. REE expects research and development expenses to increase as we continue to develop our products, components, technology and software.
Selling, General and Administrative expenses
Selling, general and administrative expenses consist of costs associated with employment of REE’s non-engineering staff, including share based compensation, legal, insurance, accounting and consulting expenses, travel and marketing expenses such as public relations activities and trade shows, costs associated with REE’s properties, and depreciation of REE’s fixed assets. REE expects selling, general and administrative expenses to increase as our overall activity levels increase over time once we will start mass production.
Finance Income, Net
Finance income, net consists primarily of interest income, foreign exchange gains or losses, and the change in fair value of derivatives liabilities offset by bank fees. Foreign currency exchange gains or losses are related to changes in the value of our non-U.S. denominated financial assets and liabilities, primarily cash and cash equivalents and operating lease liabilities related to our leased properties in Israel and the UK. Interest income consists of interest earned on our cash, cash
56
equivalents, and short-term investments. We expect interest income to vary depending on our average investment balances and market interest rates during each reporting period. Derivative liabilities at fair value are related to the Company’s convertible promissory notes. Fair value of derivative liabilities is expected to vary depending on the change in stock price, volatility, risk-free rate, cost of debt and other inputs used for the fair value measurements.
Results of Operations
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The following table sets forth REE’s historical operating results for the periods indicated:
| December 31, 2023 | December 31, 2022 | $'000 Changes | % Changes | ||||||||||||||||||||
| USD in thousands | |||||||||||||||||||||||
| Revenues | $ | 1,608 | $ | — | $ | 1,608 | |||||||||||||||||
| Cost of revenues | 3,270 | 547 | 2,723 | 498 | % | ||||||||||||||||||
| Gross loss | (1,662) | (547) | (1,115) | 204 | % | ||||||||||||||||||
| Research and development expenses, net | 82,662 | 78,225 | 4,437 | 6 | % | ||||||||||||||||||
| Selling, general and administrative expenses | 35,568 | 49,200 | (13,632) | (28) | % | ||||||||||||||||||
| Total operating expenses | 118,230 | 127,425 | (9,195) | (7) | % | ||||||||||||||||||
| Operating loss | (119,892) | (127,972) | 8,080 | (6) | % | ||||||||||||||||||
| Income from warrants remeasurement | 396 | 17,929 | (17,533) | (98) | % | ||||||||||||||||||
| Financial income, net | 3,928 | 4,371 | (443) | (10) | % | ||||||||||||||||||
| Net loss before income tax | $ | (115,568) | $ | (105,672) | $ | (9,896) | 9 | % | |||||||||||||||
| Income tax expense (income) | (1,360) | 1,748 | (3,108) | (178) | % | ||||||||||||||||||
| Net loss | (114,208) | (107,420) | (6,788) | 6 | % | ||||||||||||||||||
57
Revenue
REE has not begun significant commercial operations and currently has no significant revenues. For the year ended December 31, 2023 REE recognized revenues of $1.6 million. In April 2021, we entered into a strategic development agreement with a customer, pursuant to which we agreed to develop and supply our platform prototypes. In 2021, revenue in the amount of $0.9 million related to the agreement was deferred. In 2023 we recorded revenue in the amount of $0.9 million upon the termination of the agreement with the customer. In addition, revenues in the amount of $0.7 million were recorded with respect to sale of EV prototypes to potential customers. There was no revenue for the year ended December 31, 2022.
Cost of Revenues
Cost of revenue increased by $2.8 million, or 498%, from $0.5 million for the year ended December 31, 2022 to $3.3 million for the year ended December 31, 2023. This increase was primarily due to adjustments to write down the carrying value of inventory exceeded its estimated NRV as part of material purchasing for preparation to production of EVs. In addition, cost of revenue increased due to expensing of deferred expenses related to the strategic development agreement with a customer which was terminated as described above.
Research and Development Expenses, Net
R&D expenses increased by $4.5 million, or 6%, from $78.2 million for the year ended December 31, 2022 to $82.7 million for the year ended December 31, 2023. This increase was primarily due to an increase in non-recurring engineering expenses related to the development of the P7 EV Platform. This increase was partially offset by a decreased share-based compensation expense of $8.4 million incurred during the year ended December 31, 2023 compared to $13.2 million during the year ended December 31, 2022 as well as a decrease in costs related to a decrease in R&D employee headcount and outsourced engineering consultants and other efficiencies in R&D expenses. Excluding share-based compensation expense, R&D expenses increased by $9.3 million, or 14%, from $65.0 million for the year ended December 31, 2022 to $74.3 million for the year ended December 31, 2023.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $13.6 million, or 28%, from $49.2 million for the year ended December 31, 2022 to $35.6 million for the year ended December 31, 2023. This decrease was primarily due to decreased share-based compensation expense of $7.9 million incurred during the year ended December 31, 2023 compared to $13.6 million during the year ended December 31, 2022, as well as a decrease in marketing costs, salaries and related expenses related to a decrease in non-R&D employee headcount and transaction costs related to the Warrant Exchange incurred in the year ended December 31, 2022. Excluding share-based compensation, selling, general and administrative expenses decreased by $7.9 million, or 22%, from $35.6 million for the year ended December 31, 2022 to $27.7 million for the year ended December 31, 2023.
Income from Warrants Remeasurement
Income from warrants remeasurement, decreased by $17.5 million, or 98%, from income of $17.9 million for the year ended December 31, 2022 to income of $0.4 million for the year ended December 31, 2023. The income from warrants remeasurement for the year ended December 31, 2022 is from the change in fair value prior to the settlement of the warrant liability. The income from warrants remeasurement for the year ended December 31, 2023 is from the change in fair value of warrants liability issued in December 2023.
Financial Income, Net
Financial income, net decreased by $0.5 million, or 10%, from financial income, net of $4.4 million for the year ended December 31, 2022 to $3.9 million for the year ended December 31, 2023. The decrease in financial income, net was primarily due to foreign currency losses during the year ended December 31, 2023, compared to foreign currency gains during the year ended December 31, 2022. This decrease was partially offset by an increase in income from bank deposits and short term investments.
58
Income tax expense
Income tax expense (income), decreased by $3.1 million, or 178%, from income tax expense of $1.7 million for the year ended December 31, 2022 to income tax income of $1.4 million for the year ended December 31, 2023. This decrease was primarily due to a partial reversal of an uncertain tax position.
B. Liquidity and Capital Resources.
As of the date of this Annual Report, REE has yet to generate significant revenues from its principal business operations and has generated minimal revenues and does not expect to generate significant revenues from the sale of products in the near future. Since inception, REE has incurred losses and generated negative cash flows from operations and has funded its operations, capital expenditure and working capital requirements through capital contributions, private placements of equity securities, issuance of private warrants, convertible promissory notes, investments from certain strategic partners, and from the consummation of the Merger.
REE expects its capital expenditures and working capital requirements to continue in the near future, as it seeks to produce the REE products, develop its customer support and marketing infrastructure and continue its R&D efforts. As of December 31, 2023, REE’s cash and cash equivalents were $41.2 million and its short term investments were $44.4 million. REE’s ability to successfully carry out its business plan is primarily dependent upon its ability to raise sufficient additional capital. There are no assurances, however, that REE will be successful in obtaining an adequate level of financing needed to support its operations.
Since REE was unable to maintain sufficient financial resources to support its business operation, the Board approved a saving plan to improve REE’s available cash balances and liquidity. REE’s saving plan includes reducing costs to conserve cash and improve its liquidity position, deferral and reprioritization of certain research and development programs including tooling and additional contingent plan to reduce additional costs.
The above mentioned alleviates the substantial doubt about the Company's ability to continue as a going concern for at least twelve months from the date that the consolidated financial statements were issued.
If REE were to require additional funding or otherwise determined it was beneficial to seek additional sources of financing, REE believes that its balance sheet would enable REE to access financing on reasonable terms. However, there can be no assurance that such financing would be available to REE on favorable terms or at all. If the financing is not available, or if the terms of financing are less desirable than REE expects, REE will be forced to change its business plan, including, among other changes, decreasing its level of investment in product development, renegotiating development agreements with collaboration partners and/or scaling back its operations, which could have an adverse impact on its business and financial prospects. Additionally, any funding raised through the issuance of equity or equity-linked securities may result in the issuance of securities that have rights, preferences or privileges senior to those of our Class A Ordinary Shares or the dilution of our existing shareholders.
ATM Agreements
On August 16, 2022, REE entered into the ATM Equity Offering Sales Agreement, or the BofA Agreement, with BofA Securities Inc., or BofA, pursuant to which we may offer and sell, at our option, up to $75.0 million of our Class A Ordinary Shares through an “at-the-market” equity program under which BofA agreed to act as sales agent. As of December 31, 2023, we had not sold any of our Class A Ordinary Shares under the BofA Agreement.
On July 14, 2023, the Company entered into the HCW Agreement, pursuant to which the Company may offer and sell, at its option, up to $35 million of Class A Ordinary Shares through an “at-the-market” equity program under which HCW agreed to act as the Company’s sales agent. As of December 31, 2023, the Company sold 75,912 Class A Ordinary Shares under the ATM Sales Agreement for total gross proceeds of approximately $657,000. In January 2024, the Company issued an additional 44,968 Class A Ordinary Shares under the HCW Sales Agreement for total gross proceeds of approximately $252,000.
Convertible Promissory Notes and Warrants
On November 27, 2023, the Company entered into securities purchase agreements, or the November Purchase Agreements, with certain investors, pursuant to which REE agreed to issue and sell convertible promissory notes, or the November Notes, in the principal amount of $8,000,000, in the aggregate, at a conversion price of $5.09 per share (subject to adjustment as provided therein), and warrants, or the November Warrants, to purchase up to an aggregate of 1,571,710 of Class A Ordinary Shares at an exercise price of $4.42 per share (subject to adjustment as provided therein). Closing under
59
the November Purchase Agreements occurred on December 3, 2023, pursuant to which the November Notes and November Warrants were issued to the investors.
In addition, on December 6, 2023, REE entered into a subsequent securities purchase agreement, or the December Purchase Agreement, dated December 2, 2023, with a certain accredited investor, pursuant to which we agreed to issue and sell an additional convertible promissory note, or the December Note, in the principal amount of $750,000 at a conversion price of $5.74 per share (subject to adjustment as provided therein), and an additional warrant, or the December Warrant, to purchase up to 130,662 Class A Ordinary Shares, at an exercise price of $5.74 per share (subject to adjustment as provided therein). Closing under the December Purchase Agreement occurred on December 20, 2023, pursuant to which December Note and December Warrant were issued to the applicable investor.
Pursuant to the November Purchase Agreement and December Purchase Agreement,, the November Notes and December Note each have a term of five years from the date of issuance, accrue interest at a rate of ten percent per annum (compounding annually) and are convertible into Class A Ordinary Shares at conversion prices of $5.09 and $5.74 per share, respectively. REE may not repay any portion of the outstanding principal amount of the November Notes or December Note (or any interest accrued thereon) prior to the maturity date. The conversion price of November Notes and December Note is subject to customary adjustments, and the Notes contain customary anti-dilution protections (including in the event of (i) certain equity issuances by us at a price less than the conversion price then in effect, provided that the conversion price shall in no event be reduced to less than $1.02 and $1.15 per share, respectively; (ii) stock splits and combinations; and (iii) certain dividends or distributions).
The November Warrants to purchase up to 1,571,710 Class A Ordinary Shares are exercisable at an exercise price of $4.42 per Class A Ordinary Share (subject to customary adjustments) and have a term of five years from the date of issuance, which was December 3, 2023. The December Warrant to purchase up to 130,662 Class A Ordinary Shares are exercisable at an exercise price of $5.74 per Class A Ordinary Share (subject to customary adjustments) and has a term of five years from the date of issuance, which was December 20, 2023.
Public Offering
On March 1, 2024, REE executed the Underwriting Agreement with Roth pursuant to which REE conducted a the Public Offering of 2,000,000 Class A Ordinary Shares at a purchase price of $6.50 per share, for aggregate gross proceeds of approximately $13 million. Pursuant to the terms of the Underwriting Agreement, REE also granted Roth a 20-day option to purchase Class A Ordinary Shares of up to 300,000 Ordinary Shares, or 15% of the number of Ordinary Shares sold in the Public Offering, solely to cover over-allotments, if any. On March 4, 2024, Roth exercised its overallotment option to purchase an additional 300,000 Class A Ordinary Shares in full. The Public Offering, including the shares issuable upon the exercise of the overallotment option, closed on March 5, 2024.
At closing, REE issued 2,300,000 Class A Ordinary Shares, for aggregate net proceeds of approximately $14.15 million to REE, after deducting the underwriting discounts and commissions and other estimated offering expenses payable by REE.
Loan under Credit Facility
On August 14, 2023, REE entered into an agreement with a leading Israeli commercial bank to establish a revolving credit line facility, or the Credit Facility, in the amount of $15 million which the bank is committed to until December 31, 2024. In December 2023, the terms of the Credit Facility were extended through June 30, 2025. In March 2024, the terms of the credit facility were extended through December 31, 2025. Outstanding loans under the Credit Facility bear a variable interest at the rate of the Monthly Term Secured Overnight Financing Rate , or SOFR, plus an annual margin of 3.5%. The interest is payable on a monthly basis. Under the terms of the Credit Facility, REE is required to keep unsecured deposits in the aforementioned bank in the amount of $20 million. Under certain terms, the bank has the right to offset loans drawn under the Credit Facility with the deposits kept in the bank. REE is charged a fee of 0.25% per annum on amounts available for draw that are undrawn under the Credit Facility. As of December 31, 2023, REE has utilized $15 million under its Credit Facility for a short-term loan. In January 2024, the short-term loan was fully repaid by REE.
As an early-stage growth company in the early commercialization stage, the net losses REE has incurred since inception are consistent with REE’s strategy and budget. REE will continue to incur net losses in accordance with its operating plan as REE continues to expand its operations to meet anticipated demand.
60
Cash Flows Summary
Presented below is a summary of REE’s operating, investing and financing cash flows:
| December 31, 2023 | December 31, 2022 | ||||||||||
| USD in thousands | |||||||||||
| Net cash provided by (used in) | |||||||||||
| Operating activities | $ | (89,273) | $ | (112,585) | |||||||
| Investing activities | 49,617 | (106,835) | |||||||||
| Financing activities | 23,971 | 2,430 | |||||||||
| Net change in cash and cash equivalents and restricted cash | $ | (15,685) | $ | (216,990) | |||||||
Cash Flows from Operating Activities
REE’s cash flows used in operating activities to date have primarily resulted from costs related to development of its products, payroll, fluctuations in accounts payable and other current assets and liabilities. REE expects to continue incurring expenses on operating activities until it begins to generate sufficient cash flows from its business.
During the year ended December 31, 2023, operating activities used $89.3 million in cash. The primary factors affecting operating cash flows during this period were a net loss of $114.2 million before deducting non-cash charges consisting primarily of share-based compensation of $16.3 million and depreciation, amortization, and accretion expense of $5.1 million, offset by a change in fair value of financial liabilities of $0.6 million and a change in operating right of use asset and liability, net, of $1.4 million. These non-cash charges were offset by an increase in operating working capital of $5.7 million.
During the year ended December 31, 2022, operating activities used $112.6 million in cash. The primary factors affecting operating cash flows during this period were a net loss of $107.4 million before deducting non-cash charges consisting primarily of share-based compensation of $26.9 million and depreciation, amortization, and accretion expense of $4.3 million which was offset by the change in warrant valuation of $17.9 million and a decrease in operating working capital of $10.0 million and a change in operating right of use asset and liability, net, of $7.9 million.
Cash Flows from Investing Activities
REE’s cash flows used in investing activities to date have been primarily comprised of short-term investments and cash outflows for tangible fixed assets (plant and equipment). REE expects investing activities to include cash inflows from maturities of short-term investments offset by costs related to production related tangible fixed assets..
Net cash provided by investing activities was $49.6 million for the year ended December 31, 2023, which was primarily due to the maturity of short-term investments of $147.7 million, partially offset by purchase of short-term investments of $94.4 million and $3.7 million cash outflows for fixed assets (plant and equipment).
Net cash used in investing activities was $106.8 million for the year ended December 31, 2022, which was primarily due to $11.1 million cash outflows for fixed assets (plant and equipment) and $139.9 million purchase of short-term investments, offset by the maturity of short-term investments of $44.1 million.
Cash Flows from Financing Activities
Net cash provided by financing activities was $24.0 million for the year ended December 31, 2023, which was primarily due to proceeds from short-term loan utilized under the Company’s credit facility in the amount of $15.0 million, net proceeds from issuance of convertible promissory notes in the amount of $8.4 million and net proceeds from Ordinary Share issuances pursuant to the HCW Agreement under the Company’s ATM program in the amount of $0.5 million.
Net cash provided by financing activities was $2.4 million for the year ended December 31, 2022, which was due to proceeds from exercise of options and warrants.
61
Credit Facility
On August 14, 2023, the Company entered into the Credit Facility in the amount of $15 million which the bank is committed to until December 31, 2024. In December 2023, the terms of the Credit Facility were extended through June 30, 2025. In March 2024, the terms of the credit facility were extended through December 31, 2025. Outstanding loans under the Credit Facility bear a variable interest at the rate of the one-month SOFR plus an annual margin of 3.5%. The interest is payable on a monthly basis. Under the terms of the Credit Facility, the Company is required to keep unsecured deposits in the aforementioned bank in the amount of $20 million. Under certain terms, the bank has the right to offset loans drawn under the Credit Facility with the deposits kept in the bank. The Company is charged a fee of 0.25% per annum on amounts available for draw that are undrawn under the Credit Facility.
As of December 31, 2023 the Company has utilized $15 million under the Credit Facility for a short-term loan. In January 2024 the short-term loan was fully repaid by the Company. The annual interest rate for the loan utilized under the Credit Facility was 8.86%.
Debt
As of the date of this Annual Report, except for the Credit Facility, the November Note and the December Note, REE has no third-party debt although it may determine, based on changes in its expected cash flow needs or because it deems it beneficial, to incur debt in the future.
Contractual Obligations and Commitments
REE currently leases approximately 3,300 square meters (approximately 35,520 square feet) of office space in Glil-Yam, Israel as our headquarters. This facility accommodates its principal executive, research and development, marketing, design, business development, human resources, finance, information technology, and administrative activities. The lease is for a five-year term with the option to extend the lease period for an additional period of five years.
In the United Kingdom, REE entered into a lease agreement for its UK Engineering Centre and Launch Factory, which is located in Coventry, UK. The facility is approximately 130,000 square feet (approximately 12,077 square meters), under a lease agreement that expires in 2032. REE utilizes this facility for engineering, process validation activities, along with product assembly operations. In addition, REE has a lease in Warwickshire with MIRA Technology Park which REE utilizes as a testing facility, the agreement expires in April 2025.
In the United States, REE entered into a lease agreement for its Austin, Texas headquarters. The facility is approximately 118,132 square feet (10,975 square meter), under a lease agreement that expires in 2032. REE intends to use this facility in the future for accelerating mass production phase in the U.S. and is currently exploring other uses for this facility until such time.
The following table summarizes REE’s contractual obligations and other commitments for cash expenditures as of December 31, 2023, and the years in which these obligations are due. Certain obligations are reflected in our balance sheet, while other are disclosed as future obligations. This table is not meant to represent a forecast of our total cash expenditures for any of the periods presented.
| Payments due by period | ||||||||||||||
| Total | Less than 1 year | 1-5 years | More than 5 years | |||||||||||
| USD in thousands | ||||||||||||||
| Contractual obligations: | ||||||||||||||
| Operating lease obligations | $ | 24,222 | 3,489 | 11,599 | 9,134 | |||||||||
| Purchase obligations | 18,054 | 13,600 | 4,454 | — | ||||||||||
| Total | $ | 42,276 | $ | 17,089 | $ | 16,053 | $ | 9,134 | ||||||
Open purchase orders that are cancellable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. Such purchase orders often represent authorizations to purchase rather than binding agreements.
In addition, REE enters into agreements in the normal course of business with vendors to perform various services, which are generally cancellable upon written notice. These payments are not included in this table of contractual obligations.
62
C. Research and development, patents and licenses, etc.
REE has invested significant time and expense into research and development with respect to its products. Our research and development activities are primarily located in Israel, and at our UK Engineering Center. REE’s ability to obtain a leadership position in the automotive industry depends in part on its ongoing research and development activities. REE’s research and development team includes engineers and researchers with a diverse range of expertise, levels of experience, and academic backgrounds. REE has a strong combination of engineers with automotive and technology industry experience from Israel, the UK, Germany and the United States who together combine innovative thinking with a common goal of developing a superior EV product for the automotive market. Our research and development department is comprised of approximately 183 employees and external consultants as of December 31, 2023. In 2023, research and development costs accounted for approximately 70% of our total operating expenses.
Israeli tax law allows, under certain conditions, a tax deduction for expenditures related to scientific research and development projects, including capital expenditures, for the year in which they are incurred. Expenditures are deemed related to scientific research and development projects, if:
• the expenditures are approved by the relevant Israeli government ministry, determined by the field of research;
• the research and development must be for the promotion of the company; and
• the research and development is carried out by or on behalf of the company seeking such tax deduction.
The amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. No deduction under these research and development deduction rules is allowed if such deduction is related to an expense invested in an asset depreciable under the general depreciation rules of the Ordinance. Expenditures that are unqualified under the conditions above are deductible in equal amounts over three years.
D. Trend information.
Other than as disclosed in “Item 5.A. Operating Results — Key Factors Affecting Operating Results” and elsewhere in this Annual Report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2023 to December 31, 2023 that are reasonably likely to have a material effect on our total revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial condition.
E. Critical Accounting Estimates
REE’s financial statements have been prepared in accordance with U.S. GAAP. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires REE’s management to make estimates, judgments and assumptions. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period and accompanying notes. Actual results could differ from those estimates. REE’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made.
While REE’s significant accounting policies are described in the notes to its financial statements, REE believes the following accounting policies are the most critical in fully understanding and evaluating our financial condition and results of our operations under U.S. GAAP.
Impairment of long-lived assets
Long-lived assets, such as property, plant, and equipment are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. The evaluation of anticipated future cash flows is subjective and is based in part on assumptions regarding expected future operating income, growth rate, cost levels, capital requirements, and market and other applicable trends. If the carrying amount of an asset or
63
asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group.
Inventory
The Company’s inventory, which includes raw materials, work in-process, and finished goods, is carried at the lower of cost and net realizable value. Inventory cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on operating capacity.
At the end of each reporting period, the Company evaluates whether its inventories are damaged, obsolete, or have material changes in price or other causes, and if so, a loss is recognized in the period in which it occurs. Inventory write-downs are also based on reviews for any excess or obsolescence.
The Company also reviews its inventory to determine whether its carrying value exceeds the NRV upon the ultimate sale of the inventory. NRV is the estimated selling price of inventory in the ordinary course of business, less estimated costs of completion, disposal, and transportation. At the end of each reporting period, the Company determines the estimated selling price of its inventory based on market conditions. Once inventory is written-down, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Fair value of financial instruments
Fair value is defined as the exchange price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company measures financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities.
Level 2 — inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Financial instruments consist of cash equivalents, restricted cash, other accounts receivable, short-term loan, trade payables, other accounts payable and accrued expenses. The estimated fair values of these financial instruments approximate their carrying value as presented, due to their short term maturities. We consider public warrant liabilities to be Level 1 and private warrants and derivative liabilities at fair value to be Level 3 and are measured at fair value using Level 3 inputs. The financial liability for the warrant and derivative liabilities are accounted for at fair value through earnings.
Recently Issued Accounting Pronouncements
See Note 2 to REE’s consolidated financial statements included elsewhere in this annual report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this annual report.
64
Item 6. Directors, Senior Management and Employees
A. Directors and senior management
The following table sets forth the name, age and position of each of our executive officers and directors as of March 27, 2024:
| Name | Age | Position | ||||||
Executive Officers | ||||||||
Daniel Barel | 45 | Co-Founder, Chief Executive Officer and Director | ||||||
| Ahishay Sardes | 42 | Co-Founder, Chief Technology Officer and Director | ||||||
Yaron Zaltsman* | 49 | Chief Financial Officer | ||||||
| Joshua Tech | 45 | Chief Operating Officer | ||||||
| Keren Shemesh | 48 | Chief Marketing Officer | ||||||
| Avital Futterman | 40 | General Counsel & Corporate Secretary | ||||||
| Tali Miller | 48 | Chief Business Officer | ||||||
| Limor Raz | 44 | Chief People Officer | ||||||
| Directors | ||||||||
Carlton Rose | 62 | Director | ||||||
Michal Drayman (1) (2) (3) | 51 | Director | ||||||
Alla Felder (1) (2) (3) | 50 | Director | ||||||
Ittamar Givton (1) (2) (3) | 71 | Director | ||||||
Hicham Abdessamad | 50 | Director | ||||||
Michal Marom-Brikman (1) (2) (3) | 55 | Director | ||||||
* Yaron Zaltsman was appointed CFO effective March 29, 2023 replacing David Goldberg.
(1) Member of our audit committee
(2) Member of our compensation committee
(3) Independent director under the rules of Nasdaq
Executive Officers
Daniel Barel has been the Chief Executive Officer of REE since 2013 and has served as a member of the board of directors since 2013. Mr. Barel is an entrepreneur and businessperson who founded several startups in the fields of medical devices, cyber security and software applications. He serves as chairman of SpecterX, an Israeli data management company he co-founded in 20191. Mr. Barel holds a Bachelor of Arts in Economics and Business Administration from the Hebrew University.
Ahishay Sardes has been the Chief Technology Officer of REE since 2013 and has served as a member of the board of directors since 2021. Mr. Sardes has over 15 years of experience in engineering including mechanics, electronics, software and research. From 2008 to 2013, he served as Head of Engineering at ZIV-AV Technologies, an Israeli engineering company. Mr. Sardes holds a Bachelor of Science in Mechanical Engineering from the Afeka Tel Aviv Academic College of Engineering.
Yaron Zaltsman has been appointed as REE’s Chief Financial Officer effective March 29, 2023. Mr. Zaltsman brings over 20 years of experience in management roles as a chief financial officer and board member of various public listed companies, overseeing all capital market aspects, financial reports and credit rating matters. Mr. Zaltsman has been involved in leading initial public offerings and fund-raisings and establishing headquarters and subsidiaries with active teams in different countries. Mr. Zaltsman also serves as the managing partner of OTRE Fund from 2022 and as a board member at Megureit Israel Ltd since 2020. From 2017 to 2021 he served as the chief financial officer of Frankfurt Stock Exchange-listed company Fyber N.V., leading its acquisition by Nasdaq-listed company, Digital Turbine, Inc., and as the
1 REE is also a customer of SpecterX. See “Item 7.B. Related Party Transactions” of this Annual Report for additional information.
65
chief financial officer of A.D.O. Group Ltd, which was listed on the Tel Aviv Stock Exchange, and its subsidiary A.D.O. Properties S.A., which was listed on the Frankfurt Stock Exchange, from 2006 to 2016. Prior to these roles, from 2000 to 2005, Mr. Zaltsman was the Deputy Head of Financial Advisory Services Israel for Deloitte. Mr. Zaltsman is a certified public accountant in Israel and holds a BA in accounting and economics from the Hebrew University and a MBA from Tel Aviv University.
Joshua Tech joined REE in April 2022 as the Chief Operating Officer. Mr. Tech joins REE after serving on Tesla’s Operations Leadership Team as Head of the New Product/Manufacturing Introduction group. Previously, oversaw manufacturing development and launch at a worldwide leader in automotive exterior design, development, and manufacturing, and most recently served as Vice President of Manufacturing and Engineering for one of America’s most advanced construction technology firms, Plant Prefab. Based in the U.S.. Mr. Tech brings over 23 years of experience to REE in complex product development & launch, industrialization, infrastructure development, engineering, supply chain, quality, and operations management. Mr. Tech holds a Cert of Supervisory Management from University of Pittsburgh, a Quality Engineering from Tri County Technical College, a BS of Mechanical Engineering from Penn State University, a BA of Business Administration from Madison University and an MBA of Business Administration from Madison University.
Keren Shemesh has been Chief Marketing Officer of REE since September 2019. Prior to joining REE, she served as Vice President of Marketing at Elmo Motion Control. From 2010 until 2016, she held numerous senior marketing positions, including Global Marketing Manager at Starhome Mach from 2015 to 2016. Ms. Shemesh holds a B.Eng in Electronic Communications Engineering from Bezeq College and a Bachelor of Science in Electronic Engineering from Ariel University.
Avital Futterman Avital Futterman joined REE in July 2022. Prior to REE, Ms. Futterman served as the VP of Legal Affairs and General Counsel from 2015 through 2022 at Cellebrite, a leading digital intelligence high-tech company. Before that, Ms. Futterman worked at Zellermayer, Pelossof & Co. and SGS as an attorney. Ms. Futterman holds an LLB in Law and a BA in Economics from the Tel-Aviv University, and a Global MBA from Reichman University.
Tali Miller joined REE Automotive in 2018 and is the company’s Chief Business Officer since November 2021, having previously served as the company’s Vice President of Corporate Development. Ms. Miller brings over 20 years of experience in business development, partnerships and M&A activities in the tech, telecom and environmental sectors. Prior to REE, from 2008 to 2015, Ms. Miller led the M&A and regional business development at Miya, an Arison Group company, and from 2005 to 2008, Ms. Miller led partnerships and M&A at the Nasdaq listed companies M-Systems Ltd. and SanDisk. Ms. Miller holds a BA in Economics from Tel Aviv University and an MBA from INSEAD.
Limor Raz has been Chief People Officer of REE since November 2018. Prior to joining REE, she served as Head of HR at Xsight Systems. Ms. Raz holds a Bachelor's degree in Psychology from The Open University of Israel and a Master's degree in Art Therapy/Therapist from Beit Berl.
Directors
Carlton Rose has served on the board of directors since June 2023. Mr. Rose was employed by United Parcel Service starting in 1980, first as a package handler and, during his 43-year tenure, having earned numerous promotions as a result of his technical skills, business skills and team leadership culminating in his most recent position as its President, Global Fleet Maintenance & Engineering until his retirement in March, 2023. Mr. Rose serves on the board of directors of Lincoln Educational Services Corporation (Nasdaq: LINC) since August 2020. A native of Marion, Indiana, Mr. Rose is an automotive engineering graduate of the Indianapolis campus of Lincoln Technical Institute, now Lincoln College of Technology.
Michal Drayman has served on the board of directors since April 2023. Ms. Drayman serves as a director and chairman of the audit committee of Perion Network Ltd. (Nasdaq: PERI) and serves on the boards of several privately held companies including aVISI Ltd. and MetzerPlast. A long standing investor who served as a partner in Jerusalem Venture Partners VC since 2014 to sept 2023 and a CFO and VP business development at European High Tech Capital, a privately held investment firm which is focused on healthcare investments. Prior to that from 2001 to 2004 Ms. Drayman served as the VP Finance America of Lumenis Inc. From 1994 to 2001, Ms. Drayman served in different financial positions in Lumenis Ltd. (previously, Nasdaq:LMNS). Ms. Drayman holds a BA in Economics and Accounting from Haifa University and an MBA in excellence from The College of Management, Rishon Letzion, Israel, Biomedical Management Track.
Alla Felder has served on the board of directors since April 2023. Ms. Felder currently serves as CFO of Weebit Nano Ltd., a high-tech company traded on the Australian stock exchange (ASX), a position she has held since 2016, and in
66
addition provides business and financial advisory services. Ms. Felder serves on the boards of directors, including the audit and compensation committees, of several publicly listed companies across several industries, including Enlight Renewable Energy Ltd (Nasdaq: ENLT), Redhill BioPharma Ltd. (Nasdaq: RDHL), Ashtrom Properties Ltd., Israel Shipyards Ltd, Biolight Ltd., Photomyne Ltd. and IdoMoo Ltd. Ms. Felder was a Senior Manager at PricewaterhouseCoopers and received a degree in Business Administration and Accounting from the College of Management Academic Studies Division in Rishon Lezion, Israel and an Executive Master’s degree in the Science of Finance from the City University of New York. Ms. Felder is a Certified Public Accountant in Israel.
Ittamar Givton has served on the board of directors since March 29, 2023. Mr. Givton served on the boards of several government entities and public companies in Israel, across the energy, banking, chemical, and communication sectors as well as on the board of the Israeli Stock Exchange. In addition, Mr. Givton served for many years as Managing Director of Automotive Equipment Group in Israel (importer of Suzuki, Man and Bridgestone, among others) and is now serving as Chairman of the Group’s Advisory Committee. Prior to his work in AEG, Mr. Givton held a senior position in the Budget Department of the Israeli Ministry of Finance and later served as VP for Business Development in the Dankner Group. Mr. Givton holds a BA in Economics from Tel Aviv University and an LL.B from the Hebrew University in Jerusalem.
Hicham Abdessamad has served on the board of directors since March 29, 2023. Mr. Abdessamad is the Chairman & CEO of Hitachi America, Ltd, overseeing the growth objectives of Hitachi’s North America business across key sectors such as Digital, Green & Mobility, and Innovation. Hitachi in North America has a portfolio of 72 companies and 19 R&D facilities operating in 37 states, with over 24,700 employees. Mr. Abdessamad also serves as an advisor on the investment advisory committee (IAC) appointed by the United States Secretary of Commerce, Gina Raimondo. Mr. Abdessamad has held multiple executive roles within Hitachi, including CEO of Hitachi Global Digital Holdings, President and CEO of Hitachi Consulting. Mr. Abdessamad holds a Bachelor of Science degree in Computer Engineering from Suffolk University, Massachusetts, and has completed the Executive Development Program at the Tuck School of Business at Dartmouth College in New Hampshire, and the Executive Leadership Program at the International Institute of Management Development (IMD) in Lausanne, Switzerland.
Michal Marom-Brikman has served on REE’s board of directors since October 2021. She specializes in financial and business structures, business deals and corporate governance. Ms. Marom-Brikman has significant experience on public company boards; she is on the board of Partner Communications Co. (Nasdaq: PTNR) and is a board member of the Ichilov Medical Center & Hospital and a member of its investment committee. Ms. Marom-Brikman also served as Co-Founder and CFO of Linkury Technology International Group and as a professional assistant to the president of the CPA Institute in Israel and was chairman of the audit committee of the Halman Aldubi investment house. Ms. Marom-Brikman serves as a director in the following firms: Union Bank, Spectronix, Naaman Vardinon, Biomedix incubator, ADO group, Arko holdings, Algomizer and Dan Transportation. Ms. Marom-Brikman holds an MA in Finance from the Baruch College of Management, NYU and a BA from the College of Management Academic Studies in Israel.
Family Relationships
There are no family relationships between any of our executive officers and our directors.
Arrangements for Election of Directors and Members of Management
There are no arrangements or understandings with major shareholders or others pursuant to which any of our executive officers or directors are selected.
B. Compensation
Compensation of Executive Officers and Directors
The compensation paid by REE and our subsidiaries to our office holders as a group for the year ended December 31, 2023 was $6.0 million. This amount includes $0.5 million set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, but does not include business travel, car expenses, relocation, professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in Israel. In addition, we incurred $4.6 million of share-based compensation expense related to equity awards made by us to our office holders.
67
As of December 31, 2023, options to purchase 3,448,804 Ordinary Shares granted to our office holders as a group were outstanding under our equity incentive plans at a weighted average exercise price of $3.53 per ordinary share. The expiration date of such options is 10 years after their date of grant.
The table below sets forth the compensation earned by our five most highly compensated office holders (as defined under the Companies Law) during or with respect to the year ended December 31, 2023. An office holder is defined in the Companies Law as a general manager, chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of such person’s title, a director, and any other manager directly subordinate to the general manager. We refer to the five individuals for whom the disclosure is provided herein as “Covered Executives”. For purposes of the table and the summary below, “compensation” includes salary, bonuses, equity-based compensation, retirement or termination payments, and any benefits or prerequisites such as car, phone and social benefits, as well as undertaking to provide such compensation in the future.
Summary Compensation Table
| Information Regarding the Covered Executive (1) | |||||||||||||||||
| Name and Principal Position | Base Salary | Benefits & Perquisites (3) | Variable Compensation (4) | Equity-Based Compensation (5) | Total | ||||||||||||
| Keren Shemesh, Chief Marketing Officer | $ | 297,000 | $ | 115,813 | $ | 74,250 | $ | 1,871,830 | $ | 2,358,893 | |||||||
| Tali Miller, Chief Business Officer | $ | 400,000 | $ | 130,038 | $ | 333,333 | $ | 227,936 | $ | 1,091,307 | |||||||
| Limor Raz, Chief People Officer | $ | 297,000 | $ | 110,323 | $ | 74,250 | $ | 798,192 | $ | 1,279,765 | |||||||
Yaron Zaltsman, Chief Financial Officer | $ | 227,419 | $ | 77,293 | $ | 150,000 | $ | 343,801 | $ | 798,513 | |||||||
Joshua Tech, Chief Operating Officer | $ | 380,000 | $ | 61,069 | $ | 171,000 | $ | 90,657 | $ | 702,726 | |||||||
(1) In accordance with Israeli law, all amounts reported in the table are based on the cost to REE as recorded in our financial statements for the year ended December 31, 2023.
(2) All current officers listed in the table are full-time employees. Cash compensation amounts denominated in currencies other than the U.S. dollar were converted into U.S. dollars at the average conversion rate for the year ended December 31, 2023.
(3) Amounts reported in this column include benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include, to the extent applicable to each executive, payments, contributions and/or allocations for savings funds, pension, severance, vacation, car or car allowance, medical insurances and benefits, risk insurances (such as life, disability and accident insurances), convalescence pay, payments for Medicare and social security, tax gross-up payments and other benefits and perquisites consistent with our guidelines, regardless of whether such amounts have actually been paid to the executive.
(4) Amounts reported in this column refer to Variable Compensation such as earned commissions, incentives and earned or paid bonuses as recorded in our financial statements for the year ended December 31, 2023.
(5) Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2023, with respect to equity-based compensation, reflecting also equity awards made in previous years which may have vested during the current year. Assumptions and key variables used in the calculation of such amounts are described in Note 11 to our audited consolidated financial statements, which are included in this Annual Report.
Compensation Policy for Non-Executive Directors
In July 2021, our shareholders amended and re-adopted the compensation policy for our non-executive directors. Pursuant to the amended compensation policy, the non-executive directors are paid an annual cash retainer and receive a fixed annual equity grant. The policy does not provide for the payment of any benefits upon termination of any non-executive director’s service.
68
Cash retainer. The annual retainer for board membership is $50,000, payable quarterly, with the Chairman of the board of directors paid a supplemental annual fee of $50,000, paid quarterly. The annual retainer for committee membership is $10,000 for audit committee membership, $7,500 for membership of the compensation committee, and $5,000 for membership of each nominating and corporate governance committee. The annual retainer for serving as chair of the audit committee, the compensation committee and the nominating and corporate governance committee is $20,000, $15,000 and $10,000, respectively. To this date, REE has no nomination committee.
Initial equity awards. Each non-employee director is granted an initial grant of $100,000 worth of RSUs to purchase Ordinary Shares, plus a prorated portion of $150,000, which will be granted on the date of the director’s election or appointment to the Board, based on the closing share price on the date of grant. The prorated portion will be determined by multiplying $150,000 by the quotient of (i) the number of days remaining from the date of appointment or election until the next annual meeting of shareholders, divided by (ii) 360. Each such grant will vest in three equal installments on the first, second and third anniversaries of the date of grant or on the date of the annual meeting of shareholders in the first, second and third years following the date of grant, whichever is earlier in any year. For eligible Israeli directors, such grants will be made in accordance with the capital gains track under Section 102 of the Israeli Income Tax Ordinance and the REE Automotive Ltd. 2021 Share Incentive Plan.
Annual equity awards. Each current and future non-employee director will receive an annual grant of RSUs in the amount of $150,000 (in the case of the Chairman of the Board, $200,000, which the Chairman may elect to receive in whole or in part in quarterly installments of cash instead of RSUs, or some combination thereof), which will be granted at each annual meeting of shareholders at which such non-employee director is reelected, based on the closing share price on the date of grant. A non-employee director who is first elected at an annual meeting of shareholders will receive the full $150,000 Initial RSU Grant but will not receive an Annual RSU Grant for the year in which he or she is elected. Each such grant will vest in one installment on the first anniversary of the date of grant or the annual meeting of shareholders immediately following the date of grant, whichever is earlier. For eligible Israeli directors, such grants will be made in accordance with the capital gains track under Section 102 of the Israeli Income Tax Ordinance and the 2021 REE Automotive Ltd. Share Incentive Plan.
All RSU grants will be fully accelerated upon a change of control of the Company.
Option Plans
Key Employee Share Incentive Plan (2011)
Authorized Shares. REE no longer grants awards under the REE Automotive Ltd. Key Employee Share Incentive Plan (2011) (the “Existing Plan”), although previously granted awards under the Existing Plan remain outstanding and governed by such plan. Ordinary Shares subject to awards granted under the Existing Plan that expire or become unexercisable without having been exercised in full will become available again for future grant under the 2021 REE Automotive Ltd. Share Incentive Plan (the “2021 Plan”). As of December 31, 2023, there were a total of 3,459,972 Class A Ordinary Shares subject to outstanding awards granted under the 2011 Plan, which if expired, cancelled, terminated, forfeited or settled in cash in lieu of issuance of shares or otherwise unexercisable without having been exercised, will become available for issuance under the 2021 Plan.
Administration. REE’s board of directors administers the Existing Plan. Under the Existing Plan, the administrator has the authority, subject to applicable law, to designate recipients of option grants, determine the terms of awards, including the exercise price of an option award, the time and vesting schedule applicable to an option grant and the other conditions applicable to an award, and take all other actions and make all other determinations necessary or desirable for, or incidental to, the administration of the Existing Plan. The board of directors may resolve to appoint a Share Incentive Committee in the future and in such case such committee will administer the plan, as shall be determined by the board of directors.
Eligibility. The Existing Plan provides for granting awards under various tax regimes, including in compliance with Section 102 (“Section 102”) of the Israeli Income Tax Ordinance (New Version), 5721-1961 (the “Ordinance”), and Section 3(i) of the Ordinance.
Section 102 allows employees, directors and officers who are not controlling shareholders and who are considered Israeli residents to receive favorable tax treatment for compensation in the form of shares or options under certain terms and conditions. Our non-employee service providers and controlling shareholders who are considered Israeli residents may be granted options only under Section 3(i) of the Ordinance, which does not provide for similar tax benefits. Section 102 includes two alternatives for tax treatment involving the issuance of options or shares to a trustee for the benefit of the
69
grantees and also includes an additional alternative for the issuance of options or shares directly to the grantee. Section 102(b)(2) of the Ordinance, the most favorable tax treatment for the grantee, permits the issuance to a trustee under the “capital gain track.”
Grants. All awards granted pursuant to the Existing Plan are evidenced by an award agreement that sets forth the terms and conditions of the award, including the type of award, number of shares subject to such award, vesting schedule and conditions (including performance goals or measures) and the exercise price, if applicable.
Each award will expire ten years from the date of the grant thereof, unless such shorter term of expiration is otherwise designated by the administrator.
Exercise. An award under the Existing Plan may be exercised by providing REE with notice of exercise and full payment of the exercise price for such shares underlying the award, if applicable, in such form and method as may be determined by the administrator and permitted by applicable law. An award may not be exercised for a fraction of a share. The exercise price of awards under the Existing Plan may be paid in cash or on a net issuance basis.
Termination of Employment. In the event of termination of a grantee’s employment or service with REE or any of its affiliates, all vested and exercisable awards held by such grantee as of the date of termination may be exercised within 90 days after such date of termination, unless otherwise determined by the administrator. After such 90 day period, all such unexercised awards will terminate and the shares covered by such awards shall again be available for issuance under the 2021 Plan.
In the event of termination of a grantee’s employment or service with REE or any of its affiliates due to such grantee’s death, all vested and exercisable awards held by such grantee as of the date of termination may be exercised by the grantee or the grantee’s legal guardian, estate, or by a person who acquired the right to exercise the award by bequest or inheritance, as applicable, within four months after such date of termination, unless otherwise provided by the administrator. In the event of termination of a grantee’s employment or service with REE or any of its affiliates due to such grantee’s disability (as defined in the Existing Plan), REE’s board of directors shall determine the terms under which the grantee may continue to exercise such awards. Any awards which are unvested as of the date of such termination or which are vested but not then exercised within the four month period (in the event of death) or within the period determined by REE’s board of directors (in the event of disability), will terminate and the shares covered by such awards shall again be available for issuance under the 2021 Plan.
Notwithstanding any of the foregoing, if a grantee’s employment or services with REE or any of its affiliates is terminated for “cause” (as defined in the Existing Plan), all outstanding awards held by such grantee (whether vested or unvested) will terminate on the date of such termination and the shares covered by such awards shall again be available for issuance under the 2021 Plan, and all shares issued upon previous exercise of options of such grantee shall be subject to repurchase by REE or its designee at a price to be determined by REE’s board of directors, but not less than their nominal value.
Transactions. In the event of a share split, reverse share split, share dividend, recapitalization, combination or reclassification of REE’s shares, any other increase or decrease in the number of issued shares effected without receipt of consideration by REE, or in the event of a merger, consolidation, reorganization or the like involving REE, the options under the Existing Plan shall become exercisable for such number of securities of REE or the other corporation involved as would have been the case but for such action. In such case, REE’s board of directors in its sole discretion shall make an appropriate adjustment.
Employee Stock Purchase Plan
The REE Employee Stock Purchase Plan (the “ESPP”) was approved by REE’s board of directors and shareholders on July 21, 2021. The ESPP provides our employees and employees of participating subsidiaries with an opportunity to acquire a proprietary interest in our company through the purchase of shares of Class A Ordinary Shares. With respect to its employees in the United States, the ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Code and the ESPP will be interpreted in a manner that is consistent with that intent. However, in order to ensure our employees located in jurisdictions other than the United States may receive similar benefits under the ESPP, the Committee may, in its sole discretion, establish subplans to the ESPP that may not qualify under Section 423 of the Code.
Administration. Our ESPP is administered by the Compensation Committee. The Compensation Committee has the authority to take any actions necessary or desirable for the administration of the ESPP, including adopting sub-plans
70
applicable to particular participating subsidiaries or locations, which sub-plans may be designed to be outside the scope of Section 423 of the Code, or special rules applicable to participants in particular participating subsidiaries or particular locations. The Compensation Committee may change the minimum amounts of compensation (as defined in the ESPP) for payroll deductions, the frequency with which a participant may elect to change his or her rate of payroll deductions, the dates by which a participant is required to submit an enrollment form and the effective date of a participant’s withdrawal from the ESPP due to a termination or transfer of employment or change in employment status. The Compensation Committee may delegate some or all of its authority to the extent permitted by law to one or more officers of the Company or one or more committees of the Board.
Shares Reserved. The maximum number of shares of our common shares available for issuance under the ESPP initially shall not exceed in the aggregate 154,284 Class A Ordinary Shares. The share pool will be increased on the first day of each fiscal year in an amount equal to the lesser of (i) 154,284 Class A Ordinary Shares (ii) 1.0% of the total number of shares of the Class A Ordinary Shares outstanding on the last day of the immediately preceding fiscal year and (iii) such number of shares as determined by the Board in its discretion.
Eligibility. With respect to employees who qualify to participate in an “employee stock purchase plan” pursuant to Section 423 of the Code, unless otherwise determined by the Compensation Committee in a manner that is consistent with Section 423 of the Code, any employee of ours or a participating subsidiary who has been employed by us or a participating subsidiary for at least 6 months and is customarily employed for at least 20 hours per week and more than 5 months in any calendar year is eligible to participate in an offering period, subject to the requirements of Section 423 of the Code. An eligible employee will not be granted an option if such grant would result in the employee owning 5% or more of the total combined voting power or value of all classes of our and our subsidiaries’ Ordinary Shares or if such grant would permit the employee to purchase our and our subsidiaries’ Ordinary Shares at a rate that exceeds $25,000 of the fair market value of the Ordinary Shares for each calendar year in which such option is outstanding at any time. The Committee may also determine additional employees to participate in sub-plans that are not subject to Section 423 of the Code.
Offering Periods. Unless otherwise determined by the Compensation Committee, each offering period under the ESPP will have a duration of six months commencing on or about January 1 or July 1 of each year (or such other time determined by the Compensation Committee). The initial offering period under the ESPP will commence on a date to be specified by the Compensation Committee. The Compensation Committee may, prior to the commencement of a particular offering period, change the duration, frequency, start and end dates of such offering period, subject to a maximum duration of 27 months.
Participation. Participation in the ESPP is voluntary. Eligible employees may elect to participate in the ESPP by completing an enrollment form and submitting it in accordance with the enrollment procedures established by the Compensation Committee, upon which the employee authorizes payroll deductions from his or her paycheck on each payroll date during the offering period in an amount equal to at least 1% of his or her compensation.
Participants may decrease or increase their rate of payroll deductions only once during an offering period by submitting a new enrollment form which must be submitted at least fifteen (15) days before the Purchase Date (as defined in the ESPP). The deduction rate selected for an offering period will remain in effect for subsequent offering periods unless the participant (i) submits a new enrollment form authorizing a new rate of payroll deductions, (ii) withdraws from the ESPP or (iii) terminates employment or otherwise becomes ineligible to participate in the ESPP.
Grant and Exercise of Options. Each participant will be granted, on the first trading day of each offering period, an option to purchase, on the last trading day of the offering period, a number of shares of our common stock determined by dividing the participant’s accumulated payroll deductions by the applicable purchase price. The purchase price for the option will equal to 85% of the fair market value of a share on the purchase date. A participant’s option will be exercised automatically on the purchase date to purchase the maximum number of whole Class A Ordinary Shares that can be purchased with the amounts in the participant’s notional account.
Withdrawal. Participants may withdraw from an offering at any time prior to the last day of the offering period by submitting a revised enrollment form indicating his or her election to withdraw at least 15 days before the purchase date. The accumulated payroll deductions held on behalf of the participant in his or her notional account will be paid to the participant promptly following receipt of the participant’s revised enrollment form indicating their election to withdraw, and the participant’s option will be automatically terminated.
71
Termination of Employment; Change in Employment Status; Transfer of Employment. On termination of a participant’s employment for any reason, or a change in the participant’s employment status following which the participant is no longer an eligible employee, the participant will be deemed to have withdrawn from the ESPP effective as of the date of such termination of employment or change in status, the accumulated payroll deductions remaining in the participant’s notional account will be returned to the participant, and the participant’s option will be automatically terminated.
Over-subscribed Offerings. If the Compensation Committee determines that, on a particular purchase date, the number of shares with respect to which options are to be exercised either exceeds the number of shares available under the ESPP or the Offering Period Limit (as defined i the ESPP), the shares will be allocated pro rata in a uniform manner as practicable and as the Compensation Committee deems equitable.
Adjustments Upon Changes in Capitalization; Corporate Transactions. In the event of any dividend or other distribution, recapitalization, share split, reorganization, merger, consolidation, spin-off, combination, repurchase, or exchange of shares or other securities of REE or other change in REE’s structure affecting our Class A Ordinary Shares, then in order to prevent dilution or enlargement of the benefits intended to be made available under the ESPP, the Compensation Committee will make equitable adjustments to the number and class of shares that may be issued under the ESPP, the purchase price per share, and the number of shares covered by each outstanding option.
In the event of a Corporate Transaction (as defined in the ESPP), each outstanding option will be assumed (or an equivalent option substituted) by the successor corporation or a parent or subsidiary of such successor corporation. If the successor corporation refuses to assume or substitute such option, the offering period will be shortened by setting a new purchase date on which the offering period will end. The new purchase date for the offering period will occur before the date of the corporate transaction.
Dissolution or Liquidation. Unless otherwise determined by the Compensation Committee, in the event of a proposed dissolution or liquidation of REE, any offering period in progress will be shortened by setting a new purchase date and the offering period will end immediately prior to the proposed dissolution or liquidation. Participants will be provided with written notice of the new purchase date and that the participant’s option will be exercised automatically on such date, unless before such time, the participant has withdrawn from the offering.
Amendment and Termination. The Compensation Committee may, in its sole discretion, amend, suspend or terminate the ESPP at any time and for any reason. The Compensation Committee may elect, upon termination of the ESPP, to terminate any outstanding offering period either immediately or once shares have been purchased on the next purchase date or permit the offering period to expire in accordance with its terms.
2021 Share Incentive Plan
The 2021 Plan, was approved by REE’s board of directors and shareholders on July 21, 2021, and provides for the grant equity linked awards to attract, motivate and retain talented employees for which REE competes.
Authorized Shares. The maximum number of Class A Ordinary Shares available for issuance under the 2021 Plan is equal to the sum of (i) 771,421 Class A Ordinary Shares, (ii) any shares subject to awards under the Existing Plan which have expired, or were cancelled, terminated, forfeited or settled in cash in lieu of issuance of shares or became unexercisable without having been exercised, and (iii) an annual increase on the first day of each year beginning in 2022 and on January 1st of each calendar year thereafter during the term of the Plan, equal to the lesser of (A) 5 % of the outstanding Class A Ordinary Shares on the last day of the immediately preceding calendar year and (B) such amount as determined by REE’s board of directors if so determined prior to January 1 of a calendar year. If permitted by REE, Class A Ordinary Shares tendered to pay the exercise price or withholding tax obligations with respect to an award granted under the 2021 Plan or any additional plan may again be available for issuance under the 2021 Plan. REE’s board of directors may also reduce the number of Class A Ordinary Shares reserved and available for issuance under the 2021 Plan in its discretion.
Administration. The Compensation Committee administers the 2021 Plan. Under the 2021 Plan, the administrator has the authority, subject to applicable law, to interpret the terms of the 2021 Plan and any award agreements or awards granted thereunder, designate recipients of awards, determine and amend the terms of awards, including the exercise price of an option award, the fair market value of an ordinary share, the time and vesting schedule applicable to an award or the method of payment for an award, accelerate or amend the vesting schedule applicable to an award, prescribe the forms of
72
agreement for use under the 2021 Plan and take all other actions and make all other determinations necessary for the administration of the 2021 Plan.
The administrator also has the authority to amend and rescind rules and regulations relating to the 2021 Plan or terminate the 2021 Plan at any time before the date of expiration of its ten-year term.
Eligibility. The 2021 Plan provides for granting awards under various tax regimes, including, without limitation, in compliance with Section 102 of the Ordinance, and Section 3(i) of the Ordinance and for awards granted to REE’s United States employees or service providers, including those who are deemed to be residents of the United States for tax purposes, Section 422 of the Code and Section 409A of the Code. Generally, any employee, director, officer, consultant, advisor or any other person or entity providing services to REE (including any prospective employee, director, officer, consultant, advisor) may be eligible to receive awards under the 2021 Plan subject to the administrator’s ’s discretion and taking into account the qualification under each tax regime pursuant to which awards are granted.
Grants. All awards granted pursuant to the 2021 Plan will be evidenced by an award agreement, in a form approved, from time to time, by the administrator in its sole discretion. The award agreement will set forth the terms and conditions of the award, including the type of award, number of shares subject to such award, vesting schedule and conditions (including performance goals or measures) and the exercise price, if applicable. Certain awards under the 2021 Plan may constitute or provide for a deferral of compensation, subject to Section 409A of the Code, which may impose additional requirements on the terms and conditions of such awards.
Each award will expire 10 years from the date of the grant thereof, unless such shorter term of expiration is otherwise designated by the administrator.
Awards. The 2021 Plan provides for the grant of stock options (including incentive stock options and nonqualified stock options), Ordinary Shares, restricted shares, restricted share units, stock appreciation rights, other cash-based awards and other share-based awards. Options granted under the 2021 Plan to REE’s employees who are U.S. residents may qualify as “incentive stock options” within the meaning of Section 422 of the Code or may be non-qualified stock options. The exercise price of a stock option may not be less than 100% of the fair market value of the underlying share on the date of grant (or 110% in the case of ISOs granted to certain significant shareholders).
Exercise. An award under the 2021 Plan may be exercised by providing REE with a written or electronic notice of exercise and full payment of the exercise price for such shares underlying the award, if applicable, in such form and method as may be determined by the administrator and permitted by applicable law. An award may not be exercised for a fraction of a share. With regard to tax withholding, exercise price and purchase price obligations arising in connection with awards under the 2021 Plan, the administrator may, in its discretion, accept cash, or provide for net withholding of shares in a cashless exercise mechanism.
Transferability. Other than by will, the laws of descent and distribution or as otherwise provided under the 2021 Plan, neither the options nor any right in connection with such options are assignable or transferable.
Termination of Employment. In the event of termination of a grantee’s employment or service with REE or any of its affiliates, all vested and exercisable awards held by such grantee as of the date of termination may be exercised within three months after such date of termination, unless otherwise determined by the administrator. After such three-month period, all such unexercised awards will terminate and the shares covered by such awards shall again be available for issuance under the 2021 Plan.
In the event of termination of a grantee’s employment or service with REE or any of its affiliates due to such grantee’s death or permanent disability, or in the event of the grantee’s death within the three month period (or such longer period as determined by the administrator) following his or her termination of service, all vested and exercisable awards held by such grantee as of the date of termination may be exercised by the grantee or the grantee’s legal guardian, estate, or by a person who acquired the right to exercise the award by bequest or inheritance, as applicable, within twelve months after such date of termination, unless otherwise provided by the administrator. Any awards which are unvested as of the date of such termination or which are vested but not then exercised within the twelve months period following such date, will terminate and the shares covered by such awards shall again be available for issuance under the 2021 Plan.
Notwithstanding any of the foregoing, if a grantee’s employment or services with REE or any of its affiliates is terminated for “cause” (as defined in the 2021 Plan), all outstanding awards held by such grantee (whether vested or unvested) will
73
terminate on the date of such termination and the shares covered by such awards shall again be available for issuance under the 2021 Plan.
Voting Rights. Except with respect to restricted share awards, grantees will not have the rights as a shareholder of REE with respect to any shares covered by an award until the award has vested and/or the grantee has exercised such award, paid any exercise price for such award and becomes the record holder of the shares. With respect to restricted share awards, grantees will possess all incidents of ownership of the restricted shares, including the right to vote and receive dividends on such shares.
Dividends. Grantees holding restricted share awards will be entitled to receive dividends and other distributions with respect to the shares underlying the restricted share award. Any stock split, stock dividend, combination of shares or similar transaction will be subject to the restrictions of the original restricted share award. Grantees holding restricted share units will not be eligible to receive dividend but may be eligible to receive dividend equivalents.
Transactions. In the event of a share split, reverse share split, share dividend, recapitalization, combination or reclassification of REE’s shares, or any other increase or decrease in the number of issued shares effected without receipt of consideration by REE (but not including the conversion of any convertible securities of REE), the administrator in its sole discretion may, and where required by applicable law shall, without the need for a consent of any holder, make an appropriate adjustment in order to adjust (i) the number and class of shares reserved and available for the outstanding awards, (ii) the number and class of shares covered by outstanding awards, (iii) the exercise price per share covered by any award, (iv) the terms and conditions concerning vesting and exercisability and the term and duration of the outstanding awards, and (v) the type or class of security, asset or right underlying the award (which need not be only that of REE, and may be that of the surviving corporation or any affiliate thereof or such other entity party to any of the above transactions), and (vi) any other terms of the award that in the opinion of the administrator should be adjusted; provided that any fractional shares resulting from such adjustment shall be rounded down to the nearest whole share unless otherwise determined by the administrator. In the event of a distribution of a cash dividend to all shareholders, the administrator may determine, without the consent of any holder of an award, that the exercise price of an outstanding and unexercised award shall be reduced by an amount equal to the per share gross dividend amount distributed by REE, subject to applicable law.
In the event of a merger or consolidation of REE, or a sale of all, or substantially all, of REE’s shares or assets or other transaction having a similar effect on REE, or change in the composition of the board of directors, or liquidation or dissolution, or such other transaction or circumstances that the board of directors determines to be a relevant transaction, then without the consent of the grantee, (i) unless otherwise determined by the administrator, any outstanding award will be assumed or substituted by such successor corporation, or (ii) regardless of whether or not the successor corporation assumes or substitutes the award (a) provide the grantee with the option to exercise the award as to all or part of the shares, and may provide for an acceleration of vesting of unvested awards, (b) cancel the award and pay in cash, shares of REE, the acquirer or other corporation which is a party to such transaction or other property as determined by the administrator as fair in the circumstances, or (c) provide that the terms of any award shall be otherwise amended, modified or terminated, as determined by the administrator to be fair in the circumstances. Unless otherwise determined by the administrator, to the extent any awards are not assumed or substituted by the successor corporation, such awards shall vest in full and be entitled to receive the consideration payable to shareholders generally (subject to any applicable exercise price and taxes in respect of any award) in such event. Notwithstanding the foregoing, the administrator may upon such event amend, modify or terminate the terms of any award as it shall deem, in good faith, appropriate.
C. Board practices
Board of Directors
Under the Companies Law and REE’s Amended and Restated Articles of Association (the “Amended and Restated Articles”), our business and affairs will be managed under the direction of our board of directors. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to executive management. Our Chief Executive Officer (referred to as a “general manager” under the Companies Law) is responsible for day-to-day management of REE. Our Chief Executive Officer is appointed by and serves at the discretion of our board of directors, subject to the employment agreement that we have entered into with him. All other executive officers are appointed by the Chief Executive Officer, subject to applicable corporate approvals, and shall be subject to the terms of any applicable employment or consulting agreements.
74
Under the Amended and Restated Articles the number of directors on our board of directors will be no less than three and no more than eleven. Our directors will generally be elected by a simple majority vote of holders of Ordinary Shares, participating and voting (in person or by proxy) at an annual general meeting of our shareholders. Each director will hold office until the next annual general meeting of our shareholders, unless the tenure of such director expires earlier pursuant to the Companies Law or unless such director is removed from office as described below.
Under the Amended and Restated Articles, the approval of the holders of at least 65% of the total voting power of our shareholders will generally be required to remove any of our directors from office or amend the provision requiring the approval of at least 65% of the total voting power of our shareholders to remove any of our directors from office, provided that if any Class B Ordinary Shares remain outstanding, then the required majority shall be a majority of the total voting power of REE’s shareholders. In addition, vacancies on our board of directors may be filled by a vote of a simple majority of the directors then in office. A director so appointed will hold office until the next annual general meeting of our shareholders for the election of the class of directors in respect of which the vacancy was created. In the case of a vacancy due to the number of directors being less than the maximum number of directors stated in the Amended and Restated Articles, the new director filling the vacancy will serve until the next annual general meeting of our shareholders for the election of the class of directors to which such director was assigned by our board of directors.
On October 16, 2023, REE amended its Amended and Restated Articles of Association to include a quorum requirement so that the presence of at least one of the Company’s holders of Class B Shares shall be required to constitute a quorum, unless waived.
Chairperson of the Board
Under the Amended and Restated Articles, the board of directors shall appoint a member of the board to serve as the chairperson. Under the Companies Law, the chief executive officer of a public company, or a relative of the chief executive officer, may not serve as the chairperson of the board of directors, and the chairperson of the board of directors, or a relative of the chairperson, may not be vested with authorities of the chief executive officer, unless approved by a special majority of the company’s shareholders. The shareholders’ approval may be effective for a period of up to three years.
In addition, a person who is subordinated, directly or indirectly, to the chief executive officer may not serve as the chairperson of the board of directors, the chairperson of the board of directors may not be vested with authorities that are granted to persons who are subordinated to the chief executive officer, and the chairperson of the board of directors may not serve in any other position in the Company or in a controlled subsidiary, but may serve as a director or chairperson of a controlled subsidiary.
External Directors
Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” including companies with shares listed on Nasdaq, are required to appoint at least two external directors. Pursuant to regulations promulgated under the Companies Law, companies which do not have a “controlling shareholder,” with shares traded on certain U.S. stock exchanges including Nasdaq, may, subject to certain conditions, “opt out” from the Companies Law requirements to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of the board of directors. In accordance with these regulations, REE has elected to “opt out” from the Companies Law requirement to appoint external directors and related Companies Law rules concerning the composition of the audit committee and compensation committee of our board of directors.
Director Independence
Nasdaq corporate governance rules require that a majority of our board of directors be independent. An “independent director” is defined generally as a person who has no material relationship with the listed company (either directly or as a partner, stockholder, or officer of an organization that has a relationship with the listed company). Our board of directors has determined that Alla Felder, Michal Drayman, Ittamar Givton, and Michal Marom-Brikman are independent directors as defined in Nasdaq corporate governance rules. As a result of the resignation of Arik Steinberg, we do not currently have a majority of independent members of our board of directors. Pursuant to Nasdaq Rule 5605, we intend to cure the requirement to have a majority of our board of directors be independent upon the earlier of our next annual shareholders meeting, or one year from the resignation of Mr. Steinberg.
75
Audit Committee
Under Nasdaq corporate governance rules, we are required to maintain an audit committee consisting of at least three independent directors, each of whom is financially literate and one of whom has accounting or related financial management expertise.
Our audit committee consists of Michal Marom-Brikman, Ittamar Givton, Alla Felder and Michal Drayman. Each member of our audit committee meets the requirements for financial literacy under the applicable rules and regulations of the SEC and the Nasdaq corporate governance rules. Our board of directors has determined that Ms. Marom-Brikman and Ms. Felder are audit committee financial experts as defined by the SEC rules.
Our board of directors has determined that each member of our audit committee is independent, as such term is defined in Rule 10A3(b)(1) under the Exchange Act, which is different from the general test for independence of board and committee members.
Companies Law Requirements
Under the Companies Law, the board of directors of a public company must appoint an audit committee. We have elected to “opt out” from additional Companies Law requirements relating to the size and composition of the audit committee.
Audit Committee Role
Our board of directors adopted an audit committee charter setting forth the responsibilities of the audit committee, which are consistent with the Companies Law, SEC rules, and Nasdaq corporate governance rules. These responsibilities include:
•appointing, retaining, and overseeing our independent auditors, subject to ratification by the board of directors, and in the case of retention, subject to ratification by the shareholders;
•pre-approving audit and non-audit services to be provided by the independent auditors and related fees and terms;
•overseeing the accounting and financial reporting processes of our company;
• managing audits of our financial statements;
•preparing all reports as may be required of an audit committee under the rules and regulations promulgated under the Exchange Act;
•reviewing with management and our independent auditor our annual and quarterly financial statements prior to publication, filing, or submission to the SEC;
•recommending to the board of directors the retention and termination of the internal auditor, and the internal auditor’s engagement fees and terms, in accordance with the Companies Law, as well as approving the yearly or periodic work plan proposed by the internal auditor;
•reviewing with our general counsel and/or external counsel, as deemed necessary, legal and regulatory matters that may have a material impact on the financial statements;
•identifying irregularities in our business administration, inter alia, by consulting with the internal auditor or with the independent auditor, and suggesting corrective measures to the board of directors;
•reviewing policies and procedures with respect to transactions (other than transactions related to compensation or terms of services) between REE and its officers and directors, affiliates of officers or directors, or transactions that are not in the ordinary course of REE’s business and deciding whether to approve such acts and transactions if so required under the Companies Law; and
•establishing procedures for handling employee complaints relating to the management of our business and the protection to be provided to such employees.
76
Internal Auditor
Under the Companies Law, the board of directors of a public company must appoint an internal auditor based on the recommendation of the audit committee. The role of the internal auditor, among other things, is to review the company’s compliance with applicable law and orderly business procedure. Under the Companies Law, the internal auditor cannot be an interested party, an office holder, or a relative of an interested party or an office holder, nor may the internal auditor be the company’s independent auditor or its representative. An “interested party” is defined in the Companies Law as (i) a holder of 5% or more of the issued share capital or voting power in a company, (ii) any person or entity who has the right to designate one or more directors or to designate the chief executive officer of the company, or (iii) any person who serves as a director or as chief executive officer of the company.
The audit committee is required to oversee the activities and to assess the performance of the internal auditor as well as to review the internal auditor’s work plan. Sharon Cohen, a partner with Deloitte Brightman Almagor, serves as our internal auditor.
Compensation Committee
Under Nasdaq corporate governance rules, we are required to maintain a compensation committee consisting of at least two independent directors.
Our compensation committee consists of Michal Marom-Brikman, Ittamar Givton, Alla Felder and Michal Drayman. Ms. Marom-Brikman served as chairperson of the compensation committee and on March 25, 2024, the Board appointed Alla Felder to serve as chairperson of the compensation committee. Our board of directors has determined that each member of our compensation committee is independent under Nasdaq corporate governance rules, including the additional independence requirements applicable to the members of a compensation committee.
Companies Law Requirements
Under the Companies Law, the board of directors of a public company must appoint a compensation committee. We have elected to “opt out” from additional Companies Law requirements relating to the size and composition of the compensation committee.
Compensation Committee Role
In accordance with the Companies Law, the responsibilities of the compensation committee are, among others, as follows:
•making recommendations to the board of directors with respect to the approval of the compensation policy for office holders and, once every three years, with respect to any extensions to a compensation policy that was adopted for a period of more than three years;
•the implementation of the compensation policy and periodically making recommendations to the board of directors with respect to any amendments or updates to the compensation policy;
•resolving whether to approve arrangements with respect to the terms of office and employment of office holders; and
•exempting, under certain circumstances, a transaction with our Chief Executive Officer from the approval of our shareholders.
Our board of directors adopted a compensation committee charter setting forth the responsibilities of the committee, which are consistent with Nasdaq corporate governance rules and include:
•recommending to our board of directors for its approval a compensation policy, in accordance with the requirements of the Companies Law, as well as other compensation policies, incentive-based compensation plans, and equity-based compensation plans, overseeing the development and implementation of such policies, and recommending to our board of directors any amendments or modifications the committee deems appropriate, including as required under the Companies Law;
77
•reviewing and approving the granting of options and other incentive awards to our Chief Executive Officer and other executive officers, including reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other executive officers, including evaluating their performance in light of such goals and objectives;
•approving and exempting certain transactions regarding office holders’ compensation pursuant to the Companies Law; and
•administering our equity-based compensation plans, including without limitation, approving the adoption of such plans, amending and interpreting such plans, and the awards and agreements issued pursuant thereto, and making and determining the terms of awards to eligible persons under the plans.
Compensation Policy under the Companies Law
In general, under the Companies Law, the board of directors of a public company must approve a compensation policy after receiving and considering the recommendations of the compensation committee. In addition, our compensation policy must be approved at least once every three years, first, by our board of directors, upon recommendation of our compensation committee, and second, by a simple majority of REE Ordinary Shares present, in person or by proxy, and voting (excluding abstentions) at a general meeting of shareholders, provided that either:
• the majority of such REE Ordinary Shares is comprised of shares held by shareholders who are not controlling shareholders and shareholders who do not have a personal interest in such compensation policy; or
• the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the compensation policy voting against the policy does not exceed two percent (2%) of the aggregate voting rights in the company.
Under special circumstances, the board of directors may approve the compensation policy despite the objection of the shareholders on the condition that the compensation committee and then the board of directors decide, on the basis of detailed grounds, and after discussing again with the compensation committee, that approval of the compensation policy, despite the objection of shareholders, is for the benefit of the Company.
Pursuant to relief available under the Companies Law, REE’s compensation policy, which was approved by our board of directors and shareholders prior to the closing of the Merger and described in our Registration Statement on Form F-4 filed with the SEC in connection with the Merger, was deemed a validly adopted policy in accordance with the Companies Law requirements and will remain in effect for a term of five years from the closing of the Merger.
Our compensation policy is designed to retain and motivate our directors and executive officers, incentivize superior individual excellence, align the interests of our directors and executive officers with our long-term performance, and provide a risk management tool. To that end, a portion of our executive officer compensation package is targeted to reflect our short and long-term goals, as well as the executive officer’s individual performance. Our compensation policy includes measures designed to reduce the executive officer’s incentives to take excessive risks that may harm the Company in the long-term, such as limits on the value of cash bonuses and equity-based compensation, limitations on the ratio between the variable and the total compensation of an executive officer, and minimum vesting periods for equity-based compensation.
Our compensation policy addresses our executive officers’ individual characteristics (such as their respective positions, education, scope of responsibilities, and contributions to the attainment of our goals) as the basis for compensation variation among our executive officers and considers the internal ratios between compensation of our executive officers and directors and other employees. Pursuant to our compensation policy, the compensation that may be granted to an executive officer may include: base salary, annual bonuses, and other cash bonuses (such as a signing bonus and special bonuses with respect to any special achievements, such as outstanding personal achievement, outstanding personal effort, or outstanding company performance), equity-based compensation, benefits and retirement and termination of service arrangements. All cash bonuses will be limited to a maximum amount linked to the executive officer’s base salary.
An annual cash bonus may be awarded to executive officers upon the attainment of pre-set periodic objectives and individual targets. The annual cash bonus that may be granted to our executive officers, other than our Chief Executive Officer, will be based on performance objectives and a discretionary evaluation of the executive officer’s overall performance by our Chief Executive Officer and subject to minimum thresholds. The annual cash bonus that may be granted to executive officers, other than our Chief Executive Officer, may alternatively be based entirely on a discretionary
78
evaluation. Furthermore, our Chief Executive Officer will be entitled to approve performance objectives for executive officers who report to him.
The measurable performance objectives of our Chief Executive Officer will be determined annually by our compensation committee and board of directors. A non-material portion of the Chief Executive Officer’s annual cash bonus, as provided in our compensation policy, may be based on a discretionary evaluation of the Chief Executive Officer’s overall performance by the compensation committee and the board of directors.
Under our compensation policy, the equity-based compensation of our executive officers and members of our board of directors will be designed in a manner consistent with the underlying objectives in determining the base salary and the annual cash bonus, with its main objectives being to enhance the alignment between the executive officers’ and directors’ interests with our long-term interests and those of our shareholders, and to strengthen the retention and the motivation of executive officers and directors over the long term. Our compensation policy provides for executive officer and director compensation in the form of share options or other equity-based awards, such as restricted shares and restricted share units, in accordance with our then-current equity incentive plan. All equity-based incentives granted to executive officers and directors shall be subject to vesting periods in order to promote long-term retention. Equity-based compensation shall be granted from time to time and be individually determined and awarded according to the individual’s performance, educational background, prior business experience, qualifications, role, and personal responsibilities.
In addition, our compensation policy contains provisions that allow us, under certain conditions, to recover bonuses paid in excess, enable our Chief Executive Officer to approve an immaterial change in the terms of employment of an executive officer who reports directly to him (provided that such changes are in accordance with our compensation policy), and will allow us to exculpate, indemnify, and insure our executive officers and directors to the maximum extent permitted by Israeli law subject to certain limitations set forth therein.
Our compensation policy also provides for compensation to the members of our board of directors either (i) in accordance with the amounts provided in the Companies Regulations (Rules Regarding the Compensation and Expenses of an External Director), 5760-2000, as modified by the Companies Regulations (Relief for Public Companies Traded on Stock Exchanges Outside of Israel), 5760-2000, as such regulations may be amended from time to time, or (ii) in accordance with the amounts determined in our compensation policy.
Approval of Related Party Transactions under Israeli Law
Fiduciary Duties of Directors and Executive Officers
The Companies Law codifies the fiduciary duties that office holders owe to a company. An office holder is defined in the Companies Law as a general manager, chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of such person’s title, a director, and any other manager directly subordinate to the general manager.
An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would act under the same circumstances. The duty of care includes, among other things, a duty to use reasonable means, in light of the circumstances, to obtain:
•information on the business advisability of a given action brought for the office holder’s approval or performed by virtue of the office holder’s position; and
•all other important information pertaining to such action.
The duty of loyalty requires an office holder to act in good faith and in the best interests of the Company, and includes, among other things, the duty to:
•refrain from any act involving a conflict of interest between the performance of the office holder’s duties in the company and the office holder’s other duties or personal affairs;
•refrain from any activity that is competitive with the business of the company;
79
•refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for the office holder or others; and
•disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of the office holder’s position.
Under the Companies Law, a company may approve an act, specified above, which would otherwise constitute a breach of the office holder’s fiduciary duty, provided that the office holder acted in good faith, neither the act nor its approval harms the company, and the personal interest of the office holder is disclosed a sufficient time before the approval of such act. Any such approval is subject to the terms of the Companies Law setting forth, among other things, the required corporate approvals and the methods of obtaining such approvals.
Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions
The Companies Law requires that an office holder promptly disclose to the board of directors any personal interest and all related material information known to such office holder concerning any existing or proposed transaction with the company. A personal interest includes an interest of any person in an act or transaction of a company, including a personal interest of one’s relative or of a corporate body in which such person or a relative of such person is a 5% or greater shareholder, director, or general manager or in which such person has the right to appoint at least one director or the general manager, but excluding a personal interest stemming solely from one’s ownership of shares in the company. A personal interest includes the personal interest of a person for whom the office holder holds a voting proxy or the personal interest of the office holder with respect to the officer holder’s vote on behalf of a person for whom he or she holds a proxy even if such shareholder has no personal interest in the matter.
If it is determined that an office holder has a personal interest in a non extraordinary transaction (meaning any transaction that is in the ordinary course of business, on market terms or that is not likely to have a material impact on the company’s profitability, assets or liabilities), approval by the board of directors is required for the transaction unless the company’s articles of association provide for a different method of approval. Any such transaction that is adverse to the company’s interests may not be approved by the board of directors.
Approval first by the company’s audit committee and subsequently by the board of directors will be required for an extraordinary transaction (meaning any transaction that is not in the ordinary course of business, not on market terms or that is likely to have a material impact on the company’s profitability, assets or liabilities) in which an office holder has a personal interest.
A director and any other office holder who has a personal interest in a transaction which is considered at a meeting of the board of directors or the audit committee may generally (unless it is with respect to a transaction which is not an extraordinary transaction) not be present at such a meeting or vote on that matter unless a majority of the directors or members of the audit committee, as applicable, have a personal interest in the matter. If a majority of the members of the audit committee or the board of directors have a personal interest in the matter, then all of the directors may participate in deliberations of the audit committee or board of directors, as applicable, with respect to such transaction and vote on the approval thereof and, in such case, shareholder approval will also be required.
Certain disclosure and approval requirements apply under Israeli law to certain transactions with controlling shareholders, certain transactions in which a controlling shareholder has a personal interest, and certain arrangements regarding the terms of service or employment of a controlling shareholder. For these purposes, a controlling shareholder is any shareholder that has the ability to direct the company’s actions, including any shareholder holding 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Two or more shareholders with a personal interest in the approval of the same transaction are deemed to be one shareholder.
Shareholder Duties
Pursuant to the Companies Law, a shareholder has a duty to act in good faith and in a customary manner toward the company and other shareholders and to refrain from abusing his or her power with respect to the company, including, among other things, in voting at a general meeting and at shareholder class meetings with respect to the following matters:
• an amendment to the company’s articles of association;
80
•an increase of the company’s authorized share capital;
• a merger; or
•interested party transactions that require shareholder approval.
In addition, a shareholder has a general duty to refrain from discriminating against other shareholders.
Certain shareholders also have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that it has the power to determine the outcome of a shareholder vote, and any shareholder who has the power to appoint or to prevent the appointment of an office holder of the company or exercise any other rights available to it under the company’s articles of association with respect to the company. The Companies Law does not define the substance of this duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty of fairness.
Exculpation, Insurance and Indemnification of Office Holders
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care, but only if a provision authorizing such exculpation is included in its articles of association. Our Amended and Restated Articles will include such a provision. An Israeli company may not exculpate a director from liability arising out of a prohibited dividend or distribution to shareholders.
An Israeli company may indemnify an office holder from the following liabilities and expenses incurred for acts performed as an office holder, either in advance of an event or following an event, provided a provision authorizing such indemnification is contained in its articles of association:
•a financial liability imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the above mentioned events and amount or criteria;
• reasonable litigation expenses, including legal fees, incurred by the office holder (1) as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability, such as a criminal penalty, was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and (2) in connection with a monetary sanction;
•expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder, or certain compensation payments made to an injured party imposed on an office holder by an administrative proceeding, pursuant to certain provisions of the Israeli Securities Law; and
•expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder pursuant to certain provisions of the Israeli Economic Competition Law, 5758-1988.
An Israeli company may insure an office holder against the following liabilities incurred for acts performed as an office holder if and to the extent provided in the company’s articles of association:
•a breach of the duty of loyalty to the company, to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the Company;
81
•a breach of the duty of care to the company or to a third party, including a breach arising out of the negligent conduct of the office holder;
•a financial liability imposed on the office holder in favor of a third party;
•a financial liability imposed on the office holder in favor of a third party harmed by a breach in an administrative proceeding; and
•expenses, including reasonable litigation expenses and legal fees, incurred by the office holder as a result of an administrative proceeding instituted against him or her, pursuant to certain provisions of the Israeli Securities Law.
An Israeli company may not indemnify or insure an office holder against any of the following:
•a breach of the duty of loyalty, except to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
•a breach of the duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
•an act or omission committed with intent to derive illegal personal benefit; or
•a fine, monetary sanction, or forfeit levied against the office holder.
Under the Companies Law, exculpation, indemnification, and insurance of office holders must be approved by the compensation committee and the board of directors (and, with respect to directors and the chief executive officer, by the shareholders). However, under regulations promulgated under the Companies Law, the insurance of office holders shall not require shareholder approval and may be approved by only the compensation committee if the engagement terms are determined in accordance with the company’s compensation policy, which was approved by the shareholders by the same special majority required to approve a compensation policy, provided that the insurance policy is on market terms and the insurance policy is not likely to materially impact the company’s profitability, assets, or obligations.
Our Amended and Restated Articles will allow us to exculpate, indemnify, and insure our office holders for any liability imposed on them as a consequence of an act (including any omission) which was performed by virtue of being an office holder. Our office holders are currently covered by a directors and officers’ liability insurance policy.
We have entered into agreements with each of our directors and executive officers exculpating them in advance, to the fullest extent permitted by law, from liability to us for damages caused to us as a result of a breach of duty of care and undertaking to indemnify them to the fullest extent permitted by law. This indemnification is limited to events determined as foreseeable by the board of directors based on our activities and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances.
The maximum indemnification amount set forth in such agreements is limited to an amount equal to the higher of $50 million, 25% of our total shareholders’ equity as reflected in our most recent consolidated financial statements as of the date on which the indemnity payment is made and 10% of our total market capitalization calculated based on the average closing price of Class A Ordinary Shares over the 30 trading days prior to the actual payment, multiplied by the total number of our issued and outstanding shares as of the date of the payment and the aggregate amount of proceeds from the sale of, or value exchanged in relation to, in connection with or arising out of a public offering of our securities. The maximum amount set forth in such agreements is in addition to any amount paid (if paid) under insurance and/or by a third party pursuant to an indemnification arrangement.
In the opinion of the SEC, indemnification of directors and office holders for liabilities arising under the Securities Act, however, is against public policy and therefore unenforceable.
82
Compensation of Directors and Executive Officers
Directors
Under the Companies Law, the compensation of a public company’s directors requires the approval of (i) its compensation committee, (ii) its board of directors and, unless exempted under regulations promulgated under the Companies Law, (iii) the approval of its shareholders at a general meeting. In addition, if the compensation of a public company’s directors is inconsistent with the company’s compensation policy, then those inconsistent provisions must be separately considered by the compensation committee and board of directors, and approved by the shareholders by a special vote in one of the following two ways:
•at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such matter, present and voting at such meeting, vote in favor of the inconsistent provisions of the compensation package, excluding abstentions; or
•the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such matter voting against the inconsistent provisions of the compensation package does not exceed two percent (2%) of the aggregate voting rights in the Company.
Executive Officers other than the Chief Executive Officer
The Companies Law requires the compensation of a public company’s office holders (other than the chief executive officer) be approved in the following order: (i) the compensation committee, (ii) the company’s board of directors, and (iii) if such compensation arrangement is inconsistent with the company’s stated compensation policy, the company’s shareholders (by a special vote as discussed above with respect to the approval of director compensation that is inconsistent with the compensation policy).
However, there are exceptions to the foregoing approval requirements with respect to non-director office holders. If the shareholders of the company do not approve the compensation of a non-director office holder, the compensation committee and board of directors may override the shareholders’ disapproval for such non-director office holder provided that the compensation committee and the board of directors each document the basis for their decision to override the disapproval of the shareholders and approve the compensation.
An amendment to an existing compensation arrangement with a non-director office holder requires only the approval of the compensation committee, if the compensation committee determines that the amendment is immaterial. However, if the non-director office holder is subordinate to the chief executive officer, an amendment to an existing compensation arrangement shall not require the approval of the compensation committee if (i) the amendment is approved by the chief executive officer, (ii) the company’s compensation policy allows for such immaterial amendments to be approved by the chief executive officer and (iii) the engagement terms are consistent with the company’s compensation policy.
Chief Executive Officer
Under the Companies Law, the compensation of a public company’s chief executive officer is required to be approved by: (i) the company’s compensation committee, (ii) the company’s board of directors and (iii) the company’s shareholders (by a special vote as discussed above with respect to the approval of director compensation that is inconsistent with the compensation policy). However, if the shareholders of the company do not approve the compensation arrangement with the chief executive officer, the compensation committee and board of directors may override the shareholders’ decision provided that they each document the basis for their decision and the compensation is in accordance with the company’s compensation policy.
In the case of a new chief executive officer, the compensation committee may waive the shareholder approval requirement with regard to the compensation of a candidate for the chief executive officer position if the compensation committee determines that: (i) the compensation arrangement is consistent with the company’s compensation policy, (ii) the chief executive officer candidate did not have a prior business relationship with the company or a controlling shareholder of the company and (iii) subjecting the approval of the engagement to a shareholder vote would impede the company’s ability to employ the chief executive officer candidate. However, if the chief executive officer candidate will serve as a member of the board of directors, such candidate’s compensation terms as chief executive officer must be approved in accordance with the rules applicable to approval of compensation of directors.
83
D. Employees.
As of December 31, 2023, we had 244 employees and external consultants deployed to REE on a full-time equivalent (“FTE”)2 basis located in the following geographic locations:
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||
| Israel | 112 | 133 | 127 | ||||||||
| United Kingdom | 111 | 134 | 119 | ||||||||
| United States | 16 | 18 | 14 | ||||||||
| Germany | 3 | 3 | 5 | ||||||||
| Other | 2 | 3 | 5 | ||||||||
| 244 | 291 | 270 | |||||||||
The following table shows the breakdown of our global workforce of employees and external consultants deployed to REE on an FTE basis by category of activity as of the dates indicated:
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||
| General and administrative | 50 | 59 | 39 | ||||||||
| Selling and Marketing | 11 | 16 | 16 | ||||||||
| Research and development | 183 | 216 | 215 | ||||||||
| 244 | 291 | 270 | |||||||||
In regard to our Israeli employees, Israeli labor laws govern the length of the work day, minimum wages for employees, procedures for hiring and dismissing employees, determination of severance pay, annual leave, sick days, advance notice of termination of employment, equal opportunity and anti-discrimination laws and other conditions of employment. Subject to certain exceptions, Israeli law generally requires severance pay upon the retirement, death or dismissal of an employee, and requires us and our employees to make payments to the National Insurance Institute, which is similar to the U.S. Social Security Administration. Our employees have pension plans that comply with the applicable Israeli legal requirements and we make monthly contributions to severance pay funds for all employees, which cover potential severance pay obligations.
None of our employees work under any collective bargaining agreements. Extension orders issued by the Israeli Ministry of Economy apply to us and affect matters, such as cost of living adjustments to salaries, length of working hours and week, recuperation pay, travel expenses, and pension rights.
We have never experienced labor-related work stoppages or strikes, and believe that our relations with our employees are satisfactory.
E. Share ownership
For information regarding the share ownership of our directors and executive officers, please refer to “Item 6.B. Compensation—Option Plans” and “Item 7.A. Major Shareholders.”
F. Disclosure of a registrant’s action to recover erroneously awarded compensation.
Not applicable.
Item 7. Major Shareholders and Related Party Transactions
A. Major shareholders
2 Number of external consultants deployed to REE is calculated on a full-time equivalent basis. External consultants are converted to full-time equivalents by dividing their actual working hours per month by a full-time standard. As of December 31, 2023, 2022 and 2021 we had 11, 14 and 37 external consultants on an FTE basis deployed to REE, respectively, most of which were located in the United Kingdom.
84
The following table and accompanying footnotes set forth information with respect to the beneficial ownership of our Ordinary Shares, as of March 12, 2024:
•each person or entity who is known by us to be the beneficial owner of more than 5% of the outstanding Ordinary Shares;
•each of our current executive officers and directors, individually; and
•all of our executive officers and directors, as a group.
The SEC has defined “beneficial ownership” of a security to mean the possession, directly or indirectly, of voting power and/or investment power over such security. A shareholder is also deemed to be, as of any date, the beneficial owner of all securities that such shareholder has the right to acquire within 60 days after that date through (i) the exercise of any option, warrant or right, (ii) the conversion of a security, (iii) the power to revoke a trust, discretionary account or similar arrangement, or (iv) the automatic termination of a trust, discretionary account or similar arrangement. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, Ordinary Shares subject to options or other rights (as set forth above) held by that person that are currently exercisable, or will become exercisable within 60 days thereafter, are deemed outstanding, while such shares are not deemed outstanding for purposes of computing percentage ownership of any other person. Each person named in the table has sole voting and investment power with respect to all of the Ordinary Shares shown as beneficially owned by such person, except as otherwise indicated in the table or footnotes below.
The percentage of Ordinary Shares beneficially owned is computed on the basis of 10,827,570 Class A Ordinary Shares and 2,780,570 Class B Ordinary Shares outstanding as of March 12, 2024.
Unless otherwise indicated, we believe that all persons named in the table below have sole voting and investment power with respect to all Ordinary Shares beneficially owned by them. To our knowledge, no Ordinary Shares beneficially owned by any executive officer, director or director nominee have been pledged as security.
Number of Class A Ordinary Shares Beneficially Owned | Percentage of Outstanding Class A Ordinary Shares | Number of Class B Ordinary Shares Beneficially Owned | Percentage of Outstanding Class B Ordinary Shares | Percentage of Total Voting Power | ||||||||||||||||||||||||||||
5% Holders: | ||||||||||||||||||||||||||||||||
M&G Investment Management Limited (MAGAIM)(1) | 2,305,172 | 19.9 | % | — | — | % | 5.9 | % | ||||||||||||||||||||||||
KUKUC, LLC(2) | 1,350,970 | 11.6 | % | — | — | % | 3.4 | % | ||||||||||||||||||||||||
Gil Agmon(3) | 572,347 | 5.3 | % | — | — | % | 1.5 | % | ||||||||||||||||||||||||
Ziv Aviram(4) | 552,481 | 5.1 | % | — | — | % | 1.4 | % | ||||||||||||||||||||||||
Executive Officers and Directors | ||||||||||||||||||||||||||||||||
Daniel Barel(5) | 1,391,120 | 11.4 | % | 1,390,285 | 50 | % | 38.2 | % | ||||||||||||||||||||||||
Ahishay Sardes(6) | 1,390,287 | 11.4 | % | 1,390,285 | 50 | % | 38.2 | % | ||||||||||||||||||||||||
Tali Miller(7) | 41,750 | * | — | — | * | |||||||||||||||||||||||||||
Keren Shemesh(8) | 45,668 | * | — | — | * | |||||||||||||||||||||||||||
Limor Raz(9) | 27,883 | * | — | — | * | |||||||||||||||||||||||||||
Josh Tech(10) | 1,229 | * | — | — | * | |||||||||||||||||||||||||||
Avital Futterman(11) | 1,667 | * | — | — | * | |||||||||||||||||||||||||||
Yaron Zaltsman(12) | 44,444 | * | — | — | * | |||||||||||||||||||||||||||
Michal Marom-Brikman(13) | 10,862 | * | — | — | * | |||||||||||||||||||||||||||
Alla Felder(14) | 6,379 | * | — | — | * | |||||||||||||||||||||||||||
Michal Drayman(15) | 6,379 | * | — | — | * | |||||||||||||||||||||||||||
Ittamar Givton(16) | 6,005 | * | — | — | * | |||||||||||||||||||||||||||
Hicham Abdessamad(17) | 6,005 | * | — | — | * | |||||||||||||||||||||||||||
Carlton Rose(18) | — | — | % | — | — | — | % | |||||||||||||||||||||||||
All Executive Officers and Directors as a Group | 2,979,678 | 21.6 | % | 2,780,570 | 100.0 | % | 74.0 | % | ||||||||||||||||||||||||
85
* Less than 1%.
(1) Based on information provided to us by MAGAIM.
(2) Based on information provided to us by KUKAC, LLC.
(3) Based on the Company’s Shell Company Report on Form 20-F for the period ended July 22, 2021 filed on July 28, 2021.
(4) Based on the Company’s Shell Company Report on Form 20-F for the period ended July 22, 2021 filed on July 28, 2021.
(5) Reflects 833 Class A Ordinary Shares and 1,390,287 Class A Ordinary Shares underlying options that are exercisable within 60 days of March 12, 2024.
(6) Reflects 1,390,287 Class A Ordinary Shares underlying options that are exercisable within 60 days of March 12, 2024.
(7) Reflects 5,354 Class A Ordinary Shares and 36,396 Class A Ordinary Shares underlying options that are exercisable within 60 days of March 12, 2024. Does not include 3,991 restricted stock units or options that vest more than 60 days from March 12, 2024.
(8) Reflects 3,909 Class A Ordinary Shares and 41,759 Class A Ordinary Shares underlying options that are exercisable within 60 days of March 12, 2024. Does not include 10,676 restricted stock units or options that vest more than 60 days from March 12, 2024.
(9) Reflects 2,356 Class A Ordinary Shares and 25,527 Class A Ordinary Shares underlying options that are exercisable within 60 days of March 12, 2024. Does not include 11,008 restricted stock units or options that vest more than 60 days from March 12, 2024.
(10) Reflects 1,229 Class A Ordinary Shares. Does not include 17,104 restricted stock units that vest more than 60 days from March 12, 2024.
(11) Reflects 1,667 Class A Ordinary Shares. Does not include 11,666 restricted stock units that vest more than 60 days from March 12, 2024.
(12) Reflects 44,444 restricted stock units that vest within 60 days from March 12, 2024. Does not include 88,889 restricted stock units that vest more than 60 days from March 12, 2024.
(13) Reflects 10,862 Class A Ordinary Shares. Does not include 27,694 restricted stock units that vest more than 60 days from March 12, 2024.
(14) Reflects 6,379 restricted stock units that vest within 60 days from March 12, 2024. Does not include 50,638 restricted stock units that vest more than 60 days from March 12, 2024.
(15) Reflects 6,379 restricted stock units that vest within 60 days from March 12, 2024. Does not include 50,638 restricted stock units that vest more than 60 days from March 12, 2024.
(16) Reflects 6,005 restricted stock units that vest within 60 days from March 12, 2024. Does not include 49,889 restricted stock units that vest more than 60 days from March 12, 2024.
(17) Reflects 6,005 restricted stock units that vest within 60 days from March 12, 2024. Does not include 49,889 restricted stock units that vest more than 60 days from March 12, 2024.
(18) Does not include 62,973 restricted stock units that vest more than 60 days from March 12, 2024.
Registered Holders
As of March 12, 2024, we had 36 holders of record of our Class A Ordinary Shares in the United States, including Cede & Co., the nominee of The Depository Trust Company. These shareholders held in the aggregate 10,501,042 of our outstanding Class A Ordinary Shares, or 97.0% of our outstanding Class A Ordinary Shares as of March 12, 2024. The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these Ordinary Shares were held by brokers or other nominees.
Significant Changes
As of March 12, 2024, Phoenix Holdings Ltd., or Phoenix, no longer beneficially owns more than 5% or more outstanding Ordinary Shares, as compared to 7.3% of the Outstanding Class A Ordinary Shares as of December 31, 2022, as reported on Schedule 13G/A filed by Phoenix on February 14, 2023. In addition, of March 12, 2024, M&G Investment Management Limited (MAGAIM), or M&G, beneficially owned 19.9% of the outstanding Class A Ordinary Shares compared to 5.9% as of February 28, 2023, as reported in our annual report on Form 20-F for the year ended December 31, 2022. To our knowledge, other than as disclosed in this Annual Report and in other filings with the SEC, there has been no significant change in the percentage ownership held by any major shareholder since January 1, 2019.
Voting Rights
Neither our major shareholders nor our directors and executive officers have different or special voting rights with respect to their Ordinary Shares, except that each Class A Ordinary Share is entitled to one vote per share and each Class B
86
Ordinary Share is be entitled to ten votes per share. For additional information about our dual class structure, see Exhibit 2.6 to this Annual Report, which is incorporated by reference herein.
B. Related party transactions.
Our policy is to enter into transactions with related parties on terms that, on the whole, are no more favorable, or no less favorable, than those available from unaffiliated third parties. Based on our experience in the business sectors in which we operate and the terms of our transactions with unaffiliated third parties, we believe that all of the transactions described below met this policy standard at the time they occurred. For a description of the procedures governing our approval of related party transactions, see “Item 6.C. Board Practices — Approval of Related Party Transactions under Israeli Law.”
March 2024 Public Offering (M&G Participation)
On March 5, 2024, REE closed a public offering for net proceeds of approximately $14.15 million to the Company, after deducting the underwriting discounts and commissions and other estimated offering expenses payable by the Company. M&G Investment Management Limited, or M&G, purchased approximately $8 million of the Ordinary Shares issued and sold in the offering. As of March 12, 2024, M&G owned approximately 19.9% of our outstanding Class A Ordinary Shares representing approximately 5.9% of the total voting power of REE as of March 12, 2024.
Investors’ Rights Agreement
In connection with the Merger, each of REE, 10X Capital and certain of REE’s shareholders entered into an Investors Rights Agreement, which became effective upon the Closing Date, pursuant to which REE agreed to file a registration statement as soon as practicable upon a request from certain significant shareholders of REE to register the resale of certain registrable securities under the Securities Act, subject to required notice provisions to other shareholders party thereto. REE also agreed to provide customary “piggyback” registration rights with respect to such registrable securities and, subject to certain circumstances, REE is required to file a resale shelf registration statement to register the resale under the Securities Act of such registrable securities. Pursuant to the terms on the Investors’ Rights Agreement, REE filed a resale registration statement on Form F-1 to register the resale of Warrants and Class A Ordinary Shares held by 10X Capital. The Investors Rights Agreement provides that REE will pay certain expenses relating to such registrations and indemnify the securityholders against certain liabilities.
The Company has entered into the following agreements, which were approved by REE’s board of directors in accordance with Israeli law, and also by REE’s shareholders to the extent required by Israeli law. The following is a description of our related party transactions since January 1, 2021:
Indemnification Agreements
We have entered into indemnification agreements with our directors and executive officers. See “Item 6.C. Board Practices — Approval of Related Party Transactions under Israeli Law — Exculpation, Insurance and Indemnification of Office Holders” for additional information.
Tax Indemnity Agreement
We have entered into a tax indemnity agreement with private placement warrantholders, one of which, is 10X Capital SPAC Sponsor I LLC, or the Sponsor. Mr. Hans Thomas is the founding partner and a director of the Sponsor. On October 19, 2022 the Audit Committee had decided to classify the Tax Indemnity Agreement as an “extraordinary transaction”, considering that such transaction in not executed in the ordinary course of business; Pursuant to section 270(1) and section 272(a) of the Companies Law, on October 19, 2022 the Audit Committee and the Board have determined that it is advisable and in the best interest of the Company to (i) indemnify the private placement warrantholders in the event the ITA determines that a private placement warrantholder is subject to withholding tax or if a private placement warrantholder fails to obtain an ITA Exemption, which indemnity is to take the form of a Tax Indemnity Agreement; (ii) the potential exposure to the Company, as has been calculated by the management of the Company, as of the date of the exchange offer, does not exceed $0.2 million; considering that the available funds of the company, which to the Company’s best knowledge, exceed $180 million as of September 2022, and (iii) that the Company’s strength, and the nature and purpose of the aforementioned capital consolidation, such exposure is not material nor does it likely to substantially influence the
87
profitability, property or liabilities of the Company. In 2023, the Company received a withholding tax exemption from ITA, therefore the tax indemnity agreement is no longer applicable.
Agreements with Directors and Officers
Anti-Dilution Protection. Each of our Founders, Daniel Barel and Ahishay Sardes, were granted 39.4 million additional options to purchase Class A Ordinary Shares, which were triggered by the transactions contemplated under the Merger Agreement (and/or the PIPE Investment).
Joint Ownership Agreement for Company Vehicle. During 2021, REE entered into an agreement with co-founder, director, and CEO Daniel Barel, relating to joint ownership of a company car. REE undertook to provide Daniel Barel with a company car, the value of which is an amount of up to NIS 300,000 to be borne by REE. The excess cost of the car purchased for such purpose has been, and the ongoing fixed cost of the car will continue to be, borne by Daniel Barel. Such car is registered under REE’s name, but Daniel Barel is entitled to an ownership portion of such car, corresponding to the excess acquisition cost thereof borne by him. The full value of the vehicle is recorded in our balance sheet as of December 31, 2023.
Employment of Daniel Barel’s Father-in-Law. During 2021, REE hired co-founder, director, and CEO Daniel Barel’s father-in-law as an employee in the selling, general, and administrative department. He is paid customary compensation for this position.
SpecterX Transaction. On October 29, 2021, REE entered into a license agreement with SpecterX for secure file exchange services. The co-founder and CEO of SpecterX is the brother of co-founder, director, and CEO Daniel Barel. Daniel Barel is also the Chairman of the Board and an investor of SpecterX. Former REE director Hans Thomas is also an investor of SpecterX. Prior to entering into the agreement with SpecterX, REE conducted an extensive analysis of the available solutions, and determined that SpecterX best met REE’s needs. In 2023, REE paid SpecterX $45,630.
Carpentry Services from Nissim Sardes Welding Workshop. During the year ended December 31, 2021, REE engaged Nissin Sardes Welding Workshop to provide carpentry and welding services. Nissim Sardes Welding Workshop is owned and operated by co-founder and Chief Technology Officer Ahishay Sardes’ father and brother.
Employment and Related Agreements. We have entered into written employment agreements with each of our officers. These agreements provide for notice periods of varying duration for termination of the agreement by us or by the relevant executive officer, during which time the officer will continue to receive base salary and benefits. These agreements also contain customary provisions regarding noncompetition, confidentiality of information and assignment of inventions.
Equity Awards. Since our inception we have granted options to purchase, and restricted share units underlying, our Ordinary Shares to our officers and certain of our directors. Such award agreements contain acceleration provisions upon certain merger, acquisition, or change of control transactions. We describe our option plans under “Item 6.B. Compensation.” If the relationship between us and a senior manager, or a director, is terminated, except for cause (as defined in the various option plan agreements), all options that are vested will remain exercisable for ninety days after such termination in the case of our executive officers, or one year in the case of our directors.
The following table provides information regarding the options to purchase our Class A Ordinary Shares held by each of our directors and officers who beneficially owns 1% or more of our Class A Ordinary Shares as of March 12, 2024:
Name/Title | Number of Shares Underlying Options | Exercise Price | Expiration Date | ||||||||||||||||||||||||||
Daniel Barel, Co-Founder, Chief Financial Officer and Director | 1,390,287 | $ | 0.01 – 18.22 | 01/06/2027 - 07/22/2031 | |||||||||||||||||||||||||
Ahishay Sardes, Co-Founder, Chief Technology Officer and Director | 1,390,287 | $ | 0.01 – 18.22 | 01/06/2027 - 07/22/2031 | |||||||||||||||||||||||||
See “Item 7.A. Major Shareholders” for additional information.
88
C. Interests of experts and counsel
Not applicable.
Item 8: Financial Information
A. Consolidated Statements and Other Financial Information.
We have appended our consolidated financial statements at the end of this Annual Report, starting at page F-1, as part of this Annual Report.
Legal Proceedings
On December 16, 2022, a lawsuit was filed to the court in Texas, Austin Division, against REE and its US subsidiaries (in this section, the “Group”), by OSR Group alleging that the Group stole OSR Group’s trade secrets. The OSR Group requested the court to grant them the following: (a) a request for an injunction pertaining to the use of such trade secrets; (b) affirmative action to protect the OSR Group’s alleged trade secrets; (c) the establishment of a constructive trust to transfer all the relevant Group’s legal title and intellectual property to the OSR Group; (d) an award to the OSR Group of monetary damages in an amount of no less than USD 2.6 billion together with exemplary damages in an amount of no less than USD 5.2 billion, such amounts to be determined in the trial, plus interest; (e) an award to the OSR Group for all of its expenses relating to the action; (f) an award to the OSR Group of pre-judgment interest on all damages; and (g) an award of other relief as the court deem fit. REE believes that the lawsuit is without merit and is defending itself vigorously. On January 4, 2024, Magistrate Judge Susan Hightower entered a Report and Recommendation, or the Report, recommending dismissal of the lawsuit based on forum non conveniens, such that OSR could pursue its claims in an Israeli forum rather than in the United States, assuming that OSR chooses to do so after dismissal. The Report is pending before the District Court, which will independently review the Report to assess whether to adopt in full, in part, or to set it aside. The Report is not binding on the District Court. There is no definitive timetable for a final ruling, and any ruling by the District Court is subject to a potential appeal by OSR.
Given the uncertainty of litigation and the preliminary stage of the lawsuit, the Company cannot estimate the reasonably possible loss or range of loss that may result from this lawsuit. As of December 31, 2023, the Company did not record a loss contingency.
Notwithstanding the foregoing, from time to time, REE may become involved in actions, claims, suits, and other legal proceedings, such as requests to disclose information before initiating derivative cases, arising in the ordinary course of our business, including but not limited to claims related to employment, intellectual property and shareholder matters.
Dividend Policy
We have never declared or paid any cash dividends on our Ordinary Shares. We currently intend to retain any future earnings to finance operations and to expand our business and, therefore, do not expect to pay any cash dividends in the foreseeable future.
B. Significant Changes
No significant changes have occurred since December 31, 2023, except as otherwise disclosed in this Annual Report.
Item 9. The Offer and Listing
A. Offer and listing details
REE’s Class A Ordinary Shares and Class A warrants commenced trading on Nasdaq on July 23, 2021 under the trading symbol “REE” and “REEAW”, respectively. REE’s Class A warrants were removed from listing on October 7, 2022. Prior to July 23, 2021, no public market existed for REE’s Ordinary Shares or warrants.
B. Plan of distribution
Not applicable.
89
C. Markets
See “Item 9.A. Offer and listing details.” above.
D. Selling shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the issue
Not applicable.
Item 10. Additional Information.
A. Share capital
Not applicable.
B. Memorandum and articles of association
A copy of our current amended and restated articles of association is attached as Exhibit 1.1 to this Annual Report. The information called for by this Item is set forth in Exhibit 1.1 to this Annual Report and is incorporated by reference herein.
C. Material Contracts
The following is a summary of each material contract, other than material contracts entered into in the ordinary course of business, to which we are or have been a party, for the two years immediately preceding the date of this Annual Report:
•ATM Equity Offering Sales Agreement, dated August 16, 2022, between REE Automotive Ltd. and BofA Securities, Inc., filed as Exhibit 1.2 to the Company’s Registration Statement on Form F-3 (File No. 333-266902) filed on August 16, 2022. See Item “5.B Liquidity and Capital Resources – ATM Agreements”.
•At The Market Offering Agreement, dated July 14, 2023, between REE Automotive Ltd. and H.C. Wainwright & Co., LLC, filed as Exhibit 10.1 to the Company’s Current Report on Form 6-K, filed on July 14, 2023. See Item “5.B Liquidity and Capital Resources – ATM Agreements”.
•Securities Purchase Agreement, dated November 27, 2023, by and between REE Automotive Ltd. and the purchasers signatory thereto filed as Exhibit 99.1 to the Company’s Current Report on Form 6-K, filed on November 28, 2023. See Item “5.B Liquidity and Capital Resources – Convertible Promissory Notes and Warrants”.
•Securities Purchase Agreement, dated December 6, 2023, by and between REE Automotive Ltd. and the purchasers signatory thereto filed as Exhibit 99.1 to the Company’s Current Report on Form 6-K, filed on January 5, 2024. See Item “5.B Liquidity and Capital Resources – Convertible Promissory Notes and Warrants”.
•Underwriting Agreement, dated March 1, 2024 by and between REE Automotive Ltd. and Roth Capital Partners, LLC, filed as Exhibit 1.1 to the Company’s Current Report on Form 6-K, filed on March 4, 2024. See Item “5.B Liquidity and Capital Resources – Convertible Promissory Notes and Warrants”.
D. Exchange controls
There are currently no Israeli currency control restrictions on remittances of dividends on Class A Ordinary Shares, proceeds from the sale of the Class A Ordinary Shares or interest or other payments to non-residents of Israel, except for shareholders who are subjects of countries that at the time are, or have been, in a state of war with Israel
90
E. Taxation
Certain Material Israeli Tax Considerations
The following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of the Class A Ordinary Shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Israeli tax considerations
The following is a brief summary of certain material Israeli tax laws applicable to REE. This section also contains a discussion of certain material Israeli tax consequences concerning the ownership and disposition of Class A Ordinary Shares purchased by investors. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of its, his or her personal circumstances or to some types of investors subject to special treatment under Israeli law. Examples of such investors include Israeli residents, partnerships, trusts or traders in securities who are subject to special tax regimes not covered in this discussion. To the extent that the discussion is based on new tax legislation that has not yet been subject to judicial or administrative interpretation, REE cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion. The discussion below is not intended and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. The discussion is subject to change, including due to amendments under Israeli law or changes to the applicable judicial or administrative interpretations of Israeli law, which change could affect the tax consequences described below.
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY NON-U.S., STATE OR LOCAL TAXES.
General corporate tax structure in Israel
Israeli companies are generally subject to corporate tax on their taxable income. The corporate tax rate is 23%. However, the effective tax rate payable by a company that derives income from a Preferred Enterprise or a Preferred Technological Enterprise (as discussed below) may be considerably lower. Capital gains derived by an Israeli company are generally subject to the standard corporate tax rate.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for “Industrial Companies.” We believe that we currently qualify as an Industrial Company within the meaning of the Industry Encouragement Law.
The Industry Encouragement Law defines an “Industrial Company” as an Israeli resident-company incorporated in Israel, of which 90% or more of its income in any tax year, other than income from certain government loans, is derived from an “Industrial Enterprise” owned by it and located in Israel or in the “Area”, in accordance with the definition under section 3A of the Israeli Income Tax Ordinance (New Version) 5721-1961 (the “Ordinance”). An “Industrial Enterprise” is defined as an enterprise whose principal activity in a given tax year is industrial production.
Following are the main tax benefits available to Industrial Companies:
•amortization of the cost of purchased patent, rights to use a patent, and know-how, which were purchased in good faith and are used for the development or advancement of the Industrial Enterprise, over an eight-year period, commencing on the year in which such rights were first exercised;
•under limited conditions, an election to file consolidated tax returns with controlled Israeli Industrial Companies;
91
•expenses related to a public offering are deductible in equal amounts over three years commencing on the year of the offering.
Eligibility for benefits under the Industry Encouragement Law is not contingent upon approval of any governmental authority. There can be no assurance that we will continue to qualify as an Industrial Company or that the benefits described above will be available in the future.
Tax benefits and grants for research and development
Israeli tax law allows, under certain conditions, a tax deduction for expenditures related to scientific research and development projects, including capital expenditures, for the year in which they are incurred. Expenditures are deemed related to scientific research and development projects, if:
•the expenditures are approved by the relevant Israeli government ministry, determined by the field of research;
•the research and development must be for the promotion of the company; and
•the research and development is carried out by or on behalf of the company seeking such tax deduction.
The amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. Under these research and development deduction rules, no deduction is allowed if such deduction is related to an expense invested in an asset depreciable under the general depreciation rules of the Ordinance. Expenditures that are unqualified under the conditions above do not qualify for this special deduction are deductible in equal amounts over three years.
From time to time we may apply to the Israel Innovation Authority (the “IIA”) for approval to allow a tax deduction for all or most of research and development expenses during the year incurred. There can be no assurance that such application will be accepted. If we are not be able to deduct research and development expenses during the year of the payment, we may be able to deduct research and development expenses in equal amounts over a period of three years commencing in the year of the payment of such expenses.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives for capital investments in production facilities (or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, referred to as an Approved Enterprise, a Beneficiary Enterprise, a Preferred Enterprise, a Preferred Technological Enterprise, or a Special Preferred Technological Enterprise, is entitled to benefits as discussed below. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the geographic location in Israel of the facility in which the investment is made. In order to qualify for these incentives, the Company is required to comply with the requirements of the Investment Law.
The Investment Law was significantly amended effective as of April 1, 2005, as of January 1, 2011, or the 2011 Amendment, and as of January 1, 2017, or the 2017 Amendment. The 2011 Amendment introduced new benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect prior to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and have the benefits of the 2011 Amendment apply. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside the existing tax benefits.
Tax benefits under the 2011 amendment
The 2011 Amendment introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011. The definition of a Preferred Company includes a company incorporated in Israel that is not fully owned by a governmental entity, and that has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 16% with respect to its income derived by its Preferred Enterprise as of 2017, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 7.5%. Income derived by a Preferred Company from a “Special Preferred Enterprise” (as such term is defined in the
92
Investment Law) would be entitled, subject to certain conditions and during a benefits period of 10 years, to further reduced tax rates of 8%, or 5% if the Special Preferred Enterprise is located in a certain development zone.
Dividends distributed from income which is attributed to a “Preferred Enterprise” will be subject to withholding tax at source at the following rates: (i) Israeli resident companies — 0%, (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, a tax rate of 20% or such lower rate as may be provided in an applicable tax treaty ); (ii) Israeli resident individuals — 20%; and (iii) non-Israeli residents (individuals and corporations) — 20%, subject to a reduced tax rate under the provisions of an applicable tax treaty. Claim of tax benefits afforded by an applicable tax treaty is subject to the receipt in advance of a valid certificate from the Israel Tax Authority, or the ITA, allowing for a reduced tax rate.
REE currently does not intend to implement the 2011 Amendment.
New tax benefits under the 2017 Amendment that became effective on January 1, 2017
The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises,” as described below, and is in addition to the other existing tax benefits programs under the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technological Enterprise located in development zone “A”. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the IIA.
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by the Special Preferred Technology Enterprise or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from the IIA. A Special Preferred Technology Enterprise that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to tax at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld. If such dividends are distributed to a foreign company or companies (holding directly at least 90% in the Preferred Company which owns the Preferred Technology Enterprise or holding indirectly such 90% in the Preferred Company which owns the Preferred Technology Enterprise, subject to certain conditions) and other conditions are met, the tax rate will be 4% or such lower rate as may be provided in an applicable tax treaty.
REE currently does not intend to implement the 2017 Amendment.
Taxation of our shareholders
Capital gains Tax on Sales of our Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale or disposition of any capital assets by Israeli residents, as defined for Israeli tax purposes, and on the sale of capital assets located in Israel, including shares in Israeli companies, by both Israeli residents and non-Israeli residents, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The Ordinance distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain equivalent to the increase of the relevant asset’s purchase price attributable to an increase in the Israeli consumer price index, or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. Inflationary surplus is currently not subject to tax in Israel. The real gain is the excess of the total capital gain over the inflationary surplus.
93
Capital gains taxes applicable to Israeli resident shareholders
An Israeli resident company that derives capital gains from the sale of shares in an Israeli resident company will generally be subject to tax on the real capital gains generated on such sale at the corporate tax rate of 23% (in 2024). An Israeli resident individual will generally be subject to capital gain tax at the rate of 25%. However, if the individual shareholder claims deduction of interest and linkage differences expenses in connection with the purchase and holding of such shares or is a “substantial shareholder” at the time of the sale or at any time during the preceding twelve months period, such gain will be taxed at the rate of 30%. A “substantial shareholder” is generally a person who alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, regardless of the source of such right. Individual holders dealing in securities in Israel for whom the income from the sale of securities is considered “business income” as defined in Section 2(1) of the Ordinance are taxed at the marginal tax rates applicable to business income (up to 47% in 2024) plus an additional excess tax of 3% as described below. Certain Israeli institutions who are exempt from tax under Section 9(2) or Section 129C(a)(1) of the Ordinance (such as exempt trust fund, pension fund) may be exempt from capital gains tax from the sale of the shares.
Capital gains taxes applicable to non-Israeli resident shareholders
A non-Israeli resident who derives capital gains from the sale of shares of an Israeli resident company that were purchased after the company was listed for trading on a stock exchange outside of Israel, will be exempt from Israeli tax if, among other conditions, the shares were not held through, or attributable to, a permanent establishment that the non-Israeli resident maintains in Israel. However, non-Israeli “body of persons” (as defined in the Ordinance, which includes corporate entities,
partnerships, and other entities) will not be entitled to the foregoing exemption if Israeli residents: (i) have a controlling interest of more than 25% in any of the means of control of such non-Israeli body of persons or (ii) are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli body of persons, whether directly or indirectly. In addition, such exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
Moreover, a sale of shares by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the Convention Between the Government of the United States of America and the Government of the State of Israel with respect to Taxes on Income, as amended (the “United States Israel Tax Treaty”), the sale, exchange or other disposition of shares by a shareholder who is a United States resident (for purposes of the treaty) holding the shares as a capital asset and is entitled to claim the benefits afforded to such a resident by the United States Israel Tax Treaty (a “U.S. Resident”) is generally exempt from Israeli capital gains tax unless: (i) the capital gain arising from such sale, exchange or disposition is attributed to real estate located in Israel; (ii) the capital gain arising from such sale, exchange or disposition is attributed to royalties; (iii) the capital gain arising from the such sale, exchange or disposition is attributed to a permanent establishment in Israel, under certain terms; (iv) such U.S. Resident holds, directly or indirectly, shares representing 10% or more of the voting capital during any part of the 12 month period preceding the disposition, subject to certain conditions; or (v) such U.S. Resident is an individual and was present in Israel for 183 days or more during the relevant taxable year. In any such case, the sale, exchange or disposition of such shares by the U.S. Resident would be subject to Israeli tax, to the extent applicable.
Regardless of whether non-Israeli shareholders may be liable for Israeli capital gains tax on the sale of our Ordinary Shares, the payment of the consideration for such shares may be subject to withholding of Israeli tax at source, and holders of our Ordinary Shares may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, the ITA may require shareholders who are not liable for Israeli capital gains tax to sign declarations on forms specified by the ITA or obtain a specific exemption from the ITA to confirm their status as non-Israeli residents, and, in the absence of such declarations or exemptions, the ITA may require the purchaser of the shares to withhold tax at source.
A detailed return, including a computation of the tax due, must be filed and an advance payment must be paid on January 31 and July 31 of each tax year for sales of securities traded on a stock exchange made within the previous six months. However, if all tax due was withheld at the source according to applicable provisions of the Ordinance and the regulations promulgated thereunder, the return does not need to be filed provided that (i) such income was not generated from business conducted in Israel by the taxpayer, (ii) the taxpayer has no other taxable sources of income in Israel with respect to which
94
a tax return is required to be filed and an advance payment does not need to be made, and (iii) the taxpayer is not obligated to pay excess tax (as further explained below). Capital gains are also reportable on an annual income tax return.
Taxation of Israeli shareholders on receipt of dividends
An Israeli resident individual is generally subject to Israeli income tax on the receipt of dividends paid on our Ordinary Shares at the rate of 25%. With respect to a person who is a “substantial shareholder” at the time of receiving the dividend or on any time during the preceding twelve months, the applicable tax rate is 30%. Such dividends are generally subject to Israeli withholding tax at a rate of 25% if the shares are registered with a nominee company (whether the recipient is a substantial shareholder or not) and 20% if the dividend is distributed from income attributed to a Preferred Enterprise or Technological Enterprise. If the recipient of the dividend is an Israeli resident corporation such dividend income will be exempt from tax provided the income from which such dividend is distributed was derived or accrued within Israel and was received directly or indirectly from another corporation that is liable to Israeli corporate tax. An exempt trust fund, pension fund or other entity that is exempt from tax under Section 9(2) or Section 129(C)(a)(1) of the Ordinance is exempt from tax on dividend.
Taxation of non-Israeli shareholders on receipt of dividends
Non-Israeli residents (either individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on our Ordinary Shares at the rate of 25% or 30% if the dividends recipient is a “substantial shareholder” at the time of distribution or at any time during the preceding 12 months period, which tax will be withheld at source, unless relief is provided in a treaty between Israel and the shareholder’s country of residence. Such dividends are generally subject to Israeli withholding tax at a rate of 25% if the shares are registered with a nominee company (whether the recipient is a substantial shareholder or not). Such withholding rates may be reduced if the dividend is distributed from income attributed to a Preferred Enterprise or Technological Enterprise or a reduced rate provided under an applicable tax treaty, in each case subject to the receipt in advance of a valid certificate from the ITA allowing for a reduced tax rate. For example, under the United States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our Ordinary Shares who is a U.S. Resident is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by a Preferred Enterprise or Technological Enterprise, that are paid to a United States corporation holding 10% or more of the outstanding voting capital throughout the tax year in which the dividend is distributed as well as during the previous tax year, is 12.5%, provided that not more than 25% of the gross income for such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, dividends distributed from income attributed to an Approved Enterprise, Benefited Enterprise or Preferred Enterprise are not entitled to such reduction under the tax treaty but are subject to a withholding tax rate of 15% for a shareholder that is a U.S. corporation, provided that the conditions related to the outstanding voting rights and the gross income for the previous year (as set forth in the previous sentences) are met. If the dividend is attributable partly to income derived from a Preferred Enterprise or Technological Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. We cannot assure you that we will designate the profits that we may distribute in a way that will reduce shareholders’ tax liability.
A foreign resident who had income from a dividend that was accrued from Israeli source, from which the full tax was deducted, will be generally exempt from filing a tax return in Israel, provided that (1) such income was not generated from business conducted in Israel by the foreign resident, (ii) the foreign resident has no other taxable sources of income in Israel with respect to which a tax return is required to be filed and (iii) the foreign resident is not liable to additional Surtax (see below) in accordance with Section 121B of the Ordinance.
Surtax
Subject to the provisions of an applicable tax treaty, individuals who are subject to tax in Israel (whether any such individual is an Israeli resident or non-Israeli resident) are also subject to an additional tax at a rate of 3% on annual income (including, but not limited to, dividends, interest and capital gain) exceeding NIS 721,560 for 2024, which amount is linked to the annual change in the Israeli consumer price index.
Estate and Gift Tax
Israeli law presently does not impose estate or gift taxes.
95
Certain Material U.S. Federal Income Tax Considerations
The following discussion summarizes the material U.S. federal income tax consequences to U.S. Holders and Non-U.S. Holders (as defined below) of the ownership and disposition of Class A Ordinary Shares and Warrants. This discussion applies only to the Class A Ordinary Shares and Warrants, as the case may be, that are held as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment).
The following does not purport to be a complete analysis of all potential tax effects arising in connection with the ownership and disposition of Class A Ordinary Shares and Warrants. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local, or non-U.S. tax laws are not discussed. This discussion is based on the Code, Treasury regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”), in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect the tax consequences discussed below. REE has not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS will not take or a court will not sustain a contrary position regarding the tax consequences discussed below.
This discussion does not address all U.S. federal income tax consequences relevant to a holder’s particular circumstances, including the impact of the Medicare contribution tax on net investment income and the alternative minimum tax. In addition, it does not address consequences relevant to holders subject to special rules, including, without limitation:
•banks, insurance companies, and certain other financial institutions;
•regulated investment companies and real estate investment trusts;
•brokers, dealers, or traders in securities;
•traders in securities that elect to mark to market;
•tax-exempt organizations or governmental organizations;
•U.S. expatriates and former citizens or long-term residents of the U.S.;
•persons holding Class A Ordinary Shares and/or Warrants, as the case may be, as part of a hedge, straddle, constructive sale, or other risk reduction strategy or as part of a conversion transaction or other integrated or similar transaction;
•persons subject to special tax accounting rules as a result of any item of gross income with respect to Class A Ordinary Shares and/or Warrants, as the case may be, being taken into account in an applicable financial statement;
•persons that actually or constructively own 5% or more (by vote or value) of the outstanding Class A Ordinary Shares;
•founders, sponsors, officers or directors of 10X Capital or holders of private placement warrants;
•“controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax (and their shareholders);
•S corporations, partnerships, or other entities or arrangements treated as partnerships or other flow-through entities for U.S. federal income tax purposes (and investors therein);
•U.S. Holders having a functional currency other than the U.S. dollar;
•persons who hold or received Class A Ordinary Shares and/or Warrants, as the case may be, pursuant to the exercise of any employee stock option or otherwise as compensation; and
•tax-qualified retirement plans.
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds Class A Ordinary Shares and/or Warrants, the tax treatment of a partner in such partnership will depend on the status of the owner or participant in the arrangement, the activities of the entity or arrangement, and certain determinations made at the owner or participant level. Accordingly, entities or arrangements treated as partnerships for U.S. federal income tax purposes and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.
96
For purposes of this discussion, a “U.S. Holder” is any beneficial owner of Class A Ordinary Shares and/or Warrants, as the case may be, that is for U.S. federal income tax purposes:
•an individual who is a citizen or resident of the U.S.;
•a corporation (or other entity taxable as a corporation) created or organized in, or under the laws of, the U.S., any state thereof, or the District of Columbia;
•an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
•a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code) or (2) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.
THE U.S. FEDERAL INCOME TAX TREATMENT OF THE OWNERSHIP AND DISPOSITION OF CLASS A ORDINARY SHARES AND/OR WARRANTS TO ANY PARTICULAR HOLDER WILL DEPEND ON THE HOLDER’S PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES TO YOU, IN LIGHT OF YOUR PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES, OF THE OWNERSHIP AND DISPOSITION OF CLASS A ORDINARY SHARES AND/OR WARRANTS.
U.S. Federal Income Tax Treatment of REE
Tax Residence of REE for U.S. Federal Income Tax Purposes
Although REE is incorporated and tax resident in Israel, the IRS may assert that it should be treated as a U.S. corporation for U.S. federal income tax purposes pursuant to Section 7874 of the Code. For U.S. federal income tax purposes, a corporation is generally considered a U.S. “domestic” corporation if it is created or organized in or under the laws of the U.S., any state thereof, or the District of Columbia. Because REE is not so created or organized (but is instead incorporated only in Israel), it would generally be classified as a foreign corporation (that is, a corporation other than a U.S. “domestic” corporation) under these rules. Section 7874 of the Code provides an exception under which a corporation created or organized only under foreign law may, in certain circumstances, be treated as a U.S. corporation for U.S. federal income tax purposes. The Section 7874 rules are complex and require analysis of all relevant facts, and there is limited guidance and significant uncertainties as to their application.
Under Code Section 7874, a corporation created or organized outside the U.S. (i.e., a foreign corporation) will nevertheless be treated as a U.S. corporation for U.S. federal income tax purposes when (i) the foreign corporation directly or indirectly acquires substantially all of the assets held directly or indirectly by a U.S. corporation (including the indirect acquisition of assets of the U.S. corporation by acquiring the outstanding shares of the U.S. corporation), (ii) the shareholders of the acquired U.S. corporation hold, by vote or value, at least 80% of the shares of the foreign acquiring corporation after the acquisition by reason of holding shares in the U.S. acquired corporation (the “Section 7874 Percentage”), and (iii) the foreign corporation’s “expanded affiliated group” does not have substantial business activities in the foreign corporation’s country of creation or organization relative to such expanded affiliated group’s worldwide activities (the “Substantial Business Activities Exception”). In order to satisfy the Substantial Business Activities Exception, at least 25% of the employees (by headcount and compensation), real and tangible assets, and gross income of the foreign acquiring corporation’s “expanded affiliated group” must be based, incurred, located, and derived, respectively, in the country in which the foreign acquiring corporation is created or organized. The Section 7874 Regulations further provide for a number of special rules that aggregate multiple acquisitions of U.S. corporations for purposes of Code Section 7874 that are made as part of a plan or made over a 36-month period, making it more likely that Code Section 7874 will apply to a foreign acquiring corporation.
REE indirectly acquired substantially all of the assets of 10X Capital through the Merger. As a result, Section 7874 of the Code may apply to cause REE to be treated as a U.S. corporation for U.S. federal income tax purposes following the Merger depending on whether the Section 7874 Percentage equals or exceeds 80%, subject to the applicability of the Substantial Business Activities Exception.
Based upon the terms of the Merger and the rules for determining share ownership under Code Section 7874 and the Section 7874 Regulations, 10X Capital and REE expect that the Section 7874 Percentage of 10X Capital stockholders in REE should be less than 80% after the Merger. Accordingly, REE is not expected to be treated as a U.S. corporation for
97
U.S. federal income tax purposes under Section 7874 of the Code. The calculation of the Section 7874 Percentage is complex, is subject to detailed regulations (the application of which is uncertain in various respects and could be impacted by changes in U.S. tax laws and regulations with possible retroactive effect), and is subject to certain factual uncertainties. Moreover, former holders of 10X Capital Common Stock may be deemed to own an amount of Class A Ordinary Shares with respect to certain redemptions by former holders of 10X Capital Common Stock prior to the Merger for purposes of determining the ownership percentage of former holders of 10X Capital Common Stock under Section 7874 of the Code. Accordingly, there can be no assurance that the IRS will not challenge the status of REE as a foreign corporation under Code Section 7874 or that such challenge would not be sustained by a court.
If the IRS were to successfully challenge under Code Section 7874 REE’s status as a foreign corporation for U.S. federal income tax purposes, REE and certain REE shareholders could be subject to significant adverse tax consequences, including a higher effective corporate income tax rate on REE and future withholding taxes on certain REE shareholders. In particular, holders of Class A Ordinary Shares and/or Warrants would be treated as holders of stock and warrants of a U.S. corporation.
However, even if the Section 7874 Percentage was such that REE were still respected as a foreign corporation under Code Section 7874, REE may be limited in using its equity to engage in future acquisitions of U.S. corporations over a 36-month period following the Merger. If REE were to be treated as acquiring substantially all of the assets of a U.S. corporation within a 36-month period after the Merger, the Section 7874 Regulations would exclude certain shares of REE attributable to the Merger for purposes of determining the Section 7874 Percentage of that subsequent acquisition, making it more likely that Code Section 7874 would apply to such subsequent acquisition.
The remainder of this discussion assumes that REE will not be treated as a U.S. corporation for U.S. federal income tax purposes under Section 7874 of the Code.
Utilization of 10X Capital’s Tax Attributes and Certain Other Adverse Tax Consequences to REE and REE’s Shareholders.
Following the acquisition of a U.S. corporation by a foreign corporation, Code Section 7874 can limit the ability of the acquired U.S. corporation and its U.S. affiliates to use U.S. tax attributes (including net operating losses and certain tax credits) to offset U.S. taxable income resulting from certain transactions, as well as result in certain other adverse tax consequences, even if the acquiring foreign corporation is respected as a foreign corporation for purposes of Code Section 7874. Specifically, Code Section 7874 can apply in this manner if (i) the foreign corporation acquires, directly or indirectly, substantially all of the properties held directly or indirectly by a U.S. corporation, (ii) after the acquisition, the former shareholders of the acquired U.S. corporation hold at least 60% (by either vote or value) but less than 80% (by vote and value) of the shares of the foreign acquiring corporation by reason of holding shares in the acquired U.S. corporation, and (iii) the foreign corporation’s “expanded affiliated group” does not meet the Substantial Business Activities Exception.
Based upon the terms of the Merger and the rules for determining share ownership under Section 7874 of the Code and the Section 7874 Regulations, 10X Capital and REE expect that the Section 7874 Percentage should be less than 60% after the Merger. Accordingly, the limitations and other rules described above are not expected to apply to REE or 10X Capital after the Merger.
If the Section 7874 Percentage applicable to the Merger is at least 60% but less than 80%, REE and certain of REE’s shareholders may be subject to adverse tax consequences including, but not limited to, restrictions on the use of tax attributes with respect to “inversion gain” recognized over a 10-year period following the transaction, disqualification of dividends paid from preferential “qualified dividend income” rates, and the requirement that any U.S. corporation owned by REE include as “base erosion payments” that may be subject to a minimum U.S. federal income tax any amounts treated as reductions in gross income paid to certain related foreign persons. Furthermore, certain “disqualified individuals” (including officers and directors of a U.S. corporation) may be subject to an excise tax on certain stock-based compensation at a rate of 20%. However, as a blank check company whose assets are primarily comprised of cash and cash equivalents, it is not expected that 10X Capital will have a significant amount of inversion gain as a result of the Merger.
The determination that the Section 7874 Percentage should be less than 60% after the Merger is subject to detailed regulations (the application of which is uncertain in various respects and would be impacted by future changes in tax laws and regulations, with possible retroactive effect) and is subject to certain factual uncertainties. There can be no assurance that the IRS will not challenge whether REE is subject to the above rules or that such a challenge would not be sustained by a court. If the IRS successfully applied these rules to REE, significant adverse tax consequences could result for REE and for certain REE shareholders, including a higher effective corporate tax rate on REE U.S. Holders.
98
U.S. Federal Income Tax Consequences of the Ownership and Disposition of Class A Ordinary Shares and Warrants to U.S. Holders
Distributions on Class A Ordinary Shares
If REE makes distributions of cash or property on the Class A Ordinary Shares, such distributions will be treated first as a dividend to the extent of REE’s current and accumulated earnings and profits (as determined for U.S. federal income tax purposes), and then as a tax-free return of capital to the extent of the U.S. Holder’s tax basis, with any excess treated as gain from the sale or exchange of the shares. The amount of any such distribution will include any amounts withheld by REE (or another applicable withholding agent). If REE does not provide calculations of its earnings and profits under U.S. federal income tax principles, a U.S. Holder should expect all cash distributions to be reported as dividends for U.S. federal income tax purposes. Any dividend will not be eligible for the dividends received deduction allowed to corporations in respect of dividends received from U.S. corporations.
Subject to the discussions above under “— Utilization of 10X Capital’s Tax Attributes and Certain Other Adverse Tax Consequences to REE and REE’s Shareholders” and below under “— Passive Foreign Investment Company Rules,” dividends received by certain non-corporate U.S. Holders (including individuals) may be “qualified dividend income,” which is taxed at the lower applicable capital gains rate, provided that:
•either (a) the shares are readily tradable on an established securities market in the U.S. or (b) REE is eligible for the benefits of a qualifying income tax treaty with the U.S. that includes an exchange of information program;
•REE is neither a PFIC (as discussed below under below under “— Passive Foreign Investment Company Rules”) nor treated as such with respect to the U.S. Holder for REE’s taxable year in which the dividend is paid or the preceding taxable year;
•the U.S. Holder satisfies certain holding period requirements;
•the U.S. Holder is not under an obligation to make related payments with respect to positions in substantially similar or related property; and
•the taxpayer does not take the dividends into account as investment income under Code Section 163(d)(4)(B).
There can be no assurances that REE will be eligible for benefits of an applicable comprehensive income tax treaty between the U.S. and Israel. In addition, there also can be no assurance that Class A Ordinary Shares will be considered “readily tradable” on an established securities market in accordance with applicable legal authorities. Furthermore, REE will not constitute a qualified foreign corporation for purposes of these rules if it is a PFIC for the taxable year in which it pays a dividend or for the preceding taxable year. See “— Passive Foreign Investment Company Rules.” U.S. Holders should consult their tax advisors regarding the availability of the lower rate for dividends paid with respect to Class A Ordinary Shares.
The amount of any dividend distribution paid in foreign currency will be the U.S. dollar amount calculated by reference to the applicable exchange rate in effect on the date of actual or constructive receipt, regardless of whether the payment is in fact converted into U.S. dollars at that time. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.
Subject to certain exceptions, dividends on Class A Ordinary Shares will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will be limited to the gross amount of the dividend, multiplied by a fraction, the numerator of which is the reduced rate applicable to qualified dividend income and the denominator of which is the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by REE with respect to the Class A Ordinary Shares generally will constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income”. Moreover, Treasury regulations that apply to taxable years beginning on or after December 28, 2021 may in some circumstances prohibit a U.S. Holder from claiming a foreign tax credit unless the taxes are creditable under an applicable treaty and the holder is eligible for benefits under the treaty and elects its application. The rules governing foreign tax credits are complex and U.S. Holders are urged to consult their tax advisors regarding the creditability of foreign taxes in their particular circumstances. In lieu of claiming a foreign tax
99
credit, a U.S. Holder may, in certain circumstances, deduct foreign taxes in computing the holder’s taxable income, subject to generally applicable limitations under U.S. law. Generally, an election to deduct foreign taxes instead of claiming foreign tax credits applies to all foreign taxes paid or accrued in the taxable year.
Sale, Exchange, Redemption or Other Taxable Disposition of Class A Ordinary Shares and Warrants
Subject to the discussion below under “— Passive Foreign Investment Company Rules,” a U.S. Holder generally will recognize gain or loss on any sale, exchange, redemption or other taxable disposition of Class A Ordinary Shares or Warrants in an amount equal to the difference between (i) the amount realized on the disposition and (ii) such U.S. Holder’s adjusted tax basis in such shares and/or warrants. Any gain or loss recognized by a U.S. Holder on a taxable disposition of Class A Ordinary Shares or Warrants generally will be capital gain or loss. A non-corporate U.S. Holder, including an individual, who has held the Class A Ordinary Shares and/or Warrants for more than one year generally will be eligible for reduced tax rates for such long-term capital gains. The deductibility of capital losses is subject to limitations.
Any such gain or loss recognized generally will be treated as U.S. source income or loss. Accordingly, in the event any Israeli tax (including withholding tax) is imposed upon such sale or other disposition, a U.S. Holder may not be able to utilize foreign tax credits unless such holder has foreign source income or gain in the same category from other sources. Moreover, there are special rules under the income tax treaty between the U.S. and Israel (the “Treaty”), which may impact a U.S. Holder’s ability to claim a foreign tax credit. In addition, Treasury regulations that apply to taxable years beginning on or after December 28, 2021 may preclude a U.S. Holder from claiming a foreign tax credit with respect to Israeli taxes on gain from dispositions of Class A Ordinary Shares unless the U.S. Holder is eligible for benefits under the Treaty and elects its application and other applicable requirements are satisfied. The rules governing foreign tax credits and deductibility of foreign taxes are complex and U.S. Holders are urged to consult their tax advisor regarding the ability to claim a foreign tax credit and the application of the Treaty to such U.S. Holder’s particular circumstances.
Exercise, Lapse, or Redemption of a Warrant
Subject to the PFIC rules discussed below, a U.S. Holder generally will not recognize gain or loss upon the acquisition of a Class A Ordinary Share on the exercise of a Warrant for cash. A U.S. Holder’s tax basis in a Class A Ordinary Shares received upon exercise of the Warrant generally should be an amount equal to the sum of the U.S. Holder’s tax basis in the Warrant exchanged therefor (assuming the Merger is not a taxable transaction) and the exercise price. The U.S. Holder’s holding period for a Class A Ordinary Share received upon exercise of the Warrant will begin on the date following the date of exercise (or possibly the date of exercise) of the Warrant and will not include the period during which the U.S. Holder held the Warrant. If a Warrant is allowed to lapse unexercised, a U.S. Holder generally will recognize a capital loss equal to such holder’s tax basis in the Warrant.
The tax consequences of a cashless exercise of a Warrant are not clear under current tax law. Subject to the PFIC rules discussed below, a cashless exercise may be tax-deferred, either because the exercise is not a gain realization event or because the exercise is treated as a recapitalization for U.S. federal income tax purposes. In either tax-deferred situation, a U.S. Holder’s basis in the Class A Ordinary Shares received generally would equal the U.S. Holder’s basis in the Warrants exercised therefor. If the cashless exercise is not treated as a gain realization event, a U.S. Holder’s holding period in the Class A Ordinary Shares would be treated as commencing on the date following the date of exercise (or possibly the date of exercise) of the Warrants and will not include the period during which the U.S. Holder held the Warrants. If the cashless exercise were treated as a recapitalization, the holding period of the Class A Ordinary Shares would include the holding period of the Warrants exercised therefor.
It is also possible that a cashless exercise of a Warrant could be treated in part as a taxable exchange in which gain or loss would be recognized in the manner set forth above under “— Sale, Exchange, Redemption or Other Taxable Disposition of Class A Ordinary Shares and Warrants.” In such event, a U.S. Holder could be deemed to have surrendered warrants equal to the number of Class A Ordinary Shares having an aggregate fair market value equal to the exercise price for the total number of warrants to be exercised. Subject to the PFIC rules discussed below, the U.S. Holder would recognize capital gain or loss with respect to the Warrants deemed surrendered in an amount generally equal to the difference between (i) the fair market value of the Class A Ordinary Shares that would have been received in a regular exercise of the Warrants deemed surrendered, net of the aggregate exercise price of such Warrants and (ii) the U.S. Holder’s tax basis in such Warrants. In this case, a U.S. Holder’s aggregate tax basis in the Class A Ordinary Shares received would equal the sum of (i) U.S. Holder’s tax basis in the Warrants deemed exercised and (ii) the aggregate exercise price of such Warrants. A U.S. Holder’s holding period for the Class A Ordinary Shares received in such case generally would commence on the date following the date of exercise (or possibly the date of exercise) of the Warrants and will not include the period during which the U.S. Holder held the Warrants.
100
Due to the absence of authority on the U.S. federal income tax treatment of a cashless exercise of warrants, including when a U.S. Holder’s holding period would commence with respect to the Class A Ordinary Share received, there can be no assurance regarding which, if any, of the alternative tax consequences and holding periods described above would be adopted by the IRS or a court of law. Accordingly, U.S. Holders should consult their tax advisors regarding the tax consequences of a cashless exercise of Warrants.
Subject to the PFIC rules described below, if REE redeems Warrants for cash pursuant to the redemption provisions described in Exhibit 2.6 to this Annual Report under the section entitled “Warrants” or if REE purchases Warrants in an open market transaction, such redemption or purchase generally will be treated as a taxable disposition to the U.S. Holder, taxed as described above under “— Sale, Exchange, Redemption or Other Taxable Disposition of Class A Ordinary Shares and Warrants.”
Possible Constructive Distributions
The terms of each Warrant provide for an adjustment to the number of Class A Ordinary Shares for which the Warrant may be exercised or to the exercise price of the Warrant in certain events, as discussed in Exhibit 2.6 to this Annual Report under the section captioned “Warrants.” An adjustment which has the effect of preventing dilution generally is not taxable. A U.S. Holder of a Warrant would, however, be treated as receiving a constructive distribution from REE if, for example, the adjustment increases the holder’s proportionate interest in REE’s assets or earnings and profits (for instance, through an increase in the number of Class A Ordinary Shares that would be obtained upon exercise of such warrant) as a result of a distribution of cash or other property such as other securities to the holders of the Class A Ordinary Shares which is taxable to the U.S. Holders of such shares as described under “— Distributions on Class A Ordinary Shares” above. Such constructive distribution would be subject to tax as described under that section in the same manner as if the U.S. Holder of such Warrant received a cash distribution from REE equal to the fair market value of such increase in interest.
Passive Foreign Investment Company Rules
The treatment of U.S. Holders of the Class A Ordinary Shares and Warrants could be materially different from that described above, if REE is treated as a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes. An entity treated as a foreign corporation for U.S. federal income tax purposes generally will be a PFIC for U.S. federal income tax purposes for any taxable year if either:
•at least 75% of its gross income for such year is passive income (such as interest, dividends, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of assets giving rise to passive income); or
•at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income.
For this purpose, REE will be treated as owning its proportionate share of the assets and earning its proportionate share of the income of any other entity treated as a corporation for U.S. federal income tax purposes in which REE own, directly or indirectly, 25% or more (by value) of the stock.
Based on the current and anticipated composition of the income, assets and operations of REE and its subsidiaries, there is a substantial risk that REE was a PFIC for U.S. federal income tax purposes for 2023, and REE may be a PFIC for U.S. federal income tax purposes for current or future taxable years.
Nevertheless, whether REE is treated as a PFIC is determined on an annual basis. The determination of whether a non-U.S. corporation is a PFIC is a factual determination that depends on, among other things, the composition of REE’s income and assets, and the market value of its shares and assets, including the composition of income and assets and the market value of shares and assets of its subsidiaries, from time to time, and thus the determination can only be made annually after the close of each taxable year. Furthermore, the value of our gross assets is likely to be determined in part by reference to our market capitalization, which may fluctuate significantly. Thus, no assurance can be given as to whether REE will be a PFIC for the current or any future taxable year.
Under the PFIC rules, if REE were considered a PFIC at any time that a U.S. Holder owns Class A Ordinary Shares or Warrants, REE would generally continue to be treated as a PFIC with respect to such holder in a particular year unless (i) REE has ceased to be a PFIC and (ii) (a) the U.S. Holder has made a valid “QEF election” (as described below) for the first taxable year in which the holder owned such holder’s Class A Ordinary Shares in which REE was a PFIC, (b) a valid mark-to-market election (as described below) is in effect for the particular year, or (c) the U.S. Holder has made a “deemed sale” election under the PFIC rules. If such a “deemed sale” election is made, a U.S. Holder will be deemed to have sold its Class A Ordinary Shares at their fair market value on the last day of the last taxable year in which REE is classified as a PFIC,
101
and any gain from such deemed sale would be subject to the consequences described below. After the “deemed sale” election, the Class A Ordinary Shares with respect to which the “deemed sale” election was made will not be treated as shares in a PFIC unless REE subsequently becomes a PFIC.
For each taxable year that REE is treated as a PFIC with respect to a U.S. Holder’s Class A Ordinary Shares or Warrants, the U.S. Holder will be subject to special tax rules with respect to any “excess distribution” (as defined below) received and any gain realized from a sale or disposition (including a pledge of Class A Ordinary Shares and under proposed regulations transfers of Warrants and certain transfers of Class A Ordinary Shares that would otherwise qualify as nonrecognition transactions for U.S. federal income tax purposes) of its Class A Ordinary Shares or Warrants (collectively the “excess distribution rules”), unless, with respect to the Class A Ordinary Shares, the U.S. Holder makes a valid QEF or mark-to-market election as discussed below. Generally, distributions received by a U.S. Holder in a taxable year that are greater than 125% of the average annual distributions received by such U.S. Holder during the shorter of the three preceding taxable years or the portion of such U.S. Holder’s holding period for the Class A Ordinary Shares or Warrants that preceded the taxable year of the distribution will be treated as excess distributions. Under these special tax rules:
•the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the Class A Ordinary Shares or Warrants;
•the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution or to the period in the U.S. Holder’s holding period before the first day of REE’s first taxable year in which REE is a PFIC, will be treated as ordinary income; and
•the amount allocated to each other taxable year (or portions thereof) of the U.S. Holder and included in such holder’s holding period will be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year without regard to the U.S. Holder’s other items of income and loss for such year;
•the interest charge generally applicable to underpayments of tax will be imposed on the U.S. Holder with respect to the resulting tax attributable to each such year.
Under the excess distribution rules, the tax liability for amounts allocated to taxable years prior to the year of disposition or excess distribution cannot be offset by any net operating losses, and gains (but not losses) realized on the sale of the Class A Ordinary Shares or Warrants cannot be treated as capital gains, even though the U.S. Holder holds the Class A Ordinary Shares or Warrants as capital assets.
Certain of the PFIC rules may impact U.S. Holders with respect to equity interests in subsidiaries and other entities which REE may hold, directly or indirectly, that are PFICs (collectively, “Lower-Tier PFICs”). There can be no assurance, however, that REE does not own, or will not in the future acquire, an interest in a subsidiary or other entity that is or would be treated as a Lower-Tier PFIC. U.S. Holders should consult their tax advisors regarding the application of the PFIC rules to any of REE’s subsidiaries.
If REE is a PFIC, a U.S. Holder of shares in REE may avoid taxation under the excess distribution rules described above with respect to the Class A Ordinary Shares by making a timely and valid “qualified electing fund” (“QEF”) election (if eligible to do so). However, a U.S. Holder may make a QEF election with respect to its Class A Ordinary Shares only if REE provides U.S. Holders on an annual basis with certain financial information specified under applicable U.S. Treasury regulations, including the information provided in a PFIC Annual Information Statement. There can be no assurance, however, that REE will have timely knowledge of its status as a PFIC in the future or that REE will timely provide such information for such years. The failure to provide such information on an annual basis could prevent a U.S. Holder from making a QEF election or result in the invalidation or termination of a U.S. Holder’s prior QEF election.
A U.S. Holder that makes a QEF election with respect to its Class A Ordinary Shares would generally be required to include in income for each year that REE is treated as a PFIC the U.S. Holder’s pro rata share of REE’s ordinary earnings for the year (which would be subject to tax as ordinary income) and net capital gains for the year (which would be subject to tax at the rates applicable to long-term capital gains), without regard to the amount of any distributions made in respect of the Class A Ordinary Shares. Any net deficits or net capital losses of REE for a taxable year, however, would not be passed through and included on the tax return of the U.S. Holder. A U.S. Holder’s basis in the Class A Ordinary Shares would be increased by the amount of income inclusions under the QEF rules. Dividends actually paid on the Class A Ordinary Shares generally would not be subject to U.S. federal income tax to the extent of prior income inclusions and would reduce the U.S. Holder’s basis in the Class A Ordinary Shares by a corresponding amount. If REE owns any interests in a Lower-Tier PFIC, a U.S. Holder generally must make a separate QEF election for each Lower-Tier PFIC, subject to REE’s providing the relevant tax information for each Lower-Tier PFIC on an annual basis. There can be no assurance that REE will have timely knowledge of the status of any such Lower-Tier PFIC. In addition, REE may not hold
102
a controlling interest in any such Lower-Tier PFIC and thus there can be no assurance REE will be able to cause the Lower-Tier PFIC to provide such required information.
If a U.S. Holder does not make a QEF election effective from the first taxable year of a U.S. Holder’s holding period for the Class A Ordinary Shares in which REE is a PFIC (or a mark-to-market election, as discussed below), then the U.S. Holder generally will remain subject to the excess distribution rules. A U.S. Holder that first makes a QEF election in a later year may avoid the continued application of the excess distribution rules to its Class A Ordinary Shares by making a “deemed sale” election. In that case, the U.S. Holder will be deemed to have sold the Class A Ordinary Shares at their fair market value on the first day of the taxable year in which the QEF election becomes effective, and any gain from such deemed sale would be subject to the excess distribution rules described above. As a result of the “deemed sale” election, the U.S. Holder will have additional basis (to the extent of any gain recognized on the deemed sale) and, solely for purposes of the PFIC rules, a new holding period in the Class A Ordinary Shares.
It is not entirely clear how various aspects of the PFIC rules apply to the warrants. However, a U.S. Holder may not make a QEF election with respect to its Warrants. As a result, if a U.S. Holder sells or otherwise disposes of such warrants (other than upon exercise of such warrants) and REE was a PFIC at any time during the U.S. Holder’s holding period of such warrants, any gain recognized generally will be treated as an excess distribution, taxed as described above.
If a U.S. Holder that exercises such warrants properly makes and maintains a QEF election with respect to the newly acquired Class A Ordinary Shares (or has previously made a QEF election with respect to the Class A Ordinary Shares), the QEF election will apply to the newly acquired Class A Ordinary Shares. Notwithstanding such QEF election, the rules relating to “excess distributions” discussed above, adjusted to take into account the current income inclusions resulting from the QEF election, will continue to apply with respect to such newly acquired Class A Ordinary Shares (which under proposed regulations will be deemed to have a holding period for purposes of the PFIC rules that includes the period the U.S. Holder held the Warrants), unless the U.S. Holder makes a “deemed sale” election under the PFIC rules. U.S. Holders are urged to consult their tax advisors as to the application of the rules governing “deemed sale” elections to their particular circumstances.
The QEF election is made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder that is eligible to make a QEF election with respect to its Class A Ordinary Shares generally may do so by providing the appropriate information to the IRS in the U.S. Holder’s timely filed tax return for the year in which the election becomes effective. Retroactive QEF elections generally may be made only by filing a protective statement with such return and if certain other conditions are met or with the consent of the IRS. U.S. Holders should consult their tax advisors regarding the availability and tax consequences of a retroactive QEF election under their particular circumstances.
U.S. Holders should consult their tax advisors as to the availability and desirability of a QEF election.
Alternatively, if REE is a PFIC and Class A Ordinary Shares constitute “marketable stock” (as defined below), a U.S. Holder may make a mark-to-market election for such holder’s Class A Ordinary Shares with respect to such shares for the first taxable year in which it holds (or is deemed to hold) Class A Ordinary Shares and each subsequent taxable year to elect out of the excess distribution rules discussed above. If a U.S. Holder makes a mark-to-market election with respect to its Class A Ordinary Shares, such U.S. Holder generally will include in income for each year that REE is treated as a PFIC with respect to such Class A Ordinary Shares an amount equal to the excess, if any, of the fair market value of the Class A Ordinary Shares as of the close of the U.S. Holder’s taxable year over the adjusted basis in the Class A Ordinary Shares. A U.S. Holder will be allowed a deduction for the excess, if any, of the adjusted basis of the Class A Ordinary Shares over their fair market value as of the close of the taxable year. However, deductions will be allowed only to the extent of any net mark-to-market gains on the Class A Ordinary Shares included in the U.S. Holder’s income for prior taxable years. Amounts included in income under a mark-to-market election, as well as gain on the actual sale or other disposition of the Class A Ordinary Shares, will be treated as ordinary income. Ordinary loss treatment will also apply to the deductible portion of any mark-to-market loss on the Class A Ordinary Shares, as well as to any loss realized on the actual sale or disposition of the Class A Ordinary Shares, to the extent the amount of such loss does not exceed the net mark-to-market gains for such Class A Ordinary Shares previously included in income. A U.S. Holder’s basis in the Class A Ordinary Shares will be adjusted to reflect any mark-to-market gain or loss. If a U.S. Holder makes a mark-to-market election, any distributions REE makes would generally be subject to the rules discussed above under “— Distributions on Class A Ordinary Shares,” except the lower rates applicable to qualified dividend income would not apply. Currently, U.S. Holders of Warrants will not be able to make a mark-to-market election with respect to their Warrants.
The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. The Class A Ordinary Shares, which are expected to be listed on Nasdaq, are expected to qualify as marketable stock for purposes of the PFIC rules, but there can be no assurance that Class A Ordinary Shares will be “regularly traded” for purposes of these rules. If made, a mark-to-
103
market election would be effective for the taxable year for which the election was made and for all subsequent taxable years unless Class A Ordinary Shares cease to qualify as “marketable stock” for purposes of the PFIC rules or the IRS consents to the revocation of the election. Because a mark-to-market election cannot be made for equity interests in any Lower-Tier PFICs, a U.S. Holder that does not make the applicable QEF elections generally will continue to be subject to the excess distribution rules with respect to its indirect interest in any Lower-Tier PFICs as described above, even if a mark-to-market election is made for Class A Ordinary Shares.
If a U.S. Holder does not make a mark-to-market election (or a QEF election, as discussed above) effective from the first taxable year of a U.S. Holder’s holding period for the Class A Ordinary Shares in which REE is a PFIC, then the U.S. Holder generally will remain subject to the excess distribution rules. A U.S. Holder that first makes a mark-to-market election with respect to the Class A Ordinary Shares in a later year will continue to be subject to the excess distribution rules during the taxable year for which the mark-to-market election becomes effective, including with respect to any mark-to-market gain recognized at the end of that year. In subsequent years for which a valid mark-to-mark election remains in effect, the excess distribution rules generally will not apply. A U.S. Holder that is eligible to make a mark-to-market with respect to such holder’s Class A Ordinary Shares may do so by providing the appropriate information on IRS Form 8621 and timely filing that form with the U.S. Holder’s tax return for the year in which the election becomes effective.
U.S. Holders should consult their tax advisors as to the availability and desirability of a mark-to-market election, as well as the impact of such election on interests in any Lower-Tier PFICs.
A U.S. Holder of a PFIC may be required to file an IRS Form 8621 on an annual basis and to provide such other information as may be required by the U.S. Treasury Department. Failure to do so, if required, will extend the statute of limitations applicable to such U.S. Holder until such required information is furnished to the IRS. U.S. Holders should consult their tax advisors regarding any reporting requirements that may apply to them if REE is a PFIC.
The rules dealing with PFICs and with the QEF, “deemed sale,” and mark-to-market elections are very complex and are affected by various factors in addition to those described above. U.S. Holders are strongly encouraged to consult their tax advisors regarding the application of the PFIC rules to their particular circumstances.
Additional Reporting Requirements
Certain U.S. Holders holding specified foreign financial assets with an aggregate value in excess of the applicable dollar thresholds are required to report information to the IRS relating to Class A Ordinary Shares subject to certain exceptions (including an exception for Class A Ordinary Shares held in accounts maintained by U.S. financial institutions), by attaching a complete IRS Form 8938 (Statement of Specified Foreign Financial Assets) with their tax return for each year in which they hold Class A Ordinary Shares. Substantial penalties apply to any failure to file IRS Form 8938 and the period of limitations on assessment and collection of U.S. federal income taxes will be extended in the event of a failure to comply. U.S. Holders are urged to consult their tax advisors regarding the effect, if any, of these rules on the ownership and disposition of Class A Ordinary Shares.
Non-U.S. Holders
The section applies to Non-U.S. Holders of Class A Ordinary Shares and Warrants. For purposes of this discussion, a Non-U.S. Holder means a beneficial owner (other than a partnership or an entity or arrangement so characterized for U.S. federal income tax purposes) of Class A Ordinary Shares or Warrants that is for U.S. federal income tax purposes not a U.S. Holder, including:
•a nonresident alien individual, other than certain former citizens and residents of the U.S. subject to U.S. tax as expatriates;
•a foreign corporation; or
•a foreign estate or trust;
but generally does not include a beneficial owner who has been or is engaged in the conduct of a trade or business within the U.S. or an individual who is present in the U.S. for 183 days or more in the taxable year of the disposition of Class A Ordinary Shares or Warrants (except to the extent discussed below). If you are such an individual, you should consult your tax advisor regarding the U.S. federal income tax consequences of exercising redemption rights with respect to 10X Capital Common Stock or the ownership and disposition of Class A Ordinary Shares or Warrants.
104
U.S. Federal Income Tax Consequences of the Ownership and Disposition of Class A Ordinary Shares and Warrants to Non-U.S. Holders
Subject to the discussion below concerning backup withholding, any (i) dividends of cash or property (including constructive distributions treated as dividends as further described under the heading “U.S. Holders — U.S. Federal Income Tax Consequences of the Ownership and Disposition of Class A Ordinary Shares and Warrants to U.S. Holders — Possible Constructive Distributions”) paid or deemed paid to a Non-U.S. Holder in respect of Class A Ordinary Shares or (ii) gain realized upon the sale or other taxable disposition of Class A Ordinary Shares and/or Warrants by a Non-U.S. Holder generally will not be subject to U.S. federal income taxation or withholding tax unless:
•the gain or dividend is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment or a “fixed base” in the United States to which such gain is attributable); or
•in the case of any gain, the Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met.
Gain or distributions described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.
Gain described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty), which may be offset by U.S. source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.
The U.S. federal income tax treatment of a Non-U.S. Holder’s exercise of a Warrant, or the lapse of a Warrant held by a Non-U.S. Holder, generally will correspond to the U.S. federal income tax treatment of the exercise or lapse of a Warrant by a U.S. Holder, as described under “— U.S. Holders — U.S. Federal Income Tax Consequences of the Ownership and Disposition of Class A Ordinary Shares and Warrants to U.S. Holders — Exercise, Lapse or Redemption of a Warrant” above, although to the extent a cashless exercise or lapse results in a taxable exchange, the consequences would be similar to those described in the preceding paragraphs above for a Non-U.S. Holder’s gain on the sale or other disposition of the Class A Ordinary Shares and Warrants.
The characterization for U.S. federal income tax purposes of the redemption of the Non-U.S. Holder’s Warrants generally will correspond to the U.S. federal income tax treatment of such a redemption of a U.S. Holder’s warrants, as described under “— U.S. Holders — U.S. Federal Income Tax Consequences of the Ownership and Disposition of Class A Ordinary Shares and Warrants to U.S. Holders — Exercise, Lapse or Redemption of a Warrant” above, and the consequences of the redemption to the Non-U.S. Holder will be as described in the first paragraph above under the heading “— U.S. Federal Income Tax Consequences of the Ownership and Disposition of Class A Ordinary Shares and Warrants to Non-U.S. Holders” based on such characterization.
Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.
Information Reporting and Backup Withholding
Information reporting requirements may apply to dividends received by U.S. Holders of Class A Ordinary Shares, and the proceeds received on the disposition of Class A Ordinary Shares effected within the U.S. (and, in certain cases, outside the U.S.), in each case other than U.S. Holders that are exempt recipients (such as corporations). Backup withholding (currently at a rate of 24%) may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer identification number (generally on an IRS Form W-9 provided to the paying agent of the U.S. Holder’s broker) or is otherwise subject to backup withholding. Any redemptions treated as dividend payments with respect to Class A Ordinary Shares and proceeds from the sale, exchange, redemption or other disposition of Class A Ordinary Shares may be subject to information reporting to the IRS and possible U.S. backup withholding. U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.
Information returns may be required to be filed with the IRS in connection with, and Non-U.S. Holders may be subject to backup withholding on amounts received in respect of, a Non-U.S. Holder’s disposition of their Class A Ordinary Shares, unless the Non-U.S. Holder furnishes to the applicable withholding agent the required certification as to its non-U.S. status, such as by providing a valid IRS Form W-8BEN, IRS Form W-8BEN-E or IRS Form W-8ECI, as applicable, or the Non-
105
U.S. Holder otherwise establishes an exemption. Dividends paid with respect to Class A Ordinary Shares and proceeds from the sale of other disposition of Class A Ordinary Shares received in the U.S. by a Non-U.S. Holder through certain U.S.-related financial intermediaries may be subject to information reporting and backup withholding unless such Non-U.S. Holder provides proof of an applicable exemption or complies with certain certification procedures described above, and otherwise complies with the applicable requirements of the backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against the taxpayer’s U.S. federal income tax liability, and a taxpayer may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for a refund with the IRS and furnishing any required information.
THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO YOU DEPENDING UPON YOUR PARTICULAR SITUATION. YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO YOU OF THE OWNERSHIP AND DISPOSITION OF CLASS A ORDINARY SHARES AND WARRANTS, AS APPLICABLE, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND TAX TREATIES AND THE POSSIBLE EFFECTS OF CHANGES IN U.S. OR OTHER TAX LAWS.
F. Dividends and paying agents
Not applicable.
G. Statement by experts
Not applicable.
H. Documents on display
We are subject to the informational requirements of the Exchange Act. Accordingly, we are required to file reports and other information with the SEC, including annual reports on Form 20-F and reports on Form 6-K. The SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements and other information we have filed electronically with the SEC. As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
We also make available on our website, free of charge, our Annual Report and the text of our reports on Form 6-K, including any amendments to these reports, as well as certain other SEC filings, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our website address is www.ree.auto. The reference to our website is an inactive textual reference only, and information contained therein or connected thereto is not incorporated into this Annual Report.
I. Subsidiary Information
Not applicable.
J. Annual Report for Security Holders
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
REE is exposed to a variety of market and other risks, including foreign currency exchange fluctuations, changes in interest rates and inflation. We regularly assess currency, interest rate, and inflation risks to minimize any adverse effects on our business as a result of those factors.
Interest Rate Risk
106
REE holds cash and cash equivalents for working capital purposes. As of December 31, 2023, REE had cash and cash equivalents of $41.2 million, consisting of cash in banks and bank deposits.
Our exposure to interest rate risk primarily relates to excess cash invested in short-term investments with original maturities of less than one year. Our short-term investments as of December 31, 2023 were $44.4 million made up of investments in fixed rates which carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates. We have not been, and do not expect to be, exposed to material interest rate risks, and therefore have not used any derivative financial instruments to manage our interest risk exposure.
Inflation Risk
Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material effect on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our research and development and selling, general and administrative expenses.
Foreign Currency Risk
Our results of operations and cash flows are affected by fluctuations due to changes in foreign currency exchange rates. In 2023, the majority of our cost of revenues and operating expenses were denominated in U.S. dollars, British pounds sterling (GBP) and Israeli Shekels (NIS) and the remainder in other currencies, primarily euros and Japanese Yens (JPY). Our foreign currency-denominated expenses consist primarily of personnel, research and development, rent and other overhead costs. The foreign currency exposure gives rise to foreign currency risk associated with the exchange rate movements of the U.S. dollar against non-U.S. dollar currencies, primarily the GBP and NIS.
A 10% strengthening or weakening in the value of the GBP, NIS, euro, and JPY against the U.S. dollar would have increased or decreased our operating loss in 2023 by approximately 5.8%, respectively. If non-U.S. dollar currencies in which our operating expenses are denominated strengthen significantly against the U.S. dollar, it may have a material negative impact on our results of operations.
These estimates of the impact of fluctuations in currency exchange rates on our historic results of operations may be different from the impact of fluctuations in exchange rates on our future results of operations since the mix of currencies comprising our cost of revenue and operating expenses may change.
As of December 31, 2023, approximately 96% of our cash and cash equivalents were denominated in U.S. dollars. As a result, we are exposed to foreign currency risk. We may, in the future, decide to enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the currencies mentioned above in relation to U.S. dollars. These measure, however, may not adequately protect us and our operations could be adversely affected if we are unable to effectively hedge against currency fluctuations in the future.
Liquidity risk
We monitor forecasts of our liquidity (comprising cash and cash equivalents and short-term investments). We generally carry this out based on our expected cash flows in accordance with practice and limits set by our management. We are in the process of incurring expenses associated with the production of REE’s EV platforms. The Company has a history of losses, and expects to incur significant expenses and continuing losses for the foreseeable future. The Company expects that it will need to obtain additional financing in order to expand its future operations.
Item 12. Description of Securities Other than Equity Securities.
Not applicable.
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
Material Modifications to the Rights of Security Holders and Use of Proceeds
107
On October 16, 2023, REE shareholders voted to approve certain amendments to the Company’s Amended and Restated Articles of Association, effective immediately upon such approval. REE’s Amended and Restated Articles of Association contain certain modifications that effect the rights of REE’s security holders. The description of such amendments are set forth in REE’s proxy statement filed as Exhibit 99.1 to REE’s Form 6-K, filed with the SEC on September 21, 2023, and is incorporated by reference herein. REE’s Amended and Restated Articles of Association, as amended, is filed as Exhibit 1.1 to this Annual Report on Form 20-F and is incorporated by reference herein.
Use of proceeds
Not applicable.
108
Item 15. Controls and Procedures.
Disclosure controls and procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2023. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2023, our disclosure controls and procedures were effective such that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the company, provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment, our management concluded that as of December 31, 2023, our internal control over financial reporting was effective.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 20-F does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to an exemption for emerging growth companies provided in the JOBS Act.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) that occurred during the period covered by this Annual Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16. Insider Trading Policies
Not applicable.
Item 16A. Audit committee financial expert
Our board of directors has determined that Michal Marom-Brikman qualifies as an audit committee financial expert, as defined by the rules of the SEC and has the requisite financial experience defined by the Nasdaq listing rules. In addition, Ms. Marom-Brikman is independent as such term is defined in Rule 10A-3(b)(1) under the Exchange Act and under the listing standards of Nasdaq.
109
Item 16B. Code of Ethics
REE has adopted a Code of Business Conduct and Ethics, or Code of Conduct, which is applicable to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. We have made our Code of Conduct publicly available on our website at www.ree.auto. Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report and is not incorporated by reference herein. If we make any amendment to the Code of Conduct or grant any waivers, including any implicit waiver, from a provision of the Code of Conduct, we will disclose the nature of such amendment or waiver on our website to the extent required by the rules and regulations of the SEC, including the instructions to Item 16B of Form 20-F. REE has disclosed Related-Party Transactions in Item 7. of this Annual Report. We believe that the approval process used to authorize these transactions aligns with Israeli law and our Code of Conduct.
Item 16C. Principal Accountant Fees and Services
Kost Forer Gabbay & Kasierer, a member or Ernst & Young Global, an independent registered public accounting firm, have served as our independent public accountants for each of the fiscal years in the three-year period ended December 31, 2023, for which audited financial statements appear in this Annual Report on Form 20-F.
The following table presents the aggregate fees billed for each of the two last fiscal years for professional services rendered by Kost Forer Gabbay & Kasierer to the Company:
| December 31, 2023 | December 31, 2022 | ||||||||||
| USD in thousands | |||||||||||
| Audit Fees | $ | 451 | $ | 500 | |||||||
Audit-related fees | 102 | 108 | |||||||||
| Tax Fees | 47 | 163 | |||||||||
All other fees | — | — | |||||||||
| Total | $ | 600 | $ | 771 | |||||||
“Audit fees” are the aggregate fees billed for the audit of our annual financial statements. This category also includes services that generally the independent registered public accounting firm provides, such as consents and assistance with and review of documents filed with the SEC.
“Audit-related fees” are the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit and are not reported under audit fees. These fees primarily include accounting consultations regarding the accounting treatment of matters that occur in the regular course of business, implications of new accounting pronouncements and other accounting issues that occur from time to time.
“Tax fees” are the aggregate fees billed for tax compliance services, including the preparation of tax returns and claims for tax refund; tax consultations, such as assistance and representation in connection with tax audits and appeals, and requests for rulings or technical advice from the taxing authorities.
Audit committee’s pre-approval policies and procedures
Our audit committee has adopted a pre-approval policy for the engagement of our independent public accounting firm to perform certain audit and non-audit services. Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, the audit committee pre-approves annually a catalog of specific audit and non-audit services in the categories of audit service, audit-related service and tax services that may be performed by our independent public accounting firm. All of the audit and non-audit services performed for us by our independent registered public accounting firm in 2023 and 2022 were preapproved in accordance with our policy.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
110
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
As a foreign private issuer, we are permitted to comply with Israeli corporate governance practices instead of the Nasdaq requirements, provided that we disclose those Nasdaq requirements with which we do not comply and the equivalent Israeli requirement that we follow instead. We currently rely on this “foreign private issuer exemption” with respect to the following requirements:
•Distribution of certain reports to shareholders. As opposed to the Nasdaq Listing Rules, which require listed issuers to make certain reports, such as annual reports, interim reports and quarterly reports, available to shareholders in one of a number of specific manners, Israeli law does not require us to distribute periodic reports directly to shareholders, and the generally accepted business practice in Israel is not to distribute such reports to shareholders, but to make such reports available through a public website. In addition to making such reports available on a public website, we plan to make our audited financial statements available to our shareholders at our offices and will only mail such reports to shareholders upon request. As a foreign private issuer, we are generally exempt from the SEC’s proxy solicitation rules. See “Item 10. Additional Information—Documents on Display” for a description of our Exchange Act reporting obligations.
•Quorum requirement for shareholder meetings. Under Nasdaq corporate governance rules, a quorum would require the presence, in person or by proxy, of holders of at least 33⅓% of the total issued outstanding voting power of our shares at each general meeting of shareholders. Pursuant to our Amended and Restated Articles and as permitted under the Companies Law, the quorum required for a general meeting of shareholders will consist of at least two shareholders present in person or by proxy who hold or represent at least 33⅓% of the total outstanding voting power of our shares, except if (i) any such general meeting of shareholders was initiated by and convened pursuant to a resolution adopted by the board of directors and (ii) at the time of such general meeting, we qualify as a “foreign private issuer,” in which case the requisite quorum will consist of two or more shareholders present in person or by proxy who hold or represent at least 25% of the total outstanding voting power of our shares (and if the meeting is adjourned for a lack of quorum, the quorum for such adjourned meeting will be, subject to certain exceptions, any number of shareholders). Notwithstanding the foregoing, a quorum for a general meeting (and for any adjourned general meeting) shall also require the presence in person or by proxy of at least one shareholder holding Class B Ordinary Shares if such shares are outstanding.
•Nomination of our directors. Under Nasdaq listing rules for domestic issuers that are not controlled, director nominees must either be selected or recommended for the board’s selection by either by a nominating committee comprised solely of independent directors, or by independent directors constituting a majority of the board’s independent directors in a vote in which only independent directors participate. However, we intend to rely on the foreign private issuer exemption with respect to this requirement, such that nominations of directors will be made by our board of directors, in accordance with the provisions of the Companies Law and our Amended and Restated Articles.
•Compensation of officers. We follow the provisions of the Companies Law with respect to matters in connection with the composition and responsibilities of our compensation committee, Office Holder compensation and any required approval by the shareholders of such compensation. Israeli law and our Articles do not require that the independent members of our Board, or a compensation committee composed solely of independent members of our Board, determine an executive officer’s compensation, as is generally required under the Nasdaq Listing Rules with respect to the Chief Executive Officer and all other executive officers of a company. Instead, remuneration of Office Holders is determined and approved by our compensation committee, and in general, by our Board as well, and in certain circumstances, by our shareholders, as detailed above. The requirements for shareholder approval of any Office Holder compensation, and the relevant majority or Special Majority for such approval, are all as set forth in the Companies Law. Thus, we seek shareholder approval for all corporate actions with respect to Office Holder compensation requiring such approval under the requirements of the Companies Law, including for our Compensation Policy and for certain Office Holder Compensation, rather than seeking approval for such corporate actions in accordance with Nasdaq Listing Rules. All members of our compensation committee are independent directors under applicable Nasdaq Capital Market and SEC rules, as affirmatively determined by our Board. See “Item 6. Directors, Senior Management and Employees—B. Compensation.”
•Independent directors. Although Israeli law does not require that a majority of the directors serving on our Board be “independent,” as defined under Nasdaq Capital Market Listing Rule 5605(a)(2), but rather requires we have at least two external directors who meet the requirements of the Companies Law, as described above under “Item 6.
111
Directors, Senior Management and Employees—C. Board Practices—External Directors.”, following our “opt-out” of the requirement to appoint external directors, a majority of our Board is independent based on the Nasdaq Capital Market rules. We are required, however, to ensure that all members of our audit committee are “independent” under the applicable Nasdaq Capital Market and SEC criteria for independence (as we cannot exempt ourselves from compliance with that SEC independence requirement, despite our status as a foreign private issuer). Our independent directors’ conduct regularly scheduled meetings at which only such independent directors are present, as required by the Nasdaq Listing Rules. . Nasdaq corporate governance rules require that a majority of our board of directors be independent. An “independent director” is defined generally as a person who has no material relationship with the listed company (either directly or as a partner, stockholder, or officer of an organization that has a relationship with the listed company). Our board of directors has determined that Alla Felder, Michal Drayman, Ittamar Givton, and Michal Marom-Brikman are independent directors as defined in Nasdaq corporate governance rules. As a result of the resignation of Arik Steinberg, we do not currently have a majority of independent members of our board of directors. Pursuant to Nasdaq Rule 5605, we intend to cure the requirement to have a majority of our board of directors be independent upon the earlier of our next annual shareholders meeting, or one year from the resignation of Mr. Steinberg.
•Shareholder approval. We will seek shareholder approval for all corporate actions requiring such approval under requirements of the Companies Law, rather than seeking approval for corporate actions in accordance with Nasdaq Capital Market Listing Rule 5635. In particular, under this Nasdaq Capital Market rule, shareholder approval is generally required for: (i) an acquisition of shares or assets of another company that involves the issuance of 20% or more of the acquirer’s shares or voting rights or if a director, officer or 5% shareholder has greater than a 5% interest in the target company or the consideration to be received; (ii) the issuance of shares leading to a change of control; (iii) adoption or amendment of equity compensation arrangements; and (iv) issuances of 20% or more of the shares or voting rights (including securities convertible into, or exercisable for, equity) of a listed company via a private placement (or via sales by directors, officers or 5% shareholders) if such equity is issued (or sold) at below the greater of the book or market value of shares. By contrast, under the Companies Law, shareholder approval is required for, among other things: (i) transactions with directors concerning the terms of their service or indemnification, exemption and insurance for their service (or for any other position that they may hold at a company), for which approvals of the remuneration committee, board of directors and shareholders are all required, (ii) Extraordinary Transactions with controlling shareholders of publicly held companies, which require the special approval described under “Item 6. Directors, Senior Management and Employees—C. Board Practices—Approval of Related Party Transactions under Israeli Law—Transactions with Controlling Shareholders,” and (iii) terms of office and employment or other engagement of the controlling shareholder of the Company or such controlling shareholder’s relative, which require the special approval described under “Item 6. Directors, Senior Management and Employees—B. Compensation” and “Item 6. Directors, Senior Management and Employees—C. Board Practices—Approval of Related Party Transactions under Israeli Law.” In addition, under the Companies Law, a merger requires approval of the shareholders of each of the merging companies. See also “Compensation of officers” above.
Item 16H. Mine Safety Disclosure
Not applicable.
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Item 16J. Insider Trading Policy
Not applicable.
Item 16K. Cybersecurity
REE recognizes the critical importance of maintaining the trust and confidence of our customers, clients, business partners and employees. REE’s cybersecurity policies, standards, processes and practices are fully integrated into our risk management program and are based on recognized frameworks established by the Israel National Cyber Directorate, ISO 27001, ISO 21434 and other applicable industry standards. Moreover, REE is ISO 27001 certified. In general, we seek to address cybersecurity risks through a comprehensive, cross-functional approach that is focused on preserving the confidentiality, security and availability of the information that we collect and store by identifying, preventing and mitigating cybersecurity threats and effectively responding to cybersecurity incidents when they occur.
112
Risk Management and Strategy
As part of the critical elements of our overall risk management approach, our cybersecurity program is focused on the following key areas:
•Management: REE’s Chief Information Security Officer, or CISO, is responsible for developing, maintaining and overseeing the REE security program, providing oversight and direction and advise the organization regarding information security, assist and coordinate security incidents, assess REE’s security risks and communicate them to REE’s leadership team as a basis for risk-based decision-making, among other responsibilities.
•Least Privilege: REE believes in providing the least access possible to individuals, while allowing them to perform their responsibilities.
•Collaborative Approach: The Company has implemented a comprehensive, cross-functional approach to identifying, preventing and mitigating cybersecurity threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions regarding the public disclosure and reporting of such incidents can be made by management in a timely manner.
•Technical Safeguards: The Company deploys technical safeguards that are designed to protect the Company’s information systems from cybersecurity threats, including firewalls, intrusion prevention and detection systems, anti-malware functionality, the REE Gateway, as mentioned below, and access controls, which are evaluated and improved through vulnerability assessments and cybersecurity threat intelligence.
•Incident Response and Recovery Planning: The Company has established and maintains comprehensive incident response and recovery plans that fully address the Company’s response to a cybersecurity incident, and such plans are tested and evaluated on a regular basis. In addition, REE utilized its Security Operations Center in order to monitor and respond to incidents.
•Third-Party Risk Management: The Company maintains a comprehensive, risk-based approach to identifying and overseeing cybersecurity risks presented by third parties, including vendors, service providers and other external users of the Company’s systems, as well as the systems of third parties that could adversely impact our business in the event of a cybersecurity incident affecting those third-party systems.
•Manufacturing Security: As a manufacturer, REE addresses cybersecurity for its production lines through operational technology security strategies and product security.
•Education and Awareness: The Company provides regular, mandatory training for personnel regarding cybersecurity threats as a means to equip the Company’s personnel with effective tools to address cybersecurity threats, and to communicate the Company’s evolving information security policies, standards, processes and practices.
REE reviews its Information Security Policy annually and revises the same as applicable.
Governance
The CISO, along with the employees listed below, work collaboratively across the Company to implement a program designed to protect the Company’s information systems from cybersecurity threats and to promptly respond to any cybersecurity incidents in accordance with the Company’s incident response and recovery plans. To facilitate the success of the Company’s Information Security Policy, multidisciplinary teams throughout the Company are deployed to address cybersecurity threats and to respond to cybersecurity incidents. Through ongoing communications with these teams, the CISO monitors the prevention, detection, mitigation and remediation of cybersecurity threats and incidents in real time, and report such threats and incidents to the Risk Management Committee when appropriate. REE’s Information Security Policy delegates responsibility to the following employees:
•CISO: Responsible for developing, maintaining and overseeing the REE security program; providing oversight and direction and advising the Company regarding information and physical security; assisting and coordinating security incidents; assessing REE’s security risks and communicating them with REE’s leadership team as a basis for risk-based decisions; ensuring that security policies and procedures are on everyone’s agenda; and initiating the disciplinary process for major policy violations.
113
•Global IT Manager: Responsible for developing, maintaining and overseeing the REE network; providing and revoking access; recertification of user access to all systems on a regular basis; managing employees workstations/laptops including configurations, installations and upgrades, and ongoing maintenance; managing company information assets according to best practices and regulatory requirements; overseeing implementation of new systems to the organization (Saas, Hardware, etc.); and granting and/or revoking access to systems according to employee onboarding and offboarding processes.
•General Counsel: Acts as REE’s Data Protection Officer; provides advise regarding data protection regulation requirements and employee contracts; manages REE Data Protection Agreements for customers and vendors; and handles non-disclosure agreements, employee contracts and asset contracts.
•Government, Risk and Compliance Manager, or GRC: Responsible for managing REE’s Information Management Program; designing and implementing data protection methodologies and guidelines; verifying alignment with global data protection laws such as the GDPR; and testing the effectiveness of technical and administrative security controls.
•DevOps Engineer: Responsible for building new development tools and infrastructure with regards to cybersecurity.
REE’s CISO has extensive experience in cybersecurity, including serving as the head of the Cybersecurity Guidance department of the Israel National Cyber Directorate from 2019 to 2021.
Cybersecurity threats, including as a result of any previous cybersecurity incidents, have not materially affected or are reasonably likely to affect the Company, including its business strategy, results of operations or financial condition.
Part III
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
The audited consolidated financial statements as required under Item 18 are attached hereto starting on page F-1 of this Annual Report. The audit report of Kost Forer Gabbay and Kasierer, an independent registered public accounting firm, is included herein preceding the audited consolidated financial statements.
114
Item 19. Exhibits.
| Exhibit Number | Description | |||||||
1.1 | ||||||||
2.1 | ||||||||
2.2 | ||||||||
2.3 | ||||||||
2.4 | ||||||||
2.5* | ||||||||
4.1 | ||||||||
4.2 | ||||||||
4.3† | ||||||||
4.4† | ||||||||
4.5† | ||||||||
4.6† | Compensation Policy for Directors and Officers, incorporated by reference to Exhibit 4.6 to the Company’s Annual Report on Form 20-F field with the SEC on March 28, 2023. | |||||||
4.7 | ||||||||
4.8 | ||||||||
4.9 | ||||||||
4.10 | ||||||||
4.11 | ||||||||
4.12 | ||||||||
4.13 | ||||||||
4.14 | ||||||||
4.15 | ||||||||
115
| Exhibit Number | Description | |||||||
8.1* | ||||||||
12.1* | ||||||||
12.2* | ||||||||
13.1** | ||||||||
13.2** | ||||||||
15.1* | ||||||||
97.1* | ||||||||
| 101.INS | Inline XBRL Instance Document | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||
____________
* Filed herewith
** Furnished herewith.
† Indicates a management contract or compensatory plan.
116
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
REE Automotive Ltd. | |||||||||||
| Date: | March 27, 2024 | /s/ DANIEL BAREL | |||||||||
| Daniel Barel | |||||||||||
Co-Founder, Chief Executive Officer and Director | |||||||||||
117
REE AUTOMOTIVE LTD.
CONSOLIDATED FINANCIAL STATEMENTS
REE AUTOMOTIVE LTD
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2023
INDEX
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID: | |||||
| Consolidated Balance Sheet of REE Automotive Ltd. | |||||
Consolidated statement of comprehensive loss of REE Automotive Ltd. | |||||
Consolidated statement of Changes in Shareholders’ equity of REE Automotive Ltd. | |||||
Consolidated statement of cash flows | |||||
| Notes to the Consolidated Financial Statements of REE Automotive Ltd. | |||||
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
REE Automotive Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of REE Automotive Ltd. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of comprehensive loss, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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.
We have served as the Company’s auditor since 2015.
/S/ KOST FORER GABBAY & KASIERER
A Member of EY Global
March 27, 2024
F-2
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollar in thousands (except share and per share data)
The accompanying notes are an integral part of the consolidated financial statements.
| December 31, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Short-term investments | |||||||||||
| Accounts receivable | |||||||||||
| Inventory | |||||||||||
| Other accounts receivable and prepaid expenses | |||||||||||
| Total current assets | |||||||||||
| NON-CURRENT ASSETS: | |||||||||||
| Non-current restricted cash | |||||||||||
| Other accounts receivable | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Property and equipment, net | |||||||||||
| Total non-current assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Short term loan | $ | $ | |||||||||
| Trade payables | |||||||||||
| Other accounts payable and accrued expenses | |||||||||||
| Operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| NON-CURRENT LIABILITIES: | |||||||||||
| Deferred revenues | |||||||||||
| Warrants liability | |||||||||||
| Convertible promissory notes | |||||||||||
| Operating lease liability | |||||||||||
| Total non-current liabilities | |||||||||||
| TOTAL LIABILITIES | |||||||||||
| Commitments and Contingencies (Note 11) | |||||||||||
| SHAREHOLDERS’ EQUITY: | |||||||||||
| Ordinary shares | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total shareholders’ equity | |||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | |||||||||
F-3
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
U.S. dollar in thousands (except share and per share data)
| Twelve Months Ended | |||||||||||||||||
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||||||||
| Revenues | $ | $ | $ | ||||||||||||||
| Cost of revenues | |||||||||||||||||
| Gross loss | $ | ( | $ | ( | $ | ( | |||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development expenses, net | |||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||
| Total operating expenses | |||||||||||||||||
| Operating loss | $ | ( | $ | ( | $ | ( | |||||||||||
| Income from warrants remeasurement | |||||||||||||||||
| Financial income, net | |||||||||||||||||
| Net loss before income tax | ( | ( | ( | ||||||||||||||
| Income tax expense (income) | ( | ||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | |||||||||||
| Net comprehensive loss | $ | ( | $ | ( | $ | ( | |||||||||||
| Basic and diluted net loss per Class A ordinary share (1) | $ | ( | $ | ( | $ | ( | |||||||||||
| Weighted average number of ordinary shares used in computing basic and diluted net loss per share (1) | |||||||||||||||||
(1) Prior period results have been retroactively adjusted to reflect the 1:30 stock reverse split effected on October 18, 2023. See also Note 1 General, for details.
The accompanying notes are an integral part of the consolidated financial statements.
F-4
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
U.S. dollar in thousands (except share and per share data)
Ordinary shares - Class A (1) | Ordinary shares - Class B (1) | Preferred shares (1) | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance – January 1, 2021 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of options | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of preferred shares in connection with the SPAC merger | — | — | — | ( | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| SPAC merger and PIPE financing | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance – December 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of options, warrants and vesting of RSUs | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares for warrant exchange | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance – December 31, 2022 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of ordinary shares, net | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of options and vesting of RSUs | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance – December 31, 2023 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||
(1) Prior period results have been retroactively adjusted to reflect the 1:30 stock reverse split effected on October 18, 2023. See also Note 1 General, for details.
The accompanying notes are an integral part of the consolidated financial statements.
F-5
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
U.S. dollar in thousands (except share and per share data)
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | |||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||||||||
| Depreciation | |||||||||||||||||
| Amortization of operating lease right of use asset | |||||||||||||||||
| Accretion income on short-term investments | ( | ( | |||||||||||||||
| Share-based compensation | |||||||||||||||||
| Change in fair value of warrants liability | ( | ( | ( | ||||||||||||||
| Change in fair value of derivative liability | ( | ||||||||||||||||
| Amortization of convertible promissory note | |||||||||||||||||
| Interest expenses | |||||||||||||||||
| Transaction costs related to warrants | |||||||||||||||||
| Increase in accrued interest on short-term investments | ( | ( | |||||||||||||||
| Decrease (increase) in inventory | ( | ||||||||||||||||
| Decrease (increase) in accounts receivable | ( | ||||||||||||||||
| Decrease (increase) in other accounts receivable and prepaid expenses | ( | ( | |||||||||||||||
| Decrease in operating lease right-of-use assets and liability, net | ( | ( | |||||||||||||||
| Increase (decrease) in trade payables | ( | ( | |||||||||||||||
| Increase (decrease) in other accounts payable and accrued expenses | ( | ||||||||||||||||
| Increase (decrease) in deferred revenue | ( | ||||||||||||||||
| Other | |||||||||||||||||
| Net cash used in operating activities | ( | ( | ( | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Purchase of property and equipment | ( | ( | ( | ||||||||||||||
| Purchases of short-term investments | ( | ( | |||||||||||||||
| Proceeds from short-term investments | |||||||||||||||||
| Proceeds from bank deposits | |||||||||||||||||
| Net cash provided by (used in) investing activities | ( | ( | |||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Proceeds from issuance of ordinary shares, net | |||||||||||||||||
| Proceeds from exercise of options and warrants | |||||||||||||||||
| Proceeds from short term loan | |||||||||||||||||
| Proceeds from issuance of warrants | |||||||||||||||||
| Proceeds from bifurcated embedded derivatives | |||||||||||||||||
| Proceeds from convertible note | |||||||||||||||||
| Proceeds from exercise of warrants to preferred shares | |||||||||||||||||
| Proceeds from SPAC merger and PIPE financing, net of transaction costs | |||||||||||||||||
| Net cash provided by financing activities | |||||||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | ( | ( | |||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | |||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | $ | ||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-6
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
U.S. dollar in thousands (except share and per share data)
| Twelve Months Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Non-cash activity: | |||||||||||||||||
| Purchase of property and equipment included in accounts payable or accrued | $ | $ | |||||||||||||||
| Reclassification of warrant liability to equity | $ | $ | $ | ||||||||||||||
| Lease liabilities arising from obtaining right-of-use-assets | $ | ( | $ | $ | |||||||||||||
| Twelve Months Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Supplemental cash flow: | |||||||||||||||||
| Cash received from interest | $ | $ | $ | ||||||||||||||
| Cash paid for income taxes | $ | $ | $ | ||||||||||||||
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||||||||
| Reconciliation of cash, cash equivalents and restricted cash: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | ||||||||||||||
| Restricted cash | |||||||||||||||||
| Non-current restricted cash | |||||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | $ | ||||||||||||||
F-7
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 1. GENERAL
REE Automotive Ltd. was incorporated in Israel on January 16, 2011.
REE Automotive Ltd. is an automotive technology company focused on building commercial electric vehicles controlled fully by-wire. REE Automotive Ltd. has established wholly-owned subsidiaries in the United States, Germany, Japan and the United Kingdom (the “Subsidiaries”). REE Automotive Ltd. and its subsidiaries (the “Company”, “REE”, or “we”) is in the early stages of commercialization and is currently developing its core REEcornerTM technology which packs critical vehicle components into a single compact module positioned between the chassis and the wheel as well as building commercial Electric Vehicles (“EV”) leveraging REEcornerTM technology. The Company has commenced initial production components at its Launch Factory in Coventry, United Kingdom.
On February 3, 2021, the Company entered into a merger agreement (the “Merger Agreement”) with 10X Capital Venture Acquisition Corp (“10X Capital”), a Delaware corporation and special purpose acquisition company (“SPAC”), and Spark Merger Sub, Inc., a wholly-owned subsidiary of the Company, pursuant to which Merger Sub merged with and into 10X Capital (the “Merger”). The Merger was consummated on July 22, 2021 (the “Closing Date”) with 10X Capital becoming a wholly-owned subsidiary of the Company, and the securityholders of 10X Capital becoming securityholders of the Company.
The Company became a Nasdaq listed publicly traded company on July 23, 2021, with its Class A ordinary shares, without par value (the “Class A Ordinary Shares”) trading under the ticker symbol “REE” (for further information see Note 10). The Company also has Class B ordinary shares, without par value, having 10 votes per share (the “Class B Ordinary Shares” and together with the Class A Ordinary Shares, the “Ordinary Shares”) that include voting rights only and are not listed on the Nasdaq.
On October 18, 2023, the Company effected a reverse share split of the Company’s Class A ordinary shares and Class B ordinary shares at the ratio of 1-for-30. As a result, all Ordinary Class A shares, Ordinary Class B shares, options for Ordinary Class A Shares, exercise price and net loss per share amounts were adjusted retroactively for all periods presented in these consolidated financial statements as if the stock reverse split had been in effect as of the date of these consolidated financial statements. Following the reverse share split an additional amount of 15,890 shares were issued to reflect rounding differences resulting from fractional Class A ordinary shares. For further details, see Note 12 - Shareholder’s equity.
During February 2023, the Company undertook a reduction in the Company’s employee base of approximately 11 % of the Company’s workforce. The Company has incurred approximately $400 in severance-related charges.
As of December 31, 2023, the Company’s principal source of liquidity includes its unrestricted cash balance in the amount of $41,232 and its short term investments in the amount of $44,395 . The Company has incurred losses since inception and had negative cash flows used in operating activities of $89,273 for the year ended December 31, 2023. The Company expects to continue to incur net losses and negative cash flows from operating activities.
The Company’s ability to successfully carry out its business plan is primarily dependent upon its ability to raise sufficient additional capital. There are no assurances, however, that the Company will be successful in obtaining an adequate level of financing needed to support its operations.
Since the Company was unable to maintain sufficient financial resources to support its business operation, the Company's board of directors approved a saving plan, to improve its available cash balances and liquidity. The Company saving plan includes reducing costs to conserve cash and improve its liquidity position, deferral and reprioritization of certain research and development programs including tooling and additional contingent plan to reduce additional costs.
The above mentioned alleviates the substantial doubt about the Company's ability to continue as a going concern for at least twelve months from the date that the consolidated financial statements were issued.
F-8
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).
Use of estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions.
These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and expenses during the reporting period and accompanying notes. Actual results could differ from those estimates. The Company’s management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made.
Financial statements in U.S. dollars
The currency of the primary economic environment in which REE Automotive Ltd. and its subsidiaries operate is the U.S. dollar. Thus, the functional and reporting currency of the Company is the U.S. dollar.
Accordingly, foreign currency assets and liabilities are remeasured into U.S. dollars at the end-of-period exchange rates except for non-monetary assets and liabilities, which are measured at historical exchange rates. Revenue and expenses are remeasured each day at the exchange rate in effect on the day the transaction occurred.
Principles of consolidation
The consolidated financial statements include the accounts of REE Automotive Ltd. and its subsidiaries. Intercompany transactions and balances have been eliminated upon consolidation.
Cash and cash equivalents
Cash and cash equivalents consist of cash balances and bank deposits, including money market funds, that have a maturity, at the date of purchase, of three months or less.
F-9
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Investments
The Company accounts for investments in debt securities in accordance with ASC 320, "Investments - Debt Securities". Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date.
Held-to-maturity securities are those securities that the Company has the positive intent and ability to hold until maturity and are recorded at amortized cost and adjusted for amortization of premiums and accretion of discounts. The Company’s investment securities are classified as held-to-maturity.
Generally, premiums are amortized to call date and discounts are accreted to maturity, on a level yield basis.
Starting January 1, 2023 the Company adopted ASU 2016-13, Topic 326 "Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments" which modified the other than temporary impairment model for debt securities. Debt securities classified as held-to-maturity are reviewed each reporting period to determine whether an allowance for credit losses should be recorded. Management’s assessment as to whether an allowance should be recorded is based on, among other things, the length of time to maturity; the financial condition and near-term prospects of the issuer; The Company does not record an allowance for securities with zero expectation of nonpayment upon default. During the year ended December 31, 2023, no credit loss impairments have been identified.
Inventory
The Company’s inventory, which includes raw materials, work in-process, and finished goods, is carried at the lower of cost or net realizable value. Inventory cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on operating capacity.
At the end of each reporting period, the Company evaluates whether its inventories are damaged, obsolete, or have material changes in price or other causes, and if so, a loss is recognized in the period in which it occurs. Inventory write-downs are also based on reviews for any excess or obsolescence.
The Company also reviews its inventory to determine whether its carrying value exceeds the Net Realizable Value (“NRV”) upon the ultimate sale of the inventory. NRV is the estimated selling price of inventory in the ordinary course of business, less estimated costs of completion, disposal, and transportation. At the end of each reporting period, the Company determines the estimated selling price of its inventory based on market conditions. Once inventory is written-down, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
F-10
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Restricted cash
Restricted cash represent restricted bank deposits which are primarily used as a security for the Company’s operating lease agreements.
Impairment for long-lived assets
Long-lived assets of the Company are reviewed for impairment in accordance with ASC 360, “Property, Plant and Equipment” whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
For the years ended December 31, 2023, 2022, and 2021, no
Leases
The Company accounts for its leases under ASC 842, Leases. Under this guidance, lessees classify arrangements meeting the definition of a lease as operating or financing leases, and leases are recorded on the consolidated statements of financial position as both a right-of-use (“ROU”) assets and lease liabilities, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate (“IBR”). The IBR is estimated to approximate the interest rate on a collateralized basis with similar terms and payments. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Variable lease expenses are primarily comprised of payments affected by CPI (“Consumer Price Index”) impact.
F-11
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Property and equipment, net
| Years | |||||||||||
| Computers and software | — | ||||||||||
| Furniture and fixtures | — | ||||||||||
| Machinery and equipment | — | ||||||||||
| Vehicles | — | ||||||||||
| Leasehold improvements | Shorter of the term of the lease or useful life | ||||||||||
Pre-production costs related to long-term supply agreements
The Company incurred pre-production engineering, development and tooling costs related to products produced for its customers under future potential long-term supply agreements. Engineering, testing and other costs incurred in the design and development of production parts will be expensed as incurred. Pre-production costs related to potential long-term supply arrangements with a contractual guarantee for reimbursement were included in other assets.
Research and development, net
Research and development costs include personnel-related expenses associated with the Company’s engineering personnel and consultants responsible for the design, development and testing of its products and allocated overhead. Research and development costs are expensed as incurred and are presented net of the amount of any grants the Company receives for research and development in the period in which the grant was received.
Grants
F-12
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Israeli severance pay
Pursuant to Section 14 of Israel’s Severance Compensation Law, 1963 (“Section 14”), the Israeli entity’s employees are included under this section and entitled only to monthly deposits at a rate of 8.33 % of their monthly salary, made on their behalf with insurance companies. Payments in accordance with Section 14 release REE Automotive Ltd. from any future severance payments in respect of those employees. As a result, the related obligation and amounts deposited on behalf of such obligation are not stated on the balance sheet, as the Company is legally released from severance obligation to employees once the amounts have been deposited, and the Company has no further legal ownership on the amounts deposited.
For the years ended December 31, 2023, 2022, and 2021, severance pay expenses amounted to $1,069 , $1,217 , and $842 , respectively.
Employee benefit plan – Defined contribution plan
The Company maintains a defined contribution 401(k) retirement savings plan for its U.S. employees. Each participant in the 401(k) retirement savings plan may elect to contribute a percentage of his or her annual compensation up to a specified maximum amount allowed under U.S. Internal Revenue Service regulations. The Company matches employee contributions to a maximum of 4 % of the participant annual compensation. For the years ended December 31, 2023, 2022, and 2021 the employer expenses related to the match amounted to $106 , $117 , and $76 respectively.
For the years ended December 31, 2023, 2022 and 2021 the employer expenses related to the match amounted to $538 , $371 and $119 , respectively.
Warranty Liability
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, and short-term investments.
The Company’s cash and cash equivalents, restricted cash and short-term investments are maintained with several large and reputable banks and an investment bank in Israel and the United States. In addition, the Company’s short-term investments are in securities that have high investment grade credit ratings. Generally, these securities may be redeemed upon demand and, therefore, bear low risk.
The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts and option contracts.
F-13
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Stock-based compensation
The Company accounts for share-based compensation to employees and non-employees in accordance with ASC 718, “Compensation — Stock Compensation”, (“ASC 718”), which requires companies to estimate the fair value of equity-based payment awards on the date of grant based on the fair value of the awards granted.
The Company grants awards that vest upon the satisfaction of service condition and in certain grants performance and market conditions as well.
For graded-vesting awards with no performance or market conditions, the Company recognizes the related share-based compensation expense on a straight-line basis over the requisite service period of the awards. For awards with performance conditions the share-based compensation expense is recognized if and when the Company concludes that it is probable that the performance condition will be achieved and where the performance condition awards include graded vesting, the share-based compensation expense is recognized based on the accelerated method. The Company reassesses the probability of vesting at each reporting period for awards with performance conditions and adjust compensation cost based on its probability assessment. For graded-vesting awards with market condition the share-based compensation expense is recognized based on the accelerated method.
The Company accounts for forfeitures as they occur. The fair value of certain performance share options with market-based performance conditions granted under the employee equity plan was estimated on the grant date using the Monte Carlo valuation methodology.
The Company used the following weighted-average assumptions for options granted to employees and non-employees:
| December 31, 2021 | ||||||||||||||
| Expected volatility | % | — | % | |||||||||||
| Risk-Free interest rate | % | — | % | |||||||||||
| Expected dividend yield | ||||||||||||||
| Expected life (years) | ||||||||||||||
These assumptions and estimates were determined as follows:
Fair value of Ordinary shares — The Company’s Class A ordinary shares, without par value, having one vote per share (the “Class A Ordinary Shares”) had a limited history of being publicly traded. Prior to the consummation of the merger, the fair value was determined by management, with input from valuation reports prepared by third-party valuation specialists. In determining the fair value of ordinary shares subsequent to the consummation of the Merger Agreement, the board of directors considered the grant date fair value for share-based awards as of the closing price of our ordinary shares on NASDAQ on the date of grant.
Risk-free interest rate — The Company determined the risk-free interest rate by using a weighted-average equivalent to the expected term based on the U.S. Treasury yield curve in effect as of the date of grant.
Expected term — The expected term of options granted is based on historical experience and represents the period of time that options granted are expected to be outstanding. There was not sufficient historical share exercise data to calculate the expected term of the share options. The Company determined the expected term using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options.
F-14
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Expected volatility — Since the Company had a limited trading history of its Ordinary shares, there was not sufficient historical volatility for the expected term of the share options. The expected volatility was derived from the average historical share volatilities of several unrelated public companies within the Company’s industry that the Company considered to be comparable to its own business over a period equivalent to the option’s expected term.
Expected dividend yield - The Company did not anticipate paying any dividends in the foreseeable future. Thus, the Company used 0 % as its expected dividend yield.
Fair value of financial instruments
Fair value is defined as the exchange price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company measures financial assets and liabilities at fair value at each reporting period using a fair value hierarchy which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities.
Level 2 — inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Convertible Promissory Notes
The Company applies ASC 470-20, “Debt with Conversion and Other Options” (“ASC 470-20”). In accordance with ASC 470-20 the Company first allocates the proceeds to freestanding liability instrument that are measured at fair value at each reporting date, based on their fair value. The remaining proceeds are allocated between the convertible debt and any bifurcated embedded derivatives. In accordance with ASC 815 “Derivatives and Hedging” (“ASC 815”), the Company bifurcates embedded derivatives that require bifurcation and accounts for them separately from the convertible debt.
The Company applies ASC 815, “Derivatives and Hedging” to all features related to convertible debt. When features meet the definition of a derivative, are not clearly and closely related to the characteristics of the convertible debt, and do not qualify for any scope exceptions within ASC 815, they are required to be accounted for separately from the debt instrument and recorded as derivative instrument liabilities. The fair value assigned to the embedded derivative instruments is marked to market in each reporting period. The Company has recorded embedded derivative liabilities related to the convertible promissory notes.
For further information regarding the convertible promissory notes, see Note 15.
F-15
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Warrant Liability
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance. The assessment considers whether the warrants are freestanding financial instruments, meet the definition of a liability under ASC 480, are indexed to the Company’s own shares and whether the warrants are eligible for equity classification under ASC 815-40. This assessment is conducted at the time of warrant issuance and as of each subsequent reporting period end date while the warrants are outstanding.
Warrants that meet all the criteria for equity classification, are required to be recorded as a component of additional paid-in capital. Warrants that do not meet all the criteria for equity classification, are required to be recorded as liabilities at their initial fair value on the date of issuance and remeasured to fair value through earnings at each balance sheet date thereafter.
The Company classified the warrants (both public and private) as a liability pursuant to ASC 815-40 since the warrants do not meet the equity classification conditions. Accordingly, the Company measured the warrants at their fair value. The warrants liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of comprehensive loss.
For information Company's outstanding warrants, see Note 16.
Basic and diluted loss per share
Basic earnings (loss) per share is computed by dividing income (loss) available to Class A Ordinary shareholders by the weighted-average number of Class A Ordinary shares outstanding during the period. Basic and diluted loss per Class A Ordinary share is the same for all periods presented because all outstanding share options and warrants are anti-dilutive. The total weighted average number of shares related to outstanding options to Class A Ordinary Shares and warrants for the years ended December 31, 2023, 2022 and 2021 excluded from the calculations of diluted net loss per share were 2,679,771 , 2,314,774 and 2,357,399 , respectively. The Company’s Class B ordinary shares include voting rights only and therefore are excluded from the loss per share calculation.
Income taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). ASC 740 prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between the financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value, and if it is more likely than not that a portion or all of the deferred tax assets will not be realized.
ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard contains a two-step approach to recognizing and measuring a liability for uncertain tax positions.
F-16
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (on a cumulative basis) likely to be realized upon ultimate settlement.
Revenue recognition
Until 2021 the Company has generated revenues from selling its wheels to personal mobility products.
Under ASC 606 “Revenue from contracts with customers”, the Company recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition for contracts that are within the scope of the standard, the Company perform the following five steps: (1) Identify the contract(s) with a customer, (2) Identify the performance obligations in the contract, (3) Determine the transaction price, (4) Allocate the transaction price to the performance obligations in the contract and (5) Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company recognizes revenue at the time when its customer obtains control of the promised goods which is when the performance obligation is satisfied by transferring the promised product to the customer.
The transaction price is determined based on the consideration to which the Company expects to be entitled in exchange for transferring the products to the customer.
The Company applied the practical expedient in ASC 606 and did not evaluate payment terms of one year or less for the existence of a significant financing component.
Deferred revenues are recognized as (or when) the Company receives consideration prior to performing its obligations under the contract.
In April 2021, the Company entered into a strategic development agreement with a customer, pursuant to which the Company will develop and supply REE platform prototypes. Revenue related to the agreement is deferred and will be recognized upon satisfying performance obligations in the contract. As of December 31, 2023, 2022 and 2021, the Company recorded deferred revenues of zero , $943 and $943 , respectively. For the twelve months ended on December 31, 2023, the Company recorded revenues in the amount of $943 upon the termination of the agreement with the customer.
Fulfillment costs are capitalized up to the amount that is expected to be recovered, and any excess amounts will be expensed as incurred. As of December 31, 2023, 2022 and 2021, the Company recorded capitalized costs of zero , $943 and $943 , respectively. Following the revenue recognition as described above, the Company recorded capitalized expenses in the amount of $943 in cost of revenues.
In addition, for the twelve months ended on December 31, 2023 the Company recorded revenues from sales of EV prototypes in the aggregate amount of $665 . Revenue from sales of EV prototypes is recognized at a point in time when the control of the goods is transferred to the customer, upon delivery.
The Company applies the practical expedient and does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
For contracts in which the performance obligation has an original expected duration of one year or less, the Company does not provide disclosure on its remaining performance obligations.
F-17
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Remaining Performance Obligation
Cost of revenues
Cost of revenues primarily comprised from the cost of EVs and includes direct parts, material and labor costs, share-based compensation expenses, manufacturing overhead (e.g., depreciation of machinery and tooling), shipping and logistics costs, and reserves including for estimated warranty costs related to the production of EVs and adjustments to write down the carrying value of inventory when it exceeds its estimated net realizable value (“NRV”).
Advertising costs
For the years ended December 31, 2023, 2022, and 2021 advertising costs amounted to $224 , $614 and $1,000 respectively. Advertising costs are charged to expense when incurred.
Segment information
Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”). As the CODM reviews financial information presented on a consolidated basis for purposes of making operating decisions, allocating resources, and evaluating financial performance, the Company has determined that it operates in one operating segment.
Recently adopted accounting pronouncements
As an “emerging growth company,” the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act. The adoption dates discussed below reflect this election.
Financial Instruments-Credit Losses
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments — Credit Losses — Measurement of Credit Losses on Financial Instruments.” This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
The guidance is effective for the Company beginning January 1, 2023, and interim periods therein. The company adopted this ASU, but the standard did not have a material impact on the Company’s consolidated financial statements.
F-18
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Recently issued accounting pronouncements, not yet adopted
Convertible Debt Instruments
In August 2020, the FASB issued ASU 2020-06, “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models that separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. The guidance will be effective for the Company for the fiscal year beginning January 1, 2024 and interim periods within those fiscal years. Early adoption is permitted, but no earlier than the fiscal year beginning after December 15, 2020. The Company is currently evaluating the impact of adopting ASU 2020-06, however the adoption is not expect to result in a material impact to the Company’s consolidated financial statements.
Segment reporting
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an annual basis. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280 on an annual basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-07.
Income taxes
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-09.
F-19
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 3. INVESTMENTS
The Company’s investments as of December 31, 2023 are comprised of U.S. dollar denominated investments in bank deposits.
Short-term investments consisted of the following:
| December 31, 2023 | |||||||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Amortized cost basis | Gross unrealized gains | Gross unrealized loss | Fair value | ||||||||||||||||||||
| Bank deposit securities: | |||||||||||||||||||||||
| Bank deposits | $ | $ | $ | $ | |||||||||||||||||||
| Total short term investments | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Amortized cost basis | Gross unrealized gains | Gross unrealized loss | Fair value | ||||||||||||||||||||
| Bank deposit securities: | |||||||||||||||||||||||
| Bank deposits | $ | $ | $ | $ | |||||||||||||||||||
| Held-to-maturity marketable securities: | |||||||||||||||||||||||
| Agency bonds | $ | $ | $ | ( | $ | ||||||||||||||||||
| Municipal bonds | ( | ||||||||||||||||||||||
| Commercial paper | |||||||||||||||||||||||
| Treasury bills | |||||||||||||||||||||||
| Total held-to-maturity marketable securities | $ | $ | $ | ( | $ | ||||||||||||||||||
| Total short term investments | $ | $ | $ | ( | $ | ||||||||||||||||||
F-20
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 4. INVENTORY
Inventory consisted of the following at December 31, 2023 and 2022, respectively:
| December 31, 2023 | December 31, 2022 | ||||||||||
| Raw materials and work in progress | $ | ||||||||||
| Finished goods | |||||||||||
Total inventory | $ | $ | |||||||||
During the years ended December 31, 2023 and 2022, the Company recorded inventory write-downs of $1,970 and zero , respectively, to reduce inventories to their net realizable values and for any excess or obsolete inventories.
NOTE 5. OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
Other accounts receivable and prepaid expenses consisted of the following at December 31, 2023 and 2022, respectively:
| December 31, 2023 | December 31, 2022 | ||||||||||
| Government authorities | $ | $ | |||||||||
| Prepaid expenses | |||||||||||
| Advances to suppliers | |||||||||||
| Other receivables | |||||||||||
| Total | $ | $ | |||||||||
F-21
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 6. LEASES
The Company`s leases include offices for its facilities worldwide, as well as cars and other equipment leases, which are all classified as operating leases. Certain leases include renewal options that are under the Company`s sole discretion. The renewal options were included in the right-of-use assets and liabilities calculations if it was reasonably certain that the Company will exercise the option. The Company entered into sublease agreement for certain leased office space and the amount of sublease income for the year ended December 31, 2023, 2022 and 2021 was $25 , zero and zero , respectively.
| December 31, 2023 | December 31, 2022 | ||||||||||
| Operating lease cost | $ | $ | |||||||||
| Short-term lease cost | |||||||||||
| Variable lease cost | |||||||||||
| Total lease cost | $ | $ | |||||||||
| December 31, 2023 | December 31, 2022 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows for operating leases, net: | $ | $ | |||||||||
| Supplemental cash flow information related to operating leases: | |||||||||||
| Adoption of "Leases (Topic 842)" | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities: | $ | $ | |||||||||
| Adjustment to lease liabilities upon the resolution of contingent lease payments | $ | ( | $ | ||||||||
| Weighted average remaining operating lease term | |||||||||||
| Weighted average discount rate operating lease | % | % | |||||||||
The following table outlines maturities of the Company’s lease liabilities as of December 31, 2023:
| Operating Leases | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 and thereafter | |||||
| Total undiscounted lease payments | $ | ||||
| Less: | |||||
| Imputed interest | |||||
| Present value of lease liabilities | $ | ||||
Rent expense for the year ended December 31, 2021 amounted to $870 .
F-22
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net at December 31, 2023 and 2022, respectively, consists of:
| December 31, 2023 | December 31, 2022 | ||||||||||
| Computers and software | $ | $ | |||||||||
| Furniture and fixtures | |||||||||||
| Machinery and equipment | |||||||||||
| Vehicles | |||||||||||
| Leasehold improvements | |||||||||||
| Construction in progress | |||||||||||
| $ | $ | ||||||||||
| Less - accumulated depreciation and amortization | ( | ( | |||||||||
| Total | $ | $ | |||||||||
Construction in progress as of December 31, 2023 consists of capitalized costs related to production tooling at the UK Launch Factory located in Coventry, UK. For the year ended December 31, 2022, the amount of construction in progress is related to machinery and equipment placed in service during 2023 at the UK Launch Factory located in Coventry, UK and used for process validation activities and product assembly operations.
Depreciation expenses of property and equipment were $2,255 , $1,683 , and $484 for the years ended December 31, 2023, 2022, and 2021, respectively.
NOTE 8. CREDIT FACILITY
On August 14, 2023, the Company entered into an agreement with a leading Israeli commercial bank to establish a revolving credit line facility (the “Credit Facility”) in the amount of $15,000 which the bank is committed to until December 31, 2024. In December 2023, the terms of the Credit Facility were extended through June 30, 2025. In March 2024, the terms of the credit facility were extended through December 31, 2025. Outstanding loans under the Credit Facility bear a variable interest at the rate of Monthly Term Secured Overnight Financing Rate (“SOFR”) plus an annual margin of 3.5 %. The interest is payable on a monthly basis. Under the terms of the Credit Facility, the Company is required to keep unsecured deposits in the aforementioned bank in the amount of $20,000 . Under certain terms, the bank has the right to offset loans drawn under the Credit Facility with the deposits kept in the bank. The Company is charged a fee of 0.25 % per annum on amounts available for draw that are undrawn under the Credit Facility.
F-23
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 9. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Other accounts payables and accrued expenses consisted of the following at December 31, 2023 and 2022, respectively:
| December 31, 2023 | December 31, 2022 | ||||||||||
| Employees and payroll accruals | $ | $ | |||||||||
| Professional fees | |||||||||||
| Non recurring engineering | |||||||||||
| Government authorities | |||||||||||
| Other payables | |||||||||||
| Total | $ | $ | |||||||||
NOTE 10. MERGER WITH 10X CAPITAL
On February 3, 2021 the Company entered into the Merger Agreement with 10X Capital and Merger Sub. The Merger was consummated on July 22, 2021 (the “Closing Date”) with 10X Capital becoming a wholly-owned subsidiary of the Company, and the securityholders of 10X Capital becoming securityholders of the Company. On the Closing Date, the following transactions occurred pursuant to the terms of the Merger Agreement:
(i) Each preferred share, par value NIS 0.01 6,290,767 Class A Ordinary Shares, calculated in accordance with the terms of the Merger Agreement such that each Class A Ordinary Share had a value of $300 per share (together with the conversion of the Company’s Preferred Shares, par value NIS 0.01 (“Preferred Shares”), the “Capital Restructuring”).
F-24
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 10. MERGER WITH 10X CAPITAL (cont.)
Each outstanding share of Class B common stock, par value $0.0001 per share, of 10X Capital (“10X Capital Class B Common Stock”) converted into shares of Class A common stock, par value $0.0001 per share, of 10X Capital (“10X Capital Class A Common Stock”) and, immediately thereafter, each outstanding share of 10X Capital Class A Common Stock converted into the right to receive one newly issued Class A Ordinary Share. A total of 423,441 Class A Ordinary Shares were issued to holders of 10X Capital Class A Common Stock.
Pursuant to that certain SPAC Letter Agreement entered into concurrently with the Merger Agreement (the “Letter Agreement”), by and among 10X Capital, its executive officers and directors, 10X Capital SPAC Sponsor I LLC (the “Sponsor”) and the Company, up to 50,000 of the Class A Ordinary Shares held by the Sponsor were subject to forfeiture without consideration if the trading prices of Class A Ordinary Shares specified in the Letter Agreement were not achieved following the Merger. On the second business day following the Merger, all 50,000 Class A Ordinary Shares were forfeited pursuant to the terms of the Letter Agreement, resulting in 373,441 Class A Ordinary Shares held by the holders of 10X Capital Class A Common Stock.
Each of 10X Capital’s outstanding warrants to purchase one share of 10X Capital Class A Common Stock (the “10X Capital Warrants”), including both the 10X warrants issued to public shareholders in 10X’s initial public offering (the “Public Warrants”) and the 10X warrants issued in a private placement to 10X’s sponsors in 10X’s initial public offering (the “Private Warrants”),were converted into the right to receive an equal number of warrants to purchase one Class A Ordinary Share (the “Warrants”), subject to downward adjustment to the next whole number in case of fractions of Warrants. A total of 518,750 Warrants to purchase one Class A Ordinary Share were issued to holders of 10X Capital Warrants.
The Company’s ordinary shares are divided into two classes. The Class A Ordinary Shares have one vote per share. The Class B Ordinary Shares, each have 10 votes per share. An aggregate of 2,780,570 Class B Ordinary Shares were issued to the founders of the Company representing approximately 39 % of the voting power to each of them immediately following the Merger.
On February 3, 2021, concurrently with the execution of the Merger Agreement, the Company and 10X Capital entered into Subscription Agreements (the “Subscription Agreements”) with certain investors (the “PIPE Investors”), pursuant to which the PIPE Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell to such PIPE Investors, an aggregate of 1,000,000 shares of 10X Capital Class A Common Stock at $300 per share for gross proceeds of approximately $300,000 (the “PIPE Financing”) on the Closing Date, which were converted into 1,000,000 Class A Ordinary Shares upon the consummation of the Merger. The PIPE Financing closed immediately prior to the Merger.
Total gross proceeds resulted from the Merger transaction were approximately $348,000 out of which total transaction costs amounted to approximately $63,000 . The transaction costs related to the Warrants liability in the amount of $2,887 were recognized as expenses in the Company’s statement of comprehensive loss for the year ended December 31, 2021.
For information regarding the completion of the registered exchange offer for the Company's outstanding warrants, see Note 16.
F-25
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
The following table summarizes REE’s contractual obligations and other commitments for cash expenditures as of December 31, 2023, and the years in which these obligations are due. Certain obligations are reflected in our balance sheet, while other are disclosed as future obligations. This table is not meant to represent a forecast of our total cash expenditures for any of the periods presented.
| Purchase commitments | |||||
| 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 and thereafter | |||||
| Total | $ | ||||
Open purchase orders that are cancellable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. Such purchase orders often represent authorizations to purchase rather than binding agreements.
In addition, REE enters into agreements in the normal course of business with vendors to perform various services, which are generally cancellable upon written notice. These payments are not included in this table of contractual obligations.
Guarantee
A long-term guarantee was issued by a bank in the amount of approximately $3,008 were recorded within Long-term restricted cash to secure the Company’s office and manufacturing locations.
Royalty bearing grants
The Company’s research and development efforts have been partially financed through grants from the IIA for the technology related to the Softwheel segment. Under the research and development agreements with the IIA and pursuant to applicable laws, the Company is required to pay royalties at the rate of 3 %-5 % on sales of products developed with funds provided by the IIA. Such royalties are due up to an amount equal to 100 % of the IIA grants received, linked to the U.S. dollar plus interest. Until October 25, 2023, the interest was calculated at a rate based on 12-month LIBOR applicable to U.S. Dollar deposits on the unpaid amount received. However, on October 25, 2023, the IIA published a directive concerning changes in royalties to address the expiration of the LIBOR. Under such directive, regarding IIA grants approved by the IIA prior to January 1, 2024 but which are outstanding thereafter, as of January 1, 2024 the annual interest is calculated at a rate based on 12-month SOFR, or at an alternative rate published by the Bank of Israel plus 0.72 %; and, for grants approved on or following January 1, 2024 the annual interest shall be the higher of (i) the 12 months SOFR interest rate, plus 1 %, or (ii) a fixed annual interest rate of 4 %. based on the 12-month LIBOR rate (from the year the grant was approved) applicable to U.S. dollar deposits. If the Company returns to production of these products outside of Israel and generates sales, the ceiling will increase based on the percentage of production that is outside of Israel, up to a maximum of 300 % of the IIA grants, linked to the dollar and bearing interest as noted above. If the Company does not generate sales of products developed with funds provided by the IIA, the Company is not obligated to pay royalties or repay the grants.The Company did no
As of December 31, 2023, the Company’s remaining contingent obligation with respect to royalty-bearing participation received or accrued, net of royalties paid or accrued, were $733 .
F-26
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
In 2018, the Company signed a research and development agreement with the Israel-United States Binational Industrial Research and Development Foundation (“BIRD”). Under this agreement, the Company is required to pay royalties at a rate of 5 % of the sales of products developed with funds provided by BIRD up to an amount equal to 150 % of the aggregate dollar amount of the grants received linked to the U.S. consumer price index. The Company did no
As of December 31, 2023, the BIRD contingent liability with respect to royalty-bearing participation received or accrued, net of royalties paid or accrued, totaled $433 .
Legal proceedings
On December 16, 2022, a lawsuit was filed to the court in Texas, Austin Division, against REE and its US subsidiaries (in this section, the “Group”), by OSR Group alleging that the Group stole OSR Group’s trade secrets. The OSR Group requested the court to grant them the following: (a) a request for an injunction pertaining to the use of such trade secrets; (b) affirmative action to protect the OSR Group’s alleged trade secrets; (c) the establishment of a constructive trust to transfer all the relevant Group’s legal title and intellectual property to the OSR Group; (d) an award to the OSR Group of monetary damages in an amount of no less than USD 2.6 billion together with exemplary damages in an amount of no less than USD 5.2 billion, such amounts to be determined in the trial, plus interest; (e) an award to the OSR Group for all of its expenses relating to the action; (f) an award to the OSR Group of pre-judgment interest on all damages; and (g) an award of other relief as the court deem fit. On January 4, 2024, the Magistrate Judge entered a Report and Recommendation, or the Report, recommending dismissal of the lawsuit based on forum non conveniens, such that OSR could pursue its claims in an Israeli forum rather than in the United States, assuming that OSR chooses to do so after dismissal. The Report is pending before the District Court, which will independently review the Report to assess whether to adopt in full, in part, or to set it aside. The Report is not binding on the District Court. There is no definitive timetable for a final ruling, and any ruling by the District Court is subject to a potential appeal by OSR. REE believes that the lawsuit is without merit and is defending itself vigorously. Given the uncertainty of litigation and the preliminary stage of the lawsuit, the Company cannot estimate the reasonably possible loss or range of loss that may result from this lawsuit. As of December 31, 2023 and December 31, 2022 the Company did not
Notwithstanding the foregoing, from time to time, REE may become involved in actions, claims, suits, and other legal proceedings, such as requests to disclose information before initiating derivative cases, arising in the ordinary course of our business, including but not limited to claims related to employment, intellectual property and shareholder matters.
F-27
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 12. SHAREHOLDERS’ EQUITY
On October 18, 2023, the Company effected a reverse share split of the Company’s Class A ordinary shares and Class B ordinary shares at the ratio of 1-for-30, such that (i) each thirty (30 ) Class A ordinary shares, without par value, were consolidated into one (1) Class A ordinary share, without par value and (2) each thirty (30 ) Class B ordinary shares, without par value, were consolidated into one (1) Class B ordinary share, without par value. As a result, all Ordinary Class A shares, Ordinary Class B shares, options for Ordinary Class A Shares, exercise price and net loss per share amounts were adjusted retroactively for all periods presented in these consolidated financial statements as if the stock reverse split had been in effect as of the date of these consolidated financial statements. Following the reverse share split an additional amount of 15,890 shares was issued to reflect rounding differences resulting from fractional Class A ordinary shares.
Composition of share capital:
| December 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Authorized | Issued and outstanding | Authorized | Issued and outstanding | ||||||||||||||||||||
| Number of shares | Number of shares | ||||||||||||||||||||||
Class A Ordinary shares, no par value (1) | |||||||||||||||||||||||
Class B Ordinary shares, no par value (2) | |||||||||||||||||||||||
(1) Each Class A Ordinary Share has the right to exercise one vote, to participate pro rata in all the dividends declared by the Board of Director’s of the Company and the rights in the event of the Company’s winding up are to participate pro-rata in the total assets of the Company.
(2) Class B Ordinary Shares, which are held by the founders, are entitled to cast ten votes per each Class B Ordinary Share held as of the applicable record date. Specific actions set forth in REE’s Amended and Restated Articles may not be effected by REE without the prior affirmative vote of 100 % of the outstanding REE Class B Ordinary Shares, voting as a separate class. Each Class B Ordinary Shares will be automatically suspended upon the tenth anniversary of the closing of the Merger. There are no economic or participating rights to this class of shares.
Equity transactions
On August 16, 2022, the Company entered into the ATM Sales Agreement with BofA Securities, Inc., or BofA, pursuant to which the Company may offer and sell, at its option, up to $75,000 of Class A Ordinary Shares through an “at-the-market” equity program under which BofA agreed to act as sales agent. As of December 31, 2023, we have not sold any of our Class A Ordinary Shares under the ATM Sales Agreement.
For information regarding the completion of the registered exchange offer for the Company's outstanding warrants during the year 2022, see Note 16 - Warrant Liabilities.
On July 14, 2023, the Company entered into the H.C. Wainwright Agreement with H.C. Wainwright, pursuant to which the Company may offer and sell, at its option, up to $35,000 of Class A Ordinary Shares through an “at-the-market” equity program under which H.C. Wainwright act as the Company’s sales agent. As of December 31, 2023, the Company sold 75,912 Class A Ordinary Shares under the ATM Sales Agreement for total gross proceeds of approximately $657 . For further information regarding additional shares sold under the ATM Sales Agreement, see also Note 22.
For further information regarding public offering to offer and sell the Company’s Class A Ordinary Shares, see Note 22.
F-28
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 13. SHARE-BASED COMPENSATION
The share-based compensation expense recognized in the Company’s consolidated statements of operations are as follow:
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||||||||
| Cost of sales | $ | $ | $ | ||||||||||||||
| Research and development | |||||||||||||||||
| Selling, general and administrative | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
Share option plans
In 2011, the Board of Directors of the Company adopted the REE Automotive Ltd. Employees and Non-Employees Share Incentive Plan (as amended the “2011 Share Incentive Place”). As of the date of the consummation of the Merger, (for further details, see also Note 10), the Board of Directors approved the REE Automotive Ltd. 2021 Share Incentive Plan (the “2021 Share Incentive Place”). The 2021 Plan provides for the grant of options, ordinary shares, restricted shares, restricted share units (“RSUs”), stock appreciation rights, other cash-based awards, and other share-based awards which may be granted to employees, officers, non-employee consultants and directors of the Company. Concurrently, the Board of Directors decided to cancel the reservation of 70,966 Ordinary Shares which were previously reserved by the Board under the 2011 Share Incentive Plan, such that following such cancellation the balance of un-allocated shares (underlying option awards) under the Plan shall be zero . 771,421 Class A Ordinary Shares were reserved for issuance of awards under the 2021 Plan, in accordance with and subject to the terms and conditions of the 2021 Plan. In addition, there was an annual increase in the option pool on January 1, 2023 for 588,986 .
As of December 31, 2023, 346,883 Class A Ordinary Shares were available for future grants under the 2021 plan. Any share underlying an award that is cancelled, terminated or forfeited for any reason without having been exercised will automatically be available for grant under the 2021 Share Incentive Plan. In addition, there was an annual increase in the option pool on January 1, 2024 for 640,004 .
The Board and the shareholders of the Company approved the reservation for issuance under the “REE Automotive, Ltd. Employee Stock Purchase Plan” (the “ESPP”) of such number of Class A Ordinary Shares equal to 2 % of the Class A Ordinary Shares to be issued and outstanding as of the consummation of the Merger. 154,284 Class A Ordinary Shares were reserved for issuance of awards under the ESPP, in accordance with and subject to the terms and conditions of the ESPP. The total amount reserved is available for issuance as of December 31, 2023.
In general, options granted under the Plan vest over a three-year period and expire 10 years from the date of grant. The expiration date may not be later than 10 years from the date of grant unless determined otherwise by the board of directors. If a grantee leaves his or her employment or other relationship with the Company, or if his or her relationship with the Company is terminated without cause (and other than by reason of death or disability, as defined in the Plan), the term of his or her unexercised options will generally expire 90 days after the date of termination, unless determined otherwise by the Company.
F-29
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 13. SHARE-BASED COMPENSATION (cont.)
Options granted to employees and non-employees
A summary of option balances under the 2021 and 2011 Share Incentive Plan as of December 31, 2023, and changes during the year then ended are as follows:
| Number of options | Weighted-average exercise price | Weighted-average remaining contractual term (in years) | Aggregate intrinsic value (in thousands) (1) | ||||||||||||||||||||
Outstanding at January 1, 2023 | $ | $ | |||||||||||||||||||||
| Granted | $ | ||||||||||||||||||||||
| Exercised | ( | $ | |||||||||||||||||||||
| Forfeited | ( | $ | |||||||||||||||||||||
| Cancelled | $ | ||||||||||||||||||||||
Outstanding at December 31, 2023 | $ | $ | |||||||||||||||||||||
Exercisable at December 31, 2023 | $ | $ | |||||||||||||||||||||
(1) Intrinsic value is calculated as the difference between the fair value of REE’s Class A ordinary shares as of the end of each reporting period and the exercise price of the option.
The Company recognizes forfeitures as they occur. As of December 31, 2023, unrecognized compensation cost related to share awards was $5,459 , which was expected to be recognized over a weighted average period of 2.04 years. The weighted average grant date fair value of options granted during the years ended December 31, 2023, 2022 and 2021 was $10.86 , $56.70 , and $292.80 .
The following tables summarize information about the Company's outstanding and exercisable options granted to employees as of December 31, 2023:
| Outstanding Options | Exercisable Options | |||||||||||||||||||||||||||||||||||||||||||
Range of exercise prices | Number of outstanding options | Weighted-average remaining contractual term (in years) | Weighted-average exercise price | Number of exercisable options | Weighted-average remaining contractual term (in years) | Weighted-average exercise price | ||||||||||||||||||||||||||||||||||||||
| $ | - | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| $ | - | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| $ | - | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| $ | - | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| $ | - | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
F-30
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 13. SHARE-BASED COMPENSATION (cont.)
Restricted share units activity
The following table summarizes restricted share units activity:
| Number of restricted share units outstanding | Weighted-average ordinary fair value per share at grant date | ||||||||||
Outstanding at January 1, 2023 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Expired | |||||||||||
Outstanding at December 31, 2023 | $ | ||||||||||
As of December 31, 2023, total compensation costs related to unvested restricted share units granted to employees not yet recognized was $7,432 . This cost will be amortized over a weighted-average remaining period of 1.86 years. The weighted average grant date fair value of restricted share units granted during the years ended December 31, 2023, 2022 and 2021 was $9.67 , $68.70 and $130.50 , respectively.
NOTE 14. INCOME TAXES
Tax rates applicable to the Company
The taxable income of Israeli company is subject to a corporate tax rate of 23
Loss before taxes is comprised as follows:
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||||||||
| Domestic (Israel) | $ | ( | $ | ( | $ | ( | |||||||||||
| Foreign | ( | ( | |||||||||||||||
| Total | $ | ( | $ | ( | $ | ( | |||||||||||
Reconciliation of the theoretical tax expense (benefit) to the actual tax expense (benefit)
The main reconciling item between the statutory tax rate of the Company and the effective tax rate are the non-recognition of tax benefits from accumulated net operating loss carryforward of the Company due to the uncertainty of the realization of such tax benefits and the unrecognized tax positions recorded in the period.
Deferred income taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s deferred tax assets are comprised of operating loss carryforward and other temporary differences.
F-31
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 14. INCOME TAXES (cont.)
The following table presents the significant components of the Company’s deferred tax assets:
| December 31, 2023 | December 31, 2022 | ||||||||||
| Deferred tax assets: | |||||||||||
| Operating loss carryforward | $ | $ | |||||||||
| Share based compensation | |||||||||||
| Research and development | |||||||||||
| Accrued social benefits and other | |||||||||||
| Other costs | |||||||||||
| Operating lease liability | |||||||||||
| Deferred tax asset before valuation allowance | $ | $ | |||||||||
| Valuation allowance | ( | ( | |||||||||
| Total deferred tax assets | $ | $ | |||||||||
| Fixed Assets | ( | ( | |||||||||
| Operating lease right-of-use asset | ( | ( | |||||||||
| Deferred tax liabilities | $ | ( | $ | ( | |||||||
| Net deferred taxes | $ | $ | |||||||||
Management currently believes that since the Company and its subsidiaries have a history of losses on a consolidated basis it is more likely than not that the deferred tax regarding the loss carry forward and other temporary differences will not be realized in the foreseeable future.
The net changes in the total valuation allowance for each of the years ended December 31, 2023 and 2022, are comprised as follows:
| December 31, 2023 | December 31, 2022 | ||||||||||
| Opening balance | $ | $ | |||||||||
| Additions during the year | |||||||||||
| Ending Balance | $ | $ | |||||||||
Income taxes are comprised as follows:
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||||||||
| Current | $ | ( | $ | $ | |||||||||||||
| Deferred | ( | ||||||||||||||||
| $ | ( | $ | $ | ||||||||||||||
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||||||||
| Domestic | $ | $ | $ | ||||||||||||||
| Foreign | ( | ||||||||||||||||
| $ | ( | $ | $ | ||||||||||||||
F-32
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 14. INCOME TAXES (cont.)
Uncertain tax positions
A reconciliation of the opening and closing amounts of total unrecognized tax benefits is as follows:
| December 31, 2023 | December 31, 2022 | ||||||||||
| Opening balance | $ | $ | |||||||||
Tax positions reversed in current year related to previous years | ( | ( | |||||||||
| Tax positions taken in current year | |||||||||||
| Accrued interest | |||||||||||
| Ending Balance | $ | $ | |||||||||
Substantially all the balance of unrecognized tax benefits, if recognized, would reduce the Company’s annual effective tax rate. The Company recognizes interest and penalties, if any, related to unrecognized tax positions in income tax expense. The Company believes that its income tax filing positions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position.
Tax assessments
The Company has subsidiaries around the world subject to tax in the jurisdictions in which they operate. The significant jurisdictions in which the Company’s subsidiaries are subject to tax are Israel, the U.S, and the U.K.
Income tax returns are open for examination for the tax years 2019-2023 in Israel, 2015-2023 in the U.S., and 2021-2023 in the U.K. As a global organization, the Company may be subject to a variety of transfer pricing challenges by taxing authorities in various jurisdictions. While management believes that adequate provision has been made in the Consolidated Financial Statements for any potential assessments that may result from tax examinations for all open tax years, the completion of tax examinations for open years may result in changes to the amounts recognized in the Consolidated Financial Statements.
Net operating loss carryforward
As of December 31, 2023, the Company and its subsidiaries had net operating carry forward losses for tax purposes which may be carried forward and offset against taxable income in the future for an indefinite period.
| Name of Subsidiary | Net Operating Loss Carryforwards | ||||
| REE Automotive Ltd | $ | ||||
| REE Automotive UK Limited | $ | ||||
| REE Automotive Japan K.K. | $ | ||||
F-33
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 15. CONVERTIBLE PROMISSORY NOTES
On November 27, 2023, the Company entered into Securities Purchase Agreements with certain investors, pursuant to which the Company agreed to issue and sell Convertible Promissory Notes (the “Notes”) in the principal amount of $8,000 , in the aggregate, at a conversion price of $5.09 per share (subject to adjustment as provided therein), and Warrants to purchase up to an aggregate of 1,571,710 of the Company’s Class A Ordinary Shares at an exercise price of $4.42 per share (subject to adjustment as provided therein). Closing under these Securities Purchase Agreements occurred on December 3, 2023, pursuant to which the above Convertible Promissory Notes and Warrants were issued to the applicable selling shareholders.
In addition, on December 6, 2023, we entered into a subsequent Securities Purchase Agreement dated December 2, 2023, with a certain accredited investor, pursuant to which the Company agreed to issue and sell an additional Convertible Promissory Note in the principal amount of $750 at a conversion price of $5.74 per share (subject to adjustment as provided therein), and an additional Warrant to purchase up to 130,662 Class A Ordinary Shares, at an exercise price of $5.74 per share (subject to adjustment as provided therein). Closing under this Securities Purchase Agreement occurred on December 20, 2023, pursuant to which the above Convertible Promissory Notes and Warrants were issued to the applicable selling shareholder.
Pursuant to the Securities Purchase Agreement, the Notes have a term of five years from the date of issuance, accrue interest at a rate of ten percent per annum (compounding annually) and are convertible into Class A Ordinary Shares at conversion prices of $5.09 and $5.74 per share, respectively. We may not repay any portion of the outstanding principal amount of the Notes (or any interest accrued thereon) prior to the maturity date. The conversion price of Notes is subject to customary adjustments, and the Notes contain customary anti-dilution protections (including in the event of (i) certain equity issuances, or repricing of existing equity instrument by us at a price less than the conversion price then in effect, provided that the conversion price shall in no event be reduced to less than $1.02 and $1.15 per share, respectively; (ii) stock splits and combinations; and (iii) certain dividends or distributions).
The notes will have the repayment accelerated upon an event of default that is not cured. Events of default include (i) a default in any payment of principal, interest or liquidated damages payable under the notes, (ii) if the Company fails to observe or perform any covenants under the note, warrant or the purchase agreement, (iii) if the Company notifies the investor of its inability or intention not to comply with proper notices of conversions of the note, (iv) if the Company fails to timely deliver shares or pay liquidated damage, (v) if the Company fails to reserve a sufficient number of shares to permit the conversion of the note or exercise of the warrant, (vi) if any representation or warranty made by the Company is proven to be incorrect or breached in a material respect, (vii) if the Company or its subsidiaries default on any payment of indebtedness or causes an acceleration of repayment for such indebtedness, (viii) if the Company or a subsidiary files for bankruptcy, whether voluntary or involuntary, (ix) if the Company faces a final judgment or order in excess of $1 million, (x) if the Company fails to delivery un-legended shares within 5 days of an investors lawful request, (xi) if the Company ceases trading on its trading market, (xii) if the Company consummates a going private transaction, (xiii) if the SEC institutes a stop trade order or suspension of the Company’s ordinary shares, (xiv) if the Company or its subsidiaries fail to maintain material intellectual property rights, personal or real property or assets necessary to conduct its business, (xv) if the Depository Trust Company places any restrictions on transactions in the ordinary shares or they are no longer tradeable through the Depository Trust Company Fast Automated Securities Transfer program or (xvi) if the Company experiences a material adverse effect which would reasonably be considered to substantially impair the ability of the Company to satisfy its obligations under the transaction documents. As of December 31, 2023 no event of default as described above has occurred.
The Warrants to purchase up to 1,571,710 Class A Ordinary Shares are exercisable at an exercise price of $4.42 per Class A Ordinary Share (subject to customary adjustments) and will have a term of five years from the date of issuance, which was December 3, 2023. The Warrants to purchase up to 130,662 Class A Ordinary Shares are exercisable at an exercise price of $5.74 per Class A Ordinary Share (subject to customary adjustments) and will have a term of five years from the date of issuance, which was December 20, 2023.
F-34
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 15. CONVERTIBLE PROMISSORY NOTES (cont.)
The Company determined that the notes and the warrants are freestanding financial instruments since the instruments are legally detachable and separately exercisable. Then, the Company has evaluated the notes for embedded derivatives required to be bifurcated and concluded that the conversion features and the redemption features should be bifurcated from the debt host since they are not clearly and closely related to debt host, they meet the definition of derivative instruments and no scope exception under ASC 815 is applicable for these features. Thus, the embedded features were bifurcated from the debt host and are accounted for at fair value through earnings. In addition, the Company has concluded that the warrants should be classified as liabilities, measured at fair value through earnings.
As such, the Company allocated the proceeds to the warrants and to the convertible promissory notes based on their respective fair values with the remaining proceeds allocated to the debt host. The debt host is measured at its amortized cost using the effective interest method. As of the dates of the transactions, the cost of the debt host was $589 . As of December 31, 2023 the cost of the debt host was $680 .
F-35
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 16. WARRANT LIABILITIES
Warrant liabilities
Pursuant to the Merger Agreement with 10X Capital, the Company assumed warrants previously issued by 10X Capital consisting of 183,333 Private Placement Warrants and 335,417 Public Warrants, which were converted into warrants to purchase 518,750 Class A ordinary shares. The warrants to purchase 518,750 Class A Ordinary Shares gave the holder the right to purchase such shares at a fixed amount for a period of five years subject to the terms and conditions of the warrant agreement.
During September 2022, 2 Public Warrants were exercised at an exercise price of $345.00 per shares, for an aggregate of 2 shares of the Company's Class A ordinary shares. Total cash proceeds generated from Public Warrant exercises in September 2022 were insignificant.
On September 22, 2022, the Company completed a registered exchange offer of the Company's 518,750 outstanding warrants (“Warrant Exchange”). In connection therewith, the Company exchanged 434,445 warrants tendered for shares of the Company’s Class A ordinary shares at an exchange ratio of 6.00 shares for each warrant. As a result, at closing of the exchange, the Company was obligated to issue 86,890 Class A ordinary shares that were settled on October 4, 2022.
Additionally, the Company entered into Amendment No. 1 (the “Warrant Amendment”) to the Warrant Agreement, dated as of September 23, 2022. The Warrant Amendment provided the Company with the right to mandatorily exchange the Company’s remaining outstanding warrants for Class A ordinary shares, at an exchange ratio of 5.40 shares for each warrant. Simultaneously with the closing of the warrant exchange offer, the Company notified holders of the remaining 84,303 warrants that it would exercise its right to exchange the warrants for Class A ordinary shares, resulting in the Company’s obligation to issue 15,192 Class A ordinary shares that were issued on October 11, 2022.
The change in fair value of warrant liabilities was recorded through the date of exchange as change in fair value of warrant liabilities within the consolidated statements of comprehensive loss. Additionally, the fair value of the warrant liability as of the exchange date of $3,104 was reclassified to additional paid-in capital within the consolidated balance sheets as of December 31, 2022.
On December 3, 2023 and December 20, 2023 (the” Closing date”) the Company agreed to issue and sell Private Warrants to purchase up to an aggregate of 1,571,710 and 130,662 , respectively, of the Company’s Class A Ordinary Shares at an exercise price of $4.42 and $5.74 , respectively, per share (subject to adjustments).
The warrants to purchase 1,702,372 Class A Ordinary Shares gave the holder the right to purchase such shares at a fixed amount as described above for a period of five years subject to the terms and conditions of the warrant agreement.
The Company has concluded that the warrants are freestanding financial instruments that do not meet all the equity classification criteria pursuant to ASC 815-40 and therefore should be classified as liabilities measured at fair value through earnings. The change in fair value of warrant liabilities was recorded in fair value of warrant liabilities within the consolidated statements of comprehensive loss.
F-36
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 17. FAIR VALUE MEASUREMENTS
The following table presents information about the Company’s assets and liabilities fair value at December 31, 2023 and 2022 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
| December 31, 2023 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| Assets: | |||||||||||||||||
| Money market fund | $ | $ | $ | ||||||||||||||
| Bank deposits | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
| Amounts included in: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | ||||||||||||||
| Short-term investments | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
December 31, 2023 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| Liabilities: | |||||||||||||||||
| Warrants liability | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
F-37
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 17. FAIR VALUE MEASUREMENTS (cont.)
| December 31, 2022 | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| Assets: | |||||||||||||||||
| Money market fund | $ | $ | $ | ||||||||||||||
| Bank deposits | |||||||||||||||||
| Agency bonds | |||||||||||||||||
| Municipal bonds | |||||||||||||||||
| Commercial paper | |||||||||||||||||
| Treasury bills | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
| Amounts included in: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | ||||||||||||||
| Short-term investments | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
Fair value of warrants liability
Private Warrants were valued using a Modified Black Scholes Option Pricing Model, which was considered to be a Level 3 fair value measurement. The Modified Black Scholes model’s primary unobservable input utilized in determining the fair value of the Private Warrants was the expected volatility of the Class A ordinary shares. The expected volatility was implied from a blend of the Company’s own share and Public Warrant pricing and the average historical share volatilities of several unrelated public companies within the Company’s industry that the Company considers to be comparable to its own business. As of the exchange date, the Private Warrants were valued using the exchange ratio to ordinary share and the quoted price for such share.
The following table provides the inputs used for Level 3 fair value measurements of warrants liability:
| December 3, 2023 | December 20, 2023 | December 31, 2023 | |||||||||||||||||||||||||||||||||
| Stock price | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Strike price | $ | $ | $ | - | $ | ||||||||||||||||||||||||||||||
| Term (in years) | - | - | - | ||||||||||||||||||||||||||||||||
| Volatility | - | - | - | ||||||||||||||||||||||||||||||||
| Risk-free rate | - | - | - | ||||||||||||||||||||||||||||||||
| Dividend yield | |||||||||||||||||||||||||||||||||||
F-38
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 17. FAIR VALUE MEASUREMENTS (cont.)
Derivative liability at fair value
Derivative liability at fair value was valued using a Monte-Carlo simulation, which was considered to be a Level 3 fair value measurement. The Monte-Carlo simulation primary unobservable input utilized in determining the fair value of the Derivative liability was the expected volatility of the Class A ordinary shares. The expected volatility was implied from a blend of the Company’s own share pricing and the average historical share volatilities of several unrelated public companies within the Company’s industry that the Company considers to be comparable to its own business. As of the exchange date, the Derivative liability was valued using the exchange ratio to ordinary share and the quoted price for such share. The fair value of the redemption features was immaterial.
The following table provides the inputs used for Level 3 fair value measurements of derivative liability:
| December 3, 2023 | December 20, 2023 | December 31, 2023 | |||||||||||||||||||||||||||||||||
| Stock price | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Term (in years) | - | - | - | ||||||||||||||||||||||||||||||||
| Volatility | % | - | % | % | - | % | % | - | % | ||||||||||||||||||||||||||
| Risk-free rate | % | - | % | % | - | % | % | - | % | ||||||||||||||||||||||||||
Cost of Debt (Rd) | % | - | % | ||||||||||||||||||||||||||||||||
| Dividend yield | |||||||||||||||||||||||||||||||||||
Transfers Into and Out of Level 3
The following tables provide reconciliation for all financial liabilities measured at fair value using significant unobservable inputs (Level 3) for the twelve months ended December 31, 2022:
| Total Level 3 Financial Liabilities | |||||
| Balance – December 31, 2021 | $ | ||||
| ( | |||||
| Transfer of Private Placement Warrants to Public Warrants | ( | ||||
| Reclassification of warrant liability to equity | ( | ||||
| Balance – December 31, 2022 | |||||
There were no transfers from or into Level 3 during the year ended December 31, 2023.
F-39
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 17. FAIR VALUE MEASUREMENTS (cont.)
Changes in the fair value of Level 3
The following table presents the changes in the fair value of Level 3 warrants and derivative liabilities for the twelve months ended December 31, 2023:
| Total Level 3 Financial Liabilities | |||||
| Balance – December 31, 2022 | |||||
| Issuance of derivative liabilities at fair value | |||||
| ( | |||||
| Issuance of private warrants | |||||
| ( | |||||
| Balance – December 31, 2023 | $ | ||||
NOTE 18. FINANCIAL INCOME, NET
The components of financial income, net are as follows:
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||||||||
| Interest income and bank fees, net | $ | ( | $ | ( | $ | ( | |||||||||||
| Foreign currency translation adjustments | ( | ||||||||||||||||
| Other expense (income) | ( | ||||||||||||||||
| Financial income, net | $ | ( | $ | ( | $ | ( | |||||||||||
F-40
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 19. BASIC AND DILUTED NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted losses per share:
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||||||||
| Numerator: | |||||||||||||||||
| Net loss for basic and diluted loss per share | $ | ( | $ | ( | $ | ( | |||||||||||
| Denominator: | |||||||||||||||||
| Weighted average number of Class A ordinary and preferred shares used in computing basic and diluted net loss per share | |||||||||||||||||
| Basic and diluted net loss per Class A ordinary and preferred shares | $ | ( | $ | ( | $ | ( | |||||||||||
NOTE 20. SEGMENTS
The Company operates as one reportable segment.
Entity wide disclosures
The Company attributes revenues from external customers to individual countries based on the customer’s billing address.
Net sales attributed to countries that represent a significant portion of consolidated net sales are as follows:
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||||||||
| France | |||||||||||||||||
| US | |||||||||||||||||
| Rest of the world | |||||||||||||||||
| Total | |||||||||||||||||
Long-lived assets other than financial instruments attributed to countries that represent a significant portion of consolidated assets are as follows:
| December 31, 2023 | December 31, 2022 | ||||||||||
| Israel | % | % | |||||||||
| UK | % | % | |||||||||
| US | % | % | |||||||||
| Germany | (* | ||||||||||
*) Represents less than 1%
F-41
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 21. RELATED PARTY TRANSACTIONS
Indemnification Agreements
Tax Indemnity Agreement
We have entered into a tax indemnity agreement with private placement warrantholders, one of which, is 10X Capital SPAC Sponsor I LLC, or the Sponsor. Mr. Hans Thomas is the founding partner and a director of the Sponsor. On October 19, 2022 the Audit Committee had decided to classify the Tax Indemnity Agreement as an “extraordinary transaction”, considering that such transaction in not executed in the ordinary course of business; Pursuant to section 270(1) and section 272(a) of the Israeli Companies Law, on October 19, 2022 the Audit Committee and the Board have determined that it is advisable and in the best interest of the Company to indemnify the private placement warrantholders in the event the ITA determines that a private placement warrantholder is subject to withholding tax or if a private placement warrantholder fails to obtain an ITA Exemption, which indemnity is to take the form of a Tax Indemnity Agreement. In 2023 the Company received a withholding tax exemption from ITA, therefore the tax indemnity agreement is no longer applicable.
Agreements with Directors and Officers
The Company has entered into the following agreements, which were approved by REE’s board of directors in accordance with Israeli law, and also by REE’s shareholders to the extent required by Israeli law.
Joint Ownership Agreement for Company Vehicle. During 2021, REE entered into an agreement with co-founder, director, and CEO Daniel Barel, relating to joint ownership of a company car. REE undertook to provide Daniel Barel with a company car, the value of which is an amount of up to NIS 300,000 to be borne by REE. The excess cost of the car purchased for such purpose has been, and the ongoing fixed cost of the car will continue to be, borne by Daniel Barel. Such car is registered under REE’s name, but Daniel Barel is entitled to an ownership portion of such car, corresponding to the excess acquisition cost thereof borne by him. The full value of the vehicle is recorded in our balance sheet as of December 31, 2023.
Employment of Daniel Barel’s Father-in-Law. Since 2021 co-founder, director, and CEO Daniel Barel’s father-in-law is employed by the Company in the selling, general, and administrative department.
Carpentry Services from Nissim Sardes Welding Workshop. During the year ended December 31, 2020, REE engaged Nissim Sardes Welding Workshop to provide carpentry and welding services. Nissim Sardes Welding Workshop is owned and operated by co-founder and Chief Technology Officer Ahishay Sardes’ father and brother.
SpecterX Transaction. On October 29, 2021, REE entered into a license agreement with SpecterX for secure file exchange services. The co-founder and CEO of SpecterX is the brother of co-founder, director, and CEO Daniel Barel. Daniel Barel is also the Chairman of the Board and an investor of SpecterX. Prior to entering into the agreement with SpecterX, REE conducted an extensive analysis of the available solutions, and determined that SpecterX best met REE’s needs.
Transactions with the related parties were as follows:
| December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||||||||||
| Selling, general and administrative expenses, net | $ | $ | $ | ||||||||||||||
Balances with the related parties were as follows:
| December 31, 2023 | December 31, 2022 | ||||||||||
| Employees and payroll accruals | $ | $ | |||||||||
F-42
Table of Contents
REE AUTOMOTIVE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2023
U.S. dollars in thousands (except share and per share data)
NOTE 22. SUBSEQUENT EVENTS
a.On March 1, 2024, the Company executed an underwriting agreement (the “Underwriting Agreement”) between the Company and Roth Capital Partners LLC (the “Underwriter”) pursuant to which the Company conducted an underwritten public offering (the “Public Offering”) of 2,000,000 Class A Ordinary Shares, no par value per share (the “Ordinary Shares”), at a purchase price of $6.50 per share, for aggregate gross proceeds of approximately $13 million. Pursuant to the terms of the Underwriting Agreement, the Company has also granted the Underwriter a 20-day option to purchase Ordinary Shares of up to 300,000 Ordinary Shares, or 15 % of the number of Ordinary Shares sold in the Public Offering, solely to cover over-allotments, if any. On March 4, 2024, the Underwriter exercised its overallotment option to purchase an additional 300,000 Ordinary Shares in full. The Public Offering, including the shares issuable upon the exercise of the overallotment option, closed on March 5, 2024.
At closing, the Company issued 2,300,000 Ordinary Shares, for aggregate net proceeds of approximately $14.15 million to the Company, after deducting the underwriting discounts and commissions and other estimated offering expenses payable by the Company.
b.In January 2024, the Company issued 44,968 Class A Ordinary Shares under the ATM Sales Agreement for total gross proceeds of approximately $252 . For further information regarding the ATM Sales Agreement, see Note 12.
F-43