Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Principles

Summary of Significant Accounting Principles
12 Months Ended
Dec. 31, 2017
Organization, Consolidation and Presentation of Financial Statements [Abstract]  



The following accounting principles and practices are set forth to facilitate the understanding of data presented in the financial statements:


Nature of operations and principles of consolidation


Workhorse Group Inc. (Workhorse, the Company, we, us or our) is a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. As an American manufacturer we design and build high performance battery-electric electric vehicles and aircraft that make movement of people and goods more efficient and less harmful to the environment. As part of the Company’s solution, it also develops cloud-based, real-time telematics performance monitoring systems that enable fleet operators to optimize energy and route efficiency. Although the Company operates as a single unit through its subsidiaries, it approaches its development through two divisions, Automotive and Aviation. The Company’s core products, under development and/or in manufacture, are the medium duty step van, the light duty pickup, the delivery drone and the manned multicopter.


Workhorse, formerly known as Title Starts Online, Inc. and AMP Holding Inc., was incorporated in the State of Nevada in 2007 with $3,100 of capital from the issuance of common shares to the founding shareholder. On August 11, 2008 the Company received a Notice of Effectiveness from the U.S. Securities and Exchange Commission, and on September 18, 2008, the Company closed a public offering in which it accepted subscriptions for an aggregate of 200,000 shares of its common stock, raising $50,000 less offering costs of $46,234. With this limited capital the Company did not commence operations and remained a “shell company” (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended).


On December 28, 2009, the Company entered into and closed a Share Exchange Agreement with the Shareholders of Advanced Mechanical Products, Inc. (n/k/a AMP Electric Vehicles, Inc.) (AMP) pursuant to which the Company acquired 100% of the outstanding securities of AMP in exchange for 14,890,904 shares of the Company’s common stock. Considering that, following the merger, the AMP Shareholders control the majority of the outstanding voting common stock of the Company, and effectively succeeded the Company’s otherwise minimal operations to those that are AMP.  AMP is considered the accounting acquirer in this reverse-merger transaction.  A reverse-merger transaction is considered and accounted for as a capital transaction in substance; it is equivalent to the issuance of AMP securities for net monetary assets of the Company, which are de minimus, accompanied by a recapitalization. Accordingly, goodwill or other intangible assets have not been recognized in connection with this reverse merger transaction.  AMP is the surviving entity and the historical financials following the reverse merger transaction will be those of AMP.  The Company was a shell company immediately prior to the acquisition of AMP pursuant to the terms of the Share Exchange Agreement.  As a result of such acquisition, the Company operations are now focused on the design, marketing and sale of vehicles with an all-electric powertrain and battery systems.  Consequently, we believe that acquisition has caused the Company to cease to be a shell company as it now has operations.  The Company formally changed its name to AMP Holding Inc. on May 24, 2010.


Since the acquisition, the Company has devoted the majority of its resources to the development of an all-electric drive system capable of moving heavy large vehicles ranging from full size SUV’s up to and including Medium Duty Commercial trucks.  Additionally, in February 2013, the Company formed a new wholly owned subsidiary, AMP Trucks Inc., an Indiana corporation. On March 13, 2013 AMP Trucks Inc. closed on the acquisition of an asset purchase of Workhorse Custom Chassis, LLC. The assets included in this transaction included: the Workhorse brand, access to the dealer network of 440 dealers nationwide, intellectual property, and all physical assets which included the approximately 250,000 sq. ft. of facilities on 47 acres of land in Union City, Indiana.  This acquisition allows the Company to position itself as a medium duty OEM capable of producing new chassis with electric, propane, compressed natural gas, and hybrid configurations, as well as gasoline drive systems.  


On April 16, 2015 the Company filed Articles of Merger with the Secretary of State of the State of Nevada to change the name from “AMP Holding Inc.” to “Workhorse Group Inc.”. The Company believed that this change will allow investors, customers and suppliers to better associate the Company with the Workhorse brand, which is well known in the market.


The consolidated financial statements include Workhorse Group Inc. and its wholly owned subsidiaries, together referred as “The Company”. Intercompany transactions and balances are eliminated in consolidation.


The Company’s wholly owned subsidiaries include Workhorse Technologies Inc., Workhorse Motor Works Inc, Workhorse Properties Inc., and Surefly, Inc.which held no assets or liabilities at year end December 31, 2017.


Basis of presentation


The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  However, the Company has limited revenues and has negative working capital and stockholders’ deficits.  These conditions raise substantial doubt about the ability of the Company to continue as a going concern.


In view of these matters, continuation as a going concern is dependent upon the continued operations of the Company, which, in turn, is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and successfully carry out its future operations.  The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary, should the Company not continue as a going concern.


The Company has continued to raise capital.  Management believes the proceeds from these offerings, future offerings, and the Company’s anticipated revenue, provides an opportunity to continue as a going concern.  If additional funding is required, the Company plans to obtain working capital from either debt or equity financing from the sale of common, preferred stock, and/or convertible debentures. Obtaining such working capital is not assured. The Company is currently in a production ramp up mode and placing greater emphasis on manufacturing capability.


The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from these estimates.


Certain reclassifications were made to the prior year financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operation or stockholders’ deficit.


On May 3, 2018, we determined that we would restate previously issued financial statements to correct errors related to our recording of our customer allowance account. We made a clerical error that resulted in an improper rate being applied to the number of units sold. As a result, the Company’s accrued liabilities were over accrued by $700 thousand in our December 31, 2017 balance sheet. Therefore, we have corrected our accrued liabilities account by reducing the balance by $700 thousand in the December 31, 2017. Additionally, we have corrected an error relating to the improper exclusion of inventory in transit as of December 31, 2017.


Accordingly, we are restating: (i) our consolidated balance sheet as of December 31, 2017 and our consolidated statements of operations and comprehensive loss and statements of cash flows for the year ended December 31, 2017.


The following tables provide a reconciliation of the amounts previously reported to the restated amounts as of and for the year ended December 31, 2017:


    December 31, 2017  
    As Reported     Adjustments     As Restated  
Current assets:                  
Cash and cash equivalents   $ 4,069,477     $ -     $ 4,069,477  
Accounts receivable     1,013,423       -       1,013,423  
Lease receivable current     45,300       -       45,300  
Inventory     4,236,506       385,436       4,621,942  
Prepaid expenses and deposits     946,134       -       946,134  
      10,310,840       385,436       10,696,276  
Property, plant and equipment, net     5,596,013       -       5,596,013  
Lease receivable long-term     212,004       -       212,004  
      16,118,857       385,436       16,504,293  
Liabilities and Stockholders' Equity (Deficit)                        
Current liabilities:                        
Accounts payable     5,539,864       62,993       5,602,857  
Accrued liabilities     1,126,675       (700,000 )     426,675  
Accounts payable, related parties     54,914       -       54,914  
Customer deposits     54,405       -       54,405  
Current portion of long-term debt     381,497       -       381,497  
      7,157,355       (637,007 )     6,520,348  
Principal amount of notes payable     5,750,000       -       5,750,000  
Less unamortized discount and debt issuance costs     987,500       -       987,500  
Notes payable     4,762,500       -       4,762,500  
Long-term debt     1,709,881       -       1,709,881  
Stockholders' equity (deficit):                        
Series A preferred stock, par value of $.001 per share 75,000,000 shares authorized, 0 shares issued and outstanding at December 31, 2017 and December 31, 2016     -       -       -  
Common stock, par value of $.001 per share 100,000,000 shares authorized, 41,529,181 shares issued and outstanding at December 31, 2017 and 27,578,864 shares issued and outstanding at December 31, 2016     41,529       -       41,529  
Additional paid-in capital     107,760,036       -       107,760,036  
Accumulated deficit     (105,312,444 )     1,022,443       (104,290,001 )
      2,489,121       1,022,443       3,511,564  
    $ 16,118,857     $ 385,436     $ 16,504,293  


    December 31, 2017  
    As Reported     Adjustments     As Restated  
Sales   $ 10,846,460     $ -     $ 10,846,460  
Cost of Sales     24,516,863       -       24,516,863  
Gross loss     (13,670,403 )     -       (13,670,403 )
Operating Expenses                        
Selling, general and administrative     10,328,211       (700,000 )     9,628,211  
Research and development     18,060,180       (322,443 )     17,737,737  
Total operating expenses     28,388,391       (1,022,443 )     27,365,948  
Interest expense, net     180,437       -       180,437  
Net loss   $ (42,239,231 )   $ 1,022,443     $ (41,216,788 )
Basic and diluted loss per share     (1.09 )     0.03       (1.06 )

Weighted average number of common shares outstanding

    38,755,796       -       38,755,796  



    December 31, 2017  
    As Reported     Adjustments     As Restated  
STOCKHOLDERS' EQUITY                  
Common stock, par value of $.001 per share and 100,000,000 shares authorized 41,529,181 shares issued and outstanding     41,529       -       41,529  
Series A preferred stock, par value of $.001 per share and 75,000,000 shares authorized 0 shares issued and outstanding     -       -       -  
Additional paid-in capital     107,760,036       -       107,760,036  
Accumulated deficit     (105,312,444 )     1,022,443       (104,290,001 )
Total stockholders' equity (deficit)     2,489,121       1,022,443       3,511,564  


    December 31, 2017  
    As Reported     Adjustments     As Restated  
Cash flows from operating activities:                  
Net loss   $ (42,239,231 )   $ 1,022,443     $ (41,216,788 )
Adjustments to reconcile net loss from operations to cash used by operations:                        
Depreciation     549,973     -       549,973  
Stock based compensation     1,433,192     -       1,433,192  
Effects of changes in operating assets and liabilities:                        
Accounts receivable     (223,133 )     -       (223,133 )
Inventory     (1,771,671 )     (385,436 )     (2,157,107 )
Prepaid expenses and deposits     (196,971 )     -       (196,971 )
Accounts payable     3,777,320       (637,007 )     3,140,313  
Accounts payable, related parties     (46,425 )     -       (46,425 )
Customer deposits     54,405       -       54,405  
Net cash used by operations     (38,662,541 )     -       (38,662,541 )
Cash flows from investing activities:                        
Capital expenditures     (143,355 )     -       (143,355 )
Net cash used by investing activities     (143,355 )     -       (143,355 )
Cash flows from financing activities:                        
Proceeds from notes payable     4,762,500       -       4,762,500  
Proceeds from advances     26,732       -       26,732  
Payments on long-term debt     (76,572 )     -       (76,572 )
Issuance of common and preferred stock     37,042,468       -       37,042,468  
Exercise of warrants and options     650,675       -       650,675  
Net cash provided by financing activities     42,405,803       -       42,405,803  
Change in cash and cash equivalents     3,599,907       -       3,599,907  
Cash at the beginning of the period     469,570       -       469,570  
Cash at the end of the period   $ 4,069,477     $ -     $ 4,069,477  


Financial instruments


The carrying amounts of financial instruments including cash, inventory, accounts payable and short-term debt approximate fair value because of the relatively short maturity of these instruments.


Accounts receivable


Accounts receivable consist of collectible amounts for products and services rendered. The Company carries its accounts receivable at invoice amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts based on a history of past write-offs and collections and current credit conditions. The Company generally does not require collateral for accounts receivable. During 2017 and 2016, sales to one customer approximated 98% and 91% of net sales, respectively.


Lease Receivable


The Company’s leasing activities consist of the leasing of trucks which are classified as direct financing leases.  Revenue is recognized at the inception of the lease.  The leases have a term of eight years.  Future payments to be received on the leases are as follows:


  2018   $ 45,300  
  2019     36,240  
  2020     36,240  
  2021     36,240  
  2022     36,240  
  Thereafter     67,044  
      $ 257,304  




Inventory is stated at the lower of cost or market. Manufactured inventories are valued at standard cost, and consist of raw materials, work in process and finished goods.


Property, plant and equipment, net


Property, plant and equipment, net is stated at cost less accumulated depreciation.  Major renewals and improvements are capitalized while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed. When property, plant and equipment is retired or otherwise disposed of, a gain or loss is realized for the difference between the net book value of the asset and the proceeds realized thereon. Depreciation is calculated using the straight-line method, based upon the following estimated useful lives:


  Buildings:     15 - 30 years  
  Leasehold improvements:     7 years  
  Software:       3 - 6 years  
  Equipment:       5 years  
  Vehicles and prototypes:      3 - 5 years   


Common stock


On April 22, 2010, the directors of the Company approved a forward stock split of the common stock of the Company on a 14:1 basis.  On May 12, 2010, the stockholders of the Company voted to approve the amendment of the certificate of incorporation resulting in a decrease of the number of shares of common stock.   Management filed the certificate of amendment decreasing the authorized shares of common stock with the State of Nevada on September 8, 2010. On February 11, 2015, the Company filed a certificate of amendment to its articles of incorporation to increase the authorized shares of common stock to 50,000,000.


On December 9, 2015, the Company filed a Certificate of Amendment to its Certificate of Incorporation to implement a one-for-ten reverse split of the Corporation’s issued and outstanding common stock (the “Reverse Stock Split”), as authorized by the stockholders of the Company. The Reverse Stock Split became effective at the open of trading on December 11, 2015 (the “Effective Date”). As of the Effective Date, every ten shares of issued and outstanding common stock were combined into one newly issued share of common stock. No fractional shares were issued in connection with the Reverse Stock Split. Total cash payments made by the Company to stockholders in lieu of fractional shares was not material.


On August 7, 2017, the shareholders of the Company voted to increase the authorized shares of common stock to 100,000,000 and the Certificate of Amendment amending the Articles of Incorporation was filed with the State of Nevada on August 8, 2018.


All references in the financial statements and MD&A to number of common shares, price per share and weighted average shares of common stock have been adjusted to reflect the Reverse Stock Split on a retroactive basis for all prior periods presented, unless otherwise noted, including reclassifying an amount equal to the reduction in par value of common stock to additional paid in capital.


The capital stock of the Company is as follows:


Preferred Stock - The Company has authorized 75,000,000 shares of preferred stock with a par value of $.001 per share. These shares may be issued in series with such rights and preferences as may be determined by the Board of Directors. There are no shares of preferred stock outstanding.


Common Stock - The Company has authorized 100,000,000 shares of common stock with a par value of $0.001 per share as of December 31, 2017.  


Revenue recognition / customer deposits


It is the Company’s policy that revenues will be recognized in accordance with SEC Staff Bulletin (SAB) No. 104, “Revenue Recognition”.  Under SAB 104, product revenues (or service revenues) are recognized when persuasive evidence of an arrangement exists, delivery has occurred (or service has been performed), the sales price is fixed and determinable, and collectability is reasonably assured.


Income taxes


As no taxable income has occurred from the date of this merger to December 31, 2017 cumulative deferred tax assets of approximately $19.4 million are fully reserved, and no provision or liability for federal or state income taxes has been included in the financial statements. Carryover amount are:


  Approximate net operating loss
($ millions)
  Carryover to be used against taxable
income generated through year
  3.6   2030
  6.7   2031
  3.9   2032
  4.7   2033
  6.1   2034
  9.0   2035
  18.7   2036
  39.7   2037


Research and development costs


The Company expenses research and development costs as they are incurred. Research and Development costs were approximately $17.7 million and $6.1 million for the years ended December 31, 2017 and 2016, respectively, consisting primarily of personnel costs for our teams in engineering and research, prototyping expense, and contract and professional services.


Basic and diluted loss per share


Basic loss per share is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period.  For all periods, all of the Company’s common stock equivalents were excluded from the calculation of diluted loss per common share because they were anti-dilutive, due to the Company’s net losses.


Stock based compensation


The Company accounts for its stock-based compensation in accordance with “Share-Based Payments” (codified in FASB ASC Topic 718 and 505).  The Company recognizes in its statement of operations the grant-date fair value of stock options and warrants issued to employees and non-employees.  The fair value is estimated on the date of grant using a lattice-based valuation model that uses assumptions concerning expected volatility, expected term, and the expected risk-free rate of return.  For the awards granted, the expected volatility was estimated by management as 50% based on a range of forecasted results.  The expected term of the awards granted was assumed to be the contract life of the option or warrant (one, two, three, five or ten years as determined in the specific arrangement).  The risk-free rate of return was based on market yields in effect on the date of each grant for United States Treasury debt securities with a maturity equal to the expected term of the award.


Related party transactions


Certain stockholders and stockholder family members have advanced funds or performed services for the Company.  These services are believed to be at market rates for similar services from non-related parties.  Related party accounts payable are segregated in the balance sheet.


Subsequent events


The Company evaluates events and transactions occurring subsequent to the date of the consolidated financial statements for matters requiring recognition or disclosure in the consolidated financial statements. The accompanying consolidated financial statements consider events through March 14, 2018, the date on which the consolidated financial statements were available to be issued.