Summary of Business and Significant Accounting Principles
|12 Months Ended|
Dec. 31, 2020
|Organization, Consolidation and Presentation of Financial Statements [Abstract]|
|SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES||SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
Nature of operations and basis of presentation
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 create all-electric delivery trucks and drone systems, including the technology that optimizes the way these mechanisms operate. We are last-mile delivery’s first purpose-built electric mobility solution and we are currently focused on our core competency of bringing the C-Series electric delivery trucks to market and fulfilling our existing backlog of orders. The consolidated financial statements are prepared in conformity with U.S. GAAP.
Principles of consolidation
The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications were made to the prior year consolidated financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or stockholders’ equity.
Cash and cash equivalents
Cash includes cash equivalents which are highly liquid investments that are readily convertible to cash. A cash equivalent is a highly liquid investment that at the time of acquisition has a maturity of three months or less.
We maintain certain cash balances restricted as to withdrawal or use. Our restricted cash is comprised primarily of cash received through financing transactions that have not been released for use by us and cash held as collateral for certain payments. We record restricted cash in the Consolidated Balance Sheets and determine current or non-current classification based on the expected duration of the restriction.
The carrying amounts of financial instruments including cash and cash equivalents, restricted cash, inventory, and accounts payable approximate fair value because of the relatively short maturity of these instruments.
Accounts receivable consists of collectible amounts for products and services rendered. The Company carries its accounts receivable at invoice amount less an allowance for credit losses. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for credit losses based on a history of past write-offs, collections, and current and future credit conditions.
Inventory is stated at the lower of cost or net realizable value. Manufactured inventories are valued at standard cost, which approximates actual costs on a first-in, first-out basis. We record inventory reserves for excess or obsolete inventories based upon assumptions about our current and future demand forecasts.
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 as incurred. 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:
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. If the carrying amount of an asset or 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.
Valuation of investment
In October of 2020, we began measuring our investment in Lordstown Motor Corp. (“LMC”) at fair value as permitted under Accounting Standards Codification (“ASC”) 820, Fair Value Measurement. On October 26, 2020, LMC shares of Class A Common Stock began trading on the Nasdaq Global Select market under the ticker symbol “RIDE.” Therefore, the carrying value of our investment is equal to the quote market price of LMC's common stock. If the price of LMC's common stock decreases, we would record a decrease in the value of our investment and a charge to earnings. We have classified the LMC investment as non-current within the accompanying Consolidated Balance Sheets due to our intention to hold this investment for purposes of continued affiliation and business advantage.
We previously elected the measurement alternative allowed under generally accepted accounting principles (“GAAP”) for our investment in LMC, which, prior to October 2020, did not have a readily determinable fair value. Under the measurement alternative, we measured this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions in an identical or similar investment in LMC.
Accrued liabilities consist of the following:
We generally offer warranty coverage for our products. We accrue warranty related costs under standard warranty terms and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers.
Provisions for estimated assurance warranties are recorded at the time of sale and are periodically adjusted to reflect actual experience. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring Company obligations under the warranty plans. Historically, the cost of fulfilling the Company’s warranty obligations has principally involved replacement parts, towing and transportation costs, labor and sometimes travel for any field retrofit campaigns. The Company’s estimates are based on historical experience, the extent of pre-production testing, the number of
units involved and the extent of features/components included in product models. The Company reviews actual warranty claims experience to determine if there are systemic defects that would require a field campaign.
Although we believe that the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed to increases or decreases in our warranty accrual that could be material.
Activity for the Company's warranty accrual is as follows:
(1) The increase to the warranty accrual in 2020 primarily relates to a change in estimate in the amount of labor required to maintain our current warranty program with our 2016 and 2017 E-Series trucks. The expense includes estimated costs for labor and transportation and excludes any contribution from vendors.
Fair value option
As permitted under ASC 825, Financial Instruments, the Company has elected the fair value option to account for its convertibles notes. In accordance with ASC 825, the Company records its convertible notes at fair value with changes in fair value recorded in Interest Expense in the Consolidated Statement of Operations. As a result of applying the fair value option, direct costs and fees related to the convertible notes were recognized in earnings as incurred and were not deferred.
On May 3, 2019, the Company filed an amendment to its Articles of Incorporation to increase the authorized number of shares of common stock from 100,000,000 to 250,000,000.
We file a consolidated U.S. federal income tax return and separate state and local income tax returns. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carryforwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
We recognize the tax benefit from an uncertain tax position claimed or expected to be claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Research and development costs
The Company expenses research and development costs as they are incurred. Research and development costs consist primarily of personnel costs for engineering and research, prototyping costs, and contract and professional services.
Basic and diluted earnings (loss) per share
Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted earnings per share are calculated using the treasury stock method, on the basis of the weighted average number of shares outstanding plus the dilutive effect, if any, of stock options, unvested restricted stock and warrants. The if converted method is used for determining the impact of the convertible notes.
The following table shows the computation of basic and diluted earnings per share:
Approximately 13.3 million shares of common stock representing the conversion of the High Trail Convertible Note (as defined in Note 6) were excluded from basic and diluted weighted average shares outstanding in the table above for the year ended December 31, 2019. As the High Trail Convertible Note was fully converted during the year, the number of shares issued upon conversion is included in the basic weighted average shares outstanding for the year ended December 31, 2020.
The Company recognizes in its Consolidated Statements of Operations the grant-date fair value of share-based awards issued to employees and non-employees over the awards' vesting period which equals the service period. Forfeitures are recognized as they occur. The fair value of restricted stock awards is the price of our common stock on the date of the award.
The fair value for stock options is estimated on the grant date using a Black-Scholes valuation model that uses the assumptions of expected volatility, expected term, and the expected risk-free rate of return. The expected volatility was estimated by management as 50% based on results from other public companies in our industry. The expected term of the awards granted was assumed to be the contract life of the option 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.
Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to warranty liability, warrant liability, fair value of the convertible notes and litigation-related accruals. Actual results could differ from our estimates.
Impact of COVID-19 Pandemic
In December 2019, a novel coronavirus disease (“COVID-19”) was reported. On January 30, 2020, the World Health Organization (“WHO”) declared COVID-19 a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.
As of December 31, 2020, our locations and primary suppliers continue to operate. However, during the fourth quarter of 2020, the Company experienced an outbreak of COVID-19 cases amongst our employees. Approximately 40% of our production employees tested positive for COVID-19. Additionally, several of our suppliers experienced capacity constraints due to the pandemic, which has limited their shipment volumes. As a result, we experienced a significant reduction to our planned production volume in the fourth quarter of 2020. See Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.
The entire disclosure for the organization, consolidation and basis of presentation of financial statements disclosure, and significant accounting policies of the reporting entity. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef