Workhorse Group Inc.WKHS
Workhorse Group Inc. Debt Disclosure
DEBT
A reconciliation of the fair value of the convertible notes is as follows:
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Fair value of convertible notes, beginning of year | $ | — | $ | 24,705,000 | |||||||
| Fair value of convertible notes issued during year | 13,695,789 | — | |||||||||
Change in fair value of convertible notes (1) | 6,484,311 | 367,357 | |||||||||
| Fair value of convertible notes exchanged for common stock | — | (25,072,357) | |||||||||
| Fair value of convertible notes, end of year | $ | 20,180,100 | $ | — | |||||||
(1) The Company recognizes changes in fair value of convertible notes for common stock in in the consolidated statements of operations.
Green Senior Convertible Notes Due 2026
On December 12, 2023, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) under which the Company issued, pursuant to an indenture and supplemental indenture (the “Indenture”), $20.0 million principal amount of green senior convertible notes (the “2026 Notes”) due October 1, 2026. The 2026 Notes are a senior secured obligation of the Company and ranked senior to all unsecured debt of the Company. The 2026 Notes are guaranteed by all the Company’s current subsidiaries and are secured by substantially all the assets of the Company and its subsidiaries. The 2026 Notes were issued with an original issue discount of 12.5%. In the event of a default under the Indenture, the 2026 Notes would accrue default interest at a rate of 15.0% per annum (the “Default Interest”) until such default is cured and all outstanding Default Interest has been paid. The 2026 Notes do not bear interest other than the Default Interest. The 2026 notes are convertible into 38.6 million shares of common stock at a rate of $0.5178 per share, subject to change for anti-dilution adjustments and adjustments for certain corporate events.
The Company paid fees in connection with the issuance of the 2026 Notes of $0.6 million, resulting in net proceeds of $16.9 million. We have elected to account for the 2026 Notes using the fair value option under GAAP. All direct costs related to the issuance of our convertible notes were recognized in Interest expense in the consolidated statements of operations for the year ended December 31, 2023.
The 2026 Notes contain certain covenants, including limitations on liens, additional indebtedness, investments, dividends and other restricted payments, changes in the business, transactions with affiliates, and customary events of default. The Company is also required to at all times maintain minimum liquidity of the lesser of $10.0 million and the then aggregate outstanding principal amount under the 2026 Notes in a deposit account under the control of the collateral agent. In addition, the 2026 Notes requires that the Company have cash and cash equivalents of at least $25.0 million on December 31, 2023, $13.5 million on January 31, 2024, and of $20.0 million on February 29, 2024. In the event we consummate a sale and leaseback transaction with respect to the real property where our Union City, IN plant is located, the holder of the 2026 Notes may, at its option, require us to use up to half of the proceeds we receive in such a sale leaseback transaction to redeem outstanding principal under the 2026 Notes. For additional information regarding the sale of our Union City plant, refer to Note 16, Subsequent Events, to our consolidated financial statements.
As of December 31, 2023, the contractual principal balance of the 2026 Notes was $20.0 million and the fair value was $20.2 million. During the year ended December 31, 2023, we recorded a $6.5 million fair value adjustment in Interest expense in the statements of operations related to the 2026 Notes. No fair value adjustments related to the 2026 Notes attributable to changes in credit risk were recorded during the year ended December 31, 2023. Going forward, any future fair value adjustments attributable to changes in credit risk will be recorded in Other comprehensive loss.
The estimated fair value of the 2026 Notes upon issuance on December 12, 2023 was $13.7 million. The fair value was computed using a Binomial Lattice Model which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement. The unobservable inputs utilized for measuring the fair value of the 2026 Notes reflect our assumptions about the assumptions that market participants would use in valuing the Note as of the issuance date and subsequent reporting period.
We determined the fair value by using the following key inputs to the Binomial Lattice Model:
| Issuance Date | December 12, 2023 | |||||||
| Maturity Date | October 1, 2026 | |||||||
| Principal Balance as of the Valuation Date | $ | 20,000,000 | ||||||
| Risk-Free Rate (Annual) | 5.3 | % | ||||||
| Implied Yield | 10.45 | % | ||||||
| Volatility (Annual) | 80.00 | % | ||||||
As of December 31, 2023, the Company is in compliance with the debt terms and associated covenant under the 2026 Notes. The holder may, at its option, require the Company to redeem up to 12.5% of the original principal amount of the 2026 Notes in cash on the first and fifteenth of each month beginning January 1, 2024. Subsequent to December 31, 2023, the Company has repaid $7.5 million of the initial principal balance upon request of the holder. On February 29, 2024, the Company entered into a First Amendment to Green Senior Secured Convertible Note Due 2026 (the “2026 Notes Amendment”) with the holder. In connection with the 2026 Notes Amendment, the Company redeemed $10.0 million principal amount of the 2026 Notes, thereby reducing the outstanding principal amount of the Note to $2.5 million. Therefore, given the Company has made partial redemption payments and expects the holder to require repayment of the 2026 Notes in full within 12 months, the Company classified the 2026 Notes as current in the consolidated balance sheets.
Warrants Exercisable Prior to December 2026
On December 12, 2023, as part of the Securities Purchase Agreement, the Company issued warrants (the “2026 Warrants”) to purchase 25,601,639 shares of common stock at an exercise price of $0.4492 per share. The 2026 Warrants may be exercised by the holder immediately upon issuance and prior to December 12, 2026. No fractional shares will be issued upon exercise of the 2026 Warrants. Upon a change of control or corporate event (as defined in the warrant agreement), the holder may request that the Company repurchase the 2026 Warrants for cash in an amount equal to the Black Scholes Value (as defined in the warrant agreement). A Black Scholes Value settlement is meant to compensate the holder of the warrant for lost time value related to a forced early exercise upon the contingent event. As the 2026 Warrants are recorded at fair value and measured pursuant to a Black Scholes option pricing model, the carrying value approximates the amount that the Company would have to pay in a Black Scholes Value settlement.
The fair value of the components of the Securities Purchase Agreement was allocated between the 2026 Notes and 2026 Warrants. As of December 12, 2023 (the initial recognition) and December 31, 2023, the fair value of the 2026 Warrants was $3.8 million and $5.6 million, respectively. During the year ended December 31, 2023, we recorded a $1.8 million fair value adjustment in Interest expense in the statements of operations related to the 2026 Notes. The fair value of the 2026 Warrants was measured using the Black Scholes model approach. Significant inputs to the model at December 12, 2023 and December 31, 2023 are as follows:
| Valuation Assumptions | December 31, 2023 | Initial Recognition on December 12, 2023 | |||||||||
| Stock Price | $ | 0.36 | $ | 0.37 | |||||||
| Strike Price | $ | 0.4492 | $ | 0.4492 | |||||||
| Volatility (annual) | 98.0 | % | 98.0 | % | |||||||
| Risk-Free Rate | 5.3 | % | 5.3 | % | |||||||
| Estimated time to expiration (years) | 3 | 3 | |||||||||
| Dividend Yield | 0.0 | % | 0.0 | % | |||||||
4.0% Senior Secured Convertible Notes Due 2024
On October 14, 2020 the Company issued $200.0 million par value convertible notes (the “2024 Notes”) due October 14, 2024. The 2024 Notes were a senior secured obligation of the Company, and ranked senior to all unsecured debt of the Company. The 2024 Notes were guaranteed by all the Company’s current and future subsidiaries and were secured by substantially all the assets of the Company and its subsidiaries. Interest was payable quarterly beginning on January 15, 2021 at a rate of 4.0% per annum. The 2024 Notes were convertible at a rate of $35.29 per share, subject to change for anti-dilution adjustments and adjustments for certain corporate events.
In the fourth quarter of 2021, the Company entered into securities exchange agreements with certain holders of its 2024 Notes, to exchange $172.5 million in principal amount of the notes for 27.7 million shares of common stock. In the second quarter of 2022, the remaining $27.5 million in aggregate principal of the 2024 Notes was exchanged for 7.8 million shares of common stock. The number of shares issued was calculated by dividing $29.4 million, which represents 107% of the principal amount of the notes, plus $0.3 million of interest accrued on the notes, by the average of the daily volume weighted average price (“VWAP”) for the 10 days immediately preceding April 21, 2022. During the year ended December 31, 2022, the Company recognized a loss of $1.8 million, which included a $0.4 million fair value adjustment and a $1.4 million adjustment related to the amount previously recognized in Accumulated other comprehensive loss. The total loss was recorded in Interest expense in the consolidated statements of operations. During the year ended December 31, 2022, cash paid for contractual interest on the 2024 Notes was $0.3 million.
After the exchanges described above, the indenture and related security agreement under which the 2024 Notes were issued were terminated.
Floorplan Line of Credit
On August 10, 2023, we entered into a Floorplan and Security Agreement (the “Floorplan LOC”) with Mitsubishi HC Capital America, Inc. under which we obtained a revolving floorplan line of credit with a maximum borrowing limit of $5.0 million.
The intended use of the Floorplan LOC was to finance the acquisition of inventory used in production of our W4 CC and W750 vehicles. The terms of the Floorplan LOC included interest charged on the outstanding borrowings and other fees and covenants. Interest was to be charged at a variable rate based on a reference interest rate, such as the Secured Overnight Financing Rate (“SOFR”), plus 4.86%.
In connection with the Securities Purchase Agreement described above, we terminated the Floorplan and Security Agreement. During the year ended December 31, 2023, we did not draw on or incur any charges related to the Floorplan LOC.
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Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2023 | Mar 12, 2024 | Showing above |
| 2021 | Mar 1, 2022 | |
| 2020 | Mar 1, 2021 | |
About Debt Disclosures
Debt disclosures detail a company's borrowing structure — the types of instruments, interest rates, maturity schedule, and covenant restrictions that define its financial obligations and flexibility. This section is essential for assessing refinancing risk, interest rate exposure, and the margin of safety against financial distress.
Key signals: the maturity schedule reveals concentration risk — large maturities within 1-2 years during tight credit markets can force dilutive refinancing or asset sales. Compare the fair value of debt against carrying amount to gauge whether the market views the company's credit risk differently than the balance sheet suggests. Watch covenant compliance disclosures for tightening cushions, especially leverage and interest coverage ratios. Variable-rate debt exposure quantifies sensitivity to interest rate changes. Secured versus unsecured mix affects recovery rates and future borrowing capacity. Compare net debt-to-EBITDA against industry peers and covenant limits to assess financial health.