Workhorse Group's Reverse Merger: A Shareholder's Dilemma

The proposed reverse merger between Workhorse Group (NASDAQ: WKHS) and an unnamed U.S. electric commercial vehicle manufacturer presents a stark strategic dilemma for shareholders. While the deal aims to resolve Workhorse's debt woes and inject new capital, its structure raises red flags around extreme dilution, regulatory risks, and precarious financing terms. For investors, this is a high-stakes gamble with little upside and substantial downside exposure.

The Dilution Tsunami

At the heart of the transaction is a seismic shift in ownership. Current shareholders stand to lose majority control as the private manufacturer's investors are expected to hold a “substantial majority” of Workhorse's shares post-merger. The exact stake remains undisclosed, but given that the Manufacturer is merging into a newly created subsidiary, the equity issuance required to complete the deal could reduce existing shareholders' ownership to a minority.

Even more concerning is the 3 million newly issued shares to be given to the institutional noteholder in exchange for debt relief. These shares, combined with the Manufacturer's stake, could dilute existing equity holders to a point of irrelevance. For context, Workhorse's current float is already heavily traded on low liquidity, and this move risks rendering existing shareholders powerless over corporate decisions.

The stock's history of extreme volatility—plummeting 21% pre-market following the July 14 announcement—underscores investor skepticism.

Nasdaq Approval: A Double-Edged Sword

The transaction's success hinges on Nasdaq's approval, which is far from guaranteed. To maintain its listing, Workhorse must demonstrate compliance with Nasdaq's rules, including maintaining a minimum bid price of $1 and adequate stockholders' equity. However, the deal's structure—particularly the massive equity issuance—could trigger scrutiny over whether the transaction constitutes a “going-private” move or a de facto control shift that violates listing standards.

If Nasdaq rejects the deal, Workhorse faces two dire outcomes:
1. Delisting: A loss of Nasdaq status would trap shareholders in a penny stock with no secondary market liquidity.
2. Debt Collapse: Without the refinancing, Workhorse's $33 million in convertible notes remain due, and its $12.8 million operating loss in Q1 2025 suggests it lacks the cash to repay them.

Debt Refinancing: A Stopgap with No Safety Net

The refinancing terms, while addressing immediate liquidity needs, offer little long-term relief. The $20 million sale-leaseback of its Indiana factory and new convertible notes may stave off bankruptcy, but they do nothing to resolve Workhorse's core issues:
- Cash Burn: Despite cost-cutting, Workhorse's Q1 2025 cash balance of $30.6 million is dwindling, and its debt-to-equity ratio remains unsustainable.
- Operational Gaps: The company still struggles to fulfill orders, with its W56 electric van facing battery capacity delays and production bottlenecks.

The refinancing also terminates the Investor's right to demand additional note issuances, which may reduce near-term pressure. However, the new shares issued to settle the debt could further depress stock value, creating a self-fulfilling cycle of dilution and devaluation.

The 14-Day Exclusivity Trap

Workhorse's 14-day exclusivity agreement with the Manufacturer leaves little room for alternatives. During this period, the company cannot explore other transactions, even if the merger terms worsen or better opportunities arise. This lock-in period is especially risky given the lack of binding agreements and the Manufacturer's anonymity.

Investors are left wondering: What due diligence has been done on this partner? The refusal to name the entity or disclose key terms raises questions about transparency and the Manufacturer's ability to deliver on promises.

Investment Implications: Exit Now or Face Erosion

The risks here are asymmetrically skewed against shareholders. Even if the deal closes:
- Dilution: Majority control shifts to the Manufacturer, sidelining existing investors.
- Execution Risk: Integrating the Manufacturer's operations, technology, and debt into Workhorse's fragile balance sheet is a high-risk proposition.
- Regulatory Hurdles: Nasdaq's potential rejection could trigger delisting, erasing residual value.

The stock's history of volatility—down 75% over the past year—hints at investor distrust. With no margin of safety and a high probability of value destruction, the prudent move is to exit now.

Conclusion

Workhorse's reverse merger is a high-wire act with no net. Shareholders face a triple threat: catastrophic dilution, regulatory rejection, and a refinancing that kicks the can without solving underlying financial rot. The 14-day exclusivity period amplifies the risk of a rushed, suboptimal deal.

For investors, the writing is on the wall: sell immediately. The odds of this transaction delivering lasting value are low, and the costs of failure—delisting, bankruptcy, or permanent equity dilution—are too high to gamble on.

The chart tells the story: WKHS is a speculative bet with no safety net. Walk away while you can.