8-K: Workhorse Group Secures $3.4 Million in Additional Funding Through Convertible Note Issuance

Workhorse Group has secured $3.4 million in additional funding through the issuance of a senior secured convertible note and warrants to an institutional investor.

Summary

• Workhorse Group issued a $3.4 million senior secured convertible note and warrants to purchase 4,546,024 shares of common stock to an institutional investor on September 30, 2024.
• This is part of a larger securities purchase agreement from March 15, 2024, which allows for up to $139 million in convertible notes and warrants to be issued in multiple tranches.
• The company has previously issued $28.885 million in notes and warrants to purchase 11,094,876 shares under this agreement.
• As of September 27, 2024, $5.95 million of the previously issued notes remained outstanding, and no shares had been issued from the warrants.
• The new note has a 12.5% original issue discount, resulting in $2.975 million in proceeds for Workhorse before fees and expenses.
• The note bears interest at 9% per annum, payable quarterly, and can be paid in cash or by compounding the principal.
• The note can be converted into common stock at a price equal to the lower of $0.5983 or a variable price based on the volume weighted average price of the stock, subject to a floor price of $0.1693.
• The investor has the option to increase their beneficial ownership cap to 9.99% effective November 4, 2024.
• The note matures one year from the issue date, with potential extensions at the holder's option.
• The company may prepay the note with a premium of 25% or 75% under certain conditions.
• The warrants have an exercise price of $1.2684 per share and are exercisable for 10 years.

Sentiment

Score: 5

Explanation: The document indicates a necessary but potentially dilutive funding event. While securing capital is positive, the terms of the convertible note and warrants, including the discount and potential for dilution, temper the overall sentiment.

Positives

• Workhorse has secured additional funding of $3.4 million, which can be used for operations and growth.
• The convertible note structure provides flexibility for both the company and the investor.
• The investor's option to increase their beneficial ownership cap to 9.99% indicates confidence in the company's future.
• The company has the ability to lower the reference price of the convertible note with the investor's consent, which could be beneficial in the future.

Negatives

• The note was issued with a 12.5% original issue discount, reducing the net proceeds to $2.975 million.
• The note is a senior secured obligation, meaning it has priority over other unsecured debt.
• The interest rate on the note increases to 18% per annum upon an event of default.
• The conversion price of the note is subject to a full-ratchet adjustment in connection with a subsequent offering at a lower price, which could dilute existing shareholders.
• The company is subject to certain covenants, including limitations on debt, liens, and asset transfers.
• The company must maintain minimum liquidity of $1.5 million or $4 million depending on the status of the sale leaseback transaction.

Risks

• The company's ability to meet its debt obligations is dependent on its financial performance.
• The conversion of the notes into common stock could dilute existing shareholders.
• The company is subject to various covenants and restrictions that could limit its operational flexibility.
• The company's failure to maintain minimum liquidity could trigger an event of default.
• The company's ability to raise additional capital in the future may be impacted by the terms of this agreement.

Future Outlook

The Securities Purchase Agreement contemplates additional closings of up to $106,714,286 in aggregate principal amount of additional Notes and a corresponding Warrant, subject to certain conditions.

Industry Context

This funding is crucial for Workhorse as it continues to develop and commercialize its electric vehicles in a competitive market. The company's ability to secure additional capital is a positive sign for its future prospects, but it also highlights the ongoing need for funding in the capital-intensive EV industry.

Comparison to Industry Standards

• The use of convertible notes is a common financing method for companies in the electric vehicle sector, especially those that are still in the growth phase.
• Companies like Nikola and Lordstown Motors have also used similar financing methods to raise capital.
• The terms of the note, including the interest rate and conversion price, are within the typical range for such agreements, but the full-ratchet adjustment is a negative for existing shareholders.
• The 12.5% original issue discount is relatively high, indicating the risk associated with investing in Workhorse.

Stakeholder Impact

• Shareholders may experience dilution if the notes are converted into common stock.
• Creditors may be impacted by the senior secured nature of the notes.
• Employees may be impacted by the company's ability to secure funding and continue operations.

Next Steps

• Workhorse will continue to issue additional notes and warrants under the securities purchase agreement, subject to certain conditions.
• The investor's increased beneficial ownership cap will become effective on November 4, 2024.
• The company will need to manage its debt obligations and liquidity to avoid triggering an event of default.

Key Dates

Keywords

convertible notes, warrants, securities purchase agreement, funding, debt, equity, dilution, senior secured, institutional investor, Workhorse Group