8-K: Workhorse Group Secures $3.5 Million in Additional Funding Through Convertible Note

Workhorse Group has secured $3.5 million in additional funding through the issuance of a senior secured convertible note to an institutional investor.

Summary

• Workhorse Group Inc. has issued a $3.5 million senior secured convertible note to an institutional investor, marking the ninth such issuance under a previous agreement.
• This note, referred to as the Ninth Additional Note, is part of a larger securities purchase agreement that could potentially provide up to $139 million in total funding.
• The investor has waived their right to receive warrants in connection with this specific issuance.
• The note has an original issue discount of 12.5%, resulting in net proceeds of $3,062,500 for Workhorse before fees and expenses.
• It bears interest at 9% per annum, payable quarterly, and can be converted into common stock at a price that is the lower of $0.4996 or a variable price based on the stock's volume weighted average price, subject to a floor of $0.1190.
• The note matures one year from the issue date, with potential extensions at the holder's option.
• Workhorse may prepay the note with a premium, which increases to 75% during an event of default or if certain redemption conditions are not met.
• The company expects to record an additional reserve of $1.5 million to $1.8 million against prepaid purchases related to its W4 CC trucks in its financial statements for the year ended December 31, 2024.

Sentiment

Score: 4

Explanation: The document indicates a need for further funding and an expected additional reserve against prepaid purchases, which are negative signals. While the funding is positive, the terms and the need for it suggest financial challenges.

Positives

• Workhorse has secured additional funding of $3.5 million, which can be used for operations and growth.
• The convertible note structure provides flexibility for both the company and the investor.
• The waiver of warrants for this issuance reduces potential dilution for existing shareholders.
• The company has the option to pay interest in cash or in-kind, providing some financial flexibility.
• The company has the right, with the written consent of the Investor, to lower the reference price of the convertible note.

Negatives

• The note has a 12.5% original issue discount, reducing the net proceeds received by Workhorse.
• The interest rate increases to 18% upon default, which could be a significant financial burden.
• The note is secured, meaning the investor has a claim on the company's assets in case of default.
• The company is expected to record an additional reserve of $1.5 million to $1.8 million against prepaid purchases, indicating potential issues with inventory or supplier relationships.
• The conversion price of the note is subject to a full-ratchet adjustment in connection with a subsequent offering at a per share price less than the Reference Price then in effect, which could lead to further dilution.

Risks

• The company's ability to meet its financial obligations, including interest payments and potential redemption of the note, is a risk.
• The potential for further dilution of existing shareholders through the conversion of the note into common stock is a risk.
• The company's ongoing evaluation of its prepaid purchases asset and the need for additional reserves indicates potential financial instability.
• The company's ability to meet the minimum liquidity requirements of $1.5 million or $4 million depending on the sale leaseback transaction is a risk.
• The company's reliance on a single institutional investor for funding could pose a risk if the relationship deteriorates.

Future Outlook

The Securities Purchase Agreement contemplates additional closings of up to $96,514,286 in aggregate principal amount of additional Notes and a corresponding Warrant, subject to certain conditions.

Industry Context

This funding round is occurring in the context of Workhorse's ongoing efforts to scale production and sales of its electric vehicles. The company is operating in a competitive market with other EV manufacturers and is seeking capital to support its operations and growth.

Comparison to Industry Standards

• The use of convertible notes is a common financing method for companies in the electric vehicle sector, particularly those that are still in the growth phase.
• The interest rate of 9% is relatively high, reflecting the risk associated with investing in a company like Workhorse, which is not yet profitable.
• The 12.5% original issue discount is also relatively high, indicating that the investor is taking on significant risk.
• The potential for a full-ratchet adjustment on the conversion price is a significant risk for existing shareholders, as it could lead to substantial dilution if the company raises capital at a lower price in the future.
• Compared to companies like Rivian or Lucid, which have raised billions in equity, Workhorse's reliance on debt financing may indicate a weaker financial position.

Stakeholder Impact

• Shareholders may experience dilution if the convertible notes are converted into common stock.
• Creditors may be impacted by the company's debt obligations and potential default.
• Employees may be affected by the company's financial performance and ability to operate.
• Customers may be impacted by the company's ability to deliver products and services.
• Suppliers may be affected by the company's financial stability and ability to pay for goods and services.

Next Steps

• Workhorse will continue to evaluate its prepaid purchases asset and record reserves as necessary.
• The company may conduct additional closings under the securities purchase agreement to secure further funding.
• The company will need to manage its debt obligations and liquidity carefully.

Key Dates

Keywords

convertible notes, securities purchase agreement, funding, institutional investor, warrants, common stock, prepaid purchases, dilution, debt, liquidity