8-K: Workhorse Group Secures $4 Million in Additional Funding Through Convertible Note Offering

Workhorse Group has secured an additional $4 million in funding through the issuance of a senior secured convertible note and warrants to an institutional investor.

Summary

• Workhorse Group has issued a $4 million senior secured convertible note and warrants to purchase common stock to an institutional investor.
• This is part of a larger agreement from March 15, 2024, which could provide up to $139 million in total funding.
• The new note has a 12.5% original issue discount, resulting in $3.5 million in proceeds before fees and expenses.
• The note bears interest at 9% per annum, payable quarterly, and can be paid in cash or in-kind by compounding the principal.
• The note is convertible into common stock at a price that is the lower of $1.1783 or a variable price based on the stock's volume weighted average price, but not lower than $0.3708.
• The investor also received warrants to purchase up to 2,715,777 shares of common stock at an exercise price of $2.9260 per share.
• The company has previously issued $22.285 million in notes and warrants to purchase 5,487,198 shares under the same agreement.
• As of July 17, 2024, $5.6 million of the previously issued notes remain outstanding, and no shares have been issued from the warrants.
• The agreement allows for additional closings of up to $112.7 million in notes and warrants, subject to certain conditions.

Sentiment

Score: 5

Explanation: The document indicates a necessary capital raise, which is positive for the company's operations but also introduces risks related to debt and potential dilution. The terms of the financing are not overly favorable to the company.

Positives

• The $4 million in funding provides additional capital for Workhorse Group.
• The convertible note structure allows for potential future equity conversion, which could reduce debt.
• The agreement allows for up to $112.7 million in additional funding, providing a potential source of future capital.
• The investor's purchase rights could lead to further investment in the company.

Negatives

• The 12.5% original issue discount reduces the net proceeds from the note issuance.
• The 9% interest rate on the note adds to the company's financial obligations.
• The potential for the interest rate to increase to 18% upon default creates a significant risk.
• The conversion price of the note could lead to dilution of 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 sale leaseback transaction.

Risks

• The company's ability to meet its financial obligations, including interest payments, is a risk.
• The potential for the note's interest rate to increase to 18% upon default could significantly impact the company's finances.
• The conversion of the note into common stock could dilute existing shareholders.
• The company's ability to raise additional capital under the agreement is subject to certain conditions.
• The company is subject to various covenants that could restrict its operations.
• The company's ability to maintain minimum liquidity is a risk.

Future Outlook

The Securities Purchase Agreement contemplates additional closings of up to $112.7 million in aggregate principal amount of additional Notes and a corresponding Warrant, subject to certain conditions.

Industry Context

This funding is crucial for Workhorse Group, a company in the competitive electric vehicle market, as it continues to develop and scale its production. The use of convertible notes is a common financing method for companies in this sector.

Comparison to Industry Standards

• The use of convertible notes is a common practice for companies in the electric vehicle sector, especially those in the development and growth phase, such as Rivian and Lucid.
• The interest rate of 9% is relatively standard for this type of financing, but the increase to 18% upon default is a significant risk.
• The conversion price of the notes is structured to be favorable to the investor, which is typical in these types of agreements.
• The warrants issued alongside the notes are also a common feature, providing the investor with potential upside from the company's stock performance.

Stakeholder Impact

• Shareholders may experience dilution if the convertible notes are converted into common stock.
• Employees may benefit from the company's increased financial stability.
• Customers may benefit from the company's continued operations and product development.
• Suppliers may benefit from the company's ability to pay its obligations.
• Creditors may be impacted by the company's increased debt obligations.

Next Steps

• Workhorse Group will need to file additional prospectus supplements to enable further closings under the Securities Purchase Agreement.
• The company will need to manage its debt obligations and ensure compliance with the covenants of the note.
• The company will need to monitor its stock price to manage the potential conversion of the notes into common stock.

Key Dates

Keywords

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