8-K: Workhorse Group Secures $7 Million in Additional Funding Through Convertible Note Issuance

Workhorse Group has secured an additional $7 million in funding through the issuance of a senior secured convertible note and warrants to an institutional investor.

Summary

• Workhorse Group has issued a $7 million senior secured convertible note and warrants to an institutional investor.
• This is the second additional note issued under a securities purchase agreement, bringing the total principal amount of notes issued to $22,285,714.
• The new note has a 12.5% original issue discount, resulting in $6,125,000 in proceeds before fees and expenses.
• The note bears interest at 9% per annum, increasing to 18% upon an event of default.
• The note is convertible into common stock at a price equal to the lower of $0.1367 or a variable price based on the volume weighted average price of the stock, with a floor of $0.0421.
• The investor also received warrants to purchase up to 40,965,618 shares of common stock at an exercise price of $0.2944.
• The company has the potential to raise an additional $116,714,286 through further issuances under the agreement.
• The notes are secured obligations, ranking senior to all other unsecured debt and are guaranteed by the company's subsidiaries.
• The company must maintain minimum liquidity of $1,500,000 or $4,000,000 depending on the status of a sale leaseback transaction.

Sentiment

Score: 3

Explanation: The document indicates a need for capital, but the terms of the financing are not favorable, suggesting financial strain and potential dilution for existing shareholders. The high interest rate and discounts are concerning.

Positives

• The company has secured an additional $7 million in funding.
• The convertible note structure allows for potential future equity conversion, which could reduce debt.
• The company has the potential to raise a further $116,714,286 under the existing agreement.
• The notes are secured, providing a level of protection for the investor.

Negatives

• The note has a 12.5% original issue discount, reducing the net proceeds to the company.
• The interest rate on the note is 9%, increasing to 18% upon an event of default, which is a high cost of capital.
• The conversion price of the note can be significantly lower than the reference price, potentially diluting existing shareholders.
• The company is subject to minimum liquidity requirements, which could restrict its financial flexibility.
• The notes are secured, which could limit the company's ability to raise additional debt.

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 significantly dilute existing shareholders.
• The company is subject to various covenants, including limitations on debt, liens, and asset transfers.
• The company's minimum liquidity requirements could restrict its financial flexibility.
• The high interest rate on the note could further strain the company's finances if an event of default occurs.

Future Outlook

The company has the potential to raise an additional $116,714,286 through further issuances under the securities purchase agreement, subject to certain conditions.

Industry Context

This financing activity is common for companies in the electric vehicle sector, which often require significant capital to fund operations and growth. The use of convertible notes is a typical method for raising capital, but it can lead to dilution of existing shareholders.

Comparison to Industry Standards

• Other EV companies such as Rivian and Lucid have also raised capital through debt and equity offerings, but the terms of those offerings vary significantly based on the company's financial health and market conditions.
• The 9% interest rate on the note is relatively high, suggesting that Workhorse may have limited access to lower-cost financing options.
• The convertible note structure is similar to those used by other growth companies, but the specific terms, such as the conversion price and discount, are unique to this agreement.

Stakeholder Impact

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

Next Steps

• The company will need to file additional prospectus supplements to enable further closings under the securities purchase agreement.
• The company will need to manage its liquidity to meet the minimum requirements.
• The company will need to monitor the conversion price of the notes and the exercise of warrants to assess the potential impact on shareholders.

Key Dates

Keywords

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