8-K: Workhorse Group Secures $1.2 Million in Funding, Waives Warrants on Additional Notes

Workhorse Group Inc. has secured $1.2 million in funding through the issuance of a senior secured convertible note, while also agreeing to a limited waiver of certain provisions of its securities purchase agreement.

Summary

• Workhorse Group Inc. has issued a $1.2 million senior secured convertible note to an institutional investor.
• This note is part of a larger agreement for up to $139 million in convertible notes and warrants.
• The investor has waived its right to receive warrants for this specific note and potentially for up to $14.8 million in additional notes.
• The company has also gained the ability to sell up to $5 million in common stock through an at-the-market offering without certain restrictions.
• The new note has a 12.5% original issue discount, resulting in $1.05 million in proceeds before fees and expenses.
• The note bears interest at 9% per annum, increasing to 18% upon default, and matures in one year, subject to extensions.
• The note is convertible into common stock at a price that is the lower of $0.5983 or a variable price based on the stock's volume weighted average price, with a floor of $0.1611.
• The company must maintain minimum liquidity of $1.5 million or $4 million depending on the status of a sale leaseback transaction.
• The investor has increased its beneficial ownership cap to 9.99%, effective November 4, 2024.

Sentiment

Score: 3

Explanation: The document indicates a company in need of capital with unfavorable terms, suggesting financial distress and a high risk of dilution. The waivers and amendments indicate a need to make the deal more attractive to the investor, which is not a positive sign.

Positives

• The company secured $1.2 million in funding through the issuance of a convertible note.
• The waiver of warrants on the Sixth Additional Note and potentially on up to $14.8 million in additional notes reduces potential dilution.
• The ability to sell up to $5 million in common stock through an at-the-market offering provides additional financial flexibility.
• The increase in the beneficial ownership cap to 9.99% may attract further investment.

Negatives

• The note has a 12.5% original issue discount, reducing the net proceeds to $1.05 million.
• The interest rate on the note increases to 18% upon default, which could be costly.
• The company is subject to minimum liquidity requirements, which could restrict its financial flexibility.
• The conversion price of the note is subject to full-ratchet adjustment in connection with a subsequent offering at a lower price, which could be dilutive.

Risks

• The company's ability to meet the minimum liquidity requirements could be challenging.
• The potential for a full-ratchet adjustment of the conversion price could lead to significant dilution.
• The high interest rate of 18% upon default could create financial strain.
• The company's reliance on convertible notes for funding could indicate underlying financial challenges.

Future Outlook

The company may issue up to $105,514,286 in additional notes and corresponding warrants, subject to certain conditions. The company also has the ability to sell up to $5 million in common stock through an at-the-market offering program.

Industry Context

The electric vehicle industry is capital intensive, and Workhorse's need for additional funding through convertible notes is not uncommon. However, the terms of the financing, including the high default interest rate and potential for full-ratchet adjustments, suggest the company is facing significant financial pressures.

Comparison to Industry Standards

• Compared to other EV companies like Rivian or Lucid, Workhorse's financing is on a smaller scale and with less favorable terms, indicating a weaker financial position.
• The use of convertible notes with full-ratchet adjustments is a less common practice among more established EV companies, which typically have access to more traditional forms of financing.
• The minimum liquidity requirements are relatively low compared to the operating costs of other EV manufacturers, suggesting a tight cash position.
• The waiver of warrants on some notes is unusual and may indicate a lack of investor confidence in the company's long-term prospects.

Stakeholder Impact

• Shareholders may experience dilution due to the conversion of notes and the at-the-market offering.
• Creditors are secured by the assets of the company and its subsidiaries.
• Employees may be impacted by the company's financial performance and ability to operate.

Next Steps

• The company may issue additional notes and warrants under the Securities Purchase Agreement.
• The company will proceed with the at-the-market offering of up to $5 million in common stock.
• The investor's beneficial ownership cap will increase to 9.99% on November 4, 2024.

Key Dates

Keywords

convertible notes, securities purchase agreement, warrants, at-the-market offering, funding, dilution, liquidity, beneficial ownership, senior secured, common stock