8-K: Workhorse Group Secures $2 Million in Additional Funding Through Convertible Note Issuance

Workhorse Group has issued a $2 million senior secured convertible note to an institutional investor, marking the seventh such issuance under a prior agreement.

Summary

• Workhorse Group Inc. has issued a $2 million senior secured convertible note, referred to as the Seventh Additional Note, to an institutional investor.
• This issuance is part of a larger securities purchase agreement established on March 15, 2024, which allows for the issuance of up to $139 million in convertible notes and warrants.
• The investor waived their right to receive warrants in connection with this specific $2 million note issuance.
• The note was issued with a 12.5% original issue discount, resulting in net proceeds of $1.75 million 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 and adding to the principal.
• The note matures one year from the issue date, with potential extensions at the holder's option.
• The note is convertible into common stock at a price equal to the lower of $0.5983 or a variable price based on the stock's volume weighted average price, subject to a floor of $0.2132.
• As of November 26, 2024, $5.85 million in principal amount remained outstanding under the notes issued under the agreement, and no shares had been issued pursuant to the warrants.
• The company may prepay the note with a 25% premium, or 75% premium under certain conditions, or based on the equity value of the underlying shares.
• The agreement includes covenants that limit debt, liens, asset transfers, and require the company to maintain minimum liquidity of $1.5 million or $4 million depending on the status of a sale leaseback transaction.

Sentiment

Score: 5

Explanation: The document indicates a necessary but potentially risky financing activity. While the funding provides immediate capital, the terms of the convertible note, including the high interest rate upon default and potential dilution, present challenges. The sentiment is neutral, reflecting the mixed nature of the news.

Positives

• The issuance of the Seventh Additional Note provides Workhorse with $1.75 million in immediate funding.
• The investor's waiver of warrants for this issuance reduces potential dilution for existing shareholders.
• The convertible note structure allows for potential future equity conversion, which could reduce debt.
• The company has the option to prepay the note, providing flexibility in managing its debt obligations.
• The agreement allows for additional closings of up to $103.5 million in aggregate principal amount of additional notes.

Negatives

• The 12.5% original issue discount reduces the net proceeds received by the company.
• The 9% interest rate on the note adds to the company's financial obligations.
• The potential increase to 18% interest upon an event of default could significantly increase the company's debt burden.
• The conversion of the note into common stock could dilute existing shareholders.
• The company is subject to restrictive 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 a sale leaseback transaction.

Risks

• The company's ability to meet its debt obligations, including interest payments, is dependent on its financial performance.
• The potential for an event of default could trigger a higher interest rate of 18% and accelerate the repayment of the note.
• The conversion of the note into common stock could dilute existing shareholders and negatively impact the stock price.
• The company's ability to raise additional capital may be limited by the restrictive covenants in the agreement.
• The company's ability to meet the minimum liquidity requirements could be challenging if the sale leaseback transaction is not completed.

Future Outlook

The Securities Purchase Agreement contemplates additional closings of up to $103,514,286 in aggregate principal amount of additional Notes and a corresponding Warrant, subject to certain conditions.

Industry Context

This financing activity is indicative of the ongoing capital needs of companies in the electric vehicle sector, which often require significant investment to scale production and operations. The use of convertible notes is a common method for raising capital in this industry, allowing for flexibility and potential future equity conversion.

Comparison to Industry Standards

• The use of convertible notes is a common financing method for companies in the electric vehicle industry, particularly those in the development and early production stages, such as Rivian and Lucid.
• The 9% interest rate on the note is within the typical range for such financings, although the potential increase to 18% upon default is a significant risk.
• The 12.5% original issue discount is also a common feature of these types of financings, reflecting the risk associated with investing in early-stage companies.
• The conversion price of the note, which is the lower of $0.5983 or a variable price based on the stock's volume weighted average price, subject to a floor of $0.2132, is typical for convertible notes in this sector.
• The minimum liquidity requirements are also common in such agreements, ensuring the company maintains a certain level of financial stability.

Stakeholder Impact

• Shareholders may experience dilution if the convertible notes are converted into common stock.
• 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 continue operations.
• Customers may be impacted by the company's ability to deliver products and services.
• Suppliers may be impacted by the company's ability to pay for goods and services.

Next Steps

• Workhorse will continue to issue additional notes and warrants under the securities purchase agreement, subject to certain conditions.
• The company will need to manage its debt obligations and meet the minimum liquidity requirements.
• The company may need to seek additional financing in the future to support its operations and growth.

Key Dates

Keywords

convertible notes, securities purchase agreement, financing, debt, warrants, common stock, institutional investor, Workhorse Group, liquidity, covenants