Business Context and Reporting Period
Company: Workhorse Group Inc. (WKHS)
Filing Type: Form 8-K (Current Report)
Date of Report: December 12, 2023
Principal Executive Offices: Sharonville, Ohio
Context: The Company entered into two material definitive agreements to secure liquidity: a secured convertible note offering and an equity line of credit (Purchase Agreement).
Key Financial Metrics and Transaction Terms
Securities Purchase Agreement (Note and Warrant)
- Investor: High Trail Special Situations LLC.
- Instrument: Green senior secured convertible note with an original principal amount of $20,000,000.
- Proceeds: $17,500,000 (reflecting a 12.5% original issue discount) before fees and expenses.
- Warrant: To purchase 25,601,639 shares of Common Stock.
- Conversion Price: $0.5178 per share.
- Maturity: October 1, 2026.
- Interest: No interest unless in default (default interest rate is 15.00% per annum).
- Redemption: Investor may require monthly cash redemptions of up to 12.5% of the principal starting January 1, 2024. Full principal is expected to be recorded as a short-term liability.
- Security: Senior secured obligation guaranteed by subsidiaries and secured by substantially all assets.
Purchase Agreement (Equity Line of Credit)
- Purchaser: Lincoln Park Capital Fund, LLC.
- Capacity: Up to $50,000,000 of Common Stock over a 24-month term.
- Commitment Shares: 3,775,105 shares issued immediately as a fee.
- Pricing Mechanism:
- Regular Purchase: 97.5% of the lower of the lowest sale price on the purchase date or the average of the three lowest closing prices over the preceding 10 business days.
- Accelerated Purchase: Up to 3x the regular purchase amount at 97% of the closing price or VWAP.
- Exchange Cap: Sales at or below $0.3906 per share are capped at 52,151,507 shares (approx. 19.99% of outstanding shares) unless shareholder approval is obtained.
Liquidity Covenants
The Note requires the Company to maintain specific cash and cash equivalent balances:
- December 31, 2023: At least $25,000,000.
- January 31, 2024: At least $13,500,000.
- February 29, 2024: At least $20,000,000.
Additionally, the Company must maintain a minimum liquidity deposit account equal to the lesser of $10 million or the aggregate outstanding principal of the Notes.
Material Changes and Agreements
This filing represents a significant change in the Company's capital structure and liquidity strategy. Unlike prior periods where the Company may have relied on other financing methods, this filing establishes:
- A new senior secured debt obligation with mandatory redemption features and strict liquidity covenants.
- A new equity line of credit providing access to up to $50 million in capital, subject to market price floors and volume caps.
- Restrictions on future equity issuances and the establishment of an equity line of credit with a combined minimum availability of $25,000,000.
Guidance, Risks, and Contingencies
Management Commentary and Outlook
The filing does not provide specific revenue or earnings guidance. Management's focus is on securing liquidity through the Note and the Purchase Agreement to support operations.
Risks and Contingencies
- Dilution Risk: The issuance of the Note, Warrant, and potential shares under the Purchase Agreement will result in significant dilution to existing shareholders. The Warrant covers over 25 million shares, and the Purchase Agreement allows for up to $50 million in equity sales.
- Liquidity Covenant Risk: Failure to meet the specific cash balance requirements ($25M by year-end 2023) could trigger a default.
- Default Interest: In the event of a default, interest accrues at 15.00% per annum.
- Redemption Obligation: The Company faces potential monthly cash outflows for redemption of the Note starting January 2024.
- Change of Control: A change of control triggers a redemption premium of 115% of the conversion value or 105% of the principal, whichever is greater.
- Forward-Looking Statements: The Company notes that actual results may differ materially from expectations due to risks disclosed in other SEC filings.
Key Facts for Investor Verification
- Verify the Company's current cash and cash equivalents to ensure compliance with the $25,000,000 liquidity covenant required by December 31, 2023.
- Monitor the trading price of WKHS stock relative to the $0.5178 conversion price and the $0.3906 Exchange Cap threshold for the Purchase Agreement.
- Assess the impact of the 12.5% original issue discount and the 15% default interest rate on the Company's future interest expense and net income.
- Review the potential dilution impact of the 25,601,639 warrant shares and the up to $50,000,000 equity line of credit.
- Confirm the status of the closing of the Offering, expected on or before December 28, 2023.