Annual report pursuant to Section 13 and 15(d)

Convertible Notes and Long-Term Debt

v3.20.4
Convertible Notes and Long-Term Debt
12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
CONVERTIBLE NOTES AND LONG-TERM DEBT CONVERTIBLE NOTES AND LONG-TERM DEBT
Convertible Notes
December 31,
2020 2019
Convertible notes, at fair value $ 197,700,000  $ 39,020,000 
Less: current portion —  (19,620,000)
Convertible notes, net of current portion $ 197,700,000  $ 19,400,000 

4.0% Senior Secured Convertible Notes Due 2024
On October 14, 2020 the Company issued $200.0 million par value convertible notes (the “2024 Notes”) due October 14, 2024. The 2024 Notes are a senior secured obligation of the Company, and rank senior to all unsecured debt of the Company. Interest is payable quarterly beginning January 15, 2021 at a rate of 4.0% per annum. The interest rate on the 2024 Notes may be reduced to 2.75% if the Company meets certain conditions. The 2024 Notes are convertible at a rate of $35.29 per share, subject to change for anti-dilution adjustments and adjustments for certain corporate events.
The 2024 Notes will generally not be redeemable at the option of the Company prior to the third anniversary of their issue date. There are no required redemptions on the 2024 Notes. Accordingly, the Company has classified the full balance of the 2024 Notes as long-term on the Consolidated Balance Sheets as of December 31, 2020.
The 2024 Notes are guaranteed by all the Company’s current and future subsidiaries and are secured by substantially all the assets of the Company and its subsidiaries. The 2024 Notes include certain covenants, including a minimum sales backlog beginning the fiscal period ending on March 31, 2022, limitations on liens, additional indebtedness, investments, dividends and other restricted payments, and customary events of default.

The Company paid fees in connection with the 2024 Notes of approximately $6.6 million, resulting in net proceeds to the Company of approximately $193.4 million. As we have elected to account for our convertible notes using the fair value option allowed under GAAP, all direct costs related to the issuance of our convertible notes were recognized in Interest Expense in the Consolidated Statements of Operations for the year ended December 31, 2020.

The Company is required to hold the proceeds in escrow until it completes certain requirements related to the collateral. In January 2021, such requirements were met and the proceeds were released from escrow.
As of December 31, 2020, the contractual principal balance of the 2024 Notes was $200.0 million and the fair value was $197.7 million. The $2.3 million decrease in the fair value of the Convertible Notes is recorded in Interest Expense in the Consolidated Statements of Operations. In electing the fair value option, the Company recognizes changes in fair value related to changes in credit risk, if any, in Other Comprehensive Income and the remaining change in fair value in Interest Expense. No portion of the change in fair value was related to changes in credit risk.
High Trail Convertible Note II
On July 16, 2020, the Company issued a $70.0 million par value convertible note (the“High Trail Convertible Note II” or “Note II”) due July 1, 2023. Interest was payable quarterly beginning October 1, 2020 at a rate of 4.5% per annum. The High Trail Convertible Note II was initially convertible at a rate of $19.00 per share, subject to change for anti-dilution and adjustments for certain corporate events.
The Company paid fees in connection with the issuance of Note II of approximately $1.1 million, reducing the proceeds to the Company to approximately $68.9 million. All direct costs related to the issuance of our convertible notes were recognized in Interest Expense in the Consolidated Statements of Operations.
During the year ended December 31, 2020, the fair value of the Note II increased approximately $52.9 million, which is recorded in Interest Expense in the Consolidated Statements of Operations.
On October 14, 2020, the Company exchanged the full $70.0 million outstanding principal balance of Note II at a premium for approximately 5.2 million shares. The settlement cost of approximately $121.8 million was calculated as the number of shares issued in exchange for Note II multiplied by the closing price of Workhorse common stock on October 13, 2020, which was $23.63 per share.
High Trail Convertible Note
On December 9, 2019, the Company issued a $41.0 million par value convertible note (“High Trail Convertible Note” or “the Note”) due November 2022. The fair value of the Note was $38.5 million upon issuance. Interest was payable quarterly beginning February 1, 2020, at a rate of 4.50% per annum. The Note was initially convertible at a rate of $3.05 per share, subject to change for anti-dilution adjustments or certain corporate events.
The Note was issued with approximately 15.5 warrants to purchase common stock of the Company at an initial exercise price of $3.05 per share. The Note and the warrants were determined to be freestanding instruments and were accounted for separately. The warrants were classified as equity instruments and the fair value was estimated to be approximately $0.4 million on December 9, 2019. The fair value of the warrants was recorded as an increase to Additional Paid-In Capital.
The fair value of the High Trail Convertible Note as of December 31, 2020 and December 31, 2019 was zero and $39.0 million, respectively, and the contractual principal balance as of December 31, 2020 and December 31, 2019 was zero and $40.5 million, respectively. Fair value adjustments for the year ended December 31, 2020 were approximately $74.1 million, which were recorded in Interest Expense in the Consolidated Statements of Operations. Fair value adjustments for the year ended December 31, 2019 were $1.0 million, which is recorded in Interest Expense.
During the year ended December 31, 2020, the Company converted $40.5 million par value of the Note into approximately 14.4 million shares of common stock, resulting in a loss of approximately $35.9 million. During the year ended December 31,
2019, the Company converted $0.5 million par value of the Note into approximately 0.2 million shares of common stock, resulting in a gain of approximately $0.1 million. Gains and losses related to conversions of par value to common stock were recorded in Interest Expense in the Consolidated Statements of Operations.
The warrants were only exercisable at the option of the Company following the full or partial redemption of the Convertible Note. The percentage of the warrants exercisable upon full or partial redemption of the Note is equal to a percentage of the original principal amount redeemed at such time. Therefore, as the principal balance of the Convertible Note was fully converted during the year, the number of warrants exercisable as of December 31, 2020 is zero.
PPP Term Note
December 31,
2020 2019
Long-term debt $ 1,411,000  $ — 
Less: current portion (1,411,000) — 
Long-term debt, net of current portion $ —  $ — 

On April 14, 2020, the Company entered into a Paycheck Protection Program Term Note ( “PPP Note”) with PNC Bank, N.A. under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The Company received total proceeds of $1.4 million from the PPP Note, which was due on April 13, 2022. In accordance with the requirements of the CARES Act, the Company used the proceeds primarily for payroll costs. Interest accrues on the PPP Note at the rate of 1.0% per annum. In October 2020, the Company applied for forgiveness of the amount due on the PPP Note. On January 15, 2021, the outstanding principal and interest accrued on the Note was fully forgiven and the full amount of the Note is classified as current at December 31, 2020 on the Consolidated Balance Sheets.
The Company elected to account for the PPP Term Note as debt and will accrue interest over the term of the Note. During the year ended December 31, 2020, the Company did not make any repayments on any amount due on the Note.