This past week Canoo announced they had entered into a $45 million deal with a "foreign strategic institutional" investor. If you want to read or reference the SEC filings yourself, you can read them by clicking here.
The good news is if you didn't want to read all that legalese, you don't have to because we read it for you! In simple terms, this agreement involves the issuance of a special type of stock (Preferred Stock) and warrants to purchase another type of stock (Common Stock) to the investor.
Lets break down the key points of this agreement so anyone can understand it better.
Purchase Agreement:
Canoo made a deal with an unnamed institutional investor. They agreed to sell the investor 45,000 shares of Preferred Stock for a total price of $45 million. The investor also received warrants allowing them to buy approximately 22.96 million shares of Common Stock in the future at an exercise price of $0.5612 per share.
Interest Rate on Preferred Stock: The Preferred Stock comes with a fixed interest rate to be paid out as a dividend. Initially, this rate is 7.50% from the original issuance date through the fifth anniversary of that issuance (the "First Reset Date").
How Interest Increases Over Time: After the First Reset Date, the interest rate increases by 1.50%. So, for the first five years, it's 7.50%, and after that, it becomes 9.00%.
Calculation of Interest Paid: To calculate the total interest paid, consider the stated value of each Preferred Share, which is $1,000. In the first five years, the annual interest per Preferred Share is 7.50% of $1,000, which equals $75. After the First Reset Date, the annual interest per Preferred Share increases to 9.00%, which amounts to $90. If the investor holds the entire lot of Preferred Stock without any changes or redemptions, for five years, Canoo would pay $375 per Preferred Share or a total of $16,875,000.
Additional Agreements:
The agreement also mentions that Canoo and the investor might work on more deals in the future. These potential deals could involve the sale of more Preferred Stock, up to a total aggregate liquidation preference of up to $150 million, subject to certain conditions.
Special Meeting of Stockholders:
Canoo promised that if they decide to issue more Common Stock than allowed by a specific limit (known as the "Exchange Cap"), they will hold a special meeting for their stockholders to approve this decision. Canoo just held another special meeting for similar reasons on the 5th.
Registration Statement:
Canoo is required to file a document called a "shelf registration statement" to allow the investor to sell the shares they received in the future. If they need to issue more shares than initially registered, they must file another document within 30 days.
Terms of Preferred Stock:
The Preferred Stock that the investor received has certain features. It gives the investor priority when it comes to receiving dividends and payments in case the company is liquidated (shuts down). Each share of Preferred Stock has a stated value of $1,000. The Preferred Stock can be converted into Common Stock at a price of 120% of the average closing sale prices per share of Common Stock for the ten consecutive trading days immediately preceding September 30, 2023 (approximately $0.5612 per share).
Voting Rights:
As long as any shares of Preferred Stock are outstanding, the investor can have a say in certain company decisions. However, the Preferred Stock typically does not have voting rights before conversion.
Redemption and Change of Control:
After five years or in specific situations, Canoo can choose to buy back the Preferred Stock from the investor. Additionally, if there's a significant change in the company ownership, the investor can choose to convert their Preferred Stock into Common Stock.
Warrants:
In addition, in connection with the Purchase Agreement, the investor received warrants to purchase 22,959,184 shares of Common Stock at an exercise price of $0.5612 per share. If the investor chooses to redeem all of the warrants, they will pay Canoo an additional $12,884,694 on top of the $45 million already secured.
Canooers Take:
This deal is a step in the right direction, moving away from Yorkville. Although it still represents dilution to existing shareholders, it is much more attractive and confidence boosting than the terms we've seen established with the Yorkville agreements who turn around and dump the shares into the open market adding downward pressure to the stock price. Securing a $45M equity investment in today’s morbid EV world from a long term investor is no easy task, especially when production hasn't even really started yet. We look forward to finding out who the mystery investor is and hope Canoo can continue to keep them biting and investing more capital in this amazing American growth story.
Authors disclosures: I am long Canoo - I own common shares, warrants and call options.
Canoo Strategic Institutional Investor