Nikola Stock: Dilution Continues Unabatedly – Sell (NASDAQ:NKLA)

Be aware:

I’ve lined Nikola Company (NKLA) beforehand, so buyers ought to view this as an replace to my earlier articles on the corporate.

In early August, new amendments to Delaware Common Company Legislation resulted in ailing zero-emission transportation start-up Nikola Company (“Nikola”) lastly gaining shareholder approval for doubling the variety of licensed shares from 800 million to 1.6 billion.

Not surprisingly, the cash-strapped firm wasted no time elevating extra capital by aggressively promoting new shares into the open market and issuing $125 million in convertible notes (“the August Notes”) to a division of New York-based hedge fund 3i Administration LLC (“3i”).

Consequently, excellent shares elevated from 779.5 million on August 1 to 985.2 million as of September 20 with the vast majority of the surge apparently attributable to the close to 100% conversion of the August Notes inside simply 4 weeks.

On September 22, Nikola issued a further $40 million in convertible notes (“the September Notes”) to 3i. At the moment, solely $1 million of the August Notes remained excellent as disclosed within the second supplemental indenture.

Even when assuming full conversion of the September Notes within the close to future, buyers will seemingly have to arrange for extra near-term dilution as the corporate retains the choice to promote as much as $160 million in extra convertible notes to 3i.

Bear in mind, the phrases of the convertible notes successfully present 3i the chance to pocket protected positive aspects by shorting the corporate’s widespread shares and subsequently changing the notes at a reduction to prevailing buying and selling costs (emphasis added by writer):

At any time (…) all or any portion of the principal quantity of every Be aware, plus accrued and unpaid curiosity, any make-whole quantity and any late costs thereon (the “Conversion Quantity”), is convertible at any time, in entire or partially, on the noteholder’s choice, into shares of Widespread Inventory at a conversion value per share (the “Conversion Worth”) equal to the bottom of (i) a “reference value” of $2.94, topic to sure changes (the “Reference Worth”), (ii) the higher of (x) a “ground value” of $0.38 (the “Flooring Worth”) and (y) the quantity weighted common value (“VWAP”) of the Widespread Inventory as of the conversion date, and (iii) the higher of (x) the Flooring Worth, and as elected by the changing noteholder, (y) both (x) relying on the supply time of the relevant conversion discover, (1) the VWAP as of the relevant conversion date or (2) the VWAP instantly previous to the relevant conversion date and (y) 95% of the common VWAP for the three buying and selling days commencing on, and together with, the relevant conversion date, topic to adjustment in accordance with the phrases of the Notes.

Because the Nikola Tre BEV truck catastrophe continues to unfold, the corporate has decided that each one 200+ affected vans have to be returned to its Coolidge manufacturing facility “to make the mandatory repairs and monitor the autos to make sure security” as said by administration throughout final month’s Fireplace chat.

As you are all conscious, we have had a number of thermal incidents with our battery electrical vans which might be operating on battery packs acquired from Romeo Energy. (…)

One concern that was recognized is a coolant leak, which includes the coolant manifold and associated coolant strains. Every battery electrical truck has 9 battery packs, and every pack has two coolant loops. As a part of the restore, the coolant strains that hook up with the manifolds in every pack will likely be changed. As soon as the pack is open, we are going to examine all of the modules to make sure integrity. Module elements and doubtlessly your complete module could have to be changed on a case by tempo foundation, if any extra points are found. Our workforce is working tirelessly with our suppliers to acquire the suitable components. All fixes are and can bear thorough validation testing previous to launch. Time strains and prices will likely be relayed as quickly as attainable, and our primary precedence is to make sure buyer security and satisfaction.

In my view, I would not be shocked to see the all-in common recall price per truck exceeding $50,000 thus leading to $10+ million in one-time bills. Not surprisingly, Nikola has paused deliveries of its BEV vans till the completion of the recall.

On September 28, the corporate celebrated the business launch of its Nikola Tre FCEV truck however similar to the BEV truck, gross sales are prone to be hampered by an ongoing lack of fueling infrastructure as very a lot evidenced by the truth that the corporate solely acquired barely greater than 200 non-binding orders for the FCEV truck so far.

To place issues into perspective: The Coolidge facility has a present manufacturing capability of two,400 vans per yr.

Whereas the corporate is planning to deploy various cellular hydrogen fuelers “alongside a few of the most extremely traveled trucking corridors in California” and lately secured a $41.9 million grant underneath the Commerce Hall Enhancement Program (“TCEP”) to construct six heavy-duty hydrogen refueling stations throughout Southern California, I don’t anticipate these strikes to draw a enough variety of prospects to Nikola’s FCEV truck providing within the near- to medium-term.

In response to my estimates, Nikola has raised no less than $350 million in money for the reason that finish of the final quarter, greater than enough to cowl the corporate’s projected H2 money utilization of $220 million however nonetheless properly in need of the $600 million allegedly required to totally fund the revised enterprise mannequin.

Nevertheless, contemplating the BEV truck recall and ensuing pause in deliveries, I might anticipate the corporate to scale back its full-year outlook for truck gross sales and revenues even additional within the upcoming Q3 earnings release on November 2.

Backside Line

Whereas the corporate’s working efficiency stays impacted by the BEV truck catastrophe, dilution for widespread shareholders is prone to proceed unabatedly.

Because the finish of Q2, excellent shares have elevated by no less than 26% and this quantity does neither embrace potential extra gross sales underneath the corporate’s $600 million fairness distribution settlement with Citigroup (C) nor seemingly conversions of the September notes.

Fairly frankly, I would not be shocked to see the variety of excellent shares disclosed within the firm’s upcoming 10-Q in early November being nearer to 1.1 billion.

With as much as $160 million in extra convertible notes prone to be issued to 3i over the subsequent couple of months and ongoing open market gross sales underneath the fairness distribution settlement, I might anticipate Nikola’s inventory value to stay underneath stress in the interim.

Contemplating the probability of one other steering revision in early November in addition to the huge overhang from convertible debt issuances and open market gross sales, buyers ought to take into account promoting present positions and shifting on.

Dangers

Shares have been topic to various violent momentum rallies in latest months, with merchants apparently utilizing any short-term promoting stress reduction to maneuver the inventory.

Ought to the corporate for some purpose pause its open market gross sales and abstain from issuing extra convertible notes, one other momentum run is perhaps within the playing cards.