NKLA - Nikola Corp.: Running Out Of Funds And Options - Sell

2023-03-30 21:10:13 ET

Summary

• Company announces a $100 million equity offering despite its shares trading at all-time lows.
• Assuming an offering price of $1.30 and full exercise of the $15 million over-allotment option, remaining shares available for issuance would be down to just 47 million.
• Unrestricted cash on hand of $123 million, offering proceeds and additional share issuances should be sufficient to keep the lights on until the annual stockholder meeting in June.
• Nikola warns of potential difficulties to obtain sufficient votes for another increase in the number of authorized shares. Unlike last year, the company won't be able to afford a lengthy delay.
• Shareholders remain caught between a rock and a hard place. Even if they approve another increase in authorized shares in a timely manner and the company somehow manages to raise the capital required to make it into 2024, they will be saddled with outsized dilution. Given the obvious lose-lose situation, investors should consider selling existing positions and moving on.

Note: I have covered Nikola Corporation ( NKLA ) previously, so investors should view this as an update to my earlier articles on the company.

Last month, zero-emission transportation start-up Nikola Corporation ("Nikola") reported unimpressive fourth quarter and full-year 2022 results.

On the subsequent conference call , management provided disappointing 2023 guidance with projected revenues of $140 million to $200 million missing the $300 million analyst consensus by a mile. In addition, gross margins are expected to remain deeply in the red with a projected range of negative 75% to negative 95%.

Adjusted for $95 million in anticipated stock-based compensation, Nikola's projected cash usage for this year calculates to a range of $580 million to $705 million:

At the mid-point of the range, Nikola would use almost $650 million in cash in 2023, almost three times the amount of unrestricted cash left on the balance sheet at the end of December.

On the call, management was quick to point to its various sources of capital for this year:

Unfortunately, the company's authorized shares won't be sufficient to fully utilize the company's various equity-linked funding sources.

Nikola finished 2022 with 800 million authorized shares and approximately 512.9 million shares outstanding.

Since the beginning of the year, the company has issued 17.0 million shares under its Equity Distribution Agreement with Citigroup ( C ) and 27.4 million shares under the Tumim Stone equity line of credit.

In addition, Nikola converted $75 million in outstanding convertible notes into 28.4 million new common shares.

As a result, the number of outstanding shares had increased to at least 585.7 million by March 24. The company also disclosed the issuance of an additional 1.6 million shares subsequent to March 28 thus bringing total outstanding shares to at least 587.3 million.

After the close of Thursday's session, the company announced a $100 million underwritten equity offering which will be fully backstopped by hedge fund Antara Capital LP ("Antara") which also holds at least $213 million of the company's senior convertible notes.

Concurrently with the public offering, we have entered into the Purchase Agreement with the Investor, pursuant to which the Investor has agreed to purchase up to $100.0 million of shares of our common stock in a registered direct offering. Under the terms of the Purchase Agreement, the Investor will purchase up to $100.0 million of our common stock, with the actual amount of shares of common stock to be purchased in the concurrent direct offering to be reduced by the extent of the total public offering amount. In the event that the total public offering amount in the public offering is at least $100.0 million, the Investor will not purchase any shares of common stock in the concurrent direct offering.

Antara also agreed to release 43.2 million shares previously reserved for conversion of the notes and exchanged $100 million of its holdings into new convertible notes with a substantially reduced conversion price:

On March 29, 2023, we entered into an exchange and investment agreement, or the Exchange Agreement, with Antara Capital LP, or the Investor, to exchange $100.0 million aggregate principal amount of the 8.00%/11.00% convertible senior paid-in-kind, or PIK, toggle notes due 2026, or the Notes, for the same amount of 8.00%/11.00% series B convertible senior PIK toggle notes due 2026, or the Series B Notes, with a conversion price equal to 130% of the public offering price. The Series B Notes are not convertible until the earlier of six months from the issue date and the date on which the necessary stockholder approval is obtained. In connection with the Exchange, the indenture governing the Notes will be amended to, among other things, (i) remove the requirement that we reserve shares of common stock for conversion of the Notes until we receive stockholder approval to increase the number of our authorized shares and (ii) provide for the same restrictions on conversion as the Series B Notes. The closing of the Exchange is not contingent upon the closing of the public offering or the concurrent direct offering.

In addition, conversion will now be permitted in the very near future ( "the earlier of six months from the issue date and the date on which the necessary stockholder approval is obtained") as compared to February 28, 2026 previously.

Assuming an offering price of $1.30 and full exercise of the $15 million over-allotment option, Nikola would have to issue approximately 88.5 million new common shares.

After giving effect to shares reserved for employee option exercises, the company's stock incentive plans, restricted stock units and various other commitments, Nikola's remaining shares available for issuance would be down to approximately 47 million.

As of March 28, the company's unrestricted cash was down to approximately $123 million. Assuming full exercise of the over-allotment option, I would estimate net proceeds of $109 million to Nikola.

After giving effect to the company's $1.75 million daily cash burn run rate, Nikola would start Q2 with slightly below $230 million in unrestricted cash and 47 million shares available for issuance which should be sufficient to keep the lights on until the company's annual stockholder meeting in June (emphasis added by author):

We do not believe we currently have sufficient unissued shares of common stock for future issuances to raise funds necessary to execute on our business plan. (...)

We intend to solicit the approval of our stockholders to amend our restated certificate of incorporation to increase the number of authorized shares of our common stock at our annual meeting of stockholders in June 2023 , but we have in the past encountered difficulties obtaining stockholder approval for similar proposals and there can be no assurance that our stockholders will approve the contemplated amendment or any future amendment, particularly since we have a large retail stockholder base.

A delay in securing, or a failure to secure, stockholder approval to amend our restated certificate of incorporation could cause a delay in our future capital raising, including pursuant to existing financing agreements, collaboration, partnership or other strategic transactions, and would have a material adverse effect on our business, prospects, operations, liquidity and financial condition.

Last year, it took the company two months to win sufficient stockholder votes for increasing authorized shares from 600 million to 800 million after Nikola’s founder and former CEO and chairman, Trevor Milton, voted against the proposal.

This time, Nikola won't be able to afford a lengthy delay as the company would simply run out of funds in this case.

Bottom Line:

Nikola is quickly running out of both funds and options.

Even the anticipated net proceeds from Thursday's $100 million equity offering will only buy the company time until the annual stockholder meeting in June. Should Nikola again face difficulties to win sufficient votes for another massive increase in the company's authorized shares, bankruptcy would likely be the sole remaining option for the ailing company.

Nikola's pitiful shareholders remain caught between a rock and a hard place. Even if they approve another increase in authorized shares in a timely manner and the company somehow manages to raise the capital required to make it into 2024, they will be saddled with outsized dilution.

Given the obvious lose-lose situation, investors should consider selling existing positions and moving on.

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