Nikola Corp. (NASDAQ:NKLA) raised a net $710.9 million on June 3 through a combination of a reverse merger and the sale of PIPE shares. However, Nikola stock is likely to face selling pressure once the lock-up agreement on the PIPE shares expires.
The PIPE capital raise stand for Private Investment in Public Shares. The PIPE investors, which include some very interesting investors, paid $10 per share for 52.5 million shares of Nikola stock on June 3.
The stock is now trading at $54.24 per share. So you can bet they will sell a good portion of their shares. And why not? They have hit a home run.
The PIPE Investors
On July 1, Nikola filed an S-1 Amendment which shows who those selling shareholders are and describes the lock-up agreement. For example, under the terms of the lock-up agreement, the PIPE shareholders have to wait 150 days after June 3.
As long as Nikola stock trades for 20 days above $12 after the 150 days, they can then start selling. So, effectively they have 170 days. Here is what that means. One hundred and fifty days after June 3 is Nov. 30. The 20-trading-day countdown starts on Dec. 1. So, by Dec. 21 the PIPE shareholders, who own 52.5 million shares, can start selling.
Those 52.5 million shares represent 14.5% of the 360.9 million shares outstanding after the June 3 reverse merger. They provided $525 million of the company’s net $710 million capital raise. But since the accompanying warrants are in-the-money (with an exercise price of just $11.50), there are 384.794 million shares fully diluted.
That means the PIPE shareholders are in the aggregate owners of 13.64% of Nikola stock. But, of course, they could also own 890,000 of the warrants. So that percentage will be higher.
Insiders Will Likely Sell Nikola Stock
On July 8, Worthington Industries (NYSE:WOR) sold 5 million of its 19.048 million Nikola shares for $237.8 million. It had a special lock-up agreement. Worthington was one of the original investors in the company. Its internal venture capital fund paid just $2 million for seed capital to Nikola for all its shares.
Moreover, this was the first opportunity for the company to sell. It immediately took advantage of that lock-up expiration.
Moreover, according to Worthington’s special agreement, it can sell another 7 million shares 90 days after the June 3 reverse merger. That date is effective on Oct. 1. You can be sure that it will likely sell those shares. This will leave it with just 2.048 million shares out of the total 19.048 million. It can sell those 180 days after June 3, or Jan. 30, 2021.
Moreover, other shareholders, including Trevor Milton, the CEO, can sell portions of their shares. He will be allowed to sell up to $70 million of his shares after 180 days (i.e., Jan. 30, 2021). He can even sell some shares after 30 days and 90 days respectively.
Other insiders are restricted for 180 days or until Jan. 30, 2021.
What to Do With Nikola Stock
What would you do if you were one of the PIPE investors and made a greater than 5 times return on investment within one month? You would look to sell at the earliest opportunity.
I have shown that more than 13% of the stock from these PIPE investors could be on the market on or after Dec. 21. That assumes the stock continues at the level where it is at today.
But investors aren’t going to wait for them to sell. You should expect the stock to fall as that lock-up period approaches. The market does not want to be holding the bag after that selling pressure comes on the market. There will be natural pressure for Nikola stock to decline, all things being equal.
Let’s get serious here. It has a $19.6 billion market value, not including the effect of dilution from the warrants. There is no revenue, but there are grand plans for the future.
I detailed estimates for the company’s valuation in two prior articles. But the closer I looked at the lock-up agreements, I thought that this would bring natural selling pressure on the stock. Buyer beware.
Mark Hake runs the Total Yield Value Guide which you can review here. As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities.