Nikola Corp (NASDAQ:NKLA) had a roller-coaster week last week, rising on news of its deal with General Motors (NYSE:GM) and falling sharply after a short seller’s report claiming Nikola is an “intricate fraud.” At this point, NKLA stock looks to be severely damaged.
After reading the very damming Hindenburg Research report on Nikola, one cannot be impressed. No one who has invested in Nikola or is considering doing so should ignore the report. The allegations and proofs they have put together claiming that Trevor Milton has lied on numerous occasions paint a character picture that is questionable.
Moreover, even though Nikola has said it is going to the Securities and Exchange Commission, I highly suspect the S.E.C. will want to look into the Hindenburg details very carefully. In this article, I want to project out what the worst-case scenario could be for Nikola.
Readers who sold the stock last month based on my previous critical article on Nikola may feel somewhat justified and relieved. Unfortunately, I do not believe that worst has been seen in NKLA stock yet.
Projecting the Worst for Nikola
Sometimes it is best to project your worst fears to see how bad things could get. Facing these fears squarely and estimating the damage sometimes helps to make decisions.
The best thing that Nikola has going for it now is its cash on hand. As of June 30, Nikola had $698.37 million in cash. Furthermore, the company issued a notice to redeem all its public warrants for cash on July 21. That means that owners of 23 million warrant holders had to pay Nikola $11.50 per warrant by the end of Aug. 21.
Here is what that means. The company says in Note 13 of its 10-Q that as of July 30, 18.07 million of the 23 million warrants had exercised. As a result, Nikola received $207.8 million. The remaining 4.92 million warrants will bring in another $56.66 million. Therefore Nikola now has $264.46 million on top of the $698 million as of June 30. So it now has a total of $962.8 million.
But this is before any cash burn during the third quarter. During the first half of 2020, Nikola had $49.642 million in negative free cash flow. Assuming this pace continues, the cash balance would fall by $24.8 million. So the cash balance is now $938 million.
Here is the problem. The per-share cash amount is not that high. The number of shares outstanding is now very high. As of July 30, there were 378.98 million shares outstanding. With the additional 4.92 million warrants, the total is about 383 million.
Therefore, Nikola’s cash per share is only $2.45 per share (i.e., $938 million divided by 383 million).
Where This Leaves NKLA Stock
If NKLA stock fell to its cash per share, it would lose $29.68 per share from today’s price of $32.13 (Sept. 11) or over 92% of its value.
By the way, if that happens, I highly suspect Trevor Milton will no longer be the CEO of the company. In fact, it is very hard imagine that he will remain as the CEO within the next year after reading the Hindenburg report.
However, the GM Subscription Agreement was for $2 billion. It is supposed to close by Sept. 30.
The problem is the price was set at $41.93 for 47,698,545 shares, or $2 billion. NKLA stock is now 23.3% below that price.
This also leaves the question of whether GM is actually paying cash for the shares. The Nikola documents filed with the SEC seem to imply that it is a “sale” of shares to GM. In addition, the shares are “valued at $2.0 billion.”
However, the Nikola release says the shares will be issued to GM “in exchange for certain in-kind contributions.” That implies there won’t be any cash exchanged.
This matters because if Nikola receives cash, then its value per share goes up dramatically. But if issue shares for no cash, then the cash value per share falls by over 11% to $2.18 per share.
So far Nikola has not filed the exact Subscription Agreement with the S.E.C. Therefore, I suspect that potential investors in Nikola should wait to see what will happen from the fallout of the Hindenburg report.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.