Shares of electric vehicle startup Fisker (NYSE:FSR) surged 20% last week after the firm revealed it had refinanced $185.5 million of convertible debt. One-third of the company’s liabilities disappeared overnight after its primary backer agreed to convert the debt into 159 million new equity shares.

This comes as welcome news to fans of the firm. Convertible debt is often known as “death spiral financing” since declining share prices can trigger a self-fulfilling cycle of even lower prices. And Wednesday’s news tells us that Fisker’s main backers are more interested in seeing their firm succeed than bleeding every last dollar they can.

Nevertheless, Fisker remains in significant trouble. The EV startup remains deeply indebted, with roughly $1.7 billion of remaining liabilities. Its cash position has dwindled from $1.4 billion in 2021 to roughly $500 million today. And the firm is lagging at least a year behind its initial projections made in 2020.

Most worryingly, Fisker’s cars have failed to conjure the type of demand that Tesla’s Model S once did. In 2011, Tesla recorded $91.7 million in reservation payments in anticipation of its Model S launch. Meanwhile, Fisker’s most recent filings show just $3.5 million in prepayments.

That suggests that Fisker’s problems run deeper than the company might admit. Though the company’s charismatic founder wants to beat Tesla at its own game, time is running out for this struggling firm.

Convertible Debt and the $40 Million Car

Perhaps the clearest issue with Fisker today is its reliance on convertible debt. Even after last week’s conversion, the EV startup still has $324.5 million of convertible notes due in 2025 and another $667.5 million due in 2026.

This presents a particular problem for Fisker, which is quickly running out of cash. Ramping up EV production is expensive since car buyers only pay the full amount on delivery, and Fisker itself only has around $500 million left in the bank. Tesla itself almost went bankrupt in 2018 after ramping up production of the Model 3 too quickly. (Remember that producing 10,000 vehicles that cost $60,000 each requires $600 million of cash).

To fund this expansion, Fisker entered into a series of convertible debt deals in 2021 and 2022 — a form of financing sometimes known as “death spiral financing.” New equity shares are created whenever creditors exercise their convertible debt, which puts downward pressure on share prices. This can often trigger even more conversions, creating the “death spiral” many small firms see.

A plain illustration of this is Mullen (NASDAQ:MULN), a California-based EV startup that faced similar cash flow issues in 2022. To incentivize investment, the firm offered to match every $100 of new debt with $185 of stock once warrants became exercisable. Conversion prices were also linked to stock prices, which meant the lower Mullen’s shares dropped, the greater the number of shares its debtholders would receive in a conversion.

The results were disastrous. In 2023, Mullen saw its share count increase roughly 75-fold after convertible debtholders took advantage of low share prices. In other words, anyone who bought shares in January 2023 would have seen their stake cut by 98.7% by year-end. The company would record this as a $1 billion paper loss, which means the 25 vehicles Mullen recognized as sales technically cost $40 million each to produce.

Trouble at Fisker

Fisker’s convertible debt has some protections against this type of dilution. The company’s 2025 senior convertible notes have a fixed conversion price of $7.80 that can only be ratcheted down in case of a corporate default or agreement by the firm’s board. This greatly reduces the extreme dilution that Mullen’s shareholders faced. Fisker’s 2026 notes issued the previous year have even stronger protections, eliminating most conversion options before June 15, 2026.

However, fewer risks doesn’t mean none.

To incentivize investment in its 2025 notes, Fisker’s management added significant covenants that disallowed additional liens, removed Fisker’s ability to sell any intellectual property, and required at least $340 million cash on hand, among others. In other words, these new notes not only reduced Fisker’s future ability to raise cash. It also forced the EV startup to run on a surprisingly short budget. Less than half of its roughly $500 million cash on hand is actually usable.

Debtholders are clearly concerned. January’s debt discharge included converting shares at above-market prices (roughly representing a 25% haircut) and removing the intellectual property and cash reserve requirements covenants. That suggests these bondholders are more interested in getting out at a guaranteed smaller loss today than risk losing their entire investment down the road. Fisker’s 2026 bonds now trade for 12 cents on the dollar.

Fisker also remains unable to raise fresh capital at reasonable valuations. The stock currently trades at less than 90 cents. If the firm released its remaining 553 million authorized Class A shares into the market, the $440 million raised would dilute existing Class A shareholders by two-thirds. Anti-dilutive adjustments to the firm’s convertible debt could worsen that figure.

What’s FSR Stock Worth?

Fisker SUVs have a major problem: Not enough people like them.

“Fisker’s first SUV has to be good enough to establish a reborn brand in a crowded market,” Road & Track reviewer Jamie Kitman wrote in December. “It isn’t. …. We hate to be the bearer of bad tidings … [but] the Ocean is not ready for prime time.” Wired had similar misgivings, calling the Ocean SUV “a bewildering mix of bad and good.”

Essentially, Fisker is releasing a relatively average product into an increasingly crowded SUV market. No fewer than seven carmakers now have electric SUV offerings in the $35,000-$55,000 range, and Fisker’s Ocean model has failed to stand out.

Fisker’s management seems to understand the issues. On Jan, 4, the firm announced it would move from direct-only sales to a hybrid model using existing dealerships. That suggests that the digital sales approach touted during its 2020 SPAC debut is bringing in too few customers, and that the lower-margin dealership approach is needed. The firm was already losing 45 cents for every $1 of sales.

But the move is likely too little, too late. Fisker’s cash will likely run out before it can reach a meaningful scale. And with bondholders exiting their positions at significant losses, that tells us that common equity — which is only paid out after bondholders are made whole — is probably worth zero today. Sell your remaining Fisker stake while you still can.

On the date of publication, Thomas Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.