After setting a new 52-week low in early June, shares of ailing zero-emission transportation start-up Nikola Corporation (“Nikola”) have become the latest favorite of the momentum crowd.
At its peak last week, the stock was up by more than 600% over the last two months on massive volume.
The likely catalyst for the rally appears almost tragicomical as the company had virtually exhausted authorized shares and initially failed to gather sufficient votes for doubling the number of authorized shares from 800 million to 1.6 billion on the annual shareholder meeting in June which ended up being adjourned twice until recent amendments to Delaware General Corporation Law made approval a mere formality:
As a result, Nikola’s ability to raise additional funds by selling newly issued shares under its equity line of credit with Tumim Stone Capital LLC (“Tumim Stone”) or directly into the open market by utilizing its equity distribution agreement with Citigroup Global Markets (C) has been very limited.
In absence of material open market share sales, momentum traders experienced little problems moving the stock.
On Friday, Nikola reported second quarter results essentially in line with previously issued guidance and consensus expectations:
In the press release, management touted substantially reduced cash burn as well as a more than $100 million sequential increase in unrestricted cash.
“Nikola has turned the corner and is well on the way to executing our business plan and achieving profitability,” said Nikola CEO Michael Lohscheller. “We have nearly doubled our unrestricted cash position while also substantially reducing our spending. We continue to drive forward in our mission to decarbonize heavy-duty trucking and ensure Nikola is successful for the long haul.”
Indeed, the company managed to substantially reduce cash outflows from operating and investing activities during the quarter, mostly due to a meaningful reduction in inventories from delivering 45 trucks to dealerships:
In addition, Nikola raised almost $250 million in cash from various sources including $35 million from the recent sale of its stake in the European joint venture with Iveco:
As a result, the company’s cash position showed a substantial quarter-over-quarter increase:
Over the past three months, outstanding shares increased by 12.2% to 779.5 million.
So far in Q3, Nikola has raised an additional $30.4 million in net proceeds from further open market share sales and the recently announced divestment of the Phoenix Hydrogen Hub project to a subsidiary of Fortescue Future Industries.
On the conference call, management projected a further, meaningful reduction in inventory going forward and stated plans to resume the manufacturing of BEV trucks in early 2024 on a build-to-order basis:
We ended Q2 with 139 battery electric trucks in inventory on our site and 92 trucks at dealers. We expect a significant reduction of inventory in Q3 and plan to start producing battery electric trucks again in early 2024 on a build-to-order basis.
During the quarter, the company sold 45 BEV trucks to dealerships for net revenue of $12 million after $2.9 million of dealer rebates and incentives:
Dealer rebates are related to 2022 wholesales, which were executed at higher ASPs than they’re being retailed for in 2023. As most of our 2022 wholesales have been retailed by now and pricing levels are stabilizing, we expect rebate activity to come down.
Excluding dealer rebates, the average sales price for the battery electric truck was approximately $324,000 per unit unchanged from Q1. Despite the revenue rebate impact in Q2 we continue to see improvements in gross margin coming in as negative 180% this quarter from negative 213% in Q1.
Please note that on a net basis, the average sales price per unit was just $267,000.
During the questions-and-answers session of the conference call, the company’s new CFO Stasy Pasterick provided expectations for average selling prices going forward:
Disappointingly, management reduced full-year expectations quite meaningfully from the company’s original guidance provided on the Q4/2022 conference call:
After being poked on the lower truck delivery and gross margin guidance by an analyst, the CFO pointed to longer lead times and lower-than-anticipated scale:
So really the guidance for the rest of the year is just based on what we’re able to build, based on the lead times, based on the build to order strategy that will take a little bit longer, and based on some of the lead times of our suppliers.
So on the gross margin, really the gross margin, if you look at the overall improvements of the gross margin from where we were to where we had it, a lot of that will be driven off of the volume. Our overhead is fixed rate and as long as we are manufacturing to the levels that we’ve talked about through the next few years, we don’t need to scale the overhead significantly. So really, the margin will be just a function of the revenue. And so in the guidance, as you see, we lower delivery guidance. Obviously, you will see the margin coming down.
Management now expects reaching EBITDA breakeven by the end of 2025 with approximately $600 million of additional capital being required to fully fund the business model and achieve profitability.
According to the CFO, the company’s long-term guidance assumes gross margins of 20% on the FCEV truck and 15% to 20% on hydrogen which at least in my opinion appear to be aggressive targets, particularly when considering the very short time frame of less than three years.
For the second half of the year, management projected cash usage of approximately $220 million which will likely require the company to raise more capital towards the of the year or in early 2024 at the latest point.
That said, I fully expect Nikola to capitalize on the recent momentum by aggressively selling newly issued shares into the open market as also evidenced by the company’s decision to substantially increase the amount available under its Equity Distribution Agreement with Citigroup disclosed during Friday’s late session:
On August 4, 2023, Nikola Corporation entered into that certain Amended and Restated Equity Distribution Agreement with Citigroup Global Markets Inc. (…), pursuant to which the Company may sell shares of its common stock, (…) from time to time having an aggregate offering price of up to $600,000,000, with the Sales Agent acting as an agent for sales.
Under the Existing Agreement, the Company could sell shares of its common stock from time to time having an aggregate offering price of up to $400,000,000.
Through the date hereof, the Company has issued and sold 91,364,670 shares of common stock under the Existing Agreement for gross proceeds of approximately $241.8 million and, as a result of the increase, the Company may sell additional shares of common stock under the Agreement for an aggregate offering price of up to $358,235,072. (…)
In a separate press release, Nikola announced the surprise resignation of CEO Michael Lohscheller “due to a family health matter” and appointed the company’s previous Chairman Stephen Girsky as his successor.
Please note that Mr. Girsky engineered Nikola’s backdoor listing in 2020 by merging the company into a SPAC established by his advisory firm VectoIQ LLC.
Nikola Corporation reported second quarter results largely in line with previous projections but reduced full year expectations substantially.
In addition, the company’s revised business plan now calls for achieving EBITDA breakeven by the end of 2025 with remaining funding needs of approximately $600 million.
At least in my opinion, underlying truck and hydrogen margin assumptions appear to be aggressive thus potentially setting Nikola up for further guidance revisions down the road.
Based on projected cash outflows for the second half of the year and Friday’s substantial increase to the company’s Equity Distribution Agreement with Citigroup, I fully expect Nikola to capitalize on the recent momentum by aggressively selling new shares into the open market.
Given the company’s disappointing near-term outlook, aggressive long-term financial projections and the overhang from a likely increase in open market sales, investors should consider selling existing positions and moving on.