The electric heavy-duty truck start-up, Nikola, is in the process of raising additional funds through a new round of convertible bond sales. However, this recent development, coupled with concerns over a recent recall, has led to a decline in the company’s stock shares.
On Monday, Nikola (ticker: NKLA) announced its plans to sell up to $325 million worth of convertible bonds. The initial tranche of bonds is expected to generate approximately $125 million for the company.
These bonds feature a coupon rate of 5%, with the option for interest payments to be made either in cash or common stock. The conversion price is determined by a formula and ranges from 40 cents per share to $2.94 per share. At the time of writing, Nikola has not provided a response regarding the specifics of the conversion math.
As a result of this news, Nikola’s stock experienced a decline of about 8.2% during premarket trading. On the other hand, futures on the S&P 500 and Nasdaq Composite saw slight gains of approximately 0.4% and 0.6%, respectively.
It should be noted that the sale of stocks, bonds, and convertible bonds can potentially impact the share prices of any company. In the case of stock and convertible bond sales, these transactions increase the overall number of outstanding shares, thereby diluting the stakes of existing shareholders. Similarly, the sale of bonds can result in additional interest payments, ultimately reducing earnings and cash flow available to common stockholders.
Nikola’s Financial Outlook and Recent Challenges
Investors are well aware that Nikola, the electric vehicle manufacturer, needs to secure additional funding to sustain its operations. Analysts on Wall Street estimate that the company will require approximately $150 million per quarter in order to continue building its business. At the end of the second quarter, Nikola had access to approximately $750 million, which is expected to be sufficient to sustain the company until 2024, according to management. However, it is crucial for companies to proactively secure funding and not wait until the last minute.
In addition to discussing its financial situation, Nikola’s recent bond announcement also provided an update on a recall affecting around 200 battery-electric trucks. This recall was publicly disclosed on August 14th. The company acknowledges that these events may result in significant expenses and that the timeline for resuming production of their battery-electric trucks is uncertain. As a result, Nikola’s brand, business, financial condition, and cash flows may be negatively impacted. This news led to a nearly 7% drop in Nikola’s stock.
Although recalls can be concerning for any company, it is important to note that many risk factors are typically included in financial filings. As of Monday trading, Nikola’s stock has experienced significant volatility, with a 158% increase over the past three months, but still remaining approximately 67% lower over the past year.
Overall, while Nikola has secured substantial funding until 2024, the company faces challenges regarding its battery-electric truck recall and the potential financial impact associated with it.