Nikola, the electric heavy-duty truck start-up, has announced its plans to raise more money through a sale of convertible bonds. However, this news, coupled with the mention of risks associated with a recent recall, has resulted in a decline in the company's shares.
On Monday, Nikola (ticker: NKLA) revealed that it would be selling up to $325 million in convertible bonds. The initial tranche is expected to generate approximately $125 million for the company.
These bonds carry a 5% coupon, and the interest can be paid in either cash or common stock. The conversion price is determined by a formula and ranges from 40 cents to $2.94 per share. Nikola has not yet provided any comments regarding the conversion math.
As a consequence of this announcement, Nikola's stock experienced an 8.2% decrease in premarket trading. In contrast, futures on the S&P 500 and Nasdaq Composite saw gains of approximately 0.4% and 0.6% respectively.
It is important to note that the sales of stocks, bonds, and convertible bonds can have a negative impact on a company's share prices. In the case of stock and convertible bond sales, they increase the number of shares in circulation, thereby diluting the holdings of existing shareholders. Furthermore, bond sales may result in additional interest payments, subsequently reducing earnings and cash flow available for common stockholders.
Nikola's Financial Situation and Recall Update
Investors are keeping a close eye on Nikola's financial situation, despite the company's access to approximately $750 million at the end of the second quarter. Wall Street predicts that Nikola will require around $150 million per quarter to further develop its business, indicating the need for additional funds. Although the current cash reserves are expected to sustain the company until 2024, it is crucial for Nikola to proactively seek further investments rather than waiting until the last minute.
In addition to its financial concerns, Nikola recently disclosed a recall of approximately 200 battery-electric trucks on August 14. This development may lead to significant expenses and uncertainty regarding when production of their electric trucks can resume. As a result, the recall may adversely impact Nikola's brand reputation, business operations, financial condition, and cash flows.
Although the news of the recall caused a temporary drop of nearly 7% in Nikola's shares, it is important to note that risk factors are commonly disclosed in financial filings.
Despite these recent developments, Nikola's stock has experienced significant volatility. Over the past three months, the stock has surged by 158%, but it remains down by approximately 67% over the past 12 months.
Overall, Nikola faces both financial challenges and potential setbacks due to the recent recall. However, with strategic planning and proactive measures, the company can navigate these obstacles and regain stability in its operations.
