Nikola: Cash Burn Rate Raises Dilution Questions Ahead Of Shareholder Meeting

Jun. 28, 2022 3:37 PM ETNikola Corporation (NKLA)48 Comments


  • Nikola is working quickly to scale production and pilots as it expects to generate ~$120 million in revenue in FY22.
  • However, Nikola's liquidity picture is a bit worse than it looks, with Tumim's remaining ELOC worth less than $250 million.
  • Nikola's high cash burn rate and fragile liquidity picture raise the stakes of shareholder dilution, as Nikola is urging shareholders to approve a 33% increase in authorized shares.

A hydrogen fuel cell semi truck with H2 gas cylinder

Scharfsinn86/iStock via Getty Images

As Nikola (NASDAQ:NKLA) advances with plans to scale up production at its Coolidge facility after starting production at the end of Q1, with multiple pilots and LOIs for both its BEV and HFCEV, the company's cash burn rate raises questions going forward. Nikola's capacity isn't likely to reach full scale until 2024, with expansion in Coolidge anticipated to be complete during 2023. As such, with Nikola's current cash burn rate, the company may run through cash rather quickly and need to dilute or raise via debt in about four quarters.

Liquidity Position

Nikola has a bit of a complicated liquidity position - the company recently raised $200 million via convertible notes, and the company "would have had a total cash and liquidity position of approximately $1.0 billion as of March 31, 2022," according to CFO Kim Brady.

A quick look at Nikola's balance sheet reads $360 million in cash and equivalents at the end of Q1; with the notes and an equity line of capital with Tumim Stone Capital (with ~$408 million remaining), Nikola's total available liquidity rests at about $993 million, per its Q1 presentation with the $200 million convertible note raise added.

However, a substantial chunk of that ~$1 billion in liquidity, Tumim's chunk, varies with Nikola's share price, as Nikola has set aside a fixed amount of shares at the moment, based on closing prices of shares. Nikola listed ~$408 million in liquidity available via the ELOC with Tumim at the end of Q1, which likely represents ~42.7 million shares still authorized and reserved for Tumim.

Under the terms of the two agreements, Nikola authorized and reserved ~17.8 million shares for issuance in the first $300 million round of the agreement, and ~28.7 million shares in the second $300 million round. Thus, the total authorized and reserved shares for Tumim equals 46.64 million, of which ~3.91 million have already been purchased for ~$47 million (~$12 per share price).

At Nikola's current share price near $5.60, Tumim's remaining authorized shares equate to ~$230 to $235 million in liquidity, given the 3% discount applied to shares under the agreement. So while Nikola had ~$1.0 billion in liquidity as of March 31 with the convertibles, that liquidity has shrunk to ~$830 million simply due to Nikola's share price decline. Nikola does have until September 2024 to sell shares to Tumim under the agreement, so there definitely is a chance that liquidity can increase again; however, in the near term, selling shares off to Tumim while shares are cheap and running through a limited amount of reserved shares (which can be boosted up to 78.8 million via shareholder approval) does not seem like the best move to make.

Cash Burn

As Nikola scales with pilots and moves forward with production and capacity expansion later in the year, Nikola's cash burn rate is likely to increase. The company is targeting ~$910 million in capex, SG&A, and R&D costs for the full fiscal year. For Q1, Nikola's combined spend across the three was ~$181 million; with Q2's projected ~$230 million, Nikola is looking at about $500 million in R&D, SG&A and capex in 2H.

Nikola's Current Liquidity Picture Seems to Barely Support Spending to This Degree While Revenues Ramp Up

Given Nikola's projected annual revenues of ~$120 million at midpoint, Nikola is projecting about $200 million cost of revenues, for a gross loss of $80 million (-66%). Combining that with ~$600 million in operating expenses, Nikola is looking for about ~$480 million in net losses for the year, or ~$1.10 per share.

With Nikola's net liquidity nearer to ~$830 million with Tumim's share reservation applied to current share prices, Nikola looks to burn through 60% or more of its cash through the remainder of FY22. Any production delays, downward revisions to production, unexpected expenses related to scaling/expansion, or lower-than-expected revenues are likely to increase the need for additional capital in 2023 via shareholder dilution.

Shareholder Dilution

Nikola's cash situation and need for capital is not much of a secret - Forbes notes that Nikola "needs considerably more money to complete the construction of its Coolidge plant, begin building hydrogen fuel cell trucks and set up large-scale hydrogen fuel stations needed to power them." The upcoming shareholder meeting essentially paves the way to raise more capital via shares.

Nikola's upcoming shareholder meeting outlines a plan for the company to authorize a 33% increase in shares, from 600 million to 800 million. Keep in mind that Nikola has just 415 million shares outstanding at the end of Q1, so the additional shares to be authorized pending stockholder approval would represent a substantial chunk of possible dilution, if those shares are eventually tapped into.

If Nikola does need to raise ~$150 million in capital via shares, and shares are trading near current levels at ~$5.50, that would equate to about 30 million shares, or ~7% dilution. However, given Nikola's high cash burn rates and liquidity picture, a more substantial capital raise may be in the cards in 2023 - something along the lines of $300 million, which would equate to ~13% dilution from 54 million shares being sold (if share prices rise to ~$10 per share, dilution would still be ~7%).

Overall, Nikola does not have to tap into shares, and simply may be requesting shareholder approval to secure additional shares should it need to, as a proactive measure. But the company's cash burn rate and liquidity picture likely evaporating at a fairly quick pace over the next four quarters raises the potential for shareholder dilution.

NKLA Outlook

While Nikola is working quickly to move forward with scaling and pilots, as initial customer deliveries and revenues ramp up through the year, there are some signs to be bullish - revenue of ~$120 million, based on an ASP of $300,000, is projected by management for FY22, with more growth arising in 2023 as factory expansion and deliveries ramp up further. However, limiting this possible upside potential is Nikola's high cash burn rate paired with a relatively fragile liquidity picture, which could see some substantial shareholder dilution arise from share sales to raise capital.

This article was written by

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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