Nikola (NKLA) Facts Directory – Everything You Ever Wanted To Know About The Company

Aug 7, 2020
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Nikola Corporation (NASDAQ:NKLA) has been under a spotlight ever since its shares exploded in June, essentially doubling within the span of a single trading day. While a hefty portion of that gain has since evaporated due to a number of intrinsic factors, continuing investor interest remains a perennial reality.

Nikola is a pre-revenue company and has yet to commence formal operations. Moreover, its capital structure also appears convoluted to an ordinary investor. Consequently, through this post, we will attempt to elucidate the heretofore murkier aspects of the company. In the foremost sections, we will discuss Nikola’s products and business plans. In the latter part, we’ll shed light on the company’s corporate and capital structure, cash balance and deposits, and valuation metrics.

Nikola (NKLA) Should Salvage What Is Left of Its Tattered Reputation by Offloading Its Flamboyant Executive Chairman Trevor Milton

Product Offerings

Even though Nikola has not commenced commercial operations, it does boast of a variegated product portfolio. As an illustration, the company has three versions of its hydrogen-fueled class 8 electric trucks – Nikola One, Nikola Two, and Nikola Tre. It is also planning to launch the Badger, an electric pickup truck. Finally, its powersports-focused products include Nikola NZT, Reckless, and Nikola WAV.

Bear in mind that the Nikola One and Nikola Two are almost identical in specs and performance. Their only major difference comes from the lack of a sleeping compartment in Nikola Two. On the other hand, the Nikola Tre is geared toward the company’s European clientele, possessing a torque of up to 2,700nm and a range of between 500 and 1,200 km. This is essentially a rebadged version of the Iveco S-Way – a class 8 truck being manufactured by Nikola’s Italian partner Iveco.

The following slides offer a detailed overview of Nikola’s product range:

Nikola’s Business Strategy and Plans

Nikola’s distinctive feature – expected to debut in the Badger electric pickup truck – is the ability to utilize batteries as well as hydrogen fuel cells to drive the powertrain. Quintessentially, the concept merges a pure Battery Electric Vehicle (BEV) and a Fuel Cell Electric Vehicle (FCEV). This, of course, offers huge advantages such as faster refueling, less weight due to the need to carry a lesser quantum of batteries, and longer range. In fact, Nikola has claimed that the Badger electric pickup truck will offer a range of 600 miles by combining the two power modes. Also, the company will offer a functionality that will allow the user to calibrate via a touchscreen exactly what proportion of the power is to be drawn from the battery and the hydrogen fuel cells. For instance, the user can choose to draw the entirety of the power from the battery, thereby, converting the vehicle into a BEV for all intents and purposes. The vice versa also remains true. However, for the optimal range, a combination of the two power modes will be required.

The following tweet from Trevor Milton, the Executive Chairman of Nikola Corporation, attempts to illustrate the advantages of an FCEV:

Nikola (NKLA) Receives Another Bruising Volley From Hindenburg Research Which Terms Its Yesterday’s Rebuttal as Having “Holes Big Enough To Drive a Truck Through”

Basically, Hydrogen costs around $4 per kg. Nikola is working to reduce this cost (explained in the latter part of this section). Nikola says that its trucks can travel 8 miles per 1 kg of hydrogen. Nikola One offers a range that starts from 500 miles. Consequently, it would require 62.5 kgs of hydrogen to fill up the tank. Multiplying this quantity of hydrogen with its cost (currently at $4) gives $250 as the total cost of filling up the tank. For a BEV, according to Nikola’s computations, it costs around $241 to fully charge the batteries:

Given the identical costs, hydrogen makes intuitive sense due to much faster refueling times, less weight, etc.

Nonetheless, it is a known fact that hydrogen is not readily available and that, for Nikola’s gambit to work, a vast network of hydrogen refueling stations will have to be constructed. In this regard, the company has entered into an agreement with AB InBev (Anheuser-Busch), whereby, the brewing giant has ordered 800 Nikola trucks to power its dedicated sustainable fleet by 2025. In its Q1 2019 earnings report, AB InBev noted:

“We continue to make good progress toward our ambitious 2025 sustainability goals launched in March 2018, reducing carbon emission across our value chain by 4.5% over the last year. We successfully tested electric vehicles to be added to our fleets in Mexico and Colombia and ordered up to 800 Nikola trucks in the US. This brings us closer to our global goal of reducing carbon emissions by 25% across our entire value chain by 2025, which is aligned to the UN Sustainable Development Goal for Climate Action.”

Crucially, Nikola will initially establish its network of hydrogen refueling stations along the route identified by AB InBev. Once this preliminary network is established, the company will then focus on expanding its hydrogen coverage area. Eventually, Nikola will construct as many as 700 hydrogen refueling stations across the U.S. and Canada.

As far as the semantics of the hydrogen refueling stations are concerned, Nikola plans to utilize renewable energy sources in conjunction with off-peak grid-based electricity to generate green hydrogen on-site from electrolysis. This plan should maximize the sustainable credentials of this entire operational paradigm while ensuring maximum efficiency. The following infographic describes this process in detail:

Source

Of course, it should be noted that renewable energy sources are subject to the whims of the weather. Consequently, a situation may arise where Nikola would have to occasionally rely upon peak grid-based electricity to generate hydrogen, leading to fluctuations in the cost of production of hydrogen. While this possibility can be largely eliminated by ensuring sufficient hydrogen storage, it would substantially escalate the overall cost of these refueling stations.

As far as Nikola’s production schematics are concerned, it is currently searching for a partner in the production of the much-anticipated Badger electric pickup truck, with a formal launch expected by 2022 or earlier. An OEM partner for the production of Badger trucks will be announced by the company before the end of 2020. Moreover, Nikola is aiming to launch its class 8 electric commercial trucks, built in partnership with CNH Industrial, in the second half of 2021. To this end, the company is already building prototypes of the Nikola Tre class 8 electric truck at its facility in Ulm, Germany, with formal production expected to start in Q4 2021. After undergoing modifications, this facility will be capable of producing up to 10,000 units per year.

Additionally, Nikola broke ground on the 23rd of July in Coolidge, Arizona, for the construction of a $600 million facility that will have a capacity to produce 35,000 trucks per annum. The first phase of the 1 million-square-foot manufacturing facility will be completed in Q4 2021, with phase 2 entering the consummation phase 12 to 18 months thereafter. Phase 3 will be completed in 2023. Upon completion of Nikola's greenfield manufacturing facility in Arizona, the Ulm facility will be utilized to manufacture and supply trucks to the European market.

Nikola announced during its Q2 2020 earnings call that the FCEV version of its product offerings will only enter production in 2023.

Corporate Structure

Nikola Corporation is the product of a merger between Nikola Motors and VectoIQ – a Special Purpose Acquisition Company (SPAC) that was headed by the former General Motors (NYSE: GM) Vice Chairman, Steve Girsky. The merger achieved closure on the 3rd of June, resulting in Nikola Motors becoming a wholly-owned subsidiary of VectoIQ. The combined entity then debuted on the NASDAQ exchange under the symbol NKLA.

As a refresher, A Special Purpose Acquisition Company (SPAC) is formed for the sole purpose of raising capital through an IPO and then to channel these IPO proceeds into acquiring an existing company. If the SPAC fails to acquire its target within the stipulated timeframe, the money is returned to the investors and the entity is disbanded. A Private Investment in Public Equity (PIPE), on the other hand, is the purchase of shares of publicly traded stock at a discount to the current market price by institutional investors. Nikola deployed this PIPE facility to acquire an infusion of $700 million in fresh liquidity from investors, including Fidelity Investments, P. Schoenfeld Asset Management, etc. In return, these investors received interest in Nikola at a discount.

Nikola Corporation’s management consists of:

source

Nikola’s Capital Structure

As explained earlier, Nikola Corporation is a product of a merger between Nikola Motors and VectoIQ. As of the 3rd of June, the company had 360,904,478 (360.90 million) common shares outstanding:

  • 278,789,606 (278.79 million) shares held by pre-merger Nikola Motors shareholders
  • 64 million (23 million + 6.64 million) shares held by pre-merger VectoIQ shareholders
  • 5 million PIPE shares

Nikola filed an S-1 form with the U.S. SEC on the 15th of June followed by an amended S-1 form – called S-1/A – on the 1st of July. The S-1 form registered for sale all of the securities owned by the sponsors of VTIQ SPAC along with those held by Nikola insiders. Crucially, the filing revealed the following:

  • up to 890,000 shares of Common Stock that are issuable upon the exercise of 890,000 warrants originally issued in a private placement in connection with the initial public offering of VectoIQ
  • up to 23,000,000 shares of Common Stock that are issuable upon the exercise of 23,000,000 warrants originally issued in the initial public offering of VectoIQ
  • the offer and sale from time to time by the “selling security holders” named in this prospectus of up to 53,390,000 shares of Common Stock (including up to 890,000 shares of Common Stock that may be issued upon exercise of 890,000 Private Warrants)

While the S-1 forms filed previously by Nikola were labeled “Preliminary Prospectus”, the form 424B3 filed by the company on the 17th of July used the term “Prospectus”, thereby, indicating the finality of this filing.

In a crucial caveat, we noted that the SEC needed to approve any liquidation related to these securities. The approval from the SEC arrived via an EFFECT filing on the 20th of July, rendering the filing for the sale of securities “effective” and paving the way for mass liquidation.

The holders of NKLAW – the symbol for the company’s warrants – are now able to do a cash exercise of these securities. When any holder chooses to perform a cash exercise of the warrants, that person will receive 1 Nikola common share for every NKLAW warrant that he held.

While the window for exercising the warrants was initially thought to extend up to 5 years, Nikola released a press statement on the 22nd of July, announcing the redemption of all outstanding public warrants on the 21st of August:

“The Public Warrants may be exercised by the holders thereof until 5:00 p.m. New York City time on the Redemption Date to purchase fully paid and non-assessable shares of Common Stock underlying such warrants, at the exercise price of $11.50 per share. Any Public Warrants that remain unexercised following 5:00 p.m. New York City time on the Redemption Date will be void and no longer exercisable, and the holders of those Public Warrants will be entitled to receive only the redemption price of $0.01 per warrant. The 23 million Public Warrants are exercisable for an aggregate of 23 million shares of Common Stock at a price of $11.50 per share, representing a total of $264.5 million in potential proceeds to Nikola.”

It is crucial to remember here that private warrants are not subject to redemption:

“Warrants to purchase Common Stock that were issued under the Warrant Agreement in a private placement and still held by the initial holders thereof or their permitted transferees are not subject to this redemption.”

As per the form 424B3 filed by Nikola, its common shares outstanding will swell to 384,794,478 (384.79 million) in the event all outstanding warrants are exercised.

Now, we know that after a company goes public, its insiders are subject to a lock-up period in which the shares owned by those insiders can’t be liquidated. Recently, a controversy erupted as it was revealed that Trevor Milton, the Executive Chairman of Nikola Corporation, changed his lock-up agreement, allowing him to sell his shares in the company from the 1st of December 2020, just before Nikola World 2020 begins. Previously, he was barred from doing so before the 2nd of March 2021. However, Milton clarified the entire brouhaha through a tweet, committing himself to not selling any shares in the foreseeable future:

Cash and Deposits

Nikola gained an infusion of $700 million from the PIPE investors. Moreover, it stands to receive at least $264.5 million from the exercise/redemption of all public warrants, thereby, bringing the company’s total cash accumulation to over $940 million by the end of August 2020. On the 8th of August, Trevor Milton revealed that  that Nikola’s cash balance would swell to $940 million by the end of August 2020:

As far as significant cash outlays are concerned, the construction of the company’s Arizona facility will cost at least $600 million.

Bear in mind that Nikola currently has around 14,000 pre-orders for its trucks, translating to potential revenue of up to $10 billion. However, the company did not demand any cash deposit for these pre-orders. Nikola did require a cash deposit of at least $250 – extending up to $5,000 for the Honey reservation package – when it opened pre-orders for the Badger electric pickup truck on the 29th of June. On the 2nd of July, the company revealed that it had recorded 1,000 reservations through the $5,000 Honey package, translating to $5 million in deposits. Trevor Milton also said in a tweet that the company was “tracking about 1,500 deposits per day without showing badger or 200MM future revenue/day”. According to these details, Nikola garnered less than 5,000 Badger reservations in the immediate aftermath of opening pre-orders. Consequently, any amount raised by the company through these reservations is likely nominal.

Nikola’s Valuation

As mentioned earlier, Nikola is a pre-revenue company. Consequently, many of the traditional valuation metrics are currently not applicable. Nonetheless, on the 22nd of June, JP Morgan analyst, Paul Coster, stamped a ‘Neutral’ rating on Nikola’s shares and designated a $45 stock price target. The Wall Street behemoth stated that Nikola could earn $14 billion in revenue and $1.5 billion to $2.0 billion in EBITDA by 2027. Notably, JP Morgan’s price target of $45 for Nikola shares is based on 30x the 2027 EBITDA estimate of around $1.7 billion:

“We derive this price target by assigning a 30 times forward multiple to 2027 estimated EBITDA, net out the assumed net debt as of 2026, and then discount the implied 2026 year-end equity value to year-end 2021 using a 20% cost of equity. We then divide this value by the fully-diluted share-count to arrive at a 2021 year-end price.”

As per Coster’s tabulations, Nikola will generate free cash flow (operating cash flow minus capital expenditures) of $470 million by 2027.

Disclaimer:

The writer does not hold any long or short position in Nikola Corporation

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