Nikola (NKLA) in Murky Waters After Milton Steps Down, Shares Drop
Nikola Corporation’s NKLA founder and executive chairman Trevor Milton has resigned voluntarily from the company. This shocking move came right after the electric-truck maker was accused of fraud by the short-selling firm Hindenburg Research. Post this announcement, shares of the company depreciated 19.3% yesterday to close the session at $27.58.
Stephen Girsky, former vice-chairman of General Motors GM and Nikola director, has been appointed as the new chairman, effective immediately.
Let’s delve deeper into the current scenario.
Hindenburg's Report on Nikola — Key Facts
In a report earlier this month, Hindenburg had charged fraud allegations on Nikola. Per these allegations, the company has misled investors over its EV proprietary technology stating that the same was purchased from another company, thus stressing the attention of the United States Securities and Exchange Commission (SEC) toward the matter.
The short-selling firm claims to have gathered substantial evidence like call recordings, text messages, e-mails and behind-the-scene photographs, highlighting innumerable false statements by Milton. Hindenburg has revealed that the Nikola One prototype staged in the “Nikola One Electric Semi Truck in Motion” promotional video was "filmed by rolling it downhill" and not actually running on its own propulsion system. Also, the firm has noted that Nikola’s much-hyped multi-billion dollar order book is filled with loopholes.
In the report, Hindenburg claims to have never witnessed this level of deception by a public company, especially of this magnitude. Among the accusations, there was one where the firm has accused Milton for deceiving the public by claiming the usage of in-house manufactured inverters, which, in reality, are supplied by a third party.
The firm even stated that General Motors did not exercise due diligence before signing its high-profile partnership with Nikola, per which the auto giant will aid in engineering and manufacturing the latter’s Badger, a fully-electric and hydrogen fuel-cell electric pick-up truck. As part of the deal, General Motors will acquire an 11% stake worth $2 billion in Nikola.
Hindenburg’s report — issued on Sep 10 — has legitimately raised many red flags for Nikola, post which the company’s shares have depreciated 26% in the market.
Nikola's Weak Response
Nikola's weak response to Hindenburg has not only raised red flags about the company’s operations but has also put investors in a fix. On the promotional video issue, Nikola has defended itself by stating that the company never claimed the truck was driving under its own propulsion in the video, which seems quite unsatisfactory. In an extensive self-defense statement, the company has also validated some charges of the report, including its use of supplier inverters. Nevertheless, the company has failed to provide a plausible explanation to most of Hindenburg's charges.
Currently, Nikola is reportedly under the scrutiny of the U.S. Department of Justice as a result of the above-discussed accusations. This investigation will definitely cause irreparable damages to Nikola's reputation and affect the company’s ability to raise funds in future.
Trevor Milton, often touted as the next Elon Musk, resigned from the company after being accused of misrepresenting Nikola's technology and capabilities. This is a huge setback for the company’s soaring EV ambitions as he played a key role in driving the company’s vision.
Milton has agreed to relinquish $166 million in performance-based stock, as well as the right to enter into a two-year consulting agreement with an annual fee of $10 million. However, the company will provide a $100,000 security detail for him and his family for the next three months.
Milton has also agreed to make himself available for consultation and assistance on an ad-hoc basis till the end of this year.
Race to EV Supremacy
Electric pick-ups are becoming the hottest thing in the electric game, with auto giants, including Tesla TSLA, Ford F and General Motors, racing to roll out their models.
Hydrogen-truck upstart Nikola — often dubbed as the “Next Tesla” — was all set to heat up the EV race. In addition to making environment-friendly trucks, Nikola also offers sport-utility vehicles and even a fully-electric sit-down personal watercraft. The company seemed to be catching up in the EV race, with an anticipated production of 30,000 fuel cell EV trucks by 2027. However, the recent events seem to have hindered the company’s EV plans. At present, the comparison made between Nikola and Tesla seems preposterous.
Nevertheless, General Motors still stands tall in Nikola’s support, which is not surprising as the deal between the companies was lopsided in favor of the former.
With Nikola’s lockup period set to expire in early December, almost 250 million shares will become eligible for sale, including 91.6 million controlled by Milton. This will reduce Nikola's ability to strike partnerships or raise additional funds by issuing new shares.
Also, under the requirements of the partnership deal with General Motors, Nikola will have to raise $3.7 billion in additional capital over the next couple of years.
However, recent events affecting Nikola’s reputation have substantially reduced the chances of the company successfully raising new funds.
Nikola currently carries a Zacks Rank #4 (Sell).
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