Electric truck maker Nikola Corp. (NASDAQ: NKLA) took a paper loss from reclassifying stock warrants as liabilities following stricter guidance from the Securities and Exchange Commission (SEC) on blank check companies merging with pre-revenue startups.
Nikola was an early target last year in what would become a flurry of special purpose acquisition company (SPAC) mergers. With more than 560 SPACs raising more than $184 billion in 2020 and so far this year, the SEC in April expressed reservations about some advantages SPACs have over traditional initial public offerings.
For example, the commission now thinks companies that issued warrants to purchase additional stock at a set price as part of an IPO purchase should report them as liabilities instead of equity on the company balance sheet.
Restating financial reports
Nikola on Tuesday said it would restate financial results on warrants for the quarters ending June 30, Sept. 30 and the full year of 2020, adding $7 million to $8 million to its liabilities. In turn, its annual loss reported would be reduced $12 million to $15 million before audit.
Nikola added $264.5 million to its books in December from the sale of 23 million public warrants exercised at $11.50 per share. As of the end of March, 760,915 private warrants issued to early shareholders remained outstanding due to the fall in the company’s share price.
The stock has plummeted from an intraday high of $93.99 last June 8 to $12.71 on March 31. The private warrants were worth $500,000 to $1.5 million in noncash, nonoperating income for the three months ended March 31.
“Management believes the change in the accounting treatment of the private warrants has no effect on the company’s ongoing operations or future plans,” Nikola said in an 8-K SEC filing.
Changing how directors are elected
Separately, but in the same filing, Nikola said it changed its bylaws on how board members will be elected at the company’s first annual shareholder meeting June 30. Because of the financial restatement, the meeting was moved from June 8.
Each director will stand for reelection annually rather than a few directors being voted on each year.
“I don’t believe I have ever seen a company go public with a staggered structure and declassify before their first annual meeting,” Jay Kesten, associate professor of law at Florida State University, told FreightWaves.
A staggered, or classified vote, makes it harder for shareholders to oust a board at one time. Since the 2008 financial crisis, companies have increasingly de-staggered elections to give shareholders a greater vote in corporate governance, Kesten said.
In Nikola’s case, the move could reflect a desire to minimize a possible penalty arising from an ongoing SEC probe into claims by founder and former Executive Chairman Trevor Milton about the company’s technology prowess in fuel cells and the cost of manufacturing hydrogen.
An internal Nikola investigation into a short seller’s report last September alleging Nikola was built on “an ocean of lies” found that nine statements by Milton were wholly or partially false.
“If a company is in trouble, maybe what they need, at least for a little while, is more professionalization and more accountability directly toward the market,” Kesten said.
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