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Electric vehicle maker Nikola Corp. (NASDAQ: NKLA), suffered a paper loss by classifying stock warrants as a liability after the Securities and Exchange Commission (SEC) issued stricter guidelines for blank check companies that merged with startups before sales.
Nikola was an early target in a spate of SPAC (Special Purpose Acquisition Company) mergers last year. With more than 560 SPACs grossing more than $ 184 billion in 2020, the SEC in April expressed reservations about some of the advantages SPACs have over traditional IPOs.
For example, the Commission now believes that companies that have issued warrants to purchase additional shares at a set price in an IPO purchase should show them as liabilities instead of equity on their balance sheets.
Adjustment of the financial reports
Nikola announced Tuesday that it would adjust financial results for warrants for the quarters ending June 30, September 30, and full year 2020, and increase its liabilities by $ 7 million to $ 8 million. In turn, the reported annual loss would decrease by $ 12 to 15 million prior to testing.
Nikola added $ 264.5 million to its books in December from the sale of 23 million public warrants at $ 11.50 per share. At the end of March, there were 760,915 private warrants outstanding to early shareholders due to the company’s share price decline.
The stock fell from an intraday high of $ 93.99 on June 8th to $ 12.71 on March 31st. The private warrants had non-cash income of $ 500,000 to $ 1.5 million for the three months ended March 31.
“Management believes the change in accounting for the private warrants will have no impact on the company’s operations or future plans,” Nikola said in an 8-K SEC filing.
Change how directors are elected
Separately, but on the same file, Nikola said it had amended its bylaws regarding the election of directors at the company’s first annual general meeting on June 30th. Due to the financial adjustment, the June 8 meeting was postponed.
Each director is put up for re-election annually rather than having a few directors elected each year.
“I don’t think I’ve ever listed a company with a tiered structure and cleared it before their first annual meeting,” said Jay Kesten, associate professor of law at Florida State University, to FreightWaves.
A staggered or classified vote makes it difficult for shareholders to oust a board member at the same time. Since the 2008 financial crisis, companies have increasingly postponed elections to give shareholders a greater voice in corporate governance, Kesten said.
In Nikola’s case, the move could reflect a desire to minimize a possible penalty resulting from an ongoing SEC investigation into claims made by founder and former CEO Trevor Milton about the company’s technological capabilities in fuel cells and the cost of producing hydrogen .
An internal Nikola investigation by a short seller last September alleging Nikola was built on an “ocean of lies” found that nine statements made by Milton were wholly or partially false.
“When a company is in trouble, they may need more professionalism and accountability directly to the market, at least for a short time,” said Kesten.
On the subject of matching items:
Trevor Milton loses billionaire status when Nikola stock hits 52-week lows
Nikola adds troubled directors to add credibility
Nikola appoints new board member
Click here for more FreightWaves articles by Alan Adler.