restated its results ahead of earnings—a move that can often slam a stock—but in this case, no one needs to worry.
The restatement is driven by changes in the accounting for warrants issued by special-purpose acquisition companies that have the potential to affect all SPAC-related companies. The stock is holding its ground.
NIkola (NKLA) shares were down about 0.6% in early trading, while the
futures, for comparison, are up about 0.4% and 0.1%, respectively.
A few weeks back, in mid-April, the Securities and Exchange Commission decided that warrants should be accounted for as a liability, like debt, instead of as equity.
Warrants give the holder the right to buy shares at a fixed price. In the case of SPACs, that price is typically $11.50 a share, higher than the $10 share price SPACs generally use when they sell stock to investors. Warrants come with SPAC stocks as an inducement to buy shares.
When SPAC-related stocks are substantially above $11.50, investors can assume the warrants will be exercised. The company gets the $11.50 in cash, but the share count goes up.
Accounting expert Robert Willens points out that if warrants are accounted for as liabilities, as the SEC says they should be, changes in their value—they trade freely on exchanges—would be recognized in income from continuing operations.
That means reported earnings will fluctuate with the changes in the value of the warrants. The change will make quarterly earnings a little more difficult to follow, so why bother?
Willens says the shift may be part of an effort by the regulator to focus more on SPACs as the investment vehicles proliferate. “The SEC, as is by now well-known, is taking a hard look at SPACs generally,” wrote Willens in a recent report. “This accounting pronouncement seems to be part of the overall campaign to hold SPACs to a higher level of accountability than other registrants.”
Nikola (ticker: NKLA) restated its past results to reflect the new accounting treatment.
(QS). a maker of batteries for electric vehicles, announced a similar accounting restatement on April 28. Its shares dropped the following day, but all SPAC-related stocks have been weak. The
Defiance Next Gen SPAC Derived ETF
(SPAK) has dropped each of the past four trading sessions.
The bigger deal for Nikola investors will be earnings, due out on Friday. Nikola doesn’t generate sales yet, but analysts and investors will be eager to hear about the outlook for products such as the Tre—which will be battery powered in its initial configuration. Whether the global semiconductor shortage will slow down its product-development time lines is another key issue.