's up guys and welcome back to wall street millennial on this channel and podcast. Podcast. We cover everything related to stocks and investing by this point. Almost everybody who the stock market has heard of the hydrogen truck company.

Nicola. It was one of the first beneficiaries of the pandemic era spat craze with its share price increasing more than six fold after their listing on the nasdaq led by its visionary founder. Trevor milton nicola promised to revolutionize the semi truck industry by making the first ever viable hydrogen powered truck. However it turns out that their prototype wasn't powered by hydrogen.

It was powered by gravity. An investigation by short selling firm hindenburg research found that one of nikola's promo videos purporting to show a working truck was actually just the truck rolling down a hill with the camera angled tilted to make it look flat. Trevor milton also claimed that nikola had developed the badger pickup truck from the ground up and it was a fully functioning car in reality the prototypes were built upon the chassis of ford f 150s finally he claimed that nicola had found a way to produce hydrogen for just four dollars per kilogram. Again this was a complete lie the company had never produced any hydrogen and were instead buying it from commercial suppliers for 16 dollars per kilogram.

When these alleged lies were exposed nikola's share price started falling like a rock milton was charged with securities fraud. And now faces the prospect of up to 25 years in prison after being exposed as a near total fraud. You'd probably expect that nikola would go bankrupt and be relegated into the trash heap of history. But.

Shockingly the company is still alive today while its current share price of 638. Cents. Is well below the initial stack price of 10. It has actually outperformed the broader space market over the past year.

The company is still valued at more than 2 billion dollars and they still employ close to 1 000. Workers in just this past may they managed to raise 200 million dollars from a hedge fund. So what happened did nikola manage to turn things around or is this. All just.

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And enter promo code. Wall street at checkout and now back to the video. When hindenburg released. Their nikola short report in september of 2021.

The house of cards quickly came crumbling down. Trevor milton had no way to explain the fraud allegations and stepped down as chairman within two weeks. General motors pulled out their partnership with the company and they cancelled their much hyped badger pickup truck while much of their supposed technology was non existent nikola was a real company. They had hundreds of employees and were building a production factory.

In arizona. After milton stepped down ceo. Mark russell continued to press ahead with development and production of the company's electric and hydrogen powered trucks in 2017. The nikola truck rolling down the hill was fake.

But by 2021 they had real working prototypes for both the battery electric and hydrogen powered trucks. These are real trucks that can drive and carry cargo they have three semi trucks in the works one battery electric truck. Which became commercially available in 2021 and two hydrogen fuel cell trucks which they planned to be commercially available in 2023 and 2024 in february of 2022. They delivered two prototype hydrogen trucks anheuser busch.

Which has already started using them to deliver beer in southern california in december of 2021. They delivered their first battery electric trucks to a trucking company in california they expect to deliver 300 to 500 electric trucks in 2022 and begin large scale deliveries of hydrogen trucks in 2023. It might appear that nicola managed to snatch victory from the claws of defeat. And that they're now on track to revolutionize the logistics industry with zero emission hydrogen trucks.

But it's not that simple there's nothing particularly impressive about building an electric truck. The first electric trucks were built in the 1920s by a company called autovan but surely hydrogen trucks are cutting edge technology right wrong in 1966 general motors unveiled its electrovan the first ever hydrogen fuel cell truck the reason we don't see electric and hydrogen trucks on the road today isn't because the technology doesn't exist. It's because they're not even close to being commercially viable in 2021 mit. Published.

A study. Which compares a total cost of ownership of internal combustion engines or ice semi trucks versus battery electric and hydrogen fuel cell trucks i've linked the full paper in the video description the study finds that the total cost of ownership of a hydrogen truck is 39 higher than an internal combustion engine or ice truck. This adds up to 864 thousand dollars. Over a 15 year life.

Span of course. A lot of assumptions went into this calculation. There are three main drivers of the difference. Firstly hydrogen fuel is far more expensive than diesel over the course of 15 years you'll pay 300 000.

More for fuel costs with a hydrogen car secondly insurance will be more expensive hydrogen trucks are newer technologies and likely have a greater chance of unforeseen problems. If anything this might be a conservative estimate for a nicola truck. If i were an insurance company. I wouldn't touch a nikola truck with a 10 foot pole.

Given their history and finally they assume a hydrogen truck will cost three hundred thousand dollars more than an ice truck. Most trucking companies take out loans to pay for their trucks. Assuming a seven percent interest rate. They'll pay an additional 194 000.

Of interest expense over the 15 year lifespan for the hydrogen truck to make any economic sense. You need to make up for the 846 000. Difference. The only thing that nicola has direct control over is the price of the truck.

Let's say they reduce the price to zero. And give the truck away for free. The customer now saves 150 000. As that's the price they would have to pay to buy an ice truck.

They also save 97 000. In interest expense. However this is not enough to cover the high cost of hydrogen fuel. And the customer is still 123 thousand dollars worse off to make the transaction economically viable nicola would have to pay a customer 123 thousand dollars to take the truck off their hands clearly.

This is no way to run a business for battery electric trucks. The numbers aren't quite as bad their total cost of ownership is about three hundred thousand dollars less than hydrogen trucks. But still more than five hundred thousand dollars greater than ice trucks the only way to make hydrogen trucks viable is to drastically reduce the cost of hydrogen fuel. Hydrogen fuel is created by running electricity through water to separate the hydrogen atoms from the oxygen atoms.

The problem is that this requires a lot of electricity making it far more expensive than fossil fuels. Trevor milton originally claimed that nikola had found a way to produce hydrogen fuel for less than half. The prevailing market price. This was the major selling point to investors.

Unfortunately. It was a complete lie nikola doesn't have this type of magical technology. If hydrogen and electric trucks are so much more expensive than diesel trucks. Why have any customers agree to purchase them so far their two main customers.

Anheuser busch and total transportation services. Both bought the trucks to use in california california has something called the hybrid and zero emission truck and bus. Voucher incentive program or hvip for short under the program. Trucking companies can get up to a 120 000.

Subsidy. Whenever they buy an electric or hydrogen truck clearly this is a huge incentive. According to the mit study electric trucks cost five hundred thousand dollars more than ice trucks over the 15 year life cycle. When you consider the 150 000.

Subsidy. Plus. The fact that california has higher diesel taxes than the national average you can get pretty close to parody. But this gives nikola.

Very little room for negotiation on the price according to media reports the list price of their battery. Electric trucks is 270 thousand dollars. While this might be barely cheap enough for california customers to buy it with the hvip subsidies. It's probably not cost competitive in other parts of the country in 2023 nikola.

Will start mass production and deliveries of their hydrogen trucks they already have working prototypes. So we can give them the benefit of the doubt that they'll be able to ramp up production over the next year. But as we've seen before these trucks will not be commercially viable. Large corporations like anheuser busch might be willing to buy a few as a pr stunt.

But if they want to sell any meaningful volumes. They'll probably have to sell them at a loss there are only two ways that hydrogen can become economically viable for semi trucks firstly there could be a miraculous technological breakthrough to reduce the cost of hydrogen production secondly governments could give massive subsidies far greater than they're giving today. The problem is both of these solutions will take time time that nikola doesn't have at its current rate. The company is burning through about 150 million dollars per quarter in net losses they themselves said they won't be profitable until 2025.

This past may they raised 200 million dollars from a hedge fund called antara capital lp. The capital raised came in the form of convertible notes convertible. Notes are bonds. Which can be converted into stock at some strike price.

It's basically a bond. Plus. A call option merged together in one security after this capital raise. They had about 550 million dollars of cash on hand at the current rate of cash burn.

This will be gone in one year this begs. The question given what a precarious state. Nicola is in right. Now.

Why would antara capital be willing to invest 200 million dollars in their convertible notes hedge funds. Generally employ complicated trading strategies when you see a hedge fund buying a stake in company you can't always take it at face value because there's often more going on behind the scenes on antera's website. They give an explanation of their strategies. They say that they seek alpha shorts and utilize trait structuring and hedging to mitigate risk.

So what does this mean and how could it be related to their purchase of nicholas convertible bonds. Let's say hypothetically that entero had shorted nikola shares in the same quantity as they had exposure to it from their convertible bonds they might have to wait a period of time before shorting the shares. But to my knowledge. It would be completely legal.

Let me stress that this is purely speculation on my part. Hedge. Funds. Don't have to disclose their short positions.

So. We don't know that antera did this but given their stated strategies it seems plausible for this example let's say you invest 1 000. Into the convertible bonds this can convert into 114 shares at the price of 874. Cents per share.

This is like a call option at the same time you short 114 shares at 666. Which was nicholas share price. When antera bought the convertible bonds. This yields you 760 dollars of short sale proceeds.

Let's say that nikola doesn't do very well. But manages to barely avoid bankruptcy. Maybe the share price falls to three dollars. This is the best case scenario for the hypothetical hedge fund.

They make 417 dollars of profit on the short sale. Plus. They collect 320 of interest on the convertible bonds now let's say that nikola goes bankrupt and the stock goes to zero the hedge fund still makes a 760 dollar profit on the short sale. However.

They'll take a loss on the convertible bond. The convertible bond is senior to equity. Nicola's assets would be liquidated and they would recover. Some of the principle from the bankruptcy core.

Let's hypothetically say they only get half their principal value thereby incurring. A 500 loss the profit from the short sale will more than offset the losses from the bond. This scenario is not risk free as it's possible that nikola's assets will be worthless by this point. But the losses won't be catastrophic because they will make a significant profit from the short position in the final scenario.

Let's suppose. Trevor milton has an epiphany in prison and finds a way to make hydrogen for free. Nicola sells 10 million trucks and share price goes to a thousand dollars. The hedge fund.

Waits. Until 2026 and converts its convertible bonds into stock. At eight dollars and seventy four cents per share this limits the loss on the short position to just two hundred thirty seven dollars regardless of how high nicholas share price goes over the four years they collect 320 dollars of interest which more than covers the short sale loss as you can see it's very difficult for a hypothetical hedge fund to lose money on this trade. I don't know if this is what antera did.

But the point is just because a hedge fund was willing to lend nicola 200 million dollars. Doesn't necessarily mean that they think the company will do well. The more pressing issue for nikola. Is the 150 million dollars.

That they're losing every quarter at the current rate. The 200 million dollars that they raised from antero will be gone in four months. Now that they have 200 million dollars of debt on their balance sheet. New creditors would be very reluctant to lend them more money so.

Their only realistic option is to issue more shares. The problem is if they want to issue new shares. They would need approval from the majority of their shareholders at the company's annual shareholder meeting in june. They put forward a proposal to increase the authorized number of common shares from 600 million to 800 million 48 of existing shares voted in favor of this proposal two percent shy of the required 50.

Nicola is clearly in a desperate situation by their own admission. They won't reach profitability until 2025. And even that seems optimistic if they can't issue new shares it's hard to see how they can make it for three more years before they run out of cash ceo mark russell repeatedly posted youtube videos urging investors to vote in favor of the proposal a significant number of nicholas shares are owned by retail investors. If you're a small investor who owns a few hundred dollars of nikola stock you might not take the effort to follow what's going on very closely so a lot of nikola shareholders.

Probably don't even know about the shareholder meeting as of the time of. Recording this. Video they had managed to secure 4975 of the shares to vote. Yes.

They'll probably get to 50. Eventually. If the vote passes. They could issue about 230 million new shares at the current price of six dollars that would yield them about 15.

Billion dollars. However if they increase the share count too rapidly. It could send the price tanking so it's unclear how much they'll actually be able to raise. But regardless of how much money they raise it doesn't change the fact that hydrogen is not yet.

A viable replacement for diesel and until that changes. Nicola will be little more than a cash incinerator alright guys that wraps it up for this video. What do you think about nikola will they ever be able to turn a profit let us know in the comments section below as always thank you so much for watching. And we'll see you in the next one wall street millennial signing out.