Lucid Motors: The Numbers Behind It’s Cashless Warrant Exercise

Earlier today, Lucid Motors (NASDAQ: LCID) announced that it would be conducting what is referred to as “the cashless redemption of public warrants.” The unusual redemption is reportedly being conducted as a means of “streamlining [the] capital structure” of Lucid while also limiting dilution.

Effectively, the company will see the redemption price of its outstanding warrants issued originally in July 2020 fall to $0.01 per share, enabling warrant holders to exercise their warrants on what is essentially a cost-free basis. In exchange, each warrant will amount to 0.4458 of a full share, with the exchange instead costing a shareholder 0.5542 of a share.

On the downside, such an event comes at a cost to the company. Prior to today’s announcement, each warrant contained an exercise price of $11.50 per share, a figure that was well in-the-money based on yesterday’s closing price of $19.89 per share. In fact, the pricing offered a decent 73.0% return to holders of warrants as of yesterdays close.

The bright side here for investors, is that they effectively keep their gains based on the warrant conversion price. The numbers however don’t quite work out the same for Lucid.

Being in the money, especially to this degree, effectively guaranteed the company that holders would exercise the warrants on a cash basis to get their shares. What this means, is the company could reasonably expect all 41.4 million outstanding public warrants to be exercised at a price of $11.50 per share – equating to roughly $476.1 million in lost gross proceeds. That money will now no longer come in, in the interest of doing this “cashless warrant” exercise. Of course, these funds would trickle in over the life of the warrants – which is five years from the date of issuance.

Why might a company do this? It appears that Lucid is in effect looking to reduce the potential dilution that its corporate structure is subject to. Further, it reduces a potential future overhang of “cheap shares” should the equity begin to take off, as the company expects, once commercial production of the firms flagship vehicle begins. The latter of which is expected to occur later this year.

As a side note, interestingly, as of July 23, 2021, as per a prospectus filed by the company, there were just 6 holders of record for the warrants involved in this cashless exercise – despite rather significant volume of activity on the public listing for the warrants, LCIDW. Obviously this has changed since the firm formally completed its go-public transaction.

In terms of dilution, the company will now in effect reduce its dilution in relation to the warrants from 41.4 million shares, down to 18.5 million – a significant difference. The dilution “saved” from this exercise as a result can potentially be sold at a higher price, and thereby put more cash in Lucid’s bank account than the original option exercise would, at the same dilution expense. Any financing above $20.75 would essentially have this effect.

That, however, is a gamble on the capital markets – a game that has surely produced more losers than winners.

Lucid Motors last traded at $18.93 on the Nasdaq.

Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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