Earlier today, Lucid Engines (NASDAQ: LCID) announced that it would carry out what is known as “the cashless buyback of public mandates.” The unusual buyout would be carried out as a way to ‘streamline [the] capital ”from Lucid while limiting dilution.

In effect, the company will see the redemption price of its outstanding warrants issued initially in July 2020 fall to $ 0.01 per share, allowing warrants holders to exercise their warrants on an essentially free basis. . In exchange, each warrant will amount to 0.4458 of a whole share, with the exchange instead costing a shareholder 0.5542 of a share.

On the other hand, such an event has a cost for 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 price was offering a decent 73.0% return to warrant holders at yesterday’s close.

The good thing here for investors is that they effectively keep their earnings based on the conversion price of the warrants. The numbers don’t work quite the same for Lucid, however.

Being in the money, especially to this degree, effectively guaranteed to the company that the holders would exercise the warrants for cash to get their shares. This means that the company could reasonably expect the 41.4 million outstanding public warrants to be exercised at a price of $ 11.50 per share – equivalent to approximately $ 476.1 million in gross lost revenue. This money will no longer come in, in the interest of doing this exercise of “cashless mandate”. Of course, these funds would be paid over the life of the warrants, which is five years from the date of issue.

Why could a business do this? It appears that Lucid is indeed seeking to reduce the potential dilution to which its corporate structure is subject. In addition, it reduces a potential future “cheap stock” surplus if equity begins to take off, as the company expects, once commercial production of the company’s flagship vehicle begins. The latter should take place later this year.

By the way, it is interesting to note that as of July 23, 2021, according to a prospectus filed by the company, there were only 6 registered holders for the warrants involved in this cashless exercise – despite a volume of activity. fairly large on public listing for mandates, LCIDW. Obviously, that has changed since the company officially finalized its IPO transaction.

In terms of dilution, the company will now indeed reduce its dilution compared to BSA from 41.4 million shares, to 18.5 million – a significant difference. The dilution “saved” from this exercise as a result can potentially be sold for a higher price, and thus put more money into Lucid’s bank account than the initial option exercise would, for the same cost of dilution. Any funding over $ 20.75 would essentially have this effect.

It is, however, a gamble in 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 through Sedar and the companies mentioned. The author has no title or affiliation related to this organization. Not a buy or sell recommendation. Always do additional research and consult a professional before purchasing a title. The author does not hold any license.