Lucid Stock’s $8 Billion Shelf Filing – Should You Be Concerned?

Lucid Group, Inc. (NASDAQ:LCID) announced an $8 billion universal shelf prospectus filing on Monday (August 29^th) after market close. Its shares dropped by more than 5% accordingly in Tuesday trading (August 30^th), underperforming peers that are largely positioned to open in the green after a violent two-day market rout in response to Fed Chair Jerome Powell’s latest reiteration of the central bank’s hawkish policy stance.

Lucid’s latest universal shelf filing has raised concerns about its liquidity, as the premium electric vehicle (“EV”) start-up continues to prioritize ramping up volumes on its flagship Air sedan, while also simultaneously planning the launch of the Gravity SUV next year and expanding its manufacturing capabilities and brand prominence into the Middle East by mid-decade, which are collectively capital-intensive undertakings. The filing has also unleashed fear of whether share dilution is imminent, risking further pressure on the stock’s near-term performance. The stock has already lost close to 60% of its value this year due to broad-based market weakness resulting from looming recession risks.

The following analysis seeks to address the above concerns on Lucid’s recent $8 billion universal shelf prospectus filing – namely, share dilution and liquidity risks – and determine what it may imply on the stock’s valuation prospects.

What Is A Universal Shelf Filing?

Think of it as a placeholder – a universal shelf filing, or shelf prospectus, allows companies to “offer up to a maximum aggregate dollar value of one or more types of securities” at a future date within a designed period. At the time of the shelf prospectus filing, the issuer does not immediately engage in the sale of securities for proceeds. Instead, the issuer discloses its intentions to raise an “x” amount of capital via public markets, and obtains approval from the SEC ahead of time via the long-form shelf prospectus filing. Some of the key drivers for issuers to opt for a shelf prospectus filing includes the following:

• Financial flexibility: After having the form S-3 shelf prospectus filing approved, the issuer has permission to sell securities (e.g. equity / debt offerings) up to the designated amount at any time within the designated period. They can issue the full designated amount at once, or in increments via different types of securities, as long as it is done within the specified period at which the shelf prospectus is active.
• Simplicity and improved economics: Filing a shelf prospectus also simplifies future securities offerings for issuers. Instead of having to prepare a long-form prospectus and obtain approval from the SEC every time, a securities issuance offered as part of an existing shelf prospectus only requires the submission of a short-form prospectus supplement to detail the specific terms of the offering (e.g., amount and maturity for debt securities offering; amount and share offering count for equity issuances; transaction costs/issuance commission to underwriter). This accordingly reduces time to market, and potentially minimizes issuance costs.
• Guaranteed regulatory approval: Because the long-form shelf prospectus – which essentially acts as a placeholder – has already been previously reviewed and approved by the SEC, future issuances under the existing filing is essentially guaranteed from a regulatory perspective. This accordingly builds on the simplicity and improved economic benefits mentioned in the earlier section.

In Lucid’s case, its latest form S-3 shelf prospectus filing allows it to raise up to $8 billion via public markets through the issuance of “common stock, preferred stock (including in the form of depository shares), warrants, debt securities (including convertible debt), purchase contracts, and/or units (which are typically a combination of two or more types of securities).” Specifically, Lucid can issue up to: 1) 44,350,000 shares of common stock as part of the existing shelf prospectus filing; 2) 1,189,450,445 shares of common stock as part of previously registered “form S-1 shelf registration statement;” and 3) up to 44,350,000 warrants to purchase common stock under the existing shelf prospectus filing. The existing form S-3 shelf prospectus filing is active over a three-year period.

One of the key reasons for Lucid’s latest form S-3 shelf prospectus filing was to fulfil a requirement stipulated in its Investor Rights Agreement for the company to “covert [its] for S-1 registration statement into a form S-3 as soon as practicable after [obtaining eligibility] to use form S-3,” which occurred on August 1, 2022. Essentially, the latest shelf prospectus filing would enable the “resale of up to 1,189,450,445 shares of common stock and up to 44,350,000 warrants held by selling securityholders” – namely, existing investors through the PIPE investment, the private placement warrants and working capital warrants explained here. The 1,189,450,445 shares of common stock and 44,350,000 warrants were previously registered as part of Lucid’s original form S-1 shelf registration statement, and were subject to certain selling restrictions under the original arrangement. The latest resale enabled under the form S-3 would allow the associated parties with “additional flexibility if they decide to sell” their securities.

What Does Lucid’s $8 Billion Shelf Filing Suggest?

Lucid’s latest form S-3 filing states that any proceeds from securities offered under the $8 billion universal shelf would be used towards “general corporate purposes, which may include capital expenditures and working capital.” The placeholder would essentially provide Lucid with “greater flexibility to raise capital in the future” when needed, building on the list of shelf filing advantages explained in the earlier section.

However, the latest news seems to have taken investors by surprise, considering the stock’s latest pullback. Lucid’s latest shelf filing has primarily raised two concerns among investors: 1) liquidity; and 2) share dilution.

1. Liquidity Risks

Lucid has largely differentiated the viability of its business from the growing volume of EV SPAC peers caught in financial trouble amid tightening financial conditions, thanks to its robust liquidity position. Yet, Lucid’s latest decision to file an $8 billion universal shelf prospectus has investors wondering if the company is strapped for cash as it takes on an increasingly capital-intensive endeavor spanning production ramp-up, new product launch, and global expansion.

To understand if Lucid’s liquidity is at risk, we circle back to its financing history:

• SPAC Merger with CCIV: Lucid raised cash proceeds of more than $4.4 billion following the completion of its reverse merger with CCIV in July 2021. Management had reiterated that the funds would be sufficient to support the company’s growth plans through 2022 at the time.
• Convertible Note Issuance: Lucid went on to raise an additional $1.75 billion through 1.25% convertible senior notes due 2026 to fund new and existing “Eligible Green Investments” in December 2021. The notes were priced at a conversion rate of 18.2548 shares per $1,000 principal, or a conversion price of $54.78 apiece in a private offering to qualified institutional buyers. While investors were initially taken back by the potential share dilution risks at the time of the convertible notes’ issuance, the conversion price of $54.78 had actually corroborated institutional confidence in Lucid’s future and provided further validation on the company’s prospects for promising long-term upsides ahead.
• Asset-based revolving credit facility: The five-year senior secured asset-based revolving credit facility (“ABL credit facility”) provides Lucid with access of up to $1 billion with repayment due June 9, 2027. The ABL credit facility was undrawn as of Lucid’s latest reporting period ended June 30, 2022.
• Gulf International Bank revolving credit facilities: The Gulf International Bank has extended two revolving credit facilities (“GIB facilities”) with aggregate funding of $266.5 million to Lucid for use towards the ongoing build-out of its new manufacturing facility in the Kingdom of Saudi Arabia (“KSA facility”), as well as general corporate purposes. Specifically, the GIB facilities are structured as follows:
  • Bridge Facility: The Bridge Facility extends a $173.2 million credit line to Lucid for designated use towards capital requirements “in connection with the KSA facility.” The facility has remained undrawn as of Lucid’s latest reporting period ended June 30, 2022.
  • Working Capital Facility: The Working Capital Facility extends a $93.3 million credit line to Lucid for funding general corporate activities. The facility has an undrawn balance of $86.6 million as of Lucid’s latest reporting period ended June 30, 2022.
• Saudi Industrial Development Fund loan agreement: The Saudi Industrial Development Fund loan agreement (“SIDF loan agreement”) extends up to $1.4 billion in funding requirements towards Lucid’s build-out of its KSA facility. Repayment begins April 3, 2026 through November 12, 2038. Lucid has not made any withdrawals from the SIDF loan agreement as of June 30, 2022.

The aggregate liquidity currently available to Lucid provides sufficient funding to support its operations “well into 2023” according to management’s latest remarks, providing it with “further flexibility to scale [its] business.” As such, we do not believe Lucid’s latest $8 billion universal shelf filing is done out of need, but rather out of practical reasons similar to its decision to issue convertible notes via private placement last year.

With a three-year shelf life, Lucid’s latest S-3 filing likely points to paving financial flexibility to support its long-term growth initiatives, including the introduction of new vehicle through mid-decade. Taking a page from Lucid’s latest launch strategy for its flagship Air sedan, the company is likely going to introduce variations of the upcoming Gravity SUV beyond trim levels introduced at its planned unveiling next year.

Specifically, Lucid has surprised its market with two variants of the Air Dream Edition, the Air Grand Touring Performance, and more recently, the Air Sapphire since introducing its flagship premium electric sedan’s original trims last year, which included the Air Pure, Air Touring, Air Grand Touring, and Air Dream Edition. While Lucid currently has sufficient liquidity to fund operations through 2023, which likely includes the capital required to launch its Gravity SUV, the $8 billion shelf filing is expected to provide further financial flexibility to support the new model’s future variations similar to the roll-out strategy for the Air sedans observed to date. This is also consistent with Lucid’s long-term growth plans, which include the introduction of other planned vehicles beyond the Air sedan and Gravity SUV through 2030.

2. Dilution Risks

The stock’s selloff on Tuesday comes as a result of investor concerns of imminent share dilution upon materialization of future securities issuances under the $8 billion universal shelf filing. However, we view Lucid’s latest filing as a practical decision to enable greater financial flexibility towards funding its pipeline of growth opportunities, including the introduction of new vehicles, as well as ongoing manufacturing and operational expansion efforts. While any future equity issuances will introduce share dilution risks (or higher borrowing costs in the case of debt securities issuances), the capital raised is expected to improve Lucid’s growth positioning ahead of a robust demand environment for EVs across its major markets. This will inadvertently further its valuation prospects, which will likely offset any adverse impact resulting from share dilution.

Specifically, the $8 billion shelf prospectus paired with Lucid’s existing funding pipeline explained in the earlier section uniquely positions the company for further capitalization of growth opportunities ahead. The combination of manufacturing capacity expansion in both the U.S. and the Middle East, as well as the introduction of new vehicle models, is expected to further Lucid’s market share over the longer-term, while driving sustained top-line growth and margin expansion in the process.

Drawing on our projections that the $8 billion shelf prospectus filing is likely put in place to support Lucid’s long-term product pipeline expansion efforts, related funding is expected to play a critical role in the company’s profitability trajectory. Recall Lucid’s “Electric Advanced Platform” (“LEAP”) strategy, which enables platform sharing between multiple vehicles, the ongoing ability to fund new vehicle roll-outs is expected to drive further economies of scale, supporting sustained margin expansion towards projected profitability by mid-decade.

In addition to margin expansion, the financial flexibility enabled by the latest $8 billion universal shelf filing will play a critical role in supporting Lucid’s market share expansion as global EV adoption accelerates. Specifically, the addition of new models across different vehicle and pricing segments over coming years is expected to further reinforce Lucid’s market share gains over the longer-term by expanding its addressable market, and bolster its long-term valuation prospects.

As discussed in our previous coverage, Lucid’s primary market – the U.S. – has recently hit an inflection point on EV adoption, with more than a quarter of the American population indicating interest in making their next vehicle purchase an electric one, thanks to improved battery technologies, increased availability of public charging, and the growing range of choices. Even the recent surge in average MSRP for EVs has not deterred consumers from the segment, with demand remaining resilient still. And Lucid’s upcoming launch of its flagship Gravity SUV is also expected to benefit from favorable take-rates in the U.S., given the vehicle segment currently accounts for more than half of annual new car registrations. Meanwhile, in the Middle East, Lucid is expected to benefit from a first-mover advantage in what is expected to become the next fastest growth EV market. EV demand in the Middle East – specifically Saudi Arabia – is expected to expand rapidly at a CAGR of more than 40% through 2027, underscoring Lucid’s well-timed entry into the market next year for vehicle sales and by 2026 on manufacturing.

Final Thoughts

If anything, Lucid’s latest universal shelf filing implies further growth in store for the premium EV maker, which is with the normal course of operations and its broader long-term growth plans. The $8 billion universal shelf prospectus provides Lucid with a financial peace of mind when it comes to its ongoing capitalization of high-growth opportunities arising from global electrification efforts, making it easier for the EV maker to fund investments efficiently and quickly, and support sustained growth over the longer-term. On this basis, we remain focused on Lucid’s near-term execution abilities when it comes to ramping up productions towards its current year delivery target instead, which will be critical to restoring investors’ confidence in the stock, and unlocking further upsides ahead.