ElectraMeccanica Vehicles (NASDAQ:SOLO) recently started delivering the first shipments of its three-wheel electric vehicle (EV) called the Solo. The problem is SOLO stock has a $553 million market capitalization, but the company is going to need a lot more capital in order to ramp up production.
The Solo is a three-wheeler EV that will cost consumers only about $18,500, plus any amounts charged under the tariff rules. This is because the EV, which looks like it has no back end, is made in China with a motorcycle manufacturer called Zongshen.
The company still has not yet determined how much extra the tariffs pass-along will cost. The quarterly it filed on Nov. 10 says the extra cost could be up to 27.5%, including a 25% surcharge. That could put a damper on demand for the Solo.
ElectraMeccanica Will Need More Cash
ElectraMeccanica has a deal with Zongshen to make 75,000 EVs over a three-year period.
Based on the analysis in my previous article, I estimated that ElectraMeccanica would need up to $347 million. For example, 25,000 units cost this amount if the company needed to raise 75% of the selling costs ($18,500 selling price by 75% by 25,000 equals $347 million).
And let’s assume that even half of that could come from customers through deposits and advance sales. So that still means that the company has to fund half of $347 million, or $173.4 million.
The problem is, as of Sept. 30, the company has just $101 million. I highly, highly suspect that it will have to raise more cash within the next year, and probably even sooner than later. And it’s not just that the company is short at least $74 million or more.
For example, ElectraMeccanica is planning on making a new sportscar, a two-seater EV called the Tofino, sometime in the next two years. That will put an extra load on its cash flow and finances.
A major rule on Wall Street is “raise cash when you can, not when you have to.” It doesn’t matter that the company just had a secondary equity offering earlier this year. It raised $20 million at $2 per share on June 12.
But right in the middle of its latest 10-Q, on page 10, ElectraMeccanica admits it will raise more money:
“Management intends to finance our operations over the next 12 months through private placement and/or public offerings of equity capital, strategic investments and revenues to be derived from the sale of electric vehicles and high-end custom vehicles.”
That will dilute existing shareholders, but could also mean it will have enough money to get into full production.
What’s Next For SOLO Stock
Right now, SOLO stock has a $553 million market capitalization. This is down significantly from my prior article on Nov. 24, when it had a $794 million market cap. That could have been predicted.
The company still needs to raise at least $75 million to $150 million more. That will result in a significant dilution for the company – from 14% to 27% of the company’s shares.
As I said before, it’s always better to have more money than you may need. Sometimes it’s better to take the dilution just to raise the capital when you need to or when you can.
For example, Solo stock up is still up over 90% in the last month. The company should take advantage of this massive increase in market value by selling shares for the money that it needs. It may not have a chance to do so for quite a while.
In fact, right before my article came out last month the company acted. It said it was going to issue up to $200 million in equity securities. The prospectus that came out on Dec. 2, said it would raise the money in common shares, preferred shares, warrants, or units. So far, there has been no definitive announcement, nor any brokerage firm that is underwriting the total offering.
What To Do With Solo Stock
Let’s look at this from a prospective investor’s standpoint. Given that the company is planning on registering up to $200 million, that will dilute shareholders by 36%.
For example, even if they find some institutional investors to fully underwrite the capital raise, it is likely to be at a discount from today’s price.
However, I suspect that a portion of that $200 million is already taken into account with shares and warrants already issued so far in 2020. The remaining amount is not clear, depending on how many warrants were exercised by existing owners.
The details of how much capital the company currently has and how much it still needs to raise will not be clear without further info. Unless the company clarifies the final capital raise amounts, it will not be clear until its next quarterly report.
Therefore, most patient investors will wait until the dilutive equity offering has been announced and discounted in the Solo stock price.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.