ElectraMeccanica (NASDAQ:SOLO) recently started delivering the first shipments of its three-wheeled electric vehicle (EV) called the Solo. However, the company is currently facing a dilemma. SOLO stock has a $793 million market capitalization at the time of this writing, but the EV maker needs a lot more capital in order to ramp up production.
The Solo will cost consumers only about $18,500, plus any amounts charged under the tariff rules. This is because the EV is made in China, in partnership with a motorcycle manufacturer called Zongshen.
But right now, the company still has not yet determined how much extra the tariffs will cost. ElectraMeccanica’s most recent filing — which just came out on Nov. 10 — says the extra cost may be 27.5%. Needless to say, that could put a damper on demand for the Solo.
SOLO Stock Will Need More Cash
Currently, the ElectraMeccanica contract with Zongshen requires that the EV maker put up the money for 75,000 units over a three-year period. So, let’s do a little math.
Let’s assume the cost of manufacturing is 75%, including the battery costs, but not including the shipping. Therefore, for the first year, 25,000 units would require ElectraMeccanica to fund $346.9 million for all production costs. This is found by multiplying the $18,500 MSRP by 75%, then by 25,000.
Next, let’s assume that even half of that number could come from customers through deposits and advance sales. That still means the company has to fund a hefty chunk of the cost, at $173.4 million.
So, the problem is that — as of Sept. 30 — SOLO only has about $101 million in its coffers (Page 3). Because of this, I highly suspect that the company will have to raise more money within the next year — probably even sooner.
But it’s not just the fact that ElectraMeccanica is short at least $73 million. 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 $2.00 per share on June 12.
Right in the middle of its latest filing (Page 10), even SOLO admits it will need to 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.”
Of course, that will dilute existing shareholders in SOLO stock. But it could also mean the EV maker will have enough money to kick into full production.
Right now, SOLO stock has a $793 million market cap. But as we have seen above, the company needs to raise somewhere around $75 million to $150 million more.
In fact — if I was the CFO of the company — I would urge the board to go full tilt and try to raise $300 million. It’s always better to have more money than you need. Based on the stock’s Nov. 23 close of $10.20, that would mean dilution of a little over a third, at 38% of the existing shares outstanding.
Why does this move make sense? For one, the stock has recently risen over 280% in the last month. SOLO should take advantage of this massive increase in market value by selling shares for a large amount of money. It may not have a chance to do so again — at least for quite a while.
As such, I believe management will be tempted to shoot for the $300 million. After all, they might justify it by knowing that any kind of equity capital raise will dilute shareholders and possibly lower SOLO stock’s price. So, why not do it in full measure, in order to meet all of the company’s needs? Certainly, more cash will come in handy for future projects.
What To Do With Solo Stock
With all of this guesswork in mind, let’s now look at this from a prospective investor’s standpoint. In my opinion, given the likelihood of another capital raise, it might be better for you to wait on SOLO.
For example — even if the company finds some institutional investors to fully underwrite the raise — SOLO stock is likely to be at a discount from today’s price.
Therefore, patient investors will want to wait until the dilutive equity offering has been announced and discounted in the share 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.