• Arrival has failed with its attempt to merge with a second blank check firm to raise $238 million.
• The EV upstart has hired advisors for a potential bankruptcy filing. This could come as soon as next month.
• Cash of $130 million as of the end of March has likely been cut in half, with the company faced with a few months of cash runway left.

Arrival (NASDAQ:ARVL) is likely to file for bankruptcy before the end of astronomical summer, with the EV upstart recently hiring turnaround advisor Alvarez & Marsal to draft contingency plans for a bankruptcy filing as attempts to raise more external capital flounders. A possible filing would add Arrival to a slowly expanding list of EV deSPACs that have collapsed. Proterra was the latest in a tally that includes Lordstown Motors (OTC:RIDEQ) and Electric Last Mile Solutions (OTC:ELMSQ). Further, Arrival’s plan to engineer a second merger with blank check company Kensington Capital Acquisition Corp. V (KCGI) was scrapped. The deal would have been unique if executed and allowed Arrival to access as much as $238 million of cash held in Kensington’s trust.

The failure of the reSPAC transaction and the hiring of external advisors when aggregated with a still difficult macroeconomic backdrop for fundraising and Arrival’s abnormal cash burn profile infer continued near-term headwinds. The best-case scenario, though unlikely, would be for Arrival to be acquired by a larger firm looking to gain access to the company’s unique microfactory concept and IP. However, this is unlikely with Arrival yet to have brought a product to market and against the company’s outsized losses. Critically, the somewhat out-of-the-blue collapse of electric bus maker Proterra has highlighted the difficulty of finding buyers for loss-making EV operations. Proterra, once the poster child for the electrification of the transit bus, spoke to 26 potential buyers but failed to get the backing of a single one.

Modular Microfactory Concept Set To Turn Dark

What’s the key takeaway for current shareholders? That 2023 has seen two EV companies collapse against a Fed funds rate that has just been hiked to a 22-year-high. Arrival has held off on updating its shareholders on its financials in a timely manner with a Form 6-K filed with the SEC in July announcing that Nasdaq had granted the company an extension to the deadline to file its annual report for the fiscal year ended December 31, 2022. The company now has until October 30, 2023, to file its 2022 annual report or face being delisted from the Nasdaq after an earlier 1 for 50 reverse stock split in April brought the company back into compliance with minimum list requirements.

On the back of the hiring of external advisors, it’s unlikely Arrival will be able to maintain operations for the three months until the new deadline date. Hence, the May update on cash and operations could be the last. The company held cash and equivalents of $130 million as of the end of March, a decline from cash and equivalents of $601 million when the company started trading on the Nasdaq back in the spring of 2021 through a combination with CIIG Merger Corp. The company’s microfactories were meant to be a small and low-cost modular approach to EV construction. This should have been reflected as smaller cash outflows and a more constrained operational cost base.

Arrival was aiming to still be able to pump out at least 10,000 of its Class 4 delivery vans annually to sell to a customer base that includes United Parcel Service (UPS). The company has used up 80% of its Spring 2021 cash position, with a monthly cash burn rate running at around $20 million. This figure does not include the burn of other injections of external capital since the company went public. Arrival was able to raise $50 million in equity capital from Antara Capital earlier this year in February. The company has also been exchanging debt held by Antara for equity and most recently swapped $20 million of a 3.50% convertible note due in 2026 for 3.02 million of its ordinary shares.

A Filing Could Be Made Before The End Of The Summer

Arrival has been fighting to remain a going concern. According to LinkedIn it currently employs at least 1,068 employees across its UK and US locations, upping the stakes to find a salvo. Is an eleventh-hour solution possible? I don’t think so. The situation could have been different if capital had not been so expensive. Further, Arrival held debt of at least $300 million as of the end of June. This was all owned by Antara who has been willing to convert it to equity, but Arrival’s current market cap makes any further conversion a more difficult undertaking and would imply a near 10x rate of dilution.

Further, if Antara were to extinguish the debt in a deal to avert bankruptcy, Arrival’s core headwind still remains to find external capital to fund its operations. The company has likely used more than half of its end-of-March 2023 cash position and faces a liquidity position unable to fund another three months of operations. Against this, current shareholders should close out their position, with Arrival likely set to stage a move to over-the-counter trading on a bankruptcy filing.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Arrival: Collapse Likely Before The End Of Summer, Get Out appeared first on Up2info.com.

• Arrival’s quarterly cash burn is abnormal for a company of its size and its current cash position is not sufficient for up to a year of operations.
• The EV upstart has had to execute a 1 for 50 reverse stock split and has proposed another merger with a blank check company to avert collapse.
• The transaction could see Arrival gain access to $283 million in cash from the SPAC’s trust. However, redemptions are likely to be significant.

Arrival’s (NASDAQ:ARVL) visceral struggle for survival has seen the EV upstart execute a 1 for 50 reverse stock split, jettison plans to build a microfactory in the UK, and launch a second merger with a blank check company. The proposed merger with Kensington Capital Acquisition Corp. V would see Arrival valued at a $524 million pro-forma valuation and would allow the EV company to gain access to $283 million in cash held in Kensington’s trust account. Whilst news of the deal initially drove the commons up by 50%, Arrival’s year-to-date returns currently sit at negative 60% with bears and shareholders alike experiencing angst over the company’s liquidity position.

Arrival had cash and equivalents of $130 million as of the end of its fiscal 2023 first quarter. This was down sequentially from $205 million in the fourth quarter. Critically, whilst the $75 million quarter-on-quarter fall in liquidity is smaller than the prior third-quarter to fourth-quarter fall of around $126 million, Arrival’s cash burn still poses an existential risk to its future and is far too outsized for a company with its operational footprint. To place this in context, the pre-revenue company’s current market cap stands at $54 million.

Liquidity Dries Up As Arrival Attempts A Salvo

To be clear, Arrival is swapping hands for less than its cash burn from operations for a reason. The company remains pre-revenue against the initial guidance provided when it went public in 2021 that it would realize revenue of around $5.1 billion and EBITDA less capital expenditure of $176 million in 2023. Its seemingly unique approach to EV manufacturing through the use of a distributed production network has failed to materialize, with just three of its vans built during the quarter as testing continues ahead of commercialization guided to start later this year.

Arrival does not have the liquidity required to mass produce its vans and to bridge over what would likely be a few years of cash burn on the back of its start of production. Manufacturing a vehicle is a very cash-intensive business, and Arrival’s cash burn is already so high. This renders the company a total avoid from an investment perspective. What’s the investment story here? Indeed, whilst demand for EVs forms a secular growth sector set to be bolstered by the 2022 Inflation Reduction Act and fast-ramping efforts to combat anthropogenic climate change, there are a lot of better-capitalized companies chasing this market.

The company’s inherently small low-cost microfactories were meant to differentiate it from the sea of competition with Arrival also stating that its van would reach price parity with competing ICE vehicles with a lower total cost of ownership. A fall from a $10 SPAC reference price to a few cents before the reverse stock split was the market signal that the company is hurtling toward the brink. Arrival should run out of cash by the end of its fiscal 2023 third quarter at its current pace of burn. Further, the proposed transaction with Kensington to gain access to $283 million in cash from the trust is being built on the assumption that there won’t be significant redemptions.

Survival Seems Unlikely

Arrival has hinged its build-out of its Charlotte, North Carolina factory on accessing its full funds held in Kensington’s trust. Hence, a large degree of redemptions would not only see the company scrap plans to build its first North American microfactory, but it would also inevitably mean Arrival ceases to be a going concern beyond its current cash runway. This bearish perspective is built on the company not being able to access other avenues of cash. Whilst unlikely, Arrival accessing any other large source of funds if the Kensington deal was to fall through would form a significant rebuttal of this liquidity crunch argument.

That the proposed transaction is being completed at a 10x premium to Arrival’s current market cap will likely form a core reason for current holders of Kensington to redeem their shares. The pace of Arrival’s fall from its $10 SPAC reference price to a few cents has been dramatic, and Kensington’s holders could simply avoid being exposed to a similar price movement by redeeming their position. The stock is rightly being priced for bankruptcy with the company unlikely to see sales for its EV van start anytime soon.

Arrival is not an investment here and current shareholders would likely be best served by closing their position ahead of what could be a Chapter 11 filing later this year. The stock perhaps made sense in an era of low rates with its previous valuation north of $12 billion a direct product of the unfettered euphoria that defined that period of the pandemic. Arrival’s future is uncertain and the Kensignton deal likely represents the last possible salvo. I’d don’t have a position here but might consider buying some puts next month with shorting shares likely to form a too-risky positioning.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Arrival Drives Towards The Brink appeared first on Up2info.com.

• Arrival’s agreement to merge with a SPAC for a second time looks like a creative effort to raise much-needed capital.
• But the de-SPAC faces serious redemption risk, and a concurrent $300 million at the market offering will be hard to pull off.
• Both financing efforts likely don’t get the company all the way through initial production; more capital will be required.
• With a ~$1 billion enterprise value in 2025 needed simply to support modest upside from the current price, ARVL stock looks like an avoid.

If at first you don’t succeed, try, try again. Electric van manufacturer Arrival (NASDAQ:ARVL) went public in March 2021 via a merger with special purpose acquisition company CIIG Merger Corp. EV optimism had essentially peaked: in retrospect, the top was marked by the parabolic rally and ensuing crash in Lucid Motors (LCID) SPAC Churchill Capital IV just a few weeks earlier.

ARVL stock initially cleared its $10 merger price, but as sector optimism cooled and financing concerns increased, shares headed sharply south:

The plunging share price created a vicious circle. Arrival needed to sell more stock to fund itself through initial production. A steadily lower share price, however, meant increasingly higher potential dilution to raise the same amount of cash. The prospect of that dilution in turn led investors to sell more shares; a lower ARVL stock price followed, meaning ever more dilution and so on.

By October of last year, the company itself gave up on an at-the-market facility that was supposed to raise some $300 million. With share issuance no longer “a reliable source of capital“, Arrival announced plans to focus solely on the U.S. market in a bid to preserve the capital that remained.

Less than three weeks later, the company’s third quarter earnings release contained a so-called “going concern warning“. Arrival at the time said that it lacked cash to fund operations for the following twelve months (i.e., through Q3 of this year), a significant problem given that commercial production was (and is) not expected to begin until late 2024.

But this year, it would appear that Arrival has found a pair of lifelines — at least on paper. In March, Arrival entered into a $300 million financing agreement with Westwood Capital, resurrecting its at-the-market sales. Then on Thursday, the company announced it was merging with another SPAC, Kensington Capital Acquisition Corp. V (NYSE:KCGI).

In theory, both deals could provide enough cash to get Arrival to and through production. In practice, however, Arrival’s second de-SPAC merger seems likely to end up with the same disappointing results as the first one.

The Westwood Deal

Again, for a company like Arrival, the need to fund operations by issuing stock creates a vicious circle. In the market of 2020-2021, investors largely ignored this problem: valuations across the EV space were high enough (Arrival’s market cap was ~$14 billion after the initial de-SPAC merger) that funding could occur with relatively modest dilution.

But Arrival’s market cap, at Monday’s close, was under $100 million. Arrival did manage to raise $50 million in February, but under relatively onerous terms. There was seemingly no way for the company itself to raise the funds it needs — an amount that, on a multi-year basis, is in the high nine figures — through a direct share offering.

And so, effectively, Arrival is outsourcing that work to Westwood Capital through a $300 million equity financing. The firm doesn’t come cheap. In exchange for Westwood buying shares at Arrival’s direction, the investment bank gets, upfront, $3 million in stock. The firm also buys the shares at a 3% or 5% discount to the 3-day VWAP (volume-weighted average price).

Immediately, Westwood would own nearly 3% of the company. But Arrival can’t make Westwood buy shares that would let its ownership exceed 5% (or 10%, if Westwood so desires; it likely won’t). So the only way for Arrival to keep selling shares to Westwood and for the firm to not clear the cap on ownership is if Westwood buys the shares from Arrival and then almost immediately dumps them on the open market.

This is a simpler and more common version of the complex financing recently executed by Bed Bath & Beyond (BBBY). And it creates a very real problem for the ARVL stock price. Essentially any rally will be sold into by Westwood. As of Friday’s close, average daily volume year-to-date has been less than 2% of shares outstanding (763.2 million at Feb. 23 of this year); as of this moment, Westwood needs to sell ~300% of shares outstanding to fulfill the $300 million maximum.

The sheer size of the capital required makes for a delicate tightrope walk. (Indeed, the BBBY agreement was terminated at the end of last month.) And while ARVL no doubt will find rallies from time to time — the stock in fact gained sharply on Monday — the fire hose of equity issuance via Westwood will in turn depress the stock price. Indeed, it’s not hard to imagine that Westwood unloaded a few shares during Monday’s session:

The Second SPAC

In other words, the Westwood deal simply isn’t enough. It’s far from guaranteed that Westwood can raise anywhere near the capital Arrival requires for survival without completely tanking the stock price. And survival is only step one: Arrival still needs to get its XL van into production, raise the cash needed to survive beyond production, and handle ~$200 million in convertible notes which mature in December 2026. (Antara converted ~$122 million in notes into equity; $200 million remain outstanding. Those notes currently trade at 31 cents on the dollar, though they’ve nearly tripled from a November low.)

Arrival needs a quick, large infusion of capital. And so it’s going the SPAC route — again.

This capital raise, too, is not cheap. Dilution will be extensive. As contemplated, after the merger current Arrival shareholders will own just 12.7% of the company; in fact, at the current price, the SPAC sponsors will have larger ownership:

That said merger would provide Arrival some breathing room. The $263 million raised (net of expenses) would allow Arrival to throttle back on the Westwood arrangement, and more importantly extend its cash runway.

That incremental cash gives Arrival it a total of $468 million on the balance sheet. The year-end 202 balance of $205 million was forecast to last until late this year; with a guided burn rate of ~$35 million per quarter, the net SPAC proceeds would keep Arrival afloat until, roughly, mid-2025.

XL production is expected to begin in late 2024. And so the path here is to simply survive beyond that point, get the vehicle into production, inspire some confidence in the market, and look for incremental financing (including, potentially, some sort of exchange offer for the remaining convertible debt). Incremental proceeds from the Westwood agreement now can add a bit more breathing room, instead of having to supply all of the capital required (something which simply may not be possible).

What Do Redemptions Look Like?

But there’s a pretty large catch here: Arrival only gets the proposed cash if Kensington Capital V shareholders don’t redeem their shares before the merger. Those shareholders can simply ask the SPAC for their money back (plus interest) instead of rolling their equity into post-merger Arrival.

Amid the SPAC bust, high redemption rates have become the norm. In 2022, according to law firm Freshfields Bruckhaus Deringer, on average more than 80% of SPAC shareholders redeemed their shares. (The figure was ~40% in 2021.) 2023 trends don’t appear any better than last year’s, with several de-SPACs seeing redemptions over 90%.

Meanwhile, Arrival is not the first public company to go the de-SPAC route. In October, biotech Coeptis Therapeutics (COEP), then traded on the pink sheets, agreed to merge with SPAC Bull Horn Holdings. The merger closed in October; 88.5% of Bull Horn shares were redeemed. COEP closed Thursday at $1.34.

In January, Wejo (WEJO) agreed to merge with TKB Critical Technologies 1 (USCT). That merger hasn’t closed yet, but with the redemption deadline passed it looks like redemptions were right at 50%. (TKB announced it would retain $56.7 million in its trust account; the SPAC had 11.2 million shares outstanding on March 29.) WEJO closed Monday at 40 cents.

It’s certainly possible that shareholders in KCGI will act the same way, and redeem their shares rather than roll equity into Arrival. That’s doubly true because the same vicious circle problem that dogs ARVL on the public markets exists in the de-SPAC transaction. A high redemption rate here means the company gets relatively little cash, and thus leaves Arrival largely back where it started, with an at best narrow path to survival. And so if more investors expect redemptions, more investors will redeem, and the vicious cycle begins anew and Arrival is on a straight path to Chapter 11.

Obviously, both Arrival and Kensington Capital V are aware of this problem. And so the deal clearly appears structured to minimize redemptions. The merger is notably different from the standard structure, in which SPAC shareholders receive a predetermined ownership stake in the post-merger company at a $10 per share price. Here, KCGI shareholders receive floating consideration: a number of shares equal to $17 divided by the volume weighted average price of ARVL stock in the 10 trading days prior to the fourth day before the Kensington shareholder meeting (the meeting at which the deal will be ratified or rejected by KCGI shareholders).

In other words, at the current price Kensington Capital V shareholders who don’t redeem get Arrival stock at a 38% discount (paying $10.48 for $17 worth of ARVL stock) to the average trading price leading up to the merger. There’s a one-year lockup for the sponsor as well.

Thinking Through Post-Merger Trading Dynamics

On paper, there’s thus an easy way to make a healthy, guaranteed spread. A trader can buy a share of KCGI for $10.48, which is equivalent to 121 ARVL shares. (Arrival will execute a 1-for-50 reverse stock split presumably before the merger, but we’ll use the current stock price for this example.) She can then short 121 ARVL shares for proceeds of $16.94. When the merger closes, our trader delivers to 121 ARVL shares and, even with a high teens annualized borrow rate, makes ~$6 per share on a seemingly easy arbitrage trade.

Here too however, there are some catches. The first is that there simply aren’t enough shares to go around. At full redemption, there will be nearly six times as many Arrival shares going to KCGI shareholders as there are currently existing Arrival shares. Not all of those shares are available to short, either. Per fintel, 10 million shares are currently available for borrow. Accounting for the reverse split, that availability presumably drops to ~200,000. At full redemption, KCGI shareholders are receiving 70 million shares (again, adjusted for the reverse split) in the merger. As a result, very few traders will be able to effectively arb out KCGI and ARVL.

Presumably, an investor could simply buy KCGI and then sell ARVL post-merger. But the problem here is that, in a full-redemption scenario, there is going to be an absolute flood of supply on the day this merger closes. And there simply isn’t enough demand for the $400 million-plus in equity value that is going to be unlocked upon the close. If that kind of demand existed, ARVL wouldn’t be trading at 14 cents with a current market cap under $100 million.

Bloomberg summed up the problem well on Monday, while quoting Julian Klymochko, CEO of Accelerate Financial Technologies:

So an investor who can short enough Arrival stock, would lock in the value and earn a spread on Kensington shares. But the bet is rife with risk, and history is not on the side of investors, according to Klymochko. Similar situations typically burn arbitrage traders because when “the 10-day VWAP period shows up, there’s no borrow, and arbs get loaded with stock and pile out at the same time,” he said.

Again, on paper there’s easy money to be made. In practice, professional arbitrageurs may well pass on owning ARVL at a massive discount through KCGI. The inability to borrow enough stock leads anyone looking to flip KCGI post-merger in a precarious position: needing to get out immediately once the merger closes. The VWAP leading up to the merger thus is likely to be higher than the ARVL stock price after the merger. The value of added shares acquired through the SPAC may be offset by a sharply lower price immediately after merger close.

Arrival With Cash

All told, it’s highly unlikely that Arrival gets the nearly $600 million ($300 million from Westwood, $283 million from Kensington) it’s hoping for. It’s possible it gets nowhere close.

To be fair, Arrival should get some cash. There’s a runway here to extend the runway to at least late 2024, when production is scheduled to begin. If Arrival can start producing vans, that in turn can create some enthusiasm to allow Arrival to raise more capital and keep the company solvent through 2025.

But even that outcome doesn’t look hugely attractive. Let’s imagine a scenario in which the SPAC merger sees minimal redemptions, and Arrival raises another $100 million at $0.20 (adding 500 million to the share count, and for now ignoring the effects of the split).

That gets the pro forma share count to 5.5 billion, or 110 million post-reverse split. Cash at the beginning of 2025 is likely relatively minimal; net cash is almost certainly negative with ~$200 million in convertibles still outstanding.

At that point, Arrival (currently trading at $7 pro forma for the reverse split) would need to have a market cap near ~$800 million, and an enterprise value near $1 billion, simply to support the current ARVL stock price.

That’s possible certainly. It’s not guaranteed. Arrival in late 2020 was a company that, per the presentation for its first SPAC merger, was “revolutionizing the electric vehicle industry.” It planned to have four models on the market in 2023, including an electric bus, two van models, and a “small vehicle platform”. Its “game changing microfactories [would] enable flexible low capex [capital expenditures] production.” It had $1.2 billion in orders from United Parcel Service (UPS).

Incredibly, Arrival projected that in 2024 it would generate $14 billion in revenue, and EBITDA of more than $3 billion:

Now Arrival is operating a single factory that hopefully, if all goes well, will start producing a single model in late 2024, with the very real possibility that production (as has been the case for so many EV manufacturers, Arrival included) gets delayed beyond that point.

This Seems Too Hard

It’s exceptionally difficult to see that business worth $1 billion, which is what is required to see material upside in Arrival stock from this point. In theory, Arrival could get the XL into profitable production, raise more capital, and over time begin to build out a business plan that echoes the one that drove so much optimism two and a half years ago.

In practice, however, the path is simply so narrow. Bear in mind that Arrival’s two financing efforts imply the sale of ~85% of the company. No matter how the deal is structured, selling that much equity is a Herculean task. And even assuming the company can pull that off, it then has to actually produce vans that create sales, manage growth off a base from zero, and likely have to raise more capital at some point in the not-too-distant future.

There are simply so many points of failure along the way. And with current cash not even getting Arrival to the end of the year, there’s simply zero margin for error. Arrival gets credit for creativity, but at this point no amount of creativity seems like enough.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Arrival’s Second De-SPAC Could End Up Like The First One appeared first on Up2info.com.

• Arrival is diluting existing shareholders by 54% to 74% to raise not even 2 quarters’ worth of cash.
• Arrival is not targeting reaching production in Charlotte until 2024, with revenues practically out of the picture for 2023.
• Arrival has already issued a going concern warning, and the company’s targeted $30M/quarter cash burn looks highly ambitious.
• Given the heavy dilution and bankruptcy risk, Arrival is not worth the risk.

Shares in struggling electric vehicle startup Arrival (NASDAQ:ARVL) jumped over 15% in early Tuesday trading after the company announced a small $50M capital raise, after issuing a going concern warning with Q3 results last November. However, the terms of the capital raise with Antara appear to reflect a last-ditch attempt to stay afloat, with existing shareholders set to incur at least 54% dilution and up to 74% dilution through June 2023. With Arrival not expected to generate any meaningful revenues for at least four to six quarters, we believe shares are not worth the heavy risk following the significant dilution event.

Revenues Not In The Picture

At the moment, Arrival is not generating any meaningful revenue – the startup was projected to produce less than 25 electric vans last year, with the production outlook still uncertain for 2023 as cost cut measures take effect.

Arrival had completed its first production verification van at the end of Q3 ’22, but since then, the company has not announced any further production progress. When announcing Q3 results in November last year, Arrival stated that it “will continue to build a small number of Vans in Bicester” while progressing with a shift to focus on the US market via a microfactory in Charlotte/Rock Hill. The Q3 update confirmed that revenues again will be very limited, if anything, in 2023, noting that the small production and US microfactory shift would occur for “the next few quarters” — Charlotte production is expected to start sometime in 2024.

Another glaring negative – Arrival added that it “cannot make margin on the current L Van product given the high cost of parts” associated with low volume production. Essentially, it isn’t worth the time nor the money to produce the vans, and Arrival does not have the funding for hard tooling — a situation that only enhances and increases the risk that Arrival will not be able to scale up production to a high enough level to a) cover costs, b) make a decent margin, and c) evade bankruptcy.

Going Concern Warning

Arrival also issued a going concern warning in Q3’s report, stating that the $330 million in cash and equivalents it had on hand was “not sufficient to cover twelve months of operations.” The company also added that further funding was needed to execute on a revised business plan — which already shows signs of being difficult to achieve.

However, Arrival’s cash burn rate has raised red flags about the company’s financial situation and spending environment. In August 2022, Arrival announced it had cash on hand of $513 million (and a now-revoked at-the-market offering for $300 million); at the end of Q3, Arrival announced it had $330 million; at the end of December, Arrival announced it had just $205 million in cash on hand.

So over the course of just over 4 months, Arrival burned through $308 million in cash, or about $75 million per month; from September through the end of the year, cash burn averaged $40 million per month — slightly better, but far from what is needed to financially stay afloat.

Arrival’s CEO announcement at the end of January provided an update to its cost cutting efforts — the company now is attempting to reduce its cash burn to “approximately $30 million per quarter,” or about $10 million per month.

In order to achieve this, Arrival is cutting about half its staff and reducing expenditures in real estate and on third-party services. Given its inability so far to effectively manage costs at a much higher level — burning through $125 million in Q4 — it’s very hard to see how Arrival will be able to make any forward progress on its business plan while slashing costs to such a degree.

Diluting Shareholders Up To 74%

Although Arrival’s capital raise agreement with Antara provided $25 million cash upfront plus a $25 million option between May 15 and June 30, 2023, and reduced debt by 38%, the company is severely diluting current shareholders.

The terms of the $50 million capital raise spell out the massive dilution to shareholders:

• $25 million now for 125,000,000 shares at $0.20
• option for additional $25 million for an assumed $0.20 price (or lesser of 70% of share price) between May 15 to June 30
• $121.9 million reduction in 2026 convertible notes for 219,420,000 shares, leaving $198.1 million outstanding on the notes

Shareholders have been diluted by 344,420,000 shares, or ~54% dilution, upon the consummation of the first $25 million tranche and debt reduction exchange.

Should the second $25 million tranche be tapped into, Arrival will have diluted shareholders by 469,420,000 shares, or about 74% of its current shares outstanding. Total shares outstanding would then increase to 1.107 billion following the completion of the full offering.

Arrival is giving up about 40% of its current shares outstanding for just $50 million in capital — that’s about 1.5 quarters’ worth, assuming it can actually cut costs rapidly enough to reach its $30 million/quarter target, or about 2 months’ worth, assuming spending follows trends seen last year.

Following the raise, Arrival will have about $250 million in cash — including cash burn from January and February, Arrival is likely down to about $200 million. Given a quarterly burn rate of ~$40 million, Arrival barely has enough to reach production in 2024 at Charlotte — and that is assuming it can indeed manage costs to that degree.

In essence, we believe Arrival would have been better off incurring dilution by tapping into the now-scrapped ATM offering from last year, given that it was targeting a raise of $90 million in 2023 and $210 million in 2024. Even a $90 million raise for similar dilution would be a better play for the company.

Outlook – Not Worth The Risk

Investing in Arrival stock at about $0.30 per share is extremely risky, given the heavy, heavy dilution the company is hitting shareholders with for a tiny piece of funding. The significant dilution, up to 74%, looks like a last-ditch effort to stay afloat, given that Arrival will have no meaningful revenues for multiple quarters and is not eyeing production in the US until 2024, increasing the risk that the company goes under before getting to fulfill its 10,000 plus 10,000 vehicle, $1.2 billion order with UPS (UPS).

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The post Arrival: Up To 74% Dilution appeared first on Up2info.com.

• Arrival went public through SPAC at the height of two manias – SPAC and EV.
• The timing couldn’t have been more right for investors looking to cash out.
• Two years later, I am hard-pressed to find a single promise that can be fulfilled by the company.

2020 and 2021 were a godsend depending on which group you belonged to. For SPAC promoters, it was the right time to sell their questionable mergers to prospective investors. If this SPAC merger was with an EV company, then it’s a double delight! One example is Arrival (NASDAQ:ARVL), an EV startup with no product to market and merged with CIIG Merger Corp. for a market valuation of $5.4B in 2021.

At the time when the merger was announced in 2020, the company’s promises included everything from promised revenues in 2021 to multiple vehicles in production in 2022, expectations to be cash positive in 2023, and $14.1B in revenue in 2024! In my review, I could not find a single promise that was fulfilled by the company. So let us pick some statements from their merger disclosures and see what can be learned from them.

“Those who cannot remember the past are condemned to repeat it.”

– George Santayana.

Disclosure #1

Four vehicle designs expected in market by 2023, with start of production for the first vehicle planned for Q4 2021

The company had plans for a bus, van, large van, and a small vehicle platform by 2023 but as of the latest news they have cut down their plans from four vehicles to having just one vehicle (van) in the market by 2023, and little plans past that. In Q2 2022, their initial target of 400 vans was cut down to just 20. By Q3, even this plan was completely scrapped.

For seasoned investors, a lot of this was to be expected. Auto manufacturing is a notoriously difficult business with a lot of moving parts. Getting a single vehicle to production is hard enough but the company promised new vehicle types in back-to-back years. But there was no room for skepticism during the EV hype of 2020.

Disclosure #2

$1.2 Billion in orders

When there is any number with a “B” it is bound to get investors excited. But it is always good to see footnotes when numbers like this are thrown around. From their presentation, it mentions that these orders are non-binding. So none of the revenues are guaranteed. Also, orders don’t mean they can be fulfilled either. But it’s so easy to miss this when the environment is fully hyped around you.

Disclosure #3

Low-cost model — Early projected profitability even at low volumes

At the time, company was touting its new approach to manufacturing and assembly as revolutionary and would significantly bring down costs to build factories. Its approach was cell-based micro-factories where the process uses ‘technology cells’ with vehicles moved between cells by autonomous mobile robots (There was a high reliance on robots to get cars out the door)

For some reason, lessons on excessive reliance on automation for cars are lost on auto manufacturers. In 2018, Tesla learned this the hard way after established auto manufacturers had learned this much earlier. Now I am not saying that technology doesn’t solve problems and new technology should be abhorred. Its approach to building cars through micro factories might be novel and revolutionary. But the high optimism and investors’ eagerness to hand cash, hand over fist needs a little skepticism.

Fast forward to now, there is already evidence of cost overruns and the company’s lack of funds threatens its survivability. Their approach to tooling needs a complete rework as their previous approach relied on soft tooling. Given the high cost of soft-tooled parts, they cannot meet their margin on soft tooling anymore. Precisely, tooling was one of the areas where the company boasted of increased cost savings.

Is the latest development a canary in the coal mine for their micro-factory approach? Hard to say. But if it is, then it threatens their whole “novel” approach to building vehicles.

Disclosure #4

Transaction implies a fully diluted pro forma enterprise value of $5.39 billion, representing 0.4x based on 2024E revenue of $14.1 billion

It was quite unbelievable even back then that investors were willing to go on board for a valuation projected at 3 years into the future!

From the Q3 news I see now, it expects no revenue until 2024 (and I have a solid reason to believe it would not be $14.1B). There have also been multiple news from the company since its Q3 announcement. The CEO has stepped down and they have cut their global headcount by half. They have refocused their efforts on the U.S. which they believe to be a better target market. They are expected to end 2022 with $160 – $200M cash on hand and this to last into Q3 of 2023.

Currently, ARVL stock is trading at a market cap of $200M roughly at the amount of cash it has. This is a full indication of the current market that has arrived at reality; That there may be no pot of gold that was promised in 2020.

Why is it important to review all of this now? As we started the new year there is increasing evidence of a new hype in play. Everything AI. It only remains to be seen if investors have learned their lessons or rushing from one hype to the next. Evidence points to a bad picture.

Reassessing my rating

There are some catalysts that would make me consider reassessing my rating. Arrival is in possession of intellectual property that could be attractive to other companies. For established car companies it would take very little capital to get invested in the company. If their novel approach to manufacturing works it could present them with an asymmetric upside (Hyundai and Kia are already investors in the company and it remains to be seen if they will up their investment). In a best-case scenario, there could be an offer to outright acquire the company.

Upcoming earnings

From their last call, they refocused their strategy toward the U.S. as they saw a supply-demand imbalance for electric last-mile delivery vans that they could take advantage of. From their Q3 call –

At the same time, the introduction of the Inflation Reduction Act tax credits ranging from $7,500 up to $40,000 for commercial electric vehicles, the large market size, plus the anticipated higher margins for commercial vehicles, made the US our most attractive market

So one of the things I will be looking for in the upcoming earnings is the progress on their refocused efforts. If they have taken significant strides towards production it could be a big factor that can propel the business. They are scheduled to announce earnings on March 9. As of now, the bar is set quite low and subsequently, it could act as a crucial catalyst for them.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The post Arrival: EV Hype Arrives At Reality appeared first on Up2info.com.

• Arrival is a company which proclaims to have a revolutionizing product, but is yet to see any revenues.
• The cash position is shrinking quickly and will run out in 2023 with the current net losses.
• The electric vehicle market is growing fast but riddled with unprofitable companies like Arrival.
• Investing in the company is too risky, in my view. Holding shares carries risk, and selling positions appears to be the best course of action.

The Investment Thesis

Arrival (NASDAQ:ARVL) is the inventor of a unique method of designing and producing electric vehicles. Operations take place in both the United States and the United Kingdom. The edge of the company is its scalable product that helps transcend the production of electric vehicles. Some of the big investors in the company are both Blackrock and Hyundai, both adding over $100 million in funds. One of the major news the company had was its deal with Uber (UBER) to help build out its fleet of electric cars.

Right now I have a hard time seeing the company remaining in operations a few years from now. They have failed to raise more capital and this will hurt them immensely as the assets they hold become more and more expensive. Therefore I will keep a sell rating for the company.

Latest Earnings Report Highlights

In the latest earnings report, there was some important information shared with investors to give more clarity into the progress the business has had. As they are yet to have a product where they can generate revenues it’s no wonder they have lost money in the quarter. In Q3 it amounted to $310 million, a massive increase from the year before of just $31 million. This increase can be attributed to the company taking steps towards building out new facilities.

What investors are heavily looking towards is when production will actually start in order for the company to start generating revenue. But it seems production is still expected to start somewhere in 2023. Until then the management will need to prioritize where they spend cash.

In the earnings report, the company had some changes it wanted to highlight. They have stated wanting to set up facilities in India as the market there seems to have demand, but with the recent Inflation Reduction Act, the United States will now be the focus for the company.

In 2022 there will be some financial issues with the company raising capital. In Q2 2022 the company tried to establish a $300 million ATM platform to gain funds, but with the current market cap and low trading volumes, this plan has failed.

The year has been difficult and the future seems just as hard, something the management also commented on. The CEO Denis Sverdlov said, “2022 has been a challenging year for Arrival as well as the entire sector but we are agile in responding to these challenges”.

Sector Outlook

One of the fastest-growing industries right now is the electric vehicle. With the current revenue estimates having the market valued at around $850 billion by 2027. From the current levels that would be an annual growth rate of about 17%.

If Arrival can secure contracts and leverage their product further I think revenue increases like this could be seen.

What will be vital for companies in the sector is to at least have a clean and profitable bottom line. The automobile industry isn’t known to be a massively profitable one. Instead, most legacy car makers hover between 3- 7% in net margins. Reaching those levels will be crucial. What has me a little bit worried is that the company mentioned in the latest earnings report that the L Van is not profitable to make as the parts which are needed are too expensive to buy? So looking ahead I think keeping track of the price of costs and the margins the companies have on just manufacturing the cars will be important.

Competitors

Since Arrival has such a diversified business with a lot of potential revenue streams there are then also several competitors to them. They have a scalable product but it comes down to making cars in the end really. Securing a contract with Uber was crucial.

But I think young and hungry companies like Proterra (PTRA) and perhaps Rivian (RIVN) could be competitors. These are also companies that have secured contracts with much larger companies to produce their fleet of electric cars. Since Arrival is yet to even start production I think it will take a long time until they actually see themselves securing more contracts. Getting over the first hurdle will be the most important. After that is when the real competition starts and they need to prove themselves to have a better product and service.

The Balance Sheet

Looking at the balance sheet I think it’s important to see how the company is using cash. As I mentioned previously the company has secured several large capital investments from both Blackrock and Hyundai. This greatly helped the company start expanding faster and faster.

Right now the cash position sits at just over $500 million. With the current expenses being over $300 million in the last quarter I have little faith the company will keep going much longer. They need to secure money as the market cap has shrunk so much share dilution isn’t an option. Right now they are even spending more money than the market cap of $286 million.

Thankfully the company doesn’t have a lot of current debt to pay off. Instead, they have some long-term debt amounting to $182 million, decreasing from $279 million in 2021. If the debt didn’t worry you, then the capital leases the company combined with debt should. Right now they have $180 million in capital leases which has me worried about the outlook for the company and whether or not they can actually survive 2023 without going bankrupt.

Much of the assets the company has been in properties and facilities they have built over the last few years. I don’t expect these to be used to raise capital unless the absolute worst comes true.

All in all, I think the financial state of the company is quite honestly horrible. If spending continues like it did and they can’t raise more money then they will go bankrupt in 2023. Basing a form of investment case on fundamentals is impossible.

Valuing The Company

I won’t make price targets for a company like this. I don’t think it’s good to do it when they are yet to have revenues and even start production. The financial state of the company right now is in shambles and I wouldn’t be surprised if they go into liquidation in the next few years, if not 2023.

With a shrinking cash position and market cap, raising cash through share dilution is not enough. Instead, you would have to believe the management can persuade previous investors like Blackrock and Hyundai to pump more money into the company.

Right now I think being invested in the company is extremely dangerous and you are risking losing all your money. I think selling any remaining shares is the best course of action to help protect against any potential downside risks like bankruptcy or liquidation. The business model seemed to have failed as the company barely has money to support itself.

Conclusion

Arrival is in a dire situation where they are yet to generate revenues. Combine this with rapid cash spending and the unlikelihood of raising more capital. The market for electric vehicles is constantly growing more and more and I think there will be many winners but just as many losers. Unfortunately, I think Arrival will be one of the losers.

Investing into the company right now can’t be done based on fundamentals as there are none. Instead, it’s just wishful thinking about what the future might hold. I think this company is too risky to be a part of and selling shares is the best thing to do.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The post Arrival: Running Out Of Cash Quickly, Likely One Of The Losers appeared first on Up2info.com.

• Arrival is taking tough measures to ensure its survival with its stock price collapsing and cash position dwindling.
• The EV upstart is scaling back on its planned UK microfactory and is ditching plans to manufacture an electric bus and passenger vehicle.
• Significant doubt exists on whether Arrival will be able to remain a going concern exiting 2023. The company’s cash position is seemingly insufficient to meet near-term cash demands.

Bringing a new EV to market was never going to be easy and Arrival’s (NASDAQ:ARVL) mission was made even more difficult by its approach to manufacturing through local microfactories. The idea is simple and would see the firm skirt the gigafactory approach for smaller low-cost micro-scale factories that would be able to build up to 10,000 fully electric delivery vans annually. These microfactories could be located closer to cities and use preexisting factory space retrofitted to its new use.

Arrival’s efforts were initially going to be on a delivery van, but it would eventually expand to buses and passenger cars. The latter two have been scrapped with the London, England-based company also reducing its UK footprint in a hard pivot to the US. Arrival’s cash position is under siege from consecutive quarters of high cash burn and expected capex. This would not have been a problem had the stock market maintained the multiples on the pre-revenue company that it did when Arrival initially started trading on Nasdaq. Critically, Arrival is now stuck in a rut as it cannot lean on secondary offerings of its common shares for liquidity with its stock price so depressed.

Now In A Struggle To Have A Role In The EV Future

Arrival’s market cap was once north of $14 billion at its peak but has since declined markedly to $260 million with fears that it holds an insufficient cash balance to bring its electric van to market and ramp production. The most pertinent part of the company’s actions over the last few months to starve off a collapse has come from a shift of its production effort to the US. Initial plans would have seen its first microfactory built in Bicester, England then eventual expansion to the US. However, against the tax credits being provided by the Inflation Reduction Act for domestically produced EVs, the company has understandably pivoted to Charlotte, North Carolina to take advantage of the credits. However, significant doubt still exists about the Arrival’s ability to meet this revised ambition. The situation is serious. Firstly, Arrival has received a non-compliance letter from Nasdaq with its commons no longer meeting the minimum listing requirements. The company has also had two rounds of layoffs and has warned that it doubts its ability to remain a going concern beyond 2023.

Arrival’s fiscal 2022 third quarter business update was sobering. Whilst the company stated it had at least $330 million in cash and equivalents on hand, management warned repeatedly that this balance was not sufficient to cover twelve months of operations. Net loss for the 9 months to the end of the third quarter was $410.3 million, down from $1.24 billion in the year-ago comp with negative EBITDA also falling to $357.7 million from $1.22 billion in the year-ago comp. These numbers for a company that is still pre-revenue are staggering. Arrival did not realize any revenue during the period but somehow managed to realize an adjusted EBITDA loss of $216.44 million, up from $118.18 million in the year-ago comp.

Hope For Survival Looks Slim

Here’s what we know. Arrival is down 93% over the last 12 months and faces a material liquidity gap by the next winter. We also know that the company is now focusing purely on the US in an effort to get its van to take advantage of the Inflation Reduction Act. However, with the revised plan and layoffs, Arrival still warned that it holds insufficient funds.

Arrival will need to carefully manage its leftover funds but needs to raise more money to fully build out its first microfactory. Whilst it still has access to a $300 million at-the-market offering facility, the depressed stock price renders this a non-starter as it would essentially amount to 115% of its current market cap. Manufacturing a car is difficult. It’s an incredibly capital-intensive process that requires almost constant access to capital to build out initial production capacity and then to fund what would likely be losses in the first few quarters or years of ramping production and making deliveries.

We are early in the transition to low-carbon modes of transport and the scope of chapter 7s now haunting the sector has swelled. Electric Last Mile, a commercial EV deSPAC collapsed last year, Canoo (GOEV) is struggling, and XL Fleet, now named Spruce Power (SPRU), divested entirely from its ICE engine to electric system retrofitting businesses. Arrival’s microfactory idea seemed genuinely innovative and fresh but the heavy losses perhaps allude to a structural weakness of the concept. Apart from a buyout from a larger player or a strategic but highly dilutive investment from another company, it’s hard to see what the near-term salvo for Arrival, its commons, and its future will be.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The post Arrival: The Future Is Uncertain appeared first on Up2info.com.

• Arrival turned from a promising start-up to a disaster. I’m glad that my subscribers anticipated it many months ago.
• Although the company’s current outlook still looks awful, I hoped that the sale of its assets could have been beneficial for shareholders.
• Unfortunately, our analysis shows that the odds aren’t in the bulls’ favour.

An old friend of ours – Arrival (NASDAQ:ARVL) – is running around like a dog stung by a bee. After a devastating Q3 report, the stock plummeted by 30% before taking off again over the following days. Some of you are probably wondering what is happening with the stock right now. If questions like — should I invest in Arrival? Am I missing something that the big guys know? — are coming to mind, then this article is for you. If you’re already an Arrival bear, though, I’m sure you will still enjoy reading.

There is likely no other author on Seeking Alpha who follows Arrival’s stock as enthusiastically as I do. If only you knew how much I loved the idea of producing a cheap ecological vehicle in microfactories all over the world. It could have revolutionized the entire car industry, after all! Arrival became the hero of my first article on Seeking Alpha. But by that time, I was starting to become sceptical about the stock, as “minor” production delays seemed concerning to me.

It may be that I also feel personally attached to Arrival because its CEO is a Russian trying to build his company in Europe from scratch— just like me. But we Russians aren’t all the same. While some are pitching non-functional electric vehicle ideas and some are busy ardently supporting the war, others still are working day and night to come out with the newest and best analysis possible. My followers know that, and I really appreciate their views, comments, likes, and criticism. Thank you for your support and I hope my articles help you profit.

Turning back to our old friend, those who have been following my blog since the very beginning know that the company’s stock was dangerous. Despite all my emotional links, I continuously warned you to stay away from the stock. Recently, it became clear to the market that Arrival was turning into a zombie company that had a lot of know-how, but no sufficient funds for expansion and any promising track record. The most obvious answer in such a situation is to put the company’s goals on the shelf of dead ideas. But I decided to give it a second look and tried to approach the stock with an asset-based valuation. I thought that if Arrival found a strategic partner, then its stock could profit a lot. Unfortunately, we can’t bring you any positive news, even though we’d be eager to do it.

Pushing the panic button

In the spring article, “Avoid Buying Shares of Arrival Now,” we doubted Arrival’s chances to succeed and warned our followers to keep their fingers away from the stock.

At that time, the stock price was already about $2— significantly below the initial price of $23. Despite some difficulties, the stock was still loved by investors. Otherwise, it would not have had the $1.5 billion valuation. Its relatively low multiple compared to the peer group gave hope to investors for nice future gains. In contrast to the Street, we didn’t like the company’s continued underperformance. The plans were constantly changed, the roll-out was delayed, and Management didn’t deliver on its plans. The necessity for funding became more and more obvious. We wrote:

So far, management hasn’t shown any meaningful track record and has made significant overstatements during the SPAC roadshow. Without $1 billion in external funding in late 2022, Arrival will lack cash in early 2023.

Over the summer, the situation deteriorated, and we rushed to update our readers. In the article, “Avoid Arrival: It Is Just Getting Darker,” we questioned why management was eager to raise capital before the first vehicle launch. After all, it would have been much more rational to raise capital after a successful roll-out enjoying the strong stock momentum. It brought us to the idea that the management hadn’t expected to produce the vehicles soon. We wrote:

Arrival’s inability to produce vehicles this year, amplified by the strapped cash, would mean a bankruptcy scenario for Arrival.

A couple of days ago at the Q3 earnings call report, Arrival announced new plans that confirmed our doubts. The company announced huge losses amounting to $310.3 million, and claimed that it was changing its focus to the US market segment due to a more beneficial regulatory environment. The most surprising thing for the market was that Arrival would not make any revenue in 2023. And that it will produce vans only 12-18 months after the equity is raised. The management admitted that it was challenging to issue equity at the current market, but it hoped to do so over the next 6 months.

Doing simple math, we see that if the vans are produced, then it will happen in 18-24 months from now in late 2024. The statement, “No revenue in 2023” starts sounding optimistic in this case.

As it is said, when it rains, it pours. So, troubles didn’t end for Arrival. In fact, the situation only worsened as the media wrote about the fire that happened with the recently produced van.

I’ll be frank with you, I have lukewarm feelings. It’s really a pity that Arrival didn’t manage to bring its idea to reality. But I am utterly proud that my team was able to go against the market and turn out to be right. Could we have expected that the first van would be caught in fire? Definitely not. Even in our wildest dreams we couldn’t have imagined it. But we can be very attentive to details. We can read across the lines. And we managed to save our money and the savings of our followers.

All-or-nothing game

It seems like it can’t get any worse for Arrival. But Arrivals’ CEO, Denis Sverdlov, must be a very smart person if he managed to achieve such a tremendous valuation at the listing. Plus, the CEO of Automotive, Mike Ableson, used to work for General Motors and must be well connected in the industry. So is there any hope that Arrival will strike beneficial partnerships?

It is possible, but not very likely. Arrival has definitely invested a lot in its portfolio of software and hardware patents that could be interesting for a large auto producer. This would potentially work if a recession wasn’t knocking on the door, as automakers are among the first to suffer during a recession. As we wrote once to subscribers:

It is relatively easy for a consumer to postpone the decision to buy a car. Automakers sell roughly 15-17 million vehicles annually in the USA. Considering 127 million households in the USA, an average family buys a car every 7.5 years. Hence, if the decision is postponed only by one year, the car market decreases to 15 million cars (12% decline).

In the case of a recession, car makers count every penny and always think twice before acquiring anything. Let alone a start-up with flaming vans. But if one of them decides to support or buy Arrival, it would be a strong catalyst for the stock. Should I invest hoping for a potential acquisition, keeping in mind that the company will face bankruptcy if there is no buyer?

You should certainly do your own analysis, but in our team we’re asking ourselves: how much will we lose if the company doesn’t meet the angel in the recession hell? If loss is too high, then it is simply not worth the risk.

Potential loss calculation or asset-based valuation

There are three ways to value any company: discounted cash flow model (“DCF”), multiples valuation, and asset-based approach. Usually, analysts expect the company to operate forever and rely either on the DCF and multiples. With the DCF method, you determine the present value of the future cash flows and compare it to the current stock price. With the multiples method, you benchmark the stock vs competitors to see how the market treats the company when compared with the others. All these methods can be very helpful if you assume that the company exists forever. But what if the company is going bankrupt soon? Then another popular approach comes in handy: the asset-based method. It allows us to compare the company’s asset value with the stock’s value. In other words, how much will you get if the company declares bankruptcy?

Unfortunately, the Q3 balance sheet hasn’t been published yet. But if we take around $300 million property & equipment and add $400 million intangible assets from the Q2 report, then we will get about $700 million in assets that can be sold. I doubt that Arrival will be able to sell its assets at the balance value given that the company hasn’t managed to produce proper vehicles. Therefore, I’d assume a 30% and 50% discount for fixed and intangible assets respectively. In case of bankruptcy, creditors will be the first in line to get compensated. Therefore, I need to deduct about $470 million in debt liabilities. If the company stopped its operations today, then the cash could be also distributed to shareholders. Since the management hopes to find investors, it would initiate the bankruptcy procedure when cash is very low.

My calculations below show that, in the most likely scenario, shareholders could rely only on $30 million. This is much less than the current market capitalisation. If no investor is found, then the shareholder will receive around 10% of the current market capitalisation.

Put differently, there is enormous upside potential at the risk of 90% loss. It would be a wiser choice to spend the weekend in Las Vegas— at least then you get free cocktails.

Bulls say

Bulls would say that Arrival has produced a fantastic innovative vehicle concept— one that needs just a bit more money to start production and benefit from its capital-light business model. Thanks to a well-connected management team, the company has a good chance to strike a partnership with a leading carmaker that will help Arrival survive 2023.

Conclusion

If you don’t like Arrival, don’t invest in it. It’s that simple.

If you do like Arrival as we do, don’t invest in it either. It is difficult, I know. But from what we have been seeing, a white knight in shining armor is unlikely to save the company. Investment is about risks and reward— not love and hate. And our analysis shows that the downside risks are just too high.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The post Arrival: Don’t Hope For A Strategic Buyer appeared first on Up2info.com.

• Arrival is burning cash fast and expects to only have $160-$200 million in cash by the end of the year.
• No revenue is expected in 2023, thus Arrival does not have enough cash to cover its operations over the next twelve months.
• Arrival is likely to go bankrupt in the short term.

Earlier today, Arrival Group (NASDAQ:ARVL) updated investors about its financial position and business plans for the coming quarters, which weren’t particularly good as the company is running out of cash and is unable to raise funds.

Background

As I’ve covered in a previous article, Arrival is a speculative play in the electric vehicles (EV) sector, which has great ambitions to disrupt the automotive industry by betting on a different production approach, through smaller, automated factories.

However, since it became a public company in 2020, following the merger with a SPAC company, its equity story has gone from bad to worse. While at some point during 2021 its market value was close to $13 billion, this figure is only about $250 million now, which is less than the company’s cash on hand at the end of September.

As Arrival continues to burn cash and funding conditions are tough for start-ups, the company has changed its business targets several times and has not delivered on any of the targets it established during the SPAC listing.

More recently, in its Q2 2022 earnings release, the company slashed its deliveries target for this year, from about 600 vans to just 20, being another blow to its investment case. While investors, myself included, believed next year could be different as production was supposed to begin and revenue coming in, Arrival has again changed its business strategy and now doesn’t expect any revenue in 2023. As the company does not have enough cash to finance its operations over the next twelve months, there is a high likelihood that Arrival will go bankrupt in the coming months.

Recent Developments

Arrival released Q3 2022 earnings today, reporting a loss of $310 million in the quarter, including non-cash impairment charges and write-offs of $232 million. Adjusted EBITDA loss was $73 million, compared to a loss of $46 million in the same quarter of last year.

More important than its earnings, Arrival also updated investors on its business plans for the coming quarters, as the company tries to remain in business after significantly revising its targets downward over the past few quarters.

Investors should note that Arrival was expecting to produce three models (the van, bus, and a car) by 2024, but some months ago changed its strategy to focus only on the van. Because of that, it was expected to produce only the van at the Bicester (UK) factory, while the planned U.S. factory was put on hold. Supposedly, it was expecting to start production during Q3 2022, and to start deliveries to customers in the following months.

Additionally, the company announced several measures to cut costs and was expecting to raise funds through an at-the-market (ATM) offering, which would allow the company to have enough cash to fund its operations until the end of 2023.

However, during the past quarter, Arrival decided to not raise funds through the ATM platform due to a low share price, which was needed to invest in hard tooling. This means that Arrival does not have enough capital to invest in machinery to produce the van, which was critical for its success.

Moreover, the company has changed its business strategy again and now is shifting its focus toward the U.S. market instead of Europe, as it sees this market as more attractive following the introduction of the Inflation Reduction Act tax credits for commercial electric vehicles. The company is now targeting the U.S. to enter production, using its cash resources and further funding that it may eventually raise.

This means that Arrival will make several cuts at its Bicester factory, leading to about 700 jobs being cut across the company or some 30% of its workforce, to save cash and try to survive over the next few quarters. This is not an easy task, as Arrival does not expect to generate any revenue during 2023, thus it relies on external funding or it will run out of cash in the coming quarters.

Investors should note that Arrival had about $500 million of cash available at the end of June, while at the end of September it had only $330 million. For the end of the year, Arrival expects to have between $160-$200 million of cash, as the company will incur some $75 million in restructuring costs during Q4 that will reduce its available cash.

While its cash burn in 2023 may be lower on a quarterly basis, it seems likely that Arrival will run out of cash by mid-2023, if it is not able to raise external funding. Not surprisingly, Arrival’s shares are down today by more than 35% as I write this, to a new all-time low.

Investors should also note that Arrival has recently received a notification from the Nasdaq that it is not complying with certain listing rules, given that its share price closed below $1 for more than thirty consecutive days. This means that Arrival also faces the risk of de-listing over the coming six months, if its share price does not recover above $1.

Conclusion

As I’ve said in my previous article, Arrival was in a critical stage for its business success, with the start of production being key to show that its business model worked. Arrival does not have a proven manufacturing process and during the past quarter failed to get enough funding to go ahead with its plans, and its business prospects are now very poor.

Its investment case right now is based on basically a concept, as the company does not have enough cash to build a factory in the U.S., thus I don’t see how it will get enough funding over the coming months to stay afloat. Arrival is very likely to go bankrupt in the coming months, as funding conditions on capital markets aren’t likely to change much in the short term.

Disclosure: I/we have a beneficial long position in the shares of ARVL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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• Arrival has reorganized its business in a shift to cut costs and start production as its liquidity dries up.
• Arrival announced $513M in cash plus a $300M ATM equity program in August, but by the end of Q3, Arrival backed away from the ATM and reported $330M in cash.
• The startup has also paused its car and bus projects to favor van production, but it has already missed some start-of-production deadlines.
• Arrival’s convertible note trades in distress at just under 31, and combined with the liquidity profile and UPS’ option to walk away, the company may struggle to stay afloat.

Arrival (NASDAQ:ARVL) is a far cry from the original production, vehicle, and revenue targets that it outlined for investors to garner a $13 billion valuation on its first trading day after originally being valued at $5.4 billion. The EV startup’s recent moves to cut costs, delaying timelines while in a dire need for cash overshadow the company finally producing its first production verification vehicle at the end of Q3. Arrival has run very low on cash with little to show for it, and both shares and its convertible note signal that the company may struggle to stay afloat.

What Went Wrong?

Arrival went public via a SPAC deal touting some of the fastest growth rates in the entire EV industry — commencing deliveries and reaching $1 billion in revenues by 2022, projecting 400% y/y growth to $5 billion in 2023 before jumping another 180% y/y to $14 billion in 2024. As it currently stands, the company is on track to produce less than 25 vehicles this year.

Arrival’s original projected financials and growth targets are shown below.

Arrival also targeted nearly 10,000 units combined of Van and Large van production in 2022, with total deliveries across the two reaching nearly 168,000 by 2024. Given Arrival’s targeted maximum annual capacity of 10,000 vans per microfactory, the company’s original plans predicted reaching full-scale in at least 17 microfactories just for both van lines. Again, as it stands, Arrival is likely to have two operational (at maximum three) by 2023 — Bicester and Charlotte/Rock Hill.

Arrival only has limited orders — its order book consists of UPS (UPS) 10,000-plus-10,000 deal, as well as a deal with LeasePlan for 3,000 vehicles and a five bus deal with Anaheim Transportation Network. Arrival touts over 149,000 non-binding vehicle orders and MOUs representing more than $6 billion in revenue, if all vehicles are indeed delivered. In order to deliver such a backlog by 2025, for example, Arrival would need to have around 10, maybe 12, microfactories operating at maximum capacity by 2024, requiring about $600 million to reach that scale — Arrival does not have that cash, and plans to cut costs and pause car and bus production signal that expanding to multiple microfactories is not a high priority. The pause of bus production impacts ATN’s order.

Arrival has been an execution story since the SPAC deal, given the massive valuation, unique approach to production via the microfactories, and a lack of production and deliveries at the time — Arrival had to prove to the market that it could deliver, and to date, it hasn’t. And the outlook for the startup is only getting more bleak.

Market Losing Confidence, Fast

Arrival has made several substantial changes to its operating model and production plans that have concurred with the market losing confidence in its ability to execute and its ability to stay afloat.

Arrival isn’t only bad news — the startup has reached a major milestone with the production of its first production verification vehicle at Bicester. With this, Arrival is moving closer towards production at scale and customer deliveries; however, production is still delayed from original targeted dates. Arrival only targeted delivery volumes of about 20 vans this year, which could decrease if the company uses vehicles for continued testing and validation.

However, Arrival has made quite a few significant moves that highlighted its need for cash as well as its struggle to execute.

In July, Arrival “proposed a reorganisation of its business,” in an effort to realign costs and reach 2023 targets using its cash on hand — this move implies around a 30% reduction in spend and up to the same percentage reduction in headcount.

In August, during its Q2 earnings call, Arrival noted that it had established an ‘at-the-market’ equity program for the sale of up to $300 million in stock to “operate the business through at least 2023 without needing to raise additional capital, other than through the ATM.” Arrival planned on raising $90 million in 2022 and $210 million in 2023 — however, the company has already walked back on plans to use the ATM for funding, given the company’s current share price. Tapping into the full value of the ATM would incur about 63% dilution to shares, hence the shift away.

In late October, Arrival announced a shift to focus on the US market, producing in Charlotte’s microfactory. Arrival also updated on its cash balance — in August, Arrival announced cash on hand of $513 million plus the $300 million ATM in for over $800m in total liquidity; however, Arrival now has just $330 million in cash and no plans to use the ATM. As a result, Arrival’s quick evaporation of liquidity and its relatively thin amount of cash on hand compared to its needs suggest that the company runs the risk of bankruptcy if it cannot find outside funding. Arrival’s 2026 convertible notes corroborate this view, trading in distress — the $320 million notes (converting for 84.2105 shares, or ~$11.88 per share) last traded at 30.93 at a 37.89% yield.

The Industry Can Walk Away

Another risk that recently surfaced in great detail is the fact that the industry can, and potentially will, walk away from an investment should it not be meeting its targeted timelines. Ford (F) and Volkswagen (OTCPK:VWAGY) recently made the decision to pull out of Argo AI, their jointly-backed autonomous vehicle startup, after Argo AI has failed to attract new investors and missed targeted timelines to bring robotaxis public in 2021.

Argo AI was a high-profile name in the autonomous vehicle industry, raising $3.6 billion from its two OEM backers while testing in three major cities, two of which were with ride-hailing firm Lyft (LYFT). The widely unexpected move for Argo AI demonstrates that there is always the possibility for large players to walk away, and drop investment plans due to delays or struggles to commercialize and develop technology. For Arrival, the recent move from Ford and VW highlights the fact that UPS has the option to leave, a move which would significantly impact the company.

Arrival has noted that the UPS order, for 10,000 vans plus the option for an additional 10,000 more, representing a total value of $1.2 billion, “constitutes substantially all of the current orders for Arrival vehicles.” Any modification of the order could significantly impact liquidity or cash flow, as per Arrival. The order, when signed, said that the vans “need to be delivered” by 2026. Arrival is on the cusp of beginning deliveries to UPS, but UPS has other options that it can choose for vans, such as GM’s BrightDrop (GM). UPS can modify or cancel its Arrival order at any time, and Ford and VW have now shown that the industry may not be willing to wait any longer.

Outlook

Shares of Arrival have lost over 95% in the past year as the EV startup struggles to get production up and running, as it has delayed its car and bus project and cut costs to focus on van production. Arrival has a significant order book and a substantial order with logistics giant UPS that represent over $6 billion in revenue potential, but the company has not yet gotten production running at scale yet. Shares trading below $1 as well as its convertible notes trading in distressed territory at just under 31 suggest that the market has quickly lost confidence in Arrival. Liquidity is rapidly thinning, and the recent move by Ford and VW to pull out of Argo AI demonstrates that the industry does not have to wait, and major backer UPS has the option to do the same. Given Arrival’s liquidity position and inability to raise funding via its ATM program or via more debt, the startup may struggle to stay afloat.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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