SEV the Money Sieve

Key Points 

Sono Motors is a Munich, Germany based automaker working on a prototype of an electric vehicle aided by solar power, integrated into the car’s roof and body panels. Their first prototype began in 2012 with two students and an idea for renewable energy motoring. The company has solicited this vision to the public on several occasions including successful crowdfunding campaigns and through their recent NASDAQ IPO in Nov 2021. Their only vehicle, the Sion, remains at least 18 months from series production, and despite raising $150 Million in their IPO, the company needs at least another $250 Million over the next twelve months to reach key milestones. This report concludes that SEV will be forced to raise additional equity by the end of Q2 2021, which could prove difficult with the struggling share price and decreasing appetite for risk in pre-revenue companies, especially those without a minimum viable product in a competitive market. 

History 

Before going public, at the end of 2019 and into the beginning of 2020, the company crowdfunded 53 million euros in 50 days, an activity that saved them from bankruptcy, according to the owners themselves. Interviews would later reveal that $37 million in total was collected, due to a non-committed loan for the balance. These funds were committed to development and SG&A. Before that, their other crowdfunding rounds yielded a few million more with various efforts dating back to 2016. Due to the many rounds of crowdsourcing, the refund obligations vary for original investors, however Sono claims that pre-order values average over 3,000 Euros, despite minimum deposits of only 500 euros. 

Since the first intention of 2019 customer deliveries, Sono has failed to live up to the long list of promises it has made. Over 15,000 customers have committed deposits to secure priority pre-orders, but with the first orders taken all the way back in 2016, many reservation holders are already eligible for refunds and seeking them. Sono appears to be worried about losing deposits because they have signed a deal with Renault to offer leases to Sono pre-order holders (deducting 500 euros from an existing preorder to use as a down payment) so they can “drive electric while they wait for their Sion”. It is clear that the order book is the most important tool that Sono has, a well-tapped source of marketing goodwill that the company presents to investors. The reservations are frequently touted in press releases as “an order book value of over 385 million euro,” which is forward-looking revenue assuming 100% take-rate from existing pre-orders, based on an expected MSRP of 28,500 euros. In reality, 75% of the orders are completely refundable with no cancel penalty and Sono’s IPO filing shows a reserve of 39 million euros held for deposit that cannot be committed to development, citing the risk factor of a legal requirement to potentially reimburse investors. As if to further acknowledge the danger in losing deposits, the company now requires a lockup period of the 500 euro minimum deposits for pre-orders, which is non-refundable until the customer is presented with a final purchase and sale contract. 

IPO 

In Aug 2021, the Sono management team said in their IPO prospectus that the company would once again be insolvent, this time by year end 2021, without additional fundraising. Rumors circulated on social media that the company decided to offer shares in the United States because the DAX refused to list it, and NASDAQ accepted. The official published reason for listing in the US was that American investors have a greater appetite for risk and pre-revenue companies. In November the company went public under ticker $SEV (Solar Electric Vehicle), issuing 10 million shares at $15 each generating $150 million in cash. Of course this yet again falls far short of the amount the company actually needs to reach production, in fact it is plainly stated in the SEC filings that they estimate a total of $410M USD needed to reach production. How long do they have before the next capital raise? And what will that look like next time around with all eyes on their first 10Q? 

After the underwriters took their cut, Sono was left with about 139 million in net proceeds. The stock price spiked to 40 almost immediately, and then collapsed progressively for a week until it was under the IPO price, and has continued the downward slide since then, hovering in the mid $4 per share range. This has serious implications for the next round of funding. It seems doubtful the debt market is hungry for unsecured loans (Sono has almost no assets to pledge and their few patents are not monetizable at this time), so chances are good they will be forced to release more stock for their next funding round. Indeed they may have sold some insider shares back to the public already, evident in that the public float has more than doubled since their NASDAQ debut. But with the majority of common shares (70%) held by the two founders, they risk serious dilution if they release more ownership. They may have no choice but to go to market with additional shares, but with a market value of $4/share, even an insufficient cap raise of $100 million would have to float 25 million new shares - 2.5x the original share volume in the IPO. Investor confidence is clearly low at this time. I was saddened to see that their largest institutional investor is the Texas Teacher Retirement System, who has lost over $21 million USD on this venture since the stock launched. 

Prospects

Financially the company is clearly struggling, but maybe the product will save it. Perhaps they can license some proprietary battery technology, or innovative machinery and subcontract workflows at their factory? Unfortunately this doesn’t look good either. The final design release was supposed to occur in Sept 2021, and has gone unmet. It seems the company has one functional prototype at the moment, but before receiving regulatory approval in the EU, dozens will have to be produced to achieve Type Approval and homologation for European Highway Code. There is a contract in place for these additional prototypes with Thyssenkrup and Bertrand, reputable assembly contractors who will help Sono achieve a Certificate of Conformity (estimated Q4 2022), however before they can begin Type Approval for the test cars, a final production center must be agreed on and the final design freeze must occur. Validation testing requires the specs of the manufacturer’s vehicle to be identical to the production version, which means validation testing cannot possibly start before the next round of financing is required. On March 16th 2022 the company announced it would be producing 16 driving pre-production units for this validation and compliance testing later this year, but no mention of a commitment to the final production facility, which is worrisome for investors and implies the company is a long way from scale production.

As we will see, no significant improvement in product innovation or financial operations is likely to occur between now and the next cap raise. Sono has no meaningful moat of any kind and their intellectual property is unlikely to be very valuable in the short term. The battery for the Sion is sourced from BYD, not made in house, and offers marginal range compared to competitors like the Renault Zoe (Sion 305km compared to Zoe’s 395km). The Zoe is also only 4,000 euros more expensive, and although it has no solar panels, it’s useful range is substantially more, the fit and finish is exceptional, the dealer network is substantial, and the car has received overall great reviews. It is hard to see the advantages of Sono, however we looked for more prospects. Their solar panels themselves were initially sourced from Panasonic, like those used on the unsuccessful Toyota Prius Solar-Hybrid, but upgraded to panels likely sourced from Sharp, which offer improved efficiency - up to 16km per day of extra range in normal ambient European conditions, according to their own testing. But is this even useful? We must consider the human factor of how vehicles are used. When it is hot, and in places with intense sun that would benefit a solar-hybrid electric system, people tend to park in the shade or in garages to keep the car cool. Furthermore, a hot cabin needs to be cooled by air conditioning, which consumes a non-insignificant amount of power, potentially as much by our calculation as the sun provides, defeating the point. On the contrary, when and where it is cold, it is often cloudy and occasionally snowy, necessitating a garage or cleaning a snow-covered car, blocking the solar panels again, and requiring constant heat from an energy consuming electric heater coil. Assuming all of these factors don’t deter one from buying the car, perhaps the bland design would? This is the most subjective item in the report, and we will let readers and customers decide for themselves. 

On the production side, Sono announced their final facility would be the old Saab factory in Trollhatten Sweden, owned by NEVS (National Electric Vehicle Sweden) which has laid off over 600 employees since Sono’s IPO! Why? NEVS is the rapidly failing automotive division of Evergrande (yes, the same Evergrande that can’t meet its payment obligations and wiped out the real estate market in China) and is in the process of being gutted for parts or completely sold to help Evergrande stay afloat. Suppliers have reportedly stopped work with NEVS, and Evergrande has already missed 3 major bond payments already with even bigger payments due in March, which indicates that the sale of NEVS and NEV’s owned equipment will become an even more pressing priority as Evergrande’s creditors swoop in. What will remain of NEVS by the time Sono is ready to enter production? Considering Sono will have to invest heavily in the tooling for NEVS, it is surprising the founders denied any material impacts to their product roadmap. 

All other solar initiatives from major OEMs have failed to date, and so far the promises from SEV have remained undelivered, so it is fair to ask, why should we trust SEV? The founders have no engineering experience except this very project with a poor track record. Who will insure this car even if it is produced? Repairs to hoods and doors covered in solar panels would not be something a typical body shop could do, meaning almost any repair other than fender benders would need to be done by Sono themselves. There is also a requirement for automakers to keep replacement parts on hand for a minimum of ten years - can Sono stay in business long enough to service the cars that are actually delivered? All of this seems incredibly unrealistic. 

Projections 

To answer our original question, when will Sono need to raise money again, we look to the financial disclosures available. In 2020, the company lost 56 million euros; of that, 9.8 million occurred in the first half of the year. In 2021, the company lost 25.8 million in the first half alone, but full year actuals are not published yet. By applying weighted ratios to prior year results (2.5x the loss of 1st half 2020, and roughly 5x the 1st half result equals the full year, assuming rate of spend remains the same YoY) we estimate a conservative full year loss in 2021 of just under 130 million euros. This equates to 11 million per month. 

Sono reported in their 2021 year end report that they have 133M cash on hand and that their current debt obligations can be funded until May 2023 from this liquidity, however that faulty premise assumes that all operations would simply stop at this point, ceasing to continue the road to production, because of course they have already stated the need for an additional 275 million of paid in capital just to reach the production stage. If we assume the 133 million cash is accurate, deduct the 39 million of untouchable reserve-refund money, and at least 22 million more spent through end of February 2022, that leaves the company with a real world cash position of 72 million euro, roughly up to date. There is still no revenue recorded despite claims of licensing their injection molding technology, in fact they neither own production of the solar panels themselves, nor any proprietary assembly process of the panels themselves. As the ramp to production intensifies, the costs only grow and we expect the rate of spend to increase, as we have seen with SG&A. The company has more than tripled headcount in two years, with over 230 FTE’s, and their development becomes more complicated approaching compliance certification. It is likely the next funding round will occur no later than end of Q2, 2022 assuming (very conservatively) the rate of cash burn (in percentage terms) stays relatively equal to prior years. 

Investors will be hard pressed to find the value in another fundraising round since the market has been unkind to the company since it debuted just four months ago, now trading at just 30% of its IPO. That means the company will need to issue far more shares at its current price to achieve a meaningful cap raise. If in the unlikely event they pushed for the full 250M + necessary to reach production, in theory, it would require another 60 million shares in the public float… but of course this would dilute the two founders (who combined have about 40 million common shares) well past minority ownership. This could happen seeing as they still retain voting rights with exclusive possession of the high voting shares, however it seems more likely that the last grab at funding will be for a max of another 100 million USD. Even if a raise at that level was well subscribed, by the company’s own admission, it is still not enough to build the first road-legal vehicle… but one has to wonder when the investors will have enough? If the share price stays low or drops further, future raises will continue to provide even less value and there is almost nothing worthwhile to collect on in insolvency. 

Conclusion 

Despite Sono’s effort to forecast future fundraising efforts and thereby alleviate concern, there can be no meaningful improvement to the product before the trough runs dry again, leading to investor discomfort and lasting downward pressure on the share price. Debt would be even more difficult to raise after their first quarterly report is issued, leading us to believe the next share issuance will occur in 3 to 4 months time and the founders will likely lose majority ownership at that time. Even if this desperate cash grab did end in building a car, it is still one that is less competitive, extremely dated, and impractical in the market. It is hard to believe the idea is still alive, and even harder still to believe that others find it viable. This author suspects that will not be the case for much longer, and predicts this will be a pink sheet stock by year end.