ARVL - Arrival: Up To 74% Dilution

Summary

• 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 ( 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 ).

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