Faraday Future – Dilution effect

Best case valuation is almost zero.

• The gap between Faraday Future’s spin in its press releases and the reality of its SEC filings has never been larger, but even in the best-case scenario, there is likely to be so much equity dilution that the shares in issue now are worth almost nothing.
• Faraday Future reported its Q3 2022 results which it heralded as a “turning point” but at the same time, its 10Q filing raises serious doubts as to whether this company is a going concern.
• Given that one can pretty much say what one likes in a press release (within reason) and that it is a crime to lie on an SEC filing, I am inclined to believe the filing (see here).
• In section 2, the company admits that there is substantial doubt as to whether it is a going concern
• The shipping of the much-delayed FF91 now has no target date as it is dependent on securing more financing.
• I continue to think that the vehicle will never ship given the poor state of its development (see here)
• This puts the company in a very difficult position as new financing will be dependent on certain milestones being reached will be impossible to make with no financing.
• If there was any degree of certainty that Faraday Future will be able to close its announced financing rounds, then these disclosures would not have needed to be made.
• Hence, I think that there is a very real possibility that the investors that Faraday has lined up end up walking away.
• For current investors and those that are inclined to think about bottom-fishing the shares, the outlook is very bleak.
• This is because if Faraday succeeds in raising the money that it needs, current investors will be diluted to almost nothing.
• For example, the company is in the process of putting in place as much as $600m of financing almost all of which will be in the form of convertible bonds.
• Using the current share price for conversion (could be lower), results in an extra 1.9bn shares being issued on top of the 330m already in issue.
• This amounts to 85% dilution meaning that to return to the IPO price of $10 per share would require a market capitalisation of $24.8bn.
• This is clearly unlikely to ever come to pass and I suspect that the most likely scenario is that management continues to fail to execute resulting in new investors walking out and the company going bankrupt.
• The one feather in the company’s cap is that it has managed to survive far longer than I ever thought was possible giving investors the opportunity to salvage what little remains of their dignity.
• There is no price at which I would not sell the equity of this company as I have long believed that it has no value.