Ideanomics (NASDAQ:IDEX) must be pretty confident that it can raise equity capital. It has made many agreements lately that all require cash that only a large capital raise of IDEX stock can cover.
Based on my calculations, the company will have to raise at least $100 million.
I suspect that will happen is that IDEX stock will get a traditional pump from its capital raise operator hands. Then the dump will happen. I have seen this all the time before. Hopefully IDEX stock will be higher once the back-end dump from the short-term hands in the stock tapers off.
Calls For Cash
At the end of Q3, the company had just $27.6 million in cash. But two recent agreements Ideanomics has made will require $40 million of cash to be paid.
Moreover, the company has agreed to fund $25 million in capital spending over the next two years.
Then there are financing fees and costs, likely to cost 10% or so, or $6.5 million. Therefore I estimate the company has to dish out $71.5 million within the next year or so. In addition, it has to fund its ongoing losses, plus the losses of the acquisitions it has made.
This will add in another $25 million to $30 million, and possibly more, based on its ongoing cash flow losses. Moreover, its ride-hailing operations in China will likely cost $3 million to $5 million. The losses of its latest Wave company acquisition could cost, in my opinion, another $5 million.
Therefore, the total uses of capital will be: $40 million in purchases, $25 million capex over two years, $6.5 million in costs, $45 million in operating losses. This adds up to $116.5 million. Let’s call it $120 million. Keep in mind that the capital has to be in the bank before the spending can occur, especially for the capex spending.
So what are the sources of capital? Right now, as I said, the company has $27.6 million in cash. In addition, the company has apparently begun to sell $37.5 million of 4% convertible notes. This adds up to $65.1 million.
Conversion Likely but With Heavy Dilution
But the convertible notes have to be redeemed by July 4, 2021. So, these will have to be refinanced, unless the holders convert.
However, the good news is that the conversion price is $2.00 per share. So most holders will likely convert their notes into shares by July since IDEX stock is at $2.96. In other words, the notes are in-the-money, and upon conversion, the owners have a built-in 50% profit.
Therefore, assuming that all the noteholders convert there will be 18.75 million more shares. That represents 7.8% of the existing 238.971 million shares outstanding as of Q3.
Moreover, the company will still have to raise at least $60 million. How do I figure this? First, we subtract $37.5 million from $120 million in uses. That leaves $82.5 million in spending that has to be financed.
Next, we know that the company has $27.6 million on the balance sheet. That lowers the financing amount to $54.9 million. However, the company will still need to keep some cash on its balance sheet. If they left $5.1 million, the balance to be financed is $60 million.
However, $60 million in equity even at $3.00 per share today would increase dilution by 20 million shares. That represents 8.37% of its existing shares. Therefore the total dilution is 8.37% plus 7.8%, or 16.2%.
What To Do With IDEX Stock
Keep in mind that I expect the acquisitions that Ideanomics has made won’t be profitable anytime soon. Therefore, it’s in the best interest of the company to keep the IDEX stock dilution as low as possible.
The only way for that to happen is if the shares get artificially pumped up to $4 or even $5 a piece. That would lower the dilution effect to close to 11-12%.
The problem is what happens after that. I have seen many of these kinds of situations where the stock moves up in tune with a company’s capital raise program. But when the newly bought shares try to leave after the stock stops rising, there is a huge dump effect.
Therefore, let the buyer beware with IDEX stock. Don’t fall for the typical pump and dump schemes that Wall Street loves to play.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.