Smart Electric Tractors From Solectrac

Key Stats:

Summary

Solectrac has been selected as a “Deal to Watch” by KingsCrowd. This distinction is reserved for deals selected into the top 10%-20% of our due diligence funnel. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com.

Problem

The transition away from fossil fuels and toward renewable energy is underway. These markets are growing at an attractive clip. Even so, the primary emphasis has been on utilities and vehicles, not on other fuel-intensive aspects of society. Little emphasis has been made on other vital segments of society. One example of this is agriculture and the agricultural tractor market. Few options exist for those seeking a greener tomorrow. Incumbent technologies like diesel are inefficient. They are also high-maintenance and dangerous for the environment in the long run. 

Solution

One company looking to address these problems facing the industry is Solectrac. The business has been set up with one express aim: to build and sell electric tractors to the agricultural industry. The company’s desired niche in this space is on the small side of tractors, those with between 25 and 70 HP (horsepower). As part of its business model, management is including its patented battery exchange system. This system consists of hitches that connect to the tractors. As the tractors are driven and their electric charge weakens, the battery exchange system works to replenish the charge. This helps to address the biggest weakness of electric tractors: their limited run-time. 

In addition to being capable of drawing a charge from renewable energy sources, the company’s tractors can charge on any 220v outlet. This design provides significant flexibility for the farmers using them. Since launching, the firm has been working on four different tractor models. The first of these is the Solectrac CET. This 25 HP vehicle is an all-wheel-drive utility tractor that’s ideal for mowing, tilling, and hauling. The second unit worked on is the Solectrac eUtility. This is a 40 HP unit designed for work on vineyards, at equestrian centers, and at livestock facilities. Both the CET and eUtility are being marketed for sale, with the latter currently serving farmers across the US, in Canada, and in Norway. 

There are two other designs that Solectrac is in the process of developing. One of these is the Solectrac eFarmer, a 30 HP tractor dedicated to row-crop farming. The other appears to be in earlier stages of development, but has been given the name Solectrac e70N. This unit has an impressive 70 HP and is being marketed as a solution for larger agricultural operations. The goal is to generate revenue by selling these four tractor types. Management also intends to sell its exchangeable battery packs and front loaders too. 

In another attempt to disrupt the industry, Solectrac is taking a different approach to how they manufacture and maintain their devices. Tractors are large, complex machines, and they often require a great deal of professional care. To reduce manufacturing costs and make repair services easier, the company has adopted a modular approach. Management describes this as building their products as kits that can be quickly assembled. For the battery exchange system, this also has some other implications. Management believes that this approach to manufacturing will allow this system to be sold as kits for the purpose of catering to disaster relief efforts. 

As one might imagine, building so many different technologies at once can be costly. Solectrac has received, over the years, over $1 million worth of grants. Additionally, the company has started demanding significant down payments for their tractors. They demand 50% of the sales price up front, with the remainder due upon delivery. This helps to bring cash into the business before a sale is completed. As of the end of the company’s 2019 fiscal year, it had $114,210 worth of cash on hand. $78,990 was on its balance sheet as unearned revenue (cash the company has that came in for these pre-sales that hasn’t been recognized as revenue yet). 

Since its inception, Solectrac has made some nice progress from a development perspective. But it is lacking in sales still. In 2018, revenue was just $71,910. This grew very modestly to only $83,258 in 2019. Net losses, admittedly, did improve, moving from $194,834 in 2018 to $167,83 last year, but operating cash outflows grew from $189,834 to $191,556. Add on to this that $185,189 is the value of gross debt on the company’s books and it’s not in a great financial position. Even so, this is not to be unexpected for a capital-intensive firm that’s so early-stage. 

A Niche Market

Based on our findings, the global agricultural tractor industry is fairly large. Current estimates place it at about $56.8 billion in size using 2019’s figures. Our source on that matter suggests that the industry should grow at a rate of about 5.7% per annum, eventually reaching $75 billion in size by 2024. A separate source looked not at the dollar size of the industry, but at the unit size. It estimated that around 1.97 million units were sold in 2019. Through 2027, the expectation is for this space to grow by about 3% per annum. This would take the number of units sold annually to 2.42 million by the end of our forecast period. 

You would be forgiven for thinking that the US is the major market for agricultural tractors. Shockingly, it’s not. North America as a whole was responsible for about $5.4 billion in sales for the industry in 2019. With a forecasted growth rate of 3.88% per annum, it should rise to around $7.05 billion by 2027. The countries responsible for the bulk of sales are China and India. Collectively, they account for about 60% of the industry’s revenue. Reliable growth projections for agricultural tractors for these nations could not be found. But both countries have significant populations well exceeding 1 billion people each. Not only that, their economic growth rates have, for years, exceeded 6% per annum. That’s comfortably higher than the 2% to 4% historical range of the US. As such, it’s likely that most of the global upside in this space will come from China and India as well. 

No discussion of the tractor industry is complete without mention of Deere & Company. The company is a major source of sales in this market. Unfortunately, it does not provide a great amount of analysis about the space, but it does offer some valuable insight. According to management, sales of its Small Agriculture subsegment totaled $8.70 billion last year. This works out to about 22.2% of the company’s overall revenue. Small Agriculture consists largely of its medium and utility tractors (defined as those with less than 200 HP). Admittedly, this revenue figure does also include sales associated with hay and storage equipment, balers, mowers, and other similar devices. But the bulk of it is definitely tractors. Larger tractors (200 HP or more) generated the firm a further $11.73 billion in revenue. All of this goes to show that there is significant potential for any firm that can create something new and valuable in this space. 

Terms of the Deal

To take the business to the next level, management is working hard to close a capital raise. The goal, ultimately, is to raise up to $1.07 million through the issuance of common stock, with units priced at $1 apiece. The firm is willing to close a round with as little as $10,000 though. In order to participate in the transaction, investors must contribute a minimum of $250 apiece to the deal. As of this writing, Solectrac has received commitments totaling $105,213. 

An Eye On Management

The key figure behind Solectrac’s operations is Stephen Heckeroth, the firm’s founder, President, and CEO. Heckeroth has a long history in this space. Back in 1993, he founded MendoMotive and Electrac, with an emphasis on electric vehicles and electric tractors. He has also served as a Director of Building Integrated Photovoltaics for a thin-film solar manufacturer. Though Heckeroth is Solectrac’s only founder, there are other important people behind the company’s efforts. One of them is Heather Paulsen, the company’s COO. Paulsen is currently the CEO and founder of Heather Paulsen Consulting. She has also served in the past as a Practice Administrator at North Coast Family Health Center. The other noteworthy individual is Nishi Deokule, Solectrac’s CIO. Deokule is currently CEO and President at GetResource Inc. At one point, he served as an Enterprise Architect at Duo Security, and before that he was an Architect at Voya Financial. 

The Rating: Deal To Watch

Taking everything about Solectrac into consideration, we have rated the company as a Deal to Watch. Management’s solution to the industry’s shortcomings is a next logical step as society moves away from fossil fuels. In addition, the firm has patents on its technologies. It also already has its products in three countries spread across two continents. Add in the sizable market niche the firm is operating in and the interesting approach management is taking to energy management and manufacturing/maintenance, and there appear to be a lot of benefits to siding with the firm. 

This isn’t to say that everything is excellent though. Short-term, the implied economic slowdown caused by COVID-19 could prove to be an issue. Another issue is its small and slow-growing revenue. its net losses and its growing cash outflows are also problems the company needs to grow out of. Debt, while not astronomical, is a bit high for the firm, but it’s not overly-worrisome on its own. Even with these issues, though, the firm offers some attractive prospects that are worth considering.