Canoo (NASDAQ:GOEV) released its second-quarter results on Aug. 16 with zero revenue as expected, since it’s not yet producing any electric vehicles (EVs). Its “Lifestyle Vehicle” is not forecast to begin production until late 2022. The problem is GOEV stock is headed further down.
Based on Canoo’s Q2 cash level and management’s statements, it’s clear it could run short of cash before then. The company will have to either borrow money or issue more equity capital. This will be the case unless it can find more grants, like the recent $300 million incentive package from Oklahoma. In any case, expect to see GOEV stock falter before it’s clear how the company will raise its cash.
I had warned about this situation earlier last quarter in my previous article on June 16. I felt at the time that the company’s $641.9 million in cash was not sufficient.
Where Things Stand
But on Aug. 16, the company said it had just $563.65 million on June 30. That is a reduction of $78.36 million. But here’s the rub. According to its earnings release, Canoo hired 112 more engineers and other personnel, which was up 21% over Q1. This increases their overall costs and cash burn going forward.
In fact, the release indicated that its operating expenses and capex for Q3 will range between $120 million and $140 million. As there is no revenue, that translates completely into an average of $13o million in cash burn per quarter.
So assuming this has already occurred in Q3, that implies that the cash balance is now about $433.65 million. By the end of Q4, it could fall below $300 million, assuming that hiring continues aggressively.
In fact, the release indicated that Canoo was going to hire 2,000 people for its plant build and operations in Oklahoma. Granted, the state of Oklahoma is going to provide $300 million in financial non-dilutive incentives. I assume that means grants since even debt can be dilutive in the sense that it causes cash burn paying it back. Nevertheless, this extra hiring could easily drain a big portion of its cash during 2022.
Where This Leaves Canoo
Right now Canoo has no long-term debt. The company could decide to borrow $500 million in straight or convertible debt if it can find a willing bank or lender. I suspect that could be possible, but there is almost always an equity “kicker,” so to speak. That could be in the form of warrants, or else a convertible debt or preferred stock offering. This will be dilutive to existing shareholders.
Of course, Canoo may have to actually issue more common stock in a secondary offering. The problem is there is still not enough information for investors to estimate its cash flow going forward and for the next several years.
In fact, we aren’t even sure what EV models the company is going to produce. One analyst asked about this during the Q2 conference call. The CEO said he hopes to deliver some examples at upcoming car shows.
What To Do With GOEV Stock
The bottom line is that GOEV stock is likely to fall further at least until the company clarifies how it will raise more cash. The markets like to have certainty about these things and in the face of this kind of fear, uncertainty, and doubt (FUD), the stock will falter.
Moreover, even if there is a high debt capital raise, this will weigh on the future cash flow prospects of the company’s forward outlook. The problem is we don’t have very good optics about this.
For example, Lucid (NASDAQ:LCID) just started producing its EVs in Arizona. But Lucid has clearly presented how many units and the expected revenue it forecasts for the next five years, based on particular models. This is what Canoo needs to do. Its slide deck presentation only goes through 2023 and does not even provide a revenue forecast.
Therefore, I suspect that most investors should wait and see what happens here. It is possible that the FUD factor could push the stock significantly lower based on this cash drain issue. But I think management is aware it has to act proactively. I suspect some sort of solution will occur by the end of the year. If not, expect to see GOEV stock significantly lower.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.