Canoo Needs Capital And Shareholders Could Be Left Holding The Bag

Canoo (NASDAQ:GOEV) released its earnings on May 17 and made some concerning statements. Expect GOEV stock to drive lower.

For starters, the company is no longer going to use a contract manufacturer. It also expects to take until 2023 before electric vehicle (EV) deliveries and revenue begin to flow into the company.

More troubling is the fact that its cash burn projection now shows it will need more capital. That implies that GOEV stock could face dilution and a hit sometime in the future.

The sooner the company does the capital raise, the better shareholders will be. If it burns through most of the $641.9 million in cash on its balance sheet, GOEV stock will be much lower. That means that the cash raised from common stock issuance will dilute shareholders more than if the raise comes earlier.

As a result, beware GOEV stock. Management needs to put forward a cogent cash burn plan to head off this concern before investors can put their confidence — and their money — behind Canoo.

Cash Burn Issues

Here is how I calculate the issue relating to Canoo’s potential cash burn issues. First, the company has $642 million on its balance sheet. But during Q1 it burnt through $66 million. Operating expenses cost $53.9 million and capital expenditures (capex) were $12.1 million. This can be seen on the company’s Statement of Cash Flows on page 5 of its earnings release.

But here’s the rub. On page 2 of the release, the company provided an outlook for Q2. It said that operating expenses (excluding non-cash items) will cost between $65 million to $75 million. In addition, capex spending will range from $45 million to $55 million. My view is that you should plan on the worst in this situation. Also, note that capex spending is now starting to heat.

That implies that this level of spending will continue, especially as we get closer to the production ramp. As it stands, the company says that production will begin sometime in 2022 and “ramp to 15,000 units in 2023.” For all intents and purposes then, the company will need to fund expenses, including marketing expenses once production is about to begin, through 2021 and 2022. That is at least 7 quarters. How much will that cost?

Using their guidance for Q2, the total cost will range from $110 million to $130 million per quarter. Using the midpoint of $120 per quarter implies that it will need $840 million. In fact, even at the low point of these ranges, and even if we used 6 quarters of spending, the total cost will be $660 million. The company has just $642 million in the bank now.

So, Canoo will need another capital raise sometime in the next year or sooner.

What to Do With GOEV Stock

Given what has happened with Lordstown Motors (NASDAQ:RIDE) this week, Canoo will be better off raising the capital it needs sooner than later. Let’s evaluate the situation.

Right now GOEV stock has a market value of $2.48 billion. Let’s say they decide to raise another $600 million, or $580 million after expenses. This will dilute shareholders by just 24%. The market will not like this, but will respect the fact that the company acted in a proactive manner. This will keep GOEV stock from falling by 24% and maybe by just half of that amount.

However, if management gets through half of next year, and the cash balance has fallen by 50% to $320 million, you can be sure that GOEV stock will be 50% lower. That implies that another $600 million capital raise will dilute shareholders by 48% (i.e., $600 million / $1.24 million).

In effect, the market will anticipate the capital raise and push the stock lower. This will happen whether the company wants to admit its capital need or not. So buyers beware, as GOEV stock could end up significantly lower by next year without a proactive move by management.

On the date of publication, Mark R. Hake did not own any security mentioned in the 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.