The very first bullet point in Canoo's (GOEV 2.59%) third-quarter 2023 earnings release stated that the electric vehicle (EV) company had reached the "accelerating revenue generation phase." That sounds great, and if you look at the income statement, it is clearly true. But there's still one small nuance to consider if you examine the company's 10-Q filing.
Canoo finally has some income
In the third quarter of 2023, Canoo generated $519,000 of revenue, compared to zero in the prior year period. In fact, if you look back through the company's short history (it went public through a merger with a special purpose acquisition company in December 2020), the third quarter of 2023 was the first time it generated any revenue at all.
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To give credit where credit is due, the third quarter was a big improvement. Until now, the company has just been trying to build its business. Getting to this point was no small feat, given that creating an EV company from, effectively, scratch is both difficult and expensive.
That said, there are still some problems investors need to consider. For example, while it generated $519,000 in revenue, the cost of revenue tallied up to $903,000. So, the company's gross profit was negative. On top of that, the company is still spending a lot of money to build out its business. For example, research and development spending came in at $21.9 million, and selling, general, and administrative expenses were $24.9 million. Canoo continues to burn through cash.
That is why, despite entering the "accelerating revenue generation phase," the company's 10-Q for the third quarter still contained a going concern warning. This is a warning from a company that it may be unable to survive the next 12 months because of its weak financial condition. Here's what the filing said:
The Company expects to continue to incur net losses and negative cash flows from operating activities in accordance with its operating plan and expects that both capital and operating expenditures will increase significantly in connection with its ongoing activities. These conditions and events raise substantial doubt about the Company's ability to continue as a going concern.
Canoo's situation remains risky
There's no way to predict the future, but Canoo is clearly not starting from a position of strength. It is highly likely to need to sell equity or issue debt to continue to fund its business efforts. This isn't a maybe. It's a certainty. The company noted in the third-quarter 2023 earnings release:
As of September 30, 2023, we had cash and cash equivalents of $8.3 million. After giving effect to the preferred stock and warrant subscription agreement for a total of $45.0 million, our cash balance would have been $53.3 million on September 30, 2023.
Put into plain English, the company doesn't have nearly enough cash on hand, but it has agreements to sell preferred stock and warrants that will allow it to raise some much-needed money. Finally generating some revenue is good news, but there needs to be a drastic "acceleration" on the top line before Canoo will be able to self-fund its business. And since a going concern warning looks out 12 months, the next year isn't likely to see the company's financial situation change much.
The worst part of all this is likely that at some point in the future, Canoo will have to issue shares to cover the convertibles and warrants it is relying on to generate cash today. That means current shareholders could potentially suffer massive amounts of dilution before Canoo gets its business profitable (if it ever manages to). The risk/reward trade-off looks pretty ugly right now, and only the most aggressive investors should be looking at Canoo.
Canoo is not for the faint of heart
By Canoo's own admission, the next year will be hard financially. Buying the stock today means you must not only believe strongly that it can actually build a profitable business but also be willing to suffer more losses until it does. And even then, you will likely see material dilution as the company has to make good on the convertibles and warrants it has been using to fund its massive capital needs.
All but the most aggressive investors would probably be better off watching the company's progress over the next year than buying it. That will remain true at least until the going concern warning is removed from the company's filings with the Securities and Exchange Commission.
