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Canoo's Revenue Generation Phase: Progress Despite Continued Financial Risks

Canoo generates revenue for the first time but faces financial challenges
Canoo's cash position remains low, raising doubt about its future
2024/01/30 (Jan 30th, 2024 11:17 am)
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Canoo finally has some income

Canoo, the electric vehicle (EV) company, recently announced its earnings for the third quarter of 2023, revealing that it has entered the “accelerating revenue generation phase.” This statement is supported by the fact that Canoo generated $519,000 in revenue during this period, compared to zero in the previous year. This marks a significant milestone for the company, as it is the first time it has generated any revenue since going public through a merger with a special purpose acquisition company in December 2020.

It’s important to acknowledge Canoo’s accomplishments thus far, considering the challenges of establishing an EV company practically from scratch. However, there are some concerns that investors should take into account when analyzing the financials.

Despite the positive revenue figure, the cost of revenue amounted to $903,000, resulting in a negative gross profit. Moreover, Canoo remains in a phase of substantial expenditure to build and develop its business, with $21.9 million spent on research and development and $24.9 million on selling, general, and administrative expenses. Given these factors, it is worth noting that Canoo’s 10-Q filing for the third quarter includes a going concern warning, indicating doubts about the company’s ability to continue as a going concern. The company anticipates incurring net losses and negative cash flows from operating activities, coupled with a significant increase in capital and operating expenditures.

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Canoo’s situation remains risky

In terms of Canoo’s current financial position, the company had $8.3 million in cash and cash equivalents as of September 30, 2023. Factoring in the preferred stock and warrant subscription agreement, the cash balance would have increased to $53.3 million. However, this amount is still relatively low, and Canoo has entered into agreements to sell preferred stock and warrants to raise additional funds.

While generating revenue is undoubtedly a positive development, Canoo must substantially accelerate its top-line growth if it intends to become self-sustaining. It’s crucial to note that since the going concern warning looks ahead 12 months, the company’s financial situation is unlikely to change significantly in the coming year. Furthermore, one concern is that Canoo might need to issue shares in the future to cover the convertibles and warrants it is currently relying on to generate cash. This poses a substantial risk/reward trade-off, making Canoo an investment that only the most aggressive investors should consider.

Canoo is not for the faint of heart

Canoo itself acknowledges that the coming year will be financially challenging. Additionally, the company is likely to experience material dilution as it fulfills its obligations related to the convertibles and warrants used to fund its capital requirements. Therefore, unless investors have a high-risk tolerance, it may be wiser to closely monitor Canoo’s progress over the next year rather than making an immediate investment. This proposition remains particularly true until the going concern warning is no longer present in the company’s Securities and Exchange Commission filings.

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