Ethan Miller
Faraday Future (NASDAQ:FFIE) is fresh off the heel of a 1-for-80 reverse stock split that has brought the ticker back into compliance with Nasdaq’s minimum listing requirements. The EV universe since I last covered Faraday has shrunk with EV bus darling Proterra becoming the latest EV deSPAC in a slowly expanding list of bankrupt EV firms that includes Lordstown Motors and Electric Last Mile Solutions. Arrival (ARVL) is also flirting with insolvency as a Fed funds rate currently sitting at 22-year highs renders expensive previously cheap capital, drastically reducing the sources of liquidity for these capital-intensive businesses. Bears would be right to flag that these were always zombie companies who took advantage of euphoria around SPACs created by the pandemic and a zero-rate environment.
Cox Automotive
2022 was a bumper year for EV sales in the US with 809,000 cars sold, around 5.7% of total cars sold. This figure is on track to exceed 1 million units in 2023 and has already passed the 5% EV tipping point. This describes a threshold that signals mass adoption with consumer preferences flipping towards EVs as initial holdouts follow the lead of EV early adopters. Faraday, like its peers, went public at the right time of the adoption curve. The bottleneck to the pursuit of the EV dream has been the subsequent inflation and a 5.25% to 5.50% Fed funds rates.
Liquidity In A Period Of Mini Crisis For EV Upstarts
It’s hard not to describe two EV company bankruptcies in 2023 alone as a mini-crisis. Balance sheet strength, cash burn, and access to liquidity have become the primary investment factors to assess to avoid the fate of Proterra and Lordstown investors. Faraday is still pre-revenue but has begun limited production of its flagship FF 91 2.0 SUV. Prices for its flagship range from $249,000 to $309,000, with the later price attached to the FF 91 2.0 Futurist Alliance launch edition. Critically, Faraday ended its recent fiscal 2023 second quarter with cash and equivalents of $17.9 million, not including restricted cash of $1.5 million.
This was down from $120.6 million in the year-ago period and came on the back of a negative cash flow profile. The company recorded a cash burn from operations of $57.7 million, down sequentially from $103 million in the first quarter but still at a level that if repeated in the third quarter against Faraday’s liquidity stash would see the company file Chapter 11, especially with total debt of $109.9 million as of the end of its second quarter. To be clear, Faraday reported zero sales but has commenced extremely limited production of this flagship. The first FF 91 2.0 came off its FF ieFactory California production line in April with delivery to what management described as their “first industry expert developer corporate” during their second-quarter earnings call.
The Cash Runway Has Been Extended But The Situation Is Still Precarious
This comes as the company tilts heavily to AI and is considering a change of its ticker to FFAI to ride the AI hype and euphoria that has swept across the stock market through 2023. The company made its foray into AI with the launch of a generative AI product stack in May. However, the AI tilt has been broad with Faraday mentioning that its AI architecture is designed to allow its cars to understand its drivers’ habits and continually learn and evolve to provide a user-centric experience. The cost is also steep with Faraday intending to charge its users $14,900 per year for its FF aiHypercar+ cloud service.
Fundamentally, Faraday is still a way away from realizing significant revenue from its flagship but has been able to raise substantially more funds post-period end. The company stated it had $171.3 million of gross committed funding not yet funded as of its earnings call on the 22nd of August with a further $300 million set to be tapped through the offering of its common stock and warrants. The reverse stock split was also engineered to streamline a stock offering program that will see shareholders diluted by up to 50%. This is set against a backdrop of average diluted shares outstanding that’s already up by 657% over the last 3 years.
I remain bearish on the ticker even though it’s clear that EVs are the future of passenger transportation. The refreshed access to liquidity should mean a cash runway of 7 quarters assuming their free cash outflow moves to reflect its second quarter figure of $66.71 million for the foreseeable future. However, the ticker remains one to avoid with shareholders set to face continued cash burn, intense dilution, and a still materially restricted cash runway against ambiguity on total preorders.
