CA - GreenPower Motor:  Shares Jump And Concerns Grow

2023-07-31 15:29:49 ET

Summary

• Greenpower Motor V-Company (GP) reported revenue growth of 132% and unit sales increasing from 99 to 299.
• The growth in revenue was driven by GP's commercial van division and the EV Star product line.
• The Bus division, specifically the sales of electric school buses, is faltering and putting the company's survival at risk in my view.

The Price of Greenpower Motor V-Company ( GP ) surged after the latest earnings release . GP reported revenue growth of 132% and unit sales increasing from 99 to 299.

I have previously written two articles on GP, and the second one published in January, predicted the growth in revenue and unit sales almost perfectly.

After reading the FY 2023 report, I closed my position booking a 24% profit; in this article, I will first look at the revenue and sales growth driven by GPs commercial van division and the EV Star product line and then look at the Bus division which appears to be faltering pulling cash out of the business and putting the companies very survival at risk.

The Revenue Growth

My second article forecasted 120 vehicle sales in Q4 and FY revenue of $41 million; I was a little surprised that the $39.7 million of revenue reported caused such a stir as it should have been expected by anyone following this company as the management gave quite clear guidance about how they were doing.

The growth in revenue of 130% was the primary driver of the jump in share price. Gross Margin fell to 18% caused by a change in product mix with the Workhorse deal ( WKHS ) showing +200 EV Star cab and chassis vehicles sold at a much lower margin than the direct-to-customer sales.

Vehicle sales increased 221%, with the vast majority of the growth coming from the EV Star CC; sales of the Beast electric school bus were disappointing, falling from 18 to 7 when an increase was expected.

The excellent revenue growth led to a significant improvement in several financial ratios; improvement was seen in every business area.

Looking at the ratios in isolation would suggest that everything at GP is excellent. Analysis of the cash position and the sales of the Bus division have me worried.

Van Sales

The EV star in all its variants is becoming a monster product. Unit sales grew from 75 in 2021 to 288 in 2023, an increase of 284%

The image above is from my earlier article and shows different body shapes that fit on the same electrical system. Partners in Asia manufacture the parts, and GP assembles the vans in the US.

The future of the EV Star lineup looks outstanding. It is the basis of the Workhorse s tepvan , which is making excellent progress and selling in volume.

GP appointed a well-known and experienced industry professional, Claus Tritt, who has been mentioned in the last two earnings calls and is known to the analysts following GP ( see questions FY2023 earnings call ). The dealer network continues to grow with regular announcements and press releases . Claus is integrating the Lion Truck and Body company after the 2022 takeover into the group to develop future sales in many areas for the dealer network and the direct sales team.

Acquiring Lion Truck and Body seems to be an excellent strategic move. The commercial sales team and the dealers can use Lion Truck to build and deliver customer-specific bodies for the EV Star. Refrigerated bodies, armored vans, delivery vans even an RV to replace the stalled Forest River deal offer promise.

I like the commercial van division; the production facilities are in place, the dealers signed up, and excellent management has been hired. It is a genuine winning product, and if it were GP's only focus, I would still be a buyer.

In the recent earnings call, the CEO said

Presently, the commercial vehicle group has 42 active or live orders and 141 signed purchase orders for various EV Star models, which excludes our Workhorse activity.

With Workhorse and the new dealers, they could be looking at 750-1000 EV star unit sales in FY2024, and we should get an update soon as Q1 2024 finished at the end of June.

Electric School Bus Sales

The School Bus project has been a focus for GP senior managers from day 1; in my opinion, it is holding the company back, stopping it from reaching profitability and sucking cash out of the business, putting the survival of GP at risk.

9 of the 299 vehicle sales for FY 2023 were school buses. I commented in my second article that School Bus sales appeared to be slower than expected. In the FY 2022 report, GP had $29 million of inventory comprising approximately 100 EV star trucks and vans plus 30 BEAST school buses. I expected that they would all be delivered and more early in 2023.

During 2023 they delivered only 25 Beast school Busses meaning five remain in stock from 2022. That implies they had over a year of finished goods in stock and perhaps were having trouble moving these vehicles. Stock levels must be up again as they have produced Buses at the new West Virginia site.

Competition in the School Bus field

I wrote about Lion Electric ( LEV ) and its progress against the market-leading Blue Bird ( BLBD ). Some of the figures from that article are relevant here.

LEV and BLBD both have more than 800 electric school buses on the road at the moment.

LEV has received more than 2,000 purchase orders for electric school buses, and BLBD is expecting to generate an additional 800 bus orders from the first round of the five-year EPA clean air school bus program.

GP has not mentioned the EPA scheme explicitly nor published any orders received through the scheme.

The GP West Virginia order has made for some press hype. It is a large order of school buses. Still, it was part of the deal to entice GP to build its manufacturing facility in West Virginia. The order is for 41 busses, a mixture of the large and small versions; GP has been supplying busses on a rolling program, and according to press releases, they are performing well.

GP is not making the progress I forecast in this market, the two market leaders are clocking up large sales and taking most of the market share. It will be a challenging task for GP in this market; they are now the smallest player since LEV have made such excellent progress and GP is not the only ones chasing what is left. Some large bus companies like Thomas Built Buses and IC Bus appear to have been left behind by BLBD and LEV.

The CEO gave some guidance in his prepared remarks; he said:

The school bus group has 63 active orders or live orders and additional purchase orders for our BEAST and Nano BEAST school buses

We know 41 active orders are from West Virginia, implying that GP has only sold 22 School Busses during the period. If things do not improve soon, this could be a disaster.

Compare GPs situation to LEV, who have 2000 purchase orders for school busses and 800 on the road; the difference is startling.

GP is building a bus manufacturing facility in West Virginia that can produce as many as 100 buses a month. That is a lot of CAPEX, additional salaries and inventory. If the sales of buses do not improve significantly, it could become a real drag on the company's performance in the future. The Bus division's lack of sales, its CAPEX requirement, and inventory is a drain on resources, and the latest report brought these issues into focus.

Cash has become a real problem.

GP changed its auditor this year to one it believed would be better known throughout the US. The new auditor seems to have approached the business with a thorough review. The change in auditor caused GP to miss the deadline for filing its FY2023 accounts, and it was subject to a cease trading order; the accounts arrived on July 14, just over two weeks late.

Worse was to come when the new auditor raised concerns about the ability of GP to continue as a going concern saying:

The Company's ability to achieve its business objectives is subject to material uncertainty which casts substantial doubt upon the company's ability to continue as a going concern. Management plans to address this material uncertainty by selling vehicles in inventory, collecting accounts receivable, utilizing the company's operating line of credit and, from time to time, and at its discretion, selling common shares through the Company's At the Market Equity offering ("ATM").

( GP: 2023 20-F, 2023-7-24 )

I think GP had a real cash flow issue during the year, Note 18 of the accounts said:

During the year ended March 31, 2023, the company received loans totaling CAD$3,670,000 and US$25,000 from a company that is beneficially owned by the CEO and Chairman of the Company, and CAD$250,000 was loaned to the company from a company beneficially owned by a Director of the Company.

GP used its shelf and sold 1,565,268 common shares under the ATM program for gross proceeds of $4,895,820 in 2023 and still needed the loans from management.

In the latest earnings call, a question revealed that the recent audit had been complicated. It was asked by the first analyst to speak.

I know you guys are going to be extra careful given the challenges you had in your year-end audit

( GP: 2023 Earnings call Q4 2023 Transcript, 2023-7-17 )

In the same question, the analyst asked for guidance on sales in Q1 2024, but GP management declined to give it even though the quarter finished two weeks ago, so they must know the figures. I found this worrying. Previously, GP had given honest and open giving clear guidance, and I had used it to build my accurate forecast. Now I have little to use to make a new forecast.

Cash was a bit of a worry last time I wrote about GP; now it is a genuine concern, the company finished the year with only $600,000 in cash, and with a reported operating income of -$13 million, they had less than one month of cash on hand. Following the year's end, GP entered a term loan agreement for up to $15 million at a very high-interest rate of base +5%. The existing line of credit was at base + 1.5%.

The CEO addressed the cash issue in his opening remarks saying

We have an $8 million line of credit with BMO. At year end, we are on our line of credit for $6.6 million and have $600,000 of cash in the bank

He went on to say

At the end of last week, we were not having to utilize any of the line of credit. In other words, we are completely off our line and had approximately $1.5 million of cash

That is quite a turnaround from the end of the year (3 months earlier), repaying $6.6 million on the line of credit and adding $0.9 million to the cash balance.

The West Virginia School Bus order valued at 15 million dollars will have helped as GP received a $3 million deposit after the year-end.

$0.5 million was raised from the ATM (FY2023 Note 25), leaving $6.6+$0.9-$3-$0.5 = $4 million of additional cash generated. GP recorded $11 million in receivables at the end of the period, $4 million represents about 31 vehicles at an average sale price of $128,000.

Work In Progress

In my previous article, I highlighted the deteriorating and concerning figures for WIP. Inventory days were over 600, meaning it was taking two years to turn over the inventory into cash. I had hoped they could release $11 million of cash by reducing inventory.

Things are better, the CFO said in his prepared statement

Inventory at March 31, 2023, was $41.6 million, which was 3.2 times our fourth quarter cost of goods sold. This was a significant improvement over the prior year, as inventory at March 31, 2022, was $32.3 million or 8.7 times our quarterly cost of goods sold for the quarter ended March 31, 2022.

So inventory days are down from 8.7*90= 783 days to 3.2*90= 288. It is a significant improvement.

Total inventory of $41.6 million includes $32 million in finished goods. Moving these finished goods out to customers needs to be a priority. It would free up over $30 million in cash for a company that is very short on cash.

Inventory sucked another $9 million out of cash rather than releasing $11 million as I had hoped, and PP&E took another $4 million. The West Virginia site is taking the CAPEX, and the build-out continues. They are already producing school buses at the site, adding to inventory. The division is now a cash drain for a company that doesn't have any cash.

Conclusion

The 2023 sales revenue met the expectation of my earlier article and caused a jump in share price. Analysis of the FY2023 filings and the subsequent earnings call has added some doubt to a company I was previously very bullish about.

Inventory continues to grow in absolute terms, and finished goods of $32 million is almost a year of stock at the current run rate. They have to get to grips with this issue.

Management refused to give guidance on sales for Q1 2024, which is out of character and has me worried.

The school bus offering is not selling as well as I had hoped; the market appears to be giving more orders to LEV and BLBD than the other EV bus manufacturers.

The commercial sector remains very promising. The dealer network is expanding; the addition of Lion Truck and Body seems a positive move that will likely add tremendous flexibility to the options offered to dealers and end users; the Workhorse deal appears to be progressing well.

I would add to my position if GP were only producing the EVStar and delivering it through their developed channels.

Instead, I have closed my position and will wait for the Q1 2024 earnings release and call to re-evaluate.

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