REE - REE Automotive: Good Execution But Headwinds Abound

Summary

• REE Automotive is down 91% over the last 12 months. This has triggered a race to regain compliance with Nasdaq's minimum listing requirements.
• The company's cash position is falling as free cash burn continues to stack up ahead of Start of Production.
• Whilst demand for commercial EVs will be healthy, the company faces a difficult year ahead.

REE Automotive ( REE ) faces intense headwinds over the next four quarters with its stock price having slipped below Nasdaq's minimum listing requirement, its total liquidity position under sustained burn, and a capex plan that faces what looks to soon be an EV recession. Tesla (TSLA), arguably the barometer for the broader EV industry, has seen its commons pull back markedly over the last few months and was recently forced to slash prices by up to 20% to boost flagging consumer demand. Whilst inflation is falling, the current macro environment is still characterized by an extremely hawkish Fed, a collapsed equity market, and intense recessionary fears.

REE registered a shelf offering in August last year that will see up to $200 million worth of shares, debt securities or rights sold opportunistically. The company allocated $75 million of the shelf to the sale of its shares through an at-the-market program. This comes as REE has started to ramp up the products from the commercial partnerships for its rolling chassis platform for commercial EVs. The company's P7 EV chassis is being built from four REEcorners to serve as a platform for a new generation of fully electric class 3 to class 5 commercial vehicles. REE also recently unveiled a class 3 box truck following the debut of a class 5 van called Proxima as part of its joint partnership with Morgan Olson, an American producer of walk-in vans.

Hence, the long-term value-creation potential of the company is clear. REE wants to power a new generation of fully electric commercial vehicles with its technology. This platform approach is distinctive to other commercial or passenger EV companies that went public during the pandemic-era blank check boom from Lucid Motors ( LCID ), Fisker ( FSR ), and Canoo ( GOEV ).

Powered By REE

REE is down 91% over the last month and has received a minimum bid price notice from Nasdaq. This has driven the company's market cap to $110 million against a net cash and equivalents position of $165 million . Hence, with very few other liabilities, the company's tangible book value per share is 82% higher than the current price of its commons. Bears would highlight that this tangible book value is transient and will continue to fall with REE's cash and equivalents position under pressure from consecutive quarters of zero revenue and cash burn.

The company's last reported earnings for its fiscal 2022 third quarter saw cash burn from operations come in at $16.3 million with capex of $6.5 million driving free cash outflow of $22.8 million.

The company expects non-GAAP operating expenses to come in between $100 million and $120 million for the full fiscal year 2022 with a further $30 million in investment spending to establish initial production capacity. Cash and equivalents is down from $295 million when the company went public and will exit 2023 at around $85 million assuming the current cash flow trend persists. This has created the urgency behind the decision to file a shelf offering even against its declining stock price.

Operational Developments Come Into View

Fundamentally, the shelf has opened up a paradox, in this the company needs the shelf to buffer up a dwindling cash balance and position its operations for production ramp. However, the prospect of selling shares that would amount to 68% of their current market cap has likely led to a further weakening of their commons. This is a downward spiral that reduces the ability of the company to raise money to increase its cash position. However, the low short interest of 1.11% alludes to a relatively insignificant amount of bearish engagement with REE.

REE's commercialization efforts will be on Proxima and its P7-B box truck. Management stated during the third quarter earnings call that they've received a number of contractually binding orders for both of these with discussions still ongoing with several other prospective customers. Last-mile delivery operators likely form the bulk of these but REE did not provide information on the customers or order numbers. The company is chasing the second half of fiscal 2023 for Start of Production with an expected production capacity of 10,000 vehicles annually. REE has its engineering and integration center based in the UK but is also looking at establishing a second center in Austin, Texas when demand outpaces current production capacity.

This will come against rising demand for commercial EVs as more companies around the world look to reduce carbon emissions as part of an effort by national policymakers seeking to meet ambitious net-zero targets. REE is in a difficult position with the company not likely to realize meaningful revenue in fiscal 2023 against a cash position still declining. Whilst the long-term potential for commercial EVs is healthy, competition in the space is strong and the economic climate ahead will likely not be fully conducive to further optimal order book growth. The long-term potential of EVs is strong but I'm neutral on REE's near-term future.

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