Faraday Future: Bankruptcy Risks Elevated (NASDAQ:FFIE)

Faraday Future’s (NASDAQ:FFIE) shares have fallen over 80% this year alone, as the EV startup struggles to reach production and faces dwindling cash. Faraday’s Q2 results in late August revealed an extremely thin cash balance, with a note of needing additional funding in September in order to reach a start-of-production [SoP] for its FF 91 EV. With an incessant need for funding that may not come, as well as a decreasing amount of pre-orders, Faraday’s future moving through 2023 looks very bleak, with bankruptcy probable – just because an OEM has a vision, pre-orders, and a production vehicle does not ensure success. Faraday’s cash burn rate and ability to scale production and secure deliveries of an expensive, luxury EV will ultimately determine its fate.

A Look At Q2

Q2’s business update started off with the production delay for the FF 91 from Q3 to Q4, as Faraday works to finish its plant and raise capital to ensure that it can successfully launch its first production model. Faraday was “on track” to launch in Q3 back when it reported results in May, but in the span of three months, Faraday noted “some challenges with supply chain issues” that forced it to reconsider its production timeline.

Faraday also provided an updated look at its cash balance – cash burn rates haven’t slowed from the $50 million per month, or ~$1.7 million per day average. Faraday noted that it had $276 million in cash as of March 31, $222 million as of April 30, $121 million as of June 30, and now $47.2 million as of August 29. It’s obvious Faraday needs cash, and immediately as well – management “expects they will need additional funds by September 2022 to continue operations,” as reported by Electrek.

$50 million per month is not a sustainable rate at all, more so that production has not begun nor ramped. Faraday was “projecting cash use of around $368 million through the end of 2022 to launch the FF 91,” as it seeks to raise $325 million to fund operations.

CEO Dr. Carsten Breitfeld said the firm “announced the successful raising of $52 million in convertible note commitments and continue financing discussions with multiple parties, but delays in our anticipated timing to close these potential transactions have also impacted our launch timing.”

Q2’s brief update did not reveal much more. Yet, the picture it painted was still bleak – Faraday is delaying production and deliveries another quarter, losing preorders, and desperately needing cash, three factors which do not align in any positive light.

Lowered Expectations?

Faraday was initially expecting to launch the FF 91 Futurist in Q1 2022, followed by the lower-priced trim FF 91 in Q4 2022; that production timeline failed to hold, and Faraday is now on track for a Q4 2022 SoP date in general.

Faraday’s California facility has an annual capacity of just 10,000 vehicles, limiting volumes until Myoung Shin’s contract manufacturing is expected to kick off in mid-to-late 2023, with a larger max capacity of 270,000 units annually. Thus, Faraday’s ability to scale lies not within its own factory, but in the hands of Myoung Shin, in a similar asset-light model/contract manufacturing system to that of Fisker (FSR) and Magna (MGA). By giving up total internal control over the production line, Faraday is easing the capital requirements to scale production tenfold or more, which, in its case, is a necessity; however, Faraday also cannot control any related supply chain impacts stemming from increased tensions in the region between China and Taiwan, lengthening shipping times in the region.

Management noted during the Q1 earnings call that Faraday had 401 reservations, and that the “preorder book is a reasonable match to our production expectations through 2022 year-end.” The delay and shift from a Q3 SoP to a Q4 SoP naturally challenges that expectation – if Faraday was expecting to produce 400 vehicles this year based on a Q3 timeline, that figure now likely stands at 175 vehicles.

Such a drop in deliveries and delay to SoP (along with the dire need for/lack of funding) also challenges Faraday’s ability to scale in 2023. Management outlined a targeted 6,000 to 8,000 units volume in 2023, which looks increasingly unlikely unless Faraday can secure in excess of $1.5 billion before the end of next year.

Take rival Lucid Motors (LCID) for example, with the Air priced in the luxury segment as well – in Q4 2021, Lucid delivered just 125 vehicles, and delivered another 360 in Q1 2022, followed by 679 vehicles in Q2 2022. Lucid’s three-quarter total did not even reach 1,200 vehicles, forcing the OEM to slash production guidance to 6,000 to 7,000 vehicles for the year, 50% lower than its prior outlook and nearly 70% below its original 20,000 unit projection. The main difference – Lucid held over $4.5 billion in cash at the end of Q2, with reservations showing solid growth – Lucid has the means and the demand to effectively scale after supply chain and production issues clear. Faraday doesn’t have that fortune, and will likely struggle to scale production effectively and efficiently without a stockpile of cash and reservations.

Bankruptcy Fears Elevated

The combination of decreasing preorders, a dire need for cash, and a likelihood to decrease production volumes in 2023 to 3,000 to 4,000, are elevating bankruptcy fears.

Faraday did recently announce a non-binding convertible note agreement to raise up to $600 million, under which it has already raised $52 million. That’s enough for an extra month of operations, slightly prolonging the time until Faraday needs to raise again.

At the moment, with ~$100 million in cash (given Faraday’s reported cash and the note raise), Faraday can survive until November. But it will need to raise money again before the end of the year, potentially twice, given how cash burn is expected to accelerate as production ramps. Again, taking notes from Lucid – from pre-production to scaling production, cash used in operations doubled.

Faraday had originally projected breaking even and shifting over to profitability in FY24, assuming operations started in Q1 2022; since production has been shifted to Q4 at the earliest, it’s also highly likely to project a delay in breakeven projections. Putting this back by at least 4 quarters, Faraday’s breakeven would shift to ~FY2025 at the earliest. To secure loss-generating operations and scaling production over 24 months, Faraday would need close to $2 billion in funding over that timeframe. Given the firm’s troubled nature already, acquiring debt will be both very difficult and expensive, with the risk of bankruptcy and inability to repay obligations high. Funding via convertible notes to raise $100 to $200 million is likely to add high levels of dilution as shares sit around $1.

In addition, revenues for FY22 are projected to be ~$54 million, given an average ASP of $300,000 for the FF91 Futurist Alliance and ~175 deliveries. For FY23, revenues could fall anywhere between $400 million and $800 million depending on the volume mix, and the pricing of the other FF 91 trims, which are expected to be “more affordable” but still above $100,000. Even with that level of revenue, Faraday’s increased cash burn rate, likely nearing $70 to $80 million per month, would easily keep Faraday operating in deep losses.

Outlook

Faraday Future looks to be nearing the brink of bankruptcy, with barely two months’ cash on hand following a recent convertible notes raise. Production is not expected to commence until Q4, following a string of delays, further stressing Faraday’s balance sheet with revenues expected to be minimal this year. Production volumes also could be cut due to delays in funding, production, and supply chain issues. Acquiring funding via debt is likely to be expensive and difficult, given the strained balance sheet, while convertible notes would likely incur substantial dilution to keep Faraday afloat. As such is the case, shares are inherently risky, as Faraday’s bankruptcy risk looks elevated.