The Novonix Ltd (ASX: NVX) share price is continuing its long slide into the red this year, currently trading at near record lows.
Shares in the battery materials and technology company are fetching $2.09 apiece at the time of writing, the same as yesterday's closing price.
After reaching highs of $12.15 per share back in December 2021, Novonix shares have seen a dramatic fall.
Investors have continued the selling pressure amid a weaker macroeconomic outlook and a shift in capital flows away from unprofitable, growth-type names to more profitable companies.
Concerns for Novonix's cash flows
Last month, the company posted its annual report to shareholders.
In what was a record year for the price of lithium, and the global electric vehicle/lithium-ion battery industry as a whole, Novonix printed a substantial loss after tax of $71 million, coupled with around a $40 million net outflow in cash from operations.
Just for the record, in 2021, Novonix recognised a net loss of $18 million and cash outflow of $8.17 million. The company reported revenue of $8.4 million in FY22, up from $5 million year on year.
In light of this, the company's auditors, PriceWaterhouseCoopers (PWC), noted a "material uncertainty" related to Novonix as a going concern.
Specifically, the auditor says that it "draw[s] attention to Note 1 in the financial report, which indicates that the group incurred a net loss of $71.4 million and net operating cash outflows of $40.35 million during the year ended 30 June 2022".
Alas, Novonix "remains dependent upon raising additional funding to finance its ongoing expansionary activities", PWC says.
These conditions, along with other matters set forth in Note 1, indicate that a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Where did this stem from?
Digging a little deeper, it's abundantly clear where the cash was spent in 2022.
Firstly, Novonix bought securities in US battery tech company KORE Power, Inc. in January, acquiring around 5% of the company for a $35.1 million cash and scrip consideration.
However, the company booked a 'fair value' loss of around $11 million on this position on its income statement, despite no cash actually leaving its bank account for the 'expense'.
In addition, Novonix also increased its compensation to key management personnel by 224% year on year to $21.45 million, up from $6.6 million.
It could be seen as a curious move considering the company's substantially wider net loss last financial year.
Indeed, the share-based compensation expense (and the increased payment to managers) and fair value loss are the largest expense items on Novonix's FY22 income statement.
Combined, $31.15 million of shareholder capital was spent on these two items that, on face value, have little relation to the company's operations. That's not to mention the $35 million Novonix spent in acquiring the KORE position in the first place.
As well, of the $40 million net loss in cash from operations, the company booked $9 million in cash receipts from its customers but paid out $52.8 million in cash payments to suppliers and employees.
What's the prognosis?
It's certainly not uncommon for growth companies to churn through capital as they expand and reinvest heavily back into their operations.
Novonix has a plan to reach a production capacity of 40,000 tonnes of battery materials by FY25. To get there, significant capital investment and expenditure will be needed to finance the growth — certainly more than the company's current cash balance.
Plus, with no profitability reaching the bottom line and cash payments outpacing receipts, the company can only proceed so far before it needs to raise additional cash.
That's been the story of the past decade in equities. However, as we've seen in 2022, the tides are shifting.
Investors are no longer focused on rewarding revenue and sales growth but are instead constructive on bottom-line fundamentals such as earnings, cash receipts, and free cash flow.
So, with Novonix awarding its key managers an additional $16 million amid the net loss blowout of more than $53 million, plus the $31.5 million KORE investment that, after the 11% fair value drop, would now be marked at $28.4 million, it does start to raise questions on management's budgeting strategy.
Thankfully, the company has a strong track record of raising cash. Its top 20 shareholders on the register are largely comprised of institutional investors and investment banks.
With Novonix now "dependant" on raising additional capital, so PWC says, this could risk additional growth ventures and hamper the company's ability to build out operations.
As we've seen this year, investors will only put up with unprofitable growth stories for so long until factors impacting the wider economy become too big to ignore.
Meanwhile, the Novonix share price has slipped more than 66% into the red these past 12 months, losing more than 77% in 2022 alone.
