RIDE - I Have Serious Doubts That Lordstown Motors Can Survive

Summary

• Lordstown Motors continues to burn cash and needs even more financing as Endurance truck production increases.
• Foxconn agreed to purchase 38.8 million shares at $1.76 and to purchase $100 million convertible preferred stock.
• They finally received full homologation and have begun deliveries of their Endurance truck.
• Lordstown Motors is another example of a failed SPAC merger deal.

While limited production and deliveries have begun for Lordstown Motors' ( RIDE ) Endurance truck, the company faces an extremely difficult future. To compound their problems, Road and Track Magazine gave their Endurance truck a rather critical review in November. This is another example of a SPAC merger transaction that has been a disaster for shareholders. Because Lordstown has a mediocre product, a poor business model, and a severe cash problem, I rate RIDE common stock a sell.

(Note: earlier prices reflect DiamondPeak Holdings)

Stock Price Percent Changes Since Rivian's IPO

Failed Business Model

I don't even know where to begin. Lordstown Motors is a failed business idea. A serious problem they face that I have not seen much discussion about and is replacement parts. If Lordstown eventually goes out of business, where are buyers of their trucks going to get replacement parts? Usually, if production for a model ends often there are still parts available to buy from a major vehicle producer such as Ford ( F ). Is a business going to buy a number of Endurance trucks and take the risk that, in a few years, that business might not be able to get needed replacement parts? Very unlikely, in my opinion. An individual consumer might not consider this issue, but a commercial buyer of trucks most likely will.

Another often ignored issue is trained mechanics. Are there going to be local trained mechanics to service Endurance trucks? I call this the "Rolls-Royce" problem. If one owns/drives a Rolls-Royce in Manhattan, Palm Beach, or Beverly Hills there are local highly trained Rolls-Royce mechanics to service your Rolls, but who would you take your Rolls to in Wyoming? Are there going to be country-wide mechanics who took the time/expense to get trained to service Endurance trucks? Again, very unlikely, in my opinion. If there is a local mechanic, how long will it take to order/receive parts as the truck sits in the garage? Businesses can't wait - they need reliable vehicles that can be serviced quickly.

As many others have stated over the years about electric vehicles, I worry about very unreliable available electricity. What happens when there are brownouts/blackouts.? Parts of the country frequently have electric usage regulations put in place because of the inability of the local power grid to deliver electricity. At least with gasoline, there are many different gas stations that are often supplied by different refineries. In addition, I don't consider electric vehicles to be "green". In Casper, Wyoming, almost all the electricity comes from coal-powered generators at the Johnston Power Plant. So effectively, an electric vehicle in Casper runs mostly on coal, which causes more pollution than gasoline.

Endurance Truck - Not Impressed

Road and Track Magazine gave a rather critical review of the Endurance truck posted on November 17 titled "The Lordstown Endurance Doesn't Have What It Takes". In October, Car and Driver Magazine posted a mixed review . These highly respected publications have put a damper, in my opinion, on any fleet buyer considering buying an Endurance truck. Not all the news has been bad. According to a November 29 press release Endurance received full homologation. They received EPA and CARB certification. Plus, FMVSS crash and non-crash testing were completed. The press release also stated 500 trucks are being delivered to customers.

One of the problems I have with this commercial truck is the pickup bed length of only 66.8 inches. That does not allow enough room for many items, especially if the user has a traditional truck toolbox in the back. I don't drive around in a truck, but I talked to some who do, and they want the traditional 96-inch length. Having seating capacity of four workers (in theory five) implies this is targeted more at moving employees around instead of moving cargo/supplies around. Many people own a four-door truck for transporting their family - not so much for transporting workers, in my opinion. Lordstown, however, is only targeting commercial businesses as potential buyers.

Many others having already discussed their concerns about each of the four wheels having an electric in-wheel hub motor. I worry that these motors will get out of sync with each other, so I would never buy this truck until there has been 4-6 years of proven satisfaction by users.

Burning Cash

Lordstown has a severe cash problem, and that problem is likely to get worse in the future as a significant amount is needed to finance any potential increased vehicle production. The company received $675 million, including $500 million PIPE financing, when they merged with DiamondPeak Holdings (traded as DPHC) under a SPAC merger transaction in October 2020. A July 2021 $400 million stock purchase deal with Yorkville Advisors Global (YA II PN, LTD) was officially terminated as of November 22, 2022, according to an 8-K filing . Under this stock purchase deal, Lordstown received $49.4 million (9.6 million shares) in 2021, and for the first nine months of 2022, they received $40.4 million (7.5 million shares). In early November, the company and Jefferies entered into an ATM agreement to sell up to 50.2 million shares, which is basically replacing the Yorkville Advisors deal.

Foxconn (Hon Hai Precision Industry Co., Ltd.) has effectively become "married" to Lordstown Motors. There was the plant purchase deal earlier this year and they also agreed to a manufacturing agreement. Now Foxconn is purchasing, under multiple transactions, a total of $100 million 8% convertible preferred stock ($1.936 conversion price) and a total of 39,772,727 shares of RIDE common stock for $1.76 per share.

There is a condition associated with this deal that I would usually not consider important because it was not a problem earlier this year. It is subject to receiving a "written communication from the U.S. government's Committee on Foreign Investment in the United States ("CFIUS") that CFIUS has concluded that the transactions contemplated by the Investment Agreement are not a "covered transaction" or CFIUS has concluded that there are no unresolved national security concerns with respect to the transactions..." The potential problem, in my opinion, is that President Biden on September 15, 2022, issued an Executive Order that greatly expands the scope and power of this Committee. It could mean nothing for this specific deal, but I think investors should be made aware of this change, since it was not a problem earlier this year.

Assuming that the Foxconn and Jefferies ATM deals get completed, there could be 306.9 million RIDE common shares outstanding, and that does not even include potential shares that might be issued if the preferred shares are converted in the future. This 306.9 million figure compares to 216.9 million shares outstanding as of September 30, 2022. That is a LOT of dilution.

Lordstown understands that they need even more cash/capital as they stated in their filing: "We are also seeking strategic partners, including other automakers, to provide additional capital and other support to enable us to scale the Endurance program and to develop new vehicle programs in coordination with Foxconn or otherwise..." It is going to take a lot of new cash to be able to grow production and scale their production to even a break-even level.

Are the New Preferred Shares a Yellow Flag?

I wonder if the purchase of $100 million preferred shares by Foxconn might be considered a yellow flag for some potential future bankruptcy filing. These shares, in theory, have priority for recovery before common RIDE shareholders under the absolute priority rule, section 1129(b)(1) . I also wonder if they used preferred stock instead of $100 million in debt financing because they were worried the debt might be reclassified as "equity interest" by a bankruptcy court under section 105(a) , then the claim would be put in the common stock class and not in a higher preferred stock class for a recovery. In my opinion, I think current RIDE common shareholders should be aware of the fact that Foxconn could, in theory, gain control of Lordstown under a bankruptcy process via their new preferred shares.

Conclusion

I already covered my RIDE short sales shortly after the price dropped below $2 per share because I don't like to maintain short positions that have only a modest potential amount of additional profits and might be impacted by irrational meme trading. I am now just watching from the bleachers.

Lordstown Motors' Endurance truck is really not a needed product. There are other potential trucks to purchase from larger, established automobile manufacturers that most likely will have available replacement parts in the future and more likely to have trained mechanics locally to service a truck.

Cash will remain a problem. Their very weak financial condition makes it unlikely they can raise needed capital via traditional debt deals, so they will continue to issue more and more equity that will greatly dilute current RIDE shareholders. I also worry that Lordstown Motors could be in bankruptcy court eventually. I rate RIDE a sell.

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