RIDE - Lordstown Motors Files For Bankruptcy And Sues Foxconn Amid Ongoing Dispute

2023-06-27 11:15:00 ET

Summary

• Lordstown Motors' ongoing dispute with strategic partner Foxconn has culminated in a bankruptcy filing on Tuesday.
• The company is seeking to sell its Endurance electric pickup truck and related assets in a court-supervised auction pursuant to section 363 of the U.S. Bankruptcy Code.
• In addition, Lordstown Motors has filed an adversary complaint claiming "billions of damages" suffered as a result of Foxconn's course of action.
• A potential recovery for common shareholders will largely depend upon the bankruptcy court's rulings on the various claims against Foxconn put forward in the company's adversary complaint.
• With the company's market capitalization having fallen below $45 million at the time of this writing, I am finally upgrading Lordstown Motors' common shares to "Hold" as I can't rule out a potential recovery for common equity holders with a considerable amount of certainty.

Note:

I have covered Lordstown Motors Corp. ( RIDE ) previously, so investors should view this as an update to my earlier articles on the company.

Very much as expected by me in my last update on embattled electric vehicle ("EV") start-up Lordstown Motors Corp. or "Lordstown", the company's ongoing struggles to come to terms with strategic partner Foxconn have culminated in a bankruptcy filing on Tuesday. In addition, the company has commenced litigation against Foxconn:

(...) Lordstown Motors Corp. (...) today announced a strategic restructuring process to maximize the value of its assets: its on-the-road Endurance all-electric pickup truck and the intellectual property, platform, and people that developed it.

As part of the process, Lordstown today filed litigation against global technology company Hon Hai Technology Group and certain of its affiliates, including Foxconn Ventures Pte. Ltd. (collectively, "Foxconn"), in the United States Bankruptcy Court for the District of Delaware.

(...) Foxconn's actions led to material damage to the Company as well as its future prospects.

In addition, and as a consequence of Foxconn's material and irreparable harm, Lordstown is commencing a comprehensive marketing and sale process for the Endurance vehicle and related assets. To accomplish this expeditiously and provide a prospective buyer with a going concern asset that is free and clear of any legacy issues, Lordstown is restructuring under Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court. Lordstown further anticipates that the restructuring will enable an expedited timeline for hearing Lordstown's litigation against Foxconn. (...)

According to documents filed with the bankruptcy court, Lordstown has no debt obligations while remaining cash on hand amounts to approximately $136 million. Monthly cash burn going forward is estimated to be roughly $5 million.

That said, the company remains subject to an ongoing SEC investigation and a number of class action lawsuits as well as litigation filed by Karma Automotive LLC with a trial date having been set for September 5:

On October 30, 2020, Karma Automotive LLC filed an action (the "Karma Action") against the Company and certain of its current and former executive officers and employees in the US District Court for the Central District of California asserting claims for misappropriation of trade secrets, conspiracy, breach of the non-disclosure agreement, interference with employment contracts, and violation of the computer fraud statutes. The Company disputes these allegations.

As of December 31, 2022, the Company reported a $35.9 million reserve accrued on account of the various prepetition litigations, noting that the full range of possible outcomes could result in a significantly higher liability.

In addition, Foxconn is holding $30 million in Lordstown Motors' convertible preferred stock which ranks ahead of common equity.

In addition, investors should not bet on the company's efforts to sell its remaining assets in a court-supervised auction pursuant to section 363 of the U.S. Bankruptcy Code resulting in material cash proceeds.

According to court documents, a concerted effort by the company and its financial advisor Jefferies LLC (JEF) has not resulted in any actionable indications of interest in potential strategic partners and investors:

In September 2021, the Company retained Jefferies LLC ("Jefferies") to explore all market alternatives. Through that process, the Company and Jefferies, in consultation with Foxconn, prepared a list of more than 50 potential investors and strategic OEM partners across the globe to be contacted. Jefferies, the Company and Foxconn allocated responsibility to contact the potential investors and strategic OEM partners based upon who had the best relationship with the most relevant person at those companies. While the Company, its advisors, and potential partners held numerous meetings and in-person evaluations of the Endurance, as of the Petition Date, the Company has not received any actionable indications of interest.

On the flip side, Lordstown has filed an adversary complaint against Foxconn with the bankruptcy court claiming " billions of dollars in damages ".

In addition, the company has requested equitable subordination pursuant to section 510 of the U.S. Bankruptcy Code for all proof of claims potentially filed, and any equity interests held by Foxconn. If approved, Foxconn's claims would be moved to the very end of the line.

Bottom Line

Not surprisingly, Lordstown Motors' ongoing dispute with strategic partner Foxconn has culminated in a Chapter 11 filing.

In addition, the company has filed an adversary complaint with the bankruptcy court claiming " billions of dollars of damages " suffered as a result of Foxconn's course of action.

Going forward, a potential recovery for common shareholders will largely depend upon the bankruptcy court's rulings on the various claims against Foxconn put forward in the above-discussed litigation.

As I can't rule out a recovery for common equity holders with a considerable amount of certainty, I am upgrading Lordstown Motors' common shares to "Hold" from "Strong Sell".

That said, investors should be aware of a potential delisting by Nasdaq in the near future as a result of Tuesday's bankruptcy filing.

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