RIDE - Lordstown Motors: The End Is Getting Closer With Partner Foxconn Turning Away

2023-05-01 14:13:46 ET

Summary

• Strategic partner Foxconn's move to terminate last year's investment agreement is dealing another blow to the ailing company.
• But even if Lordstown Motors somehow manages to resolve the Foxconn dispute, liquidity and currently available funding sources appear to remain insufficient to execute on its business plan.
• As stated in the company's annual report on form 10-K, Lordstown Motors would have to raise substantial additional capital in the near term in order to continue as a going concern.
• With the capital markets basically closed to the company, I believe bankruptcy remains the most likely outcome for Lordstown Motors.
• With a potential bankruptcy filing getting closer, investors should consider selling existing positions and moving on.

Note:

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

On Monday embattled electric vehicle ("EV") start-up Lordstown Motors or "Lordstown" disclosed the latest setback for the ailing company (emphasis added by author):

(...) On April 21, 2023, the Company received a letter from Foxconn (the "Foxconn Notice") (1) asserting that the Company was in breach of the Investment Agreement due to its previously disclosed receipt of a notice from the Nasdaq Stock Market LLC indicating that the Company was no longer in compliance with the $1.00 minimum bid price requirement for continued listing on The Nasdaq Global Select Market (the "Nasdaq Notice") and (2) purporting to terminate the Investment Agreement if the breach is not cured within 30 days . The Company has notified Foxconn that (1) it believes the breach allegations in the Foxconn Notice are without merit, (2) the Investment Agreement, by its terms, does not permit Foxconn to terminate it following the Initial Closing, and (3) in any event, Foxconn cannot exercise termination rights because Foxconn has breached the Investment Agreement by failing to use necessary efforts to agree upon the EV program budget and EV program milestones to facilitate the funding of the additional Preferred Stock investment. Therefore, the Company believes that the Investment Agreement remains in effect, intends to enforce its rights thereunder, including with respect to Foxconn's breach regarding the EV program budget and EV program milestones and Preferred Stock funding and its knowing and intentional efforts to invalidly terminate the Investment Agreement and withhold key funding to the material detriment of the Company .

The Company is in discussions with Foxconn to seek a resolution regarding these matters; however, to date, Foxconn has declined to revoke its invalid termination notice and has failed to confirm that it will proceed with the Subsequent Common Closing or any Preferred Stock closing .

Remember, Foxconn saved the company from bankruptcy last year ago by committing to purchase $70 million of Class A common stock and up to $100 million in Series A Convertible Preferred Stock subject to regulatory approvals and satisfaction of certain EV program budget and EV program milestones.

On November 22, 2022, the parties completed the initial closing under the investment agreement , pursuant to which Foxconn purchased approximately $22.7 million of Class A common stock and $30 million of Preferred Stock.

On April 25, the Foxconn transaction was cleared by the U.S. government's Committee on Foreign Investment in the United States ("CFIUS") which pursuant to the terms of the investment agreement, does require Foxconn to purchase another 26.9 million Class A common shares of the company for $47.3 million within 10 business days.

In addition, Lordstown and Foxconn agreed to use commercially reasonable efforts to agree upon an EV program budget and EV program milestones no later than May 7, 2023, which would have triggered an additional $70 million Preferred Stock investment by Foxconn.

Given the termination notice and Lordstown's allegation of Foxconn not having used " necessary efforts to agree upon the EV program budget and EV program milestones " it seems quite clear that Foxconn is not willing to provide additional funding to Lordstown Motors at this point.

Assuming Foxconn's termination notice being valid, Lordstown won't be able to cure the alleged breach within 30 calendar days as the company requires shareholder approval for a reverse stock split with the annual meeting of stockholders currently scheduled for May 22.

That said, the investment agreement does not specifically require the company to comply with Nasdaq's $1 minimum pid price requirement at all times.

But even assuming Foxconn being required to purchase another $47.3 million of Lordstown Motors' Class A common shares, chances of forcing Foxconn into an agreement regarding the proposed EV program and triggering the associated $70 million Preferred Stock investment appear to be slim at best.

But even in the highly unlikely case Lordstown Motors somehow manages to close on the specified Foxconn investments without any changes to the original terms, the funds from the $70 million Preferred Stock investment may only be used " in connection with the initial planning, designing, developing, engineering, testing, industrializing, certifying, homologating and launching one or more EVs in collaboration with Foxconn ", according to statements made in the company's recent annual report on form 10-K.

As the end of 2022, Lordstown Motors had approximately $222 million in cash, cash equivalents and short-term investments, insufficient to execute on the company's business plan and leaving the company with the requirement to " raise substantial additional capital in the near term " as also disclosed in the annual report.

Monday's 8-K also includes a bold warning regarding the company's ability to continue as a going concern (emphasis added by author):

(...) If we are unable to resolve our dispute with Foxconn in a timely manner on terms that allow us to continue operating as planned, identify other sources of funding, identify a strategic partner and resolve our significant contingent liabilities, we may need to curtail or cease operations and seek protection by filing a voluntary petition for relief under the Bankruptcy Code . If this were to occur, the value available to our various stakeholders, including our creditors and stockholders, is uncertain .

While Lordstown Motors has no long-term debt, it is difficult to assign any substantial value to the company's remaining assets after the recent sale of the manufacturing facility to Foxconn. Even the retained hub motor assembly and battery module and pack lines are unlikely to result in substantial sales proceeds in a potential auction pursuant to Section 363 of the U.S. Bankruptcy Code, particularly when considering the host of issues experienced with the company's Endurance pick-up truck so far (emphasis added by author):

The rate of Endurance production remained very low during the fourth quarter as these factors continued to impact production. As we began delivering vehicles to our customers, we have experienced performance and quality issues with certain Endurance components that have led us to temporarily pause production and customer deliveries in the first quarter of 2023. Some of these issues were discovered by us or our suppliers, though some were experienced by our initial customers. In this regard, we filed paperwork with NHTSA to voluntarily recall the Endurance to address supplier quality issues. (...) As a result, we have sold a total of six vehicles of our planned initial batch of up to 500 units. (...)

Because our current BOM cost for the Endurance is well above our current selling price , we are limiting our expected production to up to 500 units in order to minimize our losses , which we anticipate being for the foreseeable future.

Bottom Line

Strategic partner Foxconn's move to terminate last year's investment agreement is dealing another blow to Lordstown Motors.

But even in case the company somehow manages to resolve the Foxconn dispute, liquidity and currently available funding sources appear to remain insufficient to execute on its business plan.

As stated in the company's annual report on form 10-K, Lordstown Motors would have to raise substantial additional capital in the near term in order to continue as a going concern.

With the capital markets basically closed to the ailing company, I believe bankruptcy remains the most likely outcome for Lordstown Motors.

Should the company be unable to resolve the Foxconn dispute in a timely manner, I would expect a bankruptcy filing in the second half of this year.

Even in the absence of long-term debt obligations, any potential recovery for common shareholders might be very limited.

With a potential bankruptcy filing getting closer, investors should consider selling existing positions and moving on, particularly with a near-term reverse stock split likely to be executed shortly following the company's annual stockholder meeting later this month.

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