RIDE - Lordstown Motors: This Could Be The End Game

2023-05-29 04:44:19 ET

Summary

• Lordstown completed a 1-for-15 reverse stock split last week.
• The EV company is under pressure to raise capital.
• If Lordstown fails to raise additional capital, the company may be in a bad spot.

Electric vehicle start-up Lordstown ( RIDE ) is heading for major trouble as it faces the very real prospect of going out of business if it can't find additional financing to ensure the ramp of its first-ever production car, the all-electric Endurance pick-up truck. Lordstown last week completed a 1-for-15 reverse stock split in order to avoid a delisting from the stock exchange and appease its strategic partner and contract manufacturer Foxconn which has alleged a breach of the Investment Agreement. Because of recent developments at the electric vehicle company -- reverse stock split, poor Endurance ramp, financing uncertainty -- I believe that Lordstown is in its end game and advise investors to stay away from the EV maker's shares!

1-for-15 reverse stock split, Foxconn financing deal

After the electrical vehicle startup disappointed with its production and delivery performance in the fourth-quarter, which included a recall and quality issues , the electric vehicle start-up is at risk of going out of business altogether and could file for bankruptcy in 2023 if the company fails to raise additional capital, either from Foxconn or another strategic investor, such as a private equity company.

In a regulatory disclosure from earlier this month, Lordstown said that Foxconn accused the EV start-up of being in breach of the Investment Agreement, chiefly because the EV company's stock price fell below $1.00. According to the stock exchange's listing rules, a company with a stock price of less than $1.00 does not meet the requirements for continuous listing on the Nasdaq Global Select Market (Bid Price Requirement).

Lordstown has denied that it breached the Investment Agreement and argued that if the "reverse split causes the Class A common stock price to remain above $1.00 per share for 10 consecutive trading days and Nasdaq notifies the Company that the Bid Price Requirement has been satisfied, that [it] may satisfy Foxconn's (incorrect) interpretation of the closing condition and cause Foxconn to close the transaction."

To avoid a delisting of its shares and to appease its main investor, Lordstown last week completed a 1-for-15 reverse stock split . The stock split went into effect on May 24, 2023.

According to the Investment Agreement between Foxconn and Lordstown, the Taiwanese contract manufacturer was set to invest $170M million into the electric vehicle start-up, in both a common and preferred stock. This financing deal is critical for Lordstown to fund the ramp of its first-ever production car, the Endurance pickup truck.

After the reverse stock split was completed last week, Lordstown has continued to suffer valuation pressure and shares are currently trading at only $3.61.

Lordstown is in a desperate situation

Production delays and quality issues have led to disappointing performance results for Lordstown in the fourth-quarter. In an update last week (which was part of the reverse stock split announcement), Lordstown said that it had cash, cash equivalents and short-term investments of approximately $165 million as of April 30, 2023, showing a decline of $11M compared to the end of the first-quarter.

Lordstown also said that it produced 56 Endurance vehicles so far and only delivered 18 electric vehicles to customers. In the fourth-quarter, Lordstown sold just three pick-up trucks for less than $200 thousand in revenues, so the ramp here is very disappointing. The slow ramp in production coincides with growing liquidity problems which could put Lordstown out of business… if the EV start-up does not manage to save the financing deal with Foxconn or find a new source of investment capital to finance the ramp of its first-ever production car. With the Foxconn/Lordstown investment deal hanging by a thread, I believe odds of a potential bankruptcy have risen sharply in May.

Lordstown has significant risks

Over the last two years, the market has seen a consistent downside revaluation of revenue prospects in the electric vehicle industry. Companies with financing troubles and weaker balance sheets, like Lordstown, are especially at risk of not surviving. Lordstown currently has a price-to-revenue ratio of 2.4X which seems rather expensive when compared against other U.S.-based EV manufacturers, especially when considering the position that the EV company finds itself in at the moment. I would expect that new uncertainty related to the Foxconn Investment Agreement will continue to weigh on Lordstown's valuation in the coming weeks and months.

Risks with Lordstown

The immediate risk is that Lordstown will not be able to save the financing deal with Foxconn and fail to secure alternative funding from other sources. However, if Lordstown were to save the deal with Foxconn, then the EV company could see a sharp upwards revaluation in its share price. Lordstown would then still have to show the market that it can ramp up Endurance production quickly... which, I believe, is not likely given that the company only delivered 18 electric vehicles so far.

Final thoughts

Unfortunately, I believe that Lordstown could be one of the first electric vehicles start-ups in the U.S. to go out of business and this looks very much like an end game. The stock price trend in recent months has been concerning and the reverse stock split is a last ditch effort to avoid a stock delisting as well as save the Investment Agreement with Foxconn. With the stock price continuing to trend down after the completion of the reverse stock split, the market seems to believe that the odds of a Lordstown bankruptcy have significantly increased. Considering the poor ramp and production of only 56 Endurance trucks so far, I agree that the risk/reward trade-off has gotten even worse!

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