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June 26, 2023 – Lordstown Motors Corp. and two affiliated debtors (Nasdaq: RIDE; together “Lordstown” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case No. 23-10831 (Judge TBD). The Debtors, "an original equipment manufacturer (OEM) of electric light-duty vehicles focused on the commercial fleet market," are represented by Kevin Gross of Richards, Layton & Finger, P.A. Further Board authorized appointments include: (i) White & Case LLP as general bankruptcy counsel, (ii) Silverman Consulting as financial advisors, (iii) Jefferies LLC as investment bankers and (iv) Kurtzman Carson Consultants LLC as claims agent.
The Debtors’ lead petition between 5,000 and 10,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn (NB: the Debtors' most recent 10-K notes assets of $452.3mn and liabilities of $70.3mn as at December 31, 2022). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Teijin Automotive Technologies, Inc ($2.1mn trade claim), (ii) ZF Passive Safety Systems Inc. ($2.0mn trade claim) and (iii) Marelli North America Inc ($1.6mn trade claim). All 30 of the Debtors' top 30 unsecured creditors hold trade claims, with the smallest being $130k and all 30 characterized as "disputed."
Petition Date Highlights
- Electric Light Vehicle Specialist (Manufacturer of Electric Pick-Up Truck "Endurance") Files for Chapter 11 with Over $100.0mn in Liabilities
- Files Adversary Proceeding Against Hon Hai Technology Group and Foxconn Accusing Those Entities of Fraudulent Conduct Intended to "Destroy an American Start-Up"
- Also Cites Numerous Litigations, SEC Investigation, Rising Interest Rates and Extremely Tough Electric Vehicle Sector as Effectively Closing Capital Markets
- Will Pursue Sale of Endurance Project, Although "As of the Petition Date, the Company has not Received any Actionable Indications of Interest"
- Files with $629.6mn of Federal NOLs and $327.0mn of Local NOLs
- With $136.0mn of Cash on Hand, Will Not Need DIP Financing
In a press release announcing the filing, Lordstown noted that it would pursue: “a strategic restructuring process to maximize the value of its assets: its on-the-road Endurance all-electric (EV) 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 (TWSE: 2317; LSE:HHPD) and certain of its affiliates, including Foxconn Ventures Pte. Ltd. (collectively, 'Foxconn' [which holds 8.4% of the Debtors' equity]), in the United States Bankruptcy Court for the District of Delaware (the 'Bankruptcy Court'). The litigation details Foxconn's fraud and willful and consistent failure to live up to its commercial and financial commitments to the Company. 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 ('Chapter 11') in the Bankruptcy Court. Lordstown further anticipates that the restructuring will enable an expedited timeline for hearing Lordstown's litigation against Foxconn."
The Debtors' CEO Edward Hightower added: "Despite our best efforts and earnest commitment to the partnership, Foxconn willfully and repeatedly failed to execute on the agreed-upon strategy, leaving us with Chapter 11 as the only viable option to maximize the value of Lordstown's assets for the benefit of our stakeholders. We will vigorously pursue our litigation claims against Foxconn accordingly.“
Goals of the Chapter 11 Filings
The Kroll Declaration [Docket No. 15] provides: "The Debtors have filed these chapter 11 cases for the purpose of maximizing value for the benefit of their stakeholders given the fraudulent conduct by Foxconn, its ongoing, repeated breaches of contractual commitments and its pattern of bad faith. Among other things, as part of these chapter 11 cases, the Debtors intend to pursue claims against Foxconn, commence a sale process for their assets, reduce their expenses, centralize and rapidly resolve claims, and, ultimately, distribute maximum value to creditors and—if sufficient—equity security holders under a chapter 11 plan."
The Debtors' adversary complaint [Docket No. 3] begins: "This case arises from, and is based on, the fraudulent conduct of one of the world’s largest multinational manufacturing companies, which, over time, had the intended effect of destroying the business of an American start-up. Promising a grandiose collaboration as the premise for stripping away Plaintiffs’ unique and most valuable asset, Defendant Hon Hai Precision Industry Co., Ltd. ('Foxconn') then embarked on a course of conduct, which is littered with a series of broken promises and repeated refusals to take any action in furtherance of the initially proffered venture, that bears all the hallmarks of bad faith, fraud and misrepresentation. This course of conduct is nothing new for Foxconn and its affiliates—their modus operandi in the United States is to overpromise and under or never deliver."
The press release adds: "The complaint filed against Foxconn centers on a transformative, strategic partnership Lordstown's management team entered into with Foxconn to combine Lordstown's innovation, technology, accomplished vehicle engineering team and manufacturing facility in Lordstown, Ohio with Foxconn's resources, supply chain capabilities and position as one of the world's largest electronics manufacturers with stated significant automotive capabilities to form a new, scalable joint vehicle development platform.
Under the partnership, Lordstown agreed to divest its most valuable assets to Foxconn, namely its Lordstown, Ohio manufacturing facility, which is one of the largest in North America, along with its highly talented and experienced manufacturing and operational employees. The up-front purchase price for the Lordstown manufacturing facility reflected the expected benefits of the contractual assurances from Foxconn that Foxconn would support the Endurance pickup truck in a variety of ways and follow through on a joint vehicle development program, leveraging what was purported to be Foxconn's established and extensive EV ecosystem and meeting its commitments to the Lordstown community.
The lawsuit details the fact that Foxconn had no intention of living up to its commitments, particularly with respect to the new vehicle development platform. As the lawsuit describes, Foxconn simply used its variety of contractual arrangements with the Company as a tool to maliciously and in bad faith destroy Lordstown's business—while leveraging resources gained through the partnership to advance its own business interests."
Neither the press release or Board minutes attached to the lead Petition note an intention to seek debtor-in-possession ("DIP") financing. The Debtors note that they "enter Chapter 11 with significant cash [$136.0mn per Kroll Declaration] on hand and a debt-free position."
The Kroll Declaration provides: "…as of December 31, 2022, the Company estimated that it had valuable tax attributes including, without limitation, (i) federal NOLs of approximately $629.6 million, which generated a deferred tax asset of $132 million, (ii) local NOLs of approximately $327 million, which generated a deferred tax asset of $3.7 million, and (iii) an indeterminate amount of net unrealized built-in loss."
Sale Prospects and Pre-Filing Marketing Efforts
The Kroll Declaration provides: "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."
Events Leading to the Chapter 11 Filings
The Kroll Declaration provides: "Given current market conditions and impediments facing the Company, including Foxconn’s breach of its commitments and the looming threat of the Prepetition Litigations, it is unlikely that the Company will be able to raise sufficient capital in the near term without a strategic transaction that includes the certainty and protections afforded by the Bankruptcy Code.
Meanwhile, prior to recent aggressive cost cutting actions taken due to the circumstances in which the Company finds itself, the Company’s average cash burn ranged from $10 million to $15 million per month. Accordingly, absent these Chapter 11 Cases, the Company’s cash position would continue to erode with no realistic hope of right-sizing its trajectory, to the detriment of all stakeholders.
The Company also requires additional capital to remove the uncertainty surrounding the Company’s ability to execute its business plan and scale the Endurance. While Foxconn is contractually obligated to provide a meaningful amount of capital and critical operational support, it has repudiated its obligations. Further, the Company does not believe that capital from other sources is available.
Further, the current market outlook makes it unlikely that the Company’s prospects will change in the near future. General market forces and outlooks, including rising interest rates and unemployment rates as well as forecasts of a near term recession will make raising capital extremely difficult. Moreover, those general hardships are even more pronounced in the electric vehicle sector. As evidenced by the Debtors’ prepetition capital raise and marketing process, there is a broadly negative investor sentiment towards publicly traded startup companies, and especially electric vehicle manufacturers. Indeed, there have been almost no traditional marketed equity sales of size among small capitalization EV companies in over a year and every start-up EV company has sustained massive declines in market capitalization. Moreover, from January 1, 2022 to April 19, 2023, even the largest U.S. OEMs (Ford, GM, and Tesla), experienced market capitalization declines of 45%, 47% and 57%, respectively, in comparison to only a 21% decline of the Russell 2000 index.
The Debtors have also faced additional challenges to raising capital. Chief among these challenges is the lack of progress with its new vehicle program with Foxconn and the substantial uncertainty related to the outcome of the Prepetition Litigations. That uncertainty has contributed to the generally negative prepetition investor sentiment toward the Company, driving LMC’s stock price down over the past two years. As of December 31, 2022, the Company reported a $35.9 million reserve accrued on account of the Prepetition Litigations, noting that the full range of possible outcomes could result in significantly higher liability. The threat of this potentially significant loss, the Company’s need to divert resources to defending the Prepetition Litigations, and the lack of aid from insurers, and perhaps most importantly, the ongoing disputes with Foxconn, together created a significant obstacle to raising capital in size prior to the Petition Date."
Significant Prepetition Shareholders
- Foxconn: 8.4%
About the Debtors
According to the Debtors: “Lordstown Motors is an electric vehicle ("EV") OEM developing innovative light duty commercial fleet vehicles, with the Endurance all electric pickup truck as its first vehicle. Lordstown Motors has engineering, research and development facilities in Farmington Hills, Michigan and Irvine, California.“
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