June 27, 2023 – The Debtors filed a motion requesting each of a bidding procedures order and a sale order [Docket No. 16]. The bidding procedures order would: (i) approve bidding procedures in relation to the sale(s) of substantially all or any portion of the Debtors’ assets (the “Sale”), (ii) authorize the Debtors to select one or more stalking horse bidders (none selected yet), and offer bid protections to any selected stalking horse, including a break-up fee and expense reimbursement (the “Bid Protections*”) and (iii) adopt a proposed auction/sale timetable culminating in an auction on August 31st and a sale hearing on September 12th. The sale order would approve the Sale.
*The motion and proposed bidding procedures do not provide specifics as to the quantum of a the break-up fee or expense reimbursement.
The Debtors note that the goal of their sale process, and indeed their Chapter 11 filing, is to shake themselves free of what they characterize as a disastrous relationship with a treacherous partner: Foxconn. Central to their bankruptcy filing is the simultaneous filing of an adversary complaint [see Docket No. 3], with the pair of steps together having two goals: (i) the severing of the contractual relationship with Foxconn ("the overhang of the Foxconn relationship") and (ii) the possibility of pocketing a large damages check ("Foxconn maliciously and in bad faith destroyed that business, costing Lordstown’s creditors and shareholders billions") for their bankruptcy estates.
What jettisoning Foxconn will achieve in the eyes of a prospective purchaser is not, however, entirely clear; Foxconn hardly being the Debtors' only problem (and in the eyes of some purchasers, possibly even an asset).
Prior to some pre-filing cost cutting measures, the Debtors "average cash burn ranged from $10 million to $15 million per month," and that in a deeply troubled sector ("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") that has been particulary brutal for EV start ups ("every start-up EV company has sustained massive declines in market capitalization").
So against a backdrop where "rising interest rates and unemployment rates as well as forecasts of a near term recession will make raising capital extremely difficult," is there a buyer under any circumstances (ie with or without Foxconn), a buyer who "could utilize the Endurance platform to create multiple EV variants and take the product to the next level"?
At filing, the Debtors have gone to lengths to promote what may be two of their most attractive assets, $134.0mn of cash and what amounts to a $1.0bn of federal and local net operating losses ("NOLs"); but those assets have been shopped aggressively at least since June of 2022 by investment banker Jefferies who "prepared a list of more than 50 potential investors and strategic original equipment manufacturing partners across the globe" further to which "the Company did not receive any actionable indications of interest.”
In their filing date press release, the Debtors note as to their sale aspirations: "Lordstown has filed motions with the Court seeking authority to commence a comprehensive marketing and sale process under section 363 of the U.S. Bankruptcy Code to realize the full value of its innovative Endurance vehicle and related assets. The Endurance is a fully homologated and certified, production-launched vehicle that can serve as a springboard for the right OEM or other strategic purchaser into the broader North American EV full-size truck market at a fraction of the cost and time it would take to develop a program from the ground-up. The Company is confident that a buyer could utilize the Endurance platform to create multiple EV variants and take the product to the next level."
On June 26, 2023, Lordstown Motors Corp. and two affiliated debtors (Nasdaq: RIDE; together “Lordstown” or the “Debtors”) filed for Chapter 11 protection noting 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). At filing, the Debtors, "an original equipment manufacturer (OEM) of electric light-duty vehicles focused on the commercial fleet market," accused erstwhile partner Foxconn of fraudulent conduct intended to "destroy an American start-up" but also noted numerous other factors, including litigation, an SEC investigation, rising interest rates and an extremely tough electric vehicle sector as effectively closing capital markets and precipitating the need to seek bankruptcy shelter.
The Bid Procedures Motion
The motion [Docket No. 16] states, “[t]he Debtors have filed these chapter 11 cases for the purpose of using the tools of the Bankruptcy Code to maximize value in the face of Foxconn’s ongoing and repeated breaches of its commitments to the Company. In this regard, the Debtors are initiating a timely and efficient chapter 11 marketing and sale process to pursue and consummate a value-maximizing sale of their assets for the benefit of all stakeholders. As more fully set forth herein, a marketing and sale process under section 363 of the Bankruptcy Code will permit the Debtors to maximize value through a sale of assets free and clear of the overhang of the Foxconn relationship and the destruction it has caused, and of any and all liens, claims, encumbrances, and other interests of any party against the Debtors or their assets.
To that end, the Debtors’ proposed investment banker and financial advisor, Jefferies LLC (‘Jefferies’) is beginning a marketing process on the Petition Date. The Debtors, with the assistance of Jefferies, have developed a list of parties whom they believe may be interested in, and whom, the Debtors reasonably believe would have the financial resources to consummate, a sale. The list of parties includes both strategic and financial investors (collectively, the ‘Contact Parties’). The Debtors or Jefferies will promptly distribute a teaser to the Contact Parties and expect to execute confidentiality agreements with certain Contact Parties as quickly as possible. Jefferies and the Debtors will work with interested parties and any additional parties to provide diligence and will continue to actively seek potentially interested purchasers.”
Sale Prospects and Pre-Filing Marketing Efforts
The bidding procedures motion notes: “In September 2021, the Company retained Jefferies to explore all market alternatives. That process resulted in the sale of the Plant to Foxconn and the intent to form a joint venture with Foxconn. Starting in June 2022, Jefferies, in consultation with Foxconn, prepared a list of more than 50 potential investors and strategic original equipment manufacturing partners across the globe seeking potential acquirors and/or strategic partners for Lordstown 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, the Company did not receive any actionable indications of interest.”
Proposed Key Dates
- Hearing to consider entry of the Bidding Procedures Order: On or about July 17, 2023, or as soon thereafter as the Court’s calendar permits.
- Indication of Interest Deadline: July 20, 2023
- Stalking Horse Notice Deadline: August 17, 2023
- Deadline to object to the Stalking Horse Notice: Five (5) business days after the service of the Stalking Horse Notice.
- Bid Deadline: August 24, 2023
- Sale Objection Deadline: August 25, 2023
- Qualified Bidders Notification Deadline: August 29, 2023
- Auction (if required): August 31, 2023
- Deadline for objection to Successful Bidder: September 5, 2023
- Sale Hearing: On or about September 12, 2023, or as soon thereafter as the Court’s calendar permits
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."
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.“
Read more Bankruptcy News
The post Lordstown Motors Corp. – Electric Pick-Up Truck Specialist, Looking to Sell Its “Assets Free and Clear of Overhang of Foxconn Relationship,” Seeks Approval of Bidding Procedures; Aims for August 31st Auction and September 12th Sale Hearing appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.