UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended |
OR
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File Number: 001-38821
Lordstown Motors Corp.
(Exact name of registrant as specified in its charter)
| | |
Delaware | | 83-2533239 |
| 2300 Hallock Young Road | |
Registrant’s telephone number, including area code: (234) 285-4001
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
| Trading symbol |
| Name of each exchange on which registered | |
Class A Common Stock, $0.0001 Par Value | |
| |
| |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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|
| |
Large accelerated filer ☐ | Accelerated filer☐ | Non-accelerated filer ☒ | |
Smaller reporting company ☒ | Emerging growth company ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 1,August 10, 2023, 239,025,59115,953,212 shares of the registrant’s Class A common stock were outstanding.
* The registrant’s Class A common stock began trading exclusively on the over-the-counter market on July 7, 2023 under the symbol “RIDEQ.” The NASDAQ Global Select Market filed a Form 25 with the Securities and Exchange Commission on July 27, 2023 to remove the registrant’s Class A common stock from listing and registration on the NASDAQ Global Select Market. Delisting became effective ten days thereafter and deregistration under Section 12(b) of the Act will become effective 90 days later.
LORDSTOWN MOTORS CORP.
Debtor-in-Possession
INDEX
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| | Condensed Consolidated Balance Sheets as of | | 6 | | ||
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| | Condensed Consolidated Statements of Operations for the three and six months ended | | 7 | | ||
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| | Condensed Consolidated Statements of Stockholders’ Equity/(Deficit) for the three and six months ended | | 8 | | ||
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| | | 10 | | |||
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report, including, without limitation, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” “could” or “should,” or, in each case, their negative or other variations or comparable terminology, although not all forward-looking statements are accompanied by such terms. There can be no assurance that actual results will not materially differ from expectations. Such statements include, but are not limited to, any statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, financial or operational prospects, growth, strategies and the industry in which we operate,effects of our filing of voluntary petitions under chapter 11 of the United States Bankruptcy Code (“Chapter 11”) and any other statements that are not statements of current or historical facts.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and developments in the industry in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity and developments in the industry in which we operate, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods. These statements are based on management’s current expectations, but actual results may differ materially due to various factors, including, but not limited to those described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2023 (the “Form 10-K”), and in subsequent reports that we file with the SEC, including this Form 10-Q for the quarter ended March 31,June 30, 2023, as well as the following:
| ● | our ability to |
| ● | our ability to obtain timely |
| ● |
| ● | the impact of the |
| ● | the |
| ● | our ability to |
3
| ● |
| ● | the adverse impact of the Company’s limited ability to continue to service the vehicles we have sold and the likelihood that we will not be able to sell any additional vehicles and may not recover value for the vehicles that we have sold; |
| ● | risks regarding our limited liquidity and unlikely access to financing as we continue to incur significant costs during and in connection with the Chapter 11 Cases, have significant known and contingent liabilities and claims for which we will continue to incur legal costs and may be subject to significant uninsured losses, face uncertainty as to the ability to realize value through the sale of our assets and litigation claims, and other |
| ● | risks related to the substantial costs and diversion of |
| ● | the impact of the delisting of our Class A common stock on the liquidity and trading price of our Class A common stock; |
| ● | our ability to |
| ● |
| ● | our ability to maintain |
| ● | our suppliers’ and |
| ● | our ability to |
4
| ● | potential changes to the amount, composition and value of our assets and liabilities depending on the outcome of the Chapter 11 Cases and the litigation and other claims asserted by or against the Company, including the claims asserted in the Karma Action; |
| ● | the |
| ● | the fact that the periodic financial information we report to the Bankruptcy Court is not presented in accordance with GAAP and may differ materially from information that has been or may in the future be provided in our periodic SEC filings and may reflect estimates based on assumptions that may change significantly during the course of the Chapter 11 Cases or due to other contingencies; |
| ● | the actions and decisions of our stakeholders and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our operational and strategic plans and adversely |
| ● |
As a resultThere can be no guarantees regarding the liabilities for which the Company will be responsible, that we will be able to sell some or all of these uncertainties, there is substantial doubt regarding our ability to continue as a going concern. Our ability to obtain additional financing is extremely limited under current market conditions,assets in particularan orderly fashion, that we will otherwise realize any significant value for our industry, and also influenced by other factors including the significant amount of capital required,assets or our damages through the Foxconn dispute, the factLitigation, that the BOM cost of the Endurance is currently, and expectedwe will be able to continue to be, substantially higher thansuccessfully complete our selling price, uncertainty surrounding the performance ofChapter 11 Cases, or that our creditors or stockholders will receive any vehicle produced by us, meaningful exposure to material losses and costs related to ongoing litigation and the SEC investigation, the Nasdaq Notice (as defined below), the market price of our stock and potential dilutionrecovery from the issuance of any additional securities. 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 substantial funding, identify a strategic partner and resolve our significant contingent liabilities, we may need to further curtail or cease operations and seek protection by filing a voluntary petition for relief under the United States Bankruptcy Code (the “Bankruptcy Code” and such processes are collectively referred to as “bankruptcy protection”). If this were to occur, the value available to our various stakeholders, including our creditors and stockholders, is uncertain and tradingbankruptcy proceedings. Trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in bankruptcy proceedings, if any.proceedings.
4
In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements.statements and the periodic financial information reported to the Bankruptcy Court (which are also subject to the qualifications provided with respect thereto). Any forward-looking statement that we make in this report speaks only as of the date of such statement, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, particularly due to the fact that the Chapter 11 Cases were initiated near the end of the reporting period and have resulted in material changes in the nature of the Company’s operations and cost structure after the reporting period discussed herein, and, unless specifically expressed as such, and should only be viewed as historical data.
Unless the context indicates otherwise, references in this report to the “Company,” “Lordstown,” “we,” “us,” “our” and similar terms refer to Lordstown Motors Corp. (f/k/a DiamondPeak Holdings Corp.) and its consolidated subsidiaries (including Legacy Lordstown (as defined below)). References to “DiamondPeak” refer to our predecessor company prior to the consummation of merger completed on October 23, 2020 pursuant to the Agreement and Plan of Merger, dated as of August 1, 2020 (the “Business Combination Agreement”), by and among DiamondPeak, DPL Merger Sub Corp. (“Merger Sub”) and Lordstown Motors Corp. (“Legacy Lordstown” and now known as Lordstown EV Corporation (as defined below)), pursuant to which Merger Sub merged with and into Legacy Lordstown, with Legacy Lordstown surviving the merger as a wholly-owned subsidiary of DiamondPeak (the “Merger” and, together with the other transactions contemplated by the Business Combination Agreement, the “Business Combination”).
Unless the context indicates otherwise, all shares of the Company’s Class A common stock are presented after giving effect to the 1:15 reverse stock split of the outstanding Class A common stock, which became effective as of 12:01 a.m. Eastern Time on May 24, 2023.
5
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Lordstown Motors Corp.
Debtor-In Possession
Balance Sheets
(in thousands except for share data)
(Unaudited)
| | | | | | |
| | | | | | |
|
| | | | ||
| | March 31, 2023 | | December 31, 2022 | ||
ASSETS: | | |
| | |
|
Current Assets |
| |
|
| |
|
Cash and cash equivalents | | $ | 108,086 | | $ | 121,358 |
Short-term investments | | | 68,589 | | | 100,297 |
Inventory, net | | | 6,340 | | | 13,672 |
Prepaid expenses and other current assets | |
| 9,028 | |
| 20,548 |
Total current assets | | $ | 192,043 | | $ | 255,875 |
Property, plant and equipment, net | |
| 78,123 | |
| 193,780 |
Other non-current assets | | | 2,244 | | | 2,657 |
Total Assets | | $ | 272,410 | | $ | 452,312 |
LIABILITIES AND STOCKHOLDERS’ EQUITY: | |
|
| |
|
|
Current Liabilities | |
|
| |
|
|
Accounts payable | | $ | 8,431 | | $ | 12,801 |
Accrued and other current liabilities | |
| 50,409 | |
| 56,033 |
Total current liabilities | | $ | 58,840 | | $ | 68,834 |
Warrant and other non-current liabilities | | | 889 | | | 1,446 |
Total liabilities | | $ | 59,729 | | $ | 70,280 |
Mezzanine equity | | | | | | |
Series A Convertible Preferred stock, $0.0001 par value, 12,000,000 shares authorized; 300,000 shares issued and outstanding as of March 31, 2023 and December 31, 2022 | | $ | 30,866 | | $ | 30,261 |
Stockholders’ equity | |
|
| |
|
|
Class A common stock, $0.0001 par value, 450,000,000 shares authorized; 239,025,591 and 238,924,486 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively | | $ | 24 | | $ | 24 |
Additional paid in capital | |
| 1,180,723 | |
| 1,178,960 |
Accumulated deficit | |
| (998,932) | |
| (827,213) |
Total stockholders’ equity | | $ | 181,815 | | $ | 351,771 |
Total liabilities and stockholders’ equity | | $ | 272,410 | | $ | 452,312 |
See Notes to Condensed Consolidated Financial Statements
6
Lordstown Motors Corp.
Statements of Operations
(in thousands except for per share data)
(unaudited)
| | | | | | |
|
| Three months ended |
| Three months ended | ||
| | March 31, 2023 | | March 31, 2022 | ||
Net sales | | $ | 189 | | $ | — |
Cost of sales | |
| 30,811 | | | — |
Operating Expenses | | | | | | |
Selling, general and administrative expenses | |
| 14,687 | |
| 26,019 |
Research and development expenses | |
| 14,425 | |
| 61,864 |
Impairment of property plant & equipment and intangibles | | | 114,440 | | | — |
Total operating expenses | | $ | 143,552 | | $ | 87,883 |
Loss from operations | | $ | (174,174) | | $ | (87,883) |
Other income (expense) | |
|
| |
| |
Other income (expense) | |
| 64 | |
| (1,492) |
Interest income (expense) | |
| 2,391 | |
| (258) |
Loss before income taxes | | $ | (171,719) | | $ | (89,633) |
Income tax expense | |
| — | |
| — |
Net loss | | | (171,719) | | | (89,633) |
Less preferred stock dividend | | | (605) | | | — |
Net loss attributable to common shareholders | | $ | (171,114) | | $ | (89,633) |
Net loss per share attributable to common shareholders | |
|
|
|
|
|
Basic | | $ | (0.71) |
| $ | (0.46) |
Diluted | | $ | (0.71) | | $ | (0.46) |
Weighted-average number of common shares outstanding | |
|
|
|
|
|
Basic | |
| 239,754 |
|
| 196,503 |
See Notes to Condensed Consolidated Financial Statements
7
Lordstown Motors Corp.
Statements of Stockholders’ Equity/(Deficit)
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | Total | ||
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | |||||||||
| | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Deficit | |||||
Balance at December 31, 2021 | | — | | $ | — | | 196,391 | | $ | 19 | | $ | 1,084,390 | | $ | (544,809) | | $ | 539,600 |
Issuance of Class A common stock |
| — | | | — | | 464 | | | 1 | | | 615 | | | — | | | 616 |
RSU vesting | | — | | | — | | 125 | | | — | | | — | | | — | | | — |
Stock compensation |
| — | | | — | | — | | | — | | | 3,920 | | | — | | | 3,920 |
Net loss |
| — | | | — | | — | | | — | | | — | | | (89,633) | | | (89,633) |
Balance at March 31, 2022 | | — | | $ | — | | 196,980 | | $ | 20 | | $ | 1,088,925 | | $ | (634,442) | | $ | 454,503 |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Additional | | | | | Total | ||
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | |||||||||
| | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Equity | |||||
Balance at December 31, 2022 | | 300 | | $ | 30,261 | | 238,924 | | $ | 24 | | $ | 1,178,960 | | $ | (827,213) | | $ | 351,771 |
Issuance of Class A common stock |
| — | | | — | | — | |
| — | |
| — | |
| — | |
| — |
RSU vesting | | — | | | — | | 101 | | | — | | | (46) | | | — | | | (46) |
Stock compensation | | — | | | — | | — | | | — | | | 2,414 | | | — | | | 2,414 |
Accrual of Series A Convertible Preferred Stock dividends | | — | | | 605 | | — | | | — | | | (605) | | | — | | | (605) |
Net loss |
| — | | | — | | — | |
| — | |
| — | |
| (171,719) | |
| (171,719) |
Balance at March 31, 2023 | | 300 | | $ | 30,866 | | 239,026 | | $ | 24 | | $ | 1,180,723 | | $ | (998,932) | | $ | 181,815 |
| | | | | | |
| | June 30, 2023 | | December 31, 2022 | ||
ASSETS: | | |
| | |
|
Current Assets |
| |
|
| |
|
Cash and cash equivalents | | $ | 115,732 | | $ | 121,358 |
Short-term investments | | | 22,000 | | | 100,297 |
Inventory, net | | | — | | | 13,672 |
Prepaid expenses and other current assets | |
| 16,697 | |
| 20,548 |
Total current assets | | $ | 154,429 | | $ | 255,875 |
Property, plant and equipment, net | |
| — | |
| 193,780 |
Assets held for sale | |
| 6,882 | |
| — |
Other non-current assets | | | 1,783 | | | 2,657 |
Total Assets | | $ | 163,094 | | $ | 452,312 |
LIABILITIES AND STOCKHOLDERS’ EQUITY: | |
|
| |
|
|
Current Liabilities | |
|
| |
|
|
Accounts payable | | $ | 3,507 | | $ | 12,801 |
Accrued expenses and other current liabilities | |
| 13,358 | |
| 56,033 |
Total current liabilities | | $ | 16,865 | | $ | 68,834 |
Liabilities subject to compromise | | | 84,995 | | | — |
Warrant and other non-current liabilities | | | 779 | | | 1,446 |
Total liabilities | | $ | 102,639 | | $ | 70,280 |
Mezzanine equity | | | | | | |
Series A Convertible Preferred stock, $0.0001 par value, 12,000,000 shares authorized; 300,000 shares issued and outstanding as of June 30, 2023 and December 31, 2022 | | $ | 31,484 | | $ | 30,261 |
Stockholders’ equity | |
|
| |
|
|
Class A common stock, $0.0001 par value, 450,000,000 shares authorized; 15,953,212 and 15,928,299, as adjusted reflecting the May 2023 1:15 reverse stock split, shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | | $ | 24 | | $ | 24 |
Additional paid in capital | |
| 1,182,370 | |
| 1,178,960 |
Accumulated deficit | |
| (1,153,423) | |
| (827,213) |
Total stockholders’ equity | | $ | 28,971 | | $ | 351,771 |
Total liabilities and stockholders’ equity | | $ | 163,094 | | $ | 452,312 |
See Notes to Condensed Consolidated Financial Statements
86
Lordstown Motors Corp.
Debtor-In Possession
Statements of Cash FlowsOperations
(in thousands)thousands except for per share data)
(unaudited)
| | | | | | |
| | Three months ended | | Three months ended | ||
| | March 31, 2023 |
| March 31, 2022 | ||
Cash flows from operating activities |
| | |
| |
|
Net loss | | $ | (171,719) | | $ | (89,633) |
Adjustments to reconcile net loss to cash used by operating activities: | |
| | |
|
|
Stock-based compensation | |
| 2,414 | |
| 3,920 |
Impairment of property plant and equipment and intangible assets | | | 114,440 | | | — |
Depreciation of property plant and equipment | | | 7,674 | | | — |
Write down of inventory and prepaid inventory | | | 19,764 | | | — |
Other non-cash changes | | | (1,085) | | | 4,420 |
Changes in assets and liabilities: | | | | | | |
Inventory | | | (12,432) | | | — |
Prepaid expenses and other assets | | | 12,822 | | | 9,987 |
Accounts payable | | | (4,115) | | | (1,490) |
Accrued expenses and other liabilities | |
| (5,879) | |
| 3,763 |
Net Cash used in operating activities | | $ | (38,116) | | $ | (69,033) |
Cash flows from investing activities | | |
| | |
|
Purchases of property plant and equipment | | $ | (7,948) | | $ | (21,896) |
Purchases of short-term investments | | | (22,208) | | | — |
Maturities of short-term investments | | | 55,000 | | | — |
Net Cash provided by (used in) investing activities | | $ | 24,844 | | $ | (21,896) |
Cash flows from financing activities | | |
| | |
|
Down payments received from Foxconn | | | — | | | 50,000 |
Issuance of Class A common stock | | | — | | | 477 |
Net Cash provided by financing activities | | $ | — | | $ | 50,477 |
Decrease in cash and cash equivalents | | $ | (13,272) | | $ | (40,452) |
Cash and cash equivalents, beginning balance | |
| 121,358 | |
| 244,016 |
Cash and cash equivalents, ending balance | | $ | 108,086 | | $ | 203,564 |
Non-cash items | | | | | | |
Capital assets acquired with payables | | $ | 256 | | $ | 5,336 |
| | | | | | | | | | | | |
| | Three months ended | | Three months ended |
| Six months ended |
| Six months ended | ||||
|
| June 30, 2023 |
| June 30, 2022 | | June 30, 2023 | | June 30, 2022 | ||||
Net sales | | $ | 2,151 | | $ | — | | $ | 2,340 | | $ | — |
Cost of sales | |
| 60,739 | |
| — | |
| 91,550 | | | — |
Operating Expenses | | | | | | | | | | | | |
Selling, general and administrative expenses | |
| 57,688 | | | 29,941 | |
| 72,375 | |
| 55,960 |
Research and development expenses | |
| 12,303 | | | 10,510 | |
| 26,728 | |
| 72,374 |
Impairment of property plant & equipment and intangibles | | | 25,041 | | | — | | | 139,481 | | | — |
Total operating expenses | | $ | 95,032 | | $ | 40,451 | | $ | 238,584 | | $ | 128,334 |
Loss from operations | |
| (153,620) | | | (40,451) | | $ | (327,794) | | $ | (128,334) |
Other income (expense) | |
|
| |
|
| |
|
| |
| |
(Loss) gain on sale of assets | | | (2,609) | | | 101,736 | | | (2,609) | | | 101,736 |
Other income | |
| 93 | | | 1,991 | |
| 157 | |
| 499 |
Investment and interest income | |
| 1,645 | | | 383 | |
| 4,036 | |
| 125 |
Loss before income taxes | | $ | (154,491) | | $ | 63,659 | | $ | (326,210) | | $ | (25,974) |
Income tax expense | |
| — | |
| — | |
| — | |
| — |
Net loss | | | (154,491) | | | 63,659 | | | (326,210) | | | (25,974) |
Less preferred stock dividend | | | (618) | | | — | | | (1,223) | | | — |
Net loss attributable to common shareholders | | $ | (153,873) | | $ | 63,659 | | $ | (324,987) | | $ | (25,974) |
Net loss per share attributable to common shareholders | |
|
| |
|
| |
|
| |
|
|
Basic | | | (9.69) | | | 4.75 | | $ | (20.39) | | $ | (1.96) |
Diluted | | | (9.69) | | | 4.75 | | | (20.47) | | | (1.96) |
Weighted-average number of common shares outstanding | |
|
| |
|
| |
|
|
|
|
|
Basic | |
| 15,940 | | | 13,388 | |
| 15,936 |
|
| 13,245 |
Diluted | | | 15,940 | | | 13,401 | | | 15,936 | | | 13,245 |
See Notes to Condensed Consolidated Financial Statements
7
Lordstown Motors Corp.
Debtor-In Possession
Statements of Stockholders’ Equity/(Deficit)
(in thousands)
(Common Stock adjusted to reflect May 2023 reverse stock split)
(unaudited)
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2023 | |||||||||||||||||
| | | | | | | | | | Additional | | | | | Total | ||||
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Deficit | |||||
Balance at March 31, 2023 |
| 300 | | | 30,866 | | 15,935 | | $ | 24 | | $ | 1,180,723 | | $ | (998,932) | | $ | 181,815 |
Issuance of common stock |
| — | | | — | | — | |
| — | | | — | |
| — | |
| — |
RSU Vesting | | — | | | — | | 18 | | | — | | | (20) | | | — | | | (20) |
Stock compensation |
| — | | | — | | — | |
| — | | | 2,284 | |
| — | |
| 2,284 |
Accrual of Series A Convertible Preferred Stock dividends | | — | | | 618 | | — | | | — | | | (617) | | | | | | (617) |
Net income |
| — | | | — | | — | |
| — | | | — | |
| (154,491) | |
| (154,491) |
Balance at June 30, 2023 |
| 300 | | $ | 31,484 | | 15,953 | | $ | 24 | | $ | 1,182,370 | | $ | (1,153,423) | | $ | 28,971 |
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 | |||||||||||||||||
| | | | | | | | | | | | Additional | | | | | Total | ||
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | |||||||||
|
| Shares |
| | Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | ||||
Balance at March 31, 2022 | | — | | | — | | 13,132 | | $ | 20 | | | 1,088,925 | | $ | (634,442) | | $ | 454,503 |
Issuance of common stock |
| — | | | — | | 43 | |
| — | | | 1,237 | | | — | |
| 1,237 |
RSU Vesting | | — | | | — | | 113 | | | | | | | | | | | | — |
Common stock issued to YA | | — | | | — | | 437 | | | 1 | | | 13,733 | | | | | | 13,734 |
Stock compensation | | — | | | — | | — | |
| — | | | 2,626 | | | — | |
| 2,626 |
Net loss | | — | | | — | | — | |
| — | | | — | | | 63,659 | |
| 63,659 |
Balance at June 30, 2022 | | — | | | — | | 13,725 | | $ | 21 | | $ | 1,106,521 | | $ | (570,783) | | $ | 535,759 |
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2023 | |||||||||||||||||
| | | | | | | | | | | | Additional | | | | | Total | ||
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||
Balance at December 31, 2022 | | 300 | | $ | 30,261 | | 15,928 | | $ | 24 | | $ | 1,178,960 | | $ | (827,213) | | $ | 351,771 |
Issuance of Class A common stock |
| — | | | — | | — | |
| — | |
| — | |
| — | |
| — |
RSU vesting | | — | | | — | | 25 | | | — | | | (65) | | | — | | | (65) |
Stock compensation | | — | | | — | | — | | | — | | | 4,698 | | | — | | | 4,698 |
Accrual of Series A Convertible Preferred Stock dividends | | — | | | 1,223 | | — | | | — | | | (1,223) | | | — | | | (1,223) |
Net loss |
| — | | | — | | — | |
| — | |
| — | |
| (326,210) | |
| (326,210) |
Balance at June 30, 2023 | | 300 | | $ | 31,484 | | 15,953 | | $ | 24 | | $ | 1,182,370 | | $ | (1,153,423) | | $ | 28,971 |
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2022 | |||||||||||||||||
| | | | | | | | | | | | Additional | | | | | Total | ||
| | Preferred Stock | | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | |||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Deficit | |||||
Balance at December 31, 2021 | | — | | $ | — | | 13,093 | | $ | 19 | | $ | 1,084,390 | | $ | (544,809) | | $ | 539,600 |
Issuance of Class A common stock |
| — | | | — | | 74 | | | 1 | | | 1,852 | | | — | | | 1,853 |
RSU vesting | | — | | | — | | 121 | | | — | | | — | | | — | | | — |
Common stock issued to YA | | — | | | — | | 437 | | | 1 | | | 13,733 | | | | | | 13,734 |
Stock compensation |
| — | | | — | | — | | | — | | | 6,546 | | | — | | | 6,546 |
Net loss |
| — | | | — | | — | | | — | | | — | | | (25,974) | | | (25,974) |
Balance at June 30, 2022 | | — | | $ | — | | 13,725 | | $ | 21 | | $ | 1,106,521 | | $ | (570,783) | | $ | 535,759 |
See Notes to Condensed Consolidated Financial Statements
8
Lordstown Motors Corp.
Debtor-In Possession
Statements of Cash Flows
(in thousands)
(unaudited)
| | | | | | |
| | Six months ended | | Six months ended | ||
| | June 30, 2023 |
| June 30, 2022 | ||
Cash flows from operating activities |
| | |
| |
|
Net loss | | $ | (326,210) | | $ | (25,974) |
Adjustments to reconcile net loss to cash used by operating activities: | |
| | |
|
|
Stock-based compensation | |
| 4,698 | |
| 6,546 |
(Loss) gain on disposal of fixed assets | |
| 2,609 | |
| (101,736) |
Impairment of property plant and equipment and intangible assets | | | 139,481 | | | — |
Depreciation of property plant and equipment | | | 54,308 | | | — |
Write down of inventory and prepaid inventory | | | 24,105 | | | — |
Other non-cash changes | | | (1,761) | | | 9,123 |
Changes in assets and liabilities: | | | | | | |
Inventory | | | (10,537) | | | (13,413) |
Prepaid expenses and other assets | | | 4,596 | | | 5,301 |
Accounts payable | | | (5,997) | | | 1,197 |
Accrued expenses and other liabilities | |
| 39,016 | |
| (2,471) |
Net Cash used in operating activities | | $ | (75,692) | | $ | (121,427) |
Cash flows from investing activities | | |
| | |
|
Purchases of property plant and equipment | | $ | (10,188) | | $ | (40,043) |
Purchases of short-term investments | | | (32,147) | | | — |
Maturities of short-term investments | | | 112,203 | | | — |
Investment in Foxconn Joint Venture | | | — | | | (13,500) |
Proceeds from the sale of capital assets | | | 198 | | | 37,553 |
Net Cash provided by (used in) investing activities | | $ | 70,066 | | $ | (15,990) |
Cash flows from financing activities | | |
| | |
|
Proceeds from notes payable for Foxconn Joint Venture | | $ | — | | $ | 13,500 |
Down payments received from Foxconn | | | — | | | 100,000 |
Issuance of Class A common stock | | | — | | | 1,853 |
Proceeds from Equity Purchase Agreement, net of issuance costs | | | — | | | 13,734 |
Net Cash provided by financing activities | | $ | — | | $ | 129,087 |
Decrease in cash and cash equivalents | | $ | (5,626) | | $ | (8,330) |
Cash and cash equivalents, beginning balance | |
| 121,358 | |
| 244,016 |
Cash and cash equivalents, ending balance | | $ | 115,732 | | $ | 235,686 |
Non-cash items | | | | | | |
Capital assets acquired with payables | | $ | 321 | | $ | 1,846 |
See Notes to Condensed Consolidated Financial Statements
9
LORDSTOWN MOTORS CORP
Debtor-In Possession
NOTES TO INTERIMCONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Description of Business
Lordstown Motors Corp., a Delaware corporation (“Lordstown,” the “Company” or “we”), is an original equipment manufacturer (“OEM”) of electric light duty vehicles focused on the commercial fleet market. Since inception, we have been developing our flagship vehicle, the Endurance, an electric full-size pickup truck.
Our strategy iswas designed to accelerate the launch of new commercial electric vehicles (“EVs”). This includesincluded working on our own vehicle programs as well as partnering with third parties, including Foxconn and its affiliates (as defined below), as we seeksought to leverage our vehicle development experience, our proprietary and open-source code and other non-proprietary technologies, our existing Endurance vehicle platform, and potentiallypotential new vehicle platforms to drive commonality and scale, and more efficiently develop and launch EVs, to enhance capital efficiency and achieve profitability.
In the third quarter of 2022, the Company started commercial production of the Endurance with the first two vehicles completing assembly in September. The Company subsequently completed homologation and testing and received required certifications enabling us to record sales of the first three vehicles in the fourth quarter of 2022. Engineering readiness, quality and part availability governed the initial timing and speed of the Endurance launch. The rate of Endurance production remained very low during the fourth quarter of 2022 as we addressed launch-relatedlaunch and supplier quality related issues that are often discovered as an entirely new vehicle begins operating in new and different environments by customers. Those challenges continued intountil June 30, 2023 when management made the firstdecision to cease production. During the second quarter of 2023, as performance and quality issues with certain suppliers’ components led uswe delivered 33 Endurance trucks to temporarily pause production and customer deliveries until mid-April 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 the National Highway Traffic Safety Administration (“NHTSA”) to voluntarily recall the Endurance to address these supplier quality issues. Production will remain at a very low ratecustomers as we continue to address any remaining, and to the extent we discover new, Endurance performance and component quality issues, manage ongoing supply chain constraints with key components, including hub motor components, and conserve funding given the high BOM cost.
If we experience one or more of these or other factors in the future it could lead to additional pauses in vehicle builds or delivery of completed vehicles, or future recalls. We continuecontinued to evaluate the merits of producing and selling vehicles to customers in order to seed the commercial fleet market, demonstrate the capabilities of the Endurance, and support our OEM partnership pursuits.
Leading up to filing the Chapter 11 Cases (as further discussed below), it became apparent that we would be unable to effectively implement and realize the anticipated benefits of the Foxconn Transactions (as defined below) as Foxconn continued to shift its approach to the nature of the partnership and the product, failed to meet funding commitments and refused to engage with the Company on various initiatives contemplated by the Foxconn Transactions that were essential to sustain ongoing operations. Due to the production delays from early January to mid-April 2023, the failure to identify a strategic partner for the Endurance, lack of expected funding and other support from Foxconn (as discussed in more detail below) and extremely limited ability to raise sufficient capital in the current market environment, we anticipatedetermined it was in the best interests of the Company’s stakeholders to take aggressive actions to cut costs and preserve cash, file the Chapter 11 Cases and cease production of the Endurance will ceaseand new program development. As part of these actions, two notices were provided to a substantial number of employees under the Worker Adjustment and Retraining Notification Act (“WARN Act”) in May 2023, for job eliminations to occur in July 2023. Therefore, this reduction in costs occurred after the near future.end of the second quarter of 2023.
Foxconn Transactions
The Company entered into a series of transactions with affiliates of Hon Hai Technology Group (“HHTG”, either HHTG or applicable affiliates of HHTG are referred to herein as “Foxconn”), beginning with the Agreement in Principal that was announced on September 30, 2021, pursuant to which we entered into definitive agreements to sell our manufacturing facility in Lordstown, Ohio under an Asset Purchase Agreement (as defined below) and outsource manufacturing of the Endurance to Foxconn under a Contract Manufacturing Agreement (as defined below). On November 7, 2022, we entered into an Investment Agreement with Foxconn under which Foxconn agreed to make an additional equity investment in the Company (the “Investment Agreement”).
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The Asset Purchase Agreement, Contract Manufacturing Agreement and the Investment Agreement together are herein referred to as the “Foxconn Transactions.”
10
Investment Agreement and Foxconn Notice
On November 7, 2022, the Company entered into
Under the Investment Agreement, under which Foxconn agreed to make additional equity investments in the Company through the purchase of $70 million of Class A common stock, $0.0001 par value per share (“Class A common stock”), and up to $100 million in Series A Convertible Preferred Stock, $0.0001 par value per share (the “Preferred Stock”), subject to certain conditions, including, without limitation, regulatory approvals and satisfaction of certain EV Program (as defined herein) budget and EV Program milestones established by the parties. The Preferred Stock funding maycould only be used in connection with planning, designing, developing, engineering, testing, industrializing, certifying, homologating and launching one or more EVs in collaboration with Foxconn (the “EV Program”). Pursuant to the Investment Agreement, the parties agreed to terminate the Foxconn Joint Venture formed on May 11, 2022 (the “Foxconn Joint Venture”) and cause development activities to be undertaken directly by us. (See Note 6 – Capital Stock and Loss Per Share).
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 (the “Initial Closing”).
The Investment Agreement providesprovided for the second closing of Class A common stock (the “Subsequent Common Closing”), at which time Foxconn iswas required to purchase approximately 26.9 million shares10% of the Class A common stock for approximately $47.3 million. The Subsequent Common Closing iswas to occur within 10 business days following the parties’ receipt of a written communication from the U.S. government’s Committee on Foreign Investment in the United States (“CFIUS”) that CFIUS has concluded that there are no unresolved national security concerns with respect to the transactions (“CFIUS Clearance”) and subject to satisfaction of the other conditions set forth in the Investment Agreement (which the Company believes were or would have been or will be satisfied). CFIUS Clearance was received on April 25, 2023, which means the Subsequent Common Closing iswas to occur on or before May 8, 2023. The Company iswas ready, willing and able to complete the Subsequent Common Closing on a timely basis.
In addition, following the parties’ agreement to the EV Program budget and the EV Program milestones and satisfaction of those EV Program milestones and other conditions set forth in the Investment Agreement, Foxconn iswas to purchase in two tranches, a total of 0.7 million additional shares of Preferred Stock at a purchase price of $100 per share for aggregate proceeds of $70 million (the “Subsequent Preferred Funding”). The parties agreed to use commercially reasonable efforts to agree upon the EV Program budget and EV Program milestones no later than May 7, 2023.
The completion of the Subsequent Common Closing and the Subsequent Preferred Funding would providehave provided critical liquidity for the Company’s operations. OnSince April 21, 2023, Foxconn has disputed its obligations under the Company received a letter fromInvestment Agreement to consummate the Subsequent Common Closing and to use necessary efforts to agree upon the EV Program budget and EV Program milestones to facilitate the Subsequent Preferred Funding. Foxconn (the “Foxconn Notice”) (1) assertinginitially asserted that the Company was in breach of the Investment Agreement due to itsthe Company’s previously disclosed receipt of a notice (the “Nasdaq Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) indicating, which Nasdaq Notice indicated that the Company was no longerCompany’s Class A common stock price dropped below the $1.00 per share threshold set forth in compliance with the $1.00 minimum bid price requirement for continued listing on The Nasdaq Global Select MarketListing Rule 5450(a)(1) (the “Bid Price Requirement”) (see Note 9 – Subsequent Events – Nasdaq Notice) and (2) purportingthat the Company had a 180-day period to remedy the drop in the stock price. As previously disclosed, Foxconn purported to terminate the Investment Agreement if thethat purported breach iswas not cured within 30 days. In response, the Company notified Foxconn in writing on April 25, 2023 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 Subsequent Preferred Funding.
On May 1, 2023, after having publicly disclosed the Foxconn Notice, the Company received correspondence from Foxconn’s counsel (the “Second Foxconn Notice” and, together with the Foxconn Notice, the “Foxconn
11
Notices”) (1) indicating that Foxconn agrees that it is unable to terminate the Investment Agreement after the Initial Closing, (2) asserting that the Nasdaq Notice constitutes a breach of a representation that is a condition to the Subsequent Common Closing and, therefore, Foxconn is not obligated to consummate the Subsequent Common Closing until such breach is cured, and (3) asserting that the Company’s claims regarding Foxconn’s breach of the Investment Agreement with respect to the EV Program and Subsequent Preferred Funding are without merit.
The Company continues to believe that the breach allegations by Foxconn are without merit, and that Foxconn iswas obligated to complete the Subsequent Common Closing on or before May 8, 2023. TheDespite the Company intendstaking action to enforce its contractual rightssatisfy the Bid Price Requirement as of June 7, 2023, and remedies underdiscussions between the Investment Agreement, including with respect to Foxconn’s breach regarding the EV Program budget and EV Program milestones, its funding obligations and its knowing and intentional efforts to invalidly terminate the Investment Agreement without any basis and withhold critical funding to the material detriment of the Company.
The Company is in discussions with Foxconnparties to seek a resolution regarding these matters; however, to date, the parties are at an impasse andInvestment Agreement, Foxconn has indicated that it doesdid not intend the close the Subsequent Common Closing on May 8, 2023 and we do not expect Foxconn to provide its approval to the EV Program budget and EV Program milestones by May 7, 2023. No assurances can be given that the parties will reach a resolution of these matters or that any such resolution will allowproceed with the Subsequent Common Closing or theany Subsequent Preferred Funding to occur onFunding. As a timely basis. If the Subsequent Common Closing is delayed or such fundings do not occur,result of Foxconn’s actions, the Company will behas been deprived of critical funding necessary for its operations. TheTo seek relief for Foxconn’s contractual breaches and other fraudulent and tortious conduct the Company is evaluating its legal and financial alternatives inbelieves were committed by Foxconn, the event a resolution is not reached.
See Note 9 – Subsequent Events –Company commenced the Foxconn Notice.Litigation.
11
Closing of the APA with Foxconn
On May 11, 2022, Lordstown EV Corporation, a Delaware corporation and wholly-owned subsidiary of the Company (“Lordstown EV”), closed the transactions contemplated by the asset purchase agreement with Foxconn EV Technology, Inc., an Ohio corporation, and an affiliate of HHTG, dated November 10, 2021 (the “Asset Purchase Agreement” or “APA” and the closing of the transactions contemplated thereby, the “APA Closing”).
Pursuant to the APA, Foxconn purchased Lordstown EV’s manufacturing facility located in Lordstown, Ohio. Lordstown EV continues to own our hub motor assembly line, as well as our battery module and pack line assets, certain tooling, intellectual property rights and other excluded assets, and outsources all of the manufacturing of the Endurance to Foxconn under the Contract Manufacturing Agreement. Lordstown EV also entered into a lease pursuant to which Lordstown EV leases space located at the Lordstown, Ohio facility from Foxconn for Lordstown EV’s Ohio-based employees for a term equal to the duration of the Contract Manufacturing Agreement plus 30 days. The right of use asset and liability related to this lease is immaterial.
We received $257 million in proceeds related to the sale, consisting of the $230 million initial purchase price for the assets, plus $8.9 million for expansion investments and an $18.4 million reimbursement payment for certain operating costs incurred by us from September 1, 2021 through the APA Closing. Foxconn made down payments of the purchase price totaling $200 million through April 15, 2022, of which $100 million was received in both 2022 and 2021. The $30 million balance of the purchase price and a reimbursement payment of approximately $27.5 million were paid at the APA Closing; $17.5 million was attributable to the reimbursement of certain operating expenses reported in research and development and $10 million was attributable to expansion costs. Under the terms of the APA, the $17.5 million reimbursement costs were an estimate which upon final settlement was subsequently increased to $18.4 million.
Research and development costs are presented net of the $18.4 million reimbursement of costs by Foxconn for the year ended December 31, 2022. Included in the $18.4 million reimbursement were approximately $7.7 million of research and development costs incurred in 2021. Also, in connection with the APA Closing, the Company issued the Foxconn Warrants (as defined herein), which are exercisable until the third anniversary of the APA
12
Closing for 1.70.13 million shares of Class A common stock at an exercise price of $10.50$157.50 per share (the “Foxconn Warrants”). In October 2021, prior to entering into the APA, Foxconn purchased 7.20.48 million shares of the Company’s Class A common stock for approximately $50.0 million.
Contract Manufacturing Agreement
On May 11, 2022, Lordstown EV and Foxconn entered into a manufacturing supply agreement (the “Contract Manufacturing Agreement” or “CMA”) in connection with the APA Closing. Pursuant to the Contract Manufacturing Agreement, Foxconn was to (i) manufacturesmanufacture the Endurance at the Lordstown facility for a fee per vehicle, (ii) following a transition period, procuresprocure components for the manufacture and assembly of the Endurance, subject to sourcing specifications provided by Lordstown EV, and (iii) providesprovide certain post-delivery services. To date, Foxconn has not begun to provideprovided the aforementioned procurement and post delivery services. The CMA providesprovided us with an almost entirely variable manufacturing cost structure and alleviates us ofalleviated the burden to invest in and maintain the Lordstown facility.
The CMA requiresrequired Foxconn to use commercially reasonable efforts to assist with reducing component and logistics costs and reducing the overall BOMbill of materials (“BOM”) cost of the Endurance, and otherwise improving the commercial terms of procurement with suppliers. However, to date, we havedid not realizedrealize any material reduction of raw material or component costs or improvement in commercial terms based on Foxconn’s actions. Foxconn iswas required to conduct testing in accordance with procedures established by us and we are generally responsible for all motor vehicle regulatory compliance and reporting. The Contract Manufacturing Agreement also allocates responsibility between the parties for other matters, including component defects, quality assurance and warranties of manufacturing and design. Foxconn invoicesinvoiced us for manufacturing costs on a fee per vehicle produced basis, and to the extent purchased by Foxconn,
12
component and other costs. Production volume and scheduling arewere based upon rolling weekly forecasts we provideprovided that arewere generally binding only for a 12-week period, with some ability to vary the quantities of vehicle type.
The CMA became effective on May 11, 2022 and continues for an initial term of 18 months plus a 12-month notice period in the event either party seeks to terminate the agreement. In the event neither party terminates the Contract Manufacturing Agreement following the initial term, it will continue on a month-to-month basis unless terminated upon 12 months’ prior notice. The CMA can also be terminated by either party due to a material breach of the agreement and terminates immediately upon the occurrence of any bankruptcy event.
Ongoing OperationsVoluntary Chapter 11 Petition
We need significant additional fundingOn June 27, 2023, the Company and its subsidiaries (the “Debtors”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Chapter 11 cases are being jointly administered under the caption In re: Lordstown Motors Corp., et al., Cases No. 23-10831 through 23-10833 (the “Chapter 11 Cases”). Additional information about the Chapter 11 Cases, including access to execute ourdocuments filed with the Bankruptcy Court, is available online at https://www.kccllc.net/lordstown/document/list, a website administered by Kurtzman Carson Consultants LLC ("KCC"), a third-party bankruptcy claims and noticing agent. The information on this website is not incorporated by reference and does not constitute part of this Form 10-Q.
The Bankruptcy Court has approved certain motions filed by the Debtors that were designed primarily to mitigate the impact of the Chapter 11 Cases on the Company’s remaining operations, customers and employees. The Debtors are authorized to conduct their business plan. Weactivities in the ordinary course, and pursuant to orders entered by the Bankruptcy Court, the Debtors are also seeking strategic partners, includingauthorized to, among other automakers,things and subject to provide additional capitalthe terms and conditions of such orders: (i) pay employees’ wages and related obligations; (ii) pay certain taxes; (iii) pay critical vendors; (iv) continue to honor certain customer obligations; (v) maintain their insurance program; (vi) continue their cash management system and (v) establish certain procedures to protect any potential value of the Company’s net operating loss carryforwards and other support to enable us to scale tax attributes (the “NOLs”). Shortly after filing the Chapter 11 Cases, the Company ceased production of the Endurance and new program development and, accordingly, the Company has no meaningful ongoing revenue stream.
As part of the Chapter 11 Cases, on August 8, 2023, the Bankruptcy Court approved procedures for the Debtors to conduct a comprehensive marketing and sale process for all, substantially all or some of their assets in order to maximize the value of those assets. The Debtors’ investment banker, Jefferies LLC, has reached out to a wide range of potential buyers. The Debtors have received a number of non-binding indications of interest. The procedures approved by the Bankruptcy Court provide that August 24, 2023 is the deadline by which the Company may select and file with the Bankruptcy Court one or more stalking horses with respect to their assets. The deadline to submit bids is September 8, 2023 and the auction, if any, is scheduled for September 19, 2023. Each of these dates is subject to change and the sale process may be cancelled in accordance with the procedures approved by the Bankruptcy Court. The Company can provide no assurance that any sale of assets (whether in whole or in part) will be consummated or what the proceeds or other terms of any such transaction may be. Further, the assets included in this report or in any filing we make with the Bankruptcy Court may not reflect the fair values thereof during the pendency of or following the Chapter 11 Cases or the value of our assets in an organized sale process in light of the uncertainty of the estimates and assumptions used in the applicable reporting principles, and such values may be higher or lower as a result.
The Company also intends to use the tools of Chapter 11 to fully, finally, and efficiently resolve its contingent and other liabilities and to develop new vehicle programspursue the Foxconn Litigation before the Bankruptcy Court. However, the Company provides no assurance as to the timing or outcome of the resolution of these matters by the Bankruptcy Court or any other court in coordinationwhich these matters may be adjudicated, including as a result of the proceedings that will occur outside of the Bankruptcy Court prior to a final disposition by the Bankruptcy
13
Court, including the Karma Action. In addition, the Bankruptcy Court has not established a deadline by which parties are required to file proofs of claim in the Chapter 11 Cases. The Company cannot provide any assurances regarding when such deadline will be, the amount or nature of the claims that may be filed by such deadline, or what the Company’s total estimated liabilities based on such claims will be.
On July 31, 2023, the Bankruptcy Court granted Karma (defined below) relief from the automatic stay imposed by the commencement of the Chapter 11 Cases and to allow the multi-week trial in the Karma Action scheduled in September 2023 to continue. The Company is continuing to vigorously defend against Karma’s claims and continues to believe that there are strong defenses to the claims and damages demanded. However, the outcome of the Karma Action is subject to uncertainties inherent in the litigation process and no assurances can be given regarding the outcome of the trial or the impact of the Karma Action on the Company, including with respect to the amount of any claim that Karma may have against the Company and the Company’s ability to sell assets that Karma contends were misappropriated by the Company or that incorporate trade secrets or property that Karma claims were misappropriated by the Company. See Note 7 – Commitments and Contingencies and Note 9 – Subsequent Events.
On July 20, 2023, Hon Hai Precision Industry Co., Ltd. (a/k/a Hon Hai Technology Group), Foxconn EV Technology, Inc., and Foxconn EV System LLC filed a motion to dismiss the Chapter 11 Cases or otherwise. To date, we have not identified a strategic partner forto convert the Endurance. Tocases under Chapter 7 of the extent weBankruptcy Code (the “Foxconn Motion to Dismiss”). The movants allege that the Debtors filed the Chapter 11 Cases in bad faith, that the Debtors do not identify suchhave a partner, we anticipatereasonable likelihood of rehabilitation, and that productiondismissal or conversion would benefit the Debtors’ creditors. The Debtors believe that there are strong defenses to the movants’ assertions and intend to vigorously oppose the motion. However, no assurances can be given regarding the outcome of the Endurance will ceasemotion.
Foxconn Litigation
On June 27, 2023, the Company commenced an adversary proceeding against Foxconn (the “Foxconn Litigation”) in the near future. We also faceBankruptcy Court seeking relief for fraudulent and tortious conduct as well as breaches of the Investment Agreement, the parties’ joint venture agreement, the APA, and the CMA that the Company believes were committed by Foxconn. As set forth in the complaint relating to the adversary proceeding, Foxconn’s actions have caused substantial harm to the Company’s operations and prospects and significant contingent liabilities related to ongoing claims against usdamages. See “Foxconn Transactions” above and government investigations (see Note 7 – Commitments and Contingencies for additional information).information. The abilityFoxconn Litigation is Adversary Case No. 23-50414.
Cessation of Production
Shortly after commencing the Chapter 11 Cases, the Company ceased production of the Endurance and new program development. Accordingly, the Company lacks any meaningful revenue related to selling vehicles. Our ongoing operations as of the end of the second quarter and continuing into the third quarter of 2023 primarily include support of vehicles that have been delivered to customers, custody and maintenance of our assets for us to raise capitalprospective sale under the process established in the current market environment is extremely limited. As a resultChapter 11 Cases or otherwise, support for the sale process and administration and facilitation of these uncertainties, there is substantial doubt regarding our ability to continue as a going concern. 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 partnerthe Chapter 11 Cases and resolve our significant contingent liabilities, we may need to further 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 and trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in bankruptcy proceedings, if any. See “Liquidity and Going Concern” below.related proceedings.
13
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to these rules and regulations. Accordingly, these unaudited condensed consolidated interim financial statements should be read in conjunction with our audited consolidated financial statements and related notes included in our Form 10-K.
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In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments necessary for a fair presentation of our interim financial results. All such adjustments are of a normal and recurring nature. The results of operations for any interim period are not indicative of results for the full fiscal year. The accompanying unaudited condensed consolidated interim financial statements include our accounts and those of our controlled subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the financial statements and the amounts of expenses during the reporting periods. Actual amounts realized or paid could differ materially from those estimates.
Since filing the Chapter 11 petitions, the Company has operated as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. In the accompanying Balance Sheet, the “Liabilities subject to compromise” line is reflective of expected allowed claim amounts in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 852-10 and are subject to change materially based on the proceedings and continued consideration of claims that may be modified, allowed, or disallowed. Refer to Note 7 – Commitments and Contingencies for further detail.
Liquidity and Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these consolidated financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. As more fully discussed below, there isa result of the Company’s recurring losses from operations, accumulated deficit, cessation of production of the Endurance and lack of any meaningful revenue stream, as well as the risks and uncertainties related to (i) the Company’s ability to successfully complete the Chapter 11 Cases, including our ability to sell all, substantially all or some of our assets, to successfully resolve litigation and other claims that may be filed against us, and to develop, negotiate, confirm and consummate a Plan, after which we do not expect to conduct ongoing business, (ii) the effects of disruption from the Chapter 11 Cases, including challenges with respect to retaining employees, (iii) the costs of the Chapter 11 Cases and (iv) the costs of defending the Company in substantial litigation and claims, along with the risk of future litigation or claims that we have and may continue to experience, substantial doubt exists regarding the Company’sour ability to continue as a going concern for a period of at least one year from the date of issuance of these consolidated financial statements. The consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if the Company were unable to continue as a going concern.
Pursuant to the requirements of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”)ASC Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date these consolidated financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the consolidated financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the consolidated financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.
The Company had cash, cash equivalents, and short-term investments of approximately $176.7$137.7 million and an accumulated deficit of $998.9$1,153.4 million at March 31,June 30, 2023 and a net loss of $171.7$154.5 million and $326.2 million for the three and six months ended March 31, 2023.
June 30, 2023, respectively.
Since inception, we have been developing our flagship vehicle, the Endurance, an electric full-size pickup truck. In the third quarter of 2022, the Company started commercial production of the Endurance with the first two vehicles completing assembly in September. The Company subsequently completed homologation and testing and received required certifications that enabled us to begin sales in the fourth quarter of 2022.
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Engineering readiness, quality and part availability governed the initial timing and speed of the Endurance launch. The rate of Endurance production remained very low during the fourth quarter of 2022 as we addressed launch-related issues that are often discovered as an entirely new vehicle begins operating in new and different environments by customers. Those challenges continued into the first quarter of 2023 as performance and quality issues with certain suppliers’ components led us to temporarily pause production and customer deliveries until mid-April 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 these supplier quality issues. Production will remain at a very low rate as we continue to address any remaining, and to the extent we discover new, Endurance performance and component quality issues, manage ongoing supply chain constraints with key components, including hub motor components, and conserve funding given the high BOM cost.
If we experience one or more of these or other factors in the future, it could lead to additional pauses in vehicle builds or delivery of completed vehicles or future recalls. We continue to evaluate the merits of producing and selling vehicles to customers in order to seed the commercial fleet market, demonstrate the capabilities of the Endurance, and support our OEM partnership pursuits. Due to the production delays from early January to mid-April 2023, the failure to identify a strategic partner for the Endurance, lack of expected funding and other support from Foxconn (as discussed in more detail above and elsewhere in this report) and extremely limited ability to raise sufficient capital in the current market environment, we anticipatedetermined it was in the best interests of the Company’s stakeholders to take aggressive actions to cut costs and preserve cash, file the Chapter 11 Cases and cease production of the Endurance will ceaseand new program development. On June 27, 2023, we voluntarily initiated the Chapter 11 Cases in the near future.Bankruptcy Court. Since filing the Chapter 11 petitions, we have operated our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. After we filed our Chapter 11 petitions, the Bankruptcy Court granted certain relief enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, to pay taxes, to maintain our insurance policies, to honor certain of our customer obligations, to continue to operate our cash management system in the ordinary course, to pay the prepetition claims of certain of our vendors and to establish certain procedures to protect any potential value of the Company’s NOLs.
The performanceOur liquidity and component quality and other supplier issues we have experienced with the Endurance have caused us to incur significant research and development expenses after the launch. Although there has been some improvement in the first quarter of 2023, the Company continues to manage challenges with its supply chain, including part pedigree and availability.
We also have meaningful exposure to material losses and costs related to ongoing litigation and regulatory proceedings for which insurance coverage has been denied for certain claims and may be unavailable for those and other claims. While we have engaged and continue to engage in discussions with the parties in these proceedings, we have not been able to reach a resolution of these matters. See Note 7 – Commitments and Contingencies for additional information and Part II - Item 1A. Risk Factors.
In an effort to alleviate these conditions, our management continues to seek and evaluate opportunities to raise additional funds through the issuance of equity or debt securities, asset sales, through arrangements with strategic partners or through financing from government or financial institutions and seek strategic partners to scale the Endurance program. We have engaged a financial advisor to advise the Company on additional financing alternatives.
As discussed under Note 6 – Capital Stock and Loss Per Share, on November 7, 2022, the Company entered into an Open Market Sales Agreement (the “Sales Agreement”) with Jefferies LLC, as agent (“Jefferies”), pursuant to which the Company may offer and sell up to approximately 50.2 million shares of its Class A common stock from time to time through Jefferies (the “ATM Offering”). There were no transactions under the ATM Offering for the period ended March 31, 2023. In the future, additional sales will depend on a variety of factors, including the sales price of the Class A common stock being at least $1.00, higher than our current stock price, and our ability to maintain compliance with exchange listing requirements, which as of April 19, 2023, we were not. (See Note 9 – Subsequent Events – Nasdaq Notice) Even if the Company had the ability to issue shares of Class A common stock under the Sales Agreement, no assurances can be given that it would sell any shares of Class A common stock under the Sales Agreement, or, if it does, as to the price or amount of the shares that it sells or the dates when such sales will take place. Even if additional funds are raised under the ATM Offering, the Company will require additional financing to execute its business plan.
The completion of the Subsequent Common Closing and the Subsequent Preferred Funding are necessary to provide critical liquidity for the Company’s operations, but the Company’s dispute with Foxconn means there is substantial uncertainty that such funding can be obtained. The Company is in discussions with Foxconn to seek a resolution regarding these matters; however, to date, the parties are at an impasse and Foxconn has indicated that it does not intend the close the Subsequent Common Closing on May 8, 2023 and we do not
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expect Foxconn to provide its approval to the EV Program budget and EV Program milestones by May 7, 2023. No assurances can be given that the parties will reach a resolution of these matters or that any such resolution will allow the Subsequent Common Closing or the Subsequent Preferred Funding to occur on a timely basis. If the Subsequent Common Closing is delayed or such fundings do not occur, the Company will be deprived of critical funding necessary for its operations. See Note 9 – Subsequent Events – Foxconn Notices.
As a result of having insufficient capital to execute our business plan, we have made and are continuing to make trade-offs with respect to how we allocate our capital, including substantially limiting investments in tooling, other aspects of the Endurance and our operations. The trade-offs we are making, including related to hard tooling, have and are likely to continue to result in higher costs for the Company in the future and are likely to slow or impair future design enhancements or options we may otherwise seek to make available to Endurance customers.
The Company’s ability to continue as a going concern is dependent onupon, among other things: (i) our ability to effectively resolve our dispute withdevelop, confirm and consummate a Plan or other alternative liquidating transaction, (ii) the resolution of contingent and other claims, liabilities, the Karma Action and the Foxconn Litigation (see Note 7 – Commitments and implementContingencies and realizeNote 9 – Subsequent Events), (iii) the benefitsoutcome of the Foxconn Transactions, raise substantial additional capital,Company’s efforts to sell all or a portion of its assets, and develop additional vehicles. The Company’s current level(iv) the cost, duration and outcome of cash, cash equivalentsthe Chapter 11 Cases.
We have incurred significant professional fees and short-term investments are not sufficientother costs in connection with preparation for the Chapter 11 Cases and expect to execute our business plan. For the foreseeable future, we willcontinue to incur significant operating expenses, capital expendituresprofessional fees and working capital funding that will depletecosts throughout our cash on hand. Additionally,Chapter 11 Cases. In addition, we faceare subject to significant contingent liabilities, arisingthe full scope of which is uncertain at this time (see Note 7 – Commitments and Contingencies and Note 9 – Subsequent Events). Further, the Bankruptcy Court has not established a deadline by which parties are required to file proofs of claim in the Chapter 11 Cases and we cannot provide any assurances regarding when such deadline will be, the amount or nature of the claims that may be filed by such deadline, or what the Company’s total estimated liabilities based on such claims will be.
The Bankruptcy Court approved procedures for the Debtors to conduct a comprehensive marketing and sale process with respect to all, substantially all or some of their assets in order to maximize the value of those assets. The Company provides no assurance that it will successfully complete any such dispositions or the pricing and other terms of any such transactions. The Company also intends to use the tools of Chapter 11 to fully, finally, and efficiently resolve its contingent and other liabilities and to pursue the Foxconn Litigation before the Bankruptcy Court. However, the Company provides no assurance as to the timing or outcome of the resolution of these matters by the Bankruptcy Court or any other court in which these matters may be adjudicated, including as a result of the proceedings that will occur outside of the Bankruptcy Court prior to a final disposition by the Bankruptcy Court, including the Karma Action. See Note 1 - Description of Organization and Business Operations - Description of Business – Voluntary Chapter 11 Petition, Note 7 – Commitments and Contingencies and Note 9 – Subsequent Events.
On July 20, 2023, certain Foxconn entities filed the Foxconn Motion to Dismiss. See Note 1 — Description Of Organization And Business Operations. The movants allege that the Debtors filed the Chapter 11 Cases in bad faith, that the Debtors do not have a reasonable likelihood of rehabilitation, and that dismissal or conversion would benefit the Debtors’ creditors. The Debtors believe that there are strong defenses to the movants’ assertions and intend to vigorously oppose the motion. However, no assurances can be given regarding the outcome of the motion. If confirmation by the Bankruptcy Court of a Plan does not occur, or if the Bankruptcy Court otherwise finds that it would be in the best interest of holders of claims and interests or upon the showing of cause, the Bankruptcy Court may convert the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Company's assets for distribution in accordance with the priorities established by the Bankruptcy Code. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and
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classification of recorded asset amounts or the amounts and classification of liabilities that might result from claims against usthe outcome of this uncertainty. As a result of these and government investigations. These conditions raiseother circumstances, there is substantial doubt regarding the Company’sour ability to continue as a going concern, for a period of at least one year from the date of issuance of these condensed consolidated financial statements.
Our ability to obtain additional financing is extremely limited under current market conditions, in particular for our industry, and also influenced by other factors including the significant amount of capital required, the Foxconn dispute, the fact that the BOM cost of the Endurance is currently, and expected to continue to be, substantially higher than our selling price, uncertainty surrounding the performance of any vehicle produced by us, meaningful exposure to material losses and costs related to ongoing litigation and the SEC investigation, the Nasdaq Notice, the market price of our stock and potential dilution from the issuance of any additional securities. 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 further curtail or cease operations and seek protection by filing a voluntary petition for relief under the Bankruptcy Code. If this were to occur, theThe value available to our various stakeholders, including our creditors and stockholders, is uncertain andhighly uncertain. The trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in bankruptcy proceedings,the Chapter 11 Cases, if any.
Notice
Reverse Stock Split
At the annual meeting of Non-Compliancestockholders held on May 22, 2023 (the “2023 Annual Meeting”), the stockholders of the Company approved a proposal to amend the Company’s Second Amended and Restated Certificate of Incorporation (the “Charter”) to effect a reverse split of the Company’s outstanding shares of Class A common stock at a ratio within a range of between 1:3 and 1:15, with the timing and the exact ratio of the reverse split to be determined by the Board of Directors of the Company (the “Board”) in its sole discretion. The Board authorized a 1:15 reverse stock split (the “Reverse Stock Split”) of the outstanding Class A common stock, which became effective as of 12:01 a.m. Eastern Time on May 24, 2023 (the “Effective Time”).
The Company filed a Certificate of Amendment (the “Amendment”) to the Charter on May 22, 2023, which provided that, at the Effective Time, every fifteen shares of the issued and outstanding Class A common stock would automatically be combined into one issued and outstanding share of Class A common stock.
The Reverse Stock Split was intended to improve the marketability and liquidity of the Class A common stock. In addition, the Reverse Stock Split was intended to increase the per share market price of the Class A common stock in order to satisfy the Minimum Bid Price Requirement. On June 7, 2023, the Company received a written notice from the Listing Qualifications Department of Nasdaq informing the Company that it had regained compliance with the Bid Price Requirement.
Nasdaq Delisting
On June 28, 2023, the Company received written notice from the Listing Qualifications Department of Nasdaq notifying the Company that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Requirements
On April 19, 2023, the Company was notified byRules 5101, 5110(b) and IM-5101-1, Nasdaq had determined that because the closing bid price for the Company’s Class A common stock had fallen below $1.00 per share for 30 consecutive business days (March 7, 2023 through April 18, 2023), the Company was no longer in compliancesuitable for listing on the Nasdaq Global Select Market. Trading of our Class A common stock was suspended at the opening of business on July 7, 2023 and a Form 25 was filed with the Bid Price Requirement.
Pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A), the Company has been provided with a compliance cure period of 180 calendar days, or until October 16,SEC on July 27, 2023 to regain compliance withdelist the Bid Price Requirement.Class A common stock from Nasdaq. We will remain subject to SEC reporting obligations.
The Company is currently evaluating various courses of action to regain compliance with the Bid Price Requirement, including implementing a reverse stock split if such action is authorized by the Company’s stockholders at its annual meeting of stockholders to be held on May 22, 2023.
See Note 9 – Subsequent Events – Nasdaq Notice for additional information.Delisting.
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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in Financial Statement Preparation
The preparation of condensed consolidated financial statements in accordance with GAAP is based on the selection and application of accounting policies that require us to make significant estimates and assumptions that affect the reported amounts in the consolidated financial statements, and related disclosures in the accompanying notes to the financial statements. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of changes are reflected in the condensed consolidated Financial Statements in the period they are determined to be necessary. The Chapter 11 Cases will result in continuous changes in facts and circumstances that will cause the Company’s estimates and assumptions to change, potentially materially. We undertake no obligation to update or revise any of the disclosures, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
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There have been no material changes to the critical accounting policies and estimates described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, except for the areas noted below, primarily driven by the filing of the Chapter 11 Cases.
Liabilities Subject to Compromise
As noted above, since filing the Chapter 11 petitions, the Company has operated as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. In the accompanying Balance Sheet, the “Liabilities subject to compromise” line is reflective of expected allowed claim amounts in accordance with ASC 852-10 and are subject to change materially based on the proceedings and continued consideration of claims that may be modified, allowed, or disallowed. Refer to Note 7 – Commitments and Contingencies for further detail.
Inventory and Inventory Valuation
Substantially all of the Company’s inventory is specific to the production of the Endurance and is stated at the lower of cost or net realizable value (“NRV”). NRV is the estimated value of the inventory in the context of the Chapter 11 Cases, which is minimal due to its unique nature. In addition to the NRV analysis, the Company recognizes an excess inventory reserve to adjust for inventory quantities in excess of anticipated Endurance production. As discussed above, the Company ceased production of the Endurance on June 30, 2023. Accordingly, NRV and excess inventory charges of $4.3 million and $24.1 million for the three and six months ended June 30, 2023, respectively, are recorded within Cost of Sales in the Company’s Condensed Consolidated Statement of Operations. No such charges were recognized for the three and six months ended June 30, 2022, as the Company had not yet commenced commercial production of the Endurance.
Property, plant and equipment
Property and equipment are stated at cost less accumulated depreciation and impairment charges. Depreciation is computed using the straight-line method over the estimated useful lives and residual values of the related assets. Upon retirement or sale, the cost and related accumulated depreciation and impairments are removed from the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repair expenditures are expensed as incurred, while major improvements that increase functionality of the asset are capitalized and depreciated ratably to expense over the identified useful life.
Due to the failure to identify a strategic partner for the Endurance, lack of expected funding and other support from Foxconn (as discussed in more detail above and elsewhere in this report) and extremely limited ability to raise sufficient capital in the current market environment, we determined it was in the best interests of the Company’s stakeholders to take aggressive actions to cut costs and preserve cash, file the Chapter 11 Cases and cease production of the Endurance and new program development.
Valuation of Long-Lived and Intangible Assets
Long-lived assets, such as property, plant, and equipment are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Asset impairment loss calculations require us to apply judgment in estimating asset group fair values and future cash flows, including periods of operation, projections of product pricing, production levels, product costs, market supply and demand, inflation, projected capital spending and, specifically for fixed assets acquired, assigned useful lives, residual values functional obsolescence, asset condition and discount rates. When performing impairment tests, we estimate the fair values of the assets using management’s best assumptions, which we believe would be consistent with the assumptions that a hypothetical marketplace participant would use. Estimates and assumptions used in these tests are evaluated and updated as appropriate. The assessment of whether an asset group should be classified as held and used or held for sale requires us to apply judgment in estimating the probable timing of the sale, and in testing for impairment loss, judgment is required in estimating the net proceeds from the sale. Actual asset impairment losses could vary considerably from estimated impairment losses if actual results are not consistent with the assumptions
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and judgments used in estimating future cash flows and asset fair values.
Cash, cash equivalents and short-term investments
Cash includes cash equivalents which are highly liquid investments that are readily convertible to cash. The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Our short-term investments consist primarily of liquid investment grade commercial paper, which are diversified among individual issuers, including non-U.S. governments, non-U.S. governmental agencies, supranational institutions, banks and corporations. The short-term investments are accounted for as available-for-sale securities. The settlement risk related to these investments is insignificant given that the short-term investments held are primarily highly liquid investment-grade fixed-income securities.
The Company maintains its cash in bank deposit and securities accounts that exceed federally insured limits. We have not experienced significant losses in such accounts and management believes it is not exposed to material credit risk.
Inventory and Inventory Valuation
Inventory is stated at the lower of cost or net realizable value. Net realizable value (“NRV”) is the estimated future selling price of the inventory in the ordinary course of business less cost to sell, and considers general market and economic conditions. A charge was also taken to adjust for inventory in excess of anticipated Endurance production. Due to the production delays from early January to mid-April 2023, the failure to identify a strategic partner for the Endurance, and extremely limited ability to raise capital in the current market environment, we anticipate production of the Endurance will cease in the near future. Therefore, the quantity we expect to produce and sell, along with inventory for future service and warranty parts is lower than previously anticipated.
The charges to reflect the NRV totaled $19.8 million for the three months ended March 31, 2023 and are recorded within Cost of Sales in the Company’s Condensed Consolidated Statement of Operations.
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Property, plant and equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation will be computed using the straight-line method over the estimated useful lives of the related assets.
Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repair expenditures are expensed as incurred, while major improvements that increase functionality of the asset are capitalized and depreciated ratably to expense over the identified useful life.
Valuation of Long-Lived and Intangible Assets
Long-lived assets, such as property, plant, and equipment are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Asset impairment calculations require us to apply judgment in estimating asset group fair values and future cash flows, including periods of operation, projections of product pricing, production levels, product costs, market supply and demand, inflation, projected capital spending and, specifically for fixed assets acquired, assigned useful lives, functional obsolescence, asset condition and discount rates. When performing impairment tests, we estimate the fair values of the assets using management’s best assumptions, which we believe would be consistent with the assumptions that a hypothetical marketplace participant would use. Estimates and assumptions used in these tests are evaluated and updated as appropriate. The assessment of whether an asset group should be classified as held and used or held for sale requires us to apply judgment in estimating the probable timing of the sale, and in testing for impairment loss, judgment is required in estimating the net proceeds from the sale. Actual asset impairment losses could vary considerably from estimated impairment losses if actual results are not consistent with the assumptions and judgments used in estimating future cash flows and asset fair values. Changes in these estimates and assumptions could materially affect the determination of fair value and any impairment charge.
For assets to be held and used, including identifiable intangible assets and long-lived assets subject to amortization, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of a long-lived asset subject to amortization is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Significant management judgment is required in this process. We recognizedThe uncertainties regarding the ability to determine the realizable value for our property, plant and equipment, including in light of the timing of the filing of the Chapter 11 Cases and lack of available reference data for market transactions, particularly with respect to Endurance-specific assets, resulted in a determination by the Company of the fair value of the assets based on their estimated residual or salvage values, which represent a range of 0% to 4% of original acquisition cost. This resulted in an impairment chargescharge of $109.8 million and $95.6$23.7 million for the three monthsquarter ended March 31, 2023 and forJune 30, 2023.
The Company also evaluated the year ended December 31, 2022. Nodecision to actively market the sale of its long-lived fixed asset impairment charges were recognized forassets in connection with the three months ended March 31, 2022.Chapter 11 Cases, against ASC 360-10-45-9 “Long-Lived Assets to Be Disposed of By Sale.” See Note 4 – Property, Plant and Equipment and Assets Held for Sale for details regarding our impairment.impairment assessment and classification of assets held for sale.
Warrants
In November 2019, the Company entered intoAs a transaction with Workhorse Group Inc. (“Workhorse Group”), for the purpose of obtaining certain intellectual property. In connection with granting this license, Workhorse Group received 10%result of the outstanding Legacy Lordstown common stock, valued at $11.1 million, and was entitled to royalties of 1% ofChapter 11 Cases, the gross sales price of the first 200,000 vehicle sales.
In November 2020, we prepaid the royalty payment to Workhorse Group in the amount of $4.75 million, representing an advance on the royalties discussed above, but only to the extent that the aggregate amount of such royalty fees exceeded the amount paid upfront.
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During the year ended December 31, 2021, we continued to refine the design of the Endurance and considered technologies we would use in future vehicles. Given the technology used in the Endurance and new management’s strategic direction of the Company, inclusive of the transactions contemplated with Foxconn as detailed in Note 1 – Description of Organization and Business Operations, we deemed it appropriate to change the useful life of the intellectual property license we acquired to zero months. As such, we recorded accelerated amortization of $11.1 million during the year ended December 31, 2021.
Given that Workhorse Group technology is not being used in the Endurance and our strategic direction, inclusive of the transactions contemplated with Foxconn, we deemed it appropriate to terminate the royalty agreement. As such, we recorded a charge of $4.75 million during the year ended December 31, 2022 to write-off the prepaid royalty.
In August 2021, the Company entered into an agreement to purchase a perpetual software license related to manufacturing execution system for a cost of $1.0 million. As of December 31, 2022, with the Company’s current strategic direction, it was determined that this software will not be utilized for the manufacturing of Endurance and therefore full impairment of $1.0 million was recorded for the period ended December 31, 2022.
Research and development costs
The Company expenses research and development costs as they are incurred. Research and development costs consist primarily of personnel costs for engineering, testing and manufacturing costs, along with expenditures for prototype manufacturing, testing, software subscriptions for computer-aided engineering and product lifecycle management validation, certification, contract and other professional services and costs associated with operating the Lordstown facility, prior to its sale.
Stock-based compensation
The Company’s stock incentive plan offers stock options, Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”). The Company recognizes share based compensation expense over a defined vesting period for the entire award. We estimate forfeitures based on actual historical forfeitures. The fair value for stock options is determined using the Black-Scholes option pricing models, which incorporates assumptions regarding the expected volatility, expected option life and risk-free interest rate. The grant date fair value of RSUs are calculated using the closing market price of the Company’s Class A common stock.
Warrants
The Company accounts for the Private Warrants (as defined below)warrants was deemed to be zero and the Foxconn Warrantsadjusted accordingly as described in Note 3 – Fair Value Measurements in accordance with the guidance contained in ASC Topic 815-40-15-7D and 7F under which these Warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company classifies these warrants as liabilities at their fair value at each reporting period or at the time of settlement. Any change in fair value is recognized in the statement of operations.
June 30, 2023.
The Company accounts for the BGL Warrants (as defined below) as equity as these warrants qualify as share-based compensation under ASC Topic 718.
Income taxes
Income taxes are recorded in accordance with ASC Topic 740, Income Taxes (“ASC Topic 740”). Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has recorded a full valuation allowance against its deferred tax assets.
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The Company accounts for uncertain tax positions in accordance with the provisions of ASC Topic 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. The Company recognizes any interest and penalties accrued related to unrecognized tax benefits as income tax expense.
Recently issued accounting pronouncements
There are no recently issued, but not yet adopted, accounting pronouncements which are expected to have a material impact on the Company’s Condensed Financial Statements and related disclosures.
NOTE 3 — FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The Company follows the accounting guidance in ASC Topic 820, Fair Value Measurements (“ASC Topic 820”) for its fair value measurements of financial assets and liabilities measured at fair value on a recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tiered fair value hierarchy, which prioritizes when inputs should be used in measuring fair value, is comprised of: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than quoted prices in active markets that are observable either directly or indirectly and (Level III) unobservable inputs for which there is little or no market data. The fair value hierarchy requires the use of observable market data when available in determining fair value.
The Company has short-term investments which are primarily commercial paper that are classified as Level II. The valuation inputs for the short-term investments are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets.
The Company has issued the following warrants:warrants (with exercise prices shown in pre-Reverse Stock Split amounts): (i) warrants (the “Public Warrants”) to purchase shares of Class A common stock with an exercise price of $11.50 per share, (ii) warrants (the “Private Warrants”) to purchase Class A common stock with an
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exercise price of $11.50 per share, (iii) warrants (the “BGL Warrants”) to purchase Class A common stock with an exercise price of $10.00 per share, and (iv) the Foxconn Warrants to purchase shares of Class A common stock with an exercise price of $10.50. The BGL Warrants were issued as part of the Business Combination in October 2020, which are set to expire in October 2023, are classified as equity as they qualify as share-based compensation under ASC Topic 718, Compensation – Stock Compensation (“ASC Topic 718”).
The PublicAs of June 30, 2023, following the Reverse Stock Split, we had 0.113 million Foxconn Warrants and thewith an exercise price of $157.50, 0.153 million Private Warrants were recorded in the Company’s Condensed Financial Statements aswith a resultstrike price of the Business Combination between DiamondPeak$172.50 and Lordstown EV Corporation (formerly known as Lordstown Motors Corp.) and the reverse recapitalization that occurred on October 23, 2020 and did not impact any reporting periods prior to the Business Combination. The Company determined that the fair value0.107 million BGL Warrants with a strike price of the Public Warrants and Private Warrants was $100.9 million as of the date of the Business Combination.
$150.00 outstanding. As of March 31, 2023,June 30, 2022, on a pre-Reverse Stock Split basis, we had 1.7 million Foxconn Warrants,outstanding 2.3 million Private Warrants and 1.6 million BGL Warrants outstanding.
As of March 31, 2022, we had 2.3 million Private Warrants, 1.6 million BGL Warrants outstanding and no Public Warrants outstanding.
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Warrants. The fair value of the Foxconn Warrants was $0.3 million at issuance. The Private Warrants and the Foxconn Warrants arewere classified as a liability with any changes in the fair value recognized immediately in our condensed consolidated statements of operations.
The As a result of the Chapter 11 Cases, the fair value of the Company’s warrants was deemed to be zero and adjusted accordingly as of June 30, 2023.The following table summarizes the net loss (gain)gain on changes in fair value (in thousands) related to the Private Warrants and the Foxconn Warrants:
| | | | | | | | | | | | | |||||||
| | | | | | | | (in thousands) | |||||||||||
| | Three months ended | | Three months ended | | Three months ended | | Three months ended | | Six months ended | | Six months ended | |||||||
| | March 31, 2023 | | March 31, 2022 | | June 30, 2023 | | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 | ||||||
Private Warrants | | | (231) | | | (1,520) | | $ | 27 | | $ | 1,797 | | $ | 254 | | $ | 277 | |
Foxconn Warrants | | | (136) | | | — | | | 34 | | | — | | | 170 | | | — | |
Net gain (loss) on changes in fair value | | $ | (367) | | $ | (1,520) | |||||||||||||
Net gain on changes in fair value | | $ | 61 | | $ | 1,797 | | $ | 424 | | $ | 277 | |||||||
Observed prices for the Public Warrants are used as Level 1 inputs as they were actively traded until being redeemed in January 2021. The Private Warrants and the Foxconn Warrants arewere measured at fair value using Level 3 inputs. These instruments are not actively traded and arewere valued as of June 30, 2022 using a Monte Carlo option pricing model and Black-Scholes option pricing model, respectively, that use observable and unobservable market data as inputs.
A Monte Carlo model was used to simulate a multitude of price paths to measure fair value of the Private Warrants. The Monte Carlo model simulates risk-neutral stock price paths utilizing two parameters – a drift term (based on the risk-free rate and assumed volatility) and an error term (determined using a random number and assumed volatility). This analysis simulates possible paths for the stock price over the term of the Private Warrants. For each simulated price path, we evaluate the conditions under which the Company could redeem each Private Warrant for a fraction of whole shares of the underlying as detailed within the applicable warrant agreement. If the conditions are met, we assume redemptions would occur, although the Private Warrant holders would have the option to immediately exercise if it were more advantageous to do so. For each simulated price path, if a redemption does not occur the holders are assumed to exercise the Private Warrants if the stock price exceeds the exercise price at the end of the term. Proceeds from either the redemption or the exercise of the Private Warrants are reduced to a present value amount at each measurement date using the risk-free rate for each simulated price path. Present value indications from iterated priced paths were averaged to derive an indication of value for the Private Warrants.
The Foxconn Warrants do not have any redemption features and their fair value was measured using the Black-Scholes closed-form option pricing model. Inputs to the model include remaining term, prevailing stock price, strike price, risk-free rate, and volatility.
The stock price volatility ratesrate utilized were 90% andwas 80%, respectively, for the valuationsvaluation as of March 31, 2023 and March 31,June 30, 2022. This assumption considersconsidered observed historical stock price volatility of other companies operating in the same or similar industry as the Company over a period similar to the remaining term of the Private Warrants, and the Foxconn Warrants, as well as the volatility implied by the traded options of the Company. The risk-free ratesrate utilized were 3.819% andwas 2.454% for the valuations as of March 31, 2023 and March 31, 2022, respectively,valuation for the Private Warrants. three and six months ended June 30, 2022.
The risk-free rate utilized forfollowing tables summarize the valuation of the Foxconn Warrants as of three months ended March 31, 2023 was 3.896%.our financial instruments (in thousands):
| | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | Total |
| Quoted prices in |
| Prices with |
| Prices with unobservable inputs | ||||
June 30, 2023 | | | | | | | | | | | | | | | |||||
Cash and cash equivalents | | | | | | | | | $ | 115,732 | | $ | 115,732 | | $ | — | | $ | — |
Short-term investments | | | | | | | | | | 22,000 | | | — | | | 22,000 | | | — |
Private Warrants | | | | | | | | | | — | | | — | | | — | | | — |
Foxconn Warrants | | | | | | | | | | — | | | — | | | — | | | — |
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The following tables summarize the valuation of our financial instruments (in thousands):
| | | | | | | | | | | | |
|
| Total |
| Quoted prices in |
| Prices with |
| Prices with unobservable inputs | ||||
March 31, 2023 | | | | | | | | |||||
Cash and cash equivalents | | $ | 108,086 | | $ | 108,086 | | $ | — | | $ | — |
Short-term investments | | | 68,589 | | | — | | | 68,589 | | | — |
Private Warrants | | | 23 | | | — | | | — | | | 23 |
Foxconn Warrants | | | 34 | | | — | | | — | | | 34 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Total |
| Quoted prices in |
| Prices with |
| Prices with unobservable inputs |
| | | | | | | Total |
| Quoted prices in |
| Prices with |
| Prices with unobservable inputs | |||||||||
December 31, 2022 | | | | | | | | | | | | | | | | | | | | | |||||||||||
Cash and cash equivalents | | $ | 121,358 | | $ | 121,358 | | $ | — | | $ | — | | | | | | | | $ | 121,358 | | $ | 121,358 | | $ | — | | $ | — | |
Short-term investments | | | 100,297 | | | — | | | 100,297 | | | — | | | | | | | | | 100,297 | | | — | | | 100,297 | | | — | |
Private Warrants | | | 254 | | | — | | | — | | | 254 | | | | | | | | | 254 | | | — | | | — | | | 254 | |
Foxconn Warrants | | | 170 | | | | | | | | | 170 | | | | | | | | | 170 | | | | | | | | | 170 | |
The following table summarizes the changes in our Level 3 financial instruments (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Balance at December 31, 2022 | Additions | Settlements | Loss on fair |
| Balance at March 31, 2023 |
| | | | | | | Balance at December 31, 2022 |
| Additions |
| Settlements |
| Loss on fair |
| Balance at June 30, 2023 | ||||||||||||||
Private Warrants | | $ | 254 | | | — | | | — | | | (231) | | $ | 23 | | | | | | | | $ | 254 | | | — | | | — | | | 254 | | $ | — | |
Foxconn Warrants | | | 170 | | | | | | — | | | (136) | | | 34 | | | | | | | | | 170 | | | | | | — | | | 170 | | | — | |
Non-Recurring Fair Value Measurements
At June 30, 2023, the Company had assets held for sale that have been adjusted to their fair value as the carrying value exceeded the estimated fair value. The categorization of the framework used to value the assets is Level 3 given the significant unobservable inputs used to determine fair value. During the three months ended June 30, 2023, we recorded a loss on asset impairment of $23.7 million related to the valuation of assets held for sale. Refer to Note 4 – Property, Plant and Equipment and Assets Held for Sale for further detail.
NOTE 4 — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net of impairment charges, consisted of the following (in thousands): AND ASSETS HELD FOR SALE
| | | | | | |
| | March 31, 2023 | | December 31, 2022 | ||
Property, Plant & Equipment | | | | | | |
Land | | $ | — | | $ | — |
Buildings | | | — | | | — |
Machinery and equipment | | | 20,384 | | | 41,143 |
Tooling | | | 59,602 | | | 119,735 |
Construction in progress | | | 14,287 | | | 41,378 |
| | $ | 94,273 | | $ | 202,256 |
Less: Accumulated depreciation | | | (16,150) | | | (8,476) |
Total | | $ | 78,123 | | $ | 193,780 |
We outsource all of the manufacturing of the Endurance and operation of certain remaining assets to Foxconn under the Contract Manufacturing Agreement.
During the year ended December 31, 2022, the Company sold its manufacturing facility, certain equipment, and other assets located in Lordstown, Ohio and recorded a gain of $100.9 million. We continue to own our hub motor assembly line, as well as our battery module and pack line assets, certain tooling and other excluded assets. Construction in progress as of March 31, 2023 primarily includes certain production equipment and tooling and uninstalled equipment acquired for higher capacity production and general assets the Company's facility in Lordstown, Ohio and tooling held at various supplier locations.
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We continue to evaluate the merits of producing and selling vehicles to customers in order to seed the commercial fleet market, demonstrate the capabilities of the Endurance, and support our OEM partnership pursuits. Due to the production delays from early January to mid-April 2023, the failure to identify a strategic partner for the Endurance, lack of expected funding and other support from Foxconn (as discussed in more detail above and elsewhere in this report) and extremely limited ability to raise sufficient capital in the current market environment, we anticipatedetermined it was in the best interests of the Company’s stakeholders to take aggressive actions to cut costs and preserve cash, file the Chapter 11 Cases and cease production of the Endurance will cease inand new program development.
During the near future. Asfirst quarter of March 31, 2023, the Company determined that there was substantial doubt in our abilitylowered Endurance production targets, accelerating the depreciable lives of its manufacturing assets to continue as a going concern. As substantially all of our fixed assets supportJuly 31, 2023. Consistent with the decision to cease production of the Endurance as of June 30, 2023, the Company periodically reviews its fixed asset useful livesrecognized an impairment charge of $23.7 million for depreciation purposes and for potential impairment.
In light of the fact that we anticipate production ofquarter. Prior to the Endurance will cease inquarterly impairment analysis, as discussed below, the near future, the Company has revised its estimate of the useful life of manufacturing assets, shortening the depreciation period to July 31, 2023. Accordingly, as of April 1, 2023 depreciation on these assets was revised to account for this change in estimate that will result in substantially higher depreciation beginning in the second quarter of 2023.
As of March 31, 2023,Company’s property, plant and equipment, net of depreciation and prior period impairments, was reviewed for potential impairment for recoverability by comparing the carrying amount of our asset group to estimated undiscounted future cash flows expected to be generated by the asset group. $30.6 million.
The Company has determined that all ourits property, plant, and equipment represent one asset group which is the lowest level for which identifiable cash flows are available. As the carrying amount of our asset group exceeded its estimated undiscounted future cash flows for the three months ended March 31, 2023, we recognized an impairment charge of $109.8 million for the three months ended March 31, 2023 based on the difference between the carryingHistorically, fair value of the fixed assetsCompany’s property, plant, and their fair value as of March 31, 2023. No fixed asset impairment charges were recognized for the three months ended March 31, 2022. The fair valueequipment was derived from the Company's enterprise value at the time of impairment as we believethe Company believed it representsrepresented the most appropriate fair value of the asset group in accordance with accounting guidance. In particular,However, since the Company’s abilitycash balances exceeded its market capitalization as of June 30, 2023, the Company determined that continuing the impairment analysis based on enterprise value was not appropriate. In light of the Chapter 11 Cases, as discussed above, the Company valued its property, plant and equipment based on its estimate of residual and salvage values, resulting in an impairment charge of $23.7 million.
In conjunction with the Chapter 11 Cases, the Company commenced a comprehensive marketing and sale process for the Endurance and related assets to raise capitalmaximize the value of those assets. The Company evaluated this decision against ASC 360-10-45-9 “Long-Lived Assets to Be Disposed of By Sale” and determined that all criteria were met to present property, plant and equipment as “assets held for sale”, as of June 30, 2023. Based on the fact that there are significant unobservable inputs used to determine fair value,
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this is currently severely limited duecategorized as a Level 3 fair value measurement, Specifically, in this case since the assets were in most cases considered “Endurance-specific,” the estimates were primarily focused on residual or salvage value where appropriate. As noted above, the Company has already recorded an impairment charge to reduce the assets to the currentlower of carrying or fair value less costs to sell. In light of these uncertainties, limited market environmentdata and Company-specific factors. Therefore, notwithstanding management’s plansestimates used in the valuation, the assets included in this report or in any filing we make with the Bankruptcy Court may not reflect the fair values thereof during the pendency of or following the Chapter 11 Cases or the value of our assets in an organized sale process, and efforts to date, there continues tosuch values may be substantial doubt about the Company’s ability to continuehigher or lower as a going concern. 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 further curtail or cease operations and seek protection by filing a voluntary petition for relief under the Bankruptcy Code. If this were to occur, significant additional impairments may result. Furthermore, the value available to our various stakeholders, including our creditors and stockholders, is uncertain and trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in bankruptcy proceedings, if any.
NOTE 5 – MEZZANINE EQUITY
On November 7, 2022, the Company issued 0.3 million shares of Preferred Stock for $100 per share to Foxconn, resulting in gross proceeds of $30 million.
In addition, following the parties’ agreement to the EV Program budget and the EV Program milestones and satisfaction of those EV Program milestones and other conditions set forth in the Investment Agreement, Foxconn iswas to purchase in two tranches, a total of 0.7 million additional shares of Preferred Stock at a purchase price of $100 per share for aggregate proceeds of $70 million.
The first tranche willwould be in an amount equal to 0.3 million shares for an aggregate purchase price of $30 million; the second tranche willwould be in an amount equal to 0.4 million shares for an aggregate purchase price of $40 million. The parties agreed to use commercially reasonable efforts to agree upon the EV Program budget and EV Program milestones no later than May 7, 2023.
The completion of the Subsequent Preferred Funding would providehave provided critical liquidity for the Company’s operations. OnSince April 21, 2023, the Company received the Foxconn Notice asserting the Company had breachedhas disputed its obligations under the Investment Agreement and purporting to terminateconsummate the Investment Agreement if the breach is not cured within 30 days. The Company has notified Foxconn in writing that (1) it believes the breach allegations in the Foxconn Notice are without merit, (2) the Investment Agreement, by its terms, does not
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permit Foxconn to terminate it following the InitialSubsequent Common 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 Subsequent Preferred Funding. On May 1, 2023, after having publicly disclosed the Foxconn Notice,initially asserted that the Company receivedwas in breach of the SecondInvestment Agreement due to the Company’s previously disclosed receipt of the Nasdaq Notice regarding the Bid Price Requirement. As previously disclosed, Foxconn Notice (1) indicating that Foxconn agrees that it is unablepurported to terminate the Investment Agreement after the Initial Closing, (2) assertingif that the Nasdaq Notice constitutes apurported breach of a representation that is a condition to the Subsequent Common Closing and, therefore, Foxconn iswas not obligated to consummate the Subsequent Common Closing until such breach is cured and (3) asserting that the Company’s claims regarding Foxconn’s breach of the Investment Agreement with respect to the EV Program and Subsequent Preferred Funding are without merit.within 30 days.
The Company continues to believe that the breach allegations by Foxconn are without merit, and that Foxconn iswas obligated to complete the Subsequent Common Closing on or before May 8, 2023. TheDespite the Company intendstaking action to enforce its contractual rightssatisfy the Bid Price Requirement as of June 7, 2023, and remedies underdiscussions between the Investment Agreement, including with respect to Foxconn’s breach regarding the EV Program budget and EV Program milestones, its Subsequent Preferred Funding obligations and its knowing and intentional efforts to invalidly terminate the Investment Agreement without any basis and withhold critical funding to the material detriment of the Company.
The Company is in discussions with Foxconnparties to seek a resolution regarding these matters; however, to date, the parties are at an impasse andInvestment Agreement, Foxconn has indicated that it doesdid not intend the closeproceed with the Subsequent Common Closing on May 8, 2023 and we do not expect Foxconn to provide its approval to the EV Program budget and EV Program milestones by May 7, 2023. No assurances can be given that the parties will reach a resolution of these matters or that any such resolution will allow the Subsequent Preferred Funding to occur onFunding. As a timely basis. If such funding does not occur,result of Foxconn’s actions, the Company will behas been deprived of critical funding necessary for its operations.
On June 27, 2023, the Company filed its Chapter 11 Cases and on that same date the Company commenced the Foxconn Litigation in the Bankruptcy Court seeking relief for fraudulent and tortious conduct as well as breaches of the Investment Agreement, the parties’ joint venture agreement, the APA, and the CMA that the Company believes were committed by Foxconn. As set forth in the complaint relating to the adversary proceeding, Foxconn’s actions have caused substantial harm to the Company’s operations and prospects and significant damages. See “Foxconn Transactions” above and Note 7 – Commitments and Contingencies for additional information. The Foxconn Litigation is Adversary Case No. 23-50414.
The descriptions herein with respect to the Preferred Stock and any rights thereunder do not account for the potential effects of the Chapter 11 Cases or the Foxconn Litigation on the Preferred Stock or any rights thereunder. The Company is evaluating its legalreserves all claims, defenses, and financial alternatives inrights with respect to the eventChapter 11 Cases, the Foxconn Litigation, the Preferred Stock, and any treatment of Preferred Stock or other interests held by Foxconn or any other party. Among other things, the Foxconn Litigation includes a resolution isclaim to subordinate Foxconn’s Preferred Stock and the descriptions below do not reached.account for the impact of that relief should it be granted.
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The Preferred Stock, with respect to dividend rights, rights on the distribution of assets on any liquidation, dissolution or winding up of the affairs of the Company and redemption rights, ranks: (a) on a parity basis with each other class or series of any equity interests (“Capital Stock”) of the Company now or hereafter existing, the terms of which expressly provide that such class or series ranks on a parity basis with the Preferred Stock as to such matters (such Capital Stock, “Parity Stock”); (b) junior to each other class or series of Capital Stock of the Company now or hereafter existing, the terms of which expressly provide that such class or series ranks senior to the Preferred Stock as to such matters (such Capital Stock, “Senior Stock”); and (c) senior to the Class A common stock and each other class or series of Capital Stock of the Company now or hereafter existing, the terms of which do not expressly provide that such class or series ranks on a parity basis with, or senior to, the Preferred Stock as to such matters (such Capital Stock, “Junior Stock”). While Foxconn’s beneficial ownership of our Class A common stock meets the 25% Ownership Requirement (defined below), Parity Stock and Senior Stock can only be issued with Foxconn’s consent.
InThe Certificate of Designation provides that, in the event of any liquidation, dissolution or winding up of the affairs of the Company, the holders of Preferred Stock are entitled, out of assets legally available therefor, before any distribution or payment to the holders of any Junior Stock, and subject to the rights of the holders of any Senior Stock or Parity Stock and the rights of the Company’s existing and future creditors, to receive in full a liquidating distribution in cash and in the amount per share of Preferred Stock equal to the greater of (1) the sum of $100$100 per share plus the accrued unpaid dividends with respect to such share, and (2) the amount the holder would have received had it converted such share into Class A common stock immediately prior to the date of such event.
All holders of shares of Preferred Stock are entitled to vote with the holders of Class A common stock on all matters submitted to a vote of stockholders of the Company as a single class with each share of Preferred Stock entitled to a number of votes equal to the number of shares of Class A common stock into which such share could then be converted; provided, that no holder of shares of Preferred Stock will be entitled to vote to the extent that such holder would have the right to a number of votes in respect of such holder’s shares of Class A common stock, Preferred Stock or other capital stock that would exceed the limitations set forth in clauses (i) and (ii) of the definition of Ownership Limitations.
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Pursuant to theThe Certificate of Designation provides that, commencing on the later of (1) May 7, 2023, and (2) the earlier of (x) the date of the Subsequent Common Closing and (y) November 7, 2023 (the “Conversion Right Date”), and subject to the Ownership Limitations, the Preferred Stock is convertible at the option of the holder into a number of shares of Class A common stock obtained by dividing the sum of the liquidation preference (i.e., $100 per share) and all accrued but unpaid dividends with respect to such share as of the applicable conversion date by the conversion price as of the applicable conversion date. The conversion price currently is $1.936$29.04 per share and it is subject to customary adjustments. At any time following the third anniversary of the date of issuance, the Company can cause the Preferred Stock to be converted if the volume-weighted average price of the Class A common stock exceeds 200% of the Conversion Price for a period of at least twenty trading days in any period of thirty consecutive trading days. Foxconn’s ability to convert is limited by clauses (i) and (ii) of the definition of the Ownership Limitations.
Upon a change of control, Foxconn can cause the Company to purchase any or all of its Preferred Stock at a purchase price equal to the greater of its liquidation preference (including any unpaid accrued dividends) and the amount of cash and other property that it would have received had it converted its Preferred Stock prior to the change of control transaction (the “Change of Control Put”).
The terms of the Company’s Preferred Stock do not specify an unconditional obligation of the Company to redeem the Preferred Stock on a specific or determinable date, or upon an event certain to occur. The Company notes the Change of Control Put; however, this is contingent on the occurrence of the change of control event, which is not a known or determinable event at time of issuance. Therefore, the Preferred Stock is not considered to be mandatorily redeemable. The conversion of the Preferred Stock is based on fixed conversion price rather than a fixed conversion amount. The value of the Preferred Stock obligation would not vary based on something other than the fair value of the Company’s equity shares or change inversely in relation to the fair value of the Company’s equity shares. Based on these factors, Preferred Stock does not
23
require classification as a liability in accordance with the provisions in ASC 480 “Distinguishing Liabilities from Equity”.
The Preferred Stock is not redeemable at a fixed or determinable date or at the option of the holder. However, the Preferred Stock does include the Change of Control Put, which could allow the holder to redeem the Preferred Stock upon the occurrence of an event. As the Company cannot assert control over any potential event which would qualify as a change of control, the event is not considered to be solely within the control of the issuer, and would require classification in temporary equity (as per ASC 480-10-S99-3A(4)). Accordingly, the Preferred Stock is classified as temporary equity and is separated from permanent equity on the Company’s Balance Sheet.
The Company believes that the transaction price associated with the sale of the Preferred Stock to Foxconn is representative of fair value and will be the basis for initial measurement.
The Preferred Stock issued by the Company accrues dividends at the rate of 8% per annum whether or not declared and/or paid by the Company (cumulative dividends). In addition, the dividends will compound on a quarterly basis (upon each Preferred Dividend Payment Date (as defined in the Certificate of Designation, Preferences and Rights of the Series A Convertible Preferred Stock filed by the Company with the Secretary of State of the State of Delaware (the “Certificate of Designations”))) to the extent they are not paid by the Company. The Company records the dividends (effective PIK dividends) as they are earned, based on the fair value of the Preferred Stock at the date they are earned.In addition, the holders of the Preferred Stock participate with any dividends payable in respect of any Junior Stock or Parity Stock. For the yearthree and six month periods ended December 31, 2022, and quarter ended March 31,June 30, 2023 the Company accrued $0.3$0.6 million and $0.6$1.2 million in dividends, respectively, which represents the estimated fair value to Preferred Stock with a corresponding adjustment to additional-paid-in-capital common stock in the absence of retained earnings.
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While the Company concluded above that accretion to redemption value of the Preferred Stock was not required as the Preferred Stock is not currently redeemable or probable of becoming redeemable, it is noted that the recognition of the dividends will not necessarily reflect the redemption value at any time (given the ‘greater of’ language included as part of the determination of redemption value per above).As of March 31,June 30, 2023, the Company doesdid not consider change of control to be probable. The Chapter 11 Cases and the Foxconn Litigation were filed just prior to the June 30, 2023 determination date and in light of the significant uncertainty with respect to the process to be undertaken and any potential outcome of the Chapter 11 Cases and the Foxconn Litigation, this determination does not take into account any potential impact thereof. The Company reserves all rights with respect to the amounts and the effects of the Chapter 11 Cases and the Foxconn Litigation.
NOTE 6 — CAPITAL STOCK AND LOSS PER SHARE
On August 17, 2022, the Company held a special meeting of stockholders whereby our stockholders voted to amend the Company’s second amended and restated certificate of incorporation, as amended (the “Charter”) Charter to increase our authorized shares of capital stock from 312 million to 462 million, consisting of (i) 450 million shares of Class A common stock and (ii) 12 million shares of preferred stock, each with a par value of $0.0001.
At the 2023 Annual Meeting, the stockholders of the Company approved a proposal to amend the Charter to effect a reverse split of the Company’s outstanding shares of Class A common stock at a ratio within a range of between 1:3 and 1:15, with the timing and the exact ratio of the reverse split to be determined by the Board in its sole discretion. The Board authorized the Reverse Stock Split at a 1:15 ratio, which became effective as of 12:01 a.m. Eastern Time on May 24, 2023, or the Effective Time.
The Company filed the Amendment to the Charter on May 22, 2023, which provided that, at the Effective Time, every fifteen shares of the issued and outstanding Class A common stock would automatically be combined into one issued and outstanding share of Class A common stock.
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We had 239.016.0 million and 238.915.9 million shares of Class A common stock issued and outstanding as of March 31,June 30, 2023, and December 31, 2022, respectively, andafter giving effect to the Reverse Stock Split. We had 0.3 million shares of Preferred Stock issued and outstanding as of each of March 31,June 30, 2023 and December 31, 2022. FASB ASC Topic 260, Earnings Per Share, requires the presentation of basic and diluted earnings per share (“EPS”). Basic EPS is calculated based on the weighted average number of shares outstanding during the period. Dilutive EPS is calculated to include any dilutive effect of our share equivalents.
The weighted-average number of shares outstanding for basic and diluted loss per share of Class A common stock is as follows (in thousands):follows:
| | | | | | | | | ||||
| | | | | | (in thousands) | ||||||
| | Three months ended | | Three months ended | | Three months ended | | Three months ended | | Six months ended | | Six months ended |
|
| March 31, 2023 |
| March 31, 2022 |
| June 30, 2023 |
| June 30, 2022 |
| June 30, 2023 |
| June 30, 2022 |
Basic weighted average shares outstanding | | 239,754 | | 196,503 | | 15,940 | | 13,388 | | 15,936 | | 13,245 |
Diluted weighted average shares outstanding | | 239,754 | | 196,503 | | 15,940 | | 13,401 | | 15,936 | | 13,245 |
The following outstanding potentially dilutive Class A common stock equivalents have beenFor the three and six months ended June 30, 2023 and for the six months ended June 30, 2022 share awards and warrants were excluded from the computationcalculation of diluted net lossearnings per share attributableas their inclusion would have been anti-dilutive.
For the three months ended June 30, 2022, the calculation of diluted weighted average shares outstanding included, on a pre-Reverse Stock Split basis, 0.2 million share awards,1.6 million BGL Warrants, 2.3 million Private Warrants, and 1.7 million Foxconn Warrants outstanding. For the three months ended June 30, 2022, the calculation of diluted weighted average shares outstanding included 0.2 million shares (on a pre-Reverse Stock Split basis) related to Class A common stock stockholders for the periods presented due to their anti-dilutive effect (in thousands):share awards.
| | | | | | |
| | | Three months ended | |
| Three months ended |
| | | March 31, 2023 | | | March 31, 2022 |
Foxconn Preferred Stock | | | 15,943 | | | — |
Share awards | | | 102 | | | 3,862 |
Foxconn Warrants | | | 1,700 | | | — |
BGL Warrants | | | 1,649 | | | 1,649 |
Private Warrants | | | 2,314 | | | 2,314 |
Total | | | 21,708 | | | 7,825 |
Investment Transactions
On November 7, 2022, the Company entered into the Investment Agreement under which Foxconn agreed to make additional equity investments (collectively, the “Investment Transactions”) in the Company through the purchase of $70 million of Class A common stock and up to $100 million in Preferred Stock, (together with the Class A common stock, the “Securities”), subject to certain conditions, including, without limitation, regulatory approvals and satisfaction of certain EV Program budget and EV Program milestones established by the parties.
The Company willcan use any proceeds from the sale of the Class A common stock for general corporate purposes as determined by the Company’s Board of Directors (the “Board”) and the proceeds from the sale of the Preferred Stock iswas to be limited to funding the EV Program or any substitute or replacement electric vehicle program as agreed to by Foxconn and the Company.
Investment Agreement
On November 22, 2022, the Company completed the Initial Closing under the Investment Agreement, at which Foxconn purchased (a) approximately 12.91.8 million shares of Class A common stock at a purchase
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price of $1.76$26.40 per share (such amounts give effect to the Reverse Stock Split), and (b) 0.3 million shares of Preferred Stock at a purchase price of $100 per share, for an aggregate purchase price of approximately $52.7 million.
The Investment Agreement providesprovided for the Subsequent Common Closing, at which time Foxconn iswas required to purchase approximately 26.9 million shares10% of the Class A common stock for approximately $47.3 million. The Subsequent Common Closing is to occur within 10 business days following the parties’ receipt of CFIUS Clearance and subject to satisfaction of the other conditions set forth in the Investment Agreement (which the Company believes have been or will be satisfied). CFIUS Clearance was received on April 25, 2023, which means the Subsequent Common Closing is to occur on or before May 8, 2023. The Company iswas ready, willing and able to complete the Subsequent Common Closing on a timely basis.
In addition, following the parties’ agreement to the EV Program budget and the EV Program milestones and satisfaction such milestones and other conditions set forth in the Investment Agreement, Foxconn iswas to
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purchase in the Subsequent Preferred Funding two tranches equal to 0.7 million additional shares of Preferred Stock at a purchase price of $100 per share for aggregate proceeds of $70 million. The parties agreed to use commercially reasonable efforts to agree upon the EV Program budget and EV Program milestones no later than May 7, 2023.
On April 21, 2023, the Company received the Foxconn Notice (1) asserting that the Company was in breach of the Investment Agreement due to its previously disclosed receipt of the Nasdaq Notice indicating that the Company was no longer in compliance with the Bid Price Requirement (see – Note 9 – Subsequent Events – Nasdaq Notice) and (2) purporting to terminate the Investment Agreement if the breach is not cured within 30 days. In response, the Company notified Foxconn in writing on April 25, 2023 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 Subsequent Preferred Funding.
On May 1, 2023, after having publicly disclosed the Foxconn Notice, the Company received the Second Foxconn Notice (1) indicating that Foxconn agrees that it is unable to terminate the Investment Agreement after the Initial Closing, (2) asserting that the Nasdaq Notice constitutes a breach of a representation that is a condition to the Subsequent Common Closing and, therefore, Foxconn is not obligated to consummate the Subsequent Common Closing until such breach is cured, and (3) asserting that the Company’s claims regarding Foxconn’s breach of the Investment Agreement with respect to the EV Program and Subsequent Preferred Funding are without merit.
The Company continues to believe that the breach allegations by Foxconn are without merit, and Foxconn is obligated to complete the Subsequent Common Closing on or before May 8, 2023. The Company intends to enforce its contractual rights and remedies under the Investment Agreement, including with respect to Foxconn’s breach regarding the EV Program budget and EV Program milestones, its funding obligations and its knowing and intentional efforts to invalidly terminate the Investment Agreement without any basis and withhold critical 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, the parties are at an impasse and Foxconn has indicated that it does not intend the close the Subsequent Common Closing on May 8, 2023 and we do not expect Foxconnfailed to provide its approval to the EV Program budget and EV Program milestones by May 7, 2023. No assurances can be given that the parties will reach a resolution of these matters or that any such resolution will allowproceed with the Subsequent Common Closing or theany Subsequent Preferred Funding to occur onFunding. As a timely basis. If the Subsequent Common Closing is delayed or such fundings do not occur,result of Foxconn’s actions, the Company will behas been deprived of critical funding necessary for its operations. The Company is evaluating its legal and financial alternativescommenced the Foxconn Litigation in the event a resolution is not reached.Bankruptcy Court seeking relief for fraudulent and tortious conduct as well as breaches of the Investment Agreement, the parties’ joint venture agreement, the APA, and the CMA that the Company believes were committed by Foxconn. As set forth in the complaint relating to the adversary proceeding, Foxconn’s actions have caused substantial harm to the Company’s operations and prospects and significant damages. See Note 1 – Description of Organization and Business Operations – Description of Business and Note 7 – Commitments and Contingencies for additional information.
The
As previously disclosed, the Investment Agreement also provides that:
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● | Board Representation: Foxconn |
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● | Termination of Foxconn Joint Venture: The Company and Foxconn |
● | Standstill: Until the date that is the later of December 31, 2024 and 90 days after the first day on which no Foxconn-appointed director serves on the Board and Foxconn no longer has a right to appoint any directors, without the approval of the Board, Foxconn |
● | Exclusivity: Prior to the Subsequent Common Closing, (i) without Foxconn’s consent, the Company |
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| not to consummate any of the Investment Transactions or (C) participate in discussions or negotiations with, or furnish any information to, any person in connection with any Acquisition Proposal, and (ii) the Company
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● | Voting Agreement and Consent Rights: The terms of the Investment Agreement and Certificate of Designations provide that, until the later of (i) December 31, 2024 and (ii) 90 days after the first day on which no Foxconn-appointed director serves on the Board and Foxconn no longer has a right to appoint any |
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directors, Foxconn
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● | Participation Rights: Following the Subsequent Common Closing and until Foxconn no longer has the right to appoint a director to the Board, other than with respect to certain excluded issuances, Foxconn has the right to purchase its pro rata portion of equity securities proposed to be sold by the Company; provided, that the Company is not required to sell Foxconn securities if the Company would be required to obtain stockholder approval under any applicable law or regulation. |
The Investment Agreement also contains closing conditions. The Investment Agreement can be terminatedprovides for termination by mutual agreement of the parties to amend the Investment Agreement to allow such a termination, and cannot otherwise be terminated by either party following the Initial Closing.
Registration Rights Agreement
On November 22, 2022, the Company and Foxconn entered into the Registration Rights Agreement pursuant to which the Company agreed to use reasonable efforts to file and cause to be declared effective a registration statement with the SEC registering the resale of the Class A common stock issued to Foxconn, including any shares of Common StockClass A common stock issuable upon conversion of the Preferred Stock under the Investment Agreement, which iswas to be filed promptly following the earlier to occur of (i) the Subsequent Common Closing and (ii) May 7, 2023. Foxconn also has customary demand and piggyback registration rights with respect to the shares of Class A common stock issued or issuable under the Investment Agreement, and indemnification rights.
The Company filed a registration statement on Form S-3 with the SEC on May 11, 2023 with the intent to satisfy its obligations under the Registration Rights Agreement.
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Sales Agreement and ATM Offering
On November 7, 2022, the Company entered into thean Open Market Sales Agreement (the “Sales Agreement”) with Jefferies LLC, as agent (“Jefferies”), pursuant to which the Company maycould offer and sell up to approximately 50.2 million shares of our Class A common stock, from time to time through Jefferies. The Company has agreed to pay Jefferies commissions for its services of acting as agent of up to 3% of the gross proceeds from the sale of the shares of Class A common stock pursuant to the Sales Agreement. The Company has also agreed to provide Jefferies with customary indemnification and contribution rights.
Upon delivery of an issuance notice and subject to the terms and conditions of the Sales Agreement, Jefferies may sell shares of Class A common stock at market prices by any method deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act, including sales made directly on or through The Nasdaq Global Select Market, the existing trading market for the Class A common stock.(the “ATM Offering”). During 2022, Jefferies sold approximately 7.8 million shares of Class A common stock, which resulted in net proceeds of $12.4 million. There were no shares sold in the quarter ending March 31,June 30, 2023.
The Company may instruct Jefferies to As a result of our delisting from Nasdaq, we do not sell the shares of Class A common stock if the sales cannot be transacted at or above the price designated by the Company inanticipate any issuance notice. The Company is not obligated to make any sales of the shares of Class A common stock under the Sales Agreement. In the
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future, any additional sales will depend on a variety of factors, including the sales price of the Class A common stock being at least $1.00, higher than the current stock price, and our ability to maintain compliance with exchange listing requirements, which as of April 19, 2023, we were not (see Note 9 – Subsequent Events – Nasdaq Notice). Even if the Company had the ability to issue shares of Class A common stock under the Sales Agreement, no assurances can be given that the Company would sell any shares of Class A common stock under the Agreement, or, if it does, as to the price or amount of the shares of Class A common stock that it sells or the dates when such sales will take place. Even if additional funds are raisedtransactions under the ATM Offering in the Company will require additional financing to execute its business plan.future.
The Company or Jefferies may suspend or terminate the offering of shares of Class A commons stock upon notice to the other party, subject to certain conditions. Jefferies will act as sales agent on a commercially reasonable efforts basis consistent with its normal trading and sales practices and applicable state and federal law, rules and regulations and the rules of Nasdaq.
We entered into an equity purchase agreement (“Equity Purchase Agreement”) with YA II PN, LTD. (“YA”) on July 23, 2021,, pursuant to which YA had committed to purchase up to $400 million of our Class A common stock, at our direction from time to time, subject to the satisfaction of certain conditions. The Equity Purchase Agreement was terminated on November 22, 2022.
As consideration for YA’s irrevocable commitment to purchase shares of During the Company’s Class A common stock upon the terms of and subject to satisfaction of the conditions set forth in the Equity Purchase Agreement, upon execution of the Equity Purchase Agreement, the Companysix months ended June 30, 2022, we issued 0.46.6 million shares of its Class A common stock to YA (the “Commitment Shares”).
and received $13.7 million cash, net of equity issuance costs. During the year ended December 31, 2022, we issued 17.5 million shares to YA and received $40.4 million cash, net of equity issuance costs. During the year ended December 31, 2021, inclusive of the 0.4 million Commitment Shares, we issued 9.6 million shares to YA and received $49.4 million cash, net of equity issuance costs.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
The Company ishas been subject to extensive pending and threatened legal proceedings arising in the ordinary course of business and we havehas already incurred, and expectexpects to continue to incur, significant legal expenses in defending against these claims. The Company records a liability for loss contingencies in the Condensed Consolidated Financial Statements when a loss is known or considered probable and the amount can be reasonably estimated. The Company may seek to achieve resolution of these matters with respect to the Company as part of the Chapter 11 Cases and has and may in the future enter into discussions regarding settlement of these matters, and may enter into settlement agreements if it believes it is in the best interest of the Company. SettlementCompany’s stakeholders. Legal fees and costs of litigation, settlement by the Company or adverse decisions with respect to the matters disclosed may result in liability that is not insured or that is in excess of insurance coverage and could significantly exceed our current accrual and ability to pay and be, individually or in the aggregate, may result in liability material to the Company’s consolidated results of operations, financial condition or cash flows.flows, impair our ability to sell certain assets and diminish or eliminate any assets available for any distribution to stockholders in the Chapter 11 Cases.
On June 27, 2023, the Company and its subsidiaries commenced the Chapter 11 Cases in the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption In re: Lordstown Motors Corp., et al., Cases No. 23-10831 through 23-10833 and the Foxconn Litigation is Adversary Case No. 23-50414. The Company received the Bankruptcy Court’s approval of its customary motions filed on June 27, 2023. The Debtors are authorized to conduct their business activities in the ordinary course, and pursuant to orders entered by the Bankruptcy Court, the Debtors are authorized to, among other things and subject to the terms and conditions of such orders: (i) pay employees’ wages and related obligations; (ii) pay certain taxes; (iii) pay critical vendors; (iv) continue to honor certain customer obligations; (v) maintain their insurance program; (vi) continue their cash management system; and (v) establish certain procedures to protect any potential value of the Company’s NOLs. The filing of the Chapter 11 Cases resulted in an initial automatic stay of legal proceedings against the Company. Additional information about the Chapter 11 Cases, including access to documents filed with the Bankruptcy Court, is available online at https://www.kccllc.net/lordstown/document/list, a website administered by KCC, a third-party bankruptcy claims and noticing agent. The information on this web site is not incorporated by reference and does not constitute part of this Form 10-Q.
On July 27, 2023, the Bankruptcy Court modified the automatic stay that was in effect at the time of filing the Chapter 11 Cases to allow the Karma Action (defined below) to proceed against the Company in the District Court (defined below). On August 8, 2023, the Bankruptcy Court approved procedures for the Debtors to conduct a comprehensive marketing and sale process for all, substantially all or some of their assets in order to maximize the value of those assets. The Debtors’ investment banker, Jefferies LLC, has reached out to a
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wide range of potential buyers. The Debtors have received a number of non-binding indications of interest. The procedures approved by the Bankruptcy Court provide that August 24, 2023 is the deadline by which the Company may select and file with the court one or more stalking horses with respect to its assets. The deadline to submit bids is September 8, 2023 and the auction, if any, is scheduled for September 19, 2023.
Since filing the Chapter 11 petitions, the Company has operated as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. In accordance with ASC 852, in the accompanying June 30, 2023 Condensed Consolidated Balance Sheet, the caption “Liabilities subject to compromise” reflects the expected allowed amount of the pre-petition claims that are not fully secured and that have at least a possibility of not being repaid at the full claim amount. “Liabilities subject to compromise” at June 30, 2023 consisted of the following:
| | | |
| | (in thousands) | |
| | June 30, 2023 | |
Accounts payable | | $ | 3,279 |
Accrued expenses and other current liabilities | | | 6,716 |
Accrued legal settlements | | | 75,000 |
Liabilities subject to compromise | | $ | 84,995 |
“Liabilities subject to compromise” are recorded at the expected amount of the total allowed claim, however, the ultimate settlement of these liabilities remain at the discretion of the Bankruptcy Court, thus may be settled for different amounts. These amounts are also subject to adjustments if we make changes to our assumptions or estimates related to claims as additional information becomes available to us. Such adjustments may be material, and the Company will continue to evaluate the amount and classification of its pre-petition liabilities. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of “Liabilities subject to compromise” may change. The Company had accruals of $34.7$75.0 million and $35.9 million, for the periods ending March 31,June 30, 2023 and December 31, 2022, respectively, for certain of its outstanding legal proceedings within Accrued and other current liabilities on its Condensed Consolidated Balance Sheet. The accrual is based on current information, legal advice and the potential impact of the outcome of one or more claims on related matters and may be adjusted in the future based on new developments. This accrual does not reflect a full range of possible outcomes for these proceedings or the full amount of any damages alleged, which are significantly higher. Furthermore, the Company may use Class A common stock as a consideration in any settlement. While the Company believes that additional losses beyond current accruals are likely, and anyAny such additional losses may be significant, itsignificant; however, the Company cannot presently estimate a possible loss contingency or range of reasonably possible loss contingencies beyond current accruals. Estimating probable losses requires the analysis of multiple forecasted factors that often depend on judgments and potential actions by third parties.
LordstownThe Bankruptcy Court has not established the deadline by which parties are required to file proofs of claim in the Chapter 11 Cases. There is substantial risk of additional litigation and claims against the Company or its indemnified directors and officers, as well as other claims by third parties that may be known or unknown and the Company does not have the resources to adequately defend or dispute due to the Chapter 11 Cases. The Company cannot provide any assurances regarding when such deadline will be, the amount or nature of the claims that may be filed by such deadline, or what the Company’s total estimated liabilities based on such claims will be.
The Company was notified by its primary insurer under ourits post-merger directors and officers insurance policy that the insurer is taking the position that no coverage is available for the consolidated securities class action,
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various shareholder derivative actions, the consolidated stockholder class action, various demands for inspection of books and records, the SEC investigation, and the investigation by the United States Attorney’s Office for the Southern District of New York described below, and certain indemnification obligations, under an exclusion to the policy called the “retroactive date exclusion.” The insurer has identified other potential coverage issues as well. Excess coverage attaches only after the underlying insurance has been exhausted, and generally applies in conformance with the terms of the underlying insurance. LordstownThe Company is analyzing the insurer’s position, and intends to pursue any available coverage under this policy and other insurance. As
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a result of the denial of coverage, no or limited insurance may be available to us to reimburse our expenses or cover any potential losses for these matters, which could be significant. The insurers in our Side A D&O insurance program, providing coverage for individual directors and officers in derivative actions and certain other situations, have issued a reservation of rights letter which, while not denying coverage, has cast doubt on the availability of coverage for at least some individuals and/or claims.
Legal fees and costs of litigation or an adverse judgment or settlement in any one or more of our ongoing litigation matters that are not insured or that is in excess of insurance coverage could significantly exceed our current accrual and ability to pay. This would have a material adverse effect on our financial position and results of operations and could severely curtail or cause our operations to cease entirely.
On October 30, 2020, the Company, together with certain of its current and former executive officers, including Mr. Burns, Mr. LaFleur, Mr. Post and Mr. Schmidt, and certain of our other current and former employees, were named as defendants in a lawsuit (the “Karma Action”) filed by Karma Automotive LLC (“Karma”) in the United States District Court for the Central District of California (“District Court”). On November 6, 2020, the District Court denied Karma’s request for a temporary restraining order. On April 16, 2021, Karma filed an Amended Complaint that added additional defendants (two Company employees and two Company contractors that were previously employed by Karma) and a number of additional claims alleging generally that the Company unlawfully poached key Karma employees and misappropriated Karma’s trade secrets and other confidential information. The Amended Complaint contains a total of 28 counts, including: (i) alleged violations under federal law of the Computer Fraud and Abuse Act and the Defend Trade Secrets Act; (ii) alleged violations of California law for misappropriation of trade secrets and unfair competition; (iii) common law claims for breach of contract and tortious interference with contract; (iv) common law claims for breach of contract, including confidentiality agreements, employment agreements and the non-binding letter of intent; and (v) alleged common law claims for breach of duties of loyalty and fiduciary duties. The Amended Complaint also asserts claims for conspiracy, fraud, interstate racketeering activity, and violations of certain provisions of the California Penal Code relating to unauthorized computer access. Karma is seeking permanent injunctive relief and monetary damages in excess of $900 million based on a variety of claims and theories asserting very substantial losses by Karma and/or improper benefit to the Company that significantly exceed the Company’s accrual with respect to the matter and ability to pay. The Company has opposed Karma’s damages claims on factual and legal grounds, including lack of causality. The Company is vigorously challenging Karma’s asserted damages.
After several months of discovery, Karma filed a motion for preliminary injunction on August 8, 2021, seeking to temporarily enjoin the Company from producing any vehicle that incorporated Karma’s alleged trade secrets. On August 16, 2021, Karma also moved for sanctions for spoliation of evidence. On September 16, 2021, the District Court denied Karma’s motion for a preliminary injunction, and denied, in part, and granted, in part, Karma’s motion for sanctions. As a result of its partial grant of Karma’s sanctions motion, the District Court awarded Karma a permissive adverse inference jury instruction, the scope of which will be determined at trial.
On January 14, 2022, Karma filed a motion for terminating sanctions (i.e., judgment in its favor on all claims) against the Company and defendant, Darren Post, as a result of Mr. Post’s handling of documents subject to discovery requests. The Company and Mr. Post opposed the request for sanctions. On February 18, 2022, the Court granted in part Karma’s motion for sanctions against Mr. Post and the Company, finding that Karma was entitled to reasonable attorneys’ fees and costs incurred as a result of Mr. Post’s and the Company’s failure to comply with the Court’s discovery orders. Karma’s request for terminating sanctions was denied. As a result of the Court’s order, on March 4, 2022, Karma submitted its application for attorneys’ fees and costs in the amount of $0.1 million. The Company did not oppose Karma’s application, and on March 21, 2022, the
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Court ordered an award of Karma’s costs and attorneys’ fees against the Company and Mr. Post in the amount of $0.1 million, which has been paid by the Company.
On July 22, 2022, Karma filed a second motion for terminating sanctions against the Company and against Mr. Post based upon Mr. Post’s installation of anti-forensic software on his personal computers following his second deposition. Karma requested that the Court enter a default judgment on all claims against Mr. Post and the Company. Karma asked that, in the event terminating sanctions were not issued, the Court order a negative adverse inference on “remaining issues,” specifically that “Defendants Lordstown Motors Corp. and Darren Post shall be presumed to have misappropriated Karma’s trade secrets and confidential information, used Karma’s trade secrets and confidential information, and deliberately and maliciously destroyed evidence of their misappropriation and use of Karma’s trade secrets and confidential information in considering all damages and maliciousness.” The Court denied Karma’s second request for terminating sanctions in all respects.
On September 27, 2022, Karma filed an ex parte application to continue the trial date until January 2023. The Company opposed the request. On September 28, 2022, the Court denied Karma’s request to continue the trial. However, on October 26, following the receipt of the parties’ pretrial filings, the Court, on its own initiative vacated the December 6, 2022 trial date. The Court subsequently scheduled trial to begin on April 11, 2023. After one of the Company’s expert witnesses was diagnosed with a serious illness shortly before trial, the Court requested a continuance of the trial date. The trial is now scheduled for September 5, 2023.
In late November 2022, the Court ruled on the motion for summary judgment filed by the Company and the individual defendants. The ruling granted summary judgment in defendants’ favor on 9 counts and partial summary judgment on 11 counts of Karma’s Complaint. Although favorable, the ruling does not substantively alter the scope of the trial, as Karma’s claims for misappropriation of trade secrets, conspiracy, breach of the non-disclosure agreement, interference with Karma’s employment contracts, and violation of the computer fraud statutes will be the subject of the trial.
The District Court initially stayed the Karma Action in light of the automatic stay imposed by the commencement of the Chapter 11 Cases. However, the Bankruptcy Court granted Karma relief from the automatic stay on July 31, 2023 to allow the multi-week trial in the Karma Action to proceed, which trial is scheduled for trial in California beginning on September 12, 2023. The jury trial is expected to last approximately three weeks.
The Company is continuing to evaluate the matters asserted in the lawsuit and is vigorously defendingdefend against Karma’s claims. The Company continues to believe that there are strong defenses to the claims and any damages demanded. The proceedings areHowever, the outcome of the Karma Action is subject to uncertainties inherent in the litigation process.process and no assurances can be given regarding the outcome of the trial or the impact of the Karma Action on the Company, including its ability to sell assets that Karma claims were misappropriated by the Company or that incorporate trade secrets or property that
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Karma claims were misappropriated by the Company. The outcome of the litigation with Karma may have an impact upon which assets the Company is able to sell through the process before the Bankruptcy Court.
Six related putative securities class action lawsuits were filed against the Company and certain of its current and former officers and directors and former DiamondPeak directors between March 18, 2021 and May 14, 2021 in the U.S. District Court for the Northern District of Ohio (Rico v. Lordstown Motors Corp., et al. (Case No. 21-cv-616); Palumbo v. Lordstown Motors Corp., et al. (Case No. 21-cv-633); Zuod v. Lordstown Motors Corp., et al. (Case No. 21-cv-720); Brury v. Lordstown Motors Corp., et al. (Case No. 21-cv-760); Romano v. Lordstown Motors Corp., et al., (Case No. 21-cv-994); and FNY Managed Accounts LLC v. Lordstown Motors Corp., et al. (Case No. 21-cv-1021)). The matters have been consolidated and the Court appointed George Troicky as lead plaintiff and Labaton Sucharow LLP as lead plaintiff’s counsel. On September 10, 2021, lead plaintiff and several additional named plaintiffs filed their consolidated amended complaint, asserting violations of federal securities laws under Section 10(b), Section 14(a), Section 20(a), and Section 20A of the Exchange Act and Rule 10b-5 thereunder against the Company and certain of its current and former officers and directors. The complaint generally alleges that the Company and individual defendants made materially false and misleading statements relating to vehicle pre-orders and production timeline. Defendants filed a motion to dismiss, which is fully briefed as of March 3, 2022. A hearing on the motion to dismiss has not been scheduled and a decision has not yet been rendered. The Company filed a suggestion of bankruptcy on June 28, 2023, and filed an amended suggestion of bankruptcy on July 11, 2023, which notified the court of the filing of the Chapter 11 Cases and resulting automatic stay; however the ultimate scope and effect of the stay remains subject to further proceedings before the Bankruptcy Court. We intend to vigorously defend against the claims. The proceedings are subject to uncertainties inherent in the litigation process.
Four related stockholder derivative lawsuits were filed against certain of the Company’s officers and directors, former DiamondPeak directors, and against the Company as a nominal defendant between April 28, 2021 and July 9, 2021 in the U.S. District Court for the District of Delaware (Cohen, et al. v. Burns, et al. (Case No. 21-cv-604); Kelley, et al. v. Burns, et al. (Case No. 12-cv-724); Patterson, et al. v. Burns, et al. (Case No. 21-cv-910); and Sarabia v. Burns, et al. (Case No. 21-cv-1010)). The derivative actions in the District Court of Delaware have been consolidated. On August 27, 2021, plaintiffs filed a consolidated amended complaint,
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asserting violations of Section 10(b), Section 14(a), Section 20(a) and Section 21D of the Exchange Act and Rule 10b-5 thereunder, breach of fiduciary duties, insider selling, and unjust enrichment, all relating to vehicle pre-orders, production timeline, and the merger with DiamondPeak. On October 11, 2021, defendants filed a motion to stay this consolidated derivative action pending resolution of the motion to dismiss in the consolidated securities class action. On March 7, 2022, the court granted in part defendants'defendants’ motion to stay, staying the action until the resolution of the motion to dismiss in the consolidated securities class action, but requiring the parties to submit a status report if the motion to dismiss was not resolved by September 3, 2022. The court further determined to dismiss without a motion, on the grounds that the claim was premature, plaintiffs'plaintiffs’ claim for contribution for violations of Sections 10(b) and 21D of the Exchange Act without prejudice. The parties filed a joint status report as required because the motion to dismiss in the consolidated securities class action was not resolved as of September 3, 2022. The parties filed additional court-ordered joint status reports on October 28, 2022, January 6, 2023 and April 3, 2023. On April 4, 2023, the Court ordered the parties to submit a letter brief addressing whether the Court should lift the stay. On April 14, 2023, the parties submitted a joint letter requesting that the Court not lift the stay. On April 17, 2023, the court lifted the stay and ordered the parties to meet and confer by May 8, 2023 and submit a proposed case-management plan. On May 9, 2023, the court reinstated the stay and ordered the parties to advise the court of any developments in the consolidated securities class action or material changes to Lordstown’s condition. The Company filed a suggestion of bankruptcy on June 27, 2023, which notified the court of the filing of the Chapter 11 Cases and resulting automatic stay; however the ultimate scope and effect of the stay remains subject to further proceedings before the Bankruptcy Court. The court entered an order acknowledging the effect of the automatic stay on June 28, 2023. We intend to vigorously defend against the claims. The proceedings are subject to uncertainties inherent in the litigation process.
Another related stockholder derivative lawsuit was filed in U.S. District Court for the Northern District of Ohio on June 30, 2021 (Thai v. Burns, et al. (Case No. 21-cv-1267)), asserting violations of Section 10(b), Section 14(a), Section 20(a) and Section 21D of the Exchange Act and Rule 10b-5 thereunder, breach of fiduciary
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duties, unjust enrichment, abuse of control, gross mismanagement, and waste, based on similar facts as the consolidated derivative action in the District Court of Delaware. On October 21, 2021, the court in the Northern District of Ohio derivative action entered a stipulated stay of the action and scheduling order relating to defendants’ anticipated motion to dismiss and/or subsequent motion to stay that is similarly conditioned on the resolution of the motion to dismiss in the consolidated securities class action. We intend to vigorously defend against the claims. The Company filed a suggestion of bankruptcy on June 28, 2023, and filed an amended suggestion of bankruptcy on July 19, 2023, which notified the court of the filing of the Chapter 11 Cases and resulting automatic stay; however the ultimate scope and effect of the stay remains subject to further proceedings before the Bankruptcy Court. The proceedings are subject to uncertainties inherent in the litigation process.
Another related stockholder derivative lawsuit was filed in the Delaware Court of Chancery on December 2, 2021 (Cormier v. Burns, et al. (C.A. No. 2021-1049)), asserting breach of fiduciary duties, insider selling, and unjust enrichment, based on similar facts as the federal derivative actions. An additional related stockholder derivative lawsuit was filed in the Delaware Court of Chancery on February 18, 2022 (Jackson v. Burns, et al. (C.A. No. 2022-0164)), also asserting breach of fiduciary duties, unjust enrichment, and insider selling, based on similar facts as the federal derivative actions. On April 19, 2022, the parties in Cormier and Jackson filed a stipulation and proposed order consolidating the two actions, staying the litigation until the resolution of the motion to dismiss in the consolidated securities class action and appointing Schubert Jonckheer & Kolbe LLP and Lifshitz Law PLLC as Co-Lead Counsel. On May 10, 2022, the court granted the parties’ proposed stipulation and order to consolidate the actions, and to stay the consolidated action pending the resolution of the motion to dismiss in the consolidated securities class action. While the action remains stayed, on June 24, 2022, the plaintiffs filed a consolidated complaint asserting similar claims, and substituting a new plaintiff (Ed Lomont) for Cormier, who no longer appears to be a named plaintiff in the consolidated action. On June 27, 2023, the Company filed a suggestion of bankruptcy, which notified the court of the filing of the Chapter 11 Cases and resulting automatic stay; however the ultimate scope and effect of the stay remains subject to further proceedings before the Bankruptcy Court. We intend to vigorously defend against these actions. The proceedings are subject to uncertainties inherent in the litigation process.
Two putative class action lawsuits were filed against former DiamondPeak directors and DiamondPeak Sponsor LLC on December 8 and 13, 2021 in the Delaware Court of Chancery (Hebert(Hebert v. Hamamoto, et al. (C.A. No. 2021-1066); and Amin v Hamamoto, et al. (C.A. No. 2021-1085)) (collectively, the “Delaware Class Action Litigation”). The plaintiffs purport to represent a class of investors in DiamondPeak and assert breach of fiduciary duty claims based on allegations that the defendants made or failed to prevent alleged misrepresentations regarding vehicle pre-orders and production timeline, and that but for those allegedly false and misleading disclosures, the plaintiffs would have exercised a right to redeem their shares prior to the de-SPAC transaction. On February 9, 2022, the parties filed a stipulation and proposed order consolidating the two putative class action lawsuits, appointing Hebert and Amin as co-lead plaintiffs, appointing Bernstein Litowitz Berger & Grossmann LLP and Pomerantz LLP as co-lead counsel and setting a briefing schedule for the motions to dismiss and motions to stay. The motions to stay were fully briefed as of February 23, 2022 and the court held oral argument on February 28, 2022. On
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March 7, 2022, the court denied the motion to stay. On March 10, 2022, defendants filed their brief in support of their motion to dismiss. The motion to dismiss was fully briefed on April 27, 2022, and was scheduled for oral argument on May 10, 2022. On May 6, 2022, defendants withdrew the motion to dismiss without prejudice. On July 22, 2022, co-lead plaintiffs filed an amended class action complaint asserting similar claims. Defendants filed a motion to dismiss the amended class action complaint on October 14, 2022. Plaintiffs’ answering brief and Defendants’ reply brief were due on November 18 and December 9, 2022, respectively. Oral argument on the motion to dismiss was scheduled for January 6, 2023. On January 5, 2023, the defendants withdrew their motion to dismiss. On February 2, 2023, the court issued a case scheduling order setting forth pre-trial deadlines and a date for trial in March 2024. On February 3, 2023, defendants filed their answer to plaintiffs’ amended class action complaint. On February 7, 2023, plaintiffs served the Company, as a non-party, with a subpoena for certain information, which the Company responded to on February 21, 2023. Plaintiff
On June 9, 2023, the court granted in part and denied in part the plaintiffs’ motion to compel regarding the appropriate scope of the Company’s response to the subpoena. On July 5, 2023, in the Chapter 11 Cases,
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the Company filed (i) an adversary complaint seeking injunctive relief to extend the automatic stay to the plaintiffs in the Delaware Class Action Litigation, initiating the adversary proceeding captioned Lordstown Motors Corp. v. Amin, Adv. Proc. No. 23-50428 (Bankr. D. Del.) and (ii) a motionand brief in support thereof, seeking a preliminary injunction extending the automatic stay to the Delaware Class Action Litigation. On August 3, 2023, the Bankruptcy Court denied the Company’s preliminary injunction motion. On July 21, 2023, plaintiffs filed a motion for class certification in the Delaware Class Action Litigation. Plaintiffs and the Company, as a non-party, are currently meeting and conferring regarding the scope of the Company’s discovery obligations pursuant to the subpoena. The defendants intend to vigorously defend against the claims. The proceedings are subject to uncertainties inherent in the litigation process.
In addition, between approximately March 26, 2021 and September 23, 2021, LMC received eight demands for books and records pursuant to Section 220 of the Delaware General Corporation Law from stockholders who state they are investigating whether to file similar derivative lawsuits, among other purposes. A lawsuit to compel inspection of books and records under 8 Del. C. § 220 was filed against the Company on May 31, 2022 in the Delaware Court of Chancery (Turner v. Lordstown Motors Corp. (C.A. No. 2022-0468)). The plaintiff sought production of documents related to, among other things, vehicle pre-orders, production timeline, and stock sales by insiders. The Company made supplemental document productions in connection with discussions to resolve or narrow this action. On December 6, 2022, the parties filed a stipulation to dismiss the action with prejudice and, as a result, the Turner matter has been completely resolved and there are no disputes as to the remaining books and records requests.
The Company has also received two subpoenas from the SEC for the production of documents and information, including relating to the merger between DiamondPeak and Legacy Lordstown and pre-orders of vehicles, and the Company has been informed by the U.S. Attorney’s Office for the Southern District of New York that it is investigating these matters. The Company has cooperated, and will continue to cooperate, with these and any other regulatory or governmental investigations and inquiries.
On January 26, 2023, we filed a petition in the Delaware Court of Chancery pursuant to Section 205 of the Delaware General Corporation Law (“DGCL”), which permits the Court of Chancery, in its discretion, to validate potentially defective corporate acts and stock after considering a variety of factors, due to developments regardingThe Company has potential interpretations of the DGCL. As previously disclosed, on March 24, 2022, we received a letter addressed to the Board from the law firm of Purcell & Lefkowitz LLP (“Purcell”) on behalf of three purported stockholders. Among other matters, the stockholder letter addressed the approval of our Charter at the special meeting of stockholders held on October 22, 2020, which included a 200 million share increase in the number of authorized shares of Class A common stock (the “2020 Class A Increase Amendment”), and was approved by a majority of the then-outstanding shares of both our Class A and Class B common stock, voting as a single class. The stockholder letter alleged that the 2020 Class A Increase Amendment required a separate vote in favor by at least a majority of the then outstanding shares of Class A common stock under Section 242(b)(2) of the DGCL, and that the 200 million shares in question were thus unauthorized. Following receipt of the stockholder letter, the Board undertook a review of the matters raised with the assistance of outside counsel not involved in the underlying transactions at issue and had determined, in reliance upon, among other things, advice of several law firms including a legal opinion of Delaware counsel, that the assertions regarding DGCL Section 242(b)(2) were wrong and that a separate class vote of the Class A common stock was not required to approve the 2020 Class A Increase Amendment. We continue to believe that a separate vote of Class A common stock was not required to approve the 2020 Class A Increase Amendment. However, in light of a recent decision of the Court of Chancery that created uncertainty regarding this issue, we filed a petition in the Court of Chancery pursuant to Section 205 seeking validation of the 2020 Class A Increase Amendment and the shares issued pursuant thereto to resolve any uncertaintyindemnification obligations with respect to those matters.the current and former directors named in the above-referenced actions, which obligations may not be covered by the Company’s applicable directors and officers insurance. In February
On June 27, 2023, the Company commenced the Foxconn Litigation in the Bankruptcy Court seeking relief for breaches of Chancery held the Investment Agreement and other agreements and fraudulent and tortious actions that the Company believes were committed by Foxconn, which have caused substantial harm to our operations and prospects and significant damages. Foxconn’s answer is currently due on September 1, 2023.
On July 20, 2023, Hon Hai Precision Industry Co., Ltd. (a/k/a hearingHon Hai Technology Group), Foxconn EV Technology, Inc., and Foxconn EV System LLC filed a motion to dismiss the Chapter 11 Cases or to convert the cases under Chapter 7 of the Bankruptcy Code. The movants allege that the Debtors filed the Chapter 11 Cases in bad faith, that the Debtors do not have a reasonable likelihood of rehabilitation, and that dismissal or conversion would benefit the Debtors’ creditors. The Debtors believe that there are strong defenses to the movants’ assertions and will vigorously oppose the motion. However, no assurances can be given regarding the outcome of the motion.
As a result of the Chapter 11 Cases and ceasing production of the Endurance, the Company has received claims from its suppliers and vendors for amounts those parties believe the Company owes. The Company and its advisors are analyzing the claims for validity. As of June 30, 2023, the Company has accrued $6.7 million for claims it believes are appropriate to recognize as a liability. There are significant additional claims being asserted and we are likely to learn of additional claims once the Bankruptcy Court establishes a deadline by which parties are required to file proofs of claims. The Company intends to vigorously defend against claims it believes are invalid. No assurances can be provided as to the extent of the claims, its ability to minimize future losses, or the substantial costs that may be incurred to evaluate known or unknown claims.
As part of the Chapter 11 Cases, the Company engaged Jefferies to act as its investment banker, and such engagement was authorized by the Bankruptcy Court on ourJuly 25, 2023. The engagement letter with Jefferies, dated June 26, 2023 (the “Engagement Letter”), provides for certain payment, reimbursement, contribution, and indemnification obligations, including the payment by the Company of (i) a monthly fee equal to $0.2 million per month until the Engagement Letter is terminated (the “Monthly Fee”), (ii) a fee equal to $3.0 million (a “Transaction Fee”) upon either the consummation of (x) any transaction involving the restructuring, reorganization, recapitalization, repayment or material modification of the Company’s outstanding indebtedness (other than any dismissal of the Chapter 11 Cases or any conversion of these cases to cases under Chapter 7 of the Bankruptcy Code) or (y) any sale, disposition or other similar business transaction or series of related transactions involving all or substantially all of the Company’s assets (any such event, a “Transaction”), and (iii) reasonable out-of-pocket fees and expenses. All Monthly Fees actually paid to and retained by Jefferies will be credited once, without duplication, against any Transaction Fee that becomes
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petition and, on February 28, 2023 issued an amended order grantingpayable to Jefferies. Either party may terminate the Company’s motionEngagement Letter upon five days’ notice, but if a Transaction occurs within twelve months after termination, Jefferies remains entitled to validate each of the following and eliminate the uncertainty with respect thereto: (1) the 2020 Class A Increase Amendment and the Charter as of the time of filing with the Delaware Secretary of State, and (2) all shares of capital stock that we issued in reliance on the effectiveness of the 2020 Class A Increase Amendment and the Charter as of the date of such shares were issued.applicable fee.
NOTE 8 — RELATED PARTY TRANSACTIONS
The Company’s Board has adopted a written Related Party Transaction Policy that sets forth policies and procedures for the review and approval or ratification of any transaction, arrangement or relationship in which the Company or any of its subsidiaries was, is or will be a participant, the amount of which exceeds $120,000 and in which any director, executive officer or beneficial owner of 5% or more of the Class A common stock had, has or will have a direct or indirect material interest (a “Related Party Transaction”). Pursuant to this policy, the Audit Committee of the Board (the “Audit Committee”) reviews and approves any proposed Related Party Transaction, considering among other factors it deems appropriate, whether the Related Party Transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction. The Audit Committee may then approve or disapprove the transaction in its discretion. Any related person transaction will be disclosed in the applicable SEC filing as required by the rules of the SEC.
Pursuant to the Investment Agreement described in Note 6 – Capital Stock and Loss Per Share, Foxconn’s beneficial ownership of Class A common stock exceeded 5% in November 2022 causing Foxconn to become a related party. The Company has entered into the Foxconn Transactions with Foxconn described under Note 1 – Description of Organization and Business Operations – Foxconn Transactions. See Note 97 – Subsequent Events – Foxconn NoticeCommitments and Contingencies for additional information regarding the status of the Foxconn Transactions.
In August 2020, we entered into an emissions credit agreement with GM pursuant to which, and subject to the terms of which, until the completion of the first three annual production/model years wherein we produce vehicles at least ten months out of the production/model year, the counterparty will have the option to purchase such emissions credits as well as emissions credits from any other U.S. state, country or jurisdiction generated by vehicles produced by us not otherwise required by us to comply with emissions laws and regulations at a purchase price equal to 75% of the fair market value of such credits. While we have launchedShortly after filing the Endurance as a 2023 model year, due toChapter 11 Cases, the production delays from early January to mid-April 2023, the failure to identify a strategic partner for the Endurance, and extremely limited ability to raise capital in the current market environment, we anticipateCompany ceased production of the Endurance will cease in the near future. Therefore, the duration of our obligations under this agreement will extend for several years and are ultimately dependent upon whether we are able to launch a new vehicle and the associated timing and/or our ability to obtain a strategic partner to support the scaling of the Endurance.
In November 2019, the Company entered into a transaction with Workhorse Group, for the purpose of obtaining certain intellectual property. In connection with granting this license, Workhorse Group received 10% of the outstanding Legacy Lordstown common stock, valued at $11.1 million, and was entitled to royalties of 1% of the gross sales price of the first 200,000 vehicle sales.program development.
In November 2020, we prepaid thea royalty payment of $4.75 million to Workhorse Group, representing an advance on the royalties, discussed above, but only to the extent that the aggregate amount of such royalty fees exceeded the amount paid upfront.
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Given that Workhorse Group technology is not being used in the Endurance and our strategic direction, inclusive of the transactions contemplated with Foxconn, we deemed it appropriate to terminate the royalty agreement.license agreement during 2022. As such, we recorded a charge of $4.75 million during the year ended December 31, 2022 to write-off prepaid royalty.
NOTE 9 — SUBSEQUENT EVENTS
Nasdaq NoticeBankruptcy and Litigation Matters
On April 19,June 27, 2023, the Company receivedand its subsidiaries filed voluntary petitions for relief under Chapter 11 in the Nasdaq Notice indicating that, becauseBankruptcy Court. The Chapter 11 Cases are being jointly administered under the closing bid price forcaption In re: Lordstown Motors Corp., et al., Cases No. 23-10831 through 23-10833. Additional information about the Company’s Class A common stock had fallen below $1.00 per share for 30 consecutive business days (March 7, 2023 through April 18, 2023), the Company was no longer in complianceChapter 11 Cases, including access to documents filed with the Bid Price Requirement.Bankruptcy Court, is available online at https://www.kccllc.net/lordstown/document/list, a website administered by KCC. The information on this website is not incorporated by reference and does not constitute part of this Form 10-Q.
PursuantThe Bankruptcy Court has approved certain motions filed by the Debtors that were designed primarily to Nasdaq Marketplace Rule 5810(c)(3)(A),mitigate the Company has a compliance cure period of 180 calendar days, or until October 16, 2023, to regain compliance with the Bid Price Requirement. To regain compliance, the closing bid priceimpact of the Chapter 11 Cases on the Company’s Class A common stock must meet or exceed $1.00 per share for a minimum of 10 consecutiveoperations, customers and employees. The Debtors are authorized to conduct their business days prioractivities in the ordinary course, and pursuant to October 16, 2023. If the Company does not regain compliance by October 16, 2023, the Company may be eligible for an additional grace period.
The Company is currently evaluating various courses of action to regain compliance with the Bid Price Requirement, including implementing a reverse stock split if such action is authorizedorders entered by the Company’s stockholders. In anticipation of receipt ofBankruptcy Court, the Nasdaq Notice, on April 11, 2023, the Company filed a definitive proxy statement (the “Proxy Statement”) for the Company’s annual meeting of stockholdersDebtors are authorized to, be held on May 22, 2023 (the “Annual Meeting”) which included a proposal to amend the Charter, to effect a reverse stock split of the Company’s Class A common stock at a reverse stock split ratio ranging from 1:3 to 1:15,among other things and to authorize the Company’s board of directors to determine, at its discretion, the timing of the amendment and the specific ratio of the reverse stock split (the “Reverse Stock Split Proposal”).
There can be no assurance that stockholders will approve the Reverse Stock Split Proposal at the Annual Meeting, that a reverse stock split, if implemented, will increase the market price of the Class A common stock in proportionsubject to the reduction in the numberterms and conditions of shares of Class A common stock outstanding before such reverse stock split or, even if it does, that such price will be maintained for any period of time. Additional information, includingorders: (i) pay employees’ wages and related obligations; (ii) pay certain risks associated with the Reverse Stock Split Proposal, can be found in the Proxy Statement.
taxes; (iii) pay
Foxconn Notice
On April 21, 2023, the Company received the Foxconn Notice (1) asserting that the Company was in breach of the Investment Agreement due to its previously disclosed receipt of the Nasdaq Notice indicating that the Company was no longer in compliance with the Bid Price Requirement and (2) purporting to terminate the Investment Agreement if the breach is not cured within 30 days. In response, the Company notified Foxconn in writing on April 25, 2023 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 Subsequent Preferred Funding.
On May 1, 2023, after having publicly disclosed the Foxconn Notice, the Company received the Second Foxconn Notice (1) indicating that Foxconn agrees that it is unable to terminate the Investment Agreement after the Initial Closing, (2) asserting that the Nasdaq Notice constitutes a breach of a representation that is a condition to the Subsequent Common Closing and, therefore, Foxconn is not obligated to consummate the Subsequent Common Closing until such breach is cured, and (3) asserting that the Company’s claims
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critical vendors; (iv) continue to honor certain customer obligations; (v) maintain their insurance program; (vi) continue their cash management system and (v) establish certain procedures to protect any potential value of the Company’s NOLs.
regarding Foxconn’s breachAs part of the Investment AgreementChapter 11 Cases, on August 8, 2023, the Bankruptcy Court approved procedures for the Debtors to conduct a comprehensive marketing and sale process for all, substantially all or some of their assets in order to maximize the value of those assets. The Debtors’ investment banker, Jefferies LLC, has reached out to a wide range of potential buyers. The Debtors have received a number of non-binding indications of interest. The procedures approved by the Bankruptcy Court provide that August 24, 2023 is the deadline by which the Company may select and file with the Bankruptcy Court one or more stalking horse bids with respect to their assets. The deadline to submit bids is September 8, 2023 and the EV Programauction, if any, is scheduled for September 19, 2023. Each of these dates is subject to change and Subsequent Preferred Funding are without merit.the sale process may be modified or cancelled in accordance with the procedures approved by the Bankrupt Court. The Company can provide no assurance that any sale of assets (whether in whole or in part) will be consummated or what the proceeds or other terms of any such transaction may be. Further, the assets included in this report or in any filing we make with the Bankruptcy Court may not reflect the fair values thereof during the pendency of or following the Chapter 11 Cases or the value of our assets in an organized sale process in light of the uncertainty of the estimates and assumptions used in the applicable reporting principles, and such values may be higher or lower as a result.
On July 31, 2023, the Bankruptcy Court granted Karma relief from the automatic stay imposed by the commencement of the Chapter 11 Cases and to allow the multi-week trial in the Karma Action scheduled in September 2023 to continue. The Company is continuing to vigorously defend against Karma’s claims and continues to believe that the breach allegations by Foxconnthere are without merit, and Foxconn is obligated to complete the Subsequent Common Closing on or before May 8, 2023. The Company intends to enforce its contractual rights and remedies under the Investment Agreement, including with respect to Foxconn’s breach regarding the EV Program budget and EV Program milestones, its funding obligations and its knowing and intentional efforts to invalidly terminate the Investment Agreement without any basis and withhold critical fundingstrong defenses to the material detrimentclaims and damages demanded. However, the outcome of the Company.
The CompanyKarma Action is subject to uncertainties inherent in discussions with Foxconn to seek a resolution regarding these matters; however, to date, the parties are at an impasselitigation process and Foxconn has indicated that it does not intend the close the Subsequent Common Closing on May 8, 2023 and we do not expect Foxconn to provide its approval to the EV Program budget and EV Program milestones by May 7, 2023. Nono assurances can be given regarding the outcome of the trial or the impact of the Karma Action on the Company, including its ability to sell assets that Karma claims were misappropriated by the parties will reach a resolution of these mattersCompany or that any such resolution will allowincorporate trade secrets or property that Karma claims were misappropriated by the Subsequent Common Closing or the Subsequent Preferred Funding to occur on a timely basis. If the Subsequent Common Closing is delayed or such fundings do not occur, the Company will be deprived of critical funding necessary for its operations. The Company is evaluating its legalCompany. See Note 7 – Commitments and financial alternatives in the event a resolution is not reached.
Contingencies.
On July 26, 2023, a purported class action lawsuit was filed against certain of the Company’s officers in the U.S. District Court for the Northern District of Ohio (Bandol Lim, Individually and on behalf of other stockholders (Case No. 4:23-cv-01454-BYP) asserting violations of Section 10(b), Section 20(a) of the Exchange Act and Rule 10b-5 thereunder relating to the Company’s disclosure regarding the status of its relationship with Foxconn and the Foxconn Transactions. The defendants, as well as the Company, are reviewing the claims and the timing thereof in light of the Chapter 11 Cases. A vigorous defense is expected and the Company may have indemnification obligations with respect thereto. The proceedings are subject to uncertainties inherent in the litigation process.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related notes. Forward-looking statements in this MD&A are not guarantees of future performance and may involve risks and uncertainties that could cause actual results to differ materially from those projected. Refer to the "Cautionary“Cautionary Note Regarding Forward-Looking Statements"Statements” and Part I – Item 1A. Risk Factors in our Form 10-K and under Part II – Item 1A. Risk Factors below for a discussion of these risks and uncertainties, including without limitation, with respect to the Chapter 11 Cases, our estimated production timeline, need for additional financingability to confirm and consummate the risks related to effectively implementingPlan and realizing the benefits of the Foxconn Transactionsour liquidity, capital resources and financial condition.
Our mission is to accelerate adoption and to be a catalyst in the transition of commercial fleets to all-EVs for a more sustainable future. We are an EV innovator focused on developing high-quality light-duty work vehicles. We believe we are one of the only North American light duty OEMs focused solely on EVs for commercial fleet customers. We believe the large commercial fleet market presents a unique opportunity for vehicles designed specifically for the needs of these customers. Our strategy iswas designed to accelerate the launch of new commercial EVs. This includesincluded working on our own vehicle programs as well as partnering with third parties, includingand included our intended development program with Foxconn and its affiliates, as we seeksought to leverage our vehicle development experience, our proprietary and open-source and other non-proprietary technologies, our existing Endurance vehicle platform,
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and potentiallypotential new vehicle platforms to drive commonality and scale, and more efficiently develop and launch EVs, to enhance capital efficiency and achieve profitability.
In the third quarter of 2022, we started commercial production of the Endurance with the first two vehicles completing assembly in September. We subsequently completed homologation and testing and received required certifications enabling us to record sales of the first three vehicles in the fourth quarter of 2022. Engineering readiness, quality and part availability governed the initial timing and speed of the Endurance launch. The rate of Endurance production remained very low as we addressed launch and supplier quality related issues until June 30, 2023 when management made the decision to cease production. During the second quarter of 2023, we delivered 33 Endurance trucks to customers as we continued to evaluate the merits of producing and selling vehicles to customers in order to seed the commercial fleet market, demonstrate the capabilities of the Endurance, and support our OEM partnership pursuits.
As a result of having insufficient capital to execute our business plan, we made trade-offs with respect to how we allocated our capital, including substantially limiting investments in tooling, other aspects of the Endurance and our operations, which resulted in higher costs for the Company and slowed or impaired future design efforts. As a further result, our ability to establish multi-year production volumes consistent with our suppliers’ expectations was limited. These factors, among others, resulted in a BOM cost for the Endurance that was, and would continue to be, significantly higher than the recent selling price. While we believe cost improvements over time could be achieved with a strategic partner to provide additional capital or other support to scale the Endurance, a positive gross margin would require investments and design enhancements to reduce the BOM cost.
In the fourth quarter of 2021, we enteredbegan entering into agreements withthe Foxconn Transactions (see Note 1 – Description of Organization and Business Operations), that resulted in more than $280 million in funding for the Company.
The Foxconn Transactions were as part of a shift in our business strategy from a vertically integrated OEM designer, developer and manufacturer of EVs into a less capital-intensive OEM business focused on designing, developing, engineering, testing, industrializing, and launching vehicles in partnership with Foxconn. Since October of 2021, Foxconn hasprovided $280 million of funding and invested approximately $103 million in our Class A common stock and Preferred Stock.
Pursuant to the Investment Agreement with Foxconn described above and in(see Note 6 – Capital Stock and Loss Per Share,Share), Foxconn agreed to provide up to $117.3 million of additional funding pursuant to the Subsequent Common Closing and Subsequent Preferred Funding, subject to conditions, including satisfaction of certain EV Program budget and EV Program milestones as set forth in the Investment
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Agreement. Proceeds from the Subsequent Preferred Stock mayFunding would only be used in connection with the EV Program or any substitute or replacement electric vehicle program as agreed to by Foxconn and the Company.
On November 22, 2022, Since April 21, 2023, Foxconn purchased approximately $22.7 million of Class A common stock and $30 million of Preferred Stock inhas disputed its obligations under the Initial Closing. The Investment Agreement provides forto consummate the Subsequent Common Closing at which time Foxconn is required to purchase approximately 26.9 million shares of Class A common stock for approximately $47.3 million. The Subsequent Common Closing is to occur within 10 business days following the parties’ receipt of CFIUS Clearance and subject to satisfaction of the other conditions set forth in the Investment Agreement (which the Company believes have been or will be satisfied). CFIUS Clearance was received on April 25, 2023, which means the Subsequent Common Closing is to occur on or before May 8, 2023. The Company is ready, willing and able to complete the Subsequent Common Closing on a timely basis.
In addition, following the parties’ agreement to the EV Program budget and the EV Program milestones and satisfaction of those EV Program milestones and other conditions set forth in the Investment Agreement, Foxconn is to purchase in two tranches, a total of 0.7 million additional shares of Preferred Stock at a purchase price of $100 per share for aggregate proceeds of $70 million. The parties agreed to use commercially reasonablenecessary efforts to agree upon the EV Program budget and EV Program milestones no later than May 7, 2023.
The completion of the Subsequent Common Closing andto facilitate the Subsequent Preferred Funding would provide critical liquidity forand has asserted breaches by the Company’s operations, butCompany of the Company’s dispute with Foxconn means there is substantial uncertainty that such funding can be obtained. See Note 9 – Subsequent Events - Foxconn Notices.Investment Agreement. The Company is in discussions withcontinues to believe that the breach allegations by Foxconn are without merit, and that Foxconn was obligated to seek a resolution regarding these matters; however, to date, the parties are at an impasse and Foxconn has indicated that it does not intend the closecomplete the Subsequent Common Closing on or before May 8, 2023 and we do not expect Foxconn to provide its approval to the EV Program budget and EV Program milestones by May 7, 2023. No assurances can be given that the parties will reachAs a resolutionresult of these matters or that any such resolution will allow the Subsequent Common Closing or the Subsequent Preferred Funding to occur on a timely basis. If the Subsequent Common Closing is delayed or such fundings do not occur,Foxconn’s actions, the Company will behas been deprived of critical funding necessary for its operations.operations and commenced the Foxconn Litigation on June 27, 2023.
Since inception,
Leading up to filing the Chapter 11 Cases, it became apparent that we have been developing our flagship vehicle,would be unable to effectively implement and realize the Endurance™, an electric full-size pickup truck. Inanticipated benefits of the third quarterFoxconn Transactions as Foxconn continued to shift its approach to the nature of 2022,the partnership and the product, failed to meet funding commitments and refused to engage with the Company started commercial production ofon various initiatives contemplated by the Endurance with the first two vehicles completing assembly in September. The Company subsequently completed homologation and testing and received required certifications enabling usFoxconn Transactions that were essential to begin sales in the fourth quarter of 2022. The rate of Endurance production remained very low during the fourth quarter of 2022 as we addressed launch-related issues that are often discovered as an entirely new vehicle begins operating in new and different environments by customers. Those challenges continued into the first quarter of 2023 as performance and quality issues with certain suppliers’ components led us to temporarily pause production and customer deliveries until mid-April 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 these supplier quality issues. Production will remain at a very low rate as we continue to address any remaining, and to the extent we discover new, Endurance performance and component quality issues, managesustain ongoing supply chain constraints with key components, including hub motor components, and conserve funding given the high BOM cost.
Any further disruptions caused by one or more of these factors could lead to further pauses in vehicle builds or delivery of completed vehicles, or future recalls. We continue to evaluate the merits of producing and selling vehicles to customers in order to seed the commercial fleet market, demonstrate the capabilities of the Endurance, and support our OEM partnership pursuits.operations. Due to the production delays from early January to mid-April 2023, the failure to identify a strategic partner for the Endurance, lack of expected funding and other support from Foxconn and extremely limited ability to raise sufficient capital in the current market environment, we anticipatedetermined it was in the best interests of the Company’s stakeholders to take aggressive actions to cut costs and preserve cash, file the Chapter 11 Cases and cease production of the Endurance will ceaseand new program development. As part of these actions, two notices were provided to a substantial number of employees under the WARN Act in May 2023, for job eliminations to occur in July 2023. Therefore, this reduction in costs occurred after the near future.end of the second quarter of 2023.
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As part of the Chapter 11 Cases, we have initiated a process to seek a buyer for some or all of the Company’s assets. The Company can provide no assurance that any sale of assets (whether in whole or in part) will be consummated or what the proceeds or other terms of any such transaction may be. The Company also intends to use the Chapter 11 Cases to fully, finally and efficiently resolve its contingent and other liabilities and is pursuing the Foxconn Litigation before the Bankruptcy Court. However, the Company provides no assurance as to the timing or outcome of the resolution of these matters by the Bankruptcy Court or any other court in which these matters may be adjudicated, including as a result of the proceedings that will occur outside of the Bankruptcy Court prior to a final disposition by the Bankruptcy Court, including the Karma Action. In addition, the Bankruptcy Court has not established a deadline by which parties are required to file proofs of claim in the Chapter 11 Cases. The Company cannot provide any assurances regarding when such deadline will be, the amount or nature of the claims that may be filed by such deadline, or what the Company’s total estimated liabilities based on such claims will be. See Note 1 – Description of Organization and Business Operations – Description of Business – Voluntary Chapter 11 Petition.
Because the Chapter 11 Cases were filed just prior to the end of the second quarter, the Company had limited information available and substantial uncertainty regarding the impact of the Chapter 11 Cases. As a result, the Company’s results for the quarter ended June 30, 2023 do not fully reflect the significant increase in costs we are incurring and other accounting impact caused by the Chapter 11 Cases. As a result of having insufficient capitalthe Company’s decision to execute our business plan, we have made and are continuing to make trade-offs with respect to how we allocate our capital, including substantially limiting investments in tooling, other aspectscease production of the Endurance, and our operations. The trade-offs we are making, including related to hard tooling, have and are likely to continue to result in higher costs for the Company in the future and are likely to slow or impair future design enhancements or options we may otherwise seek to make available to Endurance customers. As a further result, our ability to establish multi-year production volumes consistent with our suppliers’ expectations is limited. These factors, among others, result in a BOM cost for the Endurance that is, and will continue to be, significantly higher than the current selling price. We have identified significant piece price savings from future investments that we could seek to realize over time. While we believe we will be able to achieve cost improvements over time if we are able to obtain a strategic partner to provide additional capital or other support to scale the Endurance, we do not anticipate reaching a positive gross margin until or unless we are able to make the investments and design enhancements to reduce the BOM cost. However, no assurances can be made regarding our ability to successfully identify and implement actions that will lower the Endurance BOM cost, including that we will have sufficient capital to make these investments, or that our suppliers will be willing or able to manufacture the tools or the parts.
We are seeking strategic partners, including other automakers, to provide additional capital or other support to enable us to scale the Endurance program and to develop new vehicle programs in cooperation with Foxconn or otherwise. To date, we have not identified a strategic partner for the Endurance.
Our current sales and marketing efforts have been focused on direct sales through our subsidiary, Lordstown EV Sales, LLC, to commercial fleet operators and fleet management companies rather than through third-party dealerships. Our expected limited production levels and the fact that we have not achieved consistent serial production has made it more difficult to get support from commercial fleets or fleet management companies in the marketing, sale and distribution of the Endurance.
As of March 31, 2023, property, plant, and equipment was reviewed for potential impairment for recoverability by comparing the carrying amount of our asset group to estimated undiscounted future cash flows expected to be generated by the asset group. As the carrying amount of our asset group exceeds its estimated undiscounted future cash flows, we recognizedrecorded an impairment charge of $109.8$23.7 million for the three monthsquarter ended March 31, 2023 based on the difference between the carrying value of the fixed assets and their fair value as of March 31,June 30, 2023. The fair value was derived from the Company's enterprise value at the time of impairment as we believe it represents the most appropriate fair value of the asset group in accordance with accounting guidance. Additional impairments could occur in future periods and may be significant. See – Note 2 – Summary of Significant Accounting Policies and Note 4 – Property, Plant and Equipment and Assets Held for Sale for additional information.
The Company’s ability to raise capital is currently severely limited due to the current market environment and Company specific factors. Therefore, notwithstanding management’s plans and efforts to date, there continues to be substantial doubt about the Company’s ability to continue as a going concern. 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 further 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 and trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in bankruptcy proceedings, if any.
See Part I – Item 1A. Risk Factors of our Form 10-K and Part II – Item 1A. Risk Factors below for further discussion of the risks associated with the capital required to execute our business plan andChapter 11 Cases, our ability to continue as a going concernconfirm and consummationconsummate the Plan, our liquidity, capital resources and financial condition, and the use of the Foxconn Transactions,estimates and resulting uncertainty in establishing our presented financial results, among other risks.
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Results of Operations for the three months ended three months ended March 31,June 30, 2023 and 2022
(in thousands)
| | | | | | |||||
| | | | | | | (in thousands) | |||
| Three months ended | | Three months ended | Three months ended | | Three months ended | ||||
| March 31, 2023 |
| March 31, 2022 | June 30, 2023 |
| June 30, 2022 | ||||
Net sales | $ | 189 | | $ | — | $ | 2,151 | | $ | — |
Cost of sales | | 30,811 | | | — | |||||
Operating Expenses | | | | | | |||||
Cost of sales: | | 60,739 | | | — | |||||
Operating expenses: | | | | | | |||||
Selling, general and administrative expenses |
| 14,686 | |
| 26,019 | | 57,688 | | | 29,941 |
Research and development expenses 1 |
| 14,425 | |
| 61,864 | |||||
Impairment of property plant & equipment, prepaids and intangibles | | 114,440 | | | — | |||||
Research and development expenses1 | | 12,303 | | | 10,510 | |||||
Impairment of property plant & equipment and intangibles | | 25,041 | | | — | |||||
Total operating expenses | $ | 143,551 | | $ | 87,883 | $ | 95,032 | | $ | 40,451 |
Loss from operations | $ | (174,174) | | $ | (87,883) | | (153,620) | | | 40,451 |
Other income (expense) |
| 64 | |
| (1,492) | |
| | |
|
Interest income |
| 2,391 | |
| (258) | |||||
(Loss) gain on sale of assets | | (2,609) | | 101,736 | ||||||
Other income | | 93 | | | 1,991 | |||||
Investment and interest income | | 1,645 | | | 383 | |||||
Loss before income taxes | $ | (171,719) | | $ | (89,633) | $ | (154,491) | | $ | 63,659 |
Income tax expense |
| — | |
| — | | — | | | — |
Net loss | | (171,719) | | | (89,633) | $ | (154,491) | | $ | 63,659 |
Less preferred stock dividend | | (605) | | | — | |||||
Net loss attributable to common shareholders | $ | (171,114) | | $ | (89,633) | |||||
| 1 | Research and development expenses for the three months ended June 30, 2022 are net of $18.4 million in operating expense reimbursements and $1.8 million in other adjustments in connection with the APA (see Note 1 — Description of Organization and Business Operations). |
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Revenue and Cost of Sales
The Company completed homologation and testing and received required certifications enabling salesProduction of the Endurance to beginended on June 30, 2023. A total of 33 vehicles were sold in the fourth quarter of 2022. We experienced performance and quality issues with certain Endurance components that led us to temporarily pause production and customer deliveries from early January through the middle of April 2023. As a result, we sold only three vehicles during the first quarter ofmonths ended June 30, 2023.
Cost of sales totaled $30.8$60.7 million for the three months ended March 31, 2023, consistingsecond quarter of $3.6 million in costs2023. Costs associated with producing the Endurance totaled $4.0 million, including direct materials net of an adjustment to inventory to reflect its NRV, product warranty accruals and other costs related to selling and delivering the vehicles. The Company recorded $7.5$46.6 million in manufacturing depreciation for the three months ended March 31,June 30, 2023. In light of the fact that we anticipate production of the Endurance will cease in the near future, the Company has revised its estimate of the useful life of manufacturing assets, shortening the depreciation period to July 31, 2023. Accordingly, as of April 1, 2023, depreciation on these assets was revised to account for this change in estimate that will result in substantially higher depreciation. Additionally, for the three months ended March 31,June 30, 2023, the Company recorded a $19.8$6.0 million charge to reduce the carrying value of inventory reserve to reflect NRV. See Note 2 — Summary of Significant Accounting Policies and Note 4 — Property, Plant and Equipment regarding depreciation and inventory charges.
Finally, the Company recorded an additional $4.1 million reserve for potential claims from suppliers regarding costs incurred for materials.
Selling, General and Administrative Expense
Selling, general and administration expenses (“SG&A”) of $14.7$57.7 million during the three months ended March 31,June 30, 2023 consisted primarily of $8.3$7.3 million in personnel and professional fees, $3.0$40.3 million in litigation accruals, $6.8 million in legal fees,costs and $1.5 million in insurance premiums. Compared to the firstsecond quarter of 2022, SG&A was $11.3$27.7 million lower,higher primarily due primarily to a $41.2 million increase in litigation accruals and other legal expenses, offset by decreases of $3.0$6.9 million due to the charge to reflect NRV being recorded in SG&A prior to Endurance start of production, $2.7 million in legalpersonnel and professional fees $3.0 million in consulting and non-legal professional fees, $1.6 million in insurance premiums and $1.1 million in personnel costs.premiums.
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Research and Development Expense
Research and development (“R&D”) expenses were $14.4$12.3 million during the three months ended March 31,June 30, 2023, compared to $61.9 million in the same period in 2022. The significant decrease was due to the elimination of the costs associated with operating the Lordstown, Ohio facility, which was sold on May 11, 2022, as discussed in Note 1 – Description of Organization and Business Operations. During the first quarter of 2022, the total costs associated with operating the plant were $40.5 million, consisting primarily of $19.3 million in prototype components, $10.2 million in personnel and professional fees, $5.6 million in freight, and $5.4 million in utilities and other general costs. Included in R&D for the first quarter of 2023 are $14.4 million of expenses for the ongoing development and engineering work associated with the Endurance and future programs, consisting of $9.7$9.0 million in personnel costs, $2.2$1.3 million for outside engineering and consulting services and $2.5$2.0 million in prototype components, testing and development supplies. For the period ended June 30, 2022, the Company’s R&D costs were $10.5 million, including $13.8 million in personnel costs, $6.1 million in outside engineering and consulting services, and $10.8 million in prototype components and other testing and development supplies. ForThe Company’s R&D costs in the periodthree months ended March 31,June 30, 2022 included $10.7 million associated with operating the Company’s developmentLordstown facility. R&D in 2022 was reduced by $18.4 million related to a reimbursement of costs associated with operating the Lordstown facility for periods back to September 1, 2021, by Foxconn, and engineering costs were $21.3$1.8 million including $7.3 million in personnel costs, $9.7 million in outside engineering and consulting services, and $4.4 million in prototype components and other testing and development supplies.due to adjustments related to the Foxconn APA.
Impairment of fixed assets
Property,property, plant, and equipment is periodicallyand other intangibles
As of June 30, 2023, property, plant, and equipment was reviewed for potential impairment for recoverability by comparing the carrying amount of our asset group to estimated undiscounted future cash flows expected to be generated by the asset group. As the carrying amount of our asset group exceeds its estimated undiscounted future cash flows, we recognized a $109.8 million impairment charge for the three months ended March 31, 2023 based on the difference between the carryingrecoverability. In prior periods, fair value of the fixed assetsCompany’s property, plant, and their fair value as of March 31, 2023. The fair valueequipment was derived from the Company’s enterprise value at the time of impairment as we believethe Company believed it representsrepresented the most appropriate fair value of the asset group in accordance with accounting guidance. There was noIn light of the Chapter 11 Cases, the Company valued its property, plant and equipment based on its estimate of residual and salvage values, resulting in an impairment charge recognized for the same period in 2022. Additional impairments could occur in future periods and may be significant.
Liquidity and Capital Resources
We had cash, cash equivalents and short-term investments of approximately $176.7 million and an accumulated deficit of $998.9 million at March 31, 2023 and a net loss of $171.7$23.7 million, for the three months ended March 31,June 30, 2023. No such impairment charges were incurred for the same period of 2022. See Note 4 — Property, Plant, and Equipment and Assets Held For Sale for additional details regarding our impairment. Additionally, during the three months ended June 30, 2023, the Company recognized an impairment of $1.4 million related to prepaid inventory purchases.
Gain (Loss) on Sale of Assets
For the three months ended June 30, 2023, the Company recognized a loss of $2.6 million on the sale of manufacturing equipment, compared to a $101.7 million gain which was primarily attributable to the gain on the sale of the Lordstown facility to Foxconn for the same period of 2022. See Note 1 — Description of Organization and Business Operations for additional details regarding the Foxconn Transactions.
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Results of Operations for the three and six months ended June 30, 2023 and 2022
| | | | | |
| | (in thousands) | |||
| Six months ended | | Six months ended | ||
| June 30, 2023 |
| June 30, 2022 | ||
Net sales | $ | 2,340 | | $ | — |
Cost of sales | | 91,550 | | | — |
Operating Expenses | | | | | |
Selling, general and administrative expenses |
| 72,375 | |
| 55,960 |
Research and development expenses 1 |
| 26,728 | |
| 72,374 |
Impairment of property plant & equipment and intangibles | | 139,481 | | | (101,736) |
Total operating expenses | $ | 238,583 | | $ | 26,598 |
Loss from operations |
| (327,794) | |
| (26,598) |
(Loss) gain on sale of assets | | (2,609) | | | 101,736 |
Other income |
| 158 | |
| 499 |
Interest income |
| 4,036 | |
| 125 |
Loss before income taxes | $ | (326,210) | | $ | (25,974) |
Income tax expense |
| — | |
| — |
Net loss | $ | (326,210) | | $ | (25,974) |
| 1 | Research and development expenses for the six months ended June 30, 2022 are net of $18.4 million in operating expense reimbursements and $1.8 million in other adjustments in connection with the APA (see Note 1 — Description of Organization and Business Operations). |
Revenue and Cost of Sales
Production of the Endurance ended on June 30, 2023. A total of 36 vehicles were sold in the first six months of 2023.
In SeptemberCost of sales totaled $91.6 million for the first half of 2023, consisting of $7.6 million in costs associated with producing the Endurance, including direct materials net of an adjustment to inventory to reflect its NRV, product warranty accruals and other costs related to selling and delivering the vehicles. The Company recorded $54.3 million in manufacturing depreciation, a $25.8 million charge to reduce the carrying value of inventory to NRV, and a $4.1 million reserve for potential claims from suppliers regarding costs incurred or otherwise that may be owed during the six months ended June 30, 2023. See Note 2 — Summary of Significant Accounting Policies and Note 4 — Property, Plant and Equipment and Assets Held for Sale regarding depreciation and inventory charges.
Selling, General and Administrative Expense
Selling, general and administration expenses (“SG&A”) of $72.4 million during the six months ended June 30, 2023 consisted primarily of $40.3 million in litigation accruals, $15.6 million in personnel and professional fees, $9.8 million in legal fees and $2.9 million in insurance premiums. Compared to the first half of 2022, SG&A was $16.4 million higher, due primarily to a $40.3 million increase in litigation accruals, offset by decreases of $9.3 million due to the charge to reflect NRV being recorded in SG&A in the first six months of 2022, prior to Endurance start of production, $3.8 million in personnel and professional fees, $3.3 million in insurance premiums and $2.4 million in legal fees.
Research and Development Expense
Research and development (“R&D”) expenses consisted of the costs associated with the ongoing development and engineering work related to the Endurance and future programs, totaling $26.7 million during the six months ended June 30, 2023. The costs in the first half of 2023 included $18.7 million in
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personnel costs, $3.5 million for outside engineering and consulting services and $4.5 million in prototype components, other testing and development supplies. For the six months ended June 30, 2022, the Company’s R&D costs were $72.4 million, including $31.1 million in personnel costs, $16.1 million in outside engineering and consulting services, and $27.1 million in prototype components and other testing. The Company’s R&D costs for the six months ended June 30, 2022 included $32.7 million associated with operating the Lordstown facility. R&D in 2022 was reduced by $18.4 million related to a reimbursement of costs associated with operating the Lordstown facility for periods back to September 1, 2021, by Foxconn, and $1.8 million due to adjustments related to the Foxconn APA..
Impairment of property, plant, and equipment and other intangibles
As of June 30, 2023, property, plant, and equipment was reviewed for potential impairment for recoverability. In prior periods, fair value of the Company’s property, plant, and equipment was derived from the Company’s enterprise value at the time of impairment as the Company started commercialbelieved it represented the most appropriate fair value of the asset group in accordance with accounting guidance. In light of the Chapter 11 Cases, the Company valued its property, plant and equipment based on its estimate of residual and salvage values, resulting in an impairment charges of $133.5 million, for the six months ended June 30, 2023. No such impairment charges were incurred for the same period of 2022. See Note 4 — Property, Plant, and Equipment and Assets Held For Sale for additional details regarding our impairment. Additionally, during the six months ended June 30, 2023, the Company recognized an impairment of $6.0 million related to prepaid inventory purchases.
Gain (Loss) on Sale of Assets
For the six months ended June 30, 2023, the Company recognized a loss of $2.6 million on the sale of manufacturing equipment, compared to a $101.7 million gain which was primarily attributable to the gain on the sale of the Lordstown facility to Foxconn for the same period of 2022. See Note 1 — Description of Organization and Business Operations for additional details regarding the Foxconn Transactions.
Liquidity and Capital Resources
As a result of the Company’s recurring losses from operations, accumulated deficit, cessation of production of the Endurance withand lack of any meaningful revenue stream, as well as the first two vehicles completing assembly. The raterisks and uncertainties related to (i) the Company’s ability to successfully complete the Chapter 11 Cases, including our ability to sell all, substantially all or some of Endurance production remained very low during the fourth quarter of 2022 as we addressed launch-related issuesour assets, to successfully resolve litigation and other claims that are often discovered as an entirely new vehicle begins operating in new and different environments by customers. Those challenges continued into the first quarter of 2023 as performance and quality issues with certain suppliers’ components ledmay be filed against us, to temporarily pause production and customer deliveries until mid-April 2023. Production will remain at a very low rate as we continue to address any remaining, and to develop, negotiate, confirm and consummate a Plan, after which we do not expect to conduct ongoing business, (ii) the extent we discover new, Endurance performance and component quality issues, manage ongoing supply chain constraints with key components,effects of disruption from the Chapter 11 Cases, including hub motor components, and conserve funding given the high BOM cost. For the foreseeable future, we will incur significant operating expenses, capital expenditures and working capital funding that will deplete our cash on hand. As a result of having insufficient capital to execute our business plan, we have made and are continuing to make trade-offs challenges with respect to how we allocate our capital, including substantially limiting investments in tooling, other aspectsretaining employees, (iii) the costs of the EnduranceChapter 11 Cases and our operations. The trade-offs we are making, including related to hard tooling, have and are likely to continue to result in higher(iv) the costs forof defending the Company in substantial litigation and claims, along with the risk of future and are likely to slowlitigation or impair future design enhancements or options we may otherwise seek to make available to Endurance customers. The performance and component quality and other supplier issuesclaims that we have experienced with the Endurance have caused us to incur significant research and development expenses after the launch. Although there has been some improvement in the first quarter of 2023, the Company continues to manage challenges with its supply chain, including part pedigree and availability. See Part I - Item 1A. Risk Factors in our Form 10-K and Part II - Item 1A. Risk Factors below for further discussion of the risks associated with disruptions to the supply chain.
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We also have meaningful exposure to material losses and costs related to ongoing litigation and regulatory proceedings for which insurance coverage has been denied for certain claims and may be unavailable for those and other claims. While we have engaged and continue to engage in discussions with the parties in these proceedings, we have not been able to reach a resolution of these matters. See Note 7 – Commitments and Contingencies for additional information and Part II - Item 1A. Risk Factors.
We need significant additional funding in the near term to execute our business plan, including to scale the Endurance and develop new vehicles, and to maintain our targeted minimum liquidity of $75 to $100 million.
Our ability to obtain additional financing is extremely limited under current market conditions, in particular for our industry, and also influenced by other factors including the significant amount of capital required, the Foxconn dispute, the fact that the BOM cost of the Endurance is currently, and expected to continue to be, substantially higher than our selling price, uncertainty surrounding the performance of any vehicle produced by us, meaningful exposure to material losses and costs related to ongoing litigation and the SEC investigation, the Nasdaq Notice, the market price of our stock and potential dilution from the issuance of any additional securities. To date, we have not identified a strategic partner for the Endurance. To the extent we do not identify such a partner, we anticipate that production of the Endurance will cease in the near future. As a result of these uncertainties, there isexperience, substantial doubt exists regarding our ability to continue as a going concern. If we are unable to resolve our dispute with Foxconn inconcern for a timely manner on terms that allow us to continue operating as planned, identify other sourcesperiod of funding, identify a strategic partner and resolve our significant contingent liabilities, we may need to further curtail or cease operations and seek protection by filing a voluntary petition for relief underat least one year from the Bankruptcy Code. If this were to occur, the value available to our various stakeholders, including our creditors and stockholders, is uncertain and trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holdersdate of our securities in bankruptcy proceedings, if any.
As discussed under Note 6 – Capital Stock and Loss Per Share, on November 7, 2022, the Company entered into the Sales Agreement for the ATM Offering with Jefferies, pursuant to which the Company may offer and sell up to approximately 50.2 million shares of its Class A common stock from time to time through Jefferies. In the future, additional sales will depend on a variety of factors, including the sales priceissuance of the Class A common stock being at least $1.00, higher than our current stock price, and our ability to maintain compliance with exchange listing requirements, which as of April 19, 2023, we were not (see Note 9 – Subsequent Events – Nasdaq Notice). Even if the Company had the ability under the Sales Agreement to issue additional shares of Class A common stock, no assurances can be given that it would sell any shares of Class A common stock under the Sales Agreement, or, if it does, as to the price or amount of the shares that it sells or the dates when such sales will take place. Even if additional funds are raised under the ATM Offering, the Company will require additional financing to execute its business plan.consolidated financial statements included in this report.
Pursuant to the Investment Agreement with Foxconn, described above and in Note 6 – Capital Stock and Loss Per Share and Note 9 – Subsequent Events – Foxconn Notice, Foxconn has agreed to provide up to $117.3 million of additional funding, subject to conditions, including establishment of the EV Program budget and EV Program milestones and satisfaction of the EV Program milestones as set forth in the Investment Agreement. Proceeds from the Preferred Stock may only be used in connection with the EV Program or any substitute or replacement electric vehicle program as agreed to by Foxconn and the Company. The completion of the Subsequent Common Closing and the Subsequent Preferred Funding would provide critical liquidity for the Company’s operations, but the Company’s dispute with Foxconn means there is substantial uncertainty that such funding can be obtained. See Note 9 – Subsequent Events - Foxconn Notices. The Company continues to believe that the breach allegations by Foxconn are without merit, and Foxconn is obligated to complete the Subsequent Common Closing on or before May 8, 2023. The Company intends to enforce its contractual rights and remedies under the Investment Agreement, including with respect to Foxconn’s breach regarding the EV Program budget and EV Program milestones, its funding obligations and its knowing and intentional efforts to invalidly terminate the Investment Agreement without any basis and withhold critical 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, the parties are at an impasse and Foxconn has indicated that it does not intend the close the Subsequent Common Closing on May 8, 2023 and
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we do not expect Foxconn to provide its approval to the EV Program budget and EV Program milestones by May 7, 2023. No assurances can be given that the parties will reach a resolution of these matters or that any such resolution will allow the Subsequent Common Closing or the Subsequent Preferred Funding to occur on a timely basis. If the Subsequent Common Closing is delayed or such fundings do not occur, the Company will be deprived of critical funding necessary for its operations. The Company is evaluating its legal and financial alternatives in the event a resolution is not reached.
Pursuant to the requirements of the FASB’s ASC Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date the consolidated financial statements included in this report are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that
40
raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.
We had cash, cash equivalents and short-term investments of approximately $137.7 million and an accumulated deficit of $1,153.4 million at June 30, 2023 and a net loss of $154.5 million for the three months ended June 30, 2023.
As discussed under Note 6 – Capital Stock and Loss Per Share, on November 7, 2022, the Company entered into the Sales Agreement for the ATM Offering with Jefferies, pursuant to which the Company may offer and sell up to approximately 50.2 million shares of its Class A common stock from time to time through Jefferies. As a result of our delisting from Nasdaq, we do not anticipate any transactions under the ATM Offering in the future.
Pursuant to the Investment Agreement with Foxconn, described above and in Note 6 – Capital Stock and Loss Per Share, Foxconn agreed to provide up to $117.3 million of additional funding, subject to conditions, including establishment of the EV Program budget and EV Program milestones and satisfaction of the EV Program milestones as set forth in the Investment Agreement. Proceeds from the Preferred Stock would only be used in connection with the EV Program or any substitute or replacement electric vehicle program as agreed to by Foxconn and the Company. Foxconn did not proceed with the Subsequent Common Closing or any Subsequent Preferred Funding and the Company has commenced the Foxconn Litigation, seeking relief for fraudulent and tortious conduct as well as breaches of the Investment Agreement, the parties’ joint venture agreement, the APA, and the CMA that the Company believes were committed by Foxconn. As a result of Foxconn’s actions, the Company has been deprived of critical funding necessary for its operations. See Note 1 – Description of Organization and Business Operations – Foxconn Transactions and Note 7 – Commitments and Contingencies.
Due to the failure to identify a strategic partner for the Endurance, lack of expected funding and other support from Foxconn (as discussed in more detail above and elsewhere in this report) and extremely limited ability to raise sufficient capital in the current market environment, we determined it was in the best interests of the Company’s stakeholders to take aggressive actions to cut costs and preserve cash, file the Chapter 11 Cases and cease production of the Endurance and new product development. On June 27, 2023, we voluntarily initiated the Chapter 11 Cases in the Bankruptcy Court. Since filing the Chapter 11 petitions, we have operated our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. After we filed our Chapter 11 petitions, the Bankruptcy Court granted certain relief enabling us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to pay employee wages and benefits, to pay taxes, to maintain our insurance policies, to honor certain of our customer obligations, to continue to operate our cash management system in the ordinary course, to pay the prepetition claims of certain of our vendors and to establish certain procedures to protect any potential value of the Company’s NOLs.
Our liquidity and ability to continue as a going concern is dependent upon, among other things: (i) our ability to develop, confirm and consummate a Plan or other alternative liquidating transaction, (ii) the resolution of contingent and other claims, liabilities, the Karma Action and the Foxconn Litigation (see Note 7 – Commitments and Contingencies), (iii) the outcome of the Company’s efforts to sell all or a portion of its assets, and (iv) the cost, duration and outcome of the Chapter 11 Cases.
We have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Cases and have and expect to continue to incur significant professional fees and costs throughout our Chapter 11 Cases. In addition, we are subject to significant contingent liabilities, the full scope of which is uncertain at this time (see Note 7 – Commitments and Contingencies and Note 9 – Subsequent Events). Further, the Bankruptcy Court has not established a deadline by which parties are required to file proofs of claim in the Chapter 11 Cases and we cannot provide any assurances regarding when such deadline will be, the amount or nature of the claims that may be filed by such deadline, or what the Company’s total estimated liabilities based on such claims will be.
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The Company intends to use the tools of Chapter 11 to fully, finally, and efficiently resolve its contingent and other liabilities and to pursue the Foxconn Litigation before the Bankruptcy Court. However, the Company provides no assurance as to the timing or outcome of the resolution of these matters by the Bankruptcy Court or any other court in which these matters may be adjudicated, including as a result of the proceedings that will occur outside of the Bankruptcy Court prior to a final disposition by the Bankruptcy Court, including the Karma Action.
As part of the Chapter 11 Cases, on August 8, 2023, the Bankruptcy Court approved procedures for the Debtors to conduct a comprehensive marketing and sale process for all, substantially all or some of their assets in order to maximize the value of those assets. The Debtors’ investment banker, Jefferies LLC, has reached out to a wide range of potential buyers. The Debtors have received a number of non-binding indications of interest. The procedures approved by the Bankruptcy Court provide that August 24, 2023 is the deadline by which the Company may select and file with the Bankruptcy Court one or more stalking horses with respect to their assets. The deadline to submit bids is September 8, 2023 and the auction, if any, is scheduled for September 19, 2023. Each of these dates is subject to change and the sale process may be cancelled in accordance with the procedures approved by the Bankrupt Court. The Company can provide no assurance that any sale of assets (whether in whole or in part) will be consummated or what the proceeds or other terms of any such transaction may be. Further, the description of our assets included in this report or in any filing we make with the Bankruptcy Court may not accurately reflect the values thereof during the pendency of or following the Chapter 11 Cases or the value of our assets in an organized sale process in light of the uncertainty of the estimates and assumptions used in the applicable reporting principles, and such values may be higher or lower as a result.
On July 20, 2023, certain Foxconn entities filed the Foxconn Motion to Dismiss. See Note 1 — Description Of Organization And Business Operations. The movants allege that the Debtors filed the Chapter 11 Cases in bad faith, that the Debtors do not have a reasonable likelihood of rehabilitation, and that dismissal or conversion would benefit the Debtors’ creditors. The Debtors believes that there are strong defenses to the movants’ assertions and intend to vigorously oppose the motion. However, no assurances can be given regarding the outcome of the motion.
On July 31, 2023, the Bankruptcy Court granted Karma relief from the automatic stay imposed by the commencement of the Chapter 11 Cases and to allow the multi-week trial in the Karma Action scheduled in September 2023 to continue. The Company is continuing to vigorously defend against Karma’s claims and continues to believe that there are strong defenses to the claims and damages demanded. However, the outcome of the Karma Action is subject to uncertainties inherent in the litigation process and no assurances can be given regarding the outcome of the trial or the impact of the Karma Action on the Company, including its ability to sell assets that Karma claims were misappropriated by the Company or that incorporate trade secrets or property that Karma claims were misappropriated by the Company. See Note 7 – Commitments and Contingencies and Note 9 – Subsequent Events.
If confirmation by the Bankruptcy Court of a Plan does not occur, or if the Bankruptcy Court otherwise finds that it would be in the best interest of holders of claims and interests or upon the showing of cause, the Bankruptcy Court may convert the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Company’s assets for distribution in accordance with the priorities established by the Bankruptcy Code. See Note 1 – Description of Organization and Business Operations – Description of Business – Voluntary Chapter 11 Petition.
As a result of these circumstances, there is substantial doubt regarding our ability to continue as a going concern and the value available to our various stakeholders, including our creditors and stockholders, is uncertain and trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in the Chapter 11 Cases, if any.
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See Risk Factors under Part I -– Item 1A. of our Form 10-K and Part II – Item 1A. Risk Factors below for further discussion of the risks associated with our need for additional financinglimited capital resources and loss exposures, among other risks.
Summary of Cash Flows
The following table provides a summary of Lordstown’s cash flow data for the period indicated:
(in thousands)
| | | | | | | ||||||
| | | | | | | | | (in thousands) | |||
|
| Three months ended |
| Three months ended |
| Six months ended |
| Six months ended | ||||
| | March 31, 2023 | | March 31, 2022 |
| June 30, 2023 |
| June 30, 2022 | ||||
Net Cash used in operating activities | | $ | (38,116) | | $ | (69,033) | | $ | (75,692) | | $ | (121,427) |
Net Cash provided by (used in) investing activities | | $ | 24,844 | | $ | (21,896) | | $ | 70,066 | | $ | (15,990) |
Net Cash provided by financing activities | | $ | — | | $ | 50,477 | | $ | — | | $ | 129,087 |
Net Cash Used by Operating Activities
For the threesix months ended March 31,June 30, 2023 compared to 2022, net cash used in operating activities decreased by $30.9$45.7 million. The net loss increased $82.0$300.2 million from the first quartersix months of 2022 to the first quartersix months of 2023, principally due to $141.9the $101.7 million gain on the sale of the Lordstown plant in non-cashrecognized in 2022 and impairment charges related to the impairment of property, plant,$139.5 million and equipment, depreciation and write downcharges of inventory and prepaids. The overall decrease$54.2 million recognized in cash used in operating activities during the first quartersix months of 2023 compared to the same period in 2022 was primarily due to lower SG&A and R&D expense as discussed in the results of operations, partially offset by changes in working capital.2023.
Net Cash Provided by (Used in) Investing Activities
For the threesix months ended March 31,June 30, 2023 compared to 2022, cash used in investing activities increased $46.7$86.1 million primarily due to $112.2 million in maturities of short-term investments, duringpartially offset by an increase in purchases of short-term investments of $32.1 million. Compared to the threesix months ended June 30, 2023, compared tothe decrease in purchases of capital assets of $29.9 million for the first six months of 2023 was offset by an increase in proceeds from the sale of capital assets of $37.3 million for the same period ofin 2022.
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Net Cash Provided by Financing Activities
For the threesix months ended March 31,June 30, 2023 compared to 2022, cash flows from financing activities decreased $50.4$129.1 million. There were no financing transactions during the threesix months ended March 31, 2023 compared to 2022. The financing activities duringJune 30, 2023. For the first quartersix months of 2022, we received a $100.0 million down payment related to the $50.0sale of the Lordstown facility to Foxconn and $13.7 million down payment receivedin proceeds from Foxconn.
the Equity Purchase Agreement with YA.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of March 31,June 30, 2023. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Recent Accounting Pronouncements
See Note 2 — Summary of Significant Accounting Policies to the Condensed Consolidated Financial Statements for more information about recent accounting pronouncements, the timing of their adoption, and management’s assessment, to the extent they have made one, of their potential impact on Lordstown’s financial condition and results of operations.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
On March 31,June 30, 2023, we had cash, cash equivalents and short-term investments of approximately $176.7$137.7 million. We believe that a 10 basis point change in interest rates is likely in the near term. Based on our current level of investment, an increase or decrease of 10 basis points in interest rates would not have a material impact to our cash balances.
Item 4. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31,June 30, 2023.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31,June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
For a description of our legal proceedings, see Note 7 - Commitments and Contingencies of the notes to the Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
There are no material changes from the risk factors set forth in Part I, “Item 1A. Risk Factors” in our Form 10-K, except as set forth below. In addition to the risk factors set forth below and the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Form 10-K and Forms 10-Q and other filings, which could materially affect our business, financial condition or future operating results.
We are inhave filed litigation against Foxconn with the Bankruptcy Court seeking substantial damages for fraudulent and tortious conduct and contractual breaches the Company believes were committed by Foxconn, but no assurances can be provided that our claims against Foxconn will be successful or that we will recover any damages as a dispute withresult thereof.
On June 27, 2023, we filed the Foxconn regarding the matters assertedLitigation against Foxconn in the Bankruptcy Court seeking relief for contractual breaches and fraudulent and tortious actions that the Company believes were committed by Foxconn, Notices and if we are unablewhich have caused substantial harm to resolve the dispute in a timely manner to obtain the benefits we expect under the Investment Agreement, we may not be able to raise the additional funding from Foxconn that is critical toour operations which will have a material adverse effect on our business, financial condition and prospects and we will be required to substantially curtail or may cease operations or file for bankruptcy protection.significant damages.
Under the Investment Agreement, Foxconn agreed to make additional equity investments in the Company through the purchase of $70 million of Class A common stock and $100 million of Preferred Stock, subject to certain conditions. 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.
The InvestmentFoxconn Litigation involves allegations of fraudulent conduct by Foxconn, which induced the Company to enter into a series of agreements, including the Agreement provides forin Principle, the Subsequent Common Closing, at which time Foxconn is required to purchase approximately 26.9 million shares of Class A common stock for approximately $47.3 million. The Subsequent Common Closing is to occur within 10 business days followingAPA, the parties’ receipt of CFIUS ClearanceCMA, the joint venture agreement, and subject to satisfaction of the other conditions set forth in the Investment Agreement (which the Company believes have been or will be satisfied). CFIUS Clearance was received on April 25, 2023, which means the Subsequent Common Closing is to occur on or before May 8, 2023. The Company is ready, willing and able to complete the Subsequent Common Closing on a timely basis.
In addition, following the parties’ agreement to the EV Program budget and EV Program milestones and satisfaction of such milestones and other conditions set forth in the Investment Agreement, Foxconn is to purchase in two tranches, a total of 0.7 million additional shares of Preferred Stock at a purchase price of
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$100 per share for aggregate proceeds of $70 million. The parties agreed to use commercially reasonable efforts to agree upon the EV Program budget and EV Program milestones no later than May 7, 2023.
On April 21, 2023, the Company receivedAgreement. We are vigorously pursuing the Foxconn Notice (1) asserting that the Company was in breach of the Investment Agreement due to its previously disclosed receipt of the Nasdaq Notice indicating that the Company wasLitigation claims and seeking substantial damages from Foxconn. However, no longer in compliance with the Bid Price Requirement, and (2) purporting to terminate the Investment Agreement if the breach is not cured within 30 days. In response, the Company notified Foxconn in writing on April 25, 2023 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 the Investment Agreement 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 Subsequent Preferred Funding.
On May 1, 2023, after having publicly disclosed the Foxconn Notice, the Company received the Second Foxconn Notice (1) indicating that Foxconn agrees that it is unable to terminate the Investment Agreement after the Initial Closing, (2) asserting that the Nasdaq Notice constitutes a breach of a representation that is a condition to the Subsequent Common Closing and, therefore, Foxconn is not obligated to consummate the Subsequent Common Closing until such breach is cured, and (3) asserting that the Company’s claims regarding Foxconn’s breach of the Investment Agreement with respect to the EV Program and Subsequent Preferred Funding are without merit.
The Company continues to believe that the breach allegations by Foxconn are without merit, and Foxconn is obligated to complete the Subsequent Common Closing on or before May 8, 2023. The Company intends to enforce its contractual rights and remedies under the Investment Agreement, including with respect to Foxconn’s breach regarding the EV Program budget and EV Program milestones, its funding obligations and its knowing and intentional efforts to invalidly terminate the Investment Agreement without any basis and withhold critical 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, the parties are at an impasse and Foxconn has indicated that it does not intend the close the Subsequent Common Closing on May 8, 2023 and we do not expect Foxconn to provide its approval to the EV Program budget and EV Program milestones by May 7, 2023. No assurances can be givenprovided that the parties will reach a resolution of these matters or that any such resolution will allow the Subsequent Common Closing or the Subsequent Preferred Funding to occur on a timely basis. If the Subsequent Common Closing is delayed or such fundings do not occur, the Companyour claims against Foxconn will be deprived of critical funding necessary for its operations. The Company is evaluating its legal and financial alternatives in the event a resolution is not reached.
There can be no assurancesuccessful or that we will be able to successfully or timely enforce our rights under the Investment Agreement. In addition, the pending dispute creates uncertainty with respect to our prospects for developing future vehicles with and outsourcing our Endurance production to Foxconn,recover any funding from other sources, our supplier arrangements and for our employees and may entail substantial costs and diversion of personnel’s attention and resources due to these matters, each of which could have a material adverse effect on our business and prospects.
If the dispute is not resolved in a timely manner, we may not be able to raise the additional funding from Foxconn that is critical to our operations which would have a material adverse effect on our business, financial condition and prospects. There is substantial doubt about our ability to continuedamages as a going concern, we need significant additional financing and our ability to raise additional capital is extremely limited. 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 further 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.result thereof.
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Even if the dispute raised by the Foxconn Notice is resolved and we complete the Subsequent Common Closing, we may be unable to establish the EV Program budget and EV Program milestones and achieve such milestones that will be conditions to the Subsequent Preferred Funding. Further, implementation of the EV Program will require substantial funding beyond the amounts contemplated by the Investment Agreement and effective cooperation by the parties to establish plans, processes, a budget and milestones and to timely and effectively fulfill these commitments. Our ability to undertake these actions depends on many variables, which could include establishment and satisfaction of EV Program milestones and other conditions required to be met at the time of funding, and our ability to utilize the designs, engineering data and other foundational work of Foxconn, its affiliates, and other members of the MIH consortium as well as other parties, and that all such parties adhere to timelines to develop, commercialize, industrialize, homologate and certify a vehicle in North America, along with variables that are out of the parties’ control, such as technology, innovation, adequate funding, supply chain and other economic conditions, competitors, customer demand and other factors. If we are unable to obtain the additional funding that is needed or the parties are otherwise unable to successfully complete the steps required by the EV Program on a timely basis, our business plan, prospects, financial condition and results of operations could be materially and adversely impaired.
There is substantial doubt aboutregarding our ability to continue as a going concern and if weour liquidity requirements during the pendency of the Chapter 11 Cases and the adequacy of our capital resources are unabledifficult to resolve our dispute with Foxconn in a timely manner on termspredict at this time.
We have concluded 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 further curtail or cease operations and seek protection by filing a voluntary petition for relief under the Bankruptcy Code.
Therethere is substantial doubt aboutregarding our ability to continue as a going concern. The design, manufactureWe face uncertainty regarding the adequacy of our liquidity and capital resources to be used during the Chapter 11 Cases and to settle known, unknown and contingent liabilities in connection therewith. Through the Chapter 11 Cases, we are seeking to sell substantially all of our assets. We can give no assurances as to the outcome of that sale of vehicles requires substantial capital and is a complex business. process.
We have incurred significant losses since inceptionprofessional fees and other costs in connection with our business plan to design, produce, sellcontingent liabilities and servicepreparation for the EnduranceChapter 11 Cases and additional vehicles requires substantial additional capital in the near term.
Our abilityexpect to continue to incur significant professional fees and costs throughout our Chapter 11 Cases. In addition, we face uncertainty with respect to ongoing and potential future litigation and claims, as a going concern is dependent on our abilitywell as regulatory actions and government investigations and inquiries, for which we will continue to effectivelyincur significant legal costs and may be subject to significant uninsured losses although we are seeking to resolve our dispute with Foxconn and implement and realizethese contingencies through the benefitsChapter 11 Cases. Due to cessation of the Foxconn Transactions, raise substantial additional capital, scale the production of the Endurance, and develop additional vehicles. The Company’s current level of cash, cash equivalents and short-term investments are not sufficient to executewe lack any meaningful revenue stream, our business plan. For the foreseeable future, we will incur significant operating expenses, capital expenditures and working capital funding that will deplete our cash on hand. As a result of having insufficient capital to execute our business plan, we have made and are continuing to make trade-offs with respect to how we allocate our capital, including substantially limiting investments in tooling, other aspects of the Endurance and our operations. The trade-offs we are making, including related to hard tooling, have and are likely to continue to result in higher costs for the Company in the future and are likely to slow or impair future design enhancements or options we may otherwise seek to make available to Endurance customers.
We also have meaningful exposure to material losses and costs related to ongoing litigation and regulatory proceedings for which insurance coverage has been denied for certain claims and may be unavailable for those and other claims. While we have engaged and continue to engage in discussions with the parties in these proceedings, we have not been able to reach a resolution of these matters. See Note 7 – Commitments and Contingencies for additional information.
We entered into the Investment Agreement to facilitate additional funding from Foxconn; however, the availability of this funding is subject to significant uncertainty, as discussed above. We also entered into the Sales Agreement for the ATM Offering under which we may sell up to approximately 50.2 million shares of Class A common stock from time to time through at-the-market offerings by Jefferies, as agent. In the future, any additional sales will depend on a variety of factors, including the sales price of the Class A common stock being at least $1.00, higher than the current price, and continued compliance with exchange listing requirements. No assurance can be given that the Company would sell any shares of Class A common stock under the Sales Agreement, or, if it does, as to the price or amount of the shares that it sells or the dates when such sales will take place and, even if additional funds are raised under the ATM Offering, the Company will require additional financing to execute its business plan.
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Even if the ATM Offering resumes and is successful, and we receive all the funds contemplated by the Investment Agreement, we need significant additional funding to execute our business plan, including production of the Endurance and developing other vehicles, due to the capital required to complete testing and validation, purchase the raw materials and vehicle components for saleable vehicles, invest in tooling and equipment and fund future engineering, operating and corporate expenditures, and address contingent liabilities.
We received the Nasdaq Notice regarding our non-compliance with the Nasdaq listing requirements on April 19, 2023 and we are currently evaluating various courses of action to regain compliance with the Bid Price Requirement (see Note 9 – Subsequent Events – Nasdaq Notice). No assurance can be given that the Company will regain compliance or, if regains compliance, that it will remain in compliance for any period of time.
In an effort to alleviate these conditions, our management continues to seek and evaluate opportunities to raise additional funds through the issuance of equity or debt securities, asset sales, through arrangements with strategic partners or through financing from government or financial institutions and seek strategic partners to scale the Endurance program or develop other vehicles. We have engaged a financial advisor to advise the Company on additional financing alternatives.
Our ability to obtain additional financing is extremely limited under current market conditions, in particular for our industry,highly unlikely and also influenced by other factors includingwe do not expect continued operations following the significant amount of capital required, the Foxconn dispute, the fact that the BOM costcompletion of the Endurance is currently, and expected to continue to be, substantially higher than our selling price, uncertainty surrounding the performance of any vehicle produced by us, meaningful exposure to material losses and costs related to ongoing litigation and the SEC investigation, the Nasdaq Notice, the market price of our stock and potential dilution from the issuance of any additional securities. To date, we have not identified a strategic partner for the Endurance and thereChapter 11 Cases. There can be no assuranceassurances that wecash on hand and our current capital resources will do so. To the extent we do not identify such a partner, we anticipate that production of the Endurance will cease in the near future. Further, there can be no assurance that such financing would be availablesufficient to us on favorable terms or at all. 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 sourcessatisfy our obligations related to the Chapter 11 Cases or the pending litigation, claims and investigations and may negatively impact our ability to make any distribution and, if so, the amount of funding, identify a strategic partner and resolve our significant contingent liabilities, we may need to further 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 availablesuch distribution, to our various stakeholders, includingstockholders.
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Trading in our creditorsClass A common stock during the pendency of the Chapter 11 Cases is highly speculative and stockholders, is uncertain and trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in bankruptcy proceedings, if any.poses substantial risks.
Doubts aboutIt is too early to determine if our abilityPlan will allow for distributions or other residual value with respect to continue as a going concern haveour Class A common stock. It is very possible that our Class A common stock will be canceled and could continueextinguished upon the approval of the Bankruptcy Court and the holders thereof would not be entitled to impact our relationships with our suppliers, vendors,receive, and other third parties and our ability to obtain, maintainwould not receive or renew agreements with them,retain, any property or negatively impact our negotiating leverage withinterest in property on account of such parties, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, any loss of key personnel, employee attrition or material erosion of employee morale arising out of doubts about our ability to operate as a going concern could have a material adverse effect on our ability to effectively conduct our business, and could impair our ability to execute our business plan, thereby having a material adverse effect on our business, financial condition and results of operations.
equity interests. In the event we pursue bankruptcy protection, weof a cancellation of our Class A common stock, amounts invested by such holders in our outstanding Class A common stock will not be subject to the risks and uncertainties associated with such proceedings.
Givenrecoverable. Consequently, our current financial condition, wecurrently outstanding Class A common stock would have engaged advisors to assist the Company in considering the strategic alternatives available to the Company, which may include filing for bankruptcy protection. While we have not initiated bankruptcy proceedings, we caution thatno value. Any trading in our Class A common stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks relating to the potentialpurchasers of bankruptcy proceedings.our Class A common stock. Trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in bankruptcy proceedings.
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InDuring the event we file for bankruptcy protection,Chapter 11 Cases, the value that will be available to our various stakeholders, including our creditors and stockholders, is uncertain and our operations, our ability to develop and execute our business plan, our continuation as a going concern, and our ability to generate value for stakeholders, if any, will be subject to the risks and uncertainties associated with bankruptcy proceedings, including, among others: our ability to execute, confirm and consummate a plan of reorganization or liquidation, or to negotiate and consummate a sale or other transaction with a third party; the potentially high costs of bankruptcy proceedings and related fees; the sufficiency of the company’sCompany’s cash on hand and ability to obtain sufficient financing, if needed, to allow us to conductcontinue our businesslimited operations during the bankruptcy proceedings, confirm a plan of reorganization or sell some or all of our assets during the bankruptcy proceedings in orderly fashion, emerge from bankruptcy and execute our business plan post-emergence (should we emerge), and our ability to comply with terms and conditions of any such financing; our ability to continue our operations in the ordinary course; our ability to maintain our relationships with our suppliers, vendors, customers and other third parties; our ability to obtain, maintain or renew agreements that are critical to our operations on reasonably acceptable terms and conditions; our ability to attract, motivate and retain key employees; the ability of third parties to use certain limited safe harbor provisions of the Bankruptcy Code to terminate contracts without first seeking Bankruptcy Court approval; the ability of third parties to force us to into Chapter 7 proceedings, rather than Chapter 11 proceedings; and the actions and decisions of our stakeholders and other third parties who have interests in our bankruptcy proceedings that may be inconsistent with our operational and strategic plans. Any delays in our bankruptcy proceedings
We are subject to the risks and uncertainties associated with the bankruptcy process could resultChapter 11 Cases.
Since filing the Chapter 11 Cases, we have operated our business as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in prolonged operational disruption foraccordance with the Company, increaseapplicable provisions of Chapter 11 of the costsBankruptcy Code. As a consequence of filing the Chapter 11 Cases, we will be subject to the risks and risksuncertainties associated with bankruptcy. These risks include, but are not limited to, the bankruptcy process, and diminish the value, if any, that is available to our various stakeholders (including creditors and stockholders). Also, we would need the priorfollowing:
| ● | our ability to successfully develop, prosecute, confirm and consummate a Plan with respect to the Chapter 11 Cases; |
| ● | our ability to obtain the Bankruptcy Court’s approval with respect to motions or other requests made to the Bankruptcy Court in the Chapter 11 Cases, including maintaining strategic control as debtors-in-possession; |
| ● | our ability to successfully resolve our outstanding contingent liabilities through the Chapter 11 Cases, which is highly uncertain; |
| ● | the possibility that actions and decisions of our creditors and other third parties with interests in the Chapter 11 Cases may be inconsistent with our plans; |
| ● | the high costs of bankruptcy proceedings and related fees, particularly if delays in the Chapter 11 Cases increase fees and costs; |
| ● | our ability to motivate and retain key employees, and the costs associated therewith, throughout the Chapter 11 Cases, and the impact of the loss of employees on our prospects for realizing any value from the sale of our assets; |
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| ● | shortly after filing the Chapter 11 Cases we ceased production of the Endurance and new program development and, accordingly, this may adversely impact our ability to sell our assets and we have no meaningful ongoing revenue streams; |
| ● | our ability to sell all, substantially all, or some of our assets or to otherwise realize any value with respect to our assets; |
| ● | the ability of third parties to assert claims against the Company, which may be substantial or terminate the Company’s rights with respect to contracts, leases, agreements, or other assets; |
| ● | our ability to maintain our relationships with our suppliers, vendors, customers and other third parties, including those suppliers providing services that are integral to maintaining our financial, information technology and other systems used to operate our business; |
| ● | our suppliers’ and vendors’ likely unwillingness or ability to fulfill any obligations they may have under supply terms or agreements for ongoing support, including their warranty obligations to us, as a result of the Chapter 11 Cases or other disputes, that could cause us to incur costs or liabilities, damage our reputation with our customers or potential acquirers of our assets; |
| ● | our ability to maintain adequate financial, information technology and management processes, controls and procedures, particularly in light of the reduction in personnel due to the lack of support from Foxconn and the Chapter 11 Cases and risk of further attrition; and |
| ● | the ability of third parties to seek and obtain court approval to terminate or shorten the exclusivity period for us to propose and confirm a Plan, to appoint a Chapter 11 trustee, or to convert the Chapter 11 Cases to Chapter 7 cases. |
Because of the risks and uncertainties associated with any bankruptcya voluntary filing for relief under Chapter 11 of the Bankruptcy Code and the related proceedings, we cannot accurately predict or quantify the ultimate impact ofthat events that could occur during any such proceedings. There canthe Chapter 11 Cases may have on ultimate recovery for stakeholders, including creditors and stockholders.
As a result of the Chapter 11 Cases, our historical financial information will not be no guaranteesindicative of our future performance.
Due to the failure to identify a strategic partner for the Endurance, lack of expected funding and other support from Foxconn and extremely limited ability to raise sufficient capital in the current market environment, we determined it was in the best interests of the Company’s stakeholders to take aggressive actions to cut costs and preserve cash, file the Chapter 11 Cases and cease production of the Endurance and new program development. Therefore, the nature of our current business activities is materially different than those prior to June 30, 2023. Furthermore, during the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, new claims that if we seek bankruptcy protection we will emerge from bankruptcy protectionmay be significant, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance, including information presented as of June 30, 2023, is likely not indicative of our financial performance after the date of the filing of the Chapter 11 Cases.
In particular, the amount and composition of our assets and liabilities could be significantly different as a going concernresult of the Chapter 11 Cases, and the description of our operations, assets, liabilities, contingencies, liquidity and capital resources included in our periodic reports or be able to sell somein any filing we make with the Bankruptcy Court may not accurately reflect our such matters during the pendency of or allfollowing the Chapter 11 Cases or the value of our assets in orderly fashion,an organized sale process in light of the uncertainty of the estimates and assumptions used in the applicable reporting principles, and such values may be higher or lower as a result. The periodic financial information reported to the Bankruptcy Court is not presented in accordance with GAAP and may differ materially from information that we willhas been or may in the future be provided as of quarter end in our periodic reports and may reflect estimates based on assumptions that may change significantly during the course of the Chapter 11 Cases or due to other contingencies, and, as applicable, is subject to all of the disclaimers presented therewith.
Further, if confirmation by the Bankruptcy Court of a Plan does not occur, or if the Bankruptcy Court otherwise realize any significant value for our assets, orfinds that our creditors or stockholders (includingit would be in the best interest of holders of claims and interests or upon the showing of
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cause, the Bankruptcy Court may convert the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Company’s assets for distribution in accordance with the priorities established by the Bankruptcy Code. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
We have significant contingent liabilities, the full scope of our Class A common stock)liabilities is uncertain, and we may also be subject to claims that will receivenot be discharged in the Chapter 11 Cases, which could have a material adverse effect on our financial condition and results of operations.
The Company is subject to significant contingent liabilities, including, but not limited to, potential indemnification obligations to current and former directors and officers named in the actions described herein. See Note 7 – Commitments and Contingencies and Note 9 – Subsequent Events. The full scope of the Company’s contingent liabilities is uncertain at this time. In addition, the Bankruptcy Court has not established a deadline by which parties are required to file proofs of claim in the Company’s Chapter 11 Cases. The Company cannot provide any recoveryassurances regarding when such deadline will be, the amount or nature of the claims that may be filed by such deadline, or what the Company’s total estimated liabilities based on such claims will be. The Bankruptcy Code provides that the confirmation of a Chapter 11 plan discharges a debtor from substantially all debts arising prior to consummation of such plan. With few exceptions, all claims that arose prior to the consummation of a Chapter 11 plan (i) would be subject to compromise and/or treatment under such plan and/or (ii) would be discharged in accordance with the Bankruptcy Code and the terms of such plan. However, the outcome and timing of any bankruptcy proceedings.claims not ultimately discharged is uncertain, and it is possible material costs, penalties, fines, sanctions, or injunctive relief could result from such a matter. As a result, an adverse ruling with respect to potential matters could have a material impact on our financial condition, results of operations, liquidity and cash flows and recoveries for creditors and stakeholders.
In the event we do not elect or are unable to pursue bankruptcy protection under Chapter 11 of the Bankruptcy Code, or, if pursued, that we are not able to successfully sell all or someobtain confirmation of our assets in orderly fashion or to successfully emerge from Chapter 11 proceedings,a Plan, it may be necessary to pursue bankruptcy protection under Chapter 7 of the Bankruptcy Code for all or a part of our business.
InIf confirmation by the event we do not elect or are unable to pursue bankruptcy protectionBankruptcy Court of a Plan under Chapter 11 ofdoes not occur, or if the Bankruptcy Code,Court otherwise finds that it would be in the best interest of holders of claims and interests or if pursued, that we are not able to successfully sell all or someupon the showing of cause, the Bankruptcy Court may convert our assets in orderly fashion or to, successfully emerge from Chapter 11 proceedings, it may be necessary for usCases to pursue bankruptcy protectioncases under Chapter 7 of the Bankruptcy Code for all or a part of our businesses.Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. Although the value, if any, that would be available to any of our various stakeholders (including creditors and stockholders) would be uncertain in any bankruptcy proceeding, we believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our stakeholders than those we might obtain under Chapter 11 primarily because of the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern.
The Bankruptcy Court may grant Foxconn’s motion to dismiss or convert the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code
As described in Note 7 – Commitments and Contingencies, on July 20, 2023, certain Foxconn entities filed a motion to dismiss the Chapter 11 Cases or to convert the cases under Chapter 7 of the Bankruptcy Code. Although we believe that there are strong defenses to the movants’ assertions and intend to vigorously oppose the motion, we cannot make any assurances on the outcome and the Bankruptcy Court may grant Foxconn’s motion and dismiss the Chapter 11 Cases or convert the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. The dismissal of the Chapter 11 Cases or conversion to Chapter 7 cases could materially and adversely impact the Company and recoveries to creditors and other stakeholders.
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Prosecution of the Chapter 11 Cases has consumed and will continue to consume a substantial portion of the time and attention of our management, which may have an adverse effect on our business and results of operations, and we have faced increased levels of employee attrition.
While the Chapter 11 Cases continue, our management will be required to spend a significant amount of time and effort focusing on the cases. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, our financial condition and results of operations, particularly if the Chapter 11 Cases are protracted.
We depend on a few highly skilled key employees to navigate the Chapter 11 Cases and contribute to the future value of our assets, and if we are unable to retain, manage, and appropriately compensate them, the outcome of the Chapter 11 Cases and ability to realize value from our assets and litigation claims could be adversely affected.
Our ability to consummate a successful Plan and realize the value of our assets is based on continued service of our senior management team and other key employees, and on our ability to continue to motivate and appropriately compensate key employees. Some of our employees are, and others may be, subject to claims and risks of litigation for which indemnification may be uncertain. We may not be able to retain the services of our key employees, who work for us on an at-will basis, in the future. We have experienced significant voluntary resignations among our employees following the lack of support from Foxconn and the Chapter 11 Cases. The attrition we have already experienced, and may continue to experience, causes us to rely on fewer employees, increases the number of key employees as a share of the total personnel we employ, and in some cases these employees are less experienced which puts at greater risk our ability to execute our plans and strategies. Attrition has, and may also cause, us to engage third parties to perform the work. Such third parties are likely to be more costly and less efficient than if we were to be able to use our own employees. If our key employees fail to work together effectively and to execute our plans and strategies, the Chapter 11 Cases, including our efforts to sell assets and resolve and pursue litigation and other claims, could be prolonged or adversely affected.
We face risks and uncertainties related to ongoing and potential future litigation and claims, as well as regulatory actions and government investigations and inquiries, for which we will continue to incur significant legal costs and may be subject to significant uninsured losses and we are seeking to resolve these contingencies have impaired and continue to impair our ability to obtain financing.through the Chapter 11 Cases.
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We are currently subject to extensive litigation, including securities class action litigation, shareholder derivative suits, a stockholder class action, an SEC investigation, and litigation involving alleged trade secret misappropriation, unfair competition and other related claims, among other disputes. We may in the future be subject to, or become a party to, additional litigation, claims, regulatory actions, and government investigations and inquiries, as we may be subject to claims by customers, suppliers, vendors, contractors, competitors, government agencies, stockholders or other parties regarding our products, development, accidents, advertising, securities, contract and corporate matter disputes, intellectual property infringement matters and employee claims against us based on, among other things, discrimination, harassment, wrongful termination, disability or violation of wage and labor laws. These proceedings and incidents include claims for which we have no or limited insurance coverage. The Company has potential indemnification obligations with respect to the current and former directors named in the above-referenced actions, which obligations may not be covered by the Company’s applicable directors and officers insurance.
These claims have diverted and may in the future divert our financial and management resources that would otherwise be used to benefit our operations, increase our insurance costs and cause reputational harm. We have already incurred, and expect to continue to incur, significant legal expenses in defending against these claims. Further, the ongoing expense of lawsuits, investigations and any substantial settlement payment by us or damage award enforceable against us could have a material adverse effect on the Company’s consolidated results of operations, financial condition or cash flows and adversely affect our businessability to formulate and resultsexecute a successful Plan under Chapter 11, sell our assets and make any distribution and, if so, the amount of operations.such distribution, to our stockholders.
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While we currently carry commercial general liability, commercial automobile liability, product liability, excess liability, workers’ compensation, cyber security and directors’ and officers’ insurance policies, coverage amounts are limited and we may not maintain as much insurance coverage as other OEMs do.limited. In some cases, we may not maintain any insurance coverage at all. Additionally, the policies that we do have may include significant deductibles and exclusions, and we cannot be certain that our insurance coverage will be applicable to or sufficient to cover all current and future claims against us.
Our insurers have asserted a denial of coverage under the main tower of our director and officer insurance program with respect to numerous ongoing matters, including the consolidated securities class action, various shareholder derivative actions, the consolidated stockholder class action, various demands for inspection of books and records, the SEC investigation, and the investigation by the United States Attorney’s Office for the Southern District of New York, and certain indemnification obligations, under an exclusion to the policy called the “retroactive date exclusion.” The insurer has identified other potential coverage issues as well. Excess coverage attaches only after the underlying insurance has been exhausted, and generally applies in conformance with the terms of the underlying insurance. We are analyzing the insurer’s position, and intend to pursue any available coverage under this policy and other insurance. As a result of the denial of coverage, no or limited insurance may be available to us to reimburse our expenses or cover any potential losses for these matters, which could be significant. The insurers in our Side A D&O insurance program, providing coverage for individual directors and officers in derivative actions and certain other situations, have issued a reservation of rights letter which, while not denying coverage, has cast doubt on the availability of coverage for at least some individuals and/or claims.
In addition, inas a result of the event the Company pursues bankruptcy protection,Chapter 11 Cases, we have been and may be subject to additional litigation or other claims related to athe Foxconn dispute and bankruptcy, or dissolution and liquidation, andliquidation. The resolution of outstanding claims will be subject to the bankruptcy process.
The filing of the Chapter 11 Cases established an automatic stay of proceedings against the Company. However, the Bankruptcy Court granted Karma relief from the automatic stay to allow the Karma Action to proceed with the jury trial against the Company scheduled in September 2023. Karma is seeking permanent injunctive relief and monetary damages in excess of $900 million based on a variety of claims and theories asserting very substantial losses by Karma and/or improper benefit to the Company that significantly exceed our accrual with respect to the matter and ability to pay. We are continuing to vigorously defend against Karma’s claims and continue to believe that there are strong defenses to the claims and damages demanded. However, the outcome of the Karma Action is subject to uncertainties inherent in the litigation process and no assurances can be given regarding the outcome of the trial or the impact of the Karma Action on the Company, including its ability to sell assets that Karma claims were misappropriated by the Company or that incorporate trade secrets or property that Karma claims were misappropriated by the Company. At this time, the Company cannot predict the results of many of the currentongoing proceedings or the interim and futureultimate determinations regarding the claims to be made by the Bankruptcy Court. Future resolution of these matters could result in changes in management'smanagement’s estimates of losses, which could be material to our consolidated financial statements.
As of March 31,June 30, 2023, we have an aggregate provision for potential settlements of litigation of $34.7$75.0 million. This provision is based on current information, legal advice and the potential impact of the outcome of one or more claims on related matters and may be increased in the future based on new developments. This accrual does not reflect a full range of possible outcomes for these proceedings or the full amount of any damages alleged, which are significantly higher. While we believe that additional losses beyond current accruals are likely, and anyAny such additional losses may be significant,significant; however, we cannot presently estimate a possible loss contingency or range of reasonably possible loss contingencies beyond current accruals. Estimating probable losses requires the analysis of multiple forecasted factors that often depend on judgments and potential actions by third parties. Legal fees and costs of litigation or an adverse judgment or settlement in any one or more of our ongoing litigation matters that are not insured or
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that is in excess of insurance coverage could significantly exceed our current accrual and ability to pay. This would have a material adverse effect on our financial position and results of operationsoperations.
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We may not be able to consummate a sale of all, substantially all or some of our assets, or generate significant proceeds from any such sale.
On August 8, 2023, the Bankruptcy Court approved our procedures for conducting a comprehensive marketing and could adversely affectsale process for all, substantially all or some of our assets. Given general economic and market conditions, and the uncertainty regarding our ability to raise additional capital,sell assets that Karma claims were misappropriated by us or that incorporate trade secrets or property that Karma claims were misappropriated by us, we can provide no assurance that we will be able to successfully complete any such dispositions, the timing or proceeds and severely curtailother terms of any such transactions. Further, the accounting principles and estimates applied to value our assets for financial reporting purposes resulting in significant impairments and reserves may not bear any relationship to their actual market value, which may be higher or causelower.
The failure to consummate a sale of all, substantially all or some of our operationsassets or to ceasegenerate sufficient proceeds, may have a material impact on the ultimate recovery for stakeholders, including creditors. As mentioned above, it is uncertain whether holders of our equity securities will recover any portion of their investments.
The amount of claims allowed could significantly exceed our estimates.
The Bankruptcy Court has not established a bar date for all creditors to file their proof of claim or interest. There can be no assurance regarding the amount of claims allowed to participate in distributions under a Plan or that such claims will not be significantly greater than may be anticipated which, could in turn result in the value of distributions to stakeholders being delayed, reduced, or eliminated entirely. Inevitably, some assumptions will not materialize, and unanticipated events and circumstances may affect the ultimate results and total amount of claims against us.
Our Class A common stock has been delisted from Nasdaq and experiences the risks of trading in an over-the-counter market.
On June 28, 2023, we received notification from Nasdaq that our Class A common stock is no longer suitable for listing on Nasdaq. Trading of our Class A common stock was suspended at the opening of business on July 7, 2023 and a Form 25 was filed with the SEC on July 27, 2023 to delist the Class A common stock from Nasdaq. The delisting became effective August 6, 2023. We will remain subject to SEC reporting obligations.
As a result of the suspension and expected delisting, our Class A common stock began trading on the OTC Pink Marketplace under the symbol “RIDEQ” on July 7, 2023, and such market is currently the only trading market for our Class A common stock. We can provide no assurance that our Class A common stock will continue to trade on this market, whether broker-dealers will continue to provide public quotes of our Class A common stock on this market, whether the trading volume of our Class A common stock will be sufficient to provide for an efficient trading market or whether quotes for our Class A common stock will continue on this market in the future, which could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell our Class A common stock. Furthermore, because of the limited market and generally low volume of trading in our abilityClass A common stock, the price of our Class A common stock is likely to raisebe volatile and more likely to be affected by broad market fluctuations, general market conditions, changes in the additional capital we need to executemarkets’ perception of our securities, and announcements made by us or third parties with interests in the Chapter 11 Cases.
Operating in bankruptcy for a long period of time would harm our business, plans is adversely impacted byand would otherwise harm or eliminate recoveries to creditors and stockholders.
A long period of operations in the potentialChapter 11 Cases under Bankruptcy Court protection would likely have a material adverse effect ofon our business, financial condition, liquidity and ability to generate significant proceeds from any one or more ofasset sales. So long as the pending litigations, SEC investigation and related ongoing significant legal costs. Unless we are ableChapter 11 Cases continue, senior management will be required to obtain substantial additional funding, given our current lack of liquidity, it is reasonably likely that any adverse judgment, settlement, or court order requiring the payment ofspend a significant amount of damages would be settled under bankruptcy protection.
We have facedtime and expect to continue to face supply chain challenges affecting our access to critical raw materials and components in appropriate quantities and of appropriate quality, and may be unable to adequately maintain or establish supplier relationships or controleffort dealing with the costs or maintain adequate supply of components and raw materials to facilitate our development plans and production timeline.Chapter 11 Cases. A prolonged
We rely on third-party suppliers for the provision and development of many of the key components and materials used in our vehicles. Disruptions to the supply chain have resulted in and may continue to present challenges for obtaining certain components and raw materials in a timely manner, of appropriate quality and/or at favorable pricing. For example, in the first quarter of 2023, performance and quality issues with certain Endurance components led us to temporarily pause production and customer deliveries and to voluntarily recall the Endurance while we worked with our supplier network to implement corrective actions. We continue to monitor closely the key components that are in short supply and ongoing quality issues; however, no assurances can be given that part availability and quality will not restrict production further.
Inflation also has significantly impacted the prices of key raw materials included in the Endurance and its components as well as labor costs and certain indirect costs, such as utilities. Furthermore, currency fluctuations, labor shortages, tariffs or shortages in petroleum, steel and aluminum or other raw materials, the direct and indirect effects of the war in Ukraine and other economic or political conditions have impacted the transportation industry and resulted and may continue to result in significant increases in freight charges, delays in obtaining critical materials or changes in the specifications for those materials.
Moreover, our low production volumes have contributed to certain production suppliers curtailing or ceasing supply, or in some cases, materially raising the prices we must pay for certain components or imposing termination costs. Due to these factors and our limited initial production volume, our current BOM cost is substantially higher than the current selling price of the Endurance.
These factors have impacted and are expected to continue to impact our testing and production costs, and volume and timeline for production. As a result, we may be unable to adequately control the costs associated with our operations, even with continued refinement of our operating plan, and the prices for and availability, timing, terms and quality of these materials may fluctuate depending on factors beyond our control, which may negatively impact our production timeline and volume, sales, reputation, profitability and cash flows.
In addition, further production delays, curtailed operations, continuing doubt regarding our ability to continue as a going concern, the dispute with Foxconn and the initiation of any bankruptcy proceedings could further adversely affect our relationships with our suppliers, vendors, customers, employees, and other third parties, and our ability to negotiate favorable terms with them. Public perception of our continued viability may affect, among other things, the desire of new and existing customers, vendors, employees, or other third parties to enter into or continue their agreements or arrangements with us. The failure to maintain any of these important relationships could adversely affect our business, financial condition, and results of operations. If we seek bankruptcy protection, we would also need the prior approval of the bankruptcy court for transactions outside the ordinary course of business, which may lead to delays and/or limit our ability to respond timely to certain events or take advantage of certain opportunities. Any further delays or other negative events during the pendency any bankruptcy protection could result in prolonged operational disruption for the Company,
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period of operating under Bankruptcy Court protection may make it more difficult to retain management and other key personnel necessary to the success of our remaining business and the sale of all, substantially all, or some of the Company’s assets. Attrition has, and may also cause, us to engage third parties to perform the work. Such third parties are likely to be more costly and less efficient than if we were to be able to use our own employees.
So long as the Chapter 11 Cases continue, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 Cases, including potentially the cost of litigation. In general, litigation can be expensive and time consuming to bring or defend against. Such litigation could result in settlements or damages that could significantly and adversely affect our financial results. It is also possible that certain parties will commence litigation with respect to the treatment of their claims under a plan. It is not possible to predict the potential litigation that we may become party to, nor the final resolution of such litigation. The impact of any such litigation on our business and financial stability, however, could be material.
Moreover, shortly after filing the Chapter 11 Cases, we ceased production of the Endurance and new program development and accordingly have no ongoing source of meaningful revenue. Any delays in our Chapter 11 Cases could increase the costs and risks associated with the bankruptcy process, and diminish the value, if any, that is available to our various stakeholders (including creditors and stockholders).
If Also, we cannot regain compliance with Nasdaq continued listing standards, Nasdaqneed the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business during the course of bankruptcy proceedings, which may delist our Class A common stock, which could negatively affect the Company andlimit our ability to raise additional capital, the pricerespond timely to certain events or take advantage of certain opportunities. Because of the Class A common stockrisks and stockholders’ ability to sell Class A common stock.
On April 19, 2023,uncertainties associated with bankruptcy proceedings, we cannot accurately predict or quantify the Company received the Notice from Nasdaq indicatingultimate impact of events that because the closing bid price for the Company’s Class A common stock had fallen below $1.00 per share for 30 consecutive business days (March 7, 2023 through April 18, 2023), the Company was no longer in compliance with the $1.00 Minimum Bid Price requirement set forth in Nasdaq Listing Rule 5450(a)(1) for continued listing on The Nasdaq Global Select Market. Pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A), the Company has a compliance cure period of 180 calendar days, or until October 16, 2023, to regain compliance with the Bid Price Requirement. To regain compliance, the closing bid price of the Company’s Class A common stock must meet or exceed $1.00 per share for a minimum of 10 consecutive business days prior to October 16, 2023.
If the Company does not regain compliance by October 16, 2023, the Company may be eligible for an additional grace period. To qualify, the Company must apply to transfer the listing of the Class A common stock to The Nasdaq Capital Market, which requires the Company to meet the continued listing requirements for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Bid Price Requirement, and provide written notice of its intention to cure the minimum bid price deficiencycould occur during the second compliance cure period. If the Company meets these requirements, the Nasdaq staff would be expected to grant an additional 180 calendar days for the Company to regain compliance with the minimum bid price requirement.
The Company is currently evaluating various courses of action to regain compliance with the Bid Price Requirement, including implementing a reverse stock split ifany such action is authorized by the Company’s stockholders. In anticipation of receipt of the Nasdaq Notice, on April 11, 2023, the Company filed the Proxy Statement for the Annual Meeting, which included the Reverse Stock Split Proposal to amend the Charter to effect a reverse stock split of the Company’s Class A common stock at a reverse stock split ratio ranging from 1:3 to 1:15, and to authorize the Company’s board of directors to determine, at its discretion, the timing of the amendment and the specific ratio of the reverse stock split.
proceedings. There can be no assuranceassurances that stockholders will approve the Reverse Stock Split Proposal at the Annual Meeting, that a reverse stock split, if implemented, will increase the market price of the Class A common stock in proportion to the reduction in the number of shares of the Class A common stock outstanding before the reverse stock split or, even if it does, that such pricewe will be maintainedable to sell some or all of our assets in orderly fashion, that we will otherwise realize any significant value for any period of time.
Further, Nasdaq may use its discretionary authority to suspendour assets, or terminate the listing of a company that has filed for protection under any provision of the Bankruptcy Code. It is possible that Nasdaq may exercise its discretion in the event we pursue bankruptcy protection.
If we fail to regain compliance and Nasdaq takes action to delist our Class A common stock, our ability to consummate the Subsequent Common Closingcreditors or Subsequent Preferred Funding, and raise additional financing through the public or private sale of equity securities would be impaired. Delisting our Class A common stock would also adversely impact our liquidity, impair our stockholders’ ability to buy and sell our Class A common stock, and the market pricestockholders (including holders of our Class A common stock could decrease. Delisting our Class A common stock could also adversely impactstock) will receive any recovery from the perception of our financial condition and have additional negative ramifications, including loss of confidence by our employees, the loss of institutional investor interest and fewer business opportunities.
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If authorized by our stockholders, our Board would have the discretion to implement a reverse stock split to regain compliance with the Bid Price Requirement and we cannot predict the effect thatChapter 11 Cases or any reverse stock split will have on the market price for shares of our Class A common stock.
If the Company’s stockholders approve the Reverse Stock Split Proposal at the Annual Meeting, the Board would have the discretion to implement a reverse stock split in order to regain compliance with the Bid Price Requirement. We cannot predict the effect that a reverse stock split will have on the market price for shares of our Class A common stock, and the history of similar reverse stock splits for companies in like circumstances has varied. Some investors may have a negative view of a reverse stock split. Even if a reverse stock split has a positive effect on the market price for shares of our Class A common stock, performance of our business and financial results, general economic conditions and the market perception of our business, and other adverse factors which may not be in our control could lead to a decrease in the price of our Class A common stock following the reverse stock split.
Furthermore, even if the reverse stock split does result in an increased market price per share of our Class A common stock, the market price per share following the reverse stock split may not increase in proportion to the reduction of the number of shares of our common stock outstanding before the implementation of the reverse stock split. Accordingly, even with an increased market price per share, the total market capitalization of shares of our Class A common stock after a reverse stock split could be lower than the total market capitalization before the reverse stock split. Also, even if there is an initial increase in the market price per share of our Class A common stock after a reverse stock split, the market price may not remain at that level.
If the market price of shares of our Class A common stock declines following a reverse stock split, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of the reverse stock split due to decreased liquidity in the market for our Class A common stock. Accordingly, the total market capitalization of our Class A common stock following the reverse stock split could be lower than the total market capitalization before the reverse stock split.bankruptcy proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
N/A
Item 5. Other Information
N/A
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Item 6. Exhibits
Exhibit Index
| ||
|---|---|---|
Exhibit No. | Description | |
| | |
| | |
31.1* | | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
31.2* | | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
32.1* | | |
32.2* | | |
|
| |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
Exhibit 104* | | Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
*
| Filed herewith |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
E | |
| |
| LORDSTOWN MOTORS CORP. |
| |
| |
Date: | /s/ Edward T. Hightower |
| Edward T. Hightower |
| Chief Executive Officer and President |
| (Principal Executive Officer) |
| |
Date: | /s/ Adam Kroll |
| Adam Kroll |
| Chief Financial Officer |
| (Principal Financial and Accounting Officer) |
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