UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, |
OR
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☐ | 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 | |
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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 August 1, 2022, 205,871,56110, 2023, 15,953,212 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 June 30, | |
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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, 2021,2022, as filed with the SECSecurities and Exchange Commission (the “SEC”) on February 28, 2022March 6, 2023 (the “Form 10-K”), and in subsequent reports that we file with the Securities and Exchange Commission (the “SEC”),SEC, including this Form 10-Q for the quarter ended June 30, 2022,2023, as well as the following:
3
| ● | our ability to successfully |
| ● | our ability to obtain |
| ● | the adverse impact of the Chapter 11 Cases on our business, financial condition and |
| ● | the impact of the Foxconn Litigation (as defined below), the SEC investigation and any other pending or future litigation or claims asserted with respect to the Company (including the Karma Action (as defined below)), and possible claims by suppliers for our inability to meet obligations to them, the availability of insurance coverage with respect to such litigation or claims, adverse publicity with respect to these matters, as well as the significant ongoing costs associated with such litigation (see Note 7 – Commitments and Contingencies and Note 9 – Subsequent Events); |
| ● | the outcome of our efforts to market and sell our assets in connection with the Chapter 11 Cases and ability to realize value for such assets, including in light of the claims in the Karma action that certain assets were misappropriated by the Company and the accounting principles and estimates applied to value our assets for financial reporting purposes resulting in significant impairments and reserves that may not bear any relationship to their actual market value; |
| ● | our ability to |
3
| ● | the |
| ● | the |
| ● | risks regarding our |
| ● | risks related to the substantial costs and diversion of our personnel’s attention and resources due to the Chapter 11 Cases, our efforts to market and sell assets, litigation matters and other claims; |
| ● | 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 |
| ● | our ability to |
| ● | our |
| ● | our ability to |
| ● | 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 description of our operations, assets, liabilities, contingencies, liquidity and capital resources included in this report or in any filing we make with the Bankruptcy Court may not accurately reflect such matters during the pendency of or following the Chapter 11 Cases, or the actual market value of our assets in a sale process in light of the accounting principles and estimates applied compared to the results of an organized marketing process, which could result in a higher or lower value; |
| ● | the |
| ● | 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 |
| ● | the costs associated with complying with our warranty obligations for vehicles sold to customers may be significant, and may necessitate we repurchase the vehicles and or refund the purchase price paid. |
There 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 our assets in an orderly fashion, that we will otherwise realize any significant value for our assets or our damages through the Foxconn Litigation, that we will be able to successfully complete our Chapter 11 Cases, or that our creditors or stockholders will receive any recovery from the bankruptcy 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.
4
In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking 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.
45
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Lordstown Motors Corp.
Debtor-In Possession
Balance Sheets
(in thousands except for share data)
(Unaudited)
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| | June 30, 2022 | | December 31, 2021 | ||
ASSETS: | | |
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Current Assets |
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Cash and cash equivalents | | $ | 235,686 | | $ | 244,016 |
Inventory, net | | | 4,013 | | | — |
Prepaid expenses and other current assets | |
| 43,080 | |
| 47,121 |
Total current assets | | $ | 282,779 | | $ | 291,137 |
Property, plant and equipment | |
| 286,928 | |
| 382,746 |
Intangible assets | |
| 1,000 | |
| 1,000 |
Other non-current assets | | | 27,487 | | | 13,900 |
Total Assets | | $ | 598,194 | | $ | 688,783 |
LIABILITIES AND STOCKHOLDERS’ EQUITY: | |
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Current Liabilities | |
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Accounts payable | | $ | 12,979 | | $ | 12,098 |
Accrued and other current liabilities | |
| 34,355 | |
| 35,507 |
Purchase price down payment from Foxconn | |
| — | |
| 100,000 |
Note payable to Foxconn | |
| 13,500 | |
| — |
Total current liabilities | | $ | 60,834 | | $ | 147,605 |
Warrant and other non-current liabilities | | | 1,601 | | | 1,578 |
Total liabilities | | $ | 62,435 | | $ | 149,183 |
Stockholders’ equity | |
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Class A common stock, $0.0001 par value, 300,000,000 shares authorized; 205,871,561 and 196,391,349 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | | $ | 21 | | $ | 19 |
Additional paid in capital | |
| 1,106,521 | |
| 1,084,390 |
Accumulated deficit | |
| (570,783) | |
| (544,809) |
Total stockholders’ equity | | $ | 535,759 | | $ | 539,600 |
Total liabilities and stockholders' equity | | $ | 598,194 | | $ | 688,783 |
See Notes to Condensed Consolidated Financial Statements
5
Lordstown Motors Corp.
Statements of Operations
(in thousands except for per share data)
(unaudited)
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| | Three months ended | | Three months ended |
| Six months ended |
| Six months ended | ||||
|
| June 30, 2022 |
| June 30, 2021 | | June 30, 2022 | | June 30, 2021 | ||||
Net sales | | $ | — | | $ | — | | $ | — | | $ | — |
Operating expenses | |
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Selling, general and administrative expenses | |
| 29,941 | | | 33,793 | |
| 55,960 | |
| 48,187 |
Research and development expenses 1 | |
| 10,510 | | | 76,544 | |
| 72,374 | |
| 168,356 |
Gain on sale | | | (101,736) | | | — | | | (101,736) | | | — |
Total operating (income) expenses | | $ | (61,285) | | $ | 110,337 | | $ | 26,598 | | $ | 216,543 |
Income (loss) from operations | |
| 61,285 | | | (110,337) | | $ | (26,598) | | $ | (216,543) |
Other income (expense) | |
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Other income (expense) | |
| 1,991 | | | 1,877 | |
| 499 | |
| (17,255) |
Interest income | |
| 383 | | | 260 | |
| 125 | |
| 387 |
Income (Loss) before income taxes | | $ | 63,659 | | $ | (108,200) | | $ | (25,974) | | $ | (233,411) |
Income tax expense | |
| — | |
| — | |
| — | |
| — |
Net income (loss) | | $ | 63,659 | | $ | (108,200) | | $ | (25,974) | | $ | (233,411) |
Income (loss) per share attributable to common shareholders | |
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Basic | | | 0.32 | | | (0.61) | | | (0.13) |
| | (1.33) |
Diluted | | | 0.32 | | | (0.61) | | | (0.13) | | | (1.33) |
Weighted-average number of common shares outstanding | |
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Basic | |
| 200,821 | | | 176,585 | |
| 198,674 |
|
| 175,595 |
Diluted | | | 201,015 | | | 176,585 | | | 198,674 | | | 175,595 |
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| | June 30, 2023 | | December 31, 2022 | ||
ASSETS: | | |
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Current Assets |
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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: | |
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Current Liabilities | |
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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 | |
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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
6
Lordstown Motors Corp.
Debtor-In Possession
Statements of Stockholders’ Equity/(Deficit)Operations
(in thousands)thousands except for per share data)
(unaudited)
| | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 | |||||||||||||
| | | | | | | Additional | | | | | Total | ||
| | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | ||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | ||||
Balance at March 31, 2022 |
| 196,980 | | $ | 20 | | $ | 1,088,925 | | $ | (634,442) | | $ | 454,503 |
Issuance of common stock |
| 642 | |
| — | |
| 1,237 | |
| — | |
| 1,237 |
RSU Vesting | | 1,687 | | | — | | | — | | | — | | | — |
Common stock issued to YA | | 6,562 | | | 1 | | | 13,733 | | | — | | | 13,734 |
Stock compensation |
| — | |
| — | |
| 2,626 | |
| — | |
| 2,626 |
Net income |
| — | |
| — | |
| — | |
| 63,659 | |
| 63,659 |
Balance at June 30, 2022 |
| 205,871 | | $ | 21 | | $ | 1,106,521 | | $ | (570,783) | | $ | 535,759 |
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| Three Months Ended June 30, 2021 | | Three months ended | | Three months ended |
| Six months ended |
| Six months ended | |||||||||||||||||
| | | | | | | Additional | | | | | Total |
| June 30, 2023 |
| June 30, 2022 | | June 30, 2023 | | June 30, 2022 | ||||||
| | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | ||||||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | ||||||||||||||||
Balance at March 31, 2021 | | 176,579 | | $ | 18 | | $ | 962,949 | | $ | (259,652) | | $ | 703,315 | ||||||||||||
Issuance of common stock |
| 27 | |
| — | |
| 48 | |
| — | |
| 48 | ||||||||||||
Stock compensation |
| — | |
| — | |
| 3,840 | |
| — | |
| 3,840 | ||||||||||||
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) | |
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(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 |
| — | |
| — | |
| — | |
| (108,200) | |
| (108,200) | | | (154,491) | | | 63,659 | | | (326,210) | | | (25,974) |
Balance at June 30, 2021 |
| 176,606 | | $ | 18 | | $ | 966,837 | | $ | (367,852) | | $ | 599,003 | ||||||||||||
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 | |
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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 | |
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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)
| | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 | |||||||||||||
| | | | | | | Additional | | | | | Total | ||
| | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | ||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | ||||
Balance at December 31, 2021 | | 196,391 | | $ | 19 | | $ | 1,084,390 | | $ | (544,809) | | $ | 539,600 |
Issuance of common stock |
| 1,106 | | | 1 | | | 1,852 | | | — | | | 1,853 |
RSU Vesting | | 1,812 | | | — | | | — | | | — | | | — |
Common stock issued to YA | | 6,562 | | | 1 | | | 13,733 | | | | | | 13,734 |
Stock compensation |
| — | | | — | | | 6,546 | | | — | | | 6,546 |
Net loss |
| — | | | — | | | — | | | (25,974) | | | (25,974) |
Balance at June 30, 2022 | | 205,871 | | $ | 21 | | $ | 1,106,521 | | $ | (570,783) | | $ | 535,759 |
| | | | | | | | | | | | | | | | | | | |
| | 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 |
| | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 | |||||||||||||
| | | | | | | Additional | | | | | Total | ||
| | Common Stock | | Paid-In | | Accumulated | | Stockholders’ | ||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | ||||
Balance at December 31, 2020 | | 168,008 | | $ | 17 | | $ | 765,162 | | $ | (134,441) | | $ | 630,738 |
Issuance of common stock |
| 614 | |
| — | |
| 1,098 | |
| — | |
| 1,098 |
Common stock issued for exercise of warrants | | 7,984 | | | 1 | | | 194,797 | | | — | | | 194,798 |
Stock compensation |
| — | |
| — | |
| 5,780 | |
| — | |
| 5,780 |
Net loss |
| — | |
| — | |
| — | |
| (233,411) | |
| (233,411) |
Balance at June 30, 2021 | | 176,606 | | $ | 18 | | $ | 966,837 | | $ | (367,852) | | $ | 599,003 |
| | | | | | | | | | | | | | | | | | | |
| | 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
78
Lordstown Motors Corp.
Debtor-In Possession
Statements of Cash Flows
(in thousands)
(unaudited)
| | | | | | |
| | | | | | |
| | Six months ended | | Six months ended | ||
|
| June 30, 2022 |
| June 30, 2021 | ||
Cash flows from operating activities |
| | |
| |
|
Net loss | | $ | (25,974) | | $ | (233,411) |
Adjustments to reconcile net loss to cash used by operating activities: | |
| | |
|
|
Stock-based compensation | |
| 6,546 | |
| 5,780 |
Gain on disposal of fixed assets | |
| (101,736) | |
| — |
Other non-cash changes | | | 9,123 | | | 18,261 |
Forgiveness of note payable | | | — | | | (1,015) |
Changes in assets and liabilities: | | | | | | |
Accounts receivables | |
| — | |
| 19 |
Inventory | | | (13,413) | | | — |
Prepaid expenses and other assets | | | 5,301 | | | 726 |
Accounts payable | | | 1,197 | | | 7,209 |
Accrued expenses and other liabilities | |
| (2,471) | |
| 31,057 |
Net Cash used by operating activities | | $ | (121,427) | | $ | (171,374) |
Cash flows from investing activities | | |
| | |
|
Purchases of capital assets | | $ | (40,043) | | $ | (175,601) |
Investment in Foxconn Joint Venture | | | (13,500) | | | — |
Proceeds from the sale of capital assets | | | 37,553 | | | — |
Net Cash used by investing activities | | $ | (15,990) | | $ | (175,601) |
Cash flows from financing activities | | |
| | |
|
Proceeds from notes payable | | $ | 13,500 | | $ | 82,016 |
Down payments received from Foxconn | | | 100,000 | | | — |
Issuance of common stock | | | 1,853 | | | 1,098 |
Proceeds from Equity Purchase Agreement with YA, net of issuance costs | | | 13,734 | | | — |
Net Cash provided by financing activities | | $ | 129,087 | | $ | 83,114 |
Decrease in cash and cash equivalents | | $ | (8,330) | | $ | (263,861) |
Cash and cash equivalents, beginning balance | |
| 244,016 | |
| 629,761 |
Cash and cash equivalents, ending balance | | $ | 235,686 | | $ | 365,900 |
| | | | | | |
Non-cash items | | | | | | |
Derecognition of Foxconn down payments for sale of capital assets | | $ | 200,000 | | $ | — |
Capital assets acquired with payables | | $ | 1,846 | | $ | 14,631 |
| | | | | | |
| | 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
89
LORDSTOWN MOTORS CORP
Debtor-In Possession
NOTES TO INTERIMCONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 — DESCRIPTION OF ORGANIZATION AND DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATIONOPERATIONS
Lordstown Description of Business
Lordstown Motors Corp., a Delaware corporation (“Lordstown”,Lordstown,” the “Company” or “we”), is an electric vehicleoriginal equipment manufacturer (“EV”OEM”) innovator developing high-qualityof electric light duty vehicles focused on the commercial fleet vehicles, withmarket. Since inception, we have been developing our flagship vehicle, the Endurance, allan electric pick-up truckfull-size pickup truck.
Our strategy was designed to accelerate the launch of new commercial electric vehicles (“EVs”). This included working on our own vehicle programs as well as partnering with third parties, including Foxconn and its affiliates (as defined below), as we sought to leverage our first vehicle being launched indevelopment experience, our proprietary and open-source code and other non-proprietary technologies, our existing Endurance vehicle platform, and potential new vehicle platforms to drive commonality and scale, and more efficiently develop and launch EVs, to enhance capital efficiency and achieve profitability.
In the Lordstown, Ohio facility. We are inthird quarter of 2022, the final design and testing phase related to ourCompany started commercial production of the Endurance but have yetwith the first two vehicles completing assembly in September. The Company subsequently completed homologation and testing and received required certifications enabling us to bring a completed productrecord 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 market. We have also recently establishedcease 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.
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 Joint Venture (definedTransactions (as defined below) as Foxconn continued to jointly design, develop, testshift its approach to the nature of the partnership and industrialize all-electric commercial vehiclesthe 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 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 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. As part of these actions, two notices were provided to a substantial number of employees under the Worker Adjustment and Retraining Notification Act (“EC Vehicles”WARN Act”) in May 2023, for job eliminations to occur in July 2023. Therefore, this reduction in costs occurred after the 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 using its Mobility-in-Harmony (“MIH”) platform,under which would also be built at the Lordstown, Ohio plant and potentially licensed for production elsewhereFoxconn agreed to make an additional equity investment in the world.Company (the “Investment Agreement”). The Asset Purchase Agreement, Contract Manufacturing Agreement and the Investment Agreement together are herein referred to as the “Foxconn Transactions.”
10
Investment Agreement
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, $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 could 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”).
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 provided for the second closing of Class A common stock (the “Subsequent Common Closing”), at which time Foxconn was required to purchase approximately 10% of the Class A common stock for approximately $47.3 million. The Subsequent Common Closing was 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 satisfied). CFIUS Clearance was received on April 25, 2023, which means the Subsequent Common Closing was to occur on or before May 8, 2023. The Company was 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 was 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 have provided critical liquidity for the Company’s operations. Since April 21, 2023, Foxconn has disputed its obligations under the Investment 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 initially asserted that the Company was in breach of the Investment Agreement due to the Company’s previously disclosed receipt of a notice (the “Nasdaq Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”), which Nasdaq Notice indicated that the Company’s Class A common stock price dropped below the $1.00 per share threshold set forth in Nasdaq Listing Rule 5450(a)(1) (the “Bid Price Requirement”) and that 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 that purported breach was not cured within 30 days.
The Company continues to believe that the breach allegations by Foxconn are without merit, and that Foxconn was obligated to complete the Subsequent Common Closing on or before May 8, 2023. Despite the Company taking action to satisfy the Bid Price Requirement as of June 7, 2023, and discussions between the parties to seek a resolution regarding the Investment Agreement, Foxconn did not proceed with the Subsequent Common Closing or any Subsequent Preferred Funding. As a result of Foxconn’s actions, the Company has been deprived of critical funding necessary for its operations. To seek relief for Foxconn’s contractual breaches and other fraudulent and tortious conduct the Company believes were committed by Foxconn, the Company commenced the Foxconn 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 Hon Hai Technology Group (“HHTG”; either HHTG, or applicable affiliates of HHTG are referred to herein as “Foxconn”), 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 outsourcedoutsources all of the manufacturing of the Endurance to Foxconn under the Contract Manufacturing Agreement (defined below).Agreement. Lordstown EV also entered into a lease pursuant to which Lordstown EV leases space located at the Lordstown, Ohio facility from Foxconn for itsLordstown 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.
The
We received $257 million in proceeds related to the sale, consisting of the $230 million initial purchase price for the Lordstown facility consisted of $230assets, plus $8.9 million for expansion investments and aan $18.4 million reimbursement payment for certain operating and expansion costs incurred by Lordstown EVus from September 1, 2021 untilthrough the APA Closing. Foxconn made down payments of the purchase price totaling $200 million through April 15, 2022, of which $50 million and $100 million werewas received during the threein both 2022 and six months ended June 30, 2022, respectively.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 as of June 30, 2022 and will be finalized over a post-closing review period.million.
Research and development costs are presented net of the $18.4 million reimbursement of costs by Foxconn for the three and six monthsyear ended June 30,December 31, 2022. Included in the $18.4 million reimbursement were approximately $7.7 million of research and development costs incurred in 2021. Of the $10 million expansion costs, $7.5 million is attributable to assets sold to Foxconn at the APA Closing with the remaining $2.5 million being a prepayment for open purchase orders as of the APA Closing related to expansion costs. Also, in connection with the APA Closing, the Company issued warrants tothe Foxconn thatWarrants (as defined herein), which are exercisable until the third anniversary of the APA Closing for 1.70.13 million shares of Class A common stock at an exercise price of $10.50
9
$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 willwas to (i) manufacture the Endurance at the Lordstown facility for a fee per vehicle, (ii) following a transition period, procure components for the manufacture and assembly of the Endurance, subject to sourcing specifications provided by Lordstown EV, and (iii) provide certain post-delivery services. To date, Foxconn has not provided 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 bill of materials (“BOM”) cost of the Endurance, and otherwise improving the commercial terms of procurement with suppliers, and the partiessuppliers. However, we did not realize any material reduction of raw material or component costs or improvement in commercial terms based on Foxconn’s actions. Foxconn was required to work together to reduce the overall bill of materials cost of the Endurance. Foxconn conductsconduct 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 will invoiceinvoiced 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 twelve-week12-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 month12-month notice period in the event either party seeks to terminate the agreement. In the event noneither 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 will terminateterminates immediately upon the occurrence of any bankruptcy event.
Foxconn Joint Venture AgreementVoluntary Chapter 11 Petition
AlsoOn 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 connectionthe 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 documents filed with the APA Closing, LordstownBankruptcy 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 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 net operating loss carryforwards and other 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 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
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 entered intoEV System LLC filed a Limited Liability Company Agreementmotion to dismiss the Chapter 11 Cases or to convert the cases under Chapter 7 of the Bankruptcy Code (the “Foxconn Joint Venture Agreement”Motion to Dismiss”). 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.
Foxconn Litigation
On June 27, 2023, the Company commenced an adversary proceeding against Foxconn (the “Foxconn Litigation”) in the Bankruptcy Court seeking relief for fraudulent and filed a Certificatetortious conduct as well as breaches of Formation on May 11, 2022 to form MIH EV Design LLC, a Delaware limited liability company, as athe Investment Agreement, the parties’ joint venture to design, develop, testagreement, the APA, and industrialize EC Vehicles (the “Foxconn Joint Venture”). Foxconn hasthe CMA that the Company believes were committed $100 million to the Foxconn Joint Venture, consisting of $55 million in the form of direct capital contributions, and a $45 million loan to Lordstown EV pursuant to and on the conditionsby Foxconn. As set forth in the Notes (as defined below), the proceeds of which will only be used to fund our capital contributionscomplaint relating to the Foxconn Joint Venture. Initially, Foxconn has an ownership interest in the Foxconn Joint Venture of 55% and Lordstown EV has a 45% interest. On June 24, 2022, Foxconn made its initial investments totaling $16.5 million in the Foxconn Joint Venture pursuantadversary proceeding, Foxconn’s actions have caused substantial harm to the Foxconn Joint Venture Agreement. Lordstown EV’s 45% share, or $13.5 million, was invested with proceeds from issuance of the Notes on June 27, 2022.
Company’s operations and prospects and significant damages. See “Foxconn Transactions” above and Note 7 – Commitments and Contingencies for additional information. The Foxconn Joint Venture Agreement contemplates a license toLitigation is Adversary Case No. 23-50414.
Cessation of Production
Shortly after commencing the Foxconn Joint Venture to use certain intellectual property owned by Foxconn and its affiliated entities relating to certain automotive related designs (the “FX IP”) to develop EC Vehicles, with the Foxconn Joint Venture owning all intellectual property rights it develops (other than the FX IP). The Foxconn Joint Venture Agreement also contemplates an exclusive license of all intellectual property owned by the Foxcon Joint Venture relating to any EC Vehicle designed by the Foxconn Joint Venture to Lordstown EV for use in the North American commercial market, and to Foxconn for use outside of North America, each subject to customary and reasonable licensing fees.
Pursuant to the Foxconn Joint Venture Agreement, the Foxconn Joint Venture will be overseen by a five-person management board with Foxconn initially having the right to appoint three members and Lordstown EV initially having the right to appoint two members. Certain major decisions, including, but not limited to, the
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approval of budgets, raising additional equity, incurring third party indebtedness, mergers, related party transactions, dissolution and increases in the size of the management board, require the consent of at least one member of the management board appointed by Lordstown EV for so long as we own at least 30% of the Foxconn Joint Venture. Other than with respect to certain customary permitted transfers, neither Lordstown EV nor Foxconn is permitted to transfer its interest in the Foxconn Joint Venture for a period of three years following the formation of the Foxconn Joint Venture. Thereafter, each party has a right of first refusal and a tag-along right with respect to any proposed transfer by the other party.
Under the Foxconn Joint Venture Agreement, we are Foxconn’s primary development partner in North America. We plan to develop a portfolio of electric vehicles targeting commercial fleet customers, built at the Lordstown, Ohio plant using the advanced designs from Foxconn and its affiliates. We plan for Foxconn to supply the FX IP for the vehicles to be customized for and homologated in North America by the Foxconn Joint Venture, along with certain vehicle components and subsystems, enabling us to leverage Foxconn’s manufacturing expertise, supply-chain network and extensive experience in software development and integration (key capabilities in the production of EVs) to complement our EV design, development, engineering and homologation contributions. No assurance can be given that we will be able to realize the potential benefits of the Foxconn Transactions (as defined below).
Note, Guaranty and Security Agreements
The Foxconn Joint Venture Agreement provides that Lordstown EV, as the issuer, and guaranteed by our wholly-owned subsidiary Lordstown EV Sales LLC, andChapter 11 Cases, the Company (collectively, the “Note Parties”), will enter into note, guaranty and security agreements (the “Notes”) with Foxconn, as the payee, pursuant to which Foxconn makes term loans to Lordstown EV in an aggregate original principal amount not to exceed $45 million as advances are requested by Lordstown EV. On June 27, 2022, Foxconn funded $13.5 million in exchange for Lordstown EV delivering a Note in such amount. The proceeds were used for our initial investment in the Foxconn Joint Venture.
To secure its obligations under Notes, Lordstown EV has granted Foxconn a security interest in (i) all of Lordstown EV’s equity interests in the Foxconn Joint Venture, and (ii) personal property constituting the hub motor, battery module and battery pack assembly lines. We may use the proceeds only to fund our capital commitment of $45 million to the Foxconn Joint Venture, pursuant to the Foxconn Joint Venture Agreement.
The Notes will accrue interest at a rate of 7.0% per annum, to be paid-in-kind, and due on the earlier of (i) the first anniversary of issuance and (ii) December 31, 2025, unless earlier terminated in the event of a default. Pursuant to the Foxconn Joint Venture Agreement, each Note maturing before December 31, 2025 will be refinanced by Foxconn with a new Note in the principal amount equal to the outstanding principal amount of the refinanced Note, plus accrued and unpaid interest thereon, and will have terms substantively identical to the terms of the refinanced Note. Events of default include, among other things, the breach of certain covenants or representations, defaults under other loans or obligations, judgments, orders or claims not vacated or otherwise paid, involvement in bankruptcy proceedings, an occurrence of a change of control or the loss of any material collateral (as such terms are defined in the Notes). Each Note will contain negative covenants which, while in effect, restrict the Note Parties from, among other things, incurring certain types of other debt (subject to various baskets), making certain expenditures or investments, any mergers or other fundamental changes, or changing the character of the Note Parties’ businesses. While it is not intended that any amounts will become due under the Notes prior to December 31, 2025, each Note has a term of one year and the refinancing of each Note is subject to certain conditions, including the absence of an event of default. Given the risk of the incurrence of an event of default, we have classified the Notes as a current liability.
Each Note and all accrued but unpaid interest thereon may be prepaid, in whole or in part, at any time or from time to time, without any penalty or premium. Lordstown EV will be required to prepay each Note and all accrued but unpaid interest thereon with proceeds received upon distributions from the Foxconn Joint Venture or cash proceeds of certain asset dispositions.
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Ongoing Operations
Even though the APA, the Contract Manufacturing Agreement and the Foxconn Joint Venture Agreement (together, the “Foxconn Transactions”) were consummated, we will need additional funding to execute our 2022 business plan and to achieve scaledceased production of the Endurance dueand new program development. Accordingly, the Company lacks any meaningful revenue related to selling vehicles. Our ongoing operations as of the capital requiredend of the second quarter and continuing into the third quarter of 2023 primarily include support of vehicles that have been delivered to complete testingcustomers, custody and validation, purchasemaintenance of our assets for prospective sale under the raw materials and vehicle components for saleable vehicles, investprocess established in the hard tooling to lower our bill of materials costChapter 11 Cases or otherwise, support for the sale process and fund future engineeringadministration and corporate expenditures. As discussed above, the Company incurred debt to fund our investment in the Foxconn Joint Venture, and no assurance can be given that we will be able to raise sufficient capital or to realize the potential benefitsfacilitation of the Foxconn Transactions.
We continue to explore all financing alternatives as our operations are anticipated to require significant capital investment for the foreseeable future. We are also seeking strategic partners, including other automakers, to provide additional capital/orChapter 11 Cases and other support to enable us to scale the Endurance program and to develop new vehicle programs through the Foxconn Joint Venture. As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all.related proceedings.
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 unaudited condensed consolidated interim 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 unaudited condensed consolidated interim 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 a 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 our 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 unaudited condensed consolidated interim 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 unaudited condensed consolidated interim 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
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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 unaudited condensed consolidated interim 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 unaudited condensed consolidated interim financial statements are issued.
WeThe Company had cash, and cash equivalents, and short-term investments of approximately $235.7$137.7 million and an accumulated deficit of $570.8$1,153.4 million at June 30, 20222023 and a net loss of $26.0$154.5 million and $326.2 million for the three and six months ended June 30, 2023, respectively.
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Due to the failure to identify a strategic partner for the Endurance, an electric full-size pickup truck. We have built alack of expected funding and other support from Foxconn (as discussed in more detail above and elsewhere in this report) and extremely limited numberability to raise sufficient capital in the current market environment, we determined it was in the best interests of pre-production vehicles (“PPVs”) during the first half of 2022 for testing, certification, validation, regulatory approvalsCompany’s stakeholders to take aggressive actions to cut costs and to demonstratepreserve cash, file the capabilitiesChapter 11 Cases and cease production of the Endurance and new program 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 customers. Thevalue of the Company’s NOLs.
Our liquidity and ability to continue as a going concern is dependent onupon, among other things: (i) our ability to realizedevelop, confirm and consummate a Plan or other alternative liquidating transaction, (ii) the benefitsresolution of contingent and other claims, liabilities, the Karma Action and the Foxconn Litigation (see Note 7 – Commitments and Contingencies and Note 9 – Subsequent Events), (iii) the outcome of the Foxconn Transactions, raise substantial additional capital, completeCompany’s efforts to sell all or a portion of its assets, and (iv) the developmentcost, duration and outcome of the Endurance, obtain regulatory approval, begin commercial productionChapter 11 Cases.
We have incurred significant professional fees and launchother costs in connection with preparation for the saleChapter 11 Cases 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 Endurance. claims that may be filed by such deadline, or what the Company’s total estimated liabilities based on such claims will be.
The Company’s current levelBankruptcy Court approved procedures for the Debtors to conduct a comprehensive marketing and sale process with respect to all, substantially all or some of cashtheir 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 cash equivalents are not sufficientother terms of any such transactions. The Company also intends to execute our 2022 business planuse the tools of Chapter 11 to fully, finally, and achieve scaled productionefficiently 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 Endurance dueresolution 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 substantial additional capital requiredmovants’ assertions and intend to complete testing and validation, purchasevigorously oppose the raw materials and vehicle components for saleable vehicles, investmotion. 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 hard toolingbest interest of holders of claims and interests or upon the showing of cause, the Bankruptcy Court may convert the Chapter 11 Cases to lower our billcases under Chapter 7 of materials costthe 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 fund future engineering
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classification of recorded asset amounts or the amounts and corporate expenditures. Forclassification of liabilities that might result from the foreseeable future, we will incur significant operating expenses, capital expendituresoutcome of this uncertainty. As a result of these and working capital funding that will deplete our cash on hand. These conditions raiseother circumstances, there is substantial doubt regarding the Company’sour ability to continue as a going concern, The value available to our various stakeholders, including our creditors and stockholders, is highly uncertain. The trading prices for a periodour securities may bear little or no relationship to the actual recovery, if any, by holders of at least one year from the date of issuance of these condensed consolidated financial statements. As a result of having insufficient capital to execute our 2022 business plan, we have substantially limited investments in tooling and other aspects of the Endurance and our operations. The trade-offs we are making, including related to hard tooling, are likely to result in higher costs for the Companysecurities in the future and are likely to slow or impair future design enhancements or options we may otherwise seek to make available to customers.Chapter 11 Cases, if any.
Our research and development expenses and capital expenditures are significant due to spending needed for prototype components, vehicle validation tests, securing necessary parts/equipment, and utilizing in-house and third-party engineering services. During 2021, we experienced the stress that the COVID-19 pandemic put on the global automotive supply chain. Furthermore, in 2021 and 2022, we have incurred significant freight charges due in part to the COVID-19 pandemic and challenging logistics that created delays and higher pricing on standard freight as well as to incur substantially higher expedited freight charges to mitigate delays. The Company expects continued supply chain constraints including the availability of and long lead times for components, as well as raw materials and other pricing pressures that are likely to negatively impact our cost structure and production timeline. We also have meaningful exposure to material losses and costs related to ongoing litigation for which insurance is unlikely to be available. See Note 5 – Commitments and Contingencies for additional information.Reverse Stock Split
In an effort to alleviate these conditions, management continues to seek and evaluate opportunities to raise additional funds throughAt the issuanceannual meeting of equity or debt securities, asset sales, through arrangements with strategic partners or through financing from government or financial institutions. We have engaged a financial advisor to advisestockholders held on May 22, 2023 (the “2023 Annual Meeting”), the stockholders of the Company on additional financing alternatives. No assurances can be given that any such financing will be available on commercially reasonable terms or at all.
As further described in Note 7, on July 23, 2021, the Company entered into the Equity Purchase Agreement with YA II PN, LTD. (“YA”), pursuantapproved a proposal to which YA has committed to purchase up to $400 million of its Class A common stock, atamend the Company’s direction from timeSecond Amended and Restated Certificate of Incorporation (the “Charter”) to time, subject toeffect a reverse split of the satisfaction of certain conditions (the “Equity Purchase Agreement”). During the year ended December 31, 2021, the Company issued 9.6 million shares to YA and received $49.4 million, net of equity issuance costs. During the six months ended June 30, 2022, the Company issued 6.6 million shares to YA and received $13.7 million, net of equity issuance costs. The actual amount that the Company raises under this agreement will depend on market conditions and limitations in the agreement. In particular, without stockholder approval, the amount of shares the Company can issue would be limited to up to 35.1 million shares (unless the average price of all shares
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sold is $7.48 or higher) (“the Exchange Cap”), less the 16.2 million shares already issued, and therefore this share limitation and the current market price that would be the basis for the price of theCompany’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 sold limitdetermined by the fundsBoard of Directors of the Company is able(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 raisethe 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 significantly less thanimprove the original $400 million commitment undermarketability and liquidity of the Equity Purchase Agreement. AsClass A common stock. In addition, the Reverse Stock Split was intended to increase the per share market price of the Class A common stock in order to satisfy the Minimum Bid Price Requirement. On June 30, 2022,7, 2023, the Company was inreceived a written notice from the Listing Qualifications Department of Nasdaq informing the Company that it had regained compliance with the terms and conditions of the Equity Purchase Agreement and the remaining availability under the Equity Purchase Agreement was Bid Price Requirement.$
336.2
million, however, the actual availability under the Equity Purchase Agreement is limited due to the conditions described above.Nasdaq Delisting
On May 11, 2022, pursuant to the APA Closing,June 28, 2023, the Company sold received written notice from the Lordstown facility to Foxconn for $230 million and a reimbursement payment for certain operating and expansion costs incurred byListing Qualifications Department of Nasdaq notifying the Company from September 1, 2021 through the APA Closing (see Note 1).
Foxconn made down payments of the purchase price totaling $200 million through April 15, 2022, of which $50 million and $100 million was received during the three and six months ended June 30, 2022, respectively, and the $30 million balance of the purchase pricethat, as well as a reimbursement payment of approximately $27.5 million were paid at the APA Closing. Under the terms of the APA, the reimbursement payment was an estimate and will be finalized over a post-closing review period.
In addition to providing the Company with additional capital, the Foxconn Transactions should provide the benefits of scaled manufacturing, more cost-effective access to certain raw materials, components and inputs, and will reduce the overhead costs associated with the Lordstown facility that were previously borne by the Company. In connection with the Foxconn Joint Venture Agreement, Foxconn will make term loans to Lordstown EV exclusively to fund our capital commitments to the Foxconn Joint Venture in an aggregate original principal amount not to exceed $45 million pursuant to Notes. As of June 30, 2022, $13.5 million was borrowed by Lordstown EV under a Note dated June 24, 2022.
As we seek additional sources of financing and strategic partners, there can be no assurance that such financing would be available to us on favorable terms or at all. The Company’s ability to obtain additional financing is subject to several factors, including market and economic conditions, the significant amount of capital required, the fact that the Endurance bill of materials cost is currently, and expected to continue to be, substantially higher than the anticipated selling price of the Endurance, uncertainty surrounding regulatory approval and the performance of the vehicle, meaningful exposure to material expenses and losses related to ongoing litigation, our performance and investor sentiment with respect to the Company and our business and industry, as well as our ability to effectively implement and realize the expected benefits of the Foxconn Transactions. As a result of these uncertainties,the Chapter 11 Cases and notwithstanding management’s plansin accordance with Nasdaq Listing Rules 5101, 5110(b) and efforts to date, there continues to be substantial doubt aboutIM-5101-1, Nasdaq had determined that the Company’s abilityClass A common stock was no longer suitable 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 SEC on July 27, 2023 to continue as a going concern. If we are unabledelist the Class A common stock from Nasdaq. We will remain subject to raise substantial additional capital in the near term, our operations and production plans will be scaled back or curtailed. If the funds raised are insufficient to provide a bridge to full commercial production at a profit, our operations could be severely curtailed or cease entirelySEC reporting obligations. and we may not realize any significant value from our assets.
See Note 9 – Subsequent Events – Nasdaq Delisting.
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 requiresis based on the useselection and application of accounting policies that require us to make significant estimates and assumptions that affect the reported amounts of assets and liabilities,in the disclosure of contingent assets and liabilities, if any, at the date of theconsolidated financial statements, and related disclosures in the reported amounts of revenues and expenses duringaccompanying notes to the reporting period.financial statements. Actual results could differ from those estimates.
Cash Estimates and cash equivalents
Cash includes cash equivalents whichassumptions are highly liquid investments thatperiodically reviewed and the effects of changes are readily convertible to cash. The Company considers all liquid investments with original maturities of three months or lessreflected in the condensed consolidated Financial Statements in the period they are determined to be cashnecessary. 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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equivalents. TheThere 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 presents cashhas operated as debtor-in-possession under the jurisdiction of the Bankruptcy Court and cash equivalents within Cashin 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 cash equivalentsare subject to change materially based on the Balance Sheet.
The Company maintains its cash in bank depositproceedings and securities accountscontinued consideration of claims that exceed federally insured limits. We have not experienced significant losses in such accountsmay be modified, allowed, or disallowed. Refer to Note 7 – Commitments and management believes it is not exposed to material credit risk.Contingencies for further detail.
Inventory and Inventory Valuation
InventorySubstantially 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 (“LCNRV”NRV”). Net realizable value (“NRV”)NRV is the estimated future selling pricevalue of the inventory in the ordinary coursecontext of business. Non-cash chargesthe Chapter 11 Cases, which is minimal due to reflectits 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 on hand ischarges of $4.3 million and $24.1 million for the three and six months ended June 30, 2023, respectively, are recorded within Selling, General & Administrative expensesCost of Sales in the Company’s condensed consolidated statementCondensed Consolidated Statement of operations.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.depreciation and impairment charges. Depreciation will beis computed using the straight-line method over the estimated useful lives and residual values of the related assets. Determination of useful lives and depreciation will begin once the assets are ready for their intended use.
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. Further, interest on any debt financing arrangement is capitalized
Due to the purchased property, plant,failure to identify a strategic partner for the Endurance, lack of expected funding and equipment ifother support from Foxconn (as discussed in more detail above and elsewhere in this report) and extremely limited ability to raise sufficient capital in the requirements for capitalization are met.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. RecoverabilityAsset 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, 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. 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, is measured by a comparison ofincluding 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 anthese assets may not be recoverable. Recoverability of a long-lived asset or asset groupsubject to estimatedamortization is measured by comparison of its carrying amount to the expected future undiscounted future cash flows that the asset is expected to generate. Any impairment to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment chargerecognized is recognizedmeasured by the amount by which the carrying amount of the asset or asset group exceeds its fair value. Significant management judgment is required in this process.The 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 assetassets based on their estimated residual or asset group.salvage values, which represent a range of 0% to 4% of original acquisition cost. This resulted in an impairment charge of $23.7 million for the quarter ended June 30, 2023.
Equity-Method InvestmentsThe Company also evaluated the decision to actively market the sale of its long-lived fixed assets in connection with the 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 assessment and classification of assets held for sale.
We recognize our investments in unconsolidated entities over whose operatingWarrants
As a result of the Chapter 11 Cases, the fair value of the Company’s warrants was deemed to be zero and financial policies we have the ability to exercise significant influenceadjusted accordingly as of June 30, 2023.
Recently issued accounting pronouncements
There are no recently issued, but not control, under the equity method of accounting. We initially record our investments based on our cash invested.
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, validation, certification, contract and other professional services and costs associated with operating the Lordstown facility, prior to its sale.
Stock-based compensation
The Company hasyet adopted, ASC Topic 718, Accounting for Stock-Based Compensation (“ASC Topic 718”),accounting pronouncements which establishes a fair value-based method of accounting for stock-based compensation plans. In accordance with ASC Topic 718, the cost of stock-based awards issued to employees and non-employees over the awards' vest period is measured on the grant date based on the fair value. The fair value is
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determined using the Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, expected option life and risk-free interest rate.
The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. Further, pursuant to ASU 2016-09 – Compensation – Stock Compensation (Topic 718), the Company has elected to account for forfeitures as they occur.
Warrants
The Company accounts for the Public Warrants (as defined below), the Private Warrants (as defined below) and the Foxconn Warrants as described in Note 3 in accordance with the guidance contained in ASC Topic 815-40-15-7D and 7F under which the Public Warrants, the Private Warrants and the Foxconn Warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company classifies the the Public Warrants, the Private Warrants and the Foxconn Warrants as liabilities at their fair value and adjusts the Public Warrants, the Private Warrants and the Foxconn Warrants to fair value at each reporting period or at the time of settlement. Any change in fair value is recognized in the statement of operations. The Company accounts for the BGL Warrants 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 financial statement and tax basis 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 recordedhave a full valuation allowance against its deferred tax assets.
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. The Company does not have material uncertain tax positions.
Recent accounting pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, and has subsequently issued several supplemental and/or clarifying ASUs (collectively, “ASC 842”) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted ASC 842 effective January 1, 2021, but there was no material impact on the condensed consolidated financial statements.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
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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 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 are classified as equity as they qualify as share-based compensation under ASC Topic 718.
During the six months ended June 30, 2021, approximately 6.7 million Public Warrants and 0.6 million of the Private Warrants were exercised which resulted in cash proceeds of $82.0 million. As of December 31, 2021 and June 30, 2022, there were 2.3 million Private Warrants, 1.6 million BGL Warrants and 0 Public Warrants outstanding. Additionally, as of June 30, 2022, there were also 1.7 million Foxconn Warrants outstanding. The fair value of the Foxconn Warrants was $0.3 million at issuance. The Public Warrants, the Private Warrants and the Foxconn Warrants are classified as a liability with any changes in the fair value recognized immediately in our condensed consolidated statements of operations.
The following table summarizes the net (loss) gain on changes in fair value (in thousands) related to the Public Warrants, the Private Warrants, and the Foxconn Warrants:
| | | | | | | | | | | | |
| | Three months ended | | Three months ended | | Six months ended | | Six months ended | ||||
| | June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 | ||||
Public Warrants | | $ | — | | $ | — | | $ | — | | $ | (27,180) |
Private Warrants | | | 1,797 | | | 877 | | | 277 | | | 8,919 |
Foxconn Warrants | | | — | | | — | | | — | | | — |
Net gain (loss) on changes in fair value | | $ | 1,797 | | $ | 877 | | $ | 277 | | $ | (18,261) |
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 are measured at fair value using Level 3 inputs. These instruments are not actively traded and are valued 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.
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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”).
As of June 30, 2023, following the Reverse Stock Split, we had 0.113 million Foxconn Warrants with an exercise price of $157.50, 0.153 million Private Warrants with a strike price of $172.50 and 0.107 million BGL Warrants with a strike price of $150.00 outstanding. As of June 30, 2022, on a pre-Reverse Stock Split basis, we had outstanding 2.3 million Private Warrants and 1.6 million BGL Warrants. The fair value of the Foxconn Warrants was $0.3 million at issuance. The Private Warrants and the Foxconn Warrants were classified as a liability with any changes in the fair value recognized immediately in our condensed consolidated statements of operations. 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 gain on changes in fair value related to the Private Warrants and the Foxconn Warrants:
| | | | | | | | | | | | | |
| | (in thousands) | |||||||||||
| | Three months ended | | Three months ended | | Six months ended | | Six months ended | |||||
| | June 30, 2023 | | | June 30, 2022 | | June 30, 2023 | | June 30, 2022 | ||||
Private Warrants | | $ | 27 | | $ | 1,797 | | | $ | 254 | | $ | 277 |
Foxconn Warrants | | | 34 | | | — | | | | 170 | | | — |
Net gain on changes in fair value | | $ | 61 | | $ | 1,797 | | | $ | 424 | | $ | 277 |
The stock price volatility rates utilizedPrivate Warrants and the Foxconn Warrants were 80%measured at fair value using Level 3 inputs. These instruments are not actively traded and 50% for the valuationswere valued as of June 30, 2022 using a Monte Carlo option pricing model and December 31, 2021, respectively.Black-Scholes option pricing model, respectively, that use observable and unobservable market data as inputs.
The stock price volatility rate utilized was 80% for the valuation as of 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 2.956% and 1.123% for the valuations as of June 30, 2022 and December 31, 2021, respectively, for the Private Warrants. The risk-free rate utilizedwas 2.454% for the valuation offor the Foxconn Warrants as ofthree and six months ended June 30, 2022 was 2.905%.2022.
The following tables summarize the valuation of 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 | | | | | | | | | | — | | | — | | | — | | | — |
| | | | | | | | | | | | |
|
| Total |
| Quoted prices in |
| Prices with |
| Prices with unobservable inputs | ||||
June 30, 2022 | | | | | | | | |||||
Cash and cash equivalents | | $ | 235,686 | | $ | 235,686 | | $ | — | | $ | — |
Private Warrants | | | 208 | | | — | | | — | | | 208 |
Foxconn Warrants | | | 323 | | | — | | | — | | | 323 |
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| | | | | | | | | | | | |
|
| Total |
| Quoted prices in |
| Prices with |
| Prices with unobservable inputs | ||||
December 31, 2021 | | | | | | | | | | | ||
Cash and cash equivalents | | $ | 244,016 | | $ | 244,016 | | $ | — | | $ | — |
Private Warrants | | | 485 | | | — | | | — | | | 485 |
The following table summarizes the changes in our Level 3 financial instruments (in thousands):
| | | | | | | | | | | | | | | |
|
| Balance at December 31, 2021 | Additions | Settlements | Loss / (Gain) on fair |
| Balance at June 30, 2022 | ||||||||
Private Warrants | | $ | 485 | | | — | | | — | | | (277) | | $ | 208 |
Foxconn Warrants | | | — | | | 323 | | | — | | | — | | | 323 |
| | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | Total |
| Quoted prices in |
| Prices with |
| Prices with unobservable inputs | ||||
December 31, 2022 | | | | | | | | | | | |||||||||
Cash and cash equivalents | | | | | | | | | $ | 121,358 | | $ | 121,358 | | $ | — | | $ | — |
Short-term investments | | | | | | | | | | 100,297 | | | — | | | 100,297 | | | — |
Private Warrants | | | | | | | | | | 254 | | | — | | | — | | | 254 |
Foxconn Warrants | | | | | | | | | | 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 June 30, 2023 | |||||
Private Warrants | | | | | | | | | $ | 254 | | | — | | | — | | | 254 | | $ | — |
Foxconn Warrants | | | | | | | | | | 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 AND ASSETS HELD FOR SALE
Property,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.
During the first quarter of 2023, the Company lowered Endurance production targets, accelerating the depreciable lives of its manufacturing assets to July 31, 2023. Consistent with the decision to cease production of the Endurance as of June 30, 2023, the Company recognized an impairment charge of $23.7 million for the quarter. Prior to the quarterly impairment analysis, as discussed below, the Company’s property, plant and equipment, net consistedof depreciation and prior period impairments, was $30.6 million.
The Company has determined that its property, plant, and equipment represent one asset group which is the lowest level for which identifiable cash flows are available. Historically, fair value of the following:Company’s property, plant, and equipment was derived from the Company's enterprise value at the time of impairment as the Company believed it represented the most appropriate fair value of the asset group in accordance with accounting guidance. However, since the Company’s cash 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 maximize 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 categorized as a Level 3 fair value measurement, Specifically, in thousands)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 lower of carrying or fair value less costs to sell. In light of these uncertainties, limited market data and estimates 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 such values may be higher or lower as a result.
| | | | | | |
| | June 30, 2022 | | December 31, 2021 | ||
Property, Plant & Equipment | | | | | | |
Land | | $ | — | | $ | 326 |
Buildings | | | — | | | 6,223 |
Machinery and equipment | | | 165 | | | 38,608 |
Vehicles | | | 522 | | | 465 |
Construction in progress | | | 286,241 | | | 337,124 |
| | $ | 286,928 | | $ | 382,746 |
Less: Accumulated depreciation | | | — | | | — |
Total | | $ | 286,928 | | $ | 382,746 |
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 was 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 would be in an amount equal to 0.3 million shares for an aggregate purchase price of $30 million; the second tranche would 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 have provided critical liquidity for the Company’s operations. Since April 21, 2023, Foxconn has disputed its obligations under the Investment 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 initially asserted that the Company was in breach of the Investment Agreement due to the Company’s previously disclosed receipt of the Nasdaq Notice regarding the Bid Price Requirement. As previously disclosed, Foxconn purported to terminate the Investment Agreement if that purported breach was not cured within 30 days.
The Company continues to believe that the breach allegations by Foxconn are without merit, and that Foxconn was obligated to complete the Subsequent Common Closing on or before May 8, 2023. Despite the Company taking action to satisfy the Bid Price Requirement as of June 7, 2023, and discussions between the parties to seek a resolution regarding the Investment Agreement, Foxconn did not proceed with the Subsequent Common Closing or any Subsequent Preferred Funding. As a result of Foxconn’s actions, the Company has 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 reserves all claims, defenses, and rights with respect to the Chapter 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 claim to subordinate Foxconn’s Preferred Stock and the descriptions below do not 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.
The 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 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.
The Certificate of Designation provides that, commencing on 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 $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
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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 three and six month periods ended June 30, 2023 the Company accrued $0.6 million and $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.
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 June 30, 2023, the Company did 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 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 16.0 million and 15.9 million shares of Class A common stock issued and outstandingas of June 30, 2023, and December 31, 2022, respectively, after giving effect to the Reverse Stock Split. We had 0.3 million shares of Preferred Stock issued and outstanding as of each of 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) | ||||||
| | Three months ended | | Three months ended | | Six months ended | | Six months ended |
|
| June 30, 2023 |
| June 30, 2022 |
| June 30, 2023 |
| June 30, 2022 |
Basic weighted average shares outstanding | | 15,940 | | 13,388 | | 15,936 | | 13,245 |
Diluted weighted average shares outstanding | | 15,940 | | 13,401 | | 15,936 | | 13,245 |
AsFor 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 calculation of December 31, 2021, construction in progress included manufacturing equipment, operating equipment and other general assets, retooling and construction atdiluted earnings per share as their inclusion would have been anti-dilutive.
For the Company's facilities in Lordstown, Ohio, Farmington Hills, Michigan, and Irvine, California, along with tooling held at various supplier locations. During the quarterthree months ended June 30, 2022, the Company sold its manufacturing facility, certain equipment,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 other assets located in Lordstown, Ohio and recorded a gain of $101.7 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. We outsourced all of1.7 million Foxconn Warrants outstanding. For the manufacturing of the Endurance and operation of certain remaining assets to Foxconn under the Contract Manufacturing Agreement.
The Company is currently preparing for commercial production of the Endurance pickup truck and continues to invest in the necessary tooling and equipment. Completed assets will be transferred to their respective asset classes and depreciation will begin when an asset is ready for its intended use, which is anticipated to be triggered by the Company achieving its defined milestones for commercial production, for the vast majority of our assets. As ofthree months ended June 30, 2022, commercial production has not begun and thus 0 depreciation was recognized for anythe calculation of our assets in 2022 or 2021.diluted weighted average shares outstanding included 0.2 million shares (on a pre-Reverse Stock Split basis) related to share awards.
NOTE 5 — COMMITMENTS AND CONTINGENCIESInvestment Transactions
The
On November 7, 2022, the Company has entered into a supply agreement with Samsungthe Investment Agreement under which Foxconn agreed to make additional equity investments (collectively, the “Investment Transactions”) in the Company through the purchase lithium-ion cylindrical battery cells. The agreement provides for certain pricingof $70 million of Class A common stock and minimum quantity parameters, including our obligationup to purchase such minimum amounts which total approximately $11.5$100 million in 2022,Preferred Stock, subject to change for increases in raw material pricing.certain conditions, including, without limitation, regulatory approvals and satisfaction of certain EV Program budget and EV Program milestones established by the parties.
The Company iscan use any proceeds from the sale of the Class A common stock for general corporate purposes as determined by the Board and the proceeds from the sale of the Preferred Stock was to be limited to funding the EV Program or any substitute or replacement electric vehicle program as agreed to by Foxconn and the Company.
On November 22, 2022, the Company completed the Initial Closing under the Investment Agreement, at which Foxconn purchased (a) approximately 1.8 million shares of Class A common stock at a purchase price of $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 provided for the Subsequent Common Closing, at which time Foxconn was required to purchase approximately 10% of the Class A common stock for approximately $47.3 million. The Subsequent Common Closing was to occur on or before May 8, 2023. The Company was 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 was 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.
Foxconn has failed to proceed with the Subsequent Common Closing or any Subsequent Preferred Funding. As a result of Foxconn’s actions, the Company has been deprived of critical funding necessary for its operations. 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 Note 1 – Description of Organization and Business Operations – Description of Business and Note 7 – Commitments and Contingencies for additional information.
As previously disclosed, the Investment Agreement also contains the following additional terms with respect to Foxconn’s ownership of the Company’s securities; however, as detailed herein, Foxconn has refused to fulfill its obligations under the Investment Agreement, and those breaches, among the Company’s other causes of action against Foxconn, are now subject to variousthe Foxconn Litigation.
| ● | Board Representation: Foxconn would have the right to appoint two designees to the Board subject to the resolution of our dispute with Foxconn and the consummation of the Subsequent Common Closing. Foxconn would relinquish one Board seat if it did not continue to beneficially own shares of Class A common stock, Preferred Stock and shares of Class A common stock issued upon conversion of shares of Preferred Stock that represent (on an as-converted basis) at least 50% of the number of shares of Class A common stock (on an as-converted basis) acquired by Foxconn in connection with the Investment Transactions and would relinquish its other Board seat if it did not continue to beneficially own at least 25% of the number of shares of Class A common stock (on an as-converted basis) acquired by Foxconn in connection with the Investment Transactions (the “25% Ownership Requirement”). |
| ● | Termination of Foxconn Joint Venture: The Company and Foxconn terminated the Joint Venture Agreement, the Note, dated June 24, 2022, issued by Lordstown EV Corporation and guaranteed by the Company and Lordstown EV Sales (the “Note”), and all liens on assets of Lordstown EV Corporation and the Company. All remaining funds held by the Foxconn Joint Venture were distributed to Foxconn EV Technology, Inc. as a distribution for amounts contributed by it and as a repayment in full of any loans advanced by it to Lordstown EV Corporation under the Note. |
| ● | 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 would not (A) acquire any equity securities of the Company if after the acquisition Foxconn and its affiliates would own (i) prior to the Subsequent Common Closing, 9.99% of the capital stock of the Company that is entitled to vote generally in any election of directors of the Company (“Voting Power”), (ii) prior to the time the Company obtains the approval of stockholders contemplated by Rule 5635 of the Nasdaq listing rules as in effect on November 7, 2022 with respect to certain equity issuances (the “Requisite Stockholder Approval”), 19.99% of the Voting Power, and (iii) at all times following the Subsequent Common Closing and the Requisite Stockholder Approval, 24% of the Voting Power (collectively, the “Ownership Limitations”), or (B) make any public announcement with respect to, or offer, seek, propose or indicate an interest in, any merger, consolidation, business combination, tender or exchange offer, recapitalization, reorganization or purchase of more than 50% of the assets, properties or securities of the Company, or enter into discussions, negotiations, arrangements, understandings, or agreements regarding the foregoing. |
| ● | Exclusivity: Prior to the Subsequent Common Closing, (i) without Foxconn’s consent, the Company had agreed not to (A) encourage, solicit, initiate or facilitate any Acquisition Proposal (as defined below), (B) enter into any agreement with respect to any Acquisition Proposal or that would cause it |
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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 had agreed to inform Foxconn of any Acquisition Proposal that it receives. An “Acquisition Proposal” means any proposal for any (i) sale or other disposition by merger, joint venture or otherwise of assets of the Company representing 30% or more of the consolidated assets of the Company, (ii) issuance of securities representing 15% or more of any equity securities of the Company, (iii) tender offer, exchange offer or other transaction that would result in any person beneficially owning 15% or more of any equity securities of the Company, (iv) merger, dissolution or similar transaction involving the Company representing 30% or more of the consolidated assets of the Company, or (v) combination of the foregoing. The Company had also agreed that, while the Preferred Stock is outstanding, it would not put in place a poison pill arrangement that applies to Foxconn to the extent of its ownership of shares of Preferred Stock or Class A common stock that it acquired from the Company as of the date such arrangement is adopted by the Company. |
| ● | 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 directors, Foxconn agreed to vote all of its shares of Class A common stock and Preferred Stock (to the extent then entitled to vote) in favor of each director recommended by the Board and in accordance with any recommendation of the Board on all other proposals that are the subject of stockholder action (other than any action related to any merger or business combination or other change of control transaction or sale of assets). So long as the 25% Ownership Requirement is satisfied, without the consent of the holders of at least a majority of the then-issued and outstanding Preferred Stock (voting as a separate class), the Company agreed not to (i) amend any provision of the Charter or the Company’s amended and restated bylaws in a manner that would adversely affect the Preferred Stock or increase or decrease the number of shares of Preferred Stock, (ii) authorize or create, or increase the number of shares of any parity or senior securities other than securities on parity with the Preferred Stock with an aggregate liquidation preference of not more than $30 million, (iii) increase the size of the Board, or (iv) sell, license or lease or encumber any material portion of the Company’s hub motor technology and production line other than in the ordinary course of business. |
| ● | 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 provides 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 Class A common stock issuable upon conversion of the Preferred Stock under the Investment Agreement, which was 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 an Open Market Sales Agreement (the “Sales Agreement”) with Jefferies LLC, as agent (“Jefferies”), pursuant to which the Company could offer and sell up to approximately 50.2 million shares of our Class A common stock, from time to time through Jefferies (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 June 30, 2023. As a result of our delisting from Nasdaq, we do not anticipate any transactions under the ATM Offering in the future.
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. During the six months ended June 30, 2022, we issued 6.6 million shares to YA 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.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
The Company has been subject to extensive pending and threatened legal proceedings arising in the ordinary course of business.business and has already incurred, and expects to continue to incur, significant legal expenses in defending against these claims. The Company records a liability for loss contingencies in the condensed consolidated interim financial statementsCondensed Consolidated Financial Statements when a loss is known or considered probable and the amount can be reasonably estimated. The Company may alsoseek 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 condensed consolidated results of operations, financial condition or cash flows. Asflows, 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 $75.0 million and $35.9 million, for the periods ending June 30, 2023 and December 31, 2022, we have not established accruals or reserves as to mostrespectively, for certain of our proceedings. Our provisions areits outstanding legal proceedings within Accrued and other current liabilities on its Condensed Consolidated Balance Sheet. The accrual is based on historical experience, current information, and legal advice and theythe 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. Any such additional losses may be significant; 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.
The 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 its 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, 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. The 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.
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 (2(two Company employees and 2two 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,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.
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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,In late November 2022, Karma filed athe Court ruled on the motion for terminating sanctions (i.e.,summary judgment in its favor on all claims) againstfiled by the Company and defendant, Darren Post, as a resultthe individual defendants. The ruling granted summary judgment in defendants’ favor on 9 counts and partial summary judgment on 11 counts of Mr. Post’s handling of documents subject to discovery requests. The Company and Mr. Post opposedKarma’s Complaint. Although favorable, the request for sanctions. On February 18, 2022,ruling does not substantively alter 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 resultscope of the Court’s order, on March 4, 2022, Karma submitted its applicationtrial, as Karma’s claims for attorneys’ feesmisappropriation of trade secrets, conspiracy, breach of the non-disclosure agreement, interference with Karma’s employment contracts, and costs inviolation of the amountcomputer fraud statutes will be the subject of $0.1 million. The Company did not oppose Karma’s application, and on March 21, 2022 the 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.
trial.
On January 27, 2022, the District Court granted the parties’ request to vacate the scheduled case deadlines and August 2022 trial date. Fact discovery closed on July 5, 2022, and a jury trial date has been set for December 6, 2022. The parties are currently engaged in expert discovery and expect to exchange reports and complete depositions in the third quarter of 2022.
On July 22, 2022,The District Court initially stayed the Karma filed a second motion for terminating sanctions based upon Mr. Post’s installationAction in light of certain software on his personal desktop and laptop computers in early 2022, whichthe automatic stay imposed by the commencement of the Chapter 11 Cases. However, the Bankruptcy Court granted Karma alleges permanently deleted thousands of filesrelief from the computers. Karma contends thatautomatic stay on July 31, 2023 to allow the Company is also responsible for the deletions because it failed to preserve the computers following Mr. Post’s December 2021 disclosure that the computers might contain Karma documents or information. Karma has requested that the Court enter default judgment on all claims against Mr. Post and the Company. Karma also asks that,multi-week trial in the event terminating sanctions are not issued, the Court order a negative adverse inference on “remaining issues,” specifically that “Defendants Lordstown Motors Corp. and Darren Post shall be presumedKarma Action 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 Company will oppose the motion. A hearing on the motionproceed, which trial is scheduled for August 22, 2022.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. At this time, however, the Company cannot predictHowever, the outcome of this matterthe Karma Action is subject to uncertainties inherent in the litigation process and no assurances can be given regarding the outcome of the trial or estimate a rangethe impact of possible loss. However, asthe 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 established an accrual of $4.0 million for this matter.impact upon which assets the Company is able to sell through the process before the Bankruptcy Court.
NaNSix related putative securities class action lawsuits were filed against the Company and certain of its current and former officers and directors and former DiamondPeak Holdings Corp. (“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
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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. We cannot predict the outcome of these matters or estimate the possible loss or range of possible loss, if any.
NaN
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, 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 iswas 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. We cannot predict the outcome of these matters or estimate the possible loss or range of possible loss, if any.
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 action.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. We cannot predict the outcome of these matters or estimate the possible loss or range of possible loss, if any.
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. We cannot predict the outcome of these matters or estimate the possible loss or range of possible loss, if any.
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NaNTwo 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 2two 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 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. WeDefendants 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.
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. We cannot predict the outcome of these matters or estimate the possible loss or range of possible loss, if any.
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 seeks production of documents related to, among other things, vehicle pre-orders, production timeline, and stock sales by insiders. The parties are engaged in discussions to resolve or narrow this action and do not have a schedule for responding to the complaint. We intend to vigorously defend against this action to the extent it is not resolved. The proceedings are subject to uncertainties inherent in the litigation process. We cannot predict the outcome of these matters or estimate the possible loss or range of possible loss, if any.
The Company has also received 2two subpoenas from the SEC for the production of documents and information, including relating to the merger between DiamondPeak and Lordstown EV Corporation (formerly known as Lordstown Motors Corp.), a Delaware corporation (“Legacy Lordstown”)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.
Lordstown was notified
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 its primary insurer under our post-mergerthe Company’s applicable directors and officers insurance policyinsurance.
On June 27, 2023, the Company commenced the Foxconn Litigation in the Bankruptcy Court seeking relief for breaches of the Investment Agreement and other agreements and fraudulent and tortious actions that insurerthe Company believes were committed by Foxconn, which have caused substantial harm to our operations and prospects and significant damages. Foxconn’s answer is takingcurrently due on September 1, 2023.
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 positionChapter 11 Cases or to convert the cases under Chapter 7 of the Bankruptcy Code. The movants allege that no coverage is available for the consolidated securities class action, various shareholder derivative actions,Debtors filed the consolidated stockholder class action, various demands for inspectionChapter 11 Cases in bad faith, that the Debtors do not have a reasonable likelihood of booksrehabilitation, and records,that dismissal or conversion would benefit the SEC investigation, and the investigation by the United States Attorney’s Office for the Southern District of New York described above, and certain indemnification obligations, under an exclusionDebtors’ creditors. The Debtors believe that there are strong defenses to the policy calledmovants’ assertions and will vigorously oppose the “retroactive date exclusion.” The insurer has identified other potential coverage issues as well. Excess coverage attaches only aftermotion. However, no assurances can be given regarding the underlying insurance has been exhausted, and generally applies in conformance with the termsoutcome of the underlying insurance. Lordstown is analyzing the insurer’s position, and intends to pursue any available coverage under this policy and other insurance. motion.
As a result of the denialChapter 11 Cases and ceasing production of coverage,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 no$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 limited insurancethe substantial costs that may be availableincurred to us to reimburse our expensesevaluate known or cover any potential losses for these matters, which could be significant.unknown claims.
On March 24, 2022,As part of the Chapter 11 Cases, the Company receivedengaged Jefferies to act as its investment banker, and such engagement was authorized by the Bankruptcy Court on July 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 letter addressedmonthly fee equal to its Board from$0.2 million per month until the law firmEngagement Letter is terminated (the “Monthly Fee”), (ii) a fee equal to $3.0 million (a “Transaction Fee”) upon either the consummation of Purcell & Lefkowitz LLP (“Purcell”) on behalf of three purported stockholders.
The stockholder letter alleged that we would be required by Rules 14a-4(a)(3) and (b)(1)(x) any transaction involving the restructuring, reorganization, recapitalization, repayment or material modification of the Exchange ActCompany’s outstanding indebtedness (other than any dismissal of the Chapter 11 Cases or any conversion of these cases to present two separate proposals atcases under Chapter 7 of the annual meetingBankruptcy Code) or (y) any sale, disposition or other similar business transaction or series of stockholders held on May 19, 2022 (the “2022related 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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Annual Meeting”) relatingpayable to Jefferies. Either party may terminate the Engagement Letter upon five days’ notice, but if a Transaction occurs within twelve months after termination, Jefferies remains entitled to the proposed amendment of our Second Amended and Restated Certificate of Incorporation, as amended (the “Charter”) to increase the number of authorized shares, such that separate votes could be cast on a proposed increase in the number of shares of Class A common stock and a proposed increase in the number of shares of preferred stock. The Company does not believe that separate proposals would be required by the Exchange Act. Irrespective of the position asserted in the stockholder letter, the Company no longer believes an increase in the shares of preferred stock is needed and did not include this aspect of the proposal in the definitive proxy statement for the 2022 Annual Meeting filed with the SEC on April 8, 2022, as supplemented on May 9, 2022 (the “2022 Proxy Statement”).
The stockholder letter also addressed the approval of the Charter at the special meeting of stockholders held on October 22, 2020 (the “Special Meeting”), which included a 200 million share increase in the number of authorized shares of Class A common stock and was approved by majority of the then-outstanding shares of both series of the Company’s common stock, voting as a single class. The stockholder letter alleged that the Charter approval required a separate vote in favor by at least a majority of the outstanding shares of Class A common stock under Section 242(b)(2) of the Delaware General Corporation Law (“DGCL”), and that the 200 million shares in question are thus unauthorized. The stockholder letter requested that the Company present a proposal at the 2022 Annual Meeting seeking ratification of the number of shares of Class A common stock authorized under the Company’s current Charter.applicable fee.
NOTE 8 — RELATED PARTY TRANSACTIONS
The Company’s Board has completedadopted 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 reviewsubsidiaries was, is or will be a participant, the amount of the matters raised by the stockholder letter with the assistancewhich exceeds $120,000 and in which any director, executive officer or beneficial owner of outside counsel not involved in the underlying transactions at issue and determined, (a) 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) are wrong and that a separate class vote5% or more of the Class A common stock was not requiredhad, has or will have a direct or indirect material interest (a “Related Party Transaction”). Pursuant to approvethis policy, the amendmentAudit Committee of the Charter atBoard (the “Audit Committee”) reviews and approves any proposed Related Party Transaction, considering among other factors it deems appropriate, whether the Special MeetingRelated Party Transaction is on terms no less favorable than terms generally available to increasean unaffiliated third-party under the sharessame 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 (b)Business Operations – Foxconn Transactions. See Note 7 – Commitments 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. Shortly after filing the Chapter 11 Cases, the Company ceased production of the Endurance and new program development.
In November 2020, we prepaid a royalty payment of $4.75 million to Workhorse Group, representing an advance on the royalties, but only to the extent that the remaining allegations thereinaggregate amount of such royalty fees exceeded the amount paid upfront. 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 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
Bankruptcy and Litigation Matters
On June 27, 2023, the Company and its subsidiaries filed voluntary petitions for relief under Chapter 11 in the Bankruptcy Court. The Chapter 11 Cases are without merit.being jointly administered under the caption In re: Lordstown Motors Corp., et al., Cases No. 23-10831 through 23-10833. 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. 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 operations, customers and employees. 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
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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.
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 horse bids 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 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 there are strong defenses to the claims and damages demanded. However, no assurances can be made regarding the outcome of any claims, proceedings or litigation regarding the authorization of our Class A common stock, including the claims raised by the stockholder letter. Any proceedings on these matters would beKarma Action is subject to uncertainties inherent in the litigation process. Claims alleging that a portionprocess and no assurances can be given regarding the outcome of our Class A common stock was not authorized could lead to sharesthe trial or the impact of our Class A common stock being voidable and have a material adverse effectthe Karma Action on the Company, andincluding its prospects.
On May 20, 2022, the Company received a second letter addressedability to its Board from Purcell on behalf of the same three purported stockholders regarding the vote at the 2022 Annual Meeting to approve the amendment to our Charter to increase the total number of authorized shares of Class A common stock from 300 million shares to 450 million shares (the “Charter Amendment”), as further described in the 2022 Proxy Statement. The letter asserted, among other things,sell assets that that in connection with the vote at the Annual Meeting to approve the Charter Amendment, brokers had cast discretionary votes on such proposal despite a statement in the 2022 Proxy Statement that they would not have authority to do so. The Proxy Statement erroneously indicated that brokers would not have discretionary authority to vote with respect to the proposal to approve the Charter Amendment and that if beneficial owners did not provide direction to their broker as to how to vote, a broker non-vote would result that would have the effect of a vote cast against such proposal. The Company’s Current Report on Form 8-K filed with the SEC on May 19, 2022 reported that the Charter Amendment was approved at the Annual Meeting and that the Charter was thereby amended, as the Charter Amendment had been filed with the Secretary of State of the State of Delaware.
The Company’s Current Report on Form 8-K filed on May 23, 2022 reported that the Purcell letter had been received (and filed it as an exhibit), that the report of the votes at the Annual Meeting regarding the approval of the Charter Amendment was not considered final and that, to date, none of the shares authorized by the Charter Amendment had been issued. On May 31, 2022, after further reviewKarma claims were misappropriated by the Company and its Board of the votes on the proposal to approve the Charter Amendment, due to uncertainty in counting the number of votes cast “for” by brokers exercising discretion without direction from the beneficial owner, the Board determined not to consider the Charter Amendment approvedor that incorporate trade secrets or property that Karma claims were misappropriated by the Company’s stockholdersCompany. See Note 7 – Commitments and we filed a Certificate of Correction with the Secretary of State of the State of Delaware, voiding the Charter Amendment and causing the number of authorized shares of Class A common stock to remain at 300 million.
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The Company’s Form 8-K/A filed with the SEC on June 1, 2022, amending and supplementing the Forms 8-K filed by the Company on May 19, 2022, and May 23, 2022, reported that the Company had filed the Certificate of Correction and announced that the Board had called a special meeting of stockholders to be held on August 17, 2022 (“Special Meeting”), to resubmit for approval an amendment to our Charter to increase the number of authorized shares of our Common Stock from 300 million to 450 million shares (the “Certificate of Amendment”). On July 7,2022, we filed a definitive proxy statement for the Special Meeting. The Company did not issue any of the additional shares authorized by the Charter Amendment and, unless and until the Certificate of Amendment is approved by our stockholders and becomes effective, does not intend to issue or reserve for issuance any such additional shares.Contingencies.
Except as described above, the Company is notOn July 26, 2023, a party to any material legal proceedings and is not aware of any pending or threatened claims. From time to time however, the Company may be subject to various legal proceedings and claims that arise in the ordinary course of its business activities.
NOTE 6 — RELATED PARTY TRANSACTIONS
On November 7, 2019, the Company entered into a transaction with Workhorse Group Inc., 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 andpurported class action lawsuit was entitled to royalties of 1% of the gross sales price of the first 200,000 vehicle sales. In November 2020, we pre-paid a royalty payment to Workhorse Group in the amount of $4.75 million. The upfront royalty payment represented an advance on the royalties discussed above. The upfront royalty payment was recorded as other non-current assets as of June 30, 2022 and December 31, 2021.
As of September 30, 2021, Workhorse Group was no longer determined to be a related party.
As described in Note 1, the Company invested $13.5 million into the Foxconn Joint Venture, of which the Company owns 45%. The Company expects that the Foxconn Joint Venture will reimbursefiled against certain of the Company’s costs,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 extent incurred, as they relate toCompany’s disclosure regarding the development efforts undertaken bystatus of its relationship with Foxconn and the Foxconn Joint Venture. We intend to negotiate a Management Services Agreement with the Foxconn Joint Venture in order to address the services to be provided byTransactions. The defendants, as well as the Company, toare reviewing the Foxconn Joint Venture. The board of managersclaims and the timing thereof in light of the Foxconn Joint VentureChapter 11 Cases. A vigorous defense is expected and the Company also intend to implement a process to review and approve all material transactions between the Foxconn Joint Venture and the Company. Our employees will perform agreed-upon work on behalf of the Foxconn Joint Venture, at the direction of its board of managers, that will be reimbursed in accordancemay have indemnification obligations with the approved Foxconn Joint Venture budget and at a value representing our cost.
NOTE 7 — CAPITAL STOCK AND LOSS PER SHARE
Our Charter provides for 312 million authorized shares of capital stock, consisting of (i) 300 million shares of Class A common stock and (ii) 12 million shares of preferred stock each with a par value of $0.0001. We had 205.9 million and 196.4 million shares of common stock issued and outstandingas of June 30, 2022 and December 31, 2021, respectively.
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. For the three months ended June 30, 2022, our share equivalent included 0.2 million options,1.6 million BGL Warrants, 2.3 million Private Warrants, and 1.7 million Foxconn Warrants outstanding. For the three months ended June 30, 2021, our share equivalent included 3.8 million options, 1.6 million BGL Warrants, and 2.3 million Private Warrants outstanding. None of the stock options or warrants were included in the calculation of diluted EPS because we recorded a net loss for the six months ended June 30, 2022 and for the three and six months ended
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June 30, 2021 as including these instruments would be anti-dilutive. For the three months ended June 30, 2022, we included 0.2 million shares related to the options in the calculation of diluted EPS.
respect thereto. The weighted-average number of shares outstanding for basic and diluted loss per share is as follows:
(in thousands)
| | | | | | | | |
| | Three months ended | | Three months ended | | Six months ended | | Six months ended |
|
| June 30, 2022 |
| June 30, 2021 |
| June 30, 2022 |
| June 30, 2021 |
Basic weighted average shares outstanding | | 200,821 | | 176,585 | | 198,674 | | 175,595 |
Diluted weighted average shares outstanding | | 201,015 | | 176,585 | | 198,674 | | 175,595 |
On July 23, 2021, the Company entered into the Equity Purchase Agreement with YA, pursuant to which YA has 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. Such sales of Class A common stock,proceedings are subject to certain limitations, and may occur from time to time at our sole discretion, over the approximately 36-month period commencing on the date of the Equity Purchase Agreement, provided that a registration statement covering the resale by YA of the shares of Class A common stock purchased from us is declared effective by the SEC and the other conditions set forthuncertainties inherent in the Equity Purchase Agreement are satisfied. We filed the registration statement with the SEC on July 30, 2021, and it was declared effective on August 11, 2021.
Under applicable Nasdaq rules and the Equity Purchase Agreement, we will not sell to YA shares of our Class A common stock in excess of 35.1 million shares, or the Exchange Cap, which is 19.9% of the shares of Class A common stock outstanding immediately prior to the execution of the Equity Purchase Agreement, unless (i) we obtain stockholder approval to issue shares of Class A common stock in excess of the Exchange Cap or (ii) the average price of all applicable sales of shares of Class A common stock under the Equity Purchase Agreement (including the Commitment Shares described below in the number of shares sold for these purposes) equals or exceeds $7.48 per share (which represents the lower of (i) the Nasdaq Official Closing Price (as reflected on Nasdaq.com) immediately preceding the signing of the Equity Purchase Agreement; or (ii) the average Nasdaq Official Closing Price of the Class A common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the Equity Purchase Agreement). At current market prices of our shares of Class A common stock, without stockholder approval, the Exchange Cap would limit the amount of funds we are able to raise to significantly less than the $400 million commitment under the Equity Purchase Agreement.
We may direct YA to purchase amounts of our Class A common stock under the Equity Purchase Agreement that we specify from time to time in a written notice (an “Advance Notice”) delivered to YA on any trading day. The maximum amount that we may specify in an Advance Notice without YA’s consent is equal to the lesser of: (i) an amount equal to thirty percent (30%) of the Daily Value Traded of the Class A common stock on the trading day immediately preceding an Advance Notice, or (ii) $30.0 million. For these purposes, “Daily Value Traded” is the product obtained by multiplying the daily trading volume of our Class A common stock by the volume weighted average price for that trading day. Subject to the satisfaction or waiver of the conditions under the Equity Purchase Agreement, we may deliver Advance Notices from time to time, provided that we have delivered all shares relating to all prior Advance Notices, and the purchase price of the shares of Class A common stock will be equal to 97% of the simple average of the daily volume weighted average prices for the three trading days following the Advance Notice as set forth in the Equity Purchase Agreement.
As consideration for YA’s irrevocable commitment to purchase shares of 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 Company issued 0.4 million shares of its Class A common stock to YA (the “Commitment Shares”).
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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. During the six months ended June 30, 2022, we issued 6.6 million shares to YA and received $13.7 million cash, net of equity issuance costs.
As of June 30, 2022, we were in compliance with the terms and conditions of the Equity Purchase Agreement and the remaining availability under the Equity Purchase Agreement was $336.2 million which is subject to certain limitations as described above. At the current market price of the Class A common stock, the actual availability under the Equity Purchase Agreement is substantially lower.
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 statementsCondensed 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" aboveStatements” and Part I – Item 1A. Risk Factors in our Form 10-K prior Quarterly Reports on Form 10-Q 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 realizing the benefits ofPlan and our recent transactions with Foxconnliquidity, capital resources and financial condition.
Our mission isstrategy was designed to accelerate electricthe launch of new commercial EVs. This included working on our own vehicle adoptionprograms as well as partnering with third parties, and included our intended development program with Foxconn and its affiliates, as we sought to be a catalyst in the transitionleverage our vehicle development experience, our proprietary and open-source and other non-proprietary technologies, our existing Endurance vehicle platform,
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and potential new vehicle platforms to all-electric vehicles for adrive commonality and scale, and more sustainable future. We are an EV innovator focused on developing high-quality light-duty work vehicles.efficiently develop and launch EVs, to enhance capital efficiency and achieve profitability.
Since inception, we have been developing our flagship vehicle,In the Endurance, an electric full-size pickup truck. During the first halfthird quarter of 2022, we built PPVs forstarted commercial production of the Endurance with the first two vehicles completing assembly in September. We subsequently completed homologation and testing validation, certification, regulatory approvals 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 potential customers. Subjectexecute our business plan, we made trade-offs with respect to raising sufficienthow we allocated our capital, satisfactory completion of testing and receipt of regulatory approvals, we expect commercial production and salesincluding 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 begin laterestablish multi-year production volumes consistent with our suppliers’ expectations was limited. These factors, among others, resulted in 2022.
Our current bill of materialsa BOM cost for the Endurance is well above our anticipatedthat was, and would continue to be, significantly higher than the recent selling price. As a result, we will incur significant losses with each vehicle we sell. While we expect to achievebelieve cost improvements over time we do not anticipate reachingcould 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 began entering into the Foxconn Transactions (see Note 1 – Description of Organization and Business Operations) 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 provided $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 (see Note 6 – Capital Stock and Loss Per 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 Agreement. Proceeds from the Subsequent Preferred Funding 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. Since April 21, 2023, Foxconn has disputed its obligations under the Investment 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 and has asserted breaches by the Company of the Investment Agreement. The Company continues to believe that the breach allegations by Foxconn are without merit, and that Foxconn was obligated to complete the Subsequent Common Closing on or before May 8, 2023. As a result of Foxconn’s actions, the Company has been deprived of critical funding necessary for its operations and commenced the Foxconn Litigation on June 27, 2023.
Leading up to filing the Chapter 11 Cases, it became apparent that we would be unable to effectively implement and realize the anticipated benefits of the Foxconn Transactions 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 failure to identify a strategic partner for the foreseeable future. The primary factor driving the high material costs is our useEndurance, lack of components produced from soft tools that are intended for very low volumes. We are also seeking strategic partners, including other automakers, to provide additional capital/orexpected funding and other support to enable us to scale the Endurance programfrom Foxconn and extremely limited ability to develop new vehicle programs through the Foxconn Joint Venture. If we raise sufficient capital we would have the opportunity to allocate funds to investments in hard tools that are designed for long term use and higher production volumes. We have identified significant piece price savings from these investments that we would seek to realize over time. Such hard tool investments and piece price reductions may not be sufficient to achieve profitability, and we expect to continue to evaluate the need and opportunity for design enhancements that may result in further reductions in the billcurrent market environment, we determined it was in the best interests of materials cost. However, no assurances can be made regarding our abilitythe Company’s stakeholders to successfully identifytake aggressive actions to cut costs and implement actions that will lowerpreserve cash, file the Endurance bill of materials cost, including that we will have sufficient capital to make these investments or our suppliers will be willing or able to manufacture the tools. Until such time as we have sufficient capitalChapter 11 Cases and we are able to lower the bill of materials cost, we expect to limit or curtail ourcease production of the Endurance and new program development. As part of these actions, two notices were provided to a substantial number of employees under the WARN Act in orderMay 2023, for job eliminations to minimize our losses, which we anticipate to be through 2023 or potentially longer.occur in July 2023. Therefore, this reduction in costs occurred after the end of the second quarter of 2023.
We plan to focus our sales and marketing efforts on direct sales through our subsidiary, Lordstown EV Sales, LLC, to commercial fleet operators and fleet management companies rather than through third-party dealerships. However, we intend to explore other distribution strategies as our business grows. An important aspect of our sales and marketing strategy involves pursuing relationships with specialty upfitting and fleet
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management companiesAs part of the Chapter 11 Cases, we have initiated a process to incorporateseek a buyer for some or all of the Endurance into their fleetsCompany’s assets. The Company can provide no assurance that any sale of assets (whether in whole or sales programs.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 their main area of business, fleet management companies act as an intermediary facilitatinga result, the acquisition of new vehiclesCompany’s results for the ultimate end user fleets. They provide a valuable distribution channel for us because of their extensive end user relationshipsquarter ended June 30, 2023 do not fully reflect the significant increase in costs we are incurring and ability to offer attractive financing rates.other accounting impact caused by the Chapter 11 Cases. As a result of this strategy, we expect that we will not be requiredthe Company’s decision to make significant investments in a large direct sales force or third-party dealership network, thereby avoiding substantial fixed costs. Our expected limited initialcease production levels may make it more difficult to get support from commercial fleets or fleet management companies in the marketing, sale and distribution of the Endurance.
We intend to leverage our advanced technologies and highly talented team to develop additional all-electric vehicles targetedEndurance, we recorded an impairment charge of $23.7 million for the commercial market. We are currently working with Foxconn to identify the first vehicle program toquarter ended June 30, 2023. Additional impairments could occur in future periods and may be developed through the Foxconn Joint Venture, which will be funded with a $100 million capital commitment from Foxconn as described insignificant. See – Note 1 ¾ Organization2 – Summary of Significant Accounting Policies and Description of BusinessNote 4 – Property, Plant and Basis of Presentation ¾Lordstown Description of Business ¾FoxconnJoint Venture Agreement. Any such program will require substantially more capital than the initial funding from Foxconn.Equipment and Assets Held for Sale for additional information.
See Liquidity and Capital Resources and Risk Factors under Part I -– Item 1A. Risk Factors of our Form 10-K prior Forms 10-Q and Part II – Item 1A. Risk Factors below for further discussion of the risks associated with the Chapter 11 Cases, our ability to confirm and consummate the Plan, our liquidity, capital required to executeresources and financial condition, and the use of estimates and resulting uncertainty in establishing our business plan, implementation of the Foxconn Transactions and our production timeline.
The APA Closing with Foxconn on May 11, 2022 described in Note 1 resulted in more than $257 million in funding for the Company, of which $200 million was received in the form of down payments prior to the APA Closing, in addition to the $50 millon purchase of our Class A common stock in October 2021. The Foxconn Transactions represent a shift in our business strategy from a fully vertically integrated designer, developer and manufacturer of EVs into a less capital-intensive business focused on developing, engineering, testing and industrializing vehicles in partnership with Foxconn. See Note 1 for additional detail.presented financial results, among other risks.
The sale of the Lordstown facility allowed us to meaningfully reduce our operating complexity and fixed cost structure by transferring to Foxconn the current and future manufacturing employees along with nearly all of the fixed and variable overhead costs, such as maintenance, utilities, insurance and more. The Foxconn Transactions should also provide more cost-effective access to certain raw materials, components and other inputs over time. In addition, we believe we would realize the benefits of scaled manufacturing sooner, as Foxconn contracts with other OEMs to produce their vehicles in the Lordstown facility.
We believe that outsourcing our manufacturing to a highly qualified partner will enable us to leverage Foxconn’s technology, supply chain network and expertise to accelerate the launch of current and future vehicle programs. The Foxconn Joint Venture Agreement will also allow us to leverage our EV product development and engineering capabilities across a broader platform. However, no assurances can be given that we will be able to realize the anticipated benefits of the Foxconn Transactions or as to the timing of such benefits. See Note 1 and Risk Factors under Part I - Item 1A. of our Form 10-K, prior Forms 10-Q and below for further discussion of the risks associated with the anticipated benefits of the Foxconn Transactions.
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Results of Operations for the three months ended June 30, 20222023 and 20212022
(in thousands)
| | | | | | | | | | |
| Three months ended | | Three months ended | | (in thousands) | |||||
��� | Three months ended | | Three months ended | |||||||
| June 30, 2022 | | June 30, 2021 | June 30, 2023 |
| June 30, 2022 | ||||
Net sales | $ | — | | $ | — | $ | 2,151 | | $ | — |
Operating expenses |
|
| |
|
| |||||
Cost of sales: | | 60,739 | | | — | |||||
Operating expenses: | | | | | | |||||
Selling, general and administrative expenses |
| 29,941 | | | 33,793 | | 57,688 | | | 29,941 |
Research and development expenses 1 |
| 10,510 | |
| 76,544 | |||||
Gain on sale | | (101,736) | | | — | |||||
Total operating (income) expenses |
| (61,285) | |
| 110,337 | |||||
Income (Loss) from operations |
| 61,285 | |
| (110,337) | |||||
Research and development expenses1 | | 12,303 | | | 10,510 | |||||
Impairment of property plant & equipment and intangibles | | 25,041 | | | — | |||||
Total operating expenses | $ | 95,032 | | $ | 40,451 | |||||
Loss from operations | | (153,620) | | | 40,451 | |||||
Other income (expense) | |
| | |
| |||||
(Loss) gain on sale of assets | | (2,609) | | 101,736 | ||||||
Other income | | | | | | | 93 | | | 1,991 |
Other income |
| 1,991 | | | 1,877 | |||||
Interest income |
| 383 | | | 260 | |||||
Income (Loss) before income taxes |
| 63,659 | |
| (108,200) | |||||
Investment and interest income | | 1,645 | | | 383 | |||||
Loss before income taxes | $ | (154,491) | | $ | 63,659 | |||||
Income tax expense |
| — | |
| — | | — | | | — |
Net income (loss) | $ | 63,659 | | $ | (108,200) | |||||
Net loss | $ | (154,491) | | $ | 63,659 | |||||
| 1 |
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Revenue and Cost of Sales
Production of the Endurance ended on June 30, 2023. A total of 33 vehicles were sold in the three months ended June 30, 2023.
Cost of sales totaled $60.7 million for the second quarter of 2023. 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 $46.6 million in manufacturing depreciation for the three months ended June 30, 2022 are net2023. Additionally, for the three months ended June 30, 2023, the Company recorded a $6.0 million charge to reduce the carrying value of $18.4inventory to 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 in operating expense reimbursements under the APA.
Selling, General and Administrative Expense
Selling, general and administration expenses (“SG&A”) of $29.9$57.7 million during the three months ended June 30, 20222023 consisted primarily of $12.2$7.3 million ofin personnel and professional fees, $9.0$40.3 million ofin litigation accruals, $6.8 million in legal and insurance costs and $1.5 million in insurance premiums. Compared to the second quarter of 2022, SG&A was $27.7 million higher primarily due to a $6.5$41.2 million increase in litigation accruals and other legal expenses, offset by decreases of $6.9 million due to the charge to reflect the NRV being recorded in SG&A prior to Endurance start of inventory as describedproduction, $2.7 million in Note 2. Total selling, generalpersonnel and administrativeprofessional fees and $1.6 million in insurance premiums.
Research and Development Expense
Research and development (“R&D”) expenses decreased $3.9were $12.3 million during the three months ended June 30, 2023, consisting of $9.0 million in personnel costs, $1.3 million for outside engineering and consulting services and $2.0 million in prototype components, testing and development supplies. For the period ended June 30, 2022, compared tothe 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. The Company’s R&D costs in the three months ended June 30, 2022 included $10.7 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, primarilyby Foxconn, and $1.8 million due to decreasesadjustments related to the Foxconn APA.
Impairment of $8.5 millionproperty, plant, and $4.8 millionequipment 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 believed it represented the most appropriate fair value of the asset group in legal and professional fees, respectively, offset by the NRV charge and increases in personnel and insurance costs of $1.9 million and $1.3 million, respectively. We anticipate legal costs will remain substantial inaccordance 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 charge of $23.7 million, for the three 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 ongoing litigation and the SEC investigation.
Research and Development Expense
Research and development expenses were $10.5 millionimpairment. Additionally, during the three months ended June 30, 2022, $18.4 million which was attributable to the reimbursement of certain operating costs incurred by2023, the Company between September 1, 2021 and the APA Closing as described in Note 1. Until we initiate commercial production, the costs associated with operating the Lordstown facility are included in Research and Development as they relate to the design and constructionrecognized an impairment of beta and pre-production vehicles, along with manufacturing readiness.
During the second quarter of 2022, we incurred $10.7$1.4 million in costs associated with the Lordstown facility. Approximately $8.6 million of those costs would have transferred to Foxconn had the transaction closed prior to the start of the second quarter, rather than May 11, 2022. We will continue to incur certain freight, certain engineering and Endurance specific manufacturing design costs and insurance related to Company assets located at the Lordstown facility. The costs we incurred associated with the Lordstown facility during the second quarterprepaid inventory purchases.
Gain (Loss) on Sale of 2022 were $4.6 million in personnel costs, $2.1 million in freight, $1.2 million in utilities and $2.8 million of other facility and manufacturing costs. There will be a significant decrease in costs associated with the Lordstown facility in the third quarter of 2022 compared to the first and second quarters of 2022, including personnel and general operating and overhead costs now that the Foxconn Transactions have been completed as described in Note 1. However, once we commence commercial sales of the Endurance, we will
28
begin to report cost of goods sold that will represent the direct materials costs, the per vehicle manufacturing fee charged by Foxconn, delivery costs, warranty costs and accruals, and other costs associated with selling vehicles, that together will be substantially more than our anticipated selling price. See Part I - Item 1A. Risk Factors in our Form 10-K and Forms 10-Q for further discussion of the risks related to the commencement of commercial salesAssets
Also included in Research and Development costs are the prototype components used for part, module or system design testing and validation, as well as full production of beta and pre-production vehicles. In the second quarter of 2022, our prototype component costs totaled $1.5 million, a $20.5 million decrease from the second quarter of 2021. The substantial majority of the 2022 costs represented parts used in the production of PPVs. We expect prototype component costs to continue to decrease in subsequent quarters as we prepare for the commercial launch of the Endurance.
All other research and development expenses of $16.7 million decreased $19.8 million duringFor the three months ended June 30, 20222023, the Company recognized a loss of $2.6 million on the sale of manufacturing equipment, compared to 2021 primarily due to a $17.3 million decrease in outside engineering services as Endurance development costs decline as we approach commercial production. Costs for engineering personnel totaled $7.7 million in the current period, a decrease of $0.3 million. As we approach commercial production and deliveries, the costs associated with engineering, testing, certification and validation are expected to increase compared to the expenses incurred in the second quarter of 2022, and decline thereafter.
Gain on Sale
Gain on sale totaled $101.7 million during the three months ended June 30, 2022gain which was primarily attributable to the gain on the sale of the Lordstown facility sold to Foxconn as described infor the same period of 2022. See Note 1.1 — Description of Organization and Business Operations for additional details regarding the Foxconn Transactions.
38
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.
Cost 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, 20222023. See Note 2 — Summary of Significant Accounting Policies and 2021
(in thousands)
Note 4 — Property, Plant and Equipment and Assets Held for Sale regarding depreciation and inventory charges.
| | | | | |
| Six months ended | | Six months ended | ||
| June 30, 2022 |
| June 30, 2021 | ||
Net sales | $ | — | | $ | — |
Operating expenses |
|
| |
|
|
Selling, general and administrative expenses |
| 55,960 | |
| 48,187 |
Research and development expenses 1 |
| 72,374 | |
| 168,355 |
Gain on sale | | (101,736) | | | — |
Total operating expenses |
| 26,598 | |
| 216,543 |
Loss from operations |
| (26,598) | |
| (216,543) |
Other income (expense) |
|
| |
|
|
Other income (expense) |
| 499 | |
| (17,255) |
Interest income |
| 125 | |
| 387 |
Loss before income taxes |
| (25,974) | |
| (233,411) |
Income tax expense |
| — | |
| — |
Net loss | $ | (25,974) | | $ | (233,411) |
29
Selling, General and Administrative Expense
Selling, general and administration expenses (“SG&A”) of $56.0 million during the six months ended June 30, 2022 consisted primarily of $18.4 million in legal and insurance costs, $24.6 million in personnel and professional fees, and a $9.4 million charge to reflect the NRV of inventory. Total selling, general and administrative expenses increased $7.8 million during the six months ended June 30, 2022 compared to six ended June 30, 2021 primarily due to the NRV charge for inventory and a $5.9 million increase in personnel costs, offset by decreases of $5.0 million in legal and insurance costs and $2.2 million professional fees. We anticipate legal costs will remain substantial in light of our ongoing litigation and the SEC investigation.
Research and Development Expense
Research and development expenses were $72.4 million during the six months ended June 30, 2022, net2023 consisted primarily of $18.4$40.3 million reimbursement of certain operating costs incurred by the Company between September 1, 2021in litigation accruals, $15.6 million in personnel and the APA Closing as describedprofessional fees, $9.8 million in Note 1. Until we initiate commercial production, the costs associated with operating the Lordstown facility are includedlegal fees and $2.9 million in Research and Development as they relateinsurance premiums. Compared to the design and construction of beta and pre-production vehicles, along with manufacturing readiness. During the first half of 2022, we incurred $32.7SG&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 Lordstown facility, including $14.6 million in personnel costs, $7.7 million in freight, $4.5 million in utilitiesongoing development and $5.9 million of other facilityengineering work related to the Endurance and manufacturing costs. During the first half of 2021, we incurred $26.4 million in costs associated with operating the Lordstown facility, including $13.8 million in personnel costs, $3.2 million in utilities, and $9.4 million in other facility operating costs.
Also included in Research and Development costs are the prototype components used for part, module or system design testing and validation, as well as full production of beta and pre-production vehicles. In the six months ended June 30, 2022, our prototype component costs totaled $21.1 million compared to $72.6 million in the same period of 2021. The substantial majority of the 2022 costs represented parts used in the production of PPVs. We expect prototype component costs to continue to decrease in future period as we prepare for the commercial launch of the Endurance.
All other research and development expenses of $36.9 million, a decrease of $32.5programs, 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
39
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, compared to the same periodCompany’s R&D costs were $72.4 million, including $31.1 million in 2021 primarily due to a $32.4personnel costs, $16.1 million decrease in outside engineering and consulting services, and $2.4$27.1 million in freight as Endurance developmentprototype components and other testing. The Company’s R&D costs decline as we approach commercial production. Costs for engineering personnel totaled $15.0 million in the current period, an increase of $1.2 million compared to the same period of 2021.
Liquidity and Capital Resources
We had cash and cash equivalents of approximately $235.7 million and an accumulated deficit of $570.8 million atsix 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 a net loss$1.8 million due to adjustments related to the Foxconn APA..
Impairment of $26.0property, 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 believed 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, 2022.
In the first half of 2022, we continued to build PPVs for testing, validation, certification, regulatory approvals, and to demonstrate the capabilities of the Endurance to potential customers. Upon commencing commercial production and sales later in 2022, and2023. No such impairment charges were incurred 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 resultsame period of having insufficient capital to execute our 2022 business plan, we have substantially limited investments in tooling and other aspects of the Endurance and our operations. The trade-offs we are making, including related to hard tooling, are likely 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 customers. The Company’s research and development expenses and capital expenditures are significant due to spending needed for PPVs, vehicle validation tests, securing necessary parts/equipment, and utilizing in-house and third-party engineering services. During 2021, the Company experienced the stress that the COVID-19 pandemic put on the global automotive supply chain including with regard to the availability, pricing and lead times for components and raw materials. Furthermore, in 2021 and 2022, we have incurred significant freight
30
charges that in part were higher due to the COVID-19 pandemic and challenging logistics that created delays and higher pricing on standard freight as well as to incur substantially higher expedited freight charges to mitigate delays. The Company expects continued supply chain constraints as well as raw material and other pricing pressures that are likely to negatively impact our cost structure and production timeline. See Part I - Item 1A. Risk Factors in our Form 10-K and Forms 10-Q for further discussion of the risks associated with disruptions to the supply chain.
In addition, in order to secure adequate supply of battery cells, we have an agreement with a certain supplier that obligates us to purchase a minimum volume estimated to be $11.5 million in 2022, subject to change for fluctuations in raw material pricing.
We also have meaningful exposure to material losses and costs related to ongoing litigation and regulatory proceedings for which insurance is unlikely to be available.2022. See Note 5 – Commitments4 — Property, Plant, and ContingenciesEquipment and Assets Held For Sale for additional information.
Even with the consummation of and proceeds and other expected benefits from the Foxconn Transactions (see Note 1), we need additional funding to executedetails regarding our 2022 business plan and achieve scaled production of the Endurance, due to the capital required to complete testing and validation, purchase the raw materials and vehicle components for saleable vehicles, invest in the hard tooling to lower our bill of materials cost and fund future engineering, operating and corporate expenditures. If we are unable to raise substantial additional capital in the near term, our ability to invest in hard tooling to lower the bill of material cost of the Endurance will be significantly scaled back or curtailed. If the funds raised are insufficient to provide a bridge to full scale commercial production at a profit, our operations could be severely curtailed or cease entirely. Until such time as we have sufficient funds to invest in the necessary actions to reduce our bill of material costs, we will limit our curtail production in order to minimize our losses.
In an effort to alleviate these conditions, management continues to actively seek and evaluate opportunities to raise additional funds through the issuance of equity or debt securities, asset sales, arrangements with strategic partners or obtaining financing from government or financial institutions. We have engaged a financial advisor to advise the Company on additional financing alternatives. No assurances can be given that any such financing will be available on commercially reasonable terms or at all.
As part of our funding efforts, on July 23, 2021, the Company entered into the Equity Purchase Agreement with YA, pursuant to which YA has 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. During the year ended December 31, 2021, we issued 9.6 million shares to YA and received $49.4 million cash, net of equity issuance costs. Duringimpairment. Additionally, during the six months ended June 30, 2022, we issued 6.62023, the Company recognized an impairment of $6.0 million sharesrelated to YA and received $13.7 million cash, netprepaid inventory purchases.
Gain (Loss) on Sale of equity issuance costs.Assets
The actual amount that we raise underFor the Equity Purchase Agreement will dependsix months ended June 30, 2023, the Company recognized a loss of $2.6 million on market conditions and limitations in the agreement. In particular, without stockholder approval,sale of manufacturing equipment, compared to a $101.7 million gain which was primarily attributable to the Exchange Cap provision would limitgain on the amountsale of shares we can issuethe Lordstown facility to 35.1 million shares (unless the average price of all shares sold is $7.48 or higher), including the 16.2 million shares previously issued, and therefore this share limitation and the current market price that would be the basisFoxconn for the pricesame period of the shares of Class A common stock to be sold limit funds we are able to raise to significantly less than the $400 million commitment under the Equity Purchase Agreement. As of June 30, 2022, we were in compliance with the terms and conditions of the Equity Purchase Agreement and the remaining availability under the Equity Purchase Agreement was $336.2 million which is subject to certain limitations as described above and in Note 7 of the condensed consolidated financial statements. The APA Closing with Foxconn provided more than $257 million in funding for the Company, including the $230 million purchase price and $27.5 million in reimbursements, in addition to the $50 millon purchase of our Class A common stock in October 2021. The Foxconn Transactions represent a shift into a less capital-intensive business. In addition, the Foxconn Joint Venture Agreement provides that Foxconn will make term loans to Lordstown EV in an aggregate original amount not to exceed $45 million as advances are requested by Lordstown EV. Lordstown EV may use the funds only to fund Lordstown EV’s capital commitment of $45 million pursuant to the Foxconn Joint Venture Agreement. To secure its
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obligations under each Note, Lordstown EV will grant to Foxconn a security interest in (i) all of Lordstown EV’s equity interests in the Foxconn Joint Venture, and (ii) personal property constituting the hub motor assembly lines, battery module assembly lines and battery pack assembly lines. Each outstanding Note will accrue interest at a rate of 7.0% per annum, to be paid-in-kind, and is due on the earlier of (i) the first anniversary of issuance and (ii) December 31, 2025, unless earlier terminated in the event of a default. Pursuant to the Foxconn Joint Venture Agreement, each Note maturing before December 31, 2025 will be refinanced by Foxconn with a new Note in the principal amount equal to the outstanding principal amount of the refinanced Note, plus accrued and unpaid interest thereon, and will have terms otherwise substantively identical to the terms of the refinanced Note. As a result, it is not expected, absent a default, that any amounts will become due under the Notes prior to December 31, 2025. Lordstown EV will be required to prepay each Note and all accrued but unpaid interest thereon with proceeds received upon distributions from the Foxconn Joint Venture or cash proceeds of certain asset dispositions. On June 16, 2022, Lordstown EV requested an initial advance of $13.5 million, which was funded by Foxconn in exchange for the delivery by Lordstown EV of a Note in such amount on June 24, 2022. See Note 1 — Description of the condensed consolidated financial statementsOrganization and Business Operations for additional details.details regarding the Foxconn Transactions.
As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debtLiquidity and equity capital markets is subject to several factors, including market and economic conditions, the significant amount of capital required, the fact that our bill of materials cost is currently, and expected to continue to be, substantially higher than our anticipated selling price, uncertainty surrounding regulatory approval and the performance of the vehicle, meaningful exposure to material losses and costs related to ongoing litigation and the SEC investigation, our performance and investor sentiment with respect to us and our business and industry, as well as our ability to effectively implement and realize the expected benefits of the Foxconn Transactions. Capital Resources
As a result of thesethe 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 notwithstanding management’s plansother claims that may be filed against us, and efforts to date, there continuesdevelop, negotiate, confirm and consummate a Plan, after which we do not expect to beconduct 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 aboutexists regarding our ability to continue as a going concern.concern for a period of at least one year from the date of issuance of the consolidated financial statements included in this report.
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
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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 prior Forms 10-Q andPart 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.
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Summary of Cash Flows
The following table provides a summary of Lordstown’s cash flow data for the period indicated:
(in thousands)
| | | | | | | | | | | | |
|
| Six months ended |
| Six months ended | | | (in thousands) | |||||
| | June 30, 2022 | | June 30, 2021 |
| Six months ended |
| Six months ended | ||||
Net Cash used by operating activities | | $ | (121,427) | | $ | (171,374) | ||||||
Net Cash used by investing activities | | $ | (15,990) | | $ | (175,601) | ||||||
|
| June 30, 2023 |
| June 30, 2022 | ||||||||
Net Cash used in operating activities | | $ | (75,692) | | $ | (121,427) | ||||||
Net Cash provided by (used in) investing activities | | $ | 70,066 | | $ | (15,990) | ||||||
Net Cash provided by financing activities | | $ | 129,087 | | $ | 83,114 | | $ | — | | $ | 129,087 |
Net Cash Used by Operating Activities
For the six months ended June 30, 20222023 compared to 2021,2022, net cash used byin operating activities decreased by $49.9$45.7 million. The net loss increased $300.2 million primarilyfrom the first six months of 2022 to the first six months of 2023, principally due to changesthe $101.7 million gain on the sale of the Lordstown plant in working capitalrecognized in 2022 and impairment charges of $139.5 million and depreciation charges of $54.2 million recognized in the $17.5 million received from Foxconn for the reimbursementfirst six months of operating costs.2023.
Net Cash UsedProvided by (Used in) Investing Activities
For the six months ended June 30, 20222023 compared to 2021,2022, cash used byin investing activities decreased $159.6increased $86.1 million primarily due to lower$112.2 million in maturities of short-term investments, partially offset by an increase in purchases of short-term investments of $32.1 million. Compared to the six months ended June 30, 2023, the decrease in purchases of capital spending in 2022. Cash usedassets of $29.9 million for the first six months of 2023 was offset by investing activities in 2022 also included a $13.5 million investment into the Foxconn Joint Venture and was net of $37.5 millionan increase in proceeds from the sale of capital assets to Foxconn. The $200of $37.3 million for the same period in down payments received prior to closing are reflected as financing proceeds and are reflected as a non-cash transaction when the down payment was applied at the APA Closing and the Company’s repayment obligation was terminated. The capital spending in 2021 represented the early investments to retool the Lordstown Facility, acquire testing equipment and related capabilities, and to prepare for manufacturing.2022.
Net Cash Provided by Financing Activities
For the six months ended June 30, 20222023 compared to 2021,2022, cash flows from financing activities increased $46decreased $129.1 million. Financing cash flows inThere were no financing transactions during the six months ended June 30, 2023. For the first six months of 2022, was primarilywe received a $100.0 million down payment related to the $100 million down payment received fromsale of the Lordstown facility to Foxconn $13.5 million from proceeds from Foxconn notes payable and $13.7 million in proceeds fromsales under the Equity Purchase Agreement net of issuance costs. Financing cash flows in 2021 was primarily due to $82.0 million of cash proceeds from the exercise of warrants in 2021.with YA.
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Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of June 30, 2022.2023. 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 statementsCondensed 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 June 30, 2022,2023, we had cash, and cash equivalents and short-term investments of approximately $235.7$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.
Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective due to the material weakness described below and discussed in our Form 10-K for the year ended December 31, 2021.
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In the course of preparing the Company’s financial statements for the Form 10-K, our management identified the following material weakness in internal control over financial reporting:
As a consequence, the Company did not effectively operate process-level control activities related to procure-to-pay (including operating expenses, prepaid expenses, and accrued liabilities), review and approval of manual journal entries, and user access controls to ensure appropriate segregation of duties.
These control deficiencies create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis, and therefore we conclude that the deficiencies represent a material weakness in internal control over financial reporting and our internal control over financial reporting is not effective as of December 31, 2021.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2022. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as our remediation efforts are ongoing.
Management’s Remediation Plan
Our management has prepared a remediation plan that is being instituted in 2022 under the oversight of the Audit Committee. The management team has also engaged third-party consultants to assist in the implementation of our remediation plan. The plan involves hiring and training additional qualified personnel and holding personnel accountable to their responsibilities for the operating effectiveness of internal controls over financial reporting. During the six months ended June 30, 2022, the Company hired key professionals to support financial reporting and trained additional qualified personnel. The Company will seek to hire additional qualified personnel during the balance of 2022.
We have made progress with our remediation plan and our goal is to remediate our material weakness during fiscal year 2022. However, a material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures, however, there can be no assurance that this will occur within 2022.
Notwithstanding the identified material weakness, management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our condensed consolidated financial position, results of operations and cash flows for the period presented.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 June 30, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting except for the remediation efforts with regard to the material weakness described above.
reporting.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
For a description of our legal proceedings, see Note 57 - Commitments and Contingencies of the notes to the condensed consolidated financial statements of this Quarterly Report on Form 10-Q.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, and prior Forms 10-Q, except as set forth below. In addition to the risk factorfactors 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.
If Lordstown EV fails to fulfill its obligationsWe have 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 remain in compliance with its debt covenants under the Notes, Foxconn could foreclose on significant assets securing the Notes or seek repayment from us, or both, which may have an adverse effect on our business prospects and financial conditions.
Pursuant to the Foxconn Joint Venture Agreement, Foxconn and Lordstown EV are each obligated to make capital contributions to the Foxconn Joint Venture. Foxconn has committed $100 million to the Foxconn Joint Venture, consisting of $55 million in the form of direct capital contributions, andthat we will recover any damages as a $45 million loan to Lordstown EV pursuant to the Notes, the proceeds of which will only be used to fund Lordstown EV’s capital contributions to the Foxconn Joint Venture and which are guaranteed by Lordstown EV Sales LLC and the Company. To secure its obligations under the Notes, Lordstown EV will grant to Foxconn a security interest in (i) all of Lordstown EV’s equity interests in the Foxconn Joint Venture, and (ii) personal property constituting the hub motor, battery module and battery pack assembly lines.result thereof.
On June 16, 2022, Lordstown EV requested an initial advance of $13.5 million, which was funded27, 2023, we filed the Foxconn Litigation against Foxconn in the Bankruptcy Court seeking relief for contractual breaches 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.
The Foxconn Litigation involves allegations of fraudulent conduct by Foxconn, which induced the Company to enter into a series of agreements, including the Agreement in exchangePrinciple, the APA, the CMA, the joint venture agreement, and the Investment Agreement. We are vigorously pursuing the Foxconn Litigation claims and seeking substantial damages from Foxconn. However, no assurances can be provided that our claims against Foxconn will be successful or that we will recover any damages as a result thereof.
There is substantial doubt regarding our ability to continue as a going concern and our liquidity requirements during the pendency of the Chapter 11 Cases and the adequacy of our capital resources are difficult to predict at this time.
We have concluded that there is substantial doubt regarding our ability to continue as a going concern. We 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 process.
We have incurred significant professional fees and other costs in connection with our contingent liabilities and preparation for the delivery by Lordstown EVChapter 11 Cases and expect 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 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 although we are seeking to resolve these contingencies through the Chapter 11 Cases. Due to cessation of production of the Endurance, we lack any meaningful revenue stream, our ability to obtain additional financing is highly unlikely and we do not expect continued operations following the completion of the Chapter 11 Cases. There can be no assurances that cash on hand and our current capital resources will be sufficient to allow us to satisfy 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 such distribution, to our stockholders.
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Trading in our Class A common stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks.
It is too early to determine if our Plan will allow for distributions or other residual value with respect to our Class A common stock. It is very possible that our Class A common stock will be canceled and extinguished upon the approval of the Bankruptcy Court and the holders thereof would not be entitled to receive, and would not receive or retain, any property or interest in property on account of such equity interests. In the event of a Notecancellation of our Class A common stock, amounts invested by such holders in our outstanding Class A common stock will not be recoverable. Consequently, our currently outstanding Class A common stock would have no value. Any trading in our Class A common stock during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of 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.
During the Chapter 11 Cases, the value that will be available to our various stakeholders, including our creditors and stockholders, is uncertain 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’s cash on hand and ability to obtain sufficient financing, if needed, to allow us to continue our limited 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, and our ability to comply with terms and conditions of any such amount on June 24, 2022, and on June 27, 2022, the partners made their initial investments totaling $30 millionfinancing; our ability to continue our operations in the Foxconn Joint Venture pursuantordinary 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.
We are subject to the Foxconn Joint Venture Agreement.risks and uncertainties associated with the Chapter 11 Cases.
Lordstown EV’sSince filing the Chapter 11 Cases, we have operated our business as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11 of the Bankruptcy Code. As a consequence of filing the Chapter 11 Cases, we will be subject to the risks and uncertainties associated with bankruptcy. These risks include, but are not limited to, the following:
| ● | 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 a voluntary filing for relief under Chapter 11 of the Bankruptcy Code and the related proceedings, we cannot accurately predict or quantify the ultimate impact that events that occur during the 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 indicative of our future performance.
Due to the failure to make payments when due or comply with certain covenants underidentify a strategic partner for the NotesEndurance, 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 may be deemedsignificant, 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 result of the Chapter 11 Cases, and the description of our operations, assets, liabilities, contingencies, liquidity and capital resources included in our periodic reports or in any filing we make with the Bankruptcy Court may not accurately reflect our such matters during the pendency of or following the Chapter 11 Cases or the value of our assets in an eventorganized sale process in light of default,the uncertainty of the estimates and assumptions used in the applicable reporting principles, and such default could leadvalues may be higher or lower as a result. The periodic financial information reported to Foxconn foreclosingthe 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 as of quarter end in our periodic reports and may reflect estimates based on assumptions that may change significantly during the assets pledged as security under the Notes or seeking repaymentcourse of the NotesChapter 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 finds that it 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 us, or both,the outcome of this uncertainty.
We have significant contingent liabilities, the full scope of our liabilities is uncertain, and we may also be subject to claims that will not 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 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 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 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 are not able to obtain confirmation of 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.
If confirmation by the Bankruptcy Court of a Plan under Chapter 11 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 our 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 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 through the Chapter 11 Cases.
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. Weflows and adversely affect our ability to formulate and execute a successful Plan under Chapter 11, sell our assets and make any distribution and, if so, the amount of 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. 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 Lordstown EVour 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 Company will maintain sufficient capitalmain tower of our director and officer insurance program with respect to repaynumerous ongoing matters, including the Notes when due or maintain complianceconsolidated 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 covenantsterms 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 Notes, and wedenial of coverage, no or limited insurance may be forcedavailable to reduceus to reimburse our expenses or delay capital expenditures, sell assets, seek additional capital 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 restructure or refinance our indebtedness, to the extent permitted under the Notes. Further,claims.
In addition, as a result of covenants restricting our corporate actionsthe Chapter 11 Cases, we have been and future debt, we may be subject to additional litigation or other claims related to the Foxconn dispute and bankruptcy, dissolution and liquidation. 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 the ongoing proceedings or the interim and ultimate determinations regarding the claims to be made by the Bankruptcy Court. Future resolution of these matters could result in changes in management’s estimates of losses, which could be material to our consolidated financial statements.
As of June 30, 2023, we have an aggregate provision for potential settlements of litigation of $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. Any such additional losses may be 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 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.
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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 sale process for all, substantially all or some of our assets. Given general economic and market conditions, and the uncertainty regarding our ability to 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 other 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 lower.
The failure to consummate a sale of all, substantially all or some of our assets or to generate 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 pursuing certain future financingour Class A common stock, the price of our Class A common stock is likely to be volatile and transactions thatmore likely to be affected by broad market fluctuations, general market conditions, changes in the markets’ 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 otherwise be beneficial toharm our business, and operations. Foreclosurewould otherwise harm or eliminate recoveries to creditors and stockholders.
A long period of operations in the Chapter 11 Cases under Bankruptcy Court protection would likely have a material adverse effect on our assetsbusiness, financial condition, liquidity and restrictionsability to generate significant proceeds from any asset sales. So long as the Chapter 11 Cases continue, senior management will be required to spend a significant amount of time and effort dealing with the Chapter 11 Cases. A prolonged
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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 operations may lead tobusiness 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 establishingour Chapter 11 Cases could increase the costs and developingrisks associated with the bankruptcy process, and diminish the value, if any, that is available to our electric vehicles. In addition,various stakeholders (including creditors and stockholders). Also, we need the Foxconn Joint Ventureprior approval of the Bankruptcy Court for transactions outside the ordinary course of business during the course of bankruptcy proceedings, which may not succeedlimit our ability to respond timely to certain events or take advantage of certain opportunities. Because of the risks and mayuncertainties associated with bankruptcy proceedings, we cannot accurately predict or quantify the ultimate impact of events that could occur during any such proceedings. There can be terminated dueno assurances that we will be able to sell some or all of our assets in orderly fashion, that we will otherwise realize any significant value for our assets, or that our creditors or stockholders (including holders of our Class A common stock) will receive any recovery from the failure to establish a sustainable partnership and our business prospects, financial conditions and operations may be materially and adversely affected.Chapter 11 Cases or any other bankruptcy proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Except as described below and previously disclosed in a Current Report on Form 8-K, there were no sales of equity securities during the quarter ended June 30, 2022 that were not registered under the Securities Act.N/A
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On May 11, 2022, the Company issued the Foxconn Warrants to Foxconn that are exercisable until May 11, 2025 for 1.7 million shares of Class A common stock at an exercise price of $10.50 per share.
On May 17, 2022, May 23, 2022 and June 6, 2022, pursuant to the Equity Purchase Agreement the Company sold an aggregate of 6.6 million shares of Class A common stock to YA and received $13.7 million cash, net of equity issuance costs.
The shares were issued and sold to accredited investors in reliance upon the exemption from the registration requirements of the Securities Act of 1933 afforded by Section 4(a)(2) of the Securities Act of 1933.
Item 5. Other Information
On August 3, 2022 (the “Effective Date”), following Mr. Ninivaggi’s appointment as the Company's Executive Chairman of the Board, Mr. Ninivaggi and the Company entered into an amended and restated employment agreement (the “A&R Employment Agreement”), which amends and restates Mr. Ninivaggi’s original Employment Agreement, dated August 26, 2021, as amended by the Amendment to the Employment Agreement, dated November 9, 2021 (the “Prior Employment Agreement”). Pursuant to the N/A&R Employment Agreement, Mr. Ninivaggi will receive an annual salary in an amount up to $675,000 consisting of (i) a cash component of $450,000 (the “Non-Contingent Base Salary”), and (ii) a contingent component of $225,000 (the “Contingent Base Salary”) payable if the aggregate market value of the Company’s equity securities exceeds the Market Cap Threshold (as defined below). The “Market Cap Threshold” is $750,000 million in 2022, $1 billion in 2023 and $1.25 billion thereafter, measured based on the closing market price of the Class A common stock as quoted on the stock exchange or national market system on which the Class A common stock is then listed for any five (5) consecutive trading days in December of the applicable calendar year. Mr. Ninivaggi and the Company may agree for all or a portion of the Contingent Base Salary to be earned in the form of Class A common stock. Mr. Ninivaggi will also receive an annual bonus with an annual target bonus equal to 80% of the actual amount of his annual salary, based on Company and individual performance and subject to the discretion of the Board of Directors or a committee thereof. For the fiscal year ending December 31, 2022, Mr. Ninivaggi will be entitled to receive an annual bonus at a target equal to 105% of his actual annual salary earned in such year.
Under Mr. Ninivaggi’s employment agreement, if his employment is terminated by the Company without “cause” or by Mr. Ninivaggi resigning for “good reason,” Mr. Ninivaggi is entitled to receive, subject to his execution and non-revocation of a general release of claims, an amount equal to eight months of base salary, calculated based on the amount of the Non-Contingent Base Salary in effect at the time, unless the Market Cap Threshold had been achieved at the time of termination, in which case his full annual salary in effect at the time will be used, and $25,000, and accelerated vesting of all outstanding and unvested equity awards, provided that any outstanding and unvested performance-based restricted stock unit awards will only vest upon achievement of applicable performance metrics. In addition, if Mr. Ninivaggi’s employment is terminated for any reason other than “cause” or Mr. Ninivaggi’s resigns for “good reason,” Mr. Ninivaggi is entitled to receive any actual bonus earned but unpaid as of the date of termination and a prorated target bonus for the year of termination, calculated using the Non-Contingent Base Salary in effect at the time, unless the Market Cap Threshold had been achieved at the time of termination, in which case his full annual salary in effect at the time will be used. Pursuant to his employment agreement, Mr. Ninivaggi is also subject to certain restrictive covenants, including (i) perpetual confidentiality and non-disparagement covenants, (ii) an assignment of inventions covenant and (iii) non-competition and customer and employee non-solicitation covenants during and for the two-year period following any termination of employment.
The foregoing description does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the A&R Employment Agreement, a copy of which is attached hereto as Exhibit 10.7 and incorporated herein by reference.
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Item 6. Exhibits
Exhibit Index
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|---|---|---|
Exhibit No. | Description | |
| | |
3.1 | | |
| ||
| ||
| ||
| ||
| ||
|
| |
| ||
| 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* | | |
101.INS* | | 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.
| |
| |
| LORDSTOWN MOTORS CORP. |
| |
| |
Date: August | /s/ Edward T. Hightower |
| Edward T. Hightower |
| Chief Executive Officer and President |
| (Principal Executive Officer) |
| |
Date: August | /s/ Adam Kroll |
| Adam Kroll |
| Chief Financial Officer |
| (Principal Financial and Accounting Officer) |
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