RealTesla

Editor's note: This is the 2nd of a 3-part Matt Levine opinion piece, just focusing on the EV/financing portion of his op-ed. There are many links (especially when Matt Levine says "this"), but I'm not going to bother copypasting the links, too much effort to just reformat this into Markdown as it is!

Oh Lordstown

In about 2020, a lot of electric-vehicle companies went public in the US and raised money by merging with special-purpose acquisition companies. Some general features of these de-SPAC deals were:

• The EV company was not all that far along in developing a commercially viable vehicle.
• But it gave shareholders projections saying that it would sell a zillion vehicles at huge profits by, like, 2023.
• It did not.

It is interesting to consider how that might end. Like, you raise a bunch of money from retail investors to build electric vehicles, you flail around for a while not building electric vehicles … then what? Some options:

1. You keep flailing until you run out of money, then stop. You file for bankruptcy, there’s no money left, there’s no debt (who would lend you money?), the shareholders get zero, it’s not great but it’s fairly straightforward.

2. You stop flailing at some point before you run out of money. You file for bankruptcy, there is money left, there’s no debt (who would lend you money?), you sell whatever assets there are, and you divide up whatever money is left among the shareholders. This is a better outcome than No. 1, though perhaps less likely. If you run a company, it hasn’t succeeded in making electric vehicles, and it hasn’t run out of money, you will be tempted to keep spending the money to try to make electric vehicles, even if your chances of success are slim. Quitting while there is money left and giving it back to the shareholders is better for them, but psychologically difficult for you.

3. Same as No. 2, but with a subtle distinction. You don’t have debt per se (who would lend you money?), but you do have some big liabilities. The liabilities are: The people who bought your stock in the de-SPAC deal, who believed your projections about selling a zillion vehicles at huge profits, probably sued you at some point after you started missing projections and the stock started dropping. There is a securities-fraud shareholder class action. The US Securities and Exchange Commission also probably took an interest in those projections. You file for bankruptcy, you have some assets, you sell them for some money, and then a court has to figure out (1) how much of the money goes to the SEC, (2) how much goes to the (current and former) shareholders who sued you for fraud and (3) how much is left over for your current shareholders.

So here is the August 2020 investor presentation from electric-pickup-truck company Lordstown Motors Corp.’s de-SPAC merger, projecting that it would be in “full production” by the second half of 2021, that it would deliver 31,600 vehicles in 2022 and 65,000 in 2023, and that it “has already received ~27k orders (average order size of ~300 trucks) before the first vehicle has been produced, representing potential revenue sufficient to cover 2021 production and into 2022.” In fact Lordstown has produced 65 trucks — not 65,000, just 65 — in its entire history through yesterday, and its former chief executive officer resigned in 2021 when it turned out that many of those pre-orders were fake.

But Lordstown did manage to raise about $780 million from investors in the SPAC and from institutional investors in a parallel private investment in public equity deal. It spent a surprisingly large amount of that money — and of other cash that it raised, including by selling a factory to Foxconn Technology Group and getting some equity investment from Foxconn — on building its 65 trucks; its losses from operations over the last three years total $890 million, or about $13.7 million per truck. (“Anticipated [bill of materials] costs were approximately $42,000 per vehicle for manufacturing in 2021,” says Lordstown, which “compared favorably to the Company’s anticipated selling price of $52,500 for the Endurance.”) But it still has money left: As of yesterday, it “has approximately $136 million in cash on hand” and no funded debt.

But yesterday Lordstown filed for bankruptcy, and I have been quoting from the first-day declaration in that case. There is no debt to restructure, so the bankruptcy is not about that. There are some assets to sell — its December 2022 balance sheet shows $194 million of property, plant and equipment — and Lordstown plans to run a sale process for its business, but don’t get too excited:

The Company does not believe that capital from other sources is available. In September 2021, the Company retained Jefferies LLC (“Jefferies”) to explore all market alternatives. Through that process, the Company and Jefferies, in consultation with Foxconn, prepared a list of more than 50 potential investors and strategic OEM partners across the globe to be contacted. Jefferies, the Company and Foxconn allocated responsibility to contact the potential investors and strategic OEM partners based upon who had the best relationship with the most relevant person at those companies. While the Company, its advisors, and potential partners held numerous meetings and in-person evaluations of the Endurance, as of the Petition Date, the Company has not received any actionable indications of interest.

There is some operating business left, but it loses money, so Lordstown plans to stop:

Recognizing that it would still require substantial additional funding to execute its business plan, including scaling the Endurance program and developing new vehicle programs, the Company has continued to take steps to reduce its cash burn and preserve its assets for the benefit of stakeholders. Given the Company’s current prospects—including Foxconn’s unwillingness to honor its funding and product development commitments and the extremely limited ability to raise capital in the current market environment—continuing production of the Endurance would only eat away at the Company’s resources. …

The Company is currently in the process of finalizing a limited number of Endurances still in production. Once that process is complete, the Company intends to halt production of the Endurance until a value-maximizing transaction is identified in order to preserve its assets and turn its focus entirely to maximizing recoveries through the chapter 11 cases.

Schematically this is a company with about $136 million of cash, some equipment and inventory to sell, no debt, and no operating business. It can just stop, send the shareholders their pro rata share of the cash, and go home.

Well, no, there are two real issues in the bankruptcy. One is that yesterday Lordstown also sued Foxconn, in the bankruptcy court, essentially blaming Foxconn for its failure. In 2021 Lordstown sold its factory to Foxconn and entered into a series of agreements to work together to make electric trucks; Foxconn would supply the components, while Lordstown would supply “cross-functional expertise in designing, engineering and developing electric vehicles from concept through launch” and “additional capabilities in sales, marketing.” Lordstown’s current complaint accuses Foxconn of slow-walking and breaching those agreements. 1 (Foxconn vehemently disagrees.)

There is also an investment agreement in which Foxconn agreed to buy about $170 million of Lordstown stock; it bought some but not all of that stock, and honestly I am sympathetic? I also would not want to buy stock in a company that was sliding into bankruptcy; if I had an agreement to buy that stock, I would look very carefully at the agreement to see if I could find an escape hatch. 2 But arguably Foxconn's failure to buy the stock is what tipped Lordstown into bankruptcy. Anyway Lordstown is suing over all of this, and I suppose if it wins then it will get either (1) a pile of money to give to shareholders or (2) a better business deal with Foxconn that it can leverage to sell itself for more money to give to shareholders.

But the other issue is the liabilities: Lordstown has no debt, but oh does it have lawsuits. Shareholders who believed Lordstown’s hype in 2020 had started suing for securities fraud by 2021, and the SEC started an investigation. 3 “The excitement about [Lordstown’s] innovative technology and EV aspirations drove its equity market capitalization to reach $5.3 billion,” says the bankruptcy filing, somewhat euphemistically; its market cap yesterday was about $36 million. If you got excited about Lordstown’s innovative technology and EV aspirations because of its optimistic manufacturing plans and fake pre-orders, so you bought the stock at a $5.3 billion valuation and then saw it go down 99%, you might sue for fraud, and a class of Lordstown shareholders did.

The bankruptcy declaration says:

The purpose of these Chapter 11 Cases is for the Company to maximize value by conducting a robust sale process, reducing its cash burn to preserve resources, and centralizing the claims asserted against the Company to efficiently resolve those claims and provide meaningful recoveries to its creditors and, if sufficient, its shareholders.

As in any bankruptcy, one goal is to maximize the value of assets, by selling the company for as much as it can get and by suing Foxconn for damages. And as in any bankruptcy, the other goal is to figure out who has a claim to the assets, and divide the assets fairly among those claimants. Here the claims are fairly simple, with no debt and limited operations. The question is how much of the money Lordstown has to pay to its former shareholders (or the SEC) for getting their hopes up, and how much money it will have left to pay its current shareholders.

Note: Subscripts make post too long. Read subscripts in this followup comment: https://lemmy.world/comment/608642