After a number of delays and contrary to my expectations, beleaguered electric vehicle (“EV”) start-up Lordstown Motors (NASDAQ: RIDE) or “Lordstown” succeeded in close a series of important strategic transactions with Hon Hai Technology Group, better known as “Foxconn” on Wednesday:
1. Asset Purchase Agreement
Under the asset purchase agreement, Foxconn is acquiring Lordstown Motors’ vehicle assembly plant for a total purchase price of $230 million plus reimbursement of approximately $27.5 million in operating and expansion costs.
As Foxconn has already made $200 million in installments, the final proceeds for Lordstown will be around $57.5 million.
The company will retain ownership of its hub motor assembly line, along with its battery module and pack line assets, certain intellectual property rights and other excluded assets.
At the same time, the company entered into a lease agreement with Foxconn under which Lordstown Motors will lease space in its former Foxconn facility for its Ohio-based employees.
2. Contract Manufacturing Agreement
As part of the closing of the plant sale, the companies have also entered into a ‘manufacturing supply agreement’ under which all manufacturing of Lordstown’s much-vaunted ‘Endurance’ BEV pickup will be under -processed at Foxconn.
Pursuant to the agreement, Foxconn will (i) manufacture the Endurance at the Lordstown plant, (ii) after a transition period, provide components for the manufacture and assembly of the Endurance, subject to customer specifications. supplies provided by Lordstown Motors, and (iii) provide certain post-delivery services:
Foxconn will use commercially reasonable efforts to help reduce component and logistics costs, and otherwise improve commercial terms of supply with suppliers, and the parties will work together to reduce the overall cost of the Endurance BOM.
Foxconn will carry out testing in accordance with testing procedures established by Lordstown EV and Lordstown EV is responsible for compliance with motor vehicle legislation and reporting. The contract manufacturing agreement also allocates liability between the parties for other matters, including component defects, quality assurance, and manufacturing and design warranties.
Foxconn will charge Lordstown EV a fee per vehicle, as well as component and other costs due under the agreement. Production volume and scheduling are based on rolling weekly forecasts provided by Lordstown EV which are generally only binding for a twelve week period, with some ability to vary vehicle type quantities.
The term of the contract manufacturing agreement will begin on May 11, 2022 and will continue for an initial term of 18 months plus a notice period of 12 months in the event that either party seeks to terminate the agreement. In the event that neither party terminates the agreement after the initial term, it will continue on a monthly basis, unless terminated on 12 months notice. The Contract Manufacturing Agreement may also be terminated by either party due to a material breach of the Agreement and will terminate immediately upon bankruptcy.
As a result, Foxconn will employ approximately 400 former Lordstown employees. Around 250 employees, primarily in engineering, testing and validation, will remain with Lordstown Motors.
The start of commercial production of the Endurance is scheduled for the third quarter, with the first commercial deliveries expected in the fourth quarter. Foxconn should immediately assume manufacturing operations at the Lordstown plant without disruption.
3. Joint Venture Agreement
The companies have also agreed to form a joint venture (“JV”) named “MIH EV Design LLC” to design, develop, test and industrialize all-electric utility vehicles by leveraging the so-called Mobility-in-Harmony (“MIH “) from Foxconn. Platform.
Foxconn has committed $100 million to the joint venture, consisting of $55 million in direct equity contributions and a $45 million loan to a subsidiary of Lordstown Motors.
The proceeds will be used to fund Lordstown’s capital contributions to the joint venture. Initially, Foxconn will hold a 55% stake in the joint venture, while Lordstown will hold the remaining 45%.
The joint venture agreement provides for the grant of a license to LLC to use certain intellectual property relating to certain Foxconn MIH-based vehicle designs (the “FX Intellectual Property”) to develop EC vehicles, with LLC owning all intellectual property rights that it develops. (other than IP FX). In addition, the LLC will grant an exclusive license of all intellectual property owned by the LLC relating to any EC vehicle designed by the LLC 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 license fees.
The $45 million loan will be secured by substantially all of Lordstown’s remaining assets:
Lordstown EV will grant Foxconn a security interest in (i) all of Lordstown EV’s interests in the LLC, and (ii) the personal property comprising the hub motor assembly lines, battery module assembly lines and battery assembly lines. Lordstown EV may only use the funds to finance Lordstown EV’s capital commitment of $45 million pursuant to the joint venture agreement.
Each outstanding Note will bear interest at a rate of 7.0% per annum, payable in specie, and is due on the earliest of the following dates: (i) the first anniversary of issuance and (ii) December 31, 2025 , unless terminated early. in the event of a defect.
Pro forma for the closing of the asset purchase agreement, the company would have had over $300 million in cash and cash equivalents as of March 31, 2022.
Unfortunately, proceeds from the strategic partnership with Foxconn remain insufficient to fund the company’s business operations for the remainder of the year, even after deferring initial investments in hard tooling, as reported in the recent 10-Q:
Even if the Foxconn transactions are completed under current terms, we will require additional funding to execute our 2022 business plan and achieve large-scale production of the Endurance, due to the capital required to perform testing and the validation, buy the raw materials and the vehicle. components for salable vehicles, invest in hard tooling to reduce the cost of our BOM and fund future engineering and corporate expenses.
According to management on the recent first quarter conference call, Lordstown will need to raise an additional $150 million in capital this year.
The sharp drop in the company’s share price over the past two months has also led to a substantial reduction in the availability of funding below its $400 million. stock purchase agreement with YA II due to an exchange cap prohibiting the company from issuing more than 19.9% of its outstanding common shares at the date of the agreement. At the current share price, the maximum remaining proceeds would be approximately $50 million.
With capital markets more or less closed to the company, it’s hard to imagine Lordstown Motors securing $150 million in short-term funding.
With all of the company’s remaining assets mortgaged by Foxconn, Lordstown will not be able to obtain a reasonable form of debt financing and even in the event the company manages to make full use of the YA II share purchase agreement , proceeds would still be well below the $150 million requirement for this year.
While the closing of the Foxconn deals gives Lordstown Motors some extra time to raise additional capital, the company is unlikely to make it to next year as capital markets are essentially off limits at this time.
Investors should take advantage of any major turnaround to exit existing positions or even sell the stock outright at the current negligible borrowing rates, as bankruptcy remains the most likely outcome for the troubled company.