The countdown is on and time ticks away very quickly.
Will Lordstown Motors become the first EV upstart to file for bankruptcy? The life of the young electric-vehicle manufacturer based in Ohio hangs by a thread.
At the beginning of the month the company warned that it could file for bankruptcy. That's because the Taiwanese group Foxconn, with which Lordstown (RIDE) had reached an agreement relating to an injection of funds, has said it might back out of the deal.
Foxconn accused Lordstown Motors of having breached the contract by letting the stock price fall below $1 a share for too long, according to filings with the U.S. Securities and Exchange Commission.
"The company is in discussions with Foxconn to seek a resolution regarding these matters," Lordstown said at the time. "However, to date, Foxconn has declined to revoke its invalid termination notice and has failed to confirm that it will proceed with the subsequent common closing or any preferred stock closing."
Reverse Split to Try to Boost the Stock Price
It added that there was "substantial doubt" regarding its ability to continue as a going concern because its ability to obtain additional financing is "extremely limited."
"If we are unable to resolve our dispute with Foxconn in a timely manner on terms that allow us to continue operating as planned, identify other sources of funding, identify a strategic partner and resolve our significant contingent liabilities, we may need to curtail or cease operations and seek protection by filing a voluntary petition for relief under the bankruptcy code," Lordstown warned.
It concluded by saying that in the case of a bankruptcy, the value for its creditors and stockholders is "uncertain."
Lordstown has just taken a step to try to settle the dispute with Foxconn. The company declared a reverse stock split, which boosts its stock price by proportionately cutting the number of shares outstanding.
It's a 1-for-15 split, which means that an investor who owns 15 shares will receive 1 share at 15 times the presplit price, according to a statement. The company's market capitalization does not change.
Investors with less than 15 shares will be paid the market value of their shares in cash. Fractional shares will also be paid in cash.
The EV upstart also wants to avoid a delisting of the stock, which is currently trading around 29 cents a share on the Nasdaq.
The problem is that a reverse split often leads to a drop in the stock because investors see it as a sign of a company's financial weakness. This is the case of Lordstown Motors, whose share fell by more than 4% at last check.
The reverse split stock will be effective on May 24.
Lordstown in Tough Financial Straits
"If the reverse split causes the Class A common stock price to remain above $1.00 per share for 10 consecutive trading days and Nasdaq notifies the company that the bid price requirement has been satisfied, that may satisfy Foxconn’s (incorrect) interpretation of the closing condition and cause Foxconn to close the transaction," Lordstown said in the statement.
It warned, however, that "no assurance can be given regarding the impact of the reverse stock split on the stock price or that Foxconn will meet its obligation to close, even if the stock price remains above $1.00 for the 10 trading-day period."
"While the company remains willing to negotiate with Foxconn in an effort to resolve its disputes, no agreement currently exists and the company cannot predict whether such an agreement will be reached in the future."
Lordstown's financial situation is alarming. As of April 30 the company had cash, cash equivalents and short-term investments of about $165 million, a drop of approximately $11 million from the quarter ended March 31.
The carmaker has produced 56 Endurance vehicles, its pickup truck, and delivered 18 to customers.
Endurance, base-priced at a bit more than $65,000, competes with Rivian's R1T, Ford's F-150 Lightning, and General Motors' GMC Hummer EV.
In a few months, Tesla will join the competition with its Cybertruck, while GM will market the electric version of the Chevrolet Silverado.
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