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LORDSTOWN -- Lordstown Motors Corp. can continue to pursue a sale of its assets through bankruptcy, a federal judge hearing the electric-vehicle company's Chapter 11 case has ruled.
U.S. bankruptcy court Judge Mary F. Walrath on Monday sided with Lordstown Motors, which successfully fought off a motion by former business partner turned adversary, Foxconn, to either dismiss the case or convert it to Chapter 7 liquidation.
"I am going to deny the motion to convert or dismiss at this time and see if the debtor can pursue this," Walrath said. "There is always the ability of the court to take action if anything changes, but at this stage, I think the debtor has a legitimate reason to pursue the course of action it is on and does not mandate dismissing this case."
Lordstown Motors sued Foxconn on June 27, the same day it filed bankruptcy, claiming fraud and bad faith by Foxconn led to the bankruptcy.
Foxconn called the depiction that Lordstown Motors is the victim of a fraud a "fictitious narrative" Lordstown Motors created "solely for the purpose of obtaining a tactical litigation advantage," a court document states.
Foxconn also claimed Lordstown Motors filed in bad faith and without a valid bankruptcy purpose.
Lordstown Motors and Foxconn became partners when Foxconn acquired the EV company's auto assembly facility in Lordstown for $230 million in May 2022. That was after Lordstown Motors pivoted its business model from manufacturing to an asset-light one based more on partnerships, because, according to Lordstown Motors Executive Chairman Daniel Ninivaggi's testimony Monday, the company was "too small of a company" to raise the money necessary to operate in the manufacturing space.
The purchase agreement also called for the two to partner to develop electric-vehicle programs, but in November, the program was replaced by an equity investment agreement, where Foxconn agreed to invest $170 million into Lordstown Motors. A large portion of the funding was earmarked for a collaborative EV design and development program.
The companies closed on $52.7 million of the $170 million investment in November, but that was all.
In April, when Lordstown Motors learned it was out of compliance with Nasdaq trading rules regarding its stock price, Foxconn asserted the company breached the investment agreement and would not close on a second $47.3 million stock purchase.
There also was a dispute over a reverse stock split done by Lordstown Motors in an effort to inflate the stock price and cure the Nasdaq issue, which Foxconn also used as a basis for not closing on the second investment, Ninivaggi said.
"And all of those disputes were being played out publicly. At that point, customers started to pull out, employees started to quit, potential OEM (original equipment manufacturer) partners wanted out, so it just sort of destroyed the whole premise of the business strategy in our view," Ninivaggi said.
The business model with Foxconn that "appeared to be broken" was among several factors considered before the Chapter 11 petition was filed, Ninivaggi said.
The company over the past couple of years has been sued multiple times, from stockholder derivative complaints to securities complaints; found itself the subject of a federal securities investigation; and has had very little success attracting investment other than the funding from Foxconn.
Lordstown Motors, Ninivaggi said, went "all in" in the Foxconn-dependent strategy, but there were disputes, including the stock price compliance issue.
However, Ninivaggi said Foxconn was not a "silver bullet" for the problems faced by Lordstown Motors.
Lordstown Motors continued to issue going concern warnings notwithstanding Foxconn's down payments associated to the sale of the plant, Ninivaggi said. Also, attempts at traditional capital investments were not successful.
Foxconn attorney Michael Whalen asked if Lordstown Motors had a "critical need" for additional money on top of what it received from Foxconn from the plant transaction.
"I would characterize it this way, for the Endurance, we needed capital to lower the cost of the product, but it was a bit of Catch-22 or chicken and egg," Ninivaggi said. "We needed capital to reduce the BOM (bill of material) cost, but at the current BOM cost, it was difficult to attract capital.
"With the new vehicle program, it really was a function of our ability to do the predevelopment work and show customers the program, and that was the purpose of the predevelopment funds that Foxconn had committed," Ninivaggi said.
The company needed capital to spend on production tooling, also known as hard tooling, which ran upward of $250 million.
OTHER HIGHLIGHTS
The cost to produce the Endurance, the flagship vehicle for Lordstown Motors, was more than $200,000 around November, according to company President Ed Hightower. That's come down a bit to $186,000. The vehicle was priced at about $65,000.
Also, Hightower testified Lordstown Motors' battery pack module and hub motor lines were included in the agreement with Foxconn to acquire the plant.
Those assets, along with the completed Endurance program, which includes full-vehicle certifications; the intellectual property associated with the vehicle; and hard tools the company acquired to produce the truck, is what is up for sale in bankruptcy. A buyer would also have access to employees who brought the truck into production, Hightower said.
The company has had a fair number of layoffs since the dispute with Foxconn began, but still employs about 125 people, including key employees in each of the vehicle's major subsystems as well as small teams in purchasing, finance and sales and marketing, Hightower said.
OTHER COURT ACTION
Also Monday, Walrath approved a $40 million settlement between Lordstown Motors and Karma Automotive LLC, which sued Lordstown Motors in October 2020 on claims the company stole trade secrets and poached employees.
As part of the agreement, the California-based company was to receive a one-time royalty payment of $5 million.
Karma was seeking more than $900 million from Lordstown Motors, claiming the company stole intellectual property about Karma's infotainment system and poached a specialized team of Karma employees who were designing it for use in the Endurance.
The agreement announced Aug. 15 stopped a trial scheduled to begin Sept. 12 as well as relieves a significant pressure on Lordstown Motors in its bankruptcy.