When Lordstown Motors (RIDE -1.16%) unveiled its all-electric Endurance pickup truck in mid-2020 with a target production of 20,000 trucks for 2021, it looked set to beat the likes of Ford and Tesla by launching what could have been the first all-electric pickup truck to hit the U.S. roads.
Cut to 2022, and Lordstown Motors is now selling its only plant.
That sounds awful, but given how Lordstown Motors shares had already lost 93% of their value since the beginning of January 2021 through yesterday's market close, the company closing a deal that could prevent it from bankruptcy was bound to send the markets into a tizzy.
That's what happened today, as Lordstown Motors stock rocketed 58% at its highest point in trading Thursday after the company finally sold its plant in Ohio to electronics giant Hon Hai Precision (HNHPF -1.59%), better known as Foxconn, for $230 million. It had originally entered into an agreement with Foxconn for the sale in November 2021.
With this sale, Foxconn will now manufacture Lordstown Motors' flagship Endurance trucks, with Lordstown Motors sharing several responsibilities from the sourcing of raw material to vehicle testing, regulations, and warranties. The two companies will also jointly develop new EVs.
Yet, if you think the worst is over for Lordstown Motors and now's the time to load up on a promising EV stock while it's still a penny stock, here's something you must know: This deal may sound like a breakthrough for Lordstown Motors, but the truth is, it's far from it.
Image source: Getty Images.
The thing is, closing this deal was more of an obligation for Lordstown Motors than a choice. That's because Foxconn had already paid the EV maker $200 million out of the $230 million in down payments so far as pre-funding since November. Lordstown Motors had two options: Either maintain certain minimum cash balances as part of the agreement under which Foxconn pre-funded it and sell the plant as targeted, or not close the sale and repay Foxconn the down payments with interest.
Lordstown Motors was on the brink of the latter as it ran out of cash, and since nearly all of its assets were already pledged to Foxconn under the agreement, a failure to repay would have cost Lordstown Motors virtually everything it had.
Simply put, Lordstown Motors had to close this deal anyhow, and that's exactly what it just did. There's nothing more to it.
Also, Foxconn's prepayments mean Lordstown Motors received only $30 million from the sale of the plant now, aside from $27 million in reimbursement for certain costs.
These proceeds are barely enough for Lordstown Motors to scrape through, and it still has several financial commitments. It needs cash for everything, and that's what Lordstown Motors doesn't have.
By management's own admission on its latest earnings conference call held on May 9, Lordstown Motors will have to raise another $150 million in cash this year. It's anyone's guess where the company will raise the funds from.
So while the market pumped huge amounts of money into Lordstown stock Thursday, I'm still trying to figure out one valid reason why any investor would want to buy Lordstown Motors shares. In fact if I owned the stock, I'd sell out while I still had a chance and invest in better EV stocks out there instead.
