General Motors is mum on a high-profile, albeit small investment in startup electric truck maker Lordstown Motors as the startup teeters on the edge of extinction.
In a government filing Tuesday, Lordstown Motors said it doesn’t have enough money to start commercial production and it has doubts whether it can continue as a going concern through the end of the year. “Going concern” is a legal phrase companies use to warn investors they might not make it.
GM owns 7.5 million shares of Class A common stock in exchange for equity value of $75 million in Lordstown Motors. It’s a small stake of less than 5%.
In reaction to Tuesday’s filing, GM spokesman Jim Cain said, “We will not be providing a comment.” But Cain added that GM has not sold its shares in Lordstown Motors.
After the news broke, Lordstown Motors shares closed with a 16.3% decline at $11.22.
Not necessarily bankruptcy
Even if GM does nothing to unload its stake in Lordstown Motors, GM may not be too badly scathed in a Lordstown bankruptcy, analysts said.
“GM would lose its investment likely in its entirety if Lordstown went bankrupt,” said Morningstar auto analyst David Whiston. “A going concern does not definitively mean bankruptcy, but it does mean the auditors feel things, as they are, as of the date of the auditor’s opinion, do not make the auditor confident the company can definitively make it through the next year.”
Essentially, auditors have substantial doubts as to Lordstown Motor’s survival over the next year, Whiston said. Lordstown Motors plans to make the Endurance pickup to be sold to commercial fleet customers.
The fix when a company has such doubts typically involves big cost controls and/or raising more capital. If it can’t do either and it fails, GM loses its stake.
“For GM the loss would be noncash in the quarter of a bankruptcy filing because the cash was already spent,” Whiston said. “But the money would go to waste. GM is big enough that it shouldn’t matter much to their financial health.”
Lordstown Motors spokesman Ryan Hallett declined to comment beyond the securities filing. But he said the company is committed to “our continued focus on beginning production at the end of September. I’m not able to comment any further, other than to say that we are excited to welcome our invited guests in to see our progress during Lordstown Week.”
Lordstown Week is a media tour scheduled for June 22 and 23.
GM repossesses the factory?
In 2018, GM announced it was closing its Lordstown Assembly Plant because of declining sales of the Chevrolet Cruze subcompact car built there. The last Cruze rolled off the line in early 2019 and later that year, GM sold the 6.2 million-square-foot facility to Lordstown Motors.
GM’s stake in Lordstown Motors mostly reflects the selling price of the plant, equipment and the value of the in-kind contributions GM made to help Lordstown Motors “in their drive to complete the purchase and launch their product.”
In the meantime, GM remains active in the area, partnering with a division of LG Chem on construction of a battery factory right near the old Lordstown Assembly plant, which will start running early next year.
Depending on how the deal between GM and Lordstown Motors was structured when GM sold the building to Lordstown Motors, a Lordstown Motors bankruptcy could put the factory back on GM’s ledgers.
“It’s possible that GM could repossess the factory,” said Sam Abuelsamid, principal analyst of E-Mobility for Guidehouse Insights in Detroit. “If the debt was traded for equity and Lordstown Motors goes under, then GM would probably lose it all, although again depending on how the deal was set up they might get back the factory or something from a liquidation.”
Worst case, Abuelsamid said, is that GM loses it all, but given that it’s $75 million, “it’s relatively minor for GM. The goodwill they got from essentially giving the factory to a startup was probably worth it.”
‘Another blow’ to the valley
The idea that GM got any goodwill is subjective.
Former UAW Local 1112 President Tim O’Hara said many of the former union members who worked at Lordstown Assembly when GM owned it had hoped Lordstown Motors would offer them similar jobs. The latest bad news from Lordstown Motors isn’t surprising for those living in northeast Ohio’s Mahoning Valley, he said.
“We expected it,” O’Hara told the Free Press. “But it’s another economic blow to the Mahoning Valley if Lordstown Motors ultimately fails.”
In late May, Lordstown Motors reported a first-quarter net loss of $125 million. It warned at that time that it needs more money to continue on.
The startup automaker has not yet put any production models on the road, but Burns said he expected production of the Endurance electric pickup this year to be limited to “at best” half of the initial expectation, which was about 3,000.
Lordstown Motors has had a series of troubles this year. In January, engineers were testing an Endurance pickup prototype near Lordstown Motors Research and Development Center in Farmington Hills. The prototype made it about a mile from the center before it erupted into flames, burning down to its tires.
The company attributed the fire to human error but provided only a limited explanation in comments to the Free Press in February.
In April, another prototype competing in a 280-mile off-road race in Baja California only made it 40 miles before dropping out, the New York Times reported.
Lordstown Motors is also being investigated by the Securities and Exchange Commission after the Hindenburg research firm earlier this year labeled Lordstown’s claimed vehicle preorders as largely fictitious, offered in order to “raise capital and confer legitimacy.”
On May 26, Burns highlighted some positives from the quarter such as having built 48 out of 57 of its beta vehicles, or preproduction test models. Also, he said the company is on schedule to conclude the beta program by the end of June.
More:GM holds on to stock in Lordstown Motors despite EV company’s troubles
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Contact Jamie L. LaReau at 313-222-2149 or jlareau@freepress.com. Follow her on Twitter @jlareauan.