UPDATE | Lordstown Motors gets multimillion-dollar hedge fund investment

LORDSTOWN — Lordstown Motors Corp., which for months has warned of a cash crunch that could cause it to close its doors next year, on Monday morning announced a new multimillion-dollar hedge fund investment.

The company announced it entered Friday into a three-year equity purchase agreement with YA II PN Ltd., a fund managed by Yorkville Global Advisors Global LP of New Jersey, for $400 million in Class A common stock purchases.

It’s “the first step taken by the new leadership at Lordstown to ensure the company has the financing it needs to continue in the long-term,” said spokesperson Kimberly Spell.

The net proceeds for Lordstown Motors are yet to be determined but will be used for “working capital and general corporate purposes,” according to the company’s Monday filing with the U.S. Securities and Exchange Commission.

The agreement functions like a line of credit — except in shares of the company, rather than credit, explained Carter Driscoll, the company’s VP of corporate development, capital markets and investor relations.

Through this at-the-market offering — or “ATM” — agreement, Lordstown Motors can over the next three years issue shares to the hedge fund whenever it needs an infusion of cash, he said. The selling price of those shares is determined by their current market value at the time of transaction, he said. And Lordstown Motors chooses the terms of the transaction, he said.

In such a transaction, “I can control where I sell it, how much I sell it. The money is there — it’s available for us to use over time,” Driscoll said. “To me, this is a tool in the toolbox to use at our discretion while we look at other sources of financing.”

The baseline price for those shares is $7.48, which was the stock’s Friday closing price. Ideally, the company would issue shares at a higher price; otherwise it starts whittling away at its 20 percent shareholder cap on outstanding shares.

The mechanism itself is dilutive, meaning existing shareholders’ shares will be worth less when new shares are issued. But other positives, like the company’s ability to control the shares’ price points “far outweigh the potential dilution from the instrument itself,” Driscoll said.

Driscoll said the agreement doesn’t mean YA II PN Ltd. will take a substantive position in the company’s ownership — likely, the fund will “rinse” its purchased shares through the market and act more as a “balance sheet” for the company’s fundraising.

The agreement also prohibits the hedge fund from using Lordstown Motors shares in “short” or “hedging” transactions. When brokers “short” a stock, they borrow then sell shares, expecting to buy them back for less when the stock loses value.

As far as future funding sources, “I’d always prefer to do things that are non-dilutive,” Driscoll said. “I’d prefer to look at straight debt, convertible debt,” or leveraging one of the company’s assets, such as its 6.2-million-square-foot facility, which it purchased from General Motors in November 2019 for $20 million.

Shares of Lordstown Motors (NASDAQ: RIDE) rose as high as $7.94 in the first hour of trading Monday, up nearly 9 percent from their opening price of $7.30. But the stock ultimately closed in the red at $7.29, down 2.5 percent.

Lordstown Motors has set its second-quarter earnings call for Aug. 11.

This story was originally published July 26, 2021 at 10:48 AM with the headline "UPDATE | Lordstown Motors gets multimillion-dollar hedge fund investment."