💰New Chapter 11 Filing - Yueting Jia💰
Yueting Jia
October 14, 2019
So, we’re not used to seeing individuals file for chapter 11 listing $500mm-$1b in assets and $1b-$10b in liabilities. We’ll just throw that out there. But these are interesting times and since the private markets have become the new public markets, we suppose it’s not too outlandish to see private companies — and their backers — with extraordinary balance sheets (cough, WeWork). And, by extension, bankruptcy filings.
Indeed, Yueting Jia, is an exceptional case. A serial entrepreneur, Mr. Jia, is the founder of multiple businesses over the years — most notably the LeEco streaming service and Faraday Future, a much-hyped electric vehicle company that fashions itself as a would-be competitor to Elon Musk’s Tesla Inc. ($TSLA). Faraday is owned by Smart King Ltd., an entity in which Mr. Jia holds significant equity that backs personal guarantees he’s made over the years. It’s on account of those guarantees (and several direct loans) that Mr. Jia may now add the “debtor” designation to his resume. It’ll look nice next to his other recent labels: pariah and refugee. Like we said, this is an interesting “case.”
So about those personal guarantees and loans…uh…yeah, they’re pretty extensive. There’s $279mm to Shenzhen Yingda Capital Management Co. Ltd. and $233mm to China CITIC Bank Co. Ltd., followed by at least 18 other large creditors whose security is dramatically under-secured. In other words, Mr. Jia has earned that “debtor” status.
So, what’s the plan? Well, literally, Mr. Jia has already proffered a plan that would, in exchange for broad releases of he and his wife from any claims and liability, provide certain creditors with beneficial interests in a liquidating trust. As proposed, the liquidating trust assets will include “economic rights to 40.8% of the [Smart King’s] equity consisting of 147,048,823 Class B ordinary shares currently owned by FF Top, representing 10% of the [Smart King’s] equity interest” and “a preferred distribution right in connection with 30.8% of [Smart King’s] equity interest (owned through Pacific Technology Holding LLC…and collectively owned by [Mr. Jia] and the management through the Partnership Program…,which will entitle him to a priority distribution of up to US$815.7 million (subject to certain adjustments), right after the return of capital to the management, a special distribution of 10% of the remaining amounts and thereafter, a normal distribution of 20% of the balance owned by Pacific Technology.” Wait. What? What, exactly, will creditors be getting?
Let’s take a step back. Faraday Future is one of those “yogababble” companies that Scott Galloway has recently talked about — a company chock full of mission statement bullsh*t. Per Mr. Jia:
“The Company was founded with the vision to disrupt the traditional automotive industry and create a shared intelligent mobility ecosystem that empowers everyone to move, connect, breathe and live freely.”
Founded in 2014, so far Faraday Future has disrupted nothing other than the balance sheets of Mr. Jia and several other investors. It’s “pre-revenue” which is Silicon Valley bro-code for not making any f*cking money and it hasn’t delivered any cars yet. In terms of assets, the company is really just a bucket of intellectual property and some model pre-production prototypes of its signature FF 91. Suffice it to say, then, that it hasn’t changed the way anyone moves, connects, breathes or lives. At least not yet. We suppose the good thing is that burning cash ($1.7b) doesn’t negatively affect the environment. Small victories.
Anyway, back to the plan. It’s rather circular. Mr. Jia’s interest in the company “is his primary asset.” His primary asset requires new funding to survive. The only way it can get funding is, according to Mr. Jia, if his restructuring is consummated quickly, everyone just moves on, and the company can then hunt for liquidity. Otherwise, it will follow Mr. Jia into bankruptcy. He straight up says:
“If, as a result of not being able to consummate the Restructuring in a timely manner, the Company's business is not able to once again pursue its business plan, it is likely that it will not be able to continue as a going concern, it may be forced to liquidate its remaining assets and/or initiate bankruptcy proceedings….”
And then the value of the Mr. Jia’s assets will likely be nothing. So, he’s basically saying to his creditors, “agree to this restructuring to give the company a hope and prayer of raising money because without it, the company is screwed, I’m screwed, you’re screwed AND, as a cherry on top, the company’s other investors, employees and creditors are screwed.” Such a hot mess.
Hang on. Why would the company be screwed? Per Mr. Jia:
“As of July 31, 2019, the Company's current liabilities amounted to US$734.3 million, with outstanding note payables of US$402.1 million to related-party lenders and third-party lenders, respectively. The Company has defaulted on some of the notes, and is currently in negotiation with such lenders for extensions or conversion of notes into equity. Several other notes will mature by the end of 2019. For example, the Company's secured note of US$45.0 million issued to certain purchasers pursuant to the note purchase agreement with U.S. Bank National Association will become due on October 31, 2019, to which the Company is seeking an extension from the lender.”
It’s currently in default, that’s why. It needs the Series B financing to help restructure its existing debt.* Which makes this EVEN BETTER: he’s offering his creditors interests in a Trust funded by stock which is currently behind debt that is currently in default!!
So, naturally, the company is also subject to a severe working capital deficit. It has burned through $580.9mm since 2018 with a total accumulated loss of $2.15b as of July 2019. It has approximately $6.8mm of cash on hand.
But, don’t worry. Entrepreneurial optimism remains nonetheless. Per the plan documents, Mr. Jia remains optimistic that a deal will get done, that a subsequent $850mm Series B financing will get done by January 2020, and that that will be enough to bridge the company to an IPO in 2021. This is, of course, after, the company (i) beta tests its product, (ii) builds out its CA-based manufacturing facility, (iii) firms up its supply chain, (iv) completes all testing and validation, AND (v) delivers its first 100 units of the FF 91 to the market in early Q2 ‘21. This is all great because then we can see where Professor Gallaway puts the company on this spectrum:
As an inducement to voting in support of this plan, Mr. Jia provides “hypothetical figures” based on his and company management’s assumptions. Naturally, he caveats that “they may prove to have been incorrect or unfounded.” You bet your a$$ they might.
By way of comparison, Nio Inc. ($NIO) actually ships cars already (3500 in Q2 ‘19) and has a 1.68b market cap (currently trading at $1.60/share). Tesla is at 46.4b. Both companies are also hemorrhaging cash.
It’s good to see that the Adam Neumanns of the world haven’t sapped the world of hope.
*Notably, that $45mm piece reflects secured notes held by ex-Skadden attorney, Jack Butler, through his firm Birch Lake Holdings. The notes are secured by tangible and intangible assets (which, presumably, includes all of the IP, the only thing here that, as we writ this today, probably has any value whatsoever). An earlier $15mm term loan provided by Birch Lake was paid off in September. It had an impressive 15.5% interest rate (with a default rate of 21.5%).
Jurisdiction: D. of Delaware (Judge )
Capital Structure:
Professionals:
Legal: O’Melveny & Myers LLP (Suzzanne Uhland, Diana Perez) & Pachulski Stang Ziehl Jones LLP (Jeffrey Dulberg, Malhar Pagay, Richard Pachulski, James O’Neill)
Claims Agent: Epiq Corporate Restructuring LLC (*click on the link above for free docket access)
Other Parties in Interest: