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Of course. That’s exactly what “due diligence” is all about. How thorough an investor will be depends to some extent on the professionalism of the investor, the size of the investment, and the stage of the company, but the checking will almost certainly entail requesting and reviewing all of the startup’s financial accounts and projections, customer contracts, cap table, IP filings, etc. (That’s one reason that a platform like Gust Launch can be so useful, because it ensures that everything is appropriately tracked and recorded.)Here is a typical business diligence checklist for an angel or venture investment:Company OverviewArticulate the “equity story” here (i.e. why the company is on to something and why its stock will appreciate greatly). Is it compelling?Does the company engage in thorough business planning?Does management have a clear understanding of the challenges it faces and a realistic plan to address them?Are there any skeletons in the company’s closet from previous activities (e.g. outstanding liabilities, unassigned IP)?Management TeamAre all resumes and personal references available?What key strengths does the management team have collectively and individually?What holes are there in the team and how/when might they be filled?Have there been any disgruntled employees and, if so, why? Do these employees cause any tangible risk going forward?What strengths does the Board bring to the company? How might it be augmented?Is there a Board of Advisors, and, if so, how active is it?MarketingDoes the company have a well-defined sense of what its true market is?·Is this market sufficiently large and fast-growing to be attractive?Is the company’s market generalized or niche?If generalized, does the company stand out from competitors?If niche, will the company dominate sufficiently to either build attractive cash flow or be bought by a larger firm?Is the company the leading firm in its market? Market share?What barriers to entry does the company enjoy? How long lasting are they?Does management understand the key metrics to measure its business and does it track its progress effectively? How do the metrics compare to similar firms?Does the company have a sensible business model?SalesDo customer reference calls bear out claims management make about demand for their products/services?Is the company pipeline attractive? What is the probability that it will hit its targets?Does the sales strategy make sense? What could be done to improve it?Can the company acquire customers profitably?Is the company’s sales cycle better or worse than its competitors and is it attractive?CompetitionDoes the company know who its competitors are, including indirect competitors?Where does the company stack up vs. competitors? Can it win business from them?Has the company focused its business plan narrowly enough to limit its competition?How well-funded is the competition?Product DevelopmentIs the product a need-to-have, a nice-to-have, or a luxury? Does it solve a critical problem or enable growth (if B2B)/provide entertainment (if B2C)?Describe the customer demand in detail?Has the company proven adept at product development? Does it have an adequate technical team?Did product development flow from perceived (or better yet researched) customer demand or from some other impetus? Explain.Intellectual PropertyDoes the company have an appropriate IP strategy? Explain.Are there any issues relating to patents or intellectual property?Production / Operations (HR, Customer Support, Fulfillment, Returns, Distribution Logistics)Do the management team and other employees enjoy appropriate incentives to run the company for the long term?Are the interests of management aligned with ours?Are total labor costs appropriate?Does the company have a realistic plan for managing its back office and customer support? Will it be able to handle customer growth while maintaining customer satisfaction?Financing StrategyIs the valuation attractive? What is the projected times money returned and IRR (if calculable)? Is the risk-adjusted return attractive?Does the company have a thorough plan as to what it will do with our money? Is it sensible?Is the company raising the right amount of money?What financing risk exists in the business plan? How much additional money must they raise and how flexible (in amount and timing) can they be in raising it?FinancialsDoes the company have a realistic set of projections based on reasonable assumptions?Are the projections bottom-up (good) or top-down (not so good)?Does the company have good operating leverage?Are the margins attractive (absolutely and relative to competitors)?Has the company met, exceeded or fallen short of its previous budgets? Analyze variances.Assets and PropertyAre there any issues here?Customer ReferencesWrite up summary of reference calls.Do customer reference calls bear out claims management make about demand for their products/services?Are there any issues flagged by customers? Does management recognize and admit to (without prompting) these issues?Contracts and AgreementsReview all contracts with legal counsel and flag any issues, risks or omissions.Corporate DocumentsReview all corporate documents with legal counsel and flag any issues, risks or omissions.TaxesReview company tax situation and analyze effects on cash flow over next several years.InsuranceAssess adequacy of insurance coverage and analyze risk to investment thesis of any insurance gaps.And here’s the legal/financial due diligence checklist that would accompany it in the case of a full venture or strategic round:“Please furnish for our review copies of the following documents or indicate in writing on a copy of this list that none exist. In addition, please provide a written summary of each oral agreement or arrangement which is responsive to the requests set forth below. Any documents identified as originals will be returned to you promptly.Unless otherwise indicated, (i) all requests are for any matters which are currently existing and in effect or which occurred at any time since the Company’s incorporation but which are not now existing or in effect, and (ii) each request applies to all past and present direct or indirect subsidiaries (if any), and all predecessors, whether corporations, partnerships or joint ventures. For purposes of this request, all such entities are included in the term “Company.” Where there is no information responsive to the request, please so indicate by writing “N/A” or the equivalent in the margin.I. Corporate Records.Chart showing, or a narrative description of, the corporate, partnership, limited liability company structures (parents, all subsidiaries and other financially or legally related entities) and ownership (including the number of shares and/or percentage of ownership) of the Company.Copies of the certificates of incorporation, by-laws, partnership agreements, operating agreements and other similar organizational documents of the Company.Stock record books and copies of all stock certificates, including reverse sides, of the Company and affiliates.List of all subsidiaries and affiliates of the Company, if any.List of jurisdictions in which the Company is qualified or has applied for qualification to do business and evidence of such qualification or application.List of jurisdictions where the Company has substantial contacts (e.g., real or personal property owned or leased, employees, sales representatives, etc.).List of the Company’s current shareholders, the numbers of shares owned and the consideration paid for such shares.Warrants, stock options, agreements relating to any warrants or options to purchase securities, any convertible security and other rights to subscribe for or purchase securities.Schedule of all outstanding stock options and warrants, including name of individual, grant date, expiration date and exercise price, of the Company.Voting agreements, voting trusts, shareholder agreements or other similar arrangements with or among shareholders or equity owners of the Company.Stock purchase and repurchase agreements.Stock restriction agreements.Registration rights agreements.Minutes or other records of meetings of the Board of Directors, committees of the Board of Directors or shareholders of the Company.All materials distributed to members of the Board of Directors, committees of the Board of Directors or shareholders of the Company since incorporation or organization (or written consents in lieu of meetings).II. Employee Benefit Plans and Other Employment Matters.Employment, consulting, compensation or other agreements or arrangements to which any director, officer or employee of the Company is a party.Copies of any provisions of any contract or arrangement, pursuant to which any director or officer (or other applicable principals, partners or members) of the Company is insured or indemnified in any manner against liability.All documents relating to pension, deferred compensation, stock option (including SARs), profit sharing and any other similar plans of the Company, all IRS determination letters relating to the foregoing and the most recent actuarial report for any defined benefit pension plan for the Company.All other employee compensation, bonus, incentive, benefit (e.g., life or health insurance) or similar plans of the Company, including plan evaluation and actuarial evaluation reports.Any standard form employment agreements used by the Company as well as any agreements that deviate in any material respect from such standard forms, and all severance or special termination agreements with senior management of the Company.Information with respect to any pension benefit plan subject to Title IV of ERISA maintained by an entity other than the Company which is, or was within the past five years, in a single controlled group with the Company.All collective bargaining agreements to which the Company is a party or by which it is bound, including any side letters.Any policy manuals or materials with respect to trade or employment practices of the Company.Confidentiality, proprietary rights, and non-competition agreements (i) between the Company and any officer, director, employee, consultant, representative, supplier or customer or (ii) which the Company’s employees or consultants have entered into with a prior employer.Information as to employment arrangements and/or compensation plans where any benefits or rights are triggered by a change in control of the Company, including any so called “golden parachute” or similar arrangements.Information as to employment arrangements and/or severance plans where any benefits or rights are granted upon severance or termination of an employee, whether or not in connection with a change in control of the Company.Any contracts for consulting or management services.III. Regulatory MattersAll applications, filings, findings, reports, registration statements, correspondence, complaints, consent decrees, determinations, orders, etc., relating to federal regulatory agencies and all foreign, state and local agencies performing similar functions. Include all exhibits for all filings, unless duplicative of material requested elsewhere.IV. Properties, Assets, and Leases.List of all real property owned, leased (as lessee or lessor) or used by the Company including all documentation of ownership, leasehold interest, any encumbrances or restrictions against transfer on such property, and any title insurance policies or title searches.List of all intangible or intellectual property e.g., patents, trademarks, copyrights, trade names, trade secrets and customer lists owned, leased, licensed or used by the Company and any patent or trademark registrations or similar documents in any domestic or foreign jurisdiction. Please include any required permits, licenses, approvals, related regulatory reports, or agreements and any actual or threatened claims of infringement or misappropriation.List of all fixed assets, personal property and equipment owned, leased or used by the Company including all documentation of ownership, leasehold interest or any encumbrances or restrictions against transfer of such property.With respect to all of the properties and leases described in this Item IV, please identify any officers, Directors, shareholders or employees of the Company holding an interest in such properties or leases.V. Material Agreements and Financing Documents.Loan agreements, lines of credit, indentures, revolving credit agreements, note purchase agreements, notes, other evidence of indebtedness and all related documents concerning any debt financing.Venture capital financing documentsAny agreements in principle or otherwise with respect to mergers, acquisitions, divestitures or sales of material assets of the Company, whether or not consummated.Mortgages, security agreements, pledges and other evidence of liens or letters of credit securing any obligations of the Company.Corporate and personal guarantees of any obligations and powers of attorney executed in the Company’s name.Schedule and copies of all contracts, agreements, arrangements or understandings under which the Company (i) has any surviving representations or warranties or any ongoing obligation to indemnify, defend or hold harmless any party, (ii) is subject to any other material commitment, contingency or liability or (iii) which restrict in any manner the right of the Company to conduct its business or to compete with any partyList of bank accounts belonging to the Company and its affiliates.Correspondence and internal memoranda relating to any documents requested in this Item V.VI. Marketing, Sales and Operations.Licensing agreements (including inter-company).Patents, patent applications, trademarks, trademark applications and copyrights (domestic and foreign), service marks (domestic and foreign) and documents relating to know-how, trade secrets, and other proprietary information used by the Company.Promotional material, sales literature and other advertising documents distributed to potential customers.Agreements with any educational institutions or relating to the Company’s provision of private student loans.Joint venture, partnership and limited partnership agreements.Agency, commission, distribution, franchise or sales representative agreements.Governmental contracts, agreements or purchase orders.Agreements under the which the company is obligated to provide or purchase a material amount of goods or servicesAll other contracts (including executory contracts) material to the Company.VII. Accounting, Financial and Insurance Matters.2004 annual and 2005 year to date monthly financial statements (including balance sheet and income statement).All documentation relating to any transaction between the Company and any director and officer including any loans or similar arrangement.Budgets, fiscal projections and strategic plans, together with a review of or comparison with actual results, if available.Summary of federal, state, local and foreign income tax status, including consents and agreements with any tax authority or any pending or threatened disputes concerning tax matters and all audit papers and communications between the Company and the Internal Revenue Service.Any documents relating to liabilities and obligations, including material contingent liabilities, write-downs or write-offs of notes or accounts receivable, incurred otherwise than in the ordinary course of business since formation.Copies of all insurance policies and a history of insurance claims, with details of any pending claims or incidents which may arise in claims.VIII. Legal Proceedings.List and description of all material litigation, administrative proceedings, arbitration proceedings, investigations, claims or disputes (including pending or threatened litigation or claims) involving the Company or any principal shareholder, officer, director, principal, partner or member of the Company as a plaintiff or defendant.All consent decrees, judgments, other decrees or orders, settlement agreements, injunctions or similar matters (continuing or contingent) to which the Company is a party or involving any person in his capacity as a shareholder, officer, director principal, partner, member or employee of the Company.Documentation with respect to any pending or threatened disputes with any governmental agency to which the Company is or may become a party.All correspondence dealing with actual or alleged infringement of patents, trademarks and copyrights.Any waivers or agreements canceling claims or rights of substantial value other than in ordinary course of business.IX. All other materials and documents involving the Company, not otherwise covered by the foregoing items, which, in your judgment, may be material to the business of the Company or which should be reviewed in making disclosures regarding the business and financial condition of the Company.”

For the average Chinese person, high-speed rail (HSR) tickets aren’t necessarily “cheap” at this point in time. While not entirely unaffordable, travelling on high-speed rail is a luxury for the majority of Chinese people[1][1][1][1], especially the roughly two-fifths that live in the countryside.Of course, I would note that leisure travel itself is a luxury for poor people … and there are still a lot of poor people in China. For middle class urban families, high-speed rail is a relatively economical and civilized way to travel compared to the alternatives.Also, since these are ultra-long-lived assets, one cannot solely focus on the first four or five years of the project. What matters is whether it delivers value over the next hundred years. And it is increasingly clear that China’s new high-speed rail network will deliver significant long-term benefits to the development of society and the economy.There are three key factors that drive the long-term economics of high-speed rail and influence how ticket prices are set:Up-front build cost (mostly fixed)Operating costs (mostly variable)UtilizationHigh-speed rail ticket prices will be set based on the recovery of fixed costs, variable costs and some sort of profit or return on capital expectation.To minimize ticket prices, the strategy is very straightforward from a mathematical perspective:Minimize the up-front build costMinimize variable costsMaximize utilizationI’ll take each of these points in turn below and describe how they apply to China’s HSR network buildout.(1) Minimizing fixed costsTypically, the largest cost item in a high-speed rail project is the fixed upfront cost of building out the rail network. This includes major categories such as[2][2][2][2]:Land acquisition and resettlementCivil worksTrackSignaling and communicationsElectrificationRolling stockBuildings including stationsOther costs including capitalized interestOnce built, these items are classified as long-lived assets: railway companies are typically capital-intensive businesses that feature big balance sheets dominated by the “plant, property and equipment” category. These long-term assets need to be financed, typically by a combination of debt and equity.The way that very long-lived assets are accounted for on the income statement (and ultimately in the calculation of ticket prices) is via:Cost of capitalDepreciationBoth cost of capital and depreciation are calculated as a percentage of that up-front fixed cost. So the more you can minimize these percentages and/or the up-front fixed cost — ideally, both — the more effective you will be at keeping ticket prices affordable while still maintain a degree of profitability and return on capital to debt and equity holders.It turns out Chinese HSR planners did a pretty good job on both fronts.China’s cost of capital is relatively low. This was largely the result of some key economic and financial policy objectives:Macro-economic stabilityRelatively low inflationHigh savings rate that can be funneled into investmentsState-controlled banking sector that plays a critical role in allocating capitalChina also managed to hold down the cost of building its high-speed rail networks with build costs of between $17–21 million per km compared to $25–39 million in several E.U. countries[3][3][3][3]. This was the result of several key factors:Scale and its impact on construction productivityScale and its impact on technology acquisition — leverage to negotiate technology transfer and support the build out of indigenous industry for many key areas in the rail value chain.The State’s ability to minimize land acquisition and resettlement costs and reduce project build time.Somewhat favorable topography — reducing the need for expensive bridges and tunnels — as the vast majority of China’s population lives in relatively flat areas. You can see this by super-imposing a population density map[4] on top of a physical map[5].Relatively inexpensive labor cost(2) Minimizing operating costsOnce a train network is built, the key operating items are:Labor costs (running the trains, maintaining the assets, managing the entire operation)Electricity and energy costsMaterial costs to repair trains and track and maintain operating facilities like train stations, train depots, and electrical and signaling equipmentIn aggregate, the largest cost in running a network are labor costs. To the extent labor costs are low, operating costs will also be low.Of course, labor cost is highly correlated with income and affordability. As China’s labor costs rise, incomes should also rise so these effects largely cancel each other out. “Cheap” is a relative concept.(3) Maximize utilizationThe most important long-term factor driving railway economics is utilization. With train networks, the marginal cost of carrying another passenger on a train, or running another train on the same line is relatively low compared to the fixed cost of building that line.As such, the more a rail network is utilized, the more you can amortize the high fixed costs associated with the up-front costs of building out the rail network across a larger pool of usage.For example, by doubling usage of a network, you would effectively halve the fixed charge per passenger-km.In addition, there are other indirect benefits to heavy utilization. For example, Chinese train stations are among the heaviest trafficked places on the planet. This traffic can be (and is) monetized by leasing out the real estate at relatively high retail lease rates or by selling advertising. Indeed, China Railway Corporation — the state-owned enterprise that owns the entire HSR operation — is profitable no doubt in large part due to its ability to monetize the traffic that its passenger rail network generates[6][6][6][6].There are several reasons why China’s utilization is so high:Higher population density (particularly in the eastern half) which drives higher demand for inter-city transportation.The “web-like” pattern of Chinese city placement. Web-like rail networks drive higher utilization than point-to-point networks because there is a lot of interchange traffic. The city of Changsha (circled in red below) is a good example of this: It sits at the crossroads between several major regions and many passengers use the city to transit from one region to another.HSR is less expensive than alternative transportation options for certain routes, especially when you factor in comfort[7]. It is relatively more expensive to have your own car in China (taxes, parking costs). Bus transport is very inexpensive but slower for journeys longer than 200 km.To summarize, here are some of the key themes:(A) China enjoys many “natural,” structural factors that make the economics of high-speed rail attractive, especially compared to the United States[8][8][8][8]:High population densityWeb-like pattern of city placement and urban development — less low-density suburban sprawl which makes land acquisition more difficultGenerally mild topography — reducing need for expensive tunnels and bridgesSlack labor capacity — soaking up labor in the aftermath of the Global Financial Crisis(B) The heavy role of the State clearly is a recurring theme here across many areas:Economic policy directives that result in lower cost of capitalAbility to “efficiently” requisition land along the straight paths needed by high-speed rail linesWhatever your views may be on the heavy role the State plays in China’s economy, it is hard to argue against the idea that it played a critical role in the build-out of China’s high-speed rail network.(C) China’s scale was a major factor here. Scale allowed China to make certain planning decisions that are not necessarily available to other countries:Negotiating leverage to demand technology transfer agreements with other countries (again, whether or not one agrees with this practice is a different issue).Standardized processes — best practices in design and site selection could be quickly propagated from one line to the next. This is why many train stations (outside of the Tier I cities) look and feel very similar, down to the design of intermodal links they have with local transport like buses and subways.Improved productivity — scale allowed construction firms to come up with innovative new ways to increase construction productivity[9].(D) The relationship between cost of labor and income is an interesting subject to ponder.On the one hand, low labor costs are almost always correlated with low incomes. In other words, just because you can build it relatively inexpensively compared to other countries does not mean it is necessarily affordable for most people. Indeed, one of the criticisms of Chinese high-speed rail projects has been that they were unaffordable for the vast majority of Chinese people.On the other hand, if you are confident that future incomes will rise significantly, to the point where what was once unaffordable is now affordable, then you can think about high-speed rail as an arbitrage between yesterday’s inexpensive labor situation and a rich, productive world of tomorrow. Yes, you could have waited a few years to start building high-speed rail but each year that you waited would increase the build cost commensurately. Even if ticket prices are relatively unaffordable for the first five years of the line, what really matters is whether they are affordable over the next hundred[10][10][10][10].On a related note, as much as labor costs may rise in the future, the inevitable rise in Chinese NIMBY-ism[11][11][11][11] could very well have an even greater effect on the cost of future HSR development.(E) High-speed rail lines freed up capacity for commercial freight. Given the unique requirements of high-speed rail (very straight, level paths with ultra-wide turning radius), almost all lines were of the new build construction variety.In other words, existing rail lines that had previously been used for passenger traffic could be used for additional freight capacity (commercial freight is less time-sensitive than passenger travel).(F) The role that the relatively low cost of capital played in financing the build-out of China’s high-speed rail network also deserves some airtime.Some have argued that without subsidies (including financing subsidies), the high-speed rail network would not make economic sense on its own. First, I am not sure this is even true. Second, even if it is true now, it could very well be because many of the lines are still relatively new and take time to ramp up. Third, is not even clear whether low cost of capital available to finance HSR is a function of a stable, well-run economy or direct subsidies.But even beyond this, the argument that it’s not “right” to subsidize high-speed rail is suspect as well. It is obvious that high-speed rail delivers societal benefits beyond the financial returns to banks, bond and equity-holders.These benefits include:Environmental impact — reducing reliance on less energy-efficient modes of transportation like air travel and single-passenger vehicle transport.Increased economic activity — by providing a more attractive transportation option, you stimulate economic interactions that may have been heretofore unavailable. Reducing the friction costs of business has benefits that compound over time. HSR is a key infrastructure element in enabling the development of a next-level of Chinese megalopolises, including ones that may ultimately house over 100 million people[12]. These are something the world has never seen before and there could be interesting second-order effects that have not been heretofore contemplated[13].Strategic benefit — China catalyzed the creation of new industry where it now has a fairly decisive comparative advantage. The knowledge and experience it gained building its own network can effectively be monetized to the economy’s benefit by selling its expertise to the rest of the world. We are seeing this play out heavily in its “One Belt, One Road” initiative.With so many non-financial reasons to point to, there is actually quite a strong rationale for HSR development in China to be subsidized. One role of government is to encourage socially beneficial economic activity that might be hard for the private sector to handle. This would include projects that deliver sub-par financial returns — or take a very, very long time to deliver returns — but come attached with major spillover benefits to society.Footnotes[1] Glenn Luk's answer to Can poor people in China afford a bullet train?[1] Glenn Luk's answer to Can poor people in China afford a bullet train?[1] Glenn Luk's answer to Can poor people in China afford a bullet train?[1] Glenn Luk's answer to Can poor people in China afford a bullet train?[2] Glenn Luk's answer to Why does it cost between $25-$39 million to construct a kilometer of high speed rail in the European Union?[2] Glenn Luk's answer to Why does it cost between $25-$39 million to construct a kilometer of high speed rail in the European Union?[2] Glenn Luk's answer to Why does it cost between $25-$39 million to construct a kilometer of high speed rail in the European Union?[2] Glenn Luk's answer to Why does it cost between $25-$39 million to construct a kilometer of high speed rail in the European Union?[3] High-Speed Railways in China : A Look at Construction Costs[3] High-Speed Railways in China : A Look at Construction Costs[3] High-Speed Railways in China : A Look at Construction Costs[3] High-Speed Railways in China : A Look at Construction Costs[4] People[5] China Physical Map[6] Glenn Luk's answer to How profitable is China's high-speed rail?[6] Glenn Luk's answer to How profitable is China's high-speed rail?[6] Glenn Luk's answer to How profitable is China's high-speed rail?[6] Glenn Luk's answer to How profitable is China's high-speed rail?[7] Glenn Luk's answer to Can poor people in China afford a bullet train?[8] Glenn Luk's answer to Why is the United States so far behind in train speed?[8] Glenn Luk's answer to Why is the United States so far behind in train speed?[8] Glenn Luk's answer to Why is the United States so far behind in train speed?[8] Glenn Luk's answer to Why is the United States so far behind in train speed?[9] User-12584499676132467505's answer to What recent inventions have been invented by Chinese in China?[10] Glenn Luk's answer to How successful has China's high-speed railway system been?[10] Glenn Luk's answer to How successful has China's high-speed railway system been?[10] Glenn Luk's answer to How successful has China's high-speed railway system been?[10] Glenn Luk's answer to How successful has China's high-speed railway system been?[11] NIMBY - Wikipedia[11] NIMBY - Wikipedia[11] NIMBY - Wikipedia[11] NIMBY - Wikipedia[12] Glenn Luk's answer to China: Which city has the highest potential to become China's fifth tier-one city?[13] A Physicist Turns the City Into an Equation

Excerpt from an official bankruptcy document filed 11/22/13:Preliminary Statement1. The Debtors were founded in 2007 with the goal of designing, assembling, and manufacturing premium plug-in hybrid electric vehicles (“PHEVs”). To facilitate these efforts, the United States Department of Energy (“DOE”) arranged for loans to the Debtors from the Federal Financing Bank (the “FFB”) in an aggregate amount of up to approximately $530 million pursuant to the Advanced Technology Vehicles Manufacturing Incentive Program.2 The Debtors drew a total of approximately $192 million on these loans and also raised significant amounts of equity financing2 The Advanced Technology Vehicles Manufacturing Incentive Program was promulgated under section 136 of the Energy Independence and Security Act of 2007, Pub. L. 110-140, 121 Stat. 1492, 42 U.S.C. § 17013.2DOCS_DE:190465.1 28353/001from a wide range of venture capital, private equity, and sovereign wealth funds. Beginning in 2007, the Debtors established a global network of vendors, suppliers, distributors, and retailers, along with an international reputation for both their award-winning Karma sedan and their innovative hybrid electric powertrain technology. The Karma sedan is the world’s first environmentally responsible luxury PHEV and was the centerpiece of the Debtors’ prepetition manufacturing and sales efforts. The Debtors sold approximately 1,800 Karma sedans to individual buyers through a global network of independent retailers and distributors.2. Despite these accomplishments, the Debtors were unable to achieve certain financial covenants and project milestones embedded in their loan agreements with DOE. In particular, the Debtors’ loan agreements with DOE originally required the Debtors to produce, manufacture, and sell 11,000 Karma sedans by February 2012. But the Debtors were obliged to delay serial production of the Karma until October 2011 for a number of reasons, including completion of vehicle and manufacturing engineering, finalizing tooling and component specifications with the Debtors’ supply chain, and completing safety and emissions testing and certifications.3. Further, once serial production of the Karma began, vehicle sales failed to meet expectations. Factors affecting sales included negative press, initial quality and performance issues, lingering effects of the global financial recession, and challenges arising from the Debtors’ supply chain. For example, the high-voltage battery packs for the Karma, an essential component for any electric vehicle, and which were manufactured exclusively by A123 Systems, Inc.3 (“A123”), exhibited a number of performance problems. The Debtors initiated a voluntary safety recall for a small number of Karma vehicles almost immediately following the Karma’s 2011 launch relating to A123’s misalignment of internal hose clamps. A123 also announced a service campaign in3 A123 Systems, Inc. has since changed its name to B456 Systems, Inc.3DOCS_DE:190465.1 28353/001March 2012 relating to a manufacturing defect that affected the durability and performance of all battery packs manufactured at A123’s Livonia, Michigan facility. Moreover, A123 suspended Karma battery production in October 2012 when it sought bankruptcy protection.4 As a result, the Debtors were left without a high-voltage battery supplier, and the Debtors have not restarted Karma vehicle production since a previously scheduled seasonal shutdown commenced in July 2012.4. The Debtors have at all times been mindful of their commitments to stakeholders, their obligation to preserve and maximize value, and the public interest at issue here. To this end, and as discussed in greater detail below, the Debtors explored a series of alternatives to obtain financing to fulfill these commitments and to maximize stakeholder value, including with respect to DOE. Among other things, the Debtors sought additional equity and debt financing to refinance the DOE loan and provide additional working capital. More recently, the Debtors engaged with financial sponsors, original equipment manufacturers (“OEMs”), and other parties regarding astrategic investment or a going concern transaction. In this process, the Debtors retained experienced investment banking, financial, and restructuring advisors to facilitate their review, analysis, and development of potential alternatives.5 The Debtors also undertook steps to minimize costs and to preserve liquidity. These steps included, among other things, the difficult determination to conduct headcount reductions and to initiate nonpaid employee furloughs in the spring of 2013. Notwithstanding these efforts, the Debtors’ cash position continued to erode.5. To preserve and maximize value, the Debtors sought to implement a sale process in connection with a chapter 11 filing. Throughout the spring of 2013, the Debtors engaged in4 As discussed more fully below, A123 ultimately rejected its exclusive supply agreement with the Debtors effective as of February 2013.5 See infra Part II.C (discussing the Debtor’s prepetition restructuring efforts).4DOCS_DE:190465.1 28353/001substantial, good faith negotiations with DOE regarding the Debtors’ consensual use of its cash collateral to help fund a chapter 11 case and sale process. Despite significant efforts by the parties, these negotiations were ultimately unsuccessful, and DOE applied the approximately $20 million of cash that it controlled to the Debtors’ outstanding indebtedness.6. Since that time, the Debtors have operated with limited junior funding provided by related parties. The Debtors’ operations have remained curtailed, and headcount reductions have continued through both additional layoffs and voluntary attrition. The Debtors have also continued to engage in discussions and negotiations surrounding various restructuring transactions in an effort to maximize stakeholder value. Meanwhile, DOE conducted a public marketing and auction process for the purchase of its interests in the DOE loan pursuant to a competitive auction process. On October 7, 2013, an affiliate of Hybrid Tech Holdings, LLC emerged as the successful bidder, and the parties closed the loan purchase on November 22, 2013.7. Recognizing that this purchase would provide the Debtors with an opportunity to move forward, the Debtors entered into extensive arm’s-length discussions with Hybrid Tech Holdings, LLC (the “Purchaser”) and its affiliates regarding the Purchaser’s potential acquisition ofcertain of the Debtors’ assets through a credit bid of all or part of the DOE loan. These discussions culminated in the parties’ entry into a purchase agreement (the “Purchase Agreement”), as more fully described herein, pursuant to which the Purchaser would acquire substantially all the Debtors assets, with the remainder of the estates’ assets to be administered through a chapter 11 plan of liquidation. The Debtors have commenced these chapter 11 cases to facilitate a timely and efficient sale and plan process that will preserve and maximize the value of the Debtors’ estates.8. To familiarize the Court with the Debtors and the relief sought at the outset of these chapter 11 cases, this Declaration is organized in three parts. Part I provides an overview of the5DOCS_DE:190465.1 28353/001Debtors’ historical operations and capital structure. Part II describes the events leading up to the commencement of these chapter 11 cases. Part III sets forth the relevant facts supporting the relief requested by the First Day Motions.Part I: The DebtorsA. Overview of the Debtors’ Corporate History and Business Operations1. The Debtors’ History and Operations13. The Debtors were formed in 2007 with the goal of designing, engineering, and manufacturing premium PHEVs. To this end, the Debtors developed an electric vehicle with extended range, which they trademarked as “EVer.” The Debtors also established an international reputation as a leading developer of premium extended range PHEVs. The Debtors’ Karma sedan is the world’s first environmentally responsible luxury PHEV, and was developed by a highly skilled team of automotive designers and engineers located in the United States. The Karma sedan was also the centerpiece of the Debtors’ operations and won awards for excellence, innovation, and environmental responsibility from Time magazine (identifying the Karma as one of the “Green Design 100” in 2009), Top Gear Magazine (identifying the Karma as “Luxury Car of the Year” in 2011), and Automobile Magazine (identifying the Karma as “Design of the Year” in 2012).Fisker Vehicle DesignsKarma Sedan Atlantic Sedan (Concept)6DOCS_DE:190465.1 28353/00114. The Karma sedans were assembled by Valmet Automotive, Inc. (“Valmet”) in Uusikaupunki, Finland. The Debtors had planned, however, to build future vehicles at a company-owned and -operated assembly facility in the United States to improve volumes and to leverage their design, engineering, and technical expertise.15. To that end, in July 2010, the Debtors acquired a manufacturing facility covering approximately 3.2 million square feet located on approximately 142 acres at 801 Boxwood Road, Wilmington, Delaware (the “Delaware Facility”). The Debtors purchased the Delaware Facilitythrough the General Motors bankruptcy proceedings for a cash purchase price of approximately $21 million. The Delaware Facility is equipped with a number of technical and utility systems for automotive manufacturing, including a paint facility, powerhouse capability, a conveyor system, a wastewater treatment facility, and an emissions abatement system. The Debtors have not conducted active operations at that location.16. The Debtors obtained components and systems for the Karma’s assembly through a number of third-party supply relationships. For example, the Debtors had a licensing and tool use agreement with a General Motors affiliate. Through this relationship, the Debtors were able to purchase parts and components directly from suppliers that also sold to General Motors and use General Motors tooling to manufacture the parts or components. In addition, the Debtors relied on a number of “single source” suppliers for particular components. One such “single source” supplier was A123, whom the Debtors contracted with in January 2010 to act as the exclusive manufacturer of the Karma sedan’s high-voltage battery pack, as discussed more fully below.17. The Debtors began delivering the Karma sedan for sale to the general public in October 2011. This milestone was the culmination of the Debtors’ four-year effort to bring the Karma sedan from design, to concept car, to finished product ready for the showroom floor. The7DOCS_DE:190465.1 28353/001Karma sedan retailed for approximately $100,000 to $120,000, subject to consumer specifications and corresponding purchase price adjustments. The Debtors assembled approximately 2,700 Karma sedans, and approximately 1,800 Karma sedans have been sold to individual customers.18. The Debtors also planned to have another platform, the “N” or “Nina Platform,” which included the prototype Atlantic sedan. The Debtors made significant progress developing the N Platform, including entering into a number of additional supply and service agreements with third-party vendors and suppliers. These agreements included an engine purchase, supply, and development agreement with Bayerische Moteren Werke Aktiengesellschaft, or BMW. The Debtors first unveiled the Atlantic sedan at the April 2012 New York Auto Show, but have not engaged in active production of the Atlantic sedan or other N Platform derivatives.2. The Debtors’ Sales Network and Customers19. The Debtors sold the Karma sedan in the United States and Canada through a network of independent retailers located throughout the United States and Canada (each, a “Retailer”). In addition, the Debtors sold the Karma sedan in Europe, the Middle East, and China through local, independent distributors (each, a “Distributor”). Typically, Retailers and Distributors would purchase vehicles from the Debtors and then hold the vehicles for sale to the general public. A “Retail Agreement” or “Distributorship Agreement” typically governed each relationship among the parties.20. The Retail Agreements and Distributorship Agreements generally provided that the Retailers and Distributors would purchase vehicles directly from the Debtors and then hold those vehicles for sale in an assigned geographic territory. In certain circumstances, these Retailers and Distributors hold the right to compel the Debtors to repurchase their vehicles. Additionally, while the Retailers and Distributors bear primary responsibility for performing warranty repairs associated with sold vehicles, these warranty repairs may be subject to reimbursement from the Debtors.8DOCS_DE:190465.1 28353/0013. The Debtors’ Employees21. The Debtors currently employ approximately 21 full-time employees, located primarily at their Anaheim, California headquarters, and primarily tasked with engineering, product development, financial, and reporting functions. None of the Debtors’ employees are subject to a collective bargaining agreement. The Debtors’ current staffing level reflects significant headcount reductions and voluntary attrition in the period prior to these chapter 11 filings.4. Fisker GmbH22. Fisker Automotive GmbH (“Fisker GmbH”), a non-Debtor in these cases, was a wholly owned subsidiary of Fisker Automotive, Inc. organized under the laws of Germany. Fisker GmbH’s office was located in Munich, Germany, and provided international sales and marketing services to the Debtors. Fisker GmbH has no active operations.B. Overview of the Debtors’ Capital Structure23. As of the Petition Date, the Debtors had approximately $203.2 million in funded debt and related obligations outstanding, consisting of the DOE Facility, the SVB Working Capital Facility, the DEDA Loan, and the Related Party Notes (each as defined herein). As of the Petition Date, the Debtors’ funded debt obligations, excluding accrued interest, are summarized as follows:$ millionsDOE Facility $168.5SVB Working Capital Facility $6.6DEDA Loan $12.5Related Party Notes $15.6Total: $203.2In addition, the Debtors have obligations under a number of contractual and vendor-related agreements, including with respect to various prepetition supply and assembly agreements. These obligations are discussed in turn.9DOCS_DE:190465.1 28353/0011. The DOE Facilitya. The DOE Facility Generally24. Fisker Automotive, Inc., as borrower (“Fisker Automotive”), Fisker Automotive Holdings, Inc. (“Fisker Automotive Holdings”), and DOE are parties to that certain Loan Arrangement and Reimbursement Agreement, dated as of April 22, 2010 (the “DOE Loan Agreement”).6Pursuant to the DOE Loan Agreement, DOE agreed to, among otherthings:(a) arrange for purchases by the FFB of notes from Fisker Automotive in an amount not to exceed $169.3 million to fund the development, commercial production, sale and marketing, and all related engineering integration of the Debtors’ Karma sedan (the “Karma Lending Facility”); and(b) arrange for purchases by the FFB of notes from Fisker Automotive in an amount not to exceed $359.4 million to fund the development, commercial production, and sale and marketing of the Debtors’ Nina model automobile, now known as the Atlantic sedan, including the establishment and construction of an assembly and production site in the United States (the “Nina Lending Facility,” and, together with the Karma Lending Facility, the “DOE Facility”).7 Fisker Automotive Holdings unconditionally guaranteed obligations arising under the DOE Facility pursuant to that certain ParentGuarantee, dated as of April 22, 2010, made by Fisker Automotive Holdings in favor of DOE, FFB, and certain holders of notes. As discussed in detail below, on November 22, 2013, DOE sold its rights under the DOE Loan Agreement and certain related agreements to an affiliate of the Purchaser.6 See The Advanced Technology Vehicles Manufacturing Incentive Program, which was promulgated under section 136 of the Energy Independence and Security Act of 2007, Pub. L. 110-140, 121 Stat. 1492, 42 U.S.C.§ 17013.7 Pursuant to that certain Program Financing Agreement, dated as of September 16, 2009, between DOE and FFB, DOE is obligated to reimburse FFB for any liabilities, losses, costs, or expenses incurred by FFB from time to time with respect to the Notes or the related Note Purchase Agreement (each as defined in the DOE Loan Agreement).10DOCS_DE:190465.1 28353/00125. As of the Petition Date, the Debtors estimate that they had approximately $168.5 million in principal outstanding under the DOE Facility. Interest on the Karma Lending Facility is payable quarterly, bears interest at a weighted average interest rate of 2.00 percent, and was scheduled to mature on April 24, 2017. The Nina Lending Facility bears interest at a weighted average interest rate of 2.60 percent and was scheduled to mature on April 22, 2026. The DOE Loan Agreement further required the Debtors to achieve certain construction, production, manufacturing, and other milestones necessary for the completion of the Karma project and the Nina project, each by certain pre-established dates.26. Obligations arising under the DOE Facility are secured by a first priority lien on substantially all the Debtors’ assets, including personal and real property, pursuant to that certain Amended and Restated Pledge and Security Agreement, dated as of July 30, 2010 (the “Pledge andSecurity Agreement”), between Fisker Automotive and PNC Bank, N.A., d/b/a Midland Loan Services, a division of PNC Bank, N.A., as successor by merger to Midland Loan Services, Inc., as collateral agent (the “Collateral Agent”).827. In particular, DOE held an exclusive, first priority security interest in a debt service reserve account established pursuant to the DOE Loan Agreement (the “DOE Debt Service Reserve Account”), which was controlled by DOE. The DOE Debt Service Reserve Account formerly held approximately $20.6 million of cash. During the spring of 2013, the Debtors engaged in substantial, good-faith negotiations with DOE regarding the Debtors’ access to funds held in the DOE Debt Service Reserve Account. However, and despite significant efforts by the parties, these8 The collateral pledged to secure obligations arising under the DOE Facility specifically excludes, among other things, the Debtors’ rights to or interests in any lease, contract, property rights, agreement, or trademark if the grant of a security interests in such property would result in (a) the cancellation or unenforceability of the Debtors’ right or interest, or (b) a breach, default, or termination of any such property (collectively, the “Excluded Assets”).11DOCS_DE:190465.1 28353/001negotiations were ultimately unsuccessful, and DOE applied the funds held in the DOE Debt Service Reserve Account to the Debtor’s outstanding indebtedness in March 2013. As of the Petition Date, approximately $0 remains in the DOE Debt Service Reserve Account.b. Business Covenants Arising Under the DOE Loan28. In addition to traditional financial reporting, fixed charge, and EBITDA covenants, the DOE Loan Agreement imposed a number of milestones and obligations with respect to the Debtors’ business plan and performance. Among other things, the DOE Loan Agreement required the Debtors to: (a) achieve Karma sales of 11,000 units by February 29, 2012; (b) achieve an average Karma selling price of not less than $87,900 by that time; and (c) obtain $270.0 million of incremental equity financing by October 2010. The covenants and milestones provided under the DOE Loan Agreement materially affected the Debtors’ ability to pursue projects or transactions not contemplated by the business plan originally submitted to DOE in 2010.2. The SVB Working Capital Facility29. Fisker Automotive, as borrower, Fisker Automotive Holdings, as obligor, and Silicon Valley Bank (“SVB”), as lender, are parties to that certain Loan Agreement dated as of July 30, 2010 (the “SVB Loan Agreement”). The SVB Loan Agreement provided for a term loan facility and an asset-based revolving credit facility in the total amount of $21.0 million (the “SVB Working Capital Facility”). As of the Petition Date, a term loan of approximately $6.6 million remains outstanding on the SVB Working Capital Facility, and SVB is no longer providing the Debtors funding under the SVB Loan Agreement. The SVB Working Capital Facility has a weighted average interest rate of 9.00 percent and was scheduled to mature on July 30, 2014.99 Pursuant to correspondence dated April 5, 2013, SVB has taken the position that an event of default occurred under the SVB Loan Agreement on account of an unpaid principal and interest payment due on April 1, 2013.12DOCS_DE:190465.1 28353/00130. Pursuant to the Pledge and Security Agreement, obligations arising under the SVB Working Capital Facility are also secured by a lien on substantially all the Debtors’ personal property.10 However, the collateral securing the SVB Working Capital Facility excludes, among other things, cash held in the DOE Debt Service Reserve Account and the Delaware Facility.3. The DEDA Agreementsa. The DEDA Loan Agreement31. Fisker Automotive, Fisker Automotive Holdings, and the Delaware Economic Development Authority (“DEDA”), a body corporate and politic constituted as an instrumentality of the State of Delaware, are parties to that certain Loan and Security Agreement dated as of December 10, 2010 (the “DEDA Loan Agreement”). The DEDA Loan Agreement provided for a$12.5 million interest-free loan (the “DEDA Loan”) to the Debtors,11 the proceeds of which were to be used to fund the Debtors’ infrastructure improvements and upgrades at the Delaware Facility.12 As of the Petition Date, approximately $12.5 million remains outstanding under the DEDA Loan, which was scheduled to mature June 1, 2015.32. Obligations arising under the DEDA Loan are secured by a security interest in substantially all the Debtors’ personal and real property, including the Delaware Facility, although such collateral excludes the cash held in the DOE Debt Service Reserve Account and the Excluded10 On July 30, 2010, Fisker Automotive, Fisker Automotive Holdings, and the Collateral Agent, on behalf of DOE and SVB, entered into that certain Amended and Restated Collateral Agency Agreement, which created certain payment priorities between the DOE and SVB with respect to proceeds from different pools of collateral securing the Debtors’ obligations to DOE and SVB.11 The DEDA Loan Agreement was entered-into by the DEDA pursuant to the Delaware Strategic Fund Program, 29 Del. C. §§ 5027–29 (the “Delaware Fund Program”).12 The DEDA Loan Agreement provides that, subject to Fisker Automotive satisfying certain conditions set forth in the DEDA Loan Agreement relating to the employment of full-time employees and capital expenditures at the Delaware Facility, on or after June 1, 2015, up to the full amount of the DEDA Loan could convert to a grant. As of the date hereof, these milestones have not been achieved.13DOCS_DE:190465.1 28353/001Assets.13 On December 10, 2010, Fisker Automotive, Fisker Automotive Holdings, and DOE entered into that certain Third Amendment to the DOE Loan Agreement (the “Third Amendment”) requiring the Debtors to establish a collateral reserve account (the “DEDA Reserve Account”) withthe Collateral Agent. DOE controls the DEDA Reserve Account and has the power to direct the Collateral Agent to disburse funds held in the DEDA Reserve Account. DOE used this power shortly after its seizure of the cash in the DOE Debt Service Reserve Account to also sweep the cash in the DEDA Reserve Account. Thus, approximately $0 remains in the DEDA Reserve Account as of the Petition Date.b. The DEDA Grant33. Fisker Automotive and DEDA are also parties to that certain Grant Agreement dated as of December 10, 2010 (the “DEDA Grant”), pursuant to which DEDA granted up to $9.0 million to Fisker Automotive under the Delaware Fund Program to be used to offset utility costs incurred while the Debtors renovated and upgraded the Delaware Facility. Payments under the DEDA Grant were disbursed to Fisker Automotive from time to time as needed to reimburse the Debtors for “Eligible Utility Costs,” which are generally defined by the DEDA Grant to cover certain utility costs incurred during the renovation of the Delaware Facility. DEDA provided approximately $7.5 million in funding pursuant to the DEDA Grant, but is no longer providing the Debtors with additional funding. All or a portion of the DEDA Grant will convert to an interest-free loan upon the occurrence of certain conditions, including the Debtors’ failure to employ at least 1,495 full-time13 As discussed more fully in the Motion of the Debtors for Entry of Interim and Final Orders (I) Authorizing Postpetition Financing, (II) Granting Liens and Providing Superpriority Administrative Expense Priority, (III) Authorizing Use of Cash Collateral, (IV) Granting Adequate Protection, (V) Modifying the Automatic Stay, and (VI) Scheduling a Final Hearing Pursuant to Sections 105, 361, 362, and 364(c) of the Bankruptcy Code and Bankruptcy Rules 2002, 4001, and 9014 (the “DIP Motion”), the DEDA Subordination Agreement (as defined therein) subordinates DEDA’s interest in the collateral to those of DOE and SVB.14DOCS_DE:190465.1 28353/001employees at the Delaware Facility on March 1, 2015, or upon the occurrence of an event of default under the DEDA Loan Agreement.4. The Related Party Notes34. Commencing on April 16, 2013, the Debtors received approximately $15.6 million in financing on an unsecured basis through a series of promissory notes and loan agreements (collectively, the “Related Party Notes”) entered into by the Debtors and certain related parties,including Ace Strength International Limited, FAH Loan Purchase Fund, LLC, GSR Principals Fund IV, L.P., GSR Special Situation I Limited, GSR Ventures IV, L.P., JR Holdings IV, Ltd., and SugarPine Kids Trust and certain of their respective Affiliates. The Related Party Notes bear interest at a fixed rate of 10% per annum and were used to fund prepetition working capital needs and for other prepetition general corporate purposes. The Related Party Notes mature on the later to occur of (a) the sale, transfer, or disposition of all or substantially all the Debtors’ assets; (b) the Debtors’ dissolution or liquidation; or (c) 12 months from the date of the applicable promissory note, unless terminated earlier pursuant to their terms.5. Other Claims35. The Debtors’ capital structure also includes certain claims that may be secured by either security agreements or statutory or possessory liens. For example, Valmet holds certain work in progress and other inventory and has asserted its right to liquidate this inventory to satisfy claims that may be owing to Valmet. The Debtors are also parties to a number of supply and assembly agreements that give rise to substantial obligations on account of such agreements, including obligations relating to accounts payable, material authorizations and suspended shipments, and obligations for the settlement of certain volume-related charges under the Valmet Agreement, although analysis of such obligations remains ongoing. In addition, the Debtors are subject to a significant level of litigation and collection proceedings pending as of the Petition Date.15DOCS_DE:190465.1 28353/0016. Equity36. The Debtors are privately held. Fisker Automotive Holdings is owned by a diverse group of venture capital, private equity, and sovereign wealth funds, as well as private individuals. The Debtors’ equity capital consists of common stock and seven series of convertible preferred stock. Fisker Automotive Holdings, in turn, owns 100 percent of the shares in Fisker Automotive.Part II: Events Leading to the Chapter 11 Cases37. Since their inception, the Debtors pursued a strategy committed to the design, development, engineering, and production of high performance and environmentally responsible PHEVs. This strategy was reflected by the Debtors’ loan agreements, through which the Debtors were obliged to, among other things, achieve sales in excess of 11,000 vehicles less than 5 years from their initial inception and to employ approximately 1,500 full-time employees in automobile manufacturing here in the United States. The Debtors’ ability to achieve their original sales and production goals, however, was limited by a combination of negative press, lingering effects of the global financial recession, unforeseen business disruptions, and liquidity shortfalls, among other factors.A. Challenging Operating Environment38. The Debtors, like most OEMs, were responsible for the overall engineering, design, and development of the Karma sedan. In this process, the Debtors leveraged the expertise of a wide range of suppliers and service providers to complete the engineering work and to manufacture the thousands of parts and components necessary to complete each Karma sedan. In addition, and as noted above, Karma assembly was contracted to Valmet under the Valmet Agreement—although, the Debtors’ business plan contemplated that assembly operations could ultimately be brought “in house.” As a result, Karma production remained dependent on the seamless interaction of suppliers located across North America, Europe, and Asia.16DOCS_DE:190465.1 28353/00139. Building the Fisker platform, supply chain, and network of Retailers and Distributors from scratch ultimately delayed the initial Karma launch from 2009 until 2011. This delay created significant challenges with respect to the Debtors’ February 2012 deadline to sell more than 11,000 Karma sedans at an average selling price of $87,900, as required by the DOE Loan Agreement.14 The Debtors further believe that sales were adversely affected by negative press with respect to Karma performance, their existing liquidity position, and the A123 battery recall.40. In particular, these challenges were exacerbated by severe complications arising from the Debtors’ relationship with A123. As noted above, A123 was formerly the exclusive high-voltage battery pack manufacturer for the Karma sedan. The Debtors encountered a number of issues with the performance of the A123 battery packs almost immediately following the Karma’s launch in October 2011. At or about that time, the Debtors conducted a voluntary safety recall to check and correct a potential misalignment of internal hose clamps within the battery packs. In March 2012, A123 announced a voluntary service campaign to replace all Karma battery packs because of a faulty manufacturing process at A123’s production facility in Livonia, Michigan, that affected the expected performance and durability of the battery packs—the problem that caused a Karma sedan to shutdown during testing by Consumer Reports.41. A123 did not complete the service campaign and later suspended its production of Karma battery packs.15 As a result, the Debtors were left with approximately a $48.7 million warranty claim against A123’s bankruptcy estate and no supply of high-voltage battery packs to14 As noted above, approximately 1,800 Karma sedans have been sold to individual customers.15 A123 sought bankruptcy protection in October 2012 and, following its acquisition by Wanxiang Group Corp. in January 2013, rejected its battery pack supply agreement with the Debtors.17DOCS_DE:190465.1 28353/001continue Karma production.16 Facing these challenges, the Debtors have not restarted Karma production following a previously scheduled seasonal shutdown that began in July 2012.42. The Debtors suffered an additional loss on October 29, 2012, when Hurricane Sandy and its related windstorms, storm surges, and floods, destroyed approximately 338 Karma sedans located at the port in Newark, New Jersey. These vehicles represented substantially all of Fisker’s then-available Karma inventory in the United States. The Debtors’ insurance carriers denied coverage for the loss. After filing suit, the Debtors settled their coverage claims for an amount far less than the approximately $30 million wholesale value of the destroyed vehicles in order to avoid the risk and cost of protracted litigation with their insurance carriers.B. Prepetition Covenant Defaults and Capital-Raising Efforts43. As noted above, the DOE Loan Agreement required the Debtors to achieve various performance milestones, including the Debtors’ obligation to sell 11,000 Fisker sedans by February 29, 2012. Fisker did not achieve certain of these milestones in light of, among other things, the performance challenges discussed above. The Debtors’ operating position was further complicated in 2011 when DOE informed the Debtors that it would not honor future disbursement requests under the DOE Facility, and since that time DOE has ceased all funding under the DOE Facility. The Debtors subsequently engaged in good faith negotiations with DOE regarding modification or waiver of certain conditions imposed by the DOE Loan Agreement, through which the Debtors agreed to raise additional equity capital to fund operations and improve the Debtors’ overall capitalization. Since DOE suspended its funding commitments in 2011, the Debtors raised16 On April 17, 2013, the United States Bankruptcy Court for the District of Delaware approved the Debtors’ stipulation with A123 settling the Debtors’ claims against A123—the approximately $48.7 million warranty claim and a $91.2 million contract damages claim—for approximately $15 million. In re A123 Sys., Inc., No. 12-12859 (Bankr. D. Del. Oct. 16, 2012) [Docket No. 1467]. The Debtors subsequently sold their warranty claim, and, pursuant to their settlement, the Debtors’ $91.2 million contract damages claim was disallowed.18DOCS_DE:190465.1 28353/001approximately $500 million of new capital in three separate equity raises while continuing negotiations with DOE.C. Prepetition Restructuring Efforts44. Commencing in early 2012, the Debtors began exploring strategic alternatives with respect to their business and operations. To facilitate this process, the Debtors retained Evercore Group L.L.C. (“Evercore”) on two separate occasions to explore strategic alliances, junior equityinvestment opportunities, or, potentially, a going-concern sale transaction with one or more parties with respect to the Debtors’ business. Evercore’s initial efforts led to the exchange of several letters of intent between the Debtors and a major automotive OEM with a respect to a potential strategic alliance. Despite substantial negotiations, including meetings with the Debtors’ management, the parties were ultimately unable to agree to a transaction and terminated further discussions in July 2012.45. The Debtors then reengaged Evercore in December 2012 to search more broadly, and in early 2013 Evercore engaged a worldwide universe of more than 50 prospective strategic and financial investors through a structured process designed to publicize the opportunity and induce interest in a transaction. Again, management was actively involved with discussions with potentially interested parties, and approximately thirteen parties executed non-disclosure agreements and accessed an extensive electronic data room. Of these parties, two submitted preliminary non-binding proposals; however, the Debtors were again unable to reach definitive agreements with any of the potential purchasers, due to the Debtors’ inability to, among other things: (a) secure additional financing to fund a potential sale transaction; (b) reach an agreement with DOE regarding the consensual use of cash collateral to fund a potential chapter 11 case; and (c) secure third-party financing to fund a potential chapter 11 sale process.19DOCS_DE:190465.1 28353/00146. The Debtors then sought to market their assets for sale in three discrete groups, with the goal of reaching agreements with one or more bidders that would serve as stalking horses for a sale process in chapter 11 that would be funded by either DOE or third parties. Based on information gleaned from their interactions in the prior processes, Evercore re-solicited interest on this basis from fifteen parties. Again, however, the Debtors were unable to reach definitive agreements with any parties, again, largely due to funding issues.47. In addition to these efforts to locate a transaction partner, the Debtors also took substantial additional steps over the past year to address their liquidity position and preserve operational stability as much as reasonably possible. The Debtors engaged financial advisors that facilitated the Debtors’ efforts to preserve liquidity, while permitting executive management to continue to focus on the Debtors’ overall business plan and strategic alternatives. The financial advisors, in conjunction with the Debtors’ management team and Evercore, continued to negotiate with DOE to provide for the Debtors’ continued access to liquidity on a prepetition basis. Similarly, the Debtors implemented a cash preservation plan that facilitated the Debtors’ efforts to maintain liquidity as they continued to explore strategic alternatives.48. Despite their extensive efforts to preserve cash and execute on a restructuring transaction outside a chapter 11 process, no transaction with investors or purchasers materialized, and the Debtors’ liquidity position continued to deteriorate. As a result, the Debtors made the difficult decision to implement nonpaid employee furloughs and a series of headcount reductions, including voluntary attrition, beginning during the spring of 2013.49. The Debtors continued to explore potential strategic alternatives, but were unsuccessful until their universe of available restructuring alternatives materially shifted in mid-2013 when DOE commenced a marketing and auction process for its interests under the DOE20DOCS_DE:190465.1 28353/001Loan Agreement. The DOE auction process commenced on September 17, 2013, when DOE publicized its plan to sell its interests through a competitive auction. The Debtors actively facilitated diligence and engaged with DOE throughout this process, and it is my understanding that DOE received over twenty written expressions of interest in performing due diligence and participating in the auction process. I further understand that those expressing interest were contacted by DOE’s financial advisor, Houlihan Lokey Capital, Inc. (“Houlihan”), and over half of the potentiallyinterested parties executed non-disclosure agreements with DOE and the Debtors. Approximately half of these potentially interested parties that executed non-disclosure agreements ultimately submitted binding bids before the October 7, 2013 bid deadline, and I further understand that Houlihan conducted the final, live phase of the auction on October 11, 2013. An affiliate of the Purchaser was the successful bidder, and the parties closed the loan purchase on November 22, 2013.50. Recognizing that the DOE marketing and auction process would provide the Debtors with an opportunity to move forward with their restructuring process, the Debtors entered into extensive arm’s-length discussions with the Purchaser regarding the Purchaser’s potential acquisition of certain of the Debtors’ assets through a credit bid of all or part of the DOE loan. These discussions culminated in the parties’ entry into the Purchase Agreement described below.D. The Proposed Sale51. Contemporaneously herewith, the Debtors filed a motion (the “Sale Motion”) seeking authorization of a sale, pursuant to the Purchase Agreement, of substantially all of the Debtors’ assets to the Purchaser free and clear of all claims, liens, and other encumbrances pursuant to section 363 of the Bankruptcy Code in exchange for, among other things: (a) $75 million in the form of a credit bid of claims owned by the Purchaser under the DOE loan; (b) the Purchaser’s agreement to waive $4 million of claims held by the Purchaser or its affiliates under the Debtors’21DOCS_DE:190465.1 28353/001proposed postpetition financing;17 and (c) the assumption of customary liabilities in accordance with the Purchase Agreement. In addition, the Purchaser has committed to support the Debtors’ proposed chapter 11 plan by, among other things, funding up to $725,000 in creditor distributions pursuant to the Plan, each as set forth more fully in the Purchase Agreement.52. In evaluating the benefits and issues associated with another marketing process, the Debtors determined that a sale to a third party other than the Purchaser was highly unlikely to generate greater value than the Debtors’ proposed sale transaction or advisable under the facts and circumstances of these chapter 11 cases. Specifically, as the Debtors’ senior secured lender, the Purchaser holds approximately $168.5 million in claims secured by substantially all of the Debtors’ assets. As a result, I believe the Purchaser holds an overwhelming advantage in any prospective sale process. Thus, given that a competitive auction process or pursuing a potential transaction with an entity other than the Purchaser would be highly unlikely to increase value for the Debtors’ estates—particularly given the extensive prepetition marketing efforts conducted by both the Debtors and DOE prior to the date hereof—the Sale Motion seeks approval of a private sale. The Debtors believe that a private sale will maximize value for the benefit of all creditors and clear the way for the Debtors to expeditiously complete these chapter 11 cases.E. Chapter 11 Plan Process53. The Debtors intend to file their proposed chapter 11 plan promptly after the commencement of these cases. Generally, the Debtors seek to utilize proceeds from the Purchase Agreement, the Purchaser’s additional undertakings to fund creditor recoveries, and their remaining assets to administer these chapter 11 estates, fund creditor recoveries, and bring these chapter 1117 As set forth more fully in the DIP Motion, the Purchaser is also an affiliate of the Debtors’ proposed DIP lender.22DOCS_DE:190465.1 28353/001cases to a prompt conclusion. The Debtors further anticipate seeking approval of their related disclosure statement and plan confirmation in the near term.