Crunch Time for Lordstown Motors

Updated, June 14, 2021 | This article went to press June 11. This update includes the latest information regarding the resignation of Steve Burns as CEO.
LORDSTOWN, Ohio – The next several months will prove critical to the survival of Lordstown Motors Corp., as the electric-vehicle startup scrambles to raise capital to stay in business, restore shareholder confidence in the wake of the resignation of two top executives, and ramp up production while an investigation by the U.S. Securities and Exchange Commission into the company’s conduct plays out.

Lordstown Motors disclosed in its amended annual report June 8 that the SEC served the company with two subpoenas for records pertaining to its merger with DiamondPeak Holdings Corp. and pre-orders of its touted Endurance pickup.  The company also disclosed that it doesn’t have enough cash to remain in business as a going concern over the next year and must secure additional funding.

Then on June 14, the company announced founder and CEO Steve Burns and Chief Financial Officer Julio Rodriguez had resigned. Their departures were portrayed by the company as part of the transition “from the R&D and early production phase to the commercial production phase of its business.”

Lead independent director Angela Strand was named executive chairwoman of the company and will oversee the transition until a permanent CEO is identified. Becky Roof will serve as interim chief financial officer.

They are faced with the fact that the SEC’s use of subpoena power means a formal investigation into Lordstown Motors is underway.  The company said earlier this year that it received a request from the agency to voluntarily produce records, but made no mention of a subpoena.  Lordstown Motors said it is cooperating with the investigation.

“It’s consistent with the SEC’s investigative powers,” says Bret Treier, an attorney with Vorys Legal Counsel in Akron. “It’s not a routine or a daily occurrence, but the path it’s going down is not unusual.”

The SEC investigation into Lordstown Motors has yet to reach a critical stage, Treier says, but more details should be forthcoming in a few months.

“The next steps could be the SEC simply closing its investigation with no further action, or run all the way to filing an enforcement action against Lordstown and/or its key executives,” he says.  “Those could result in either penalties or prosecutions.”

Molly Brown, an attorney for Brouse McDowell in Cleveland, agrees a subpoena doesn’t mean an enforcement action is imminent. But regulators must have found some justification for taking the inquiry to the next level, she says.

“A subpoena is more significant than a request, but there is a process,” Brown says. “It generally means they feel there’s something more there.”

The investigation would take on more significance should the SEC file what is known as a Wells Notice, the formal name for an enforcement action, she adds. “That’s very serious.”

In March, Lordstown Motors and its investors were blindsided by a scathing report published by short-seller Hindenburg Research that alleged the company faked pre-orders of the Endurance, misled its investors, and didn’t have the financial resources to build the vehicle. Share prices of Lordstown collapsed in the wake of the report. 

A special committee formed by Lordstown Motors’ board of directors concluded in a report released June 14 that the Hindenburg analysis is “in significant respects, false and misleading. In particular, its challenges to the viability of Lordstown Motors’ technology and timeline to start production are not accurate”

Nevertheless, the committee’s investigation did “identify issues regarding the accuracy of certain statements regarding the company’s pre-orders,” the report stated. 

“It’s not uncommon to have an SEC investigation when there’s a lot of these kind of [public] disclosures,” Treier says. “What they would be looking for is tangible support for statements made in all public filings.”

It’s likely that Lordstown Motors first appeared on the SEC’s radar screen when the company went public through its merger with DiamondPeak, a special-purpose acquisition company, or SPAC. 

SPACs are essentially shell companies with no assets that are publicly listed as they search for a company to merge with and take public.

The corporate structure is inviting to startups such as Lordstown Motors because it shortcuts the process toward a public listing. While it could take years for a young company to complete the requirements to launch a traditional initial public offering, SPACs are able to take companies public in a matter of months.

This has raised concerns within the SEC related to how SPACs represent themselves to retail investors. 

“I want to make sure investors, particularly retail investors, understand the incentives of the sponsors and for the selling company,” former SEC Chairman Jay Clayton said in October.

In April, the SEC published new guidelines on how SPACs were to treat stock warrants at the time of any merger. Under the new guidelines, these warrants should be declared as debt and not equity.  The new guidelines forced EV companies such as Lordstown Motors and Nikola to restate their annual earnings for 2020.

The SEC has launched inquiries or investigations into at least three EV companies that went public through SPACs: Nikola, Lordstown Motors, and Canoo.

Lordstown Motors’ disclosures in its restated financial statements could help its case with the SEC, Brouse McDowell’s Brown says. “It’s possible that since they made the filings, the SEC will consider that,” she says.

Still, a subpoena from the SEC is never a good sign for a company – especially an early-stage venture such as Lordstown Motors, financial specialists say. 

“The last thing you want is to go from an audit to an investigation,” says Jon Arnold, president of J. Arnold Wealth Management Co., Canfield.  “That’s bad news for the company.  If they smell any hint of wrongdoing, they’ll investigate and it could destroy a company.”

The SEC investigation is just one of the daunting challenges the startup faces as it prepares to launch the Endurance.

In a preliminary prospectus filed June 10 with the SEC, Lordstown Motors said it would require more capital in order to manufacture the pickup and remain in business. The company said it’s in discussions with several entities related to additional funding.

It is also pursuing $200 million in financing through the federal Advanced Technology Vehicle Loan program. “A basic requirement”of that program, however, “is that applicants be financially sound without further assistance,” The Wall Street Journal reported June 10.

Should Lordstown Motors survive its cash squeeze and the SEC probe, looming ahead is the now crowded EV market that industry analysts say will make it very difficult for early-stage automakers to compete.

“The challenge is to build a pickup that will compete with a well-known dominant player,” says Jessica Caldwell, executive director of insights at Edmunds. “A lot has changed in the last six months.”

Most of the disruption is the result of Ford Motor Co.’s announcement in May that it plans to launch its F-150 Lightning pickup in 2022, a direct competitor to the Endurance. 

“It felt like Ford changed everything with such an aggressive price point,” says Caldwell.

Ford’s electric pickup is expected to retail around $40,000 compared to the $52,000 price tag for the Endurance.

And Ford’s move is likely to kick major automakers such as General Motors into gear toward more competitive pricing for their forthcoming EV trucks, Caldwell says.

“That places even more pressure on Lordstown,” she says. “They’re a new pickup with a new name. There’s always a risk.”

Lordstown does have an advantage in that it wants to produce the right vehicle for the right market, Caldwell says. Plus, the company is retooling an existing plant that was formerly owned by GM, which gives it a leg up against other young competitors.

“The product itself is the right product,” she says. “But can the product deliver and the price deliver?”

Plus, Lordstown Motors’ financial squeeze means it stands the risk of losing investor and consumer confidence as the major automakers ramp up their EV portfolios, Caldwell says.  “Lordstown Motors is running out of time and there are new price pressures,” she says. 

The company has said it is exploring possibilities such as “strategic partnerships” and has not ruled out joint ventures with a major automaker. In May, then Lordstown Motors CEO Burns said a sale of the company is not under consideration.

General Motors loaned Lordstown Motors $50 million so the startup could purchase and begin retooling its former Lordstown Complex. When Lordstown Motors went public in October, GM’s loan plus another $25 million in cash was converted into equity. GM now owns about a 4.5% stake in Lordstown Motors.

Could GM step back in at some point to its former factory?

The timeframe for Lordstown Motors to strike a joint venture or even a buyout from a major automaker grows tighter every day, Caldwell says. 

“The established automotive brands have been working on their electric technology for some time now,” she says. “I don’t know if the window is still open for them. It might be starting to close.”

For Lordstown Motors to survive, it must regain the confidence of the investor community, Caldwell says.

Much of that confidence has waned since the Hindenburg Report, the SEC investigation and the handful of class action lawsuits investors have filed against the EV automaker.

That some top executives of Lords-town Motors cashed out portions of their stock when share prices were high has not helped investor confidence, either.

An investor’s lawsuit filed in May, for example, singled out Lordstown Motors chief financial officer Julio Rodriguez, director David Hamamoto and its president, Richard Schmidt, for selling Lordstown shares “while in possession of material, adverse nonpublic information that artificially inflated the price of Lordstown stock.”

As a result, Rodriguez, Schmidt, and Hamamoto “profited from their misconduct and were unjustly enriched through their exploitation of material and adverse inside information,” the pleadings state.

Hamamoto, for example, sold 1 million shares at $16.38 per unit for a total of $16.38 million on Oct. 22, 2020, according to SEC documents. A footnote in a regulatory filing describing the transaction shows that the shares were sold to trusts established for family members.

Schmidt, Lordstown’s president, jettisoned more than $6.38 million worth of stock over four transactions between Dec. 12, 2020, and Feb. 3, 2021. Rodriguez, the CFO, sold shares worth a total of $251,100, documents show.

Edmunds’ Caldwell said the EV market was hot last year, as investors lined up to get in on the ground floor of what could become the next Tesla.

“That’s why these startups were so popular,” she says. “But they’re not all going to be the next Tesla. It was exciting at the beginning because we really didn’t know where this space was going. Now it feels more defined.”

Pictured: When Steve Burns showed off this prototype to the world in June 2020, the future seemed bright.