SEC Launched Inquiry a Month Before Lordstown Motors Disclosure
YOUNGSTOWN, Ohio – The U.S. Securities and Exchange Commission launched its inquiry into Lordstown Motors Corp. a full month before the company’s CEO disclosed that it was cooperating with federal regulators, according to an annual report the company filed March 25.
The SEC inquiry also predates by more than three weeks the release of a damaging short-seller report that accused the electric-vehicle startup of faking preorders of its Endurance pickup truck, now undergoing beta testing at the company’s plant in Lordstown.
And, the report confirms that the SEC has specifically requested documents related to Lordstown Motors’ preorders and its merger with DiamondPeak Holdings Corp., a special purpose acquisition company, or SPAC. DiamondPeak acquired Lordstown Motors in October with the intent of taking the company public.
According to the annual report, the company received on Feb. 17 “a request from the SEC for the voluntary production of documents and information, including relating to the merger between DiamondPeak and Legacy Lordstown and pre-order of vehicles. The company is responding to the SEC’s requests and intends to cooperate with its inquiry.”
Lordstown Motors’ CEO Steve Burns did not disclose the SEC inquiry until March 17 during a conference call with analysts, noting that the company was cooperating with the agency’s request. He then declined to comment further on the matter.
And the company did not disclose the inquiry through any regulatory filings until the annual report was issued March 25.
Burns’ disclosure was presented during Lordstown Motors’ first earnings call – less than a week after Hindenburg Research published a blistering report that alleges the EV startup had misled investors, concocted most of its 100,000 preorders and is likely to miss production targets of the Endurance. Company shares plummeted more than 16% on the heels of the Hindenburg report and fell further after disclosure of the SEC inquiry.
Hindenburg hit again on March 24, publishing photos of an alleged broken down Endurance on a tow truck during a commercial shoot last summer. The commercial aired several days before Lordstown Motors announced its merger with DiamondPeak.
Lordstown Motors in its annual report identifies “uncertainties related to litigation, regulatory actions and government investigations and inquiries,” among a long list of risks facing the company.
Executives announced the merger of DiamondPeak and Lordstown Motors in August, and the deal was approved Oct. 22, 2020. Lordstown Motors began trading on NASDAQ under the ticker symbol RIDE on Oct. 26.
Under RIDE, Lordstown Motors’ stock peaked at $30.75 in February. By mid-day trading on March 25, the stock had dropped to $11.36 per share, or down 63% since its peak value. Shares closed at $12.30 Thursday, up 8% from Wednesday’s close.
An email to Lordstown Motors’ public relations firm seeking comment was not returned.
Lordstown Motors’ plummeting stock in the wake of the Hindenburg report and the SEC inquiry helped instigate at least two potential class action lawsuits on behalf of investors against the company, mostly citing allegations brought forth in the Hindenburg report.
According to Hindenburg, “Lordstown is an electric vehicle SPAC with no revenue and no sellable product, which we believe has misled investors on both its demand and production capabilities.”
In the wake of that report, Lordstown Motors vowed to fully rebuke Hindenburg’s analysis. “We will be sharing a full and thorough statement in the coming days, and when we do we will absolutely be refuting the Hindenburg Research report,” company spokesman Ryan Hallet said in a statement March 12.
However, neither the company nor CEO Burns has presented a “thorough” rebuttal to the Hindenburg analysis and there is no mention of it in Lordstown Motors’ annual report.
Burns indirectly addressed the report during a press event at the plant on March 15, when he hosted Ohio Secretary of State Frank LaRose.
“Whatever anybody thinks of us in the world, the main thing is we are going to be the first electric pickup truck in the United States, full-size, and that starts in September,” Burns said. “Haters are gonna hate,” he added, quoting singer Taylor Swift.
Moreover, the annual report filed March 25 displays a careful appraisal of an untested and young startup company. The report emphasizes the great risks involved with the venture, painting a worst-case scenario throughout the entire document.
“Investing in our Class A common stock involves a high degree of risk because our business is subject to numerous risks and uncertainties,” the report says.
These include concerns about the company’s ability to execute its business model, the company’s limited operating history, pending litigation against the company, the rollout of the business and meeting expected milestones, and the ability of the company to obtain “binding purchase orders and build customer relationships.”
Hindenburg’s report singled out the company’s proclamations that it had obtained more than 100,000 preorders for the Endurance. The short-seller alleged that many of these orders were “fictitious,” noting that it was unlikely that those potential customers would purchase the vehicle.
The report, titled “The Lordstown Motors Mirage: Fake Orders, Undisclosed Production Hurdles, and a Prototype Inferno,” challenged Lordstown Motors’ assertions that it has obtained more than 100,000 “serious orders” of the Endurance. Instead, the report alleges that most of those orders “appear to be fictitious” and are “fake and entirely non-binding orders, from customers that generally do not even have fleets of vehicles.”
Burns has since said that the company has always acknowledged that the orders were nonbinding and merely letters of intent. Lordstown Motors has stated in earlier SEC filings that it had no customers and all of its preorders were nonbinding.
“With our vehicle still under development, we do not have any current customers or any pending orders,” the annual report declares. “There is no assurance nonbinding preorders and other indications of interest will be converted into binding orders or sales.”
Lordstown Motors expects to launch the Endurance in September and Burns has said that schedule has not changed. The company began production of 57 beta models in March to be used for safety validation. It will begin preproduction of the vehicle during the summer and start full production by late September.
The company said in March that it is in the early stages of producing an all-electric van that would initially be sold as a recreational vehicle.
Burns says Lordstown Motors employs about 500 and expects to employ more than 1,000 once production of the Endurance hits full stride.
However, the annual report noted potential roadblocks. Among them is that the company could be exposed to liability for infringing upon other companies’ intellectual property rights.
“While we are not aware of any patents and trademarks which would cause our products or their use to infringe on any third parties, we cannot be certain that infringement has not or will not occur.”
Karma Automotive LLC, based in Irvine, Calif., filed a civil complaint against Lordstown Motors Oct. 30 in U.S. District Court, alleging it “brazenly stole” its trade secrets. Karma has called the matter a “classic corporate espionage case,” and alleges Lordstown Motors poached employees from Karma and with them proprietary technology related to the company’s infotainment systems.
Lordstown Motors has denied the allegations.
Other challenges to the business outlined in the report include the difficulty of and expenses related to developing an in-house sales, marketing and distribution division; whether there will be sufficient demand among fleet customers for electric vehicles; competition in the EV space; future capital requirements; and the “ability to attract and retain key employees.”
The report explicitly identified CEO Burns as a vital part of Lordstown Motors and the success of the company.
“We are highly dependent on the services of Stephen S. Burns, our chairman of the board and chief executive officer and our largest stockholder. Mr. Burns is our founder and a significant influence on and driver of our business plan. If Mr. Burns were to discontinue his service to us due to death, disability, or any other reason, we would be significantly disadvantaged,” the report says.
Copyright 2021 The Business Journal, Youngstown, Ohio.