The mayor of Lordstown, Ohio, is waiting to see what happens next with the high-profile electric truck start-up that promised to revitalise the village. So are the company’s investors.
Lordstown Motors promised the Mahoning Valley 400 jobs and a chance to transform this part of north-east Ohio into what some dubbed “Voltage Valley”.
Instead, top executives have resigned following a warning that the company might run out of money and Lordstown now threatens to become one of the biggest disappointments among the electric vehicle start-ups that rushed to go public via special purpose acquisition companies over the past year.
The Mahoning Valley knows disappointment. The 3,200-person village is about 17 miles from Youngstown, where residents still speak of “Black Monday”, the day in September 1977 when Youngstown Sheet & Tube announced the closure of the larger of its two steel mills and threw 5,000 people out of work.
President Donald Trump held a 2017 rally in Youngstown telling Ohioans not to move away, because “we’re going to get those jobs coming back, and we’re going to fill up those factories”.
The plant where Lordstown Motors said it would make its flagship pick-up, the Endurance, formerly made the Chevrolet Cruze by General Motors, employing 12,000 at its height. GM closed it in 2019 and, amid haranguing from Trump, agreed to sell it to the start-up despite uncertainty over its financing plans.
“We’re survivors here in the Mahoning Valley,” said Arno Hill, Lordstown’s mayor. “We’re the land of broken promises.”
Bold sales forecasts
Lordstown Motors is not the first electric vehicle start-up to have disappointed investors within months of being taken public by a Spac. Nikola, which plans to make industrial trucks, admitted its founder made wholly or partly inaccurate statements, and the company is now under US Department of Justice investigation. Shares in other start-ups have fallen as investor euphoria has given way to realism on the difficulties of hitting ambitious production and sales goals.
Companies going public via a Spac have more freedom to make bold sales forecasts than companies that pursue a traditional initial public offering, a difference that regulators have flagged as a worry.
Lordstown took advantage. PowerPoint presentations used to attract investors in August and September painted a rosy picture of the company’s prospects. It said it expected $1.7bn in revenue by 2022 and more than three times that by 2024, largely from the Endurance, which is priced at $52,500 and targeted at commercial fleet operators rather than luxury buyers.
Significantly, the start-up touted its “strong” balance sheet. It would have $675m in cash after going public, including money raised from institutional investors and cash already held by DiamondPeak Acquisition, the Spac set up by former Goldman Sachs real estate banker David Hamamoto. It said it expected “no additional capital requirements” until it started selling vehicles.
Behind the scenes, it was tussling with regulators over where to put the asterisks to that rosy outlook.
In September, the Securities and Exchange Commission ordered it to mention more prominently that an independent auditor, assessing its losses to date, found “substantial doubt about the company’s ability to continue as a going concern”.
That report, found on page 288 of Lordstown’s preliminary proxy statement, was referenced on page 51 of the final version ahead of a vote of DiamondPeak shareholders.
“While Lordstown believes the proceeds of the business combination [with DiamondPeak] will provide sufficient funds to alleviate this doubt, additional funding may be required in the future for a variety of reasons,” the company said in the final proxy.
‘Evaluating funding alternatives’
The fine print of the proxy has proven a more reliable guide than some of the figures in the Lordstown PowerPoints.
The prospect of disappointment was first raised in March when the short seller Hindenburg Research published a report saying the company’s 100,000 pre-orders were “largely fictitious and used as a prop to raise capital”. The SEC opened an inquiry.
In May, the company hinted it planned to raise more capital and by last week, Lordstown was warning that the company could fail within a year.
The $587m in cash and cash equivalents it had at the end of the first quarter “are not sufficient to fund commercial-scale production”, according to a June 8 regulatory filing. “Management is currently evaluating various funding alternatives.”
The company did not respond to messages seeking comment for this article, but it has made a series of public comments this week.
On Monday, when chief executive Steve Burns and his chief financial officer resigned, a special committee established by Lordstown’s board revealed that the company had inaccurately described pre-orders for the electric pick-up truck. A large number came from “influencers” with no intention of buying trucks or from entities without the funds to complete the purchase, it said.
On Tuesday, executives told reporters the company has enough cash to last until May 2022, and it still plans to begin limited production of the Endurance in September. Lordstown had “binding” purchase orders for the first two years of production, company president Rich Schmidt said.
On Thursday, the company clarified in an SEC filing that while these pre-orders “provide us with a significant indicator of demand”, they were not firm.
‘A rising tide doesn’t lift all boats’
Mayor Arno Hill says the village has excluded Lordstown Motors from its budgeting plans. “You don’t pin your finances on something you don’t have yet,” he said.
His hopes for an electric future for the Mahoning Valley are pinned more firmly on established players such as GM and LG Chem, which announced a joint venture in May 2020 that would build a $2.3bn plant in Lordstown to manufacture battery cells. The plant went up “at warp speed”, Hill said, and has already started hiring. It is expected to employ 1,100.
The jobs lost when GM closed the Cruze factory cannot be replaced at once, Hill said, “but we’re working on it”.
Lordstown’s travails could give also pause to investors who, seeking the next Tesla, have ploughed money into EV start-ups in the past year.
“It’s a fourth Industrial Revolution playing out, but a rising tide doesn’t lift all boats,” said Wedbush analyst Dan Ives. With Lordstown Motors, “there’s more questions than answers at this point”.