The Hindenburg Report stated, among other things, that Lordstown Motors had made various misstatements about demand for its Endurance pick-up truck, the viability of the technology utilized in the Endurance, and its ability to start production of the Endurance in September 2021. In response, the Lordstown Motors Board of Directors established a Special Committee of independent directors to investigate the allegations made in the Hindenburg Report. The members of the Special Committee are David T. Hamamoto, Jane Reiss, and Dale Spencer. The Special Committee engaged Sullivan & Cromwell LLP, a leading global law firm, to conduct the investigation. Sullivan & Cromwell was assisted by technical experts from a leading automotive consulting firm.
The Special Committee’s investigation concluded that the Hindenburg Report is, in significant respects, false and misleading. In particular, its challenges to the viability of Lordstown Motors’ technology and timeline to start of production are not accurate. The investigation did, however, identify issues regarding the accuracy of certain statements regarding the Company’s pre-orders. A summary of the Special Committee’s findings is presented below.
Findings
1. September 2021 Start of Production Target
The Hindenburg Report stated that Lordstown Motors’ plan to start production in September 2021 is unrealistic based on Hindenburg’s allegations relating to recent design changes (including to the composition of frames), a failure to complete necessary testing, a lack of battery pack manufacturing capability, and a lack of hub motor manufacturing capability. The Special Committee concluded that while various factors could lead to delays in the start of production, the projected September 2021 start of production remains achievable with the expectation of delivery to customers in the first quarter of 2022.
The Hindenburg Report cites a purported statement from an anonymous former Lordstown Motors’ employee that Lordstown Motors switched from plastic frames to aluminum frames earlier this year. That is false. While Lordstown Motors made certain changes to the materials to be used for the doors, hoods, and fenders, there has been no change to its plan to manufacture the vehicle frame from steel.
Lordstown Motors has commenced and plans to complete required regulatory, durability, and Federal Motor Vehicle Safety Standards (“FMVSS”) testing during 2021. While certain testing must be completed before Lordstown Motors can deliver the Endurance to customers, none of the testing cited in the Hindenburg Report must be complete before the start of production. Lordstown Motors has begun testing consistent on a timeline that anticipates delivery to customers in the first quarter of 2022, taking into account the potential adjusted production volumes discussed on the Company’s May 24, 2021 first quarter earnings conference call.
Lordstown Motors has sourced battery cells from suppliers, and initial battery pack assembly equipment has been received and is being installed, with remaining equipment due to arrive in advance of the projected start of production date.
Lordstown Motors currently expects to produce hub motors in part using manual processes while the automated hub motor production line is installed over the next few months. It expects this process to provide sufficient hub motor production capacity to support expected production volumes in 2021 and 2022.
2. Viability Of Hub Motor Technology
The Hindenburg Report questioned the viability of the hub motor technology used in the Endurance, stating that the hub motors are licensed from a Slovenian company, Elaphe, that hub motors present durability issues because of “unsprung weight,” and that hub motors have not previously been commercialized at scale in the light vehicle market. The Special Committee concluded that while hub motors have not previously been used at scale in commercially-produced passenger vehicles, the hub motor technology licensed from Elaphe is viable. The Endurance was engineered to address the unsprung vehicle mass attributable to in-wheel motors, including through tuning of the suspension, reinforcing the vehicle structure, and utilizing a heavier truck chassis. These measures are expected to alleviate any ride or durability issues that might otherwise arise.
3. January 13, 2021 Truck Fire
The Hindenburg Report described a January 13, 2021 incident in which a prototype of the Endurance caught fire during a test drive. The Special Committee concluded that the incident was an isolated event rather than one reflecting a systemic problem. Lordstown Motors conducted a technical investigation of the incident that identified the root cause of the fire to be non-conforming parts on a battery pack that had been manually reworked for assembly on the prototype. During a test drive, the driver accelerated beyond the expected test parameters for that prototype. As a result of the rapid acceleration, the faulty connection point resulting from the manually reworked assembly experienced an overload of electric current which caused the battery to ignite. Lordstown Motors reported the incident to the relevant regulator and has taken steps to address the isolated issues that contributed to this incident. The production process now in place and the automation of battery pack assembly are intended to ensure that this type of issue does not recur.
4. Pre-Orders
The Hindenburg Report raised various questions regarding the Company’s practices and disclosures regarding “pre-orders.” Among other things, the Hindenburg Report stated that Lordstown Motors’ pre-orders (i) are non-binding letters of intent, (ii) require no reservation payment and in some instances were procured through the payment of sales commissions, (iii) are from customers that generally do not operate fleets, and (iv) include pre-orders from customers that do not have the means to make the purchases indicated.
Lordstown Motors has repeatedly disclosed that its pre-orders are non-binding, and it has highlighted the risk that pre-orders may not be converted to actual orders.
In most instances, Lordstown Motors’ pre-orders did not require a reservation or similar payment, though pre-orders submitted through a website portal required a refundable $100 payment. Lordstown Motors entered into an arrangement to pay one entity commissions for procuring pre-orders. That entity procured approximately 1,000 pre-orders and also assisted Lordstown Motors into entering into an important commercial relationship with a leading fleet management company.
Lordstown Motors has obtained tens of thousands of pre-orders from fleets, fleet management companies, or other end users. If converted to orders, this demand will comprise substantially all of the Company’s expected production volume through 2022.
Lordstown Motors made periodic disclosures regarding pre-orders which were, in certain respects, inaccurate.
- Lordstown Motors has stated on several occasions that its pre-orders were from, or “primarily” from commercial fleets. In fact, many pre-orders were obtained from (i) fleet management companies or other end users that indicated interest in purchasing Endurance trucks, similar to commercial fleets, and (ii) so-called “influencers” or other potential strategic partners that committed to attempt to secure pre-orders from other entities, but did not intend to purchase Endurance trucks directly.
- One entity that provided a large number of pre-orders does not appear to have the resources to complete large purchases of trucks. Other entities provided commitments that appear too vague or infirm to be appropriately included in the total number of pre-orders disclosed.
5. Other Matters
The Special Committee also reviewed certain other matters raised in the Hindenburg Report and made the following observations. First, although not in a position to assess ongoing litigation with Karma Motors, the Special Committee notes that Lordstown Motors has denied the allegations against it and is contesting both liability and damages. Second, as described in various Form 4 filings in the months following the DiamondPeak transaction, certain Lordstown Motors directors and executives have sold or transferred shares in the Company. Each of those transactions were made for reasons unrelated to the performance of the company or viability of the Endurance, and each such director and executive retained substantial Lordstown Motors equity holdings in the form of shares and options following the sales and transfers described in the Company’s public filings.
Lordstown Motors announced several changes to its executive management team as the Company begins to transition from the R&D and early production phase to the commercial production phase of its business.
To that end, Lordstown Motors Lead Independent Director Angela Strand has been appointed Executive Chairwoman of the Company, and will oversee the organization’s transition until a permanent CEO is identified, and Becky Roof, will serve as Interim Chief Financial Officer. Steve Burns has resigned as Chief Executive Officer and from the Company’s Board of Directors, and Chief Financial Officer Julio Rodriguez has also resigned. All changes are effective immediately and the Company has engaged an executive search firm to identify a permanent CEO and CFO.
On behalf of the Board of Directors, David Hamamoto stated, “Lordstown Motors has achieved significant milestones on the path to developing the first and best full-size all-electric pickup truck, the Lordstown Endurance. We thank Steve Burns for his passion and commitment to the company. As we transition to the commercial stage of our business – with planned commencement of limited production in late-September – we have to put in place a seasoned management team with deep experience leading and operating publicly-listed OEM companies. We have complete confidence in Angela and Becky, and our expanded leadership team, to effectively guide the company during this interim period.”
The Company has further augmented its executive team. Key individuals, along with their roles and responsibilities, include:
- Rich Schmidt, President of Lordstown Motors, will continue to oversee all day-to-day operations, including manufacturing and engineering. Mr. Schmidt was promoted to President in November having previously served as Lordstown’s Chief Production Officer. He has over 30 years of automotive industry expertise, including experiences at Toyota and Nissan, Hyundai, Volkswagen, J.D. Power, and Tesla Motors.
- Jane Ritson-Parsons, formerly Lordstown Motors Interim Chief Brand Officer, has been appointed Chief Operating Officer. Jane is a highly experienced senior global executive with demonstrated leadership and revenue building success with a successful track record most recently at Hasbro Inc as their Group Executive, Global Marketing.
- Carter Driscoll, formerly Lordstown Motors Head of Investor Relations, has been promoted to Vice President, Corporate Development, Capital Markets and Investor Relations.
- Tom Canepa, General Counsel, Shane Brown, Chief Production Officer, Darren Post, Vice President of Engineering, John Vo, Vice President of Propulsion, will all remain in their current roles to continue to guide the Company’s progress.
Ms. Strand stated, “We remain committed to delivering on our production and commercialization objectives, holding ourselves to the highest standards of operation and performance and creating value for shareholders. Along with the management team, I will continue to work closely with them and the Board to execute on Lordstown’s vision for the future of electrified transportation. I am excited to lead the passionate and dedicated team of Lordstown employees and to work with our valued customers, suppliers, investors and partners and to hosting Lordstown Week, which commences on June 21st.”
Ms. Strand, is presently the Managing Director of Strand Strategy, an advisory firm specializing in technology, business strategy and organization development across multiple sectors working with corporate board executives, investors, suppliers, and policy makers. She is considered a thought leader and expert in the commercial electric vehicle sector, with a decade of real-world executive and advisory experience working with fleets, fleet management companies, OEMs, utilities, financing and infrastructure solutions providers to successfully launch and deploy electric trucks and end-to-end infrastructure solutions. Ms. Strand also currently serves on the board of directors of Nuvve Corp (NASDAQ:NVVE).
Ms. Roof will serve as Interim CFO, effective immediately. She is a certified public accountant and seasoned financial executive who has served as a consultant to publicly traded companies and in an interim CFO capacity at numerous companies including Eastman Kodak, Hudson’s Bay Company, Saks Fifth Avenue and Aceto Corporation, a publicly traded generic pharma and specialty chemical company.
About Lordstown Motors Corp.