Dogs of Lordstown: A Community Story

Lordstown Motors' Results Contribute to SPAC Market Concerns

Recent declines in the stock performance of companies that have merged with special purpose acquisition companies (SPACs) continued yesterday following the release of Lordstown Motors’ first-quarter financial report.

Lordstown, a member of the growing number of electric vehicle firms that secured funding and became publicly traded through SPACs, revealed lower-than-anticipated vehicle production figures for 2021.

Increased Capital Expenditure and Further Funding Needs

The company also announced increased capital expenditures (capex) for the current year, alongside a necessity for additional capital acquisition. This news proved disheartening for its shareholders, as previously covered by TechCrunch.

Currently, Lordstown shares are experiencing a 14% decrease in pre-market trading, following a drop in after-hours trading the previous day.

Discrepancies Between Projections and Reality

The challenges facing Lordstown extend beyond a single disappointing quarter. A comparison of the reported results with the company’s original SPAC deck reveals inconsistencies.

These decks, typically optimistic in nature, often project rapid scaling and improving profitability with relatively modest capital investment.

However, once the merger is finalized and the company becomes publicly listed, the reality of quarterly earnings reports emerges.

Shifting Sentiment Towards SPACs

Lordstown’s financial difficulties and the divergence from its initial forecasts are significant. They also suggest a potential shift in investor perception regarding SPAC combinations.

Returns have been underwhelming, the Securities and Exchange Commission (SEC) has expressed concerns about overly optimistic projections, and Congress is actively investigating the recent SPAC boom.

Broader Implications for the SPAC Market

While this analysis focuses on Lordstown’s performance, it’s important to note that other companies exhibit similar patterns. More instances of this nature are anticipated in the future.

We are currently examining Lordstown’s results in detail, but it’s crucial to understand that this is not an isolated case.

The situation highlights a growing trend of discrepancies between initial SPAC projections and subsequent real-world performance.

Concerning Developments at Lordstown Motors

Allegations have surfaced from short-sellers suggesting that Lordstown Motors may have misrepresented the size of its order backlog to attract investment prior to its merger with a Special Purpose Acquisition Company (SPAC). The company has refuted these claims, and the Securities and Exchange Commission (SEC) is currently investigating the matter.

However, based on the company’s declining market capitalization, the short-sellers’ arguments currently appear to hold more weight. Initially, Lordstown stock reached a high of $31.80 per share following the SPAC transaction.

Currently, the equity is projected to commence trading at a value of only $8.29 per share, demonstrating a significant loss of investor confidence.

A review of the following chart, taken from the company’s SPAC sales presentation in August 2020, helps illustrate the situation:

Lordstown initially projected the sale of 2,200 vehicles, anticipating $118 million in revenue and $45 million in capital expenditures. A key component of the investor pitch was the assertion that “no additional capital” would be required.

This implied no future stock dilution or debt financing that could potentially destabilize the company’s financial standing.

The actual results, however, differed substantially. Here’s a summary of Lordstown’s performance during Q1 2021, as reported by TechCrunch and the company’s earnings statement:

• Only 1,000 vehicles were sold, representing a decrease of over 50% from the original projections.
• Capital expenditures reached $53 million in the first quarter alone, exceeding the full-year forecast of $45 million.
• The company revised its operating expense expectations for 2021 upward by $115 million, necessitating the need for “additional capital to complete our business plans.”

These discrepancies are noteworthy.

Further examination of the same presentation reveals additional concerns:

The company’s outlook shifted dramatically from anticipating sufficient capital to reach positive cash flow to requiring additional funding within a matter of quarters. The slide indicates a need for approximately $90 million in Research and Development (R&D) spending.

It was subsequently revealed that the company expended that amount during the first quarter of 2021.

Details from the earnings statement are as follows:

These figures are concerning.

While I am not a legal expert in securities law, the situation raises significant questions. Investors who relied on the company’s initial projections may understandably feel frustrated by the substantial deviations from those forecasts.

Referring back to the previously mentioned slide, the company initially stated it had approximately $320 million in readily available cash reserves. However, Lordstown now anticipates capital expenditure costs of “between $250 and $275 million” this year, alongside R&D expenses of “between $280 and $290 million.”

Consequently, these funds have been largely allocated.

This represents a markedly different financial picture than the one initially presented to the market.

Lordstown is not an isolated case among SPACs experiencing a gap between their initial projections and actual performance. However, it serves as a potent reminder that SPAC presentations are marketing materials, not legally binding commitments.

Let the buyer beware; there is concern for both inexperienced investors and those with financial expertise who should have exercised greater due diligence.