One of the biggest stories in equity markets over the past few years is the disastrous share price performances of companies that went public by merging with Spaxs. In some cases like Nicola this is the result of outright fraud where the company lies to investors about either their operational performance or capabilities of their technology. but this only represents a minority of cases. The vast majority of Spcs have not been charged with fraud, yet.

Their average share price performance has been abysmal. One of the key features of Spaxs is their ability to give future projections about their revenue and profitability forecasted. Revenue Growth is one of the key factors investors rely upon when making decisions of whether or not to invest in a spa. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements to encourage companies to provide prospective information.

so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those disclosed in the statement. A company can provide guidance to investors as to how much revenue and profits they expect to generate in the future. Any future Financial projection is inherently uncertain. A company may fail to achieve its guidance for a variety of legitimate reasons.

The Safe Harbor protects the company from being sued when this happens. Importantly, this: Safe Harbor protection only applies to companies after they go public. Thus, they do not apply to traditional IPOs because the IPO perspectus is before the company goes public. That's why you almost never see future Financial projections in IPO prospectuses for SPS.

On the other hand, the spa itself is already a publicly traded company before completing the business combination. They thus enjoy Safe Harbor protection and can make forward-looking projections with near impunity. According to a recent study by Harvard University Spack Revenue projections tend to be very optimistic with Revenue growth projected at three times industry averages, but only 35% of Spacks are able to achieve their projections. A separate study by The Wall Street Journal found that the average Spack underperformed its 2021 Revenue projections by 53% In today's video, We'll take a look at perhaps one of the most outrageous examples of overly optimistic Spack projections.

In 2020, the Hybrid Electric Drivetrain Company XL Fleet merged with a Spack at a roughly $1 billion valuation. In the prior year, they generated just $7 million of Revenue. They claimed that they had a low-risk path to Growing their revenue to 1.4 billion by 2024. Over the next few years, the company massively underperformed expectations.

In the first 9 months of 2022, they generated $16 million of Revenue. According to their Spa presentation, they should have generated more than $200 million in this period. In January of 2023, they sold the business to another company called Shift for an immaterial purchase price likely less than $100,000 Remember, this was a company valued at $1 billion just 2 years prior. In this video, we'll take a deep dive into the XL Fleet disaster and what this can tell us more broadly about Spaxs and investor psychology: XL Fleet produces electric drivetrains which can be retrofitted onto internal combustion engine vehicles to turn them into a hybrid electric vehicle.

they Target commercial Fleet Operators such as logistics companies. According to: XL Fleet the fuel savings from turning a commercial van into a hybrid can pay for the cost of the electric drivetrain in 3 years or less. The company was founded in 2009. By 2019, they had upgraded thousands of Vans to hybrid electric.

In 2019, they generated $7 million of Revenue and posted an operating loss of $13.5 million. In December of 2020, they merged with a spa raising $380 million at a pre-money valuation of $1 billion. At this point, XL Fleet was a tiny, unprofitable company. It would be almost impossible to justify a$1 billion valuation based on their current financials.

So they published a slide in their investor presentation called a lowrisk Path to dramatic growth. They projected that their revenue would surge to $1.4 billion by 2024. It's one thing to say that you expect your Revenue to increase massively over the next few years, but for the transaction to close EXL Fleet Needed to convince the spa investors that these projections were realistically achievable. To make this more believable, EXL Fleet Said that they have a more than $220 million sales Pipeline with existing customers.

This indicates that there is strong demand for their electric drivetrains to meet their lofty Revenue goals. all they have to do is ramp up their production. Given that a commercial Fleet operator can make back the cost of a hybrid conversion in just 3 years, it makes sense that demand is through the roof. Investors bought into the story, pushing the stock price up to a high of $30 in the weeks following the acquisition.

This is adjusted for a subsequent reverse stock split. The $30 share price represented an almost $4 billion valuation for a company that only did $7 million of of sales in the prior year. As an aside, the company eventually changed its name from XL Fleet to Spruce Power Holding. We'll get into how this came about shortly.

Everything seemed to be going well until March of 2021, when the famed short seller Carson block of Muddy Waters research published a short report accusing XL Fleet of misleading both its customers and investors. Muddy Waters spoke with former XL Fleet employees who said that the company greatly exaggerated the Improvement in miles per gallon that they could achieve after installing the electric drivetrain. For example, one of XL Fleet's customers was the Seattle Fire Department they retrofitted ambulances with electric drivetrains. According to a former employee, the heavy weight of the electric drivetrain more than offsets the fuel savings, so the miles per gallon actually decreases.

XEL Fleet Advertised to his customers that they could see a 25% increase in miles per gon. This was based on simulations using highly idealized conditions. A hybrid electric vehicle recharges its battery through regenerative braking. When the car breaks, the kinetic energy of the car is used to recharge the battery.

If you drive for long distances without braking, such as on a highway, the battery won't have any opportunities to recharge, so you'll just be burning gas the whole time. In fact, your miles per gallon may actually decrease because you have to carry the extra weight of the battery and electric drivetrain. XL Fleet was able to land many customers with overly optimistic promises about fuel savings, but the fuel savings rarely met those expectations. Because of this, most customers did not make any new orders after the initial order.

Of the 33 customers that they touted in their Spa presentation, 18 of them were inactive, meaning that they had not made any new orders in the past year. In addition to misleading its customers. XL Fleet Allegedly misled its investors as well. The $220 million of pipeline value did not represent signed customer orders.

It instead represented conversations with potential customers which may or may not result in an actual sale. According to a former employee. Sometimes he would talk to a potential customer and realize they had zero interest in making an order order, But regardless, his boss would tell him to go into their Salesforce software and input this as a potential opportunity. This is how they created the $220 million pipeline.

Shortly after the Muddy Waters short report was released, XL Fleet published a response, calling it grossly inaccurate. They refuted some of Muddy Water's claims about the alleged poor performance of their electric drivetrains. but importantly, they did not refute the core allegation that the sales pipeline was exaggerated. XL Fleet's subsequent financial performance more or less.

Vindicated Muddy Waters In 2021, they only generated $15.6 million based on their Spa presentation. They were supposed to do $75 million of Revenue in that year. In the first 9 months of 2022, they generated $16 million of Revenue almost $200 million less in their prior projections. All the while their operating losses were exploding by 2022.

It was clear that the original business of hybrid electric drivetrains was a complete failure and a path to profitability was all but impossible. The company's senior management conducted a strategic review of what to do next. While they had burned a lot of cash over the prior 2 years, they still had about $240 million left over from the SPC transaction. So in September of 2022, they acquired a solar company called Spruce Power and changed their name to Spruce Power.

Holdings Spruce Power Solar Business has nothing to do with XL Fleet's original business of electric Drivetrains. Shortly thereafter, they sold the Drivet Train business to a company called The Shift Group. The exact purchase price was not disclosed, but in XL regulatory filings they said it was an immaterial amount of money. This probably means that it was less than $100,000 They basically gave the business away for free.

The company is still trading on the New York Stock Exchange although they had to do a 1 for8 reverse stock split to keep their share price above $1 The new Spruce Power Solar business may or may not be successful going forward, but this has not changed the fact that the initial XL Fleet story that they sold to the spa investors was an epic fail. At the beginning of this video, we talked about Safe Harbor protections for forward-looking statements: XL Fleet cannot be sued for failing to meet its lofty revenue forecast, but they did more than just give a revenue forecast. They stated that they had a $220 million sales pipeline between the time that they went public in 2020 and exited the business in 2022. they generated less than $50 million of Revenue.

So clearly the pipeline was exaggerated in September of 2020. 3 The SEC charged Exel Fleet with misleading investors. Their investigation confirmed many of the allegations made in the Muddy Wat short report 2 years prior. They found that over 90% of the supposed sales pipeline consisted of speculative opportunities.

These opportunities included past or exiting customers who have not indicated any interest in buying more of XL Fleet's products, customers in California to whom XL Fleet could not legally sell certain of its products, and stale opportunities that had not been updated. Spruce Power settled with the SEC for $1 million. This allows them to finally Turn the page on the XL Fleet disaster and focus on their new solar business In many ways. EXL Fleet is a poster child for the excesses of the Spack.

Mania A small and unprofitable company made a glossy presentation with fake Revenue projections and this allowed them to Swindle hundreds of millions of dollars from naive investors. All right guys, that wraps it up for this video. What do you think about XL Fleet Was the $1 million settlement a worthy punishment for their crime? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.