Tuesday, November 28, 2023

Nikola: the clues in Trevor Milton’s past that investors missed or ignored

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The operations boss of Worthington Industries was talking up the US steel processor’s new stake in a little-known start-up company. Mark Russell told investors on the 2014 earnings call that dHybrid Systems was “a leading manufacturer” of compressed natural gas fuel systems with “significant growth potential”.

It also, he stressed, had “very entrepreneurial leadership”.

It was a reference to Trevor Milton, the serial founder who months later would quit to start Nikola. In the past 15 months, the electric truck group has struck a $250m investment and truck deal with Iveco owner CNH Industrial, secured a public listing in June through a reverse takeover, and three months ago announced a $2bn partnership with General Motors.

Mr Milton — described by some as an evangelical salesman — was selling the idea of a future where roads teemed with hydrogen powered trucks, each one leased by Nikola. A future where the company would claw back $1m for each $300,000 vehicle it produced via a subscription service and refuelling network created with a yet-to-be-named energy partner.

Trevor Milton presents Nikola’s new full-electric and hydrogen fuel-cell battery trucks in Turin © Massimo Pinca/Reuters

The GM deal was, it seemed, the latest stamp of approval from the very industry he sought to upend. But just two days after announcing the partnership, Nikola was branded “an intricate fraud” in a short seller’s report that detailed a litany of business failings throughout Mr Milton’s career. Nikola, the report claimed, had overstated its technology, passing off purchased components as its own and, once, even rolled a dummy truck down a hill for a video showing its product “in motion”.

The company vehemently disputed the report and its fraud allegation, but later admitted that some of the criticisms of Nikola were true.

Most damaging, perhaps, was the section on the turbulent history of businesses run by Mr Milton, which included repeated accusations of overstating technology and lying to customers. In several cases, business relationships soured and ended in lawsuits.

In the days that followed the report, with Nikola’s shares in freefall and personal allegations swirling online, Mr Milton resigned as executive chairman. He remains the company’s largest shareholder. Mr Milton, who has denied any wrongdoing, declined to comment for this article.

This account of his career is drawn from more than a dozen interviews with past employees, customers, advisers and investors in Nikola and some of his former businesses. It is a tale of company failures and lawsuits that beg the question of why investors did not look more closely at Mr Milton’s business history.

Nikola chairman Steve Girsky, a former GM executive, says ‘an army’ of advisers conducted due diligence on the company before it went public © Angel Navarrete/Bloomberg

Nikola’s backers, including its chairman and former GM executive Steve Girsky, insist that “an army” of advisers conducted due diligence on the company before it went public. Now it is the turn of the US Department of Justice and the Securities and Exchange Commission, to pore over Nikola after they launched separate investigations into the allegations swirling around the company.

The repercussions are being widely felt. The incident has raised further doubts over the extent of due diligence being carried out on companies aiming to go public via so-called special purpose acquisition companies, rather than the more rigorous route of an initial public offering. “Nikola could have done with a little more disclosure,” says one banker who has worked on multiple Spac deals. “Someone missed the buck on that one.”

Mr Milton’s exuberance was a “yellow flag” for some investors, says one who did put money into Nikola before the listing.

“It’s clear he was a difficulty to manage going forward,” he adds. Despite the reservations, this investor says his company conducted no due diligence on either Mr Milton or his past business ventures. Instead, it weighed the passion of Mr Milton with the level-headedness of Mr Russell, who had joined Nikola in 2019, and pushed ahead.

Mark Russell, CEO of Nikola, says it was always the plan to take the company public © Nikola

Retrofitting spree

Mr Milton, 38, spent much of his youth in southern Utah. According to an interview he gave to trade publication Trucks.com in 2019, his father was a manager at the Union Pacific railroad, and his mother died of cancer when he was a teenager.

He dropped out of Utah Valley State College after one semester, then moved in 2003 to the small Utah city of St George. His early ventures included a failed home security business and an ecommerce website called Upillar “that competed with Amazon”, according to a now-deleted line on his LinkedIn page.

A 2018 patent infringement lawsuit filed by Nikola claims that: “from childhood, Trevor Milton wanted to revolutionise the trucking industry”. He entered the industry in 2009, when he began looking for investors to fund a new business, dHybrid Inc. It would build hybrid diesel and natural gas systems to retrofit trucks built to run on diesel. A former dHybrid Inc employee says Mr Milton tapped more than 40 people to raise at least $2m, the majority of them social acquaintances or connections through the Mormon church rather than experienced investors.

The company landed a $16m contract in 2010 with Arizona trucking company Swift Transportation, to install hybrid fuel systems on 800 trucks in its fleet, after first demonstrating that it worked on 10 trucks, according to records from an Arizona state court.

DHybrid Inc also sold fuel systems to Florida rubbish collector Waste Pro and Pennsylvania trucking company Birkmire Transportation Solutions. Owner Tim Birkmire Sr says the system was less durable than the company had wanted, but notes that Mr Milton “did his best to make it work for us”.

DHybrid Inc won a $16m contract in 2010 with Arizona trucking company Swift Transportation to install hybrid fuel systems on 800 trucks. Swift sued two years later © Andreistanescu/Dreamstime

Workers at dHybrid Inc criss-crossed the US to make good on Mr Milton’s promises to customers. At other times, employees fixed the fuel systems when they malfunctioned. The natural gas tanks were mounted on brackets bolted to the trucks, and the bolts were prone to shearing off, taking the tank with them, according to three people familiar with the matter.

“I spent two years of my life . . . fixing the fuel systems,” a second former employee says. “They were under-engineered.”

Meanwhile, Mr Milton told investors it cost more than $100,000 a month to run the company, says the first former employee. “On top of that, Trevor was a spender. He would buy $10,000 four-wheelers in cash like he was buying a pack of gum.” Another former dHybrid Inc employee adds: “Most people building a business are very frugal . . . He’s the opposite.”

Mr Milton attempted to sell dHybrid in May 2012 for $3m, but the buyer, the Salt Lake City-based Sustainable Power Group, backed out of the deal and sued a month later, saying the company had misrepresented its technological prowess and progress towards certification with the US Environmental Protection Agency. The lawsuit was dismissed without prejudice six months later leaving the claimants free to refile in the future.

Swift sued a month later. The trucking company said dHybrid had installed just five systems, which “did not in fact possess the technical efficiencies or capabilities as represented by dHybrid”. The lawsuit also claimed that the company used portions of a $2m advance payment “for its and/or its officers’ or directors’ personal use”. The Swift case was dismissed with prejudice in 2015.

Nikola Corp headquarters in Phoenix, Arizona © Ash Ponders/Bloomberg

As dHybrid Inc became embroiled in litigation, Mr Milton’s father, William, formed a new company in October 2012 called dHybrid Systems, which was legally distinct from dHybrid Inc and owned solely by William Milton and his son. The new company used the same building, tools, inventory and intellectual property as dHybrid Inc, a former investor says.

A few months after meeting Trevor Milton, Mr Russell shepherded Worthington’s 2014 purchase of an 80 per cent stake in dHybrid Systems — by then one of the oil supplier’s biggest customers — for $15.9m. Over time, Worthington would end up paying $1.5m in warranty costs and eventually write down the value of the investment by $2.3m before finally winding down the business in May 2019, according to SEC filings.

According to the first former employee — on the payroll when the initial $2m investment for dHybrid Inc was raised — many of the original investors lost their money on the deal. But there appears to be no record of any subsequent legal action seeking compensation.

Nikola  annotated share price chart

Mr Russell, now Nikola’s chief executive, told the Financial Times in October that the write-off in dHybrid Systems was because the price gap between diesel and natural gas had “collapsed” and “taken the wind out of the sails of the market”.

Asked if the state of the business Worthington purchased was exactly as he expected, he said, “Trevor built that company from scratch extremely rapidly . . . and took significant market share very quickly. We understood exactly what we were buying.”

By the time of the writedown, Mr Milton had already left the company. Only months after the 2014 purchase, he walked into Mr Russell’s office, and pronounced that he was going to build the “truck of the future” in a new venture he would later call Nikola.

“If you’re smart you’ll back me, but either way I quit,” Mr Russell recalled Mr Milton saying.

Jeff Ubben, the founder of activist hedge fund ValueAct, was an early investor in Nikola

Route to a resignation

Some investors in Nikola say they overlooked Mr Milton’s brashness because of the other executives backing the company — including Jeff Ubben, the founder of activist hedge fund ValueAct and Mr Girsky, a respected automotive executive. Mr Ubben vociferously defended Nikola and Mr Milton in the wake of the short-seller report, though since the founder’s departure he has remained largely silent on the issue.

Ultimately, what felled Mr Milton was not the collapsing share price, nor the catalogue of legal fallouts aired in the short selling report, or even the DoJ investigation into the business. Instead it was a series of personal allegations, circulating online in the days following the report, that led him to offer his resignation, according to three people.

David Bateman, chief executive of software group Entrata and an acquaintance of Mr Milton from Utah, posted screenshots on Twitter in September — which are still on the site — allegedly showing Mr Milton pressuring women to sleep with other men in exchange for money.

A lawsuit filed by Mr Milton against Mr Bateman in October says the messages were sent “prior to his marriage” and that they paint Mr Milton in “a misleading and unflattering manner”. The suit requests “compensatory and punitive damages” for Mr Milton.

These allegations came perilously close to breaking into the public sphere just as Nikola prepared to become a public company. In April, a friend of Mr Milton’s, Jonny Robb, threatened to publish the same screenshots on his Instagram page. According to Mr Milton’s October lawsuit against Mr Bateman, Mr Robb asked the Nikola founder for $500,000 to prevent him from publishing the “damaging information”.

The pair agreed to meet — and when they did, Mr Robb was arrested, and charged with extortion. Shortly after his release, Mr Robb, who had been suffering from mental health issues, according to family and friends, committed suicide. A month after his death — with the full nature of the allegations still not public — Nikola listed through a reverse merger with VectoIQ, cementing Mr Milton’s status as a paper billionaire.

The publicly available lawsuit states that by posting the messages online, Mr Bateman “falsely portrayed Trevor Milton to the public . . . as some type of serial sex offender and even implies he was somehow partly responsible for the suicide death of one of Bateman’s friends.”

Mr Bateman, who did not respond to several FT requests for comment, told CNBC that the lawsuit is “not going to intimidate me”.

Mr Russell declined to comment on the personal allegations surrounding Mr Milton, saying only that his decision to resign was the correct one.

Nikola’s ventures: (clockwise from top left) computer-aided designs for the Nikola Two, the now scrapped Badger, the Nikola Tre and a design for a filling station © Company

Nikola’s projects are still at an early stage. Its first commercial trucks, made by Iveco, will not enter production until late 2021. It had hoped to announce a hydrogen station partner before the end of 2020 but now says it might not happen until next year. And the GM deal, which was supposed to close at the end of September, was torn up, and replaced on November 30 by a supply agreement for the carmaker to sell its hydrogen system to the start-up.

Investors, particularly those who piled in after that deal was announced in September, have been left to ponder their decision to back the company. Shares that once valued Nikola at $30bn — above Ford — have more than halved since September 9.

That Nikola came so close to landing a transformational deal with the world’s fourth largest carmaker despite Mr Milton’s record is, in the words of the second former dHybrid Inc employee, “hilarious”. Nikola’s woes and the allegations of over-egged technology are, he adds: “a repeat of history from three companies ago”.


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