A hazard in the road for Hyzon Motors

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Less than three months after its shares began trading on the Nasdaq Global Select market, Hyzon Motors has been hit with a class action lawsuit claiming securities law violations.

The suit, filed in U.S. District Court for the Western District of New York, claims that Hyzon and current and former senior officials at the company knowingly made untrue and misleading statements with the intent to deceive investors, causing Hyzon stock to be artificially inflated. The complaint, with a sole named plaintiff, was filed on behalf of all investors who purchased publicly traded shares of Hyzon this year between Feb. 9 and Sept. 27.

Brought against Hyzon by the Rosen Law Firm P.A. of New York City, the suit also names as defendants Craig Knight, Hyzon CEO and co-founder; Erik Anderson, former president and CEO; Peter Haskopoulos, former chief financial officer; and Mark Gordon, current CFO. The complaint asks the court to order the defendants to pay damages in an amount to be determined at trial.

The claims made in the suit are drawn from a scathing Sept. 28 report by Blue Orca Capital, a self-described “activist investment firm named for the legendary killer whales found off the coast of British Columbia.” Blue Orca contends Hyzon’s “supposed major customers are a fake-looking Chinese shell company incorporated three days before the deal announcement and a tiny New Zealand startup which told us they are not really a customer.”

Blue Orca also claims that Hyzon is nothing more than a “repackaging” of a “flailing” 17-year-old hydrogen fuel cell business that recently delisted from the Chinese over-the-counter market and which has “taken advantage of the general suspension of disbelief in financial markets to enrich insiders by repackaging an old technology in a fig leaf of misleading deal announcements and illusory customer contracts.”

In a strongly worded Oct. 5 response, Hyzon maintained that “the self-serving short seller report published by Blue Orca last week is inaccurate and misleading, and we believe it was intended solely to generate profits on Blue Orca’s short position at the expense of Hyzon’s long-term shareholders.”

The company added: “Hyzon has no record of this short seller ever meeting with Hyzon management, requesting any information or clarification from Hyzon, or otherwise seeking to verify any of its claims, which would have been expected given the inflammatory and grossly inaccurate statements made in the report. We stand by our public disclosures, and we expect Hyzon’s performance will speak for itself.”

The day Blue Orca issued its report, Hyzon stock closed at $6.63 a share, down from $9.21 the today before—a 28 percent drop. On Monday, it closed at $5.78.

‘A new chapter’

A Honeoye Falls-based global supplier of zero-emissions commercial vehicles fueled by hydrogen fuel cells, Hyzon made its market debut under the ticker symbol HYZN on July 19, three days after completion of its merger with Decarbonization Plus Acquisition Corp., a “blank check” public company. 

With the transaction, Hyzon received more than $550 million in proceeds—money the company said it planned to use to fund operations and accelerate its growth.

“It’s the beginning of a new chapter in the history of Hyzon,” Knight said, “as we accelerate the transition to hydrogen commercial transport worldwide, and advance our commitment to reducing carbon emissions in a sector that is one of the largest contributors to climate change.”

The merger agreement—with an expected $2.1 billion enterprise value—was announced by Hyzon and DCRB in early February.

In a conference call following the merger announcement, Knight described Hyzon as “the realization of the vision that our Chairman George Gu and I had almost 20 years ago. We’ve worked together pursuing the commercialization of hydrogen fuel cell technologies for many years.”

Craig Knight, CEO of Hyzon

Hyzon was launched when Horizon Fuel Cell Technologies spun off its Heavy Vehicle Business Unit in 2020. Last year, Hyzon established its headquarters in Honeoye Falls at the former General Motors facility that closed in 2012. 

It announced plans in February for a nearly $8 million expansion there, a project assisted by Empire State Development, Monroe County and Greater Rochester Enterprise. 

Hyzon has proprietary hydrogen fuel cell technologies that target commercial heavy-duty vehicle applications. According to Knight, the fuel cell electric vehicle market is “positioned to grow rapidly,” with research predicting it will expand at a 34 percent compound annual rate through 2030.”

The company’s potential is “huge,” Chief Financial Officer Mark Gordon said during the conference call.

Hyzon said it expects its revenues to grow from an estimated $37 million in 2021 to nearly $3.3 billion in 2025. 

The 2021 forecast, Gordon said, is “100 percent covered by contracts and (memorandums of understanding), while our 2022 forecast is almost 50 percent contract and MoU covered.” Thirty percent of 2025 revenue is accounted for under current MoUs.

Blue Orca’s report and the class action suit paint a different picture. Hyzon’s revenue forecasts and descriptions of its customer base are portrayed as attempts by a zero-revenue venture to hoodwink investors. The suit accuses the defendants of “misrepresenting the nature of (Hyzon’s) ‘customer’ contracts and severely embellish(ing) its ‘deals’ and ‘partnerships’ with customers.” It also contends that Hyzon “could not deliver its announced vehicles in 2021, on its stated timeline.”

Points of contention 

On Sept. 9, Hyzon issued a release stating it had secured a deal for 500 trucks—including 100 orders in 2021—with Shanghai Hydrogen HongYun Automotive Co. Ltd. According to Blue Orca, Chinese government records show that “Shanghai HongYun was established only three days before Hyzon announced the deal and has no paid in capital. It has no WeChat account or website. The supposedly major customer appears to be just an empty shell entity. … Such evidence suggests that Hyzon announced a major order with a fake looking Chinese customer just to pump its stock price.”

In its response, Hyzon says Shanghai HongYun was launched in the wake of the Shanghai government’s Aug. 26 announcement that Shanghai would be among the first participants in China’s national hydrogen fuel cell vehicle pilot program. Hyzon maintains its Sept. 9 release made clear that it had a non-binding memorandum of understanding for the truck orders and that Shanghai HongYun was not yet a Hyzon customer. It added: “Hyzon expects to receive binding purchase orders from Shanghai HongYun for these vehicles.”

Also targeted in the suit are Hyzon’s statements about its agreement with Hiringa Energy, a New Zealand hydrogen refueling infrastructure provider. According to Blue Orca’s report, Hyzon said Hiringa signed an agreement to order 1,500 trucks by 2026, “purportedly making it Hyzon’s next largest customer.” But when contacted by Blue Orca, a Hiringa executive said the New Zealand company “was not actually a customer, but a ‘channel partner’ assisting Hyzon in marketing vehicles to real end customers in New Zealand. Hiringa is a small startup operating out of a house in New Zealand which wants to raise money to build hydrogen fuel stations. … According to Hyzon, Hiringa will account for 24% of the Company’s projected deliveries in 2021. Yet Hiringa stated point blank that no deliveries would be taken in 2021, and the first validation trucks would be delivered for testing in March or April 2022, at the earliest.”

In response, Hyzon said it has “never suggested that Hiringa is an end user of hydrogen trucks. … (T)he partnership between the companies is intended to accelerate the decarbonization of heavy transport in New Zealand” and already has resulted in an agreement for 20 trucks to be delivered to one of that country’s largest truck and trailer leasing and rental companies.

Hyzon also disputes Blue Orca’s description of the Honeoye Falls-based business as “a repackaging of a flailing Chinese parent which delisted from the Chinese OTC market at an enterprise value of only $190 million, and which for 17 years had failed to gain meaningful traction with its fuel cell technology.”

These claims are “misinformed and misleading,” Hyzon asserts. Its response identifies Horizon Fuel Cell Technologies Pte. Ltd. as the “ultimate majority shareholder of Hyzon,” adding that the entity identified by Blue Orca as Hyzon’s corporate parent, Jiangsu Horizon New Energy, is a subsidiary of Horizon. “Given that Jiangsu Horizon’s shares were not publicly traded, the short seller report’s speculation as to Jiangsu Horizon’s valuation is irrelevant. (And) although not relevant to Hyzon’s future business, (Blue Orca’s) allegations regarding Jiangsu Horizon’s fuel cell sales are also grossly inaccurate.”

Hyzon believes the core fuel cell powertrain technologies it is developing—which include fuel cell, hydrogen storage, battery, e-axle, and integrated controllers to electrify commercial vehicles—justify its projected margins. The company plans to manufacture components in its facilities in Rochester and Bolingbrook, Ill., but is sourcing hydrogen fuel cells and fuel cell stacks and systems from Jiangsu Horizon, and may continue to do so after Hyzon’s manufacturing plants are operational, believing this “flexible sourcing is a strategic asset relative to other fuel cell vehicle manufacturers.”

Blue Orca describes Hyzon’s projected gross margins of 30 percent or more as “grossly inflated,” saying an unnamed former Hyzon executive told it that Hyzon’s business model would yield no more than 5 to 10 percent gross margins.

“To put it in perspective, a 32% gross margin is nearly twice the industry average for vehicle manufacturers,” the Blue Orca report states. “The leading (electric vehicle) brand, Tesla, reports a gross margin of 22%.”

Hyzon’s response did not specifically address other statements from the unnamed former executive that are contained in both the Blue Orca report and the lawsuit. Among those statements, the former executive is quoted as saying: “A lot of the stuff that they are saying is open to interpretation how you read that. Saying that they’ve got all of these orders and things. But a lot of them are all MoUs which as you know in the business mean basically nothing.

“They were going out, kind of selling it as really what it wasn’t at the time. … It’s kind of a lot of hype, and getting money through that hype from people who don’t really understand. … You know it’s great to show all these pictures of renderings of trucks and orders that you may have, but these orders, most of them… 90% of them are MoUs so there’s no binding contract, and if you look from when they’ve announced those (contracts), still none of those have been built or delivered.”

Hyzon concluded its response by saying that “the misleading and inaccurate claims in this short seller report are a harmful distraction for Hyzon and the global family of employees, customers, suppliers and investors, but not one that will deter Hyzon from fulfilling its commitments to these stakeholders.”

The company added that while it does not plan to comment further at this time, “Hyzon does intend to vigorously defend the company and its shareholders.”

Paul Ericson is Rochester Beacon executive editor.

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