When Hyzon Motors Inc. reported its fourth-quarter and full-year results late last month, CEO Craig Knight said “2021 was truly a transformational year” for the Honeoye Falls-based company. Hyzon’s shares had begun trading on the Nasdaq Global Select market, its worldwide team had grown to more than 200, and it had logged revenues for the first time.
“We see hydrogen as the solution to decarbonize the commercial transport industry and have positioned ourselves as the key to the hydrogen economy through our leading fuel cell technology,” Knight told analysts during a conference call.
Legal papers filed two days earlier, however, told a different story. An amended class-action complaint, the filing in the U.S. District Court for the Western District of New York repeated the allegations laid out in litigation brought last fall but added new information to bolster the claim that Hyzon had violated securities laws. The new material included the findings of a China-based investigative firm hired by the lead plaintiff that, the filing alleges, cast serious doubt on Hyzon’s reported sales from that market.
In truth, the filing contends, Hyzon is a “repackaging of a flailing Chinese hydrogen-fuel-cell business covered in a glittering new wrapper of misleading deal announcements, illusory customer contracts, and fantastical financial projections.”
The lead plaintiff was appointed by the court when it consolidated three securities class-action suits. The litigation has been brought on behalf of investors who purchased or otherwise acquired Hyzon shares from Feb. 9, 2021, to Jan. 12, 2022. In addition, several other related shareholder derivative lawsuits have been filed against Hyzon.
What may prove decisive in these cases—and for Hyzon itself—is another development: a Securities and Exchange Commission inquiry into allegations against the company.
A vision realized
A global supplier of zero-emissions commercial vehicles fueled by hydrogen fuel cells, Hyzon is “the realization of the vision that our Chairman George Gu and I had almost 20 years ago,” Knight told analysts in February 2021, following the announcement that the firm would merge with Decarbonization Plus Acquisition Corp., a “blank check” public company that traded under the symbol DCRB. The merger agreement had an expected $2.1 billion enterprise value, the companies said. Hyzon said it expected revenues to jump from an estimated $37 million in 2021 to nearly $3.3 billion in 2025, adding that the 2021 forecast was “100 percent covered by contracts and (memorandums of understanding).”
Hyzon at the time was barely a year old. It had been launched in 2020 when Horizon Fuel Cell Technologies spun off its Heavy Vehicle Business Unit. That year, Hyzon opened its headquarters in Honeoye Falls at the former General Motors facility that closed in 2012.
In February 2021, it also announced plans for a nearly $8 million expansion there, with assistance from Empire State Development, Monroe County and Greater Rochester Enterprise.
Hyzon shares began trading under the ticker symbol HYZN on July 19, three days after completion of its merger with DCRB. After expenses, the transaction pumped $512.9 million into Hyzon, which said it planned to use the proceeds to fund operations and accelerate its growth.
Less than three months later, Hyzon was rocked by a Sept. 28 report by Blue Orca Capital, a self-described “activist investment firm.” As the Rochester Beacon reported, Blue Orca claimed 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.”
The shareholder class-action litigation, based largely on the Blue Orca report, followed in short order. It accused Hyzon and current and former top executives of “misrepresenting the nature of (Hyzon’s) ‘customer’ contracts and severely embellish(ing) its ‘deals’ and ‘partnerships’ with customers.” Early October brought another scathing report, from Iceberg Research.
The day before the Iceberg Research report appeared, Hyzon hit back at Blue Orca, maintaining that its “self-serving short seller report (was) 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: “We stand by our public disclosures, and we expect Hyzon’s performance will speak for itself.”
Operating in the red
Its recently filed 2021 10-K provides new detail on Hyzon’s performance. For the year ended Dec. 31, it reported total revenue of $6 million and a net loss of $13.8 million, compared with a loss of $14.3 million from Jan. 21, 2020 (the firm’s inception) through Dec. 31, 2020. However, the company’s loss from operations last year was much larger—$101.4 million—as was net cash used in operating activities, which totaled $95.2 million. (The difference between the operating loss and net loss is due in large part to an $84.6 million “adjustment in fair value of earnout liability,” relating to shares held by Hyzon stockholders before the merger with DCRB.)
Executive compensation also increased sharply last year. Gu received total compensation of $6,357,709 versus $429,519 in 2020, and Knight’s compensation jumped to $4,640,278 from $414,415 the year before.
As of Dec. 31, Hyzon had $445.1 million in cash.
In the March 23 conference call with analysts, Knight said Hyzon last year delivered 87 fuel cell electric trucks to customers in Asia and Europe with a total contract value of $19 million. The total deliveries topped its February 2021 forecast of 85 vehicles, though its revenues fell short of expectations due, as the company noted in a January press release, to “lower average selling price per vehicle due to product mix and multi-year revenue recognition for the majority of sales, which will result in materially lower than forecast revenues and margins.”
Most of the vehicles were sold to Shanghai Hydrogen HongYun Automotive Co. Ltd., in a deal announced last September. Chief Financial Officer Mark Gordon said during the March 23 conference call that “we expect another large portion of cash for the vehicles delivered in China during 2021 to be collected in 2022. Once this customer has a longer operating history, we anticipate booking more revenues up front.”
Blue Orca pulled no punches in its description of this customer, writing that Chinese government records show “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.” Added Blue Orca: “Such evidence suggests that Hyzon announced a major order with a fake looking Chinese customer just to pump its stock price.”
Much of the new material in the amended class-action complaint focuses on research into Shanghai HongYun by a firm in China owned and operated by “Investigator C-1,” who observed “significant abnormalities” that support Blue Orca and Iceberg Research’s conclusions. The filing states that while “Shanghai HongYun’s purchase of 62 vehicles to date, if genuine, would generate at least $15 million in revenue for Hyzon (and) the MoU for 500 vehicles would similarly generate as much as $125 million,” the Chinese customer in fact has “no paid-in capital.”
The amended complaint also alleges that Shanghai HongYun has “no real operations,” stating that “Investigator C-1 found that Shanghai HongYun’s entire building—which primarily houses a community center—has been closed for renovations since as early as August 10, 2021—well before the company was founded.”
The investigator found that Shanghai HongYun has one primary shareholder, Kou Jian, who serves as CEO. And as of February, no employees working for Shanghai HongYun had been identified.
Investigator C-1 further confirmed that “Shanghai HongYun had no direct phone line, no website, and no WeChat account, suggesting that it had little to no ability to build the customer base necessary in China to purchase for itself, or as a channel partner, up to 100 (vehicles) from Hyzon in 2021, or make upfront or installment payments for any vehicles,” the filing states.
To date, Hyzon has not filed a response to the amended class-action complaint.
Hyzon has vowed to “vigorously defend the company and its shareholders.” The company also says it is cooperating with the SEC, which has subpoenaed information and documents including those related to the allegations made in Blue Orca report.
In its 10-K, Hyzon notes that “because of these events, certain of the Company’s potential suppliers and partners indicated that they were suspending negotiations with us concerning supplying us with key components necessary to produce our vehicles. … The negative publicity stemming from (the Blue Orca) article has adversely affected our brand and reputation as well as our stock price,” making it more difficult for the company to attract and retain employees, partners and customers.
Like other manufacturers during the COVID-19 pandemic, Hyzon also has faced supply-chain difficulties, which it thinks will persist through 2022. “Lead times on things that are normally a five- or six-week delivery schedule, those lead times went out to unknown numbers of months and typically nine months plus,” Knight told analysts on March 23.
Overall, though, Hyzon’s CEO was decidedly upbeat on the company’s prospects. Knight said he was “particularly excited by the recent commissioning work occurring on Hyzon’s Membrane Electrode Assembly production line, and we look forward to producing the first made-in-the-USA Hyzon fuel cell system before the end of 2022.” He also pointed to “increasing demand as evident in our growing backlog, which now stands at $287 million, an increase of well over 200 percent since our last backlog update was provided, as of July 2021.” Hyzon also expects its first gas-to-hydrogen and waste-to-hydrogen hubs—in partnership with Raven SR—to be online by the end of the year.
On April 11, Hyzon said Hylane GmbH, a wholly owned subsidiary of German motor insurer DEVK Versicherung, had purchased 18 vehicles, with deliveries expected to begin in late 2022. Nine days later, Hyzon Motors Australia unveiled plans to build a green hydrogen refueling depot at its regional headquarters in Melbourne, Australia, in partnership with the RACV, hydrogen specialists ENGV, and others. The company expects to have the depot online in late 2023.
Meanwhile, Hyzon hired Samuel Chong as chief financial officer, replacing Gordon, who will serve as senior adviser for the next 12 months. Chong previously was treasurer and head of investor relations for Fluence Energy Inc. and treasurer of Gogo Inc. The move was seen by some on Wall Street as a step to strengthen Hyzon’s financial reporting.
Investors have yet to return a clear verdict on Hyzon. The day Blue Orca issued its report last September, Hyzon’s share price plunged 28 percent, to $6.63 from $9.21 the day before, then rebounded to over $8 in November. On Friday, it closed at $4.33 a share.
As Hyzon’s 10-K filing notes: “Negative publicity has adversely affected our brand and reputation and our stock price. … If we fail to successfully rehabilitate our brand … or if events similar to the negative publicity occur in the future, our brand and reputation would be further damaged and our business may suffer.”