Hyzon Motors (HYZN)- Total Disaster – Sell

Last year, shares of emerging fuel cell electric vehicle “FCEV” producer Hyzon Motors (NASDAQ:HYZN) or “Hyzon” were hit hard by a shortseller report from Blue Orca Capital which essentially asserted the company being a sham.

Fellow contributor Stephen Tobin recently provided a short overview of the key allegations, readers looking for more detail should consider starting with his article.

While the company was quick to refute the report, the allegations not only resulted in multiple shareholder lawsuits and a SEC subpoena but also impacted the company’s business as stated in its 2021 annual report on form 10-K:

The negative publicity stemming from this article has adversely affected our brand and reputation as well as our stock price which makes it more difficult for us to attract and retain employees, partners and customers, reduces confidence in our products and services, harms investor confidence and the market price of our securities, invites legislative and regulatory scrutiny, and has resulted in litigation and governmental investigations. As a result, customers, potential customers, partners and potential partners have failed to award us additional business or cancelled or sought to cancel existing contracts or otherwise, directed or may direct future business to our competitors, and may in the future take similar actions, and investors may invest in our competitors instead of us.

After Thursday’s market close, Hyzon filed an 8-K which appears to lend plenty of credibility to last year’s shortseller allegations (emphasis added by author):

In connection with the preparation of the Company’s financial results for the period ended June 30, 2022, the Company’s Board of Directors appointed a committee of independent board members to investigate, with the assistance of independent outside counsel and other advisors, certain issues regarding revenue recognition timing and internal controls and procedures, primarily pertaining to its China operations, that were brought to the attention of the Board by Company management. The revenue recognition timing issues being investigated include the recognition of revenue for the year ended December 31, 2021. Due to the ongoing investigation, the Company will be unable to file its Form 10-Q for the quarter ended June 30, 2022 by August 15, 2022, the due date for filing, and does not have an anticipated filing date at this time. The Company will file a Notification of Late Filing on Form 12b-25 (the “Notification”) on or before August 16, 2022.

(…)

The Audit Committee of the Board of Directors of the Company, based on the recommendation of management, determined that the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and Quarterly Report on Form 10-Q for the period ended March 31, 2022 (the “Non-Reliance Periods”) should no longer be relied upon as a result of the information contained in the above Item 2.02 of this Current Report on Form 8-K.

The Company’s management and the Audit Committee have discussed the matters disclosed in this Current Report on Form 8-K with KPMG LLP, the Company’s independent registered public accounting firm.

(…)

The Company has determined to withdraw all financial and operational guidance it has previously issued for all periods, including for the year ended December 31, 2022 and subsequent years.

Adding insult to injury, Hyzon also identified “operational inefficiencies” at Hyzon Motors Europe B.V., the company’s European joint venture with Holthausen, which are expected to have a “material adverse effect on its ability to produce and sell vehicles“.

In short, there appear to be serious issues with both the domestic China operations and the company’s much-touted European business.

As a result of the devastating revelations, the Board of Directors has retained third party consultants to assist with “reassessing the company’s global strategies and operations“.

At this point, the company firmly looks like the next busted SPAC deal but with an estimated remaining cash balance of at least $350 million and no debt, Hyzon won’t be required to raise additional capital or even file for bankruptcy anytime soon.

Assuming annual cash usage of $125 million, the company would have runway well into 2025.

That said, with management and third party advisors apparently back to the drawing board, there’s not much of an investment thesis left at this point.

Bottom Line

Kudos to Blue Orca Capital and Iceberg Research for their timely exposure of what I believe is just another dubious SPAC deal.

With both previously reported financials and Hyzon’s outlined strategy apparently being null and void, it’s difficult to assign any value to the company besides its (shrinking) cash balances.

Based on 247.8 million outstanding shares and assuming an unrestricted cash balance of $300 million at the end of Q4, my year-end share price target calculates to $1.20.

Quite frankly, given the company’s material cash usage, one might actually argue that Hyzon should trade at a sizeable discount to its ever decreasing cash balances.

In light of Thursday’s disturbing disclosures and with the company’s future increasingly uncertain, investors should sell existing positions or even consider outright shorting the shares.

At the time of this writing, Interactive Brokers has plenty of available shares for borrowing at an affordable rate of below 10% p.a.

As always, don’t bet the farm on short positions and adequately manage your risk.