💥Taking Out the EV Garbage💥

Hyzon Motors Inc. sucks. Wheel Pros gets its private sales done.

⏩One to Watch: Hyzon Motors Inc. ($HYZN)⏩

Source: Getty Images

On June 24, 2024, Hyzon Motors Inc. ($HYZN)(“Hyzon” or the “company”), a Riverstone Holdings’ SPAC from ‘21 that wanted to “lead the decarbonization of commercial transportation,” announced a “realignment of strategic priorities.” The NY-based company, with $50mm of cash on its books after raising over half a billion through the SPAC, said it would focus solely on delivering fuel-cell powered vehicles to its “core” North American markets, particularly the garbage industry.

The garbage industry.

How appropriate. 

Investors have been dealing with the stench around this name for quite awhile: there’s been short attacks, SEC investigations, earnings restatements, C-suite turmoil — all contributors to a staggering 99% share price collapse. Query how investors felt after learning that the company hired PJT Partners Inc. ($PJT)(“PJT”) to raise capital or pursue other alternatives (including a sale or divestiture). Hyzon said “…it will continue to focus on cost reduction efforts and managing liquidity, including a reduction in work force or other strategic transactions and/or measures.” Cue the performance improvement team (and warm-up the restructuring advisors)! 

By the way, we were just kidding when we said “query how investors felt,” because we know damn well how they feel. Here is the company’s stock performance after the June 24 announcement: 

Source: Google. As of 9/24. It’s only gotten worse since then. As of 10/8, it’s at $2.20/share.

An ~87% drop in exactly three months! Garbage indeed, 💩. Clearly PJT had no time to waste (😉).

In early July, Hyzon announced the halt of operations in the Netherlands and Australia, for which it expected charges of $17mm ($7mm of that cash) in the second and third quarters, an amount adjusted to $21mm ($4mm cash) by August 16, 2024, when Hyzon reported Q2 earnings. The company realized revenues of $300k for the quarter, compared to zero in the prior-year period. Improvement (🖕)! The press release talked up customer trials with a garbage hauler in San Francisco, and cheered its delivery of a single truck — yes, a single truck — to Performance Food Group. CFO Stephen Weiland praised cost-cutting efforts: R&D expenses of $9.8mm, SG&A of $25.5mm and net cash burn of $27.5mm were all “all at or below the low-end of our guidance ranges.” Average monthly cash burn during the quarter was $9.5mm. The company hopes to get that to an average of $6.5mm by year-end. 

It’s hard times for Hyzon bulls. Fuel cells may well power the auto fleets of the future and perhaps Hyzon will become a leading supplier of the technology. History suggests, however, that they may run out of capital first. 

Hyzon was a ‘20 spinoff from Singapore’s Horizon Fuel Cell Technologies PTE Ltd. (“HFCT”); it set up shop in a former GM research facility in Honoeye Falls, New York. The company “…has European investors, 17 years of experience making a million fuel cells and working arrangements with two major manufacturers to retrofit their trucks,” FreightWaves wrote in a 2020 profile. Then-CEO Craig Knight talked about strategy: a focus on fuel cells for heavy trucks and buses. Knight had big dreams: in ‘20, there were 400 Hyzon fuel cell-powered buses and trucks on the road. The company planned to deliver as many as 5k through ‘23. “By 2025, Hyzon expects to turn out more than 40,000 fuel cell vehicles annually.” 

There was the little matter of paying for this, but fortunately the American genius for financial innovation was there to support the eager entrepreneurs: 

Source: Freightwaves: Singapore spinoff Hyzon Motors makes US fuel cell trucking play, 11/24/20.

It being the swash-buckling money-frenzied times that were the ‘20-’21 SPAC mania, Hyzon could afford to be picky. The “winner” was Decarbonization Plus Acquisition Corporation (“DPAC”). A blank-check entity sponsored by an affiliate of Riverstone Holdings, DPAC wanted “…to build a company whose principal effort is developing and advancing a platform that decarbonizes the most carbon-intensive sectors.” Hyzon dreamed of a carbon-free commercial vehicle sector: “Zero Emissions with Zero Compromise.” It must have been love at first sight. They announced the engagement in February ‘21. The combination was completed on July 16, 2021. 

Hyzon’s 10K for ‘21, filed on March 30, 2022, is giddy as it describes Hyzon at the center of a carbon-free future. All the strategic partnerships! A collaboration to explore the development of “new fuel cell-powered commercial mobility applications;” a MoU to study a vehicle assembly center in Saudi Arabia; a JV for vehicles fueled by liquid hydrogen. One JV was with a renewable fuels company “to work towards building” (as opposed to simply “building’’?) 100 hydrogen hubs across the world, with the first two in California. Hyzon listed various taxpayer-funded “incentive and grant programs” available in the U.S., the European Union and China for energy transition programs. We are the world! We can do this! And cheaply, too: this schematic on how FCEVs would besides decarbonizing the planet slash the “total cost of ownership” (“TCO”) of a heavy-duty truck:

Source: Hyzon 10K for year ended 12/31/21.

As for Hyzon's own vehicles: “We are taking a vehicle system-level approach to assembling these vehicles by focusing on our proprietary fuel cell and electric propulsion systems, optimizing the vehicle controls and interfaces while utilizing existing third-party components such as the chassis, cab, and hydrogen cylinders.” 

To translate from B-schoolese: Hyzon supplies the fuel cells, which it manufactures at its factory in Bolingbrook, Illinois. Other components are supplied by, well, others.

Source: Hyzon 10K for year ended 12/31/21.

So all these parts — the illustration is a guide — are shipped to Fontaine Modification (“Fontaine”), a Berkshire Hathaway company based in North Carolina. Fontaine does the assembly; the arrangements between Hyzon and Fontaine are governed by one of the many strategic partnerships. The idea, per the FreightWaves article, was to ramp Fontaine’s assembly pace to 5k/year by ‘25.

And yes indeed, the company was making all of those extravagant promises in ‘21, when the global economy and its supply chains were still recovering from the pandemic lockdowns. Hyzon’s “ship it to Fontaine and they’ll put it together” may not be optimal for this environment? And don’t they seem a little too confident? Yeah, well, this is an emerging growth company, you were warned. “Our business model has yet to be tested and we may fail to commercialize our strategic plans,” Hyzon announced chirpily in the “Risk Factors” section of that first 10K. But this time it wasn’t just cover-the-CEO’s-ass boilerplate. Hyzon’s goals were of course noble, but that 5k/year target looks no more attainable in ‘24 than it was in ‘21. A few bullets down the Risk Factors page, there’s one of these, which no one likes to see:

Source: Hyzon 10K for year ended 12/31/21.

At some point that year they caught the attention of Blue Orca Capital (“Blue Orca”), a short-seller. Blue Orca made “various allegations about the Company’s business, including allegations about the nature and viability of the Company’s potential customers, the accuracy of the Company’s disclosures and the Company’s financial projections.” In January ‘22 the SEC served the company with a subpoena, seeking documents and information related to the allegations. As a result, according to the 10K, “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.” Hyzon “strongly rejected” Blue Orca’s claims and said it would defend itself aggressively. Nevertheless, the company said, the “negative publicity” impacted its ability to do, well, everything: from hiring employees to entering new “strategic agreements” to raising funds. And even worse, it “invites legislative and regulatory scrutiny, and has resulted in litigation and governmental investigations.”

It’s impossible to know, of course, how much of Hyzon’s woes were caused by “negative publicity,” and how much was the result of the company’s own ineptitude. There’s not much they could do about “disruptions in the supply chain” or “substantial increases” in raw material prices. But they could have hired some competent bean-counters. 

Hyzon blamed the weaknesses identified in the ‘21 10K to its small size and limited operating history (PETITION Note: So who told Freightwaves Hyzon had 17 years of operating history and built over a million fuel cells?). But it doesn’t look like they got around to remediating. On August 4, 2022 the company filed an 8K with some painful news for shareholders. While preparing financials for the June quarter of 2022, the company discovered “certain issues regarding revenue recognition timing and internal controls and procedures,” related primarily to its operations in China. Oh, and by the way: “operational inefficiencies” at a European joint venture with Holthausen Clean Technology Investments B.V. will have a “material adverse effect” on Hyzon’s ability to produce and sell vehicles. It announced the restructure of its European operations and disclosed the retention of a consultant to advise on strategy and operations.

Two weeks later, on August 17, the company dropped another 8K. CEO Knight was out. The board appointed chief strategy officer Parker Meeks, a former McKinsey & Co. consultant as interim CEO. McKinsey? Really? This was probably the biggest sign yet that the company was FUBAR, 😜. The company said it would “assess the effect of the control deficiencies” identified in ‘21 on the revenue recognition issues in ‘22.

For ‘22, Hyzon reported $3.7mm in revenue compared to “negligible” revenue the prior year. Still, their position at year-end wasn’t completely hopeless: $60.6mm unrestricted cash and cash equivalents, $194.8mm in short-term investments, and positive working capital of $267mm, according to the 10K. “We believe that our current cash balance will provide adequate liquidity during the 12-month period from the issuance date of these consolidated financial statements.”

The “issuance date” was May 31, 2023. The year began, though, with the departure of CFO Samuel Cheong on January 24, 2023. On January 30, the board advised ex-CEO Knight that his termination was for cause. Management’s efforts to maintain the company’s Nasdaq listening was detailed across multiple 8Ks. The media relations team cranked out a stream of press releases suggesting all was well: new board members, an appearance at JPMorgan’s ($JPM) auto conference. Parker Meeks, named permanent CEO in March, accentuated the positive like a McKinsey man should: “tremendous progress” over the past year (first quarter); “significant strides” (second quarter). In August, the company demo’d a truck powered by liquid hydrogen; in September, they reached a settlement with the SEC, which included a $25mm fine. 

Meeks confessed the company was “pleased” to put that sad chapter in the rearview so it could focus on “disciplined execution.” The third quarter was “remarkable,” according to Meeks. The company made its first commercial delivery. “We believe that Hyzon is at an inflection point.” 

Meeks repeated the “inflection” idea in the fourth quarter ‘23 earnings release, issued on March 22, 2024. The company deployed 19 vehicles in ‘23, “at the high end” of guidance range. Cash stood at $112mm. The 10K for ‘23, however, carried a warning: “our management has raised concerns about our ability to continue as a going concern.” In April the company sold its Honeoye Falls facility for $3mm and relocated to Illinois. “While based in Honeoye Falls, the company never got out of first gear,” the Rochester Beacon wrote on April 30.

And so we return to where we began: the summer of ‘24, and Hyzon’s “strategic realignment” to focus solely on North America and the refuse industry. Cash, $112mm at the end of Q1, is now $50mm. Revenues were $10mm during the quarter; Meeks professed himself “pleased” (again). 

Hyzon bolstered that with $4.5mm raised in July through a registered direct offering placed by Roth Capital LLC, which with BTIG LLC was authorized to sell up to $50mm from the company’s shelf registration. It’s not hard to work out how long that’ll last, based on past cash burn. Remember, an average of $9.5mm a month in Q2, but they’re hoping to get that to $6.5mm by year-end. Meeks did not characterize Q2 results, interestingly enough. He just noted that Hyzon “executed on several strategic initiatives.”

In August Meeks appeared at a “Monumental Clean Energy Event” in Oakland, California sponsored by the US Department of Energy (“DOE”). The purpose was to celebrate a $12.6b “investment” — a $1.2bb DOE grant, the rest in “public and private matching funds” — to create a “Regional Clean Hydrogen Hub.” You may recall Hyzon once entered a JV to “work toward building” 100 of those hubs. 

Meeks was there to show off “North America's first hydrogen fuel cell electric refuse truck,” built by New Way Trucks and powered by Hyzon. The dignitaries read the words from Teleprompters: "Today is an opportunity for the public to see the promise for hydrogen's future," said U.S Sen. Alex Padilla. “I'm proud to be here with so many great partners," said California Gov. Gavin Newsom. "This is part of the most significant economic and industrial policy in our lifetime. It's not just about growth, it's about inclusion.”

Source: Hyzon

Then came Meeks’ turn. "Today, we see not only North America's first hydrogen-powered refuse truck but also the critical role government plays in making these innovations a reality. When government steps up, the private sector responds, and today is proof of that.”

He has a point, you know. If not for the government, none of those innovations would ever see the light of day. Perhaps one day the government will discover how to make them profitable.

And Hyzon struggles on. On Friday, Sept. 27, the company announced it has regained compliance OF “…all applicable Nasdaq Capital Markets listing requirements and has fully cured its prior bid price deficiencies.” It’s back trading on the Nasdaq. The 1-for-50 reverse split, announced Sept. 6 and effective Sept. 11, must have been a big help.

The stock is down over 14% since.

PJT must be loving this assignment.

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🛞 Update: Wheel Pros LLC 🛞

There’s a definite Grand Theft Auto gestalt to the last grubby chapter of Wheel Pros LLC (d/b/a Hoonigan), the Clearlake Capital Group rollup of parts suppliers to boomer gearheads: broke-a$$ debtors hit the chop-shop in the ever-friendly District of Delaware (Judge Dorsey) on September 8, 2024 to, among other things, dash the hopes of those clamoring for double-dip (liability management) drama and, more on point, strip the sled and sell the parts for whatever they’ll fetch.

We discussed the (disappointing — consent!) prepackaged chapter 11 bankruptcy filing here:

💥New Chapter 11 Bankruptcy Filing - Wheel Pros LLC💥

The key to it all is the equitization of the debtors’ first lien debt and the sale of “certain non-core assets.” One asset, 4WP, acquired so the debtors could have a “retail footprint” and expanded e-commerce presence. Another, Poison Spyder Customs Inc., which designs accessories for the off-road and 4x4 markets. Both joined the Wheel Pros family of companies in ‘22 when the debtors purchased Transamerican Auto Parts (“TAP”) from Polaris Inc. ($PII): 

Source: Docket 6

The terms of that purchase were not disclosed but the release indicates that TAP’s ‘21 revenues were $760mm. Feel free to assign a multiple of your choosing. It didn’t take long for things to unravel and after the infamous “double dip” LM deal, here we are.

“The Company has faced integration challenges following the Debtors’ rapid acquisition of new business segments,” reads the debtors’ motion for an order approving the sale of Poison Spyder. Poison Spyder, in particular, was “underutilized,” and it “would take significant financial and managerial resources, in addition to time, to reinvigorate the brand.” A somewhat different set of headaches plagued 4WP. It sold 57 stores and closed four as part of a strategy to focus on key markets in California, Texas and Florida, according to the sale motion. Would it have worked? We will never know. There were “integration challenges.” 

The debtors retained Stifel to run a marketing process for both the Poison Spyder and 4WP assets. Air Locker, a subsidiary of ARB Corp Ltd. (“ARB”) expressed an interest in Poison Spyder. So did ORW Inc. (“ORW”) a retailer of 4x4 gear in which ARB has a stake, and which was in talks to buy the 4WP assets. ORW submitted an IOI for Poison Spyder. However, “it was subsequently determined that ARB would acquire the assets, rather than ORW.”

Given the debtors’ wretched state, we’re glad to see the deals got done. The debtors in the sale motions for both Poison Spyder and 4WP state that “the cost and delay” of running an auction outweighed any “marginal increase to Sales proceeds.” Stifel’s marketing efforts — 30 possible buyers contacted for Poison Spyder, eight for 4WP — was appropriate enough. The proposed private sales “provide the most efficient path to divesting the Assets for fair consideration.” 

Ah yes. That fair consideration. What was that again, please?

$1mm for the Poison Spyder assets. And $30mm for 4WP. 

We’re not exactly math experts over here but $1mm plus $30mm equals $31mm.

That’s something. We guess.

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📤 Notice📤

Abbas Perez (Senior Associate) joined SierraConstellation Partners.

Adithya Harihara (Analyst) joined SierraConstellation Partners from Baird KeyBanc Capital Markets.

Brian Masunda (Senior Associate) joined SierraConstellation Partners from Baird Global Investment Bank.

Chas Schlaack (Senior Director) joined SierraConstellation Partners from Acuity Eye Group.

Elan Ben-Avi (Managing Director) joined Alvarez & Marsal LLC from Ankura Consulting LLC.

Leah Saiontz (Associate) joined Akerman LLP from Weil Gotshal & Manges LLP.

🍾Congratulations to…🍾

Brown Rudnick LLP (Robert Stark, Bennett Silverberg, Elizabeth Castano, Tristan Axelrod, Matthew Sawyer) and Morris James LLP (Jeffrey Waxman, Eric Monzo, Siena Cerra) for securing the legal mandate on behalf of the official committee of unsecured creditors in the Tupperware Brands Corp. chapter 11 bankruptcy cases.

McDonald Hopkins LLC (Alan Burger, Alaina Karsten, Scott Opincar) and Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Matthew Talmo, Austin Park) for securing the legal mandate on behalf of the official committee of unsecured creditors in the BurgerFi International Inc. chapter 11 bankruptcy cases.

Willkie Farr & Gallagher LLP (Brian Lennon, James Burbage, Jennifer Hardy) and Venable LLP (Jeffrey Sabin, Carol Weiner Levy, Arie Peled, Andrew Currie) for securing the legal mandate on behalf of the official committee of unsecured creditors in the Digital Media Solutions Inc. chapter 11 bankruptcy cases.

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📚Resources📚

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.