Tag: EVs

EXRO: exaggerated partnerships, leadership concerns, and no revenue – PT $0.35

Portfolio manager summary

  • Exro (EXRO), a wind power equipment founded by a former mutual fund salesman, made a pivot in 2018 to EVs – a flurry of press releases followed this pivot, and the stock has rallied over 1200% over the last twelve months
  • Recently touted partnerships are pegged as key growth drivers
  • Our investigation found that EXRO’s partnerships have limited, if any, value
  • One of its oldest and most touted partnerships, with Potencia Industrial, has been marred by repeated delays and no revenue
  • One of EXRO’s other partnerships, a vendor “focused on the mass production of commuter electric boats”, is based out of a UPS store mailbox
  • EXRO’s other celebrated partnerships include a single storefront in Vancouver, a “leading” Finnish snowmobile manufacturer with <€600k in revenue, and an agricultural equipment company with no planned capex until 2022 – these unimpressive partnerships support our view that the hype around Exro is misplaced
  • This pattern of obfuscation and exaggeration appears to be reflective of tone at the top.  EXRO was taken public and led by a BC entrepreneur who we believe exaggerated his prior successes – in one case, we could not confirm his claims that he founded a successful healthcare business
  • This same BC entrepreneur was CEO of Unity Wireless, which ultimately collapsed 87% during his tenure – the entrepreneur was KIDNAPPED by an angry counterparty alleging that Unity was a “pump-and-dump”; in the kidnapper’s ensuing trial, the entrepreneur admitted in testimony that other Unity shareholders tried to get him to participate in a pump-and-dump scheme 
  • Our sources, which include auto OEMs and others, suggest that EXRO is far from getting a seat at the table with any auto manufacturers of consequence
  • Since 2016, EXRO has spent 4x more on opex than R&D – calling into question whether this is really a technology business
  • Despite a furious pace of press released “opportunities”, the CEO has blown out of almost 20% of her holdings in a short period as EXRO’s stock rallied
  • Our view is that EXRO is little more than an exaggeration designed to line the pockets of insiders, and we assign a $0.35 price target to the stock, down over 90% from current levels

EXaggerations

Exro (EXRO) was founded in 2005 by former mutual fund salesman Jonathan Ritchey, who launched the company with a focus on generators in the wind power space.  Despite a long list of patents, EXRO was unable to generate meaningful revenues, and in 2017 went public through an RTO with Mark Godsy, a British Columbia-based stock promoter and “entrepreneur” at the helm.

It is our view that EXRO’s current claims and partnerships, like Mark Godsy’s background, appear to be overexaggerated, and that EXRO exists to enrich its management team. 

In this article, we discuss the following:

  • EXRO’s pivot to EVs after being unable to generate revenue in the wind space
  • Findings from our conversations with auto OEMs and experts that suggest that EXRO is unlikely to ever become an automotive supplier of consequence
  • Missed expectations around EXRO’s Potencia partnership
  • What appears to be clear overexaggeration for no less than four other EXRO partnerships including a company based out of a UPS box and another operating out of a single Vancouver storefront
  • An apparent underprioritization of R&D spend
  • A CEO in a hurry to sell stock
  • Irregularities in former CEO and current chairman Mark Godsy’s background and an apparent pump-and-dump of a company he led

EXRO, in our view, is very good at pouring out press releases, but our work suggests the substance of these releases to be lacking, and the company’s results thus far have amounted to near nothing.

The electric slide

EXRO’s 2017 listing document showed that for the two years ending January 2017, EXRO had just one quarter where it generated ANY revenue, suggesting it had not had much product success in wind turbines:

Source: Listing document

Given the lack of revenue development and, in our view, investor excitement about wind energy, it is therefore not terribly surprising that EXRO made a public pivot to the EV space in early 2018:

Source: Press release

With all the publicity the EV space was getting in 2018, what better area was there for EXRO to pivot to? What better way to get investor attention than to join the roster of small cap EV companies? All things considered, EXRO, with a product set targeted to electrical motor applications, could credibly make this pivot.

The ensuing flurry of press releases and investor optimism about electric vehicles led EXRO’s stock up over 1200% over the last year. 

After learning more about EXRO’s product offering and partnerships, we believe EXRO’s success in EVs will mirror its success in wind turbines – that is, it is most likely to fail miserably and ultimately generate no meaningful revenues. 

Below, we show why we think EXRO’s strategy is flawed, why we believe its announced partnerships are vaporware, and why we believe investors should be concerned about its Chairman/former CEO’s past.

What does EXRO DO?

Investors could be forgiven for not understanding what EXRO means when it says:

Source: EXRO website

We were certainly confused. A further look reveals that EXRO has its sights set on two main business areas:

  • Coil switching
  • Battery control systems

EXRO’s coil switching technology apparently allows for electric motors to switch coil configurations to optimize motor performance:

Source: EXRO

This sounds well and good – if EXRO’s target markets cared about it.  Our research into EV applications found the following:

  • None of the EV OEMs or sellside analysts we spoke to were familiar with coil switching 
  • EV manufacturers have tended to prefer internally developed IP

Our view is that EXRO’s technology for EV application is a longshot at best – one, because it does not appear that OEMs are focused on optimizing power in this manner and two, because EXRO does not possess a fraction of the qualifications needed to supply major producers.

On the battery management side, we learned that OEMs typically develop their battery management software in-house.  In addition to having to compete with in-house development, EXRO’s positioning is also substantially weaker because NONE of its patents have anything to do with batteries, artificial intelligence, machine learning, or any other buzzwords found in EXRO discussions:

Source: AIF

EXRO is unlikely to become an automotive supplier

Technology aside, with marketing like this, we think that EXRO wants investors to believe that it’s going to supply EV manufacturers with its products:

Source: EXRO website

While this is an admirable goal, we believe the likelihood of it actually happening is extremely low. Becoming a supplier to any auto manufacturer of scale requires a rock-solid balance sheet, years of testing, and a proven technology. We believe EXRO has none of these.

The simplest way to explain our view is around the idea of supplier qualification.  For a part or component to be automotive qualified, “…manufacturers have to meet specific industry standards throughout the manufacturing and testing process.  Three key standards are IATF 16949, AEC-Q100 and AEC-Q200:”

Source: Qorvo

IATF 16949 cannot be implemented on a stand-alone basis – it must be implemented as a supplement to ISO 9001, another standard.

EXRO’s own filings do not even mention ISO 9001 or IATF 16949 – leading us to conclude that EXRO does not meet those standards.  This, in fact, does make sense, since EXRO does not even have a manufacturing facility.

Further, “because cars last much longer than other electronic devices, manufacturers typically must ensure a supply of each automotive component will be available for 10 years.” As we show below, EXRO has been unable to meet stated prototype deadlines; it’s a stretch to think they could ensure the supply of anything for ten years.

In the next sections, we highlight several highly publicized, but eventually delayed or failed business announcements and series of partnerships with tiny companies we believe are unlikely to move the needle.

Failure to launch is a sign of things to come

In December 2017, EXRO announced that it was working with a Fortune 50 company on drones:

Source: Press release

No further detail about the partner was provided, and in February 2018, EXRO updated investors to tell them that things were “more difficult and time-intensive than originally planned”:

Source: Press release

Apparently, things seem to have been too difficult and time-intensive – EXRO never mentioned the Fortune 50 drone effort again, and doesn’t appear to have recognized any revenues from it:

Source: 2019 AIF

Below, we show you more of the same – execution issues and partnerships with companies that we believe are unlikely to result in any revenue.

Potencia partnership – moving the goalposts after each missed kick

One of EXRO’s most press-released current partnerships is with Potencia Industrial, a Mexican industrial goods company.  EXRO is allegedly providing Potencia with its coil driver technology for Potencia’s Pronto Power technology, which Potencia describes as a “concept design”:

Source: Potencia website

While this sounds straightforward, as with all things we like to look at, the Potencia relationship is much more complicated – investors have been treated to bullish announcements and promises of actual revenue only to be shown delays and no cash flow. We show all this below.

EXRO first announced its Potencia partnership in May 2018, announcing a collaboration in three areas: electric motors for car conversions, generators for wind turbines, and electric motors used in trams and trains:

Source: Press release

Just six months later, in November, EXRO’s focused narrowed on just the motor project, and management claimed they were just “contemplating” the two other areas.  The motor project entails “exploring the integration of Exro’s hardware and software into Potencia’s motor drives”:

Source: Press release

A month later, in December, EXRO said that a prototype of its “intelligent battery management system” (IEMS) would be delivered to Potencia by 2Q19:

Source: Press release

In the same release, EXRO also claims to have received a “pilot purchase order” from Potencia for the prototype:

Source: Press release

So now we have EXRO setting two major expectations for investors:

  • Prototype delivery by 2Q19
  • Potential revenues from a purchase order

RESULT: By 2Q19, no announcement of a prototype delivery or revenues has been made.

The next we hear about the Potencia partnership is nine months later, in September 2019, when EXRO announces it has received a production order for approximately $500k for Motor Drivers, one of five modular units in the IEMS, of which delivery is anticipated to commence in 1Q20:

Source: Press release

RESULT: By 1Q20, still no revenue, and no delivery announcement. The Company replied to us that the lack of revenue was due to EXRO moving to “Stage Two”, a different product. We find this unusual since Stage One produced no revenue:

But then in June 2020 – another order? Expected to be delivered to Potencia by “4Q19”?

Source: Press release

Come August 2020, and EXRO announces it delivered the Motor Driver in June, and that it’s being tested at Potencia with expected testing completion by end of October 2020:

Source: Press release

RESULT: By October 2020, no announcement of completed testing.

And then on February 3, 2021, EXRO tells us that “testing was delayed prior to Christmas”, and that they are “looking forward to sharing the performance results as soon as they are completed in third quarter 2021”:

Source: Press release

What we have here is a series of moving targets, and we are not optimistic that EXRO will succeed in meeting this most recent bogey.

We also reached out to Potencia to clarify this situation, and we were told by the person on the phone that EXRO had asked Potencia not to talk to anyone about the partnership, but that nothing had been finalized.

This, plus the constantly changing targets and lack of revenue (see below) suggest a problem with execution and management.

It’s critical to note that despite claiming to have received orders, EXRO has not booked ANY revenue in 2019 and YTD 2020:

Source: Financials

And from the 2019 AIF, no revenue since inception:

Source: 2019 AIF

We are now in February 2021, and investors have the following from EXRO:

  • A 2018 initial announcement claiming early 2019 deliveries where the eventual delivery date of the prototype was June 2020
  • Claims of purchase orders that have so far generated $0 in revenue in 2019 and 2020
  • Expectations that EXRO will share performance results in 3Q21

It seems to us that EXRO could be overstating Potencia’s potential – in its investor deck, EXRO claims that Potencia is one of the largest motor OEMs in Mexico:

Source: EXRO Investor Deck

EXRO’s claim here would imply that Potencia Industrial is a large OEM of automotive motors. Our diligence would suggest otherwise:

Sources: Astronic UPS, Hydro Generators, Wind Generators, MG Sets, Hummingbird, Motors & Generators, Permanent Magnet Generators

  • The ONLY automotive application we could find on Potencia’s website was Pronto Power, a kit that Potencia sells for converting internal combustion vehicles to EVs

Source: Pronto Power

  • It doesn’t look like Potencia even presents itself to customers as an EV or automotive player, as EXRO seems to suggest

Our view is that Potencia is most like a large industrial motor player, not a large automotive motor company.

Unfortunately, as we show below, it appears that overstating partnerships is a pattern for EXRO.

EXRO’s other partnerships – not much more than press releases, in our view

Aside from Potencia, we believe that EXRO is overstating the potential of at least four of its announced deals.

Motorino Electric – a single storefront partner

In September 2019, EXRO announced that it signed its first licensing agreement Motorino Electric, a company it characterized as a “a pioneer in the Canadian electric transportation industry starting over 17 years ago with its first product launch, and now having dozens of products across the electric bicycle, electric scooter and electric motorcycle categories.”  For this deal, EXRO would be integrating one of its technologies into Motorino’s CTi electric bicycle:

Source: EXRO Press Release

Now, investors might be forgiven, based on EXRO’s description, to think that Motorino is some giant company, making electric bikes and other electric vehicles.  The reality is quite different, in our view.  

Motorino operates out of a single storefront in at 336 W 2nd Ave in Vancouver:

Source: Google Maps

Further, EXRO, by its own admission, is integrating its technology into ONE of Motorino’s 26 different products, the Motorino CTi.  At just CAD $1,950 a unit, we think the revenue opportunity for EXRO here is likely minimal:

Source: Motorino

When our investigator called Motorino to inquire about the EXRO-fitted bike, he was told that the performance improvement of the EXRO-fitted product would be marginal, more expensive, and if he wanted an e-bike, he should just buy one now. Not a ringing endorsement of the EXRO technology.

Templar Marine – a boat manufacturer headquartered at a UPS store?

In November 2019, EXRO put out a characteristically optimistic press release announcing its partnership with an “…e-Boat Leader in Multi-Billion-Dollar e-Marine Sector”:

Source: EXRO Press Release

As you can see in the release, EXRO is partnering with one Templar Marine Group, Ltd., a Canadian company focused on producing electric boats.  EXRO claims that Templar will be integrating EXRO’s technology into its water taxis and implies that Templar is an e-boat leader in a giant, almost $8B market. 

Our findings would suggest that Templar is more like Motorino, a small business.

Templar’s own website gives the company address as #379, 9-3151 Lakeshore Road in Kelowna, British Columbia:

Source: Templar website

This address appears to be a box at a UPS store located at a strip mall in Kelowna:

Source: Google maps

Source: Google maps

UPS’s own website confirms that 9-3151 is, in fact, the address for the UPS Store in this strip mall:

No showroom – no place where a potential customer can see and touch Templar’s boats – just a UPS store mailbox.  Hardly a strategy we’d employ.

The other unusual finding about Templar is that it only has one employee on LinkedIn – one of the co-owners, Jennifer Fry:

Source: LinkedIn

Source: LinkedIn

A minimal LinkedIn presence and headquarters at a UPS store don’t scream “e-Boat leader” to us. It is our opinion that this is EXRO yet again overstating the size and revenue potential of a potential partner.

Aurora Powertrains – Proactive Investors overstates the potential

In February 2020, EXRO announced a strategic agreement with Aurora Powertrains, “…one of the world’s most innovative manufacturers of snowmobile powertrains”:

Source: EXRO Press Release

EXRO’s CEO, Sue Ozdemir, was quoted as saying, “We are very excited to now be entering the snowmobile industry, which sees more than one billion dollars of global sales annually.”

Based on this characterization, plus a puff-piece released by Proactive Investors calling Aurora “Finland’s leading snowmobile manufacturer”, we wouldn’t fault investors for thinking this might be a significant deal.

Source: Proactive Investors

Unsurprisingly, this is not the case.  Finnish corporate filings for Aurora (which can be accessed using business ID 2825151-4) show that, for the twelve months ending April 30, 2020, Aurora did just EUR 530k in revenues and lost EUR 148k in net income:

We would hardly characterize a business that does a little over half a million euro in revenue as “the leading” anything – nor is Aurora, at the revenue level, grabbing much share of the $1B market that Ozdemir mentioned.

Not to mention Aurora had just EUR 46k of cash on its balance sheet in April 2020:

We have a hard time believing how a business with such a small revenue base and cash balance will be able to meaningfully contribute to EXRO’s top line.

Clean Seed Capital Group – not on the same page as EXRO

In April 2020, EXRO announced that it signed a collaboration and supply agreement with Clean Seed Capital to “integrate Exro’s technology into Clean Seed’s high-tech agricultural seeder and planter platforms, advancing the electrification of the world’s heavy-farm equipment.”  

Clean Seed, a TSX-listed company with ticker CSX, has only generated $5MM in revenue in the recent past, and has just CAD $2.3MM of cash on the balance sheet as of September 2020:

Source: Clean Seed MD&A

Source: Clean Seed Financials

In fact, in the three months ending September 2020, Clean Seed burned almost CAD $880k in cash, leaving it with just over 2.5 quarters of cash on its balance sheet at the current burn rate.  Given its size and burn rate, it should come as no surprise that Clean Seed’s own management noted, in the June 2020 MD&A, that it expected capital-intensive expenditures “…more likely would start in 2022” than fiscal 2021.

Additionally, in EXRO’s release, the company claimed that Clean Seed “will be building a working prototype that will be implemented in the field by 2021” and that Clean Seed would “issue a purchase order to integrate Exro’s electric-motor-enhancing technology into Clean Seed’s latest technology offerings and beyond:”

Source: EXRO Press Release

However, in Clean Seed’s release announcing the very same collaboration, there is no mention of a 2021 implementation nor any indication that Clean Seed will be purchasing ANYTHING from EXRO.

So, not only does Clean Seed have just $2.3MM on its balance sheet, it expects to deploy its capex in 2022 and has not mentioned anything about purchasing EXRO’s product, despite EXRO’s communications. 

In our view, this would suggest that EXRO may be overstating the near-term potential of the Clean Seed relationship to investors.

To recap, here we have four EXRO business announcements where the business partner’s size and scope don’t seem to match EXRO’s claims.  While we don’t question the legitimacy of these enterprises, we do question EXRO’s characterizations of them and the likelihood that they will result in meaningful revenue for EXRO.  

We believe that this is a concerning pattern that, combined with the CEO’s stock sales and management history, should keep investors away from EXRO’s stock.

A focus on payroll, not R&D

For a company that uses the word “technology” no less than 89 times in its Annual Information From, EXRO doesn’t appear to prioritize R&D.  

Since 2016, EXRO has spent at staggering 43% of its operating expenses on payroll and consulting but just 9% on research and development:

Source: Company filings

This perhaps explains the Potencia delays, and doesn’t speak to the company investing in what it claims is a unique technological proposition.

Getting out while the getting is good

As EXRO’s stock reached all-time highs in February, we’ve seen several executives exercise low priced options and sell what we view are meaningful amounts of stock (all amounts CAD):

  • Between 2/9 and 2/12, CFO John Meekison sold 50k shares for net proceeds of approximately $321k
  • Between 2/10 and 2/12, Strategic Advisor Eamonn Percy sold 100k shares for net proceeds of approximately $630k
  • On 2/17, Corporate Secretary Christina Boddy sold 13.3k shares for net proceeds of approximately $90k 

The most concerning of these sales are from EXRO’s CEO, however.  

Sue Ozdemir, who took over from Mark Godsy (more on Mark later!) as CEO in 2019, seems to be a rush to lower her personal exposure to EXRO stock, for whatever reason.  Since December 30, 2020, Sue has sold almost 18% of her ownership in EXRO stock, according to SEDI. 

According to the SEDI data, Sue was granted 2.75MM options to purchase EXRO stock – 2MM on 9/13/19 and another 750k on 10/13/20, all with a strike price of CAD $0.25.  It appears that she also acquired 37k shares “under a prospectus exemption” at CAD $0.27, giving her a total of 2.5 options and 37k shares.

Since 12/30, she’s exercised 500k options and sold off the corresponding stock for a total of CAD $2.1MM in proceeds – in a four-week span.  Sue began her substantial sales after EXRO’s stock moved up over 1100%, and since 1/18/21 has not sold anymore (perhaps her remaining options are still unvested?)

We believe that her recent stock sales and falling exposure to EXRO are significant red flags in light of all of EXRO’s announced partnerships.  

Her stock sales raise serious questions:

  • Does Sue believe that the recent EV-driven increase in the stock exceeds the eventual value creation from the litany of deals EXRO has announced?
  • Is Sue concerned about the very same issues we raise in this report about the technology and revenue opportunity?

Our view is that if the CEO of a company is selling stock after a big move up, investors should take that a signal to stay away.

The Company’s response to our question around stock sales was unsatisfying, essentially dodging the substance of our question:

The Mark Godsy playbook

EXRO’s partnerships would suggest that EXRO implies, but never outright states, massive revenue opportunities. For example, mentioning the $1B snowmobile market without mentioning that their partner in the snowmobile market did less than EUR 600k in revenues in FY20.  

It’s like saying we played on the 1988 Jazz without telling people it was a team for eight-year olds that happened to be called the Jazz.  

This pattern seems to extend to EXRO’s former CEO and current chairman, Mark Godsy.  Godsy, who took EXRO public through a reverse merger in 2017, was CEO through August 2019 and remains chairman of EXRO.

In several of Mark’s biographies (the EXRO prospectus, the McGill website, and a 2020 investor deck), he makes reference to his success as an entrepreneur as founder of two companies in particular, ID Biomedical and Angiotech Pharmaceuticals:

Source: EXRO prospectus

Source: McGill website

Source: June 2020 EXRO investor deck

With all due respect to Mark, we believe that he has overstated his contributions and successes at both businesses.

We believe that Mark had nothing to do with ID’s GSK acquisition

Mark’s biography, in our view, reads like he had a hand in or benefited from GSK’s acquisition of ID Biomedical.  Our work, below, suggests that Mark’s time at ID had nearly nothing to do with the eventual success of the business.

Indeed, according to Godsy’s bio in an Angiotech (more on this in a second) offering document, Mark Godsy was an officer of ID Biomedical from 1991 to 1995:

Source: Angiotech Offering Document

And in ID’s 1997 AIF, we see that Godsy is a Director at ID:

Source: ID Biomedical AIF

Sometime between this filing and the 1999 20-F, Mark Godsy left ID Biomedical’s board:

Source: ID Biomedical 20-F

The timeline here is critical – Mark Godsy was an officer of ID Biomedical from 1991 to 1995 and a Director of the company until sometime before mid-1999. 

Why do we believe Godsy had nothing to do with GSK? Well, at the time Mark Godsy was involved with ID Biomedical, it was primarily involved in genetic diagnostics and the development of subunit vaccines for tuberculosis and Group A strep:

Source: ID Biomedical AIF

When GSK acquired ID Biomedical in 2005 (almost ten years since Godsy left the management team and about six since he left the board), it was primarily for ID’s flu vaccine capabilities:

Source: FT

Source: CBC

ID Biomedical did not get into flu vaccines until 2001, when it bought Intellivax:

Source: thepharmaletter.com

By the time ID made its entry into flu vaccines in 2001, Godsy had been out of leadership for almost six years and off the board for around two. There is little chance he had any role in the strategy that led to ID’s eventually acquisition by GSK.

We cannot verify Godsy’s Angiotech claims

To recap, in EXRO’s prospectus, Mark Godsy is described as a founder of Angiotech Pharmaceuticals; in his McGill biography, it says he founded Angiotech after founding ID Biomedical.  

Our research would suggest neither of these claims hold water – but let’s tackle the second one first.  ID Biomedical, by its own admission, was incorporated in 1991:

Source: ID Biomedical AIF

Angiotech, by its own admission, was incorporated in 1989:

Source: Angiotech Offering Document

So perhaps someone got the timing wrong? Either way, we cannot find evidence to even support that Godsy was ever a founder of Angiotech.

A 1996 private placement offering document explicitly names the three founders of the company as William Hunter, Larry Arsenault, and Lindsay Machan:

Source: Angiotech Offering Document

Mark Godsy, in fact, was a director of Angiotech at the time, but his biography in the offering document does not characterize him as being a founder (even though Dr. Arsenault, mentioned immediately after, is mentioned as a founder):

Source: Angiotech Offering Document

Angiotech’s Wikipedia page similarly only mentions Drs. Hunter, Arsenault, and Machan:

Our view is that Mark Godsy may have been an early investor in Angiotech, and thus thought it appropriate to consider himself a founder – the public record, including Angiotech’s own filings, suggests otherwise.

In our view, this exaggeration fits the same pattern as EXRO’s partnership and business claims.

An unfortunate incident alleging a pump and dump

The smoke around Mark Godsy doesn’t stop at his claims about the companies he claims to have founded:

Source: Globe & Mail

We wouldn’t bring this unfortunate incident up if it weren’t for the things that came out at Mr. Shaw’s trial. From a June 4, 2004, piece in the Vancouver Sun, we learn:

  • “Shaw accused Godsy of orchestrating a “pump and dump” — artificially inflating the share value through false representations and then dumping his shares on the open market through offshore accounts.”

Now thankfully Godsy made it through this harrowing experience in one piece, but the pump-and-dump commentary is a cause for concern, in our view:

Source: Bloomberg

Source: SEC

While certainly not conclusive, we have:

  • A chart that looks like a pump-and-dump
  • Late disclosure on stock transactions
  • An admission by Godsy that he was invited to participate in a pump-and-dump, but declined

Based on that, it’s probably not a stretch to conclude that Unity could have been a pump-and-dump, and despite Godsy’s claims that he didn’t participate in it, he was the CEO and largest shareholder during part of the pump and the eventual dump.  

Did Godsy try to stop the pump-and-dump, since, by his own admission, it appears he was aware of it? 

We believe that Godsy has a history that should call into question the credibility of any venture he is involved in, and investors should act accordingly.

Valuation

The Mariner Instant Replay shows:

  • EXRO’s stock is up over 1200% on optimism that it will be some kind of credible EV player
  • EXRO, in fact, is offering up a technology platform that is not a priority for EV manufacturers, and appears to be best suited to wind turbines; given the R&D spend – we are not even sure the technology WORKS
  • EXRO has failed to achieve milestones in its critical Potencia partnership
  • EXRO appears to have overstated the potential of its other partnerships
  • It looks like EXRO’s own CEO, Sue Ozdemir, sees the writing on the wall, has been rapidly reducing her exposure to EXRO, having sold almost 18% of her shares in a four-week period
  • EXRO’s former CEO and current chairman, Mark Godsy, appears to have exaggerated his involvement in prior ventures and admitted knowledge of a pump-and-dump of a company he led

Before we start talking about price targets, let’s take a quick break to go through the Mariner stock promote checklist:

  • A “hypeable” business, say, EVs
  • Dollars spent on G&A, but not a whole lot on the technology that’s supposedly game-changing
  • Investor hype up about an unproven technology that seems largely hypothetical
  • Promise the world

In our view, EXRO checks all these boxes. Our view is that EXRO is little more than a vehicle to enrich its management team rather than a company that will bring some kind of revolutionary technology to market.

The question is then, how do you value a company with a bunch of patents no one is using, with no revenue, and a raft of positive press with nothing to show for it?  Our best guess is cash value per share, or approximately 8 cents a share. 

Perhaps that is too draconian, so let’s simply say EXRO’s prospects are no better than they were before the stock started running, so around $0.35 per share, down over 90% from the most recent close.

Appendix – Company response to our questions

Author’s note

3/5/21 – we edited this piece to reflect commentary provided by Potencia Industrial regarding its facility size.  

Falling off the BEEM

Portfolio manager summary

  • Beam Global (BEEM), formerly Envision Solar, sells the EV ARC, a solar-powered EV charging station whose main customers have been government entities, accounting for the majority of revenues
  • We believe two recent business press releases that were part of driving the stock recent parabolic move overstate reality – one gives us DÉJÀ VU as we believe BEEM recycled a 2017 item for one of these announcements
  • Gov’t entities have reduced their Beam spend – for example, once mission critical to BEEM’s revenues, NYC has not placed a new BEEM order since 2018! We dug up budgetary filings that suggest this trend will continue
  • We believe and show that EV ARC’s impracticality and performance is the primary cause of falling orders – imagine our disbelief when we found out that EV ARC costs almost 100x more than some residential chargers but charges at a slower rate! 
  • Not only that, but the EV ARC may never be profitable, with gross margins ranging from -4% to +8% (solar company median is almost 20%), and unlikely to ever be profitable given its revenue outlook
  • If you can’t make it…just stop disclosing it…management stopped disclosing backlog (forward indicator of revenue) after it fell over 50% in the two years leading to 2Q20 – this affirms our view that topline growth is challenged 
  • But have no fear, the management team is unusually well compensated. Between 2010 and 2019, the CEO + CFO compensation accounted for about 1/3 of cumulative revenues
  • Both the current CEO and CFO were senior executives at companies that had to restate their financials 
  • BEEM trades (undeservedly, in our view) at a massive premium to successful, mature, solar companies with real revenues like Enphase, SolarEdge, and First Solar. Median EV/Sales for the peer group comes in at 3.9x, compared to 27x for BEEM
  • A disappointing margin profile and a bleak revenue outlook paints an impossible path to profitability – we assign BEEM a target of $12.49, down 82% from the last close.

This isn’t a BEEM of light

Beam Global (BEEM), formerly Envision Solar, primarily manufactures and sells solar-powered EV charging infrastructure.  BEEM’s primary product is the Electric Vehicle Autonomous Renewable Charger (EV ARC), which is effectively a carport with solar panels mounted on top.  The EV ARC line includes a frame, panels, and battery to which a purchaser can connect an EV charger of their choice:

Source: BEEM

BEEM is the product of a 2010 reverse merger into a shell company known as Casita Enterprises.  At the time, BEEM’s founder, Robert Noble, was CEO, and the company had a rather sordid set of allegations against it, which includes lying about installation contracts to attract investors:

Source: Casita 8-K

While a distant memory, we’ve long believed that zebras don’t change their stripes – the reverse merger history plus the 1460% stock price performance over the last year caught our eye.  We believe that BEEM’s rocket ship stock performance is the result of investor optimism about the renewables space magnified by price insensitive ETF purchases of BEEM stock, but that this excessive excitement for BEEM is largely unwarranted.  We also believe that management quality remains unchanged from the Noble days.

In this report, we explain our views on BEEM’s unprofitable products, its falling revenue outlook, disappearing forward-looking disclosure, excessive executive compensation, and troubling management histories.

These factors lead us to assign a $12.49 price target to BEEM’s stock, down ~82% from current levels.

“All the time our customers ask us, ‘How do you make money doing this?’ The answer is simple – volume.”

Very few companies we have analyzed have been so kind as to provide unit-level cost economics, but BEEM does.  Below, from its 2018 10-K, are two tables which outline the cost of goods for two versions of the EV ARC:

Source: 2018 10-K

What we see here is that GAAP gross profits for the “average” and “least profitable” EV ARCs are 4% and -8%, respectively – this is driven in part by what we would view as a large portion of variable costs with volume-based fixed cost allocations.

As an aside, our analysis suggests that some of BEEM’s largest orders have been for the “least profitable” EV ARC, based on back of the envelope math:

  • In September 2018, BEEM received a $3.3MM order for 50 EV ARCs from New York City, or an average price of $66k per unit
  • In September 2020, BEEM announced a $2MM order for 30 EV ARCs from Electrify America, or an average price of $66.7k per unit

Despite this profitability profile,  BEEM says, “We have assumed in the past, and continue to assume, that our sales will increase and will, as a result, reduce the impact of our per unit fixed cost contributions.”, implying that revenue growth will improve gross margins. This sentiment is repeated in the 2019 10-K: “As our business continues to grow, we expect to see an improvement on our gross profit through better utilization of our manufacturing facility.”  

Despite this unit level disclosure, BEEM has not yet come close to achieving the GAAP gross margins it claims for each of these units, suggesting that revenue levels or mix are worse than management hopes (in other words, likely below the assumptions used in the above charts):

Source: Company filings

Notably, management never updated the unit economics for the EV ARC in subsequent 10-Ks.  If unit profitability were improving, wouldn’t management want us to know that? (Note to reader: the company has put out 66 press releases in 2020, one would think if gross margins improved, we’d hear about it)

The company’s performance thus far, and our view of the future, suggest that further revenue growth needed to achieve positive gross margins is unlikely, but before we discuss that, let’s put some context around BEEM’s gross margins.

BEEM’s actual gross margins on a consolidated and unit basis as disclosed in the 2018 10-K put it firmly at the bottom of a peer group of solar component manufacturers:

Source: Bloomberg and company filings

On this basis alone, we believe that BEEM has a very deep hole to dig itself out of to come close to matching peer group profitability.  In the rest of this report, we show that BEEM has thus far failed to achieve any revenue scale and explain our view that BEEM is unlikely to do so.

When the trend is not your friend: Municipal contracts that made up over 50%+ of revenues are starting to fade 

In BEEM’s own words, “As our business continues to grow, we expect to see an improvement on our gross profit through better utilization of our manufacturing facility.” The problem here is that the business has stopped growing.  After putting up 336% growth in FY18, BEEM’s revenues have been trending down dramatically:

Source: Company filings

Our view is that this has largely been the result of falling or nonexistent deliveries at two critical customers – the City of New York and the State of California – over the last twelve months. The contracts, which do not have minimum purchase requirements, associated with these entities accounted for a meaningful portion of revenue in 2018 and 2019:

Source: Company filings

The New York City contract appears to be a cause for concern – after receiving a $3.3MM order from the city in September 2018, we believe that BEEM HAS NOT RECEIVED ANY NEW ORDERS SINCE THEN. After recognizing revenue for 34 units from this order in 2019, our examination of the filings for the first 9 months of 2020 suggest that BEEM has not recognized any further revenue from the city of New York:

“For the nine months ended September 30, 2020, revenues were $4,009,644, compared to $4,615,669 for the nine months ended September 30, 2019, a 13% decrease. Revenues in the nine months ended September 30, 2020 included a wide variety of customers, including several municipalities and state agencies in various states and in Canada, colleges, a large commercial business and two nonprofit organizations. We have also sold a variety of different products during this period, including our traditional EV ARC™, our new EV ARC™ 2020, a DC fast charging station for a California rest stop and the first two of three Solar Tree® solar-powered sustainable infrastructure products sold to charge large vehicles. This compares to revenues for the nine months ended September 30, 2019 where almost half of our revenue resulted from the delivery of units to one customer, the City of New York. We also sold two DC fast charging stations for California rest stops last year. Our shipments will continue to fluctuate each quarter due to the varying size of orders and timing of deliveries.”

Going deeper, BEEM’s own disclosures and those of New York City confirm our conclusion:

In the 2015 10-K, BEEM notes that it deployed one EV ARC to New York City in 3Q15

In the 2019 10-K, BEEM says as of March 2017 it had received an order of 36 EV ARCs from New York City, and in September 2018 received an order for 50 EV ARCs from NYC

The sum total of the above mentioned orders is 1 + 36 + 50 = 87 units, which matches to what New York City discloses as the number of EV ARCs deployed

Based on the fact that the number of EV ARCs deployed by the city match the number that BEEM discloses as being ordered from the city, we can conclude that no new orders have been delivered after the 2018 order.  Does this imply that the NYC was unhappy with BEEM’s product?

We considered that NY might be an outlier, so we investigated California.  For the California Department of General Services contract, we see a material deterioration through 2019:

Source: Company filings

On a total unit basis, BEEM delivered 90 units in 2018, but just 65 in 2019, down 28% year over year.  Even though the company has not provided clear unit delivery numbers YTD2020, revenues for the first nine months of 2020 are down 13%, making it safe to conclude that units are also down for the same period.

Declining Revenue in the Face of a Massively Growing Sector

To put this in context of the industry – while BEEM’s unit volumes have fallen from 2018 through 3Q20, U.S. total solar capacity has increased 34% (Dec 2018 to Aug 2020), meaning solar power capacity is growing, but BEEM is just not participating:

Source: US EIA

This deterioration in revenues from material contracts implies that BEEM would have to find new customers to fill these revenue holes – and they have, to some extent – but it’s come at the cost of BEEM’s profitability.  

In February of 2020, BEEM announced a $2MM order for 30 EV ARC charging stations from Electrify America, of which 8 were deployed in 3Q20.  This order equates to approximately $66k per unit…which happens to be the price point of BEEM’s “least profitable” product (as illustrated earlier).  So while BEEM did find a new customer, it was for a product with -8% gross margins.

Source: 2018 10-K

In our next section, we reveal why we believe that BEEM’s future revenue growth is likely to be limited.

Significant revenue growth is unlikely to materialize

There are two main indicators that suggest BEEM is unlikely to experience a dramatic increase in revenues.  

The first, and most significant, in our view, is the company’s backlog, which is typically a representation of orders to be delivered in the future.  Through 2Q20, BEEM’s backlog is down over 50% from the $5.7MM peak in 3Q18:

Source: Company filings

By analyzing the change in backlog and revenue booked in a quarter, we can estimate the dollar value of new orders, which are barely up year over year through 2Q20:

Source: Analysis of company filings (orders = EOP backlog – BOP backlog + revenue)

Unfortunately for investors, BEEM appears to have withdrawn this disclosure in 3Q20, which we would view as a negative indicator for the future. This is addition to eliminating quarterly unit delivery disclosures, leading us to believe that management does not want to provide critical transparency to investors.

If backlog was up, wouldn’t BEEM want you to know that? We can only assume that it was down yet again, and consequently BEEM decided to exclude it from its quarterly disclosure.

The second indicator for a less than rosy future is the state of BEEM’s customers. As we covered in our note on GreenPower Motor, COVID has had a negative impact on state tax revenue.  For example, in January, California was predicting a $5.6B budget surplus – by May, that surplus had turned into a $54B deficit.

Similarly, for the state of New York, state tax revenues are down 17.2% through September 2020 compared to the prior year.

What this results in is flat to smaller budgets, meaning BEEM finds itself trying to sell to customers who have less dollars to spend.

NYC budget dollars are downward trending

While New York City may be a moot point given it hasn’t ordered anything from BEEM since 2018, it’s still important to assess the city’s budget.  The city division that has a contract with BEEM is the Department of Citywide Administrative Services, per the contract exhibit found in BEEM’s filings:

Source: Company filings

The trend in funds allocated to fleet services (where we believe BEEM’s products are included given their use in charging vehicles) is negative, down from $58MM in 2018 to just $31MM for 2021, a drop of 46% and not a good indicator for incremental spend:

Source: NY Department of Citywide Administrative Services

Customer budgets in California are also shrinking

We found several instances where named BEEM customers in California are reducing budget allocations to the departments most likely to purchase BEEM products.

Source: San Diego County Budgets

Source: City of Long Beach

  • Tehama County, a March 2020 purchaser of EV ARC to provide free electric charging to citizens through its Carl Moyer Program, has seen budgets to the Moyer program fall 60% since 2018, inclusive of a significant increase to funds in 2020

Source: Tehama County Budget

Source: Air Pollution Control District

We believe that recent announcements are hot air and unlikely to translate into meaningful revenue

BEEM recently made two business announcements that would suggest potential revenue upside:

Here, we’ll show you why we believe there is much less to these announcements than suggested.

The first, with the US General Services Administration (GSA), simply allows federal agencies to purchase EV ARC through the GSA Advantage website.  Importantly, there is no volume commitment associated with this award. We would liken this to just getting your product added to a catalog where catalog recipients can choose to order your product.  

Notably, in this release, BEEM CEO Desmond Wheatley notes that five federally funded labs and the Navy already use EV ARC:

“Five Federally funded National Laboratories and the U.S. Navy already use EV ARC™ products. It will be much easier to get follow on orders from them and new orders from other Federal agencies as a result of this contract vehicle being in place.”

Those five federally funded labs are the US Department of Energy’s National Renewable Energy Laboratory (NREL), Lawrence Livermore National Laboratory, Sandia National Laboratories in Albuquerque, Sandia National Laboratories in Livermore, and Idaho National Laboratory and while they can certainly now use the GSA website to place orders, their 2021 budgets don’t suggest an increasing ability to pay.

Livermore and the Sandia labs have 2021 budgets 25.5% and 12.6% less than 2020, respectively, while NREL and Idaho are flat.

Source: Department of Energy funding by site

In fact, the DOE’s budget for “Energy Efficiency and Renewable Energy” is down 74% in 2021:

Source: Department of Energy Funding by Appropriation

Stepping even further back, the DOE’s overall budget for 2021 is 8.2% below 2020’s budget. Unless other federal agencies decide to make up for budget shrinkage by BEEM’s existing federal customers, we do not believe this announcement will translate into meaningful revenues.

We believe that the above shows a fairly clear trend that budgets of key municipal and government customers are tightening and less funds are available to purchase EV ARC products.

Is this déjà vu?

The San Diego announcement, in our view, bears a striking resemblance to a 2017 announcement that doesn’t appear to have gone anywhere. 

In this most recent announcement, BEEM says it is collaborating with the city of San Diego to offer “free sustainable charging to the public” through a “a public-private partnership with a corporate sponsor who will receive global naming rights to the network and highly visible corporate brand placement on the EV ARC™ units”:

Source: Press release

In 2017, in fact, BEEM made an announcement that it had engaged Outfront Media to procure a “naming rights sponsor for the EV ARC™ charging station network throughout San Diego”:

Source: Press release

Strangely, it does not appear that this amounted to anything – we were unable to find a subsequent release that Outfront and BEEM had found a naming rights sponsor.  We would assume, based on this and the fact that the “corporate sponsor” story is back in 2020 that the initial 2017 effort didn’t amount to anything.  

These two announcements are strikingly similar – both mention a to-be-determined corporate sponsor, suggesting an intent to do business with a corporate sponsor rather than anything actually set in stone.

Given that the 2017 announcement doesn’t seem to have amounted to anything, what’s to say that the 2020 announcement will? Is it simply possible that corporate sponsors don’t have interest in spending over $60k per device for marketing purposes?  

These indicators, plus BEEM’s considerable decline in backlog and decision to eliminate the backlog disclosure lead us to believe that revenue growth for the foreseeable is unlikely to reach the sell-side’s eyepopping revenue growth estimates of 259% in 2021 and 84% in 2022 (Bloomberg).

Is EV ARC an uncompetitive product?

We believe that it’s important to understand the why behind the apparent stalled-out growth and limited product demand and future we have outlined above. 

When we first started looking at the EV ARC, we were unable to find any real competitors in the solar powered EV-charging carport category.  This led us to two potential conclusions: either BEEM had bottled lightning and no one was able to compete with them, or the product category itself was, for some reason, unattractive.  Unsurprisingly, our conclusion is firmly in the latter camp. A quick look at the EV ARC’s capabilities provides insight into why – according to BEEM’s own fact sheet, EV ARC only provides up to 245 miles of daily range:

Source: BEEM

Our interpretation here is that a single EV ARC can provide a total of just 245 miles of range per day – so if two cars are using the charger over the course of the day, they split that 245 miles of range. This is a function of the solar panels’ ability to generate electricity, and compares unfavorably with traditional, on-grid stations both in range and price:

Sources: New Motion catalog, New Motion Business Line, New Motion Home Line, EV Solutions, EV Solutions Store, CarPlug, EVBox, ChargePoint Home, ChargePoint HomeFlex, ChargePoint Express 250, ChargePoint CPF50, Charging Shop, Beam Global

The rate of charge for the EV ARC is dramatically slower than the other commercial and residential chargers, which we would imagine doesn’t provide a great customer experience.  In fact, we reviewed user feedback from six EV ARC stations we were able to find on PlugShare, and while many users were able to use the stations, common complaints were related to stations not working or slow charging:

Camp Roberts Northbound Rest Area

Ginkgo Petrified Forest – Trees of Stone Trailhead

Camp Roberts Southbound Rest Area

Santa Monica Airport

Selma City Hall

Huron City Hall

The economics of an EV ARC don’t appear attractive to us, either – a survey of the EV ARCs in the Fresno area shows that they charge $0.43/kWh for a charge. Assume we are attempting to fully charge a 75 kWh TSLA Model S, the owner would pay 75 * $0.43 = $32, and the EV ARC would be tapped out. Based on this 43c/kWh pricing, the revenue for the EV ARC is capped at ~$30 a day, or $10,950 a year. Assuming zero operating costs (which is obviously unrealistic), that’s an almost 6-year payback period, best case, for an EV ARC.

Unsurprisingly, BEEM has received criticism for its product given this dynamic. As early as 2014, BEEM (then Envision), received criticism for being too expensive at $40k (it’s now over $60k!):

Source: WIRED

Aside from being expensive, it appears that off-grid commercial charging presents another costly problem – wasted capacity.  The changing dynamics of traffic flow in cities or employee presence in corporate lots make “sizing a suitable generation system – without massively overbuilding capacity – very difficult.”

According to this article, you can easily install enough solar-powered EV charging for your “busiest days”, but then your system is underutilized on other days:

Source: TheDriven.io

Given this, if a customer really wants solar-power EV charging, they are either going to optimize capital returns by planning deployments based on lower utilization (vs “busiest days”) or push for pricing that makes wasted capacity less of an issue.

We think the latter is where solar power EV charging is headed – as an example, just a few days ago, we learned that the Minnesota Pollution Control Agency is planning on spending $170k on 22 Level 2 charging stations, but will reward developers who include solar panels or other renewable power sourced into their stations:

Source: US News

A municipality is offering $170k to purchase 22 charging stations, INCLUDING SOLAR PANELS, amounting to an average price of $7727 per station.  BEEM, at over $60k a station (and still barely/not profitable on a unit basis at these prices), is entirely unable to compete in such situations.  BEEM would only have to drop their pricing by ~87% in order to be competitive in this situation

Despite this difficult dynamic powering anemic future revenue growth, history tells us that management will be well compensated regardless.

Great work if you can get it

Since its 2010 reverse merger through 3Q20, BEEM has generated approximately $27MM in revenue. Of that, an eye-popping 99.7% has gone to operating expenses:

Source: Company filings

The prime beneficiaries of this operating spend have been BEEM’s current CEO, Desmond Wheatley, and CFO (formerly Chris Caulson and currently Katherine McDermott).  From FY10 to FY19, the period for which compensation data is available, operating expenses were 106% of revenue. Compensation paid to the CEO and CFO were approximately 30% of revenues during this period. 

CEO Wheatley’s comp alone accounted for almost 20% of revenues from 2010 to 2019:

Source: Company filings

While BEEM’s revenues have fluctuated dramatically over the last 10 years, Wheatley appears to have done just fine. 

In addition to what we believe is excessive executive compensation, we have other concerns about certain members of the executive team and board.

The C-suite and two restatements 

In something we typically don’t see in our work, both the CEO and CFO of BEEM were at companies that both had to restate their financials.  

From 2000 to 2007, BEEM’s longtime CEO, Desmond Wheatley, was in leadership at Wireless Facilities, Inc. (WFII), now Kratos Defense Solutions.  He was a VP from 2000-2002, and from 2002 to 2007 was the President of the Enterprise Network Services Segment (ENS):

Source: LinkedIn

On August 4, 2004, WFII announced it would have to restate its financial statements for the years 2001 to 2003, primarily as a result of a “recent analysis of contingent tax liabilities primarily in foreign jurisdictions”.  WFII estimated that the “preliminary estimate of the impact of the adjustments is between approximately 3 – 8% of net income or loss for any given year from 2000 to 2003 for an aggregate increase of expenses of $10 million to $12 million.”  In the three months preceding this announcement, company insiders were alleged to have sold over $60MM in stock.  When the company released its amended 10-K a month later, however, net income was reduced by a total of $33.6MM, and the drivers of the restatement were a broad range of issues:

Source: 10-K/A

The division Wheatley was president of, ENS, was also caught up in the restatement – its 2003 revenues were reduced from $43.2MM to $41.1MM, or down 4.9%.  While Wheatley was never mentioned in the ensuing lawsuit, his position in leadership of a segment that had to restate numbers is, in our view, a cause for concern.

CFO Katherine McDermott, who joined in July of 2019, was at Lantronix from 2000 to 2005 as VP of Finance when the company had to restate its financials.  Lantronix announced that it expected revenue reductions of less than 15% for fiscal 2001 and 2002.  Lantronix later disclosed it was the subject of an SEC probe, and, in 2006, the SEC sued Steven Cotton, Lantronix’s CFO during this period:

Source: SEC

In 2009, Cotton “consented to entry of a permanent injunction, disgorgement of $344,976.98 in ill-gotten gains plus pre-judgment interest of $62,629.03, payment of a $120,000 civil penalty, and imposition of a ten-year officer and director bar.”

Let us be clear, Kathy McDermott is not mentioned in the restatements or SEC complaint.  It is, however, troubling to us that Kathy was the VP of Finance at Lantronix, potentially working for CFO Steven Cotton.

In both cases, neither Wheatley nor McDermott were implicated in the suits that resulted from the restatements.  They were, however, indisputably in senior roles in their organizations when the above-mentioned events transpired.  We believe this should be a red flag for investors.

Unhappily EVer after

We believe BEEM presents significant risk to retail investors, and that the 1460% increase in the stock price over the last year on deteriorating fundamentals is entirely unjustified. 

The Mariner instant replay shows that:

  • BEEM sells a product whose profitability has thus far been minimal
  • BEEM’s revenues, after growing in FY18, have since slowed considerably, leading to stagnant margins
  • BEEM’s backlog has shrunk, and the company has stopped providing backlog disclosure
  • BEEM’s municipal customers are facing budget headwinds
  • EV Arc’s performance is far behind that of on-grid systems, despite a much higher price tag
  • Despite all this, BEEM’s executive compensation has soaked up ~30% of revenues since 2010
  • Both BEEM’s CEO and CFO had leadership roles in companies that had to restate their financials

In light of these factors, we do not believe that BEEM can achieve the lofty sell side estimates found on Bloomberg, which call for revenues of $20.2MM in 2021 and $37.1MM in 2022, up 270% and 72%, respectively, from the prior year periods.

Given current backlog and customer trends, we think revenues will be flat in 2021 (to TTM 3Q20) at best.  Assuming multiple compression from BEEM’s eye-popping 27.0x EV/Sales multiple (a 585% premium to the group median multiple) to 20x EV/Sales, we get to a price target of $12.49, down 82% from the last close:

GreenPower Motor – the wheels on the bus are slowing down

Portfolio manager summary

GreenPower Motor (TSX: GPV, NASDAQ: GP) is an EV bus company that we believe has significant misunderstood risks:

  • Unlike certain EV plays (cough, cough, NKLA), GreenPower actually has revenues! The problem is that those revenues are entirely from California, and have been dependent on a subsidy program that we estimate accounted for ~74% of calendar year 2019 and 2020 YTD revenues
  • As a result of state budget constraints, the subsidy program itself is expected to keep shrinking – we believe this dynamic has already started to affect GreenPower’s revenues, which are down 41% compared to the same period in the prior year
  • We believe that GreenPower has prioritized G&A over R&D, having spent ~$2MM on R&D over the last five fiscal years while spending close to $8MM on “Administrative Fees”; this is perhaps the reason why GreenPower has no patents and licenses, and could explain the inconsistencies we found in how the company has marketed its products in press releases compared to how it discloses the specs on its vehicles
  • We believe that CEO Fraser Atkinson has kept some questionable people in his orbit of colleagues – his prior endeavors have seen SEC subpoenas, a delisting by the BC Securities Commission, and collapsing stock prices
  • One of GreenPower’s major shareholders is a BC bus entrepreneur who owned a company implicated in deaths of two teenagers in a crash that was determined to be due to a “flagrant disregard for safety provisions”
  • Another (former) major holder of GreenPower is reputed by penny stock investors as having a history of “toxic financings”. They were also a holder of SCWorx, a company recently halted by the SEC
  • The PCAOB imposed sanctions on GreenPower’s auditor, Crowe MacKay, related to a 2014/2015 audit, and the PCAOB noted deficiencies related to a 2017 audit that included “the inappropriate issuance of an audit report without having planned and performed an audit under PCAOB standards”
  • We believe that GreenPower’s revenue growth is likely to be significantly hampered due to the shrinking California subsidy program – this, compounded with the governance risks outlined above, leads us to assign a $2 price target to GreenPower’s stock, down 84% from the last close

Despite having real revenues, GreenPower has major risks misunderstood by retail investors

GreenPower Motor Company (TSX: GPV, NASDAQ: GP) is a British Columbia-based designer, builder, and distributor of all-electric buses used in various applications. It is the product of a 2014 reverse merger into Oakmont Minerals, which at the time was being run by current GreenPower CEO Fraser Atkinson.

GreenPower’s product offering is comprised of:

GreenPower EV Star Min-E – Which is an electric mini-bus available in four configurations and with a “life expectancy of ten years”

The Beast– A Type-D School Bus which is offered in two different lengths and configurations

EV Transit Bus Line– GreenPower’s low-floor transit line that features multiple models: 30-ft EV250, 40-EV350 and the double decker EV550

With all the hype about EVs out there, and a great many charlatans pumping their technologies, the combination of EV and reverse merger might leave a skeptical investor questioning this company.

Much to our surprise, and, we would imagine, to yours, GreenPower has achieved the first step to establishing a real business and has booked approximately $25.3MM in revenue since March 2018, which on the surface, seems impressive, but we believe is unlikely to be sustainable.

GreenPower’s stock is up ~767% this year and up ~300% since July – before we delve into why we believe this is unjustified, let’s recap the long case:

  • GreenPower has revenue! More than what NKLA can claim – which gives GreenPower real legitimacy as an EV business
  • A hype-driven exponential increase in investor interest in the EV space and trade opportunities created because of the rise of EV stocks such as TSLA (up ~410% YTD) and NKLA (up ~167% YTD)
  • Electric buses are a unique segment of the EV market, not pursued by many public companies (perhaps the closest public competitor is Ballard Power)
  • Increased government investment in the EV infrastructure, especially electric buses

Mariner Reality Check: The wheels on the bus are slowing down

We believe GreenPower’s revenue is about to fall off a cliff as a result of its exposure to California’s subsidy program. GreenPower is only registered as a motor vehicle manufacturer and dealer in California, and the company has “not yet sought formal clarification of our ability to manufacture or sell our vehicles in any other states.”  In our view, this effectively makes GreenPower a “one-state” wonder. 

We believe that revenues to date have been supported significantly by one government program (we estimate that 74% of GreenPower’s total revenue in calendar years 2019 and 2020 YTD is from the program): California’s Hybrid and Zero-Emission Truck and Bus Voucher Inventive Project (HVIP).

Funds allocated to HVIP were fully claimed by November 2019, no new funds have been allocated, and HVIP expects the next allocation to be lower – thus far, we have seen GreenPower’s YTD 2020 revenues fall 41% from the same period in 2019 – we expect them to fall further given shrinking HVIP program funding.

Like the bus in Speed, we believe the shrinking HVIP program is the proverbial bomb in the bus, as EV truck/bus producers fight for a piece of a smaller pie – except Sandra Bullock isn’t there to steer the bus to safety and Keanu Reeves isn’t there to defuse the bomb.

In this report, we explore the risk of falling HVIP credits, GreenPower’s claims about its products and autonomous driving, the CEO’s history with seemingly questionable characters (hint: SEC allegations) and an auditor with PCAOB deficiencies.

The combination of all these factors leads us to believe that GreenPower’s stock, trading at 16x 2021 revenues, is inappropriately valued, and assign a price target of $2, down 84% from the last close.

We believe that a shrinking HVIP credit program poses the number one risk to GreenPower’s topline and its future growth

At first blush, electric vehicles are extremely expensive compared to their ICE counterparts. An average diesel transit bus costs $500,000, compared to an EV bus at $750,000, while a diesel school bus costs around $110,000 compared to an EV school bus at $230,000.

Because of this pricing differential, governments have long offered subsidies to bring the cost of the vehicles close to their cheaper, gas-powered peers and induce usage of cleaner technologies to mitigate harm to the environment.

Since GreenPower is only registered as a motor vehicle dealer in California, the ONLY truly relevant subsidy program in our view is California’s Hybrid and Zero-Emission Truck and Bus Voucher Inventive Project (HVIP). The HVIP program was established in California following the passage of the California Alternative and Renewable Fuel Carbon Reduction Act and to date, HVIP has deployed more than 4,000 medium-to-heavy duty vehicles across 1,100 participating fleets. 

The California HVIP works as follows:

  • Every budget year, the California Air Resources Board (CARB) sets a budget that will be allocated to the HVIP program
  • Vehicle buyers submit purchase orders to dealers, and the dealer uses that order to apply for the HVIP voucher
  • The purchaser will receive the vehicle at a discounted price at point of sale, while the dealer will receive the incentive payment from HVIP as well

In the case of GreenPower, HVIP provides the following incentives for its products:

These incentives allow for an effective reduction in the price of the vehicle for the end user, and have been a meaningful source of revenues for GreenPower. The Voucher Funding Map allows users to download a CSV file to show how much funding GreenPower has gotten from the HVIP program:

The data set shows GreenPower received approximately $13.5MM in funding from HVIP for what we believe to be calendar 2019 and YTD 2020 (since GreenPower only began mentioning the program starting in 2019). Over this same period, GreenPower has reported $18.3MM in revenues – this implies that HVIP has been responsible for 74% of GreenPower’s revenue for calendar years 2019 and YTD 2020, making it a very important source of revenue.

Why does this matter? If ~3/4ths of GreenPower’s revenues are associated with one state subsidy program and the budgetary authority is reducing their funding, that creates quite the pickle for GreenPower; not to mention that demand for these vouchers has been increasing.

  • We called HVIP, and learned that by May 2019, funds allocated for the HVIP voucher program for the July 1, 2018 to June 30, 2019 fiscal year had already been claimed, so a waitlist for the next fiscal year’s allocation was started
  • According to GreenPower, on October 24, 2019, CARB approved funding of $142MM for the fiscal year starting July 1, 2019 until June 30, 2020 – because there was a $125MM waitlist already extant, the entire $142MM was spoken for by November 2019 – it follows, in our view, that funds for any GreenPower order that arrived after November 2019 are simply not available
  • The implication, in our view, is that new HVIP subsidy funding for GreenPower has been effectively unavailable since November 2019, and will, best case, be available in early 2021 – this represents over a year without incremental subsidy funding to help drive demand for GreenPower’s orders

This dynamic seems to be hitting GreenPower already, as June 2020 YTD revenues are down 41% versus the same period in 2019.

Based off the press releases from the company, above are the orders/deployments announced by GreenPower since the beginning of the year. On top of most of these orders being announced since June (after the stock caught fire and almost 8 months since funding closed), the startling fact is that all these orders are from California based customers, suggesting their dependence on HVIP funds.

We view HVIP as a key demand driver for buyers of EV buses – without subsidization, we believe that few municipalities or customers have the wherewithal to purchase premium priced EV vehicles. This, combined with the fact that HVIP has been such a meaningful contributor to GreenPower’s revenues and concentration of orders in California, leads us to believe that GreenPower’s revenue growth is about to be seriously hampered as the HVIP program shrinks. If these customers do not receive HVIP funding, will they really follow through with these orders? 

The Company has shied away from talking much about subsidies and their significance as a potential headwind; however buried in its filings, GreenPower itself has also mentioned the negative impact of HVIP funding:

In the 2020 20-F:

“On November 1, 2019, CARB announced that it had received voucher requests for the entire $142 million budget allocated to the HVIP program for the current fiscal year and was no longer accepting new voucher requests until new funding for the program is identified. This announcement has negatively impacted new sales prospects for GreenPower buses in the state of California and any further reduction or elimination of the grants or incentives in the state of California would have a material negative impact on our business, financial condition, operating results and prospects.”

For the quarter ending December 2019:

“by November 1, 2019, CARB announced that it had received voucher requests for the entire budget allocated to the HVIP program for the current fiscal year and was no longer accepting new voucher requests until new funding for the program is identified. This announcement has negatively impacted new sales prospects for GreenPower buses in the state of California.”

We believe the market underappreciates the risk that is posed by the HVIP program:

  • While the program has led to revenues for GreenPower in the past, it has made the company almost entirely dependent on the HVIP and California ecosystem
  • Given our estimate that ~3/4 of the company’s revenues are from the HVIP program and all the announced orders since January originating in California, we believe that the shrinkage of the HVIP and its increased competitiveness poses a huge risk to the company’s topline
  • This has already started to impact the company in our opinion, with YTD revenues down 41% compared to the same period last year, but we fear the worst is yet to come

Not only are the state subsidies trouble for GreenPower, we believe that the company’s R&D and product marketing are a cause for concern.

Product marketing and R&D concern us…a lot

The EV industry is still very much at a nascent stage and companies within the industry need to be constantly innovative to stay on the forefront. Some of the most adopted EV products available today, i.e Tesla products, are the product of billions in R&D and product development costs.

Over the past five fiscal years, GreenPower has spent just $2.2MM on product development – a relatively small dollar expenditure when you consider that TSLA, in 2006, before it had ANY revenue to speak of, spent $25MM on R&D:

To put this in context, TSLA, in a year when it had zero revenues and was still very much a nascent business, spent over 10x what GreenPower has spent in the last five fiscal years.

What GreenPower has spent on is “Administrative Fees”, a cumulative ~$8MM over the same period, or almost 3.6x its product development spend. In our view, we do not believe that companies that claim to be innovative yet spend minimally on said innovations are good investments.

Why spend so much on “Administrative Fees” rather than pursue innovation, as Greenpower lacks substantive IP? “We do not currently have patents and licenses, but may choose to obtain patents and licenses on our designs, processes or inventions in the future.”

Why allocate funds to “Administrative Fees” when those funds could be used to legally protect its own designs and inventions?

We wonder if this lack of spend on product development is the reason for the inconsistencies we’ve discovered in some of GreenPower’s marketing and specifications. GreenPower’s media outreach appears to present outcomes that are much higher than the specifications outlined on its website.

Instance 1: EV550’s range

  • In 2016, GreenPower delivered an EV550 bus to the Greater Victoria Harbour Authority – the article covering the delivery noted that the “Last October, GreenPower supplied the Greater Victoria Harbour Authority with North America’s first fully electric double-decker bus. It was also the company’s first delivery, an ‘EV550’ that can travel up to 300 miles on a single charge (MPC)”
  • But on GreenPower’s own product site, the EV550 today is characterized by a minimum range of 175 miles

Instance 2: A wide range of seating capacity on the Synapse Shuttle

  • But when it delivered the Synapse Shuttle to a client in 2019, the vehicle capacity appears to have shrunk – “The Synapse Shuttle is a thirty-six foot purpose built all-electric bus with seating for over 40 passengers and a range of up to 150 miles on a single charge. The Synapse Shuttle can be configured with multiple charging options including Level 2 on-board charging or Level 3 DC fast charging”

Instance 3: Range estimates for the EV 350

  • In April 2018, GreenPower announced that “its EV350 40-Foot All-Electric Transit Bus has outperformed its original range expectations. The zero-emission vehicle recently traveled 205 miles with 50% SOC (state of charge) remaining battery power after the trip” (this implies a 410 mile range in our view)

These inconsistencies make us question the credibility of GreenPower’s management team – our questions only increase with the announcement that it was developing a fully autonomous vehicle.

Autonomous driving, like EVs, has been used by to excite and entice investors curious about the future of transportation. During the quarter ending March 2020, GreenPower announced that it had entered into an agreement with Perrone Robotics (“Perrone”) to build a fully autonomous EV Star for the transit market. We are very skeptical that this is anything but hype – fully autonomous driving is notoriously hard and we believe it is unrealistic that this milestone will be achieved in the near future (from Business Insider):

What GreenPower seems to propose is Level 5 automation, which is “decades away”:

GreenPower ’s partner in this effort, Perrone – did a Series A with Intel in 2016 – by the time Perrone received this funding, Google had already spent $1.1B on its autonomous driving project. In 2019, Uber raised $1B JUST for its driverless cars business. We cannot comprehend how GreenPower and Perrone will be able to compete or innovate in this market given the level of capitalization required to invest and subsequently commercialize the technology.

Recall that GreenPower, in the last five fiscal years, has spent just ~$2.2MM in product development while it has spent $8MM on “Administrative Fees”. The company does not have patents or licenses – this causes us to question the company’s autonomous driving claims and goals. How is GreenPower supposed to compete or innovate without protected IP?

We believe that GreenPower should focus on aligning its specifications with its marketing, rather than marketing optimistic cases and instead presenting “minimum” specs. To us, this is not the sign of growing, innovative company.

We believe that the people in the GreenPower ecosystem have serious credibility issues

We are big believers that the people behind a company – the executives, directors, and major shareholders – are critical to the success or failure of the company and its strategy. Their prior business performance, personal conduct, and relationships should be an indicator of the likelihood of success of their current venture, especially in light of the nascent nature of the EV space.

When we evaluated GreenPower’s key personnel, we found what can best be described as a series of red flags – collapsing stock prices, an SEC subpoena, and major shareholders with issues that made us uncomfortable.

Enter Management: Not so “Versatile” after all

In February 2003, GreenPower’s current CEO, Fraser Atkinson, after leaving his position at KPMG, was appointed CFO of a Canadian company known as Versatile Mobile Systems, which traded on the TSX Venture Exchange under the ticker VV. Notably, another Versatile AND GreenPower board member, Malcolm Clay, was also a KPMG alum. At the time, VV was “primarily engaged in software development and sales of computer software, hardware and systems integration services related to wired and wireless mobile business solutions.”

In 2008, VV appointed one Alessandro Benedetti to its board – an Italian gentleman who had, in the early 1990s, been arrested “on charges which included false accounting”, and “entered into a plea bargain with the prosecuting authorities under which he entered a guilty plea and accepted a sentence of imprisonment.”

This doesn’t seem like someone you’d want on your board, right? It seems that Mr. Benedetti has continued to court controversy, having recently been identified by the WSJ as having worked in concert with Softbank’s Rajeev Misra to strike “at two of [Rajeev’s] main rivals inside SoftBank with a dark-arts campaign of personal sabotage”.

In 2009, shortly after Benedetti’s appointment, VV started a private equity subsidiary, Mobiquity Investments Limited, on the fact that the “core strength of our Board of Directors, in particular Alessandro Benedetti and Bertrand Des Pallieres, is in banking and private equity activities.”

Come October 2009, and we find that VV has taken an 8.3% in the Equus Total Return Fund (NYSE: EQS), a Houston-based business development company (BDC) making investments in the debt and equity securities of companies with an enterprise value of between $5MM and $75MM.

By January 2010, EQS’s stock price had fallen approximately 55%, and the VV players (CEO John Hardy, CFO Fraser Atkinson, and the aforementioned Des Pallieres and Benedetti) approached EQS’s existing board asking for board representation. On April 13, 2010, EQS filed a definitive proxy with the SEC to, among other things, consider the election the VV directors.

Just 13 days later, on April 26, 2010, the SEC “subpoenaed records of the Fund in connection with certain trades in the Fund’s shares by SPQR Capital LLP, SAE Capital Ltd., Versatile Systems Inc., Mobiquity Investments Limited, and anyone associated with those entities.”

These entities were all related to one another:

  • Mobiquity was a subsidiary of Versatility

We cannot speculate as to what this was related to or amounted to, but we believe it’s fair to say that drawing the attention of the SEC is never a good sign. A letter sent to EQS shareholders on May 3, 2010, characterized the SEC matter as follows: “the Securities and Exchange Commission issued a subpoena and notice that it was conducting an investigation into possible violations of federal securities laws in connection with trading in Equus stock.”

By June 2010, the VV group had been elected to the board on their promises to change the poor governance of EQS, with Hardy winning the Executive Chairman seat and Fraser becoming the Chairman of the Audit Committee. But it seems like they did not live up to their promises, being called to task by a shareholder for:

  • “Accounting inconsistencies” – remember that Fraser was Chairman of the Audit Committee!
  • “Ridiculous” board salaries, with John Hardy earning “2% of the fund’s current market cap annually”
  • “Within 6 months they announced plans for a massively dilutive rights offering”

Sure enough, it doesn’t look like Fraser and his crew generated much value at EQS – since being appointed to the board, EQS is down 50%.Versatile itself has suffered a similar fate – by March 2016, it had accumulated a working capital deficit of CAD $3.3MM, accumulated losses of CAD $63.7MM, and “material uncertainty that may cast significant doubt as to the ability of the Company to continue operating as a going concern”.

By January 2017, Versatile received a cease trade order from the British Columbia Securities Commission for failing to file its financials, and was subsequently delisted. Shareholders were caught unaware:

From its peak in 2011 until it was delisted, Versatile fell 14c to 3c, approximately 79%:

From 2009 to 2013, Fraser was also the Chairman at Rara Terra Minerals, a Canadian mining outfit that trumpeted developments at one of its rare earth properties in November 2012: they believe that they had found “numerous geophysical anomalies on the Xeno property meritorious of geochemical followup next summer.” Barely two months later in January, Fraser resigned from the board and the Company announced a private placement.

In May 2013, Rara Terra later abandoned rare earth mining, and rebranded itself Echelon Petroleum – in 2017, Echelon became Trenchant Capital Corp (TCC CN).

More importantly, Fraser presided over an 82% plunge in Rara Terra’s stock in 2011:

We believe that Fraser Atkinson’s track record speaks for itself – he has aligned himself with seemingly questionable individuals and several listed entities which he was associated with have virtually collapsed in price. Below, we show that his association with potentially dubious individuals continues today.

The RedDiamond connection conundrum

In May 2020, GreenPower released a prospectus to outline the sale of approximately 11.5MM shares by a group of shareholders who obtained their shares through private placements. The selling shareholder table reveals that one of these holders, RedDiamond Partners LLC, was selling all of its 737k shares in the company:

In the footnotes we learn that:

  • RedDiamond’s address is 156 West Saddle River Road, Saddle River, NJ 0745
  • John DeNobile exercises control over the shares RedDiamond owned

A quick look at RedDiamond’s SEC filings shows that in 2019, RedDiamond held shares in a company called SCWorx, a “provider of data content and services related to the repair, normalization and interoperability of information for healthcare providers and big data analytics for the healthcare industry.”

Yes, that SCWorx (WORX), which was halted for three months by the SEC in April 2020:

SCWorx’s CEO pled guilty to felony tax evasion charges and the Covid-19 test supplier they used had a CEO who was a convicted rapist – huge hat tip to Hindenburg Research for a job well done on this one.

Curiously, while RedDiamond is the DeNobile entity that reported its WORX holding to the SEC, another DeNobile entity, RDW Capital LLC, actually shows up as a stockholder in a share exchange agreement:

DeNobile and his business partners, through RDW and other entities they control, have been criticized by microcap investors as providers of “toxic financing” – a form of discounted financing where the convertible note holder is allowed to convert to equity at a price below market. These shares, since they are issued below market, provide an immediate return to the holder, who can then dump them in the open market, causing the stock price to collapse.

The prior presence of RedDiamond’s shareholder list is yet another apparent indication of the types of people Fraser Atkinson associates himself with, which we believe calls into question his credibility as CEO of GreenPower.

A principal shareholder and a potential “flagrant disregard for safety provisions”

In GreenPower’s US IPO filing, we learn that another principal shareholder of the company is Gerald Conrod:

Imagine if you owned shares in an EV bus company and one of the company’s principal shareholders used to run a bus company that had operations that resulted in death? In our view, this would cause us to be highly skeptical of said EV bus company. This is exactly the situation here.

In 1979, Gerald, along with a partner, started Conmac Stage Lines, after the BC government-owned operator ended tour and charter service. On January 30, 1984, one of Conmac’s buses lost its brakes and crashed, killing two high school students and injuring more than 50 others. A BC coroner’s jury cited a “flagrant disregard for safety provisions” as the primary cause of the crash. “During the 17-day inquest, the jury heard ConMac Stages Ltd. continued to use the 20-year-old bus for high-school trips despite inspections that revealed a cracked frame, poorly anchored seats, a broken speedometer and defects in the braking system.” The jury also heard a former driver say that the “company routinely swapped parts on its buses to meet the standards of motor vehicle branch inspectors.”

Gerald has in fact been involved with Fraser since Oakmont bought Greenpower in 2013, when he held approximately 15% of Greenpower’s shares. We find it hard to imagine why a bus company would want to partner with Gerald.

To recap, GreenPower’s CEO and principal shareholders have seen SEC investigations, significant price declines in the companies they were involved in, and a delisting – we view these are major red flags in the ability of management to execute on the stated vision of the company. We believe this complicates the already precarious situation that we believe exists as a result of the declining HVIP credits.

Given all this, one might hope that GreenPower’s auditors are the adults in the room, but we believe that this is NOT the case. Our findings below, regarding GreenPower’s auditors, further compound our concerns that GreenPower presents unquantifiable risk to investors.

Is GreenPower’s auditor credible?

Crowe MacKay, GreenPower’s auditor, has had its own issues that call into question the reliability and credibility of the company’s financials. In Dec 2018, the PCAOB imposed sanctions and fined Crowe MacKay $25,000:

These sanctions related to Crowe MacKay’s audit of Canadian mining company Hunt Mining Corp.’s 2014 and 2015 financial statements, where Crowe MacKay, among other issues:

  • “[F]ailed to exercise due care and professional skepticism, and failed to plan audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for the Firm’s audit report”
  • “[F]ailed to consider information in the prior year’s audit working papers obtained from a predecessor auditor”
  • Conducted Hunt’s audits under Canadian GAAS instead of PCAOB standards, which was required due to Hunt’s status as a “foreign private issuer for the purposes of United States federal securities laws”

Insanely, Crowe MacKay, a Canadian accounting firm, failed to “evaluate relevant public information” to recognize that its audit client needed to be audited under PCAOB audit standards.

In 2019, the PCAOB released the results of a 2017 inspection which found deficiencies in both the audits that PCAOB inspected:

  • For one issuer, the PCAOB found “the inappropriate issuance of an audit report without having planned and performed an audit under PCAOB standards”
  • For the other issuer, the PCAOB found a failure to “perform sufficient procedures to test the valuation of a liability”

Let’s review that first one – basically, Crowe MacKay issued an audit report without conducting the audit using PCAOB standards – some of the standards that the PCAOB referred to are as follows:

It appears that Crowe MacKay’s shortcomings in its audit practices could be a significant risk to GreenPower shareholders, compounding what we view as management’s checkered history. How can GreenPower’s shareholder believe the company’s financials when the very firm in charge of vetting those financials appears to lack the policies and processes to do so?

Conclusion & valuation

The Mariner Instant Replay on GreenPower is as follows:

  • We believe that GreenPower’s revenue growth will collapse as the business is materially exposed to California’s shrinking HVIP subsidy program
  • We believe that GreenPower lack of R&D spend calls into questions its competitiveness. We believe that GreenPower’s autonomous driving partnership is unlikely to get off the ground given the difficulty and investment requirements to achieve fully autonomous driving
  • We believe that the people in the GreenPower ecosystem have past histories that call into question their credibility, including SEC subpoenas and delistings
  • We believe that auditor Crowe MacKay’s history suggests that GreenPower has little in the way of substantial auditor oversight, calling into question the reliability of reported numbers

Let’s be generous and assume a 25% reduction to the next HVIP budget – based on this, we model that GreenPower’s revenues could fall another 25% from the $6MM calendar year run rate implied by the first two calendar quarters of 2020, resulting in forward revenues of approximately $4.5MM.

Being generous (again) and applying TSLA’s FY21 price/sales multiple of 8.1x to GreenPower’s revenues, we arrive at a price target of $2, down ~84% from the most recent close and inline with the stock price before its massive run up. Given the hype and volatility typically associated with EV stocks, we believe the path to our target could be volatile.

Mariner’s Final Word: Remember Your ABCs (Always Be Cautious)

NOTE: Aside from confirming that GreenPower holder Gerald Conrod was in fact the bus entrepreneur that owned Conmac, Greenpower did not respond to our other questions.

Don’t get charged up on BLNK – questionable origin story, management history and product issues portend potential 90%+ downside

PM Summary – 90% downside in the BLNK of an eye

  • Blink Charging (BLNK) is an owner and operator of electric vehicle charging infrastructure whose stock has appreciated 505% since June on TSLA’s meteoric rise, increased Robinhood attention and potential that we will show is likely unrealistic
  • BLNK’s origins trace back to a 2009 reverse merger with ties to Barry Honig whom settled with the SEC for $27MM for “classic pump-and-dump schemes”. In addition to the potential Honig connection, CEO Michael Farkas’s ties to other alleged pump and dump artists and SEC charges of its 2nd largest shareholder lead us to believe that the people behind BLNK could present serious risks
  • BLNK’s core assets come from the 2013 asset acquisition of bankrupt EV charging company ECOtality – it has no technological IP; as such, BLNK’s revenue growth has significantly seriously lagged the EV industry –  yet CEO Farkas made >$7m in compensation during this period
  • We believe that this is due to persistent issues around product quality, customer churn, and user experience, and believe that these issues will continue to hamper BLNK’s growth
  • We believe BLNK’s management team and underlying products do not justify its 46x FY20 revenue, and assign a ~$1 base case price target to the stock, down 91% from here

Executive Summary – BLNK’s origins as a reverse merger in the orbit of SEC-charged pump-and-dumpers combined with its acquisition of inferior assets out of bankruptcy are a significant risk to investors 

Blink Charging (BLNK) is an owner and operator of electric vehicle (EV) charging equipment and networked EV charging services proclaiming to capitalize on the ever-growing EV industry.  However, this report aims to prove otherwise and bring question into the people and underlying business.  BLNK’s performance in the EV market has been tepid and is obscured by consistent promotion and retail mania over the EV space. 

BLNK began as Car Charging Group, a 2009 reverse merger starring SEC-charged Barry Honig (more on him later) that in 2013 acquired the Blink assets from ECOtality, a charging station business that went bankrupt despite being the beneficiary of over $100MM in government grants.   That same year, BLNK also acquired Beam LLC and 350Green, both subscale companies where the CEO of the latter company was charged with fraudulently obtaining federal grants.  We believe that the management team and underlying asset base are a significant cause for concern.

To begin with, CEO Michael Farkas appears to step in as a controlling shareholder when Honig and company sold out of the stock in the 2010-2011 timeframe as it skyrocketed up and subsequently collapsed.  Farkas was previously the principal shareholder of an entity whose executives were charged with a pump-and-dump scheme, and whose assets were caught smuggling cocaine.  Despite this questionable background, he collected over $7MM in compensation from Blink through 2015-2019 for near no growth, which has broadly lagged the broader EV space.  Management concerns extend to the fact that the company is on its third CFO since 2015, and it has disclosed a material weakness in internal controls over financing reporting.  It seems like this lack of oversight and controls could allow an unscrupulous management team to present dubious figured or pay itself excessive compensation (which they did, over $27m of compensation since inception). 

For a “technology” company, BLNK doesn’t even have a P&L line item for R&D spend, and has what appears to be minimal technology related IP – it has just 4 active US patents, all of which came from the ECOtality deal.  The patents (USD626063S1, USD674334S1, USD626065S1, USD626064S1) solely pertain to the visual design of their stations, not the underlying technology (note to reader: unless you are Apple and we’re talking about the iPhone design, visual design patents don’t have much value).  This stands in stark contrast to competitor ChargePoint, who has about 59 patents assigned, several of which are related to their technology.  User reviews of the chargers suggest poor maintenance, low functionality, and high fees – a major hindrance when TSLA, has a network of free (in some cases) rapid chargers for its fleet of cars, which lead EV sales in the US.  Our proprietary research shows that charger counts have FALLEN at two key customers since the ECOtality deal, making us question the level of effort BLNK’s management has taken to grow the business.  Not to mention at least one client BLNK claims that doesn’t appear to have BLNK chargers…

All this makes us question the ability of this business to be competitive and causes us to question the legitimacy of the price move from approximately $2 to over $10 over two months.  Combined with revenue growth well behind that of the EV industry and the proximity of alleged pump and dump artists to the company lead us to believe that the stock is unsupported by fundamentals and the price move is entirely unjustified.  We assign a price target of approximately $1 to BLNK, representing downside of 91%, and caution shareholders against chasing this stock.

Company ties to alleged pump and dumpers starring the infamous Barry Honig

BLNK has its origins in Car Charging Group (CGGI), which itself is the product of a 2009 reverse merger with a Nevada shell known as New Image Concepts. In its 2009 10-K ownership table, we find that 33% of the company is owned by none other than Barry Honig (yes, that Barry Honig), his son Jonathan Honig, and father-in-law Herb Hersey:

Recently, and unrelated to BLNK, the SEC alleged that Barry Honig and other codefendants, “amassed a controlling interest in the issuer, concealed their control, drove up the price and trading volume of the stock through manipulative trading and/or paid promotional activity, and then dumped their shares into the artificially inflated market on unsuspecting retail investors…Across all three schemes, Honig was the primary strategist, calling upon other Defendants to, among other things, acquire or sell stock, arrange for the issuance of shares, negotiate transactions, and/or engage in promotional activity.”

Barry has a certain way with companies, and that way is usually down a lot, by near 90%:

In fact, in the 2009 filing, we learn that CGGI hit a low of just $0.002 that year, climbing to $1.01, thereafter rocketing to $75 sometime in 2010, only to collapse to $1.00 low in 2011 – a 97% drop in split-adjusted price from $2250 on 12/31/09 to $68 at 12/31/11:

Not only was the origin of the company related to a pump and dump artist, current management also has ties to similarly accused individuals.

CEO Michael Farkas’s ties to alleged pump and dumpers and penny stock dealers

In 2011, and unsurprisingly in the context of the Honig SEC complaint, we see that Honig and his associates disappear from CGGI’s ownership:

Two new names emerge, Ze’evi Group and Michael Farkas – Farkas, it turns out, “has served as our Chief Executive Officer and as a member of our board of directors since 2009” (but is not shown as a beneficial owner and not mentioned once in the 2009 10-K, which cites Belen Flores as CEO).  In fact, Farkas appears to have been named CEO in an April 30, 2010 filing.  If BLNK’s own filings can’t accurately represent when Farkas became CEO, should they be relied upon for other information?

But the story gets stranger – in the 2013 10-K, we learn that Farkas in fact, controlled Ze’evi Group, controlling just over 44% of CGGI in at the end of 2013.  Corporate records show that Farkas was actually an officer of Ze’evi Group going back to 2009, which would imply that he controlled approximately 60% of CGGI once Honig and co blew out of the name.  We can only speculate as to what relationship Farkas has or had with Honig, but we can say that based on the stock performance of other Honig names, stepping into a post-Honig situation could lead to tears.

Farkas appears to have hidden his initial control over the entity as its stock price cratered in 2011, which makes us wonder what role, if any, he had in helping the Honig crew exit their holdings.

Why is this important now?  Farkas, as we will show later, as current CEO since 2018 and prior CEO from 2010 to 2015, has presided over growth far behind that of BLNK’s industry and made acquisitions which appear to have created little, if no, value for BLNK shareholders.  But before that, we show that Farkas has been in proximity of some questionable, if not outright illegal, activities.

In 2009, the SEC accused Brent Kovar and Glenn Kovar, among others, principals in a company known as Sky Way Global, LLC, of “defrauding investors through multiple so-called ‘pump-and-dump’ schemes”, “timing stock sales from at least 2002 until 2005 to news releases that claimed President George W. Bush and others had endorsed company technology that would protect airplanes from terrorism.”  In 2003, Sky Way Global itself was merged into a public shell to become known as SkyWay Communications Holding Corp.  Michael Farkas, it turns out, was characterized as SkyWay’s “principal shareholder”, owning almost 10% of the company:

And if the Kovar pump-and-dump was not enough, Skyway was involved with potential drug trafficking:

“In 2006 an airplane Skyway said it had acquired in exchange for stock was caught in Mexico with 5 1/2 tons of cocaine on board.

In an email Friday, Farkas said, “Skyway was thoroughly investigated by several government agencies although there were indictments given to others, I was never accused or charged with any wrong doing.”

We are certainly not alleging that Farkas had anything to do with smuggling cocaine, but the actions of a company that he was principal shareholder of dictate the level of skepticism with which investors should view his ventures.

Farkas reminds us of Pigpen from Peanuts, with a cloud of “something” just following him around – BLNK’s second largest shareholder Justin Keener (9.9% ownership), was recently charged by the SEC for “failing to register as a securities dealer with the SEC. Keener allegedly bought and sold billions of newly issued shares of penny stock, generating millions of dollars in profits.”

Management quality can present risk to investors

To recap, BLNK and Farkas have been in some proximity to:

  • Barry Honig, who was accused of and settled pump-and-dump charges
  • Brent Kovar and Glenn Kovar, who were accused of “defrauding investors through multiple so-called ‘pump-and-dump’ schemes” – Farkas was involved as a key investor in the entity
  • Justin Keener, BLNK’s #2 shareholder, who was charged by the SEC for being an “Unregistered Penny Stock Dealer” 

And let’s not forget Balance Labs (not to be confused with BLNK), which Farkas owns 88% of, has collapsed from over $3 in 2016 to just $0.75 at the end of 2019 (it barely trades now, calling into question whether it has any value):

With so many EV companies out there, why invest in a company with questionable individuals with less than stellar track records? We continue to dive deeper in the story and find even more issues internally with the company…particularly with governance and management turnover.

Executive turnover and a material weakness leaves investors exposed

It should perhaps come as no surprise that over the last four years, BLNK has gone through 3 principal financial officers/chief financial officers and has seen several board members resign, including Kevin Evans, who resigned under the following circumstances: “To the knowledge of the Company’s executives and Board members, Mr. Evans resigned due to a failure to find common ground with the Executive Chairman [Michael Farkas]”

And if all this were not sufficiently concerning, BLNK has a material weakness in its internal controls over financial reporting, specifically “related to lack of (i) formalized controls and procedures required to ensure that information necessary to properly record transactions is adequately communicated on a timely basis from non-financial personnel to those responsible for financial reporting, (ii) segregation of duties in our accounting function, and (iii) monitoring of our internal controls.”

This, to us, suggests that not only do the players in the BLNK ecosystem present outsized risk to investors, but the ability of the company to accurately report its performance is insufficient to offset the risk of potentially risky conduct by those same players. 

We believe that on this basis alone, BLNK presents significant downside risk to investors at these levels. In addition to the concerning origin of the company, we find that the current business has been struggling dramatically as well and yet management continues to receive hefty compensation.

Little growth in a growth industry, while Michael Farkas makes millions

In its 10-K, BLNK characterizes itself as a “leading owner, operator, and provider of electric vehicle (“EV”) charging equipment and networked EV charging services.” We question the basis of this claim. 

To begin with, BLNK appears to significantly lag its competitors in market share – for Level 2 EVSE stations (commercial chargers), BLNK’s market share is just 8% compared to competitors: ChargePoint’s 37%, TSLA’s 13%, and just 4% in DC Fast Chargers:

This market share differential appears to reflect BLNK’s inability to keep up with the growth of the overall EV and EV charging markets. According to the IEA, electric vehicle and charging station growth since 2014 has greatly exceeded BLNK’s revenue growth – BLNK’s revenues from 2014 to 2018 were down 3.8%, while the total of public and private chargers grew 277% in the same period:

In fact, the number of BLNK charging stations have barely grown over the last two years, going from 14,165 at May 2018 to 15,151 at June 2020, a growth of just 6.9% – BLNK actually LOST about 135 charges in 1Q20 (and note the 269 drop in the charger count over 6 days in 2019):

In the context of its most recent results, BLNK’s TTM 2Q20 revenues of $4.34MM is just 10% greater than its 2015 revenues of $3.96MM. Despite this growth, operating income has remained persistently negative at -$11.8MM:

For this performance, CEO Michael Farkas has made approximately $15MM since 2009, and in the period from 2015 to 2019, he has made close to $7.2MM.

Source: BLNK 10-Ks

In 2018 alone, Farkas made 17.9x and 21.7x what BLNK’s CFO and COO, made, respectively:

In light of this misaligned compensation versus company growth dynamic, we sought to understand the reason why BLNK’s growth lagged its industry.  We believe that this is due to acquisition of subscale assets from failing companies whose management teams either couldn’t successfully execute or simply attempted to defraud the government.

BLNK’s underperformance is rooted in acquisitions of sub-scale and bankrupt competitors 

The question remains – why is BLNK’s growth underperforming its industry? 
In 2013, BLNK embarked on an acquisition spree of four companies – Beam LLC, Synapse/EV Pass LLC, 350Green LLC, and ECOtality’s Blink assets – the Beam and Synapse deals were small, we believe, with Beam ($2.1MM in consideration) having just 40 chargers and Synapse ($892k in consideration) just 68. 350Green, at $1.2MM in consideration, came with its own management baggage:

It would follow that the substance of 350Green’s business may not have been very significant, if at all existent.

BLNK’s core assets come from the purchase of assets from bankrupt ECOtality

We believe that the answer to BLNK’s underperformance lies in the 2013 ECOtality acquisition that turned CGGI into Blink.  In 2013, CGGI acquired ECOtality’s Blink-related assets (and subsequently changed its name in 2017) out of bankruptcy, picking up more than 12,450 Level 2 commercial charging stations, 110 fast-charging stations, and a network supporting them.

By that time, ECOtality had received over $100MM in Department of Energy grants, but its SEC filings suggested serious underlying business issues, the most critical being a “failure to attain sales volumes of its commercial Electric Vehicle Service Equipment (“EVSE”) sufficient to support the Company’s operations in the second half of 2013.”:

This lack of sales is likely tied to bad user experiences and low user reliability ratings dating back to 2013 related to the Blink brand:

Our research on Blink today suggests that these issues persist and are the most likely driver of BLNK’s lagging results – users complain about broken chargers, long charge times, and high fees:

Slow charging complaints

Reliability and functionality issues

Stations in terrible shape?

Expensive and poorly maintained

The complaints and poor reviews are not limited to Reddit, however – people have reviewed individual stations in a similar manner:

A San Diego station reviewed on Yelp

Plugshare reviews on a Walgreens station in Elk Grove, IL

Plugshare review at Whole Foods

Even the BLNK app has bad reviews on the Google Play App store, with barely 2.5 stars

One of the biggest headwinds to BLNK’s growth is related to TSLA – in 2019, TSLA accounted for 78% of all US EV sales, making it the #1 seller of EVs domestically.  TSLA drivers can access one of its 16,103 Supercharger fast charging stations and one of 23,963 regular TSLA chargers to charge their vehicles (both free to use for certain drivers).  Said another way, the leading vendor of EVs already has a charging infrastructure tailor-made for its cars, significantly lowering the likelihood that TSLA drivers would choose a BLNK charger over a TSLA one.

The case of the missing chargers

We spent quite a bit of time scouring BLNK’s charger map and its client highlights (in BLNK’s investor deck) to understand its infrastructure.  What we found suggests that little effort has been made to grow the business.  In using the charger map to count chargers at BLNK’s “select clients” (pasted below), we found several interesting data points that suggest BLNK has not expanded its network beyond what it acquired from ECOtality:

  • Kroger – according to the charger map, BLNK has 52 chargers at Kroger locations.  In this article, we learn that back in 2013, Kroger was planning to invest $1.5MM to expand its charger base from 74 to 225 through its partnership with ECOtality.  Even though ECOtality went bankrupt in the same year, BLNK doesn’t appear to have pursued the partnership, and even saw total Kroger chargers fall from 74 to 52, a 30% reduction
  • Fred Meyer – according to the charger map, BLNK has 63 chargers at Fred Meyer locations.  Here, we learn that by 2015, Fred Meyer had installed 68 chargers across 33 stores.  Even though the article quotes a Fred Meyer spokesperson saying it plans on adding another 18 chargers, we wonder if this ever happened – it is 2020, five years later, and the charger count at Fred Meyer locations has FALLEN from 68 to 63, about 7%.   

This makes us wonder why BLNK management didn’t capitalize on these opportunities that it inherited from the ECOtality deal.  But we found something even more unusual at St. Joseph, a healthcare organization based in California which BLNK claims as a client:

St. Joseph has just two hospital locations, one on Dolbeer Street in Eureka, CA 95501, and another on Renner Drive in Fortuna, CA 95540 – but neither location has a BLNK charger, according to BLNK’s own site:

Plugshare actually just shows competitor ChargePoint’s stations at the Eureka and Fortuna locations:

The Redwood Coast Energy Authority, which “is a local government Joint Powers Agency whose members include the County of Humboldt; the Cities of Arcata, Blue Lake, Eureka, Ferndale, Fortuna, Rio Dell, and Trinidad; and the Humboldt Bay Municipal Water District,” would be the governing organization for charging infrastructure in this geography – IT DOES NOT MENTION BLINK CHARGERS IN ITS DESCRIPTION OF LOCAL CHARGING INFRASTRUCTURE.

We wonder why BLNK would show St. Joseph as a client when it doesn’t appear to be – more importantly, what does this say about the rest of the client list? We believe that this could indicate that the number of BLNK chargers is potentially overstated.

This, in our view, combined with poor user reviews about charger reliability, maintenance, and price does not bode well for the future prospects of the company – we believe that BLNK will continue to underperform the rapid growth in the EV industry at the ultimate cost to the shareholder.

Conclusion & valuation

In this note, we laid out several key findings that we believe makes BLNK a seriously risky investment that is likely to disappoint investors:

  • CEO Michael Farkas’s seeming proximity to individuals charged by the SEC with pump and dump schemes
  • A richly compensated CEO despite revenue significantly lagging industry growth and persistently negative profitability 
  • Asset base (chargers) appears to be the legacy assets of failed or bankrupt companies 
  • Ongoing user complaints about BLNK’s product stretching as far back as 2013
  • Churn at key customers, and a potentially overstated charger base
  • No intellectual property related to the underlying charger technology

We believe that the underlying business here is not positioned to compete with its peers and thus will not “catch up” to industry growth.  We believe that the stock price run from approximately $2 in June to approximately $10 today should be considered skeptically given the history of the individuals involved here.  

At 46x FY20 revenues, its valuation strains credulity.  The business is significantly unprofitable with what we believe are limited prospects to catching up to the EV industry broadly and has hemorrhaged an estimated $115MM in FCF since 2010.  

Given this, we believe the business should be valued at its liquidation, or book value, of just 17c in a downside scenario and at $2 a share in a bull case scenario (basically where it was before this non-fundamental move).  The average of our price targets produces a base case target of $1.09, a drop of 91% from the 8/18/20 close.