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 filingIf 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 2013Corporate 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.