Saturday, January 21, 2017

Elio Motors Unwinds

It was never going to happen, but a lot of people apparently put down deposits and bought stock.  Was this a scam from the get-go or just someone's wet dream gone wrong?

It took years, but it seems that Elio motors is finally going bust - but not before taking tens of millions of dollars in deposits - some "refundable" and some "non-refundable" as well as selling tens of millions in stock over-the-counter, taking millions from investors, and borrowing millions more.

By the way, if you have a "refundable deposit" you might not get a refund if they go bankrupt.   You are a creditor, and if the company goes bankrupt, you have to stand in line behind a lot of other people.   With about $100,000 in the bank and millions in liabilities, the company is basically insolvent at this point, unless it can attract a whole lot more investment in a very short period of time.

As I noted before, it can take years and years for a failing company to go bust - leaving people to believe in the interim that the company is sound and solvent.   Radio Shack did a slow-motion keel-over that took nearly a decade.   Sears/K-Mart and J.C. Penny are going through it right now.  Sears isn't going to bounce back as the nation's next great retailer - everyone knows this because retail in general is dead, other than Wal-Mart.   Wal-Mart is where America shops today, not Sears.  And this isn't likely to change.  And unlike Sears, which abandoned its catalog at the dawn of online retailing, Wal-Mart is jumping in with both feet to take on Amazon and eBay.   Wal-Mart knows how to survive.

But getting back to Elio, the company has been in a slow-motion crash for years now.  You could do a lot of finger-pointing on this one.  The idea made no sense in a market where gas was cheap.  If three-wheeled cars are not popular in countries where gas is $5 to $10 a gallon, why would they be popular in the land of $2 gas?  It simply makes no sense whatsoever from an engineering or marketing standpoint.

As I noted in an earlier posting, you can buy a nice used four-door Corolla with air conditioning, air bags, and a nice stereo and trunk for about the sticker price of the Elio - an unrealistic sticker price, by the way, that they never could have made manufacturing a niche product at low production levels.

Several odd decisions delayed the introduction of the car - perhaps intentionally.   Rather than purchasing an engine from an existing manufacturer, they decided to build their own - arguably the most difficult part of car manufacturing.   This gave them an excuse to say the project was delayed for yet another year - or more - but for no apparent real logical reason.   For a niche manufacturer, developing your own engine would be a ridiculous expense.  The engine was never produced in any volume - nor were any of the cars.

Was this a scam?  If so, who profited from it?   It is hard to say if it was a "scam" or just poor planning.  But a lot of people made money on this.  For starters, Mr. Elio.   He got paid for years and years as "CEO" of this company, making $250,000 a year, according to the annual report.   He and the other employees took in millions over the years in salaries, so it was a good ride for them.  Let's hope they banked some of it.

Speaking of annual reports, it was the most bizarre I have seen - reading more like a prospectus or promotional brochure than an annual report.  Most annual reports are columns upon columns of numbers.   This one is mostly text.

The latest filing with the SEC is very fascinating.  For a company that is hemorrhaging cash, has no product and no profit and should be developing its manufacturing base, it spends a lot on advertising and promotion:
For the nine months Ended September 30, 2016 Compared to September 30, 2015.  Operating expenses for the nine months ended September 30, 2016 increased by 289% over the comparable 2015 period.
Sales and marketing expenses increased $2.3 million or 67% as a result of: (1) a $1.814 million increase in social media, television and print advertisements; (2) a $234 thousand increase in press release fees; (3) a $117 thousand increase in credit card processing fees; and (4) a $120 thousand increase in promotion related expenses.
 $2.3 million to advertise a non-existent product.   Notice the amount spent on press releases - the only product Elio seems to churn out with any regularity.

They are actually doing TV buys, according to one YouTuber - buying expensive air time to sell a car that doesn't exist.   Oh, but you can put down a deposit!

Maybe media buys should wait until there is product in the pipeline?

They have been rapidly ramping up engineering expenses in the latter part of 2016, but the ratio of actual development dollars to promotion and advertising is somewhat alarming in my mind.
For the nine months Ended September 30, 2016 Compared to September 30, 2015.  Operating expenses for the nine months ended September 30, 2016 increased by 289% over the comparable 2015 period.
Engineering, research and development costs increased $16.9 million or 1609%.  This was a result of: (1) a $5.9 million increase soft tooling and expenses related to the prototype builds for testing and validation purposes; (2) a $10.2 million increase for ongoing engineering, design and development; and (3) a $525 thousand increase in payroll and payroll related expenses due to an increase in engineering and development staff.
One wonders why it took so long to ramp-up these engineering expenses.  If $16.9 million represents a 1609% increase in spending, it means they were spending very little before.   And this is just for building yet more prototypes and "soft tooling" - not for setting up a manufacturing assembly line.

Is this a "scam"?   Well, that is a hard word to parse.   Like with Tucker, so long as you have a product and a business model, you are a legitimate business.   If your business model sucks and your product is no good, it makes no difference - the investors, dealers, and people making deposits have to use their own judgement to determine whether or not to part with their hard-earned cash.

Bear in mind, you can file a prospectus with the SEC that states, in so many words, that "the goal of our company is to sell a lot of stock and then pay ourselves generous salaries and maybe, if we get around to it, sell some sort of product or service and maybe make a profit."   You could do that, and not get sued, because you disclosed this all ahead of time.   So no, Elio isn't a "scam" in that they have said out loud in their SEC filings, the extreme challenges they face, the debts they owe, and how much they are paying themselves.   Caveat Emptor.   People "investing" in Elio stock aren't investing at all, but dreaming - the subject for another posting.

A "scam" would be where they took money from people and had no real intention to build the car, just take the money and run - and did not disclose their financial condition to shareholders.   This can be hard to prove, as in the case of Tucker, as people can claim they were using "best efforts" to make the product, but that the market shifted or they merely misjudged the market.  All of that is perfectly legal, because that is how businesses work.  It is incumbent on the investor to fathom whether their business model makes sense.

So scam?  No, not that any other startup that goes belly-up leaving shareholders and creditors holding the bag while executives walk away with huge salaries is a "scam".   Was Solyndra a scam?   A lot of people made money there, in its brief existence.   They misjudged the market and didn't anticipate cheap solar from China.   That's the story, anyway - a story told on a daily basis in Silicon Valley.

What sets off red flags in my mind is that they are using unusual ways to raise money.   They used just about every way you could - private equity, loans, selling stock, and taking deposits.   This last one is troubling to me, as the people putting down deposits on cars that don't exist are not "investors" in the company, but people wanting to buy a product.   There is little oversight in this method of raising money - no prosectus or legal standards of disclosure to adhere to.  It was the same unorthodox method Tucker resorted to, which eventually landed him in court.

You would think they would have done an IPO - a real IPO - from the get-go and raise hundreds of millions in cash, rather than ask people for deposits.   The deposit thing is a real red-flag to me.   Never put down a deposit on something that doesn't exist.   Don't waste your time with "crowd-funding" either.

Do I feel sorry for anyone who put down a deposit or invested money in the stock or the company?  No, not at all.   I've read postings by die-hard "believers" online that somehow their lives will be changed forever if they had an Elio to drive.   I might suggest they just buy a Chevy Sonic or other small car instead, if they want to be punished every day on the way to work.   Religion and investing - or car-buying for that matter - simply don't mix.   You can't use political beliefs as an investment tool - again a subject for another posting.

You see, getting 84 miles per gallon - even if it could be done (and I am skeptical about that) doesn't save a ton of money.   At $2.50 a gallon, if you drive 15,000 miles a year, you'll spend $446.43 on fuel.  If you buy a regular small car getting 30 miles per gallon, you spend $1250 a year a savings of only $800 a year.   That might sound like a lot, but it is not really enough to justify the sacrifice of having a very limited-use car.  As gas mileage increases, the savings fall off, to the point where each increase in miles per gallon results in a smaller and smaller savings.

This Facebook Page is making the call that it is an out-and-out fraud - a pump-n-dump stock scheme.  One does have to wonder where all the money is going - tens of millions of dollars for "research" and advertising and all they have to show for it is a few prototypes, if in fact it is not just one car.   You can build a kit car for $20,000 - why is the Elio taking so long and costing so much to build?   Why has absolutely no work been done at the Louisiana factory where they are supposed to be built?

The problem is, as I noted in an earlier posting, the media loves a good press release with lots of eye-candy pictures and videos - and that is one product Elio has no trouble delivering.  Also, major media outlets don't like to say things like "lie" or "scam" or "fraud" for fear of being sued - they are deep pockets and attractive targets.  So they waffle and say things like "controversial" or "some people allege" and so forth, which takes the edge off reporting.

The faithful read this and think, "well the naysayers are a bunch of sourpusses, that's all!  I'm putting down a deposit today!"   Deposits of up to $1000 it appears.   According to one site tens of thousands of people have put down deposits.  Ten thousand times a thousand is ten million dollars.  That's a lot of money to make not selling a car.   Of course, we don't know how many put down deposits - this site says 40,000 people.  And it is not clear at what level their deposits were.  We are talking tens of millions of dollars here, potentially - in addition to the amount raised in the stock offering

From the SEC filing above:
Through September 30, 2016, we have $25,970,200 in reservations, an average of $577,116 per month.  Of this amount, $679,415 was held at September 30, 2016 by credit card processing companies as a percentage of non-refundable reservations.
In addition to this reservation money, the money raised through the stock offering, the money obtained from investors, the SEC filing shows millions in unpaid loans that have been deferred well into 2017.

The question I have is this:   Where the hell did all the money go?   By my counting, they have spent over $100 million dollars on a prototype that you could probably have a motorcycle shop throw together in a month or two.  If it takes this much to develop a prototype - which they hope will achieve significant "milestones" soon (not after eight years???) how much will it cost to develop tooling for the factory and to start production?   You can't do that on a shoestring - suppliers will want to be paid.

And of course, we don't know how many insiders have sold stock and cashed out of their investment, at the expense of new shareholders.

We won't know until it goes belly-up whether this was merely wild dreams gone wrong, an intentional scam on the part of the principals, or maybe a wild dreamer who was co-opted by a scammer, like the air-powered car guy was.

One thing is for sure.  Elio Motors has been around for eight years now - an entire product cycle in the automotive industry - with absolutely nothing to show for it but a Facebook page, a stack of press releases, a prototype or two, and a lease option on an old GM factory.

At what point do people finally break down and realize that "introduced next year!" is a phrase being used for several years now - and each year, the company burns through more money and gets no closer to production.

I think that point is coming soon.

Only then will some intrepid reporter comb though the wreckage and figure out where all the money went.   Only then will we know the real story.  My gut reaction is that it will be a fascinating story and people will say, "why didn't we see the warning signs sooner?"

If you want to buy a car, put down your money on a car you are standing next to, not someone's pipe dream!