Friday, July 14, 2017

Where Did All The Money Go, Elio?

Was Elio Motors a scam from the get-go, or was a naive inventor snookered into having his dream used as pretext for scams of others?  Or does it really make a difference for the many parties who have collectively lost millions in this deal?  Where did all the money go, anyway?

Complex financial transactions are hard to figure out, which makes them poor choices for small investors.   And the Elio deal has so many layers-of-the-onion to peel back, that it is hard to figure out exactly what happened.   This latest article from the Shreveport Times tries to spell it out.  One of the Parish Commissioners also tries to explain what is going on.  Why was a modern manufacturing plant handed over, lock, stock, and barrel to a  real estate developer and sublet to Elio motors - instead of more viable manufacturers like Range Rover?   And where did all the money go?  What did Elio and his cohorts really plan on doing with all this?   Were they starry-eyed visionaries or crafty crooks who paid themselves millions while perpetrating a huge fraud?  It is hard to tell, as you have to dig for the facts, and when you start digging, you hit rock real fast.

It would appear from what I have been able to divine so far that a real estate investor may end up owning the Shreveport plant - one of GM's latest high-tech facilities that used to make Hummers, along with 600 acres of land.   According to some, the screwy deal set up by the RACER trust and the local Parish hands over the ownership of the property, once the developer has paid about $7.5 million in lease payments.  Was this transaction the intent of the whole scheme from the get-go?   We will have to wait and see.

But what about Paul Elio and others on the board or employed by Elio Motors?   Did they make out in this deal as well?  Again, you can dig, but it gets so complicated and difficult to follow, that you lose track of the cash really fast.  Companies that are related to companies, various agreements and contracts we don't have access to.   SEC filings that - like most SEC filings - can be pretty opaque to the amateur investor.   It would appear, based on my limited research, that most of the people who are principals in this deal will walk away with more money than they started with.   Those who bought stock, loaned money, or put down deposits, will likely walk away with nothing.

Unless of course, Elio comes up with the tens or hundreds of millions it says it needs to build the first production model, and that Elio motors can sell nearly as many of these as Honda does Accords, for a number of years.   That could happen, I suppose.  But I would bet on lighting strikes and lottery tickets first.   And it seems many people are coming to the same conclusion.  The Facebook site for "future Elio owners" is throwing in the towel.  The Reddit subreddit once full of cheerleaders is now dominated by skeptics.   The few die-hards left admit they will never see car or deposit, in their lifetimes.

Sadly, few people are willing to admit that the entire scheme was cockamamie.  There are indeed, three wheel cars for sale right now, worldwide.   They cost more than $8000 and do not get 84 miles per gallon.   The basic premise is flawed by both physics and economics.

But getting back to the money, where did it all go?   I still have no concrete idea, but there are clues.

Much  of  the  vehicle  engineering  has  been  completed,  and  we  are  finalizing  our  engineering simulations,  which  suggest  that  the important vehicle performance milestones can be achieved.  To date, $41 million has been invested in vehicle engineering and development, of which $26.3 million was in the form of shares of common stock granted and the assumption of liabilities of Elio Engineering, Inc. dba ESG Engineering. At the close of our Regulation A offering,  we  obtained approximately  $16.0  million  in  net  proceeds  to  build  prototypes.  Upon completion of this phase, the vehicle production costs, as well as the performance and safety profiles, will be understood to a level that will allow for the kick-off of hard tooling.  With the development risks addressed, we will then be in a position to raise larger amounts of capital - up to an additional estimated $312 million to fund production activities.

What the hell is "Elio Engineering" anyway?

From an earlier report:
Paul Elio, Chief Executive Officer and Elio Motors Board Chairman.  Mr.  Elio  founded  Elio  Motors  and  has  been  its  CEO  and  Chairman  since  the  Company’s  inception.  He  has  over  18  years  of experience in business management and engineering, most recently as founder and CEO, from 1998 to 2011, of Elio Engineering, dba ESG Engineering. ESG was a Tempe, Arizona company which designed, engineered and prototyped products using state-of-the-art design tools and techniques, evaluated them for engineering feasibility and designed them for high volume manufacturing and assembly. Mr. Elio held various positions at Johnson Controls from 1992 to 1997. He holds numerous patents related to various mechanisms. He graduated from the General Motors Institute of Engineering & Management (now Kettering University) with a Bachelor of Science in Mechanical Engineering in 1995.

This is fascinating to me.   $26 million dollars paid to Mr. Elio's former company.  But what was or is Elio Engineering?  This google link to a power-point presentation:
Elio Engineering was started by an individual name Paul Elio who had an idea that of the ABTS(All-Belt-To-Seat) called “No Compromise seat” or NC seat.
The "NC seat" apparently had the seatbelts built-in.  He founded this company a mere three years after graduation from GMI with his "mentor" Hari Sankara at Johnson Controls (who also makes car seats).  It appears from his resume, that Paul Elio was a co-op student with Johnson Controls while at GMI.  Mr. Sankara was COO of Elio Motors, but goes by the name of Hari Iyer, according to the latest annual reports.  He is no longer COO, but is still on the Board.

From this slide presentation:
Timeline
1996, Pual[sic] Elio designed a revolutional [sic] bike which got a patent.
1998, Pual[sic] met Hari Sankara who was his mentor in Structural design and Analysis department of Johnson Controls,Inc.
July 1998 , Pual[sic] invited Hari to join his idea about the NC seat and they founded Elio Engineering
Nov 1998,They went to present the NC seat to Bostrom Seating, the seat supplier for heavy truck and bus industry, that was looking to develop the ABTS.
No word on whether they sold any of these "NC" seats and it appears the company was dissolved in 2011.  Manta shows them still in business in Tempe Arizona with an annual income of $2.5M. According to the Arizona Corporation Commission, the company is still in business and is in "good standing" (meaning they have filed their annual renewal documents).

But who owns the stock in Elio motors?
Paul Elio and Elio Engineering own a helluva lot of the stock in this company.  But who owns "Elio Engineering"?  This footnote is helpful:
(1) Includes  12,750,000  shares  owned  of  record  by  Elio  Engineering,  Inc.  of  which  Mr.  Elio  is  the  President,  a  director  and majority shareholder.
So how is "Elio Engineering" related to "Elio Motors"?
The Company received engineering and prototype development services from Elio Engineering, Inc. dba ESG Engineering, valued  at  $25,000,000.    In  exchange  for  these  services,  the  Company  transferred  25,000,000  shares  of  common  stock  to  Elio Engineering, Inc. in October 2011.
Elio Engineering was awarded 25 Million shares but only shows half that number today.  Where did the other 12,250,000 shares go?  Does Mr. Elio get paid from both companies?  It is hard to tell.  25 million shares, trading at even $6 a share today is worth $150 million right there.  No word on how many Shares Mr. Elio has sold.
Paul Elio and ESG Engineering
The original design for the Elio was conceived by Paul Elio and Elio Engineering, Inc., dba ESG Engineering, a company partially owned and controlled by Paul Elio.  ESG Engineering transferred all rights to the design to the Company, valued at $5,000,000, as consideration for 25,000,000 shares of common stock in the Company.  In addition, we assumed approximately $1,277,187 of payables that ESG Engineering had incurred on behalf of Elio Motors.  At December 31, 2015 and 2014, these outstanding payables were $-0- and $164,827, respectively.  ESG Engineering transferred 12,250,000 shares of common stock in the Company to Paul Elio in November 2012 in consideration for his services in forming and organizing Elio.
Transfer of Consumer Financing Rights
In 2012, we transferred the right to provide consumer financing for the purchase of  the Elio to Carr Finance Company, LLC in consideration of Paul Elio’s efforts to devote his time and attention to developing the business of the Company with only limited compensation.  Mr. Elio is a member of Carr Finance Company, LLC.
Guaranty of Loan Repayment Provided by Stuart Lichter; Loan from CH Capital Lending
On February 28, 2013, in connection with the acquisition of certain machinery and equipment at the Shreveport facility, we entered into a promissory note with GemCap Lending I, LLC for $9,850,000, the payment of which is secured by a first lien on our equipment at the Shreveport facility.  Stuart Lichter personally guaranteed the payment of this note.  CH Capital Lending, LLC purchased the loan from GemCap on August 1, 2014.  CH Capital Lending is an affiliate of Stuart Lichter.  On July 31, 2015, we entered into a forbearance agreement with CH Capital Lending in which CH Capital Lending has agreed to forbear on enforcing the payment of this note until July 31, 2016.
Lease with Shreveport Business Park, LLC
Our equipment is located in a plant in Shreveport, Louisiana, which is leased by Shreveport Business Park, LLC, an entity owned and controlled by Stuart Lichter, one of Elio’s directors and significant stockholders.  We entered into an agreement with Shreveport Business Park in December 2013 to sublease 997,375 square feet of manufacturing and warehouse space for a 25-year term, which provides for a rent-free period until the earlier of four months after the start of production or August 1, 2015, after which the base rent will be $249,344 per month.  Since December 2013, the Company has been obligated to pay taxes, insurance expenses and common expenses with respect to this space and is past due in paying these amounts.  On July 31, 2015, we entered into an amendment to the lease which extended the base rent commencement date to February 1, 2016 and deferred payment of the base rent for the period February 1, 2016 through July 31, 2016 until August 1, 2016.
Advances to Paul Elio
During 2015 and 2014, we advanced a total of $328,014 and $74,966, respectively, to Paul Elio, our Chief Executive Officer.  The advance accrued interest at the Federal Funds rate per annum, is due on demand and is reflected on the balance sheets as other current assets.
This is a fascinating arrangement.  It appears that Elio Motors is assuming debts of Elio Engineering, and that Mr. Elio, either directly or through his subsidiary company Elio Engineering, owns much if not most of the stock of Elio motors.  Stuart Lichter is both landlord and shareholder, and according to some sources, will end up owning the plant outright, without having to pay much for it. What is not clear is whether Elio Engineering is still being paid for design services for the Elio car, which would arguably be a conflict of interest if it were to occur.

In over five years since Elio Motors was founded, they have gone through over a hundred million dollars in capital, some claiming as much as $150 million or more - and yet they say they need hundreds of millions more to start building this fairly simple three-wheel car.  And over the years, Mr. Elio has received "advances" and salaries in the six-figure range.   It is safe to say that he has been compensated with well over a million dollars, perhaps two million or more, just in salaries and advances since the founding of the company.  His "mentor" Mr. Iyer has been paid a similar amount.

Not only that, but even at $6 a share, Mr. Elio is sitting on $150 million in stock (25 million shares) in his Elio Engineering company alone.   If he has been selling any of this stock, he has cashed out millions of dollars.   But I cannot find any record of whether he has sold any stock, either the shares he holds directly, or through Elio Engineering.

Not bad money for a car that has yet to be built!  But the question remains, where did the rest of the money go?   So far, the costs of "engineering" are running $2M to $5M per year, zooming to $20M last year.  The administrative costs are running about $5M a year, which I am guessing is salaries and stock options for the executives.  For a company that is in mostly engineering (design) mode, this seems like a lot of administrative overhead.  From the annual report, there are a number of employees pulling in well over six figures, as well as a CFO making good money plus $1M in "option awards" for one year, at $19 a share.

The stock went public in February of 2016 on the OTC (Over the Counter) at $19 a share and quickly rose to $60 a share and then tanked to $20.  Today it is at about $6 a share after a massive sell-off in January of this year.   No word on how much the founders cashed out on this.  The other principals don't have stock options because they already own large amounts of stock in the company, from what I can discern, particularly Mr. Elio and Mr. Lichter.  Some of the directors also received stock options in the six figures, for their troubles.

So where did all the money go?   It didn't go all to one place, but went many places.  To lenders in the form of interest payments, to employees and directors in the form of salaries and stock options.   People made money at this over the years.   And of course, some went to "engineering" the prototypes, and apparently some to an outside design firm.

Keeping this enterprise going is important, if you want to sell stock and keep that lease active on the old Hummer plant.   And maybe that is why Elio has "gone dark" in recent months in terms of news, information, and data.   The last bit of hard information was that the company had only about $100,000 in cash on hand, and yet over a hundred million in debts, and needing just as much more to start building their prototype.   Stories abound about equipment being stripped from the Hummer plant and sold for cash - if so, one wonders how they will build a car without assembly line equipment.

Raging true believers I have written about before - whether it is gold bugs or bitcoin fiends.  They are all convinced, based not on numbers or hard data, but raw belief that whatever it is they are investing in (or crowdfunding) is going to be "the next big thing!"   Belief is a fine thing if you want answers to questions like "What happens when we die?" and "Is there a God?" but a horrific thing rely on in financial matters.   Having your beliefs shattered can lead to depression and self-doubt.   And sadly, the sorts of folks who engage in this behavior never learn from their failures but instead, jump right back on the belief bandwagon again and again.   How sad.

The fantasy of a "revolutionary car" that will change the world and put the "big 3" out of business has been going on for a long time - a fantasy that only people without Engineering degrees believe in.   Many people even today want to make a folk hero out of Preston Tucker, who appears to at best have been snookered into having his dream car used as a front for stock fraud - or at worst was in on the con himself.   Make no mistake about it, the Tucker car was hardly revolutionary and was in fact, a piece of crap.   Sure a turning center headlight might seem "radical" but the rest of the car was nothing out of the ordinary, other than it was staggeringly expensive to build.   And as it turns out, he never would have been able to build it or compete with the major automakers.   There was no "conspiracy" against him, just a poor design and a poor business plan.  "But Bob, they made a movie about him!"   They also made a movie about the windshield-wiper guy and he was crazy as a loon, too.

But maybe that will be the next shoe to drop - that the reason why Elio was forced out of business was a "conspiracy of the big-three automakers" who just couldn't stand the competition!   And I am sure right now, someone somewhere already believes this.

There are idiots.   Look around you.    Some readers ask me how to make a ton of money in a short period of time.  My suggestion:  Find raging true believers and relieve them of their money.   Myself, I don't have the stomach for it.

UPDATE:  The more I think about this Elio thing, the more questions I have.   Making cars is a cut-throat marginal business.  Even Mary Barra, my former classmate at GMI made "only" about $7M back in 2015, and is up to $28M in 2016.  And she's running the largest car company on the planet.

For someone running a company that has yet to make or sell a single production car to make anything is all is puzzling.   Even if Elio Motors was "successful" and made money, one wonders if the CEO and other principals would have made less money than they are making today running a company that doesn't make cars.   A scam from the get-go, or just poor visionary planning?   Like with the show The Producers sometimes a flop makes more money than a hit!

3 comments:

  1. "$16.0 million in net proceeds to build prototypes."

    That's more than a million dollars per car! George Barris could have built them for you for less than that!

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  2. There are some Elio "owners" (people who put down deposits) who realize that the car isn't going to happen, but still refuse to blame Elio and his cohorts for the debacle. Sort of like how an abused spouse defends her husband.

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  3. Please note that this is all the information I have been able to divine so far from online sources. If you have additional information, I would be glad to consider it. If you feel some of this information is inaccurate, please let me know, and I will correct it. All the data I have here is from online sources as well as SEC filings and corporate records.

    ReplyDelete

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