Taxpayer-Funded Electric Vehicle Maker Needs IPO Cash to Survive
Smith Electric Vehicles, which is using $32 million in taxpayer stimulus to practically give away its delivery trucks to corporations like Frito-Lay (owned by PepsiCo), Coca-Cola and Staples, is hemorrhaging money anyway and now is looking to an initial public offering to pay off debts and try to survive.
The Kansas City Star reported last week that Smith cut its production expectations and warning it is running low on cash, citing filings with the Securities and Exchange Commission. The company announced nearly a year ago it would seek $125 million through an IPO, but now says it hopes to raise about $76 million at a stock price of $16 to $18, according to a Kansas City Business Journal report.
Good luck with that. The Journal said the revenues generated “would help pay off a $16.5 million bridge loan, $1.3 million related to a legal settlement involving Smith’s British subsidiary, and $500,000 owed to former British partner Tanfield Group.”
While the dollar figure shoveled from taxpayers to Smith isn’t nearly as astronomical as some others (for example Ford, at $5.9 billion, and Nissan, with $1.44 billion), the circumstances under which the electric-charged truck maker was bestowed with the cash grant is appalling.
As NLPC has reported, when Smith received its Recovery Act funding through the Department of Energy, it had no business track record in the U.S. – at all – to merit the receipt of public money. But it was much worse than just a start-up. Smith was already a deeply failed company based in the United Kingdom – a division of a larger company, the aforementioned Tanfield Group.
Smith-U.S. established itself in Kansas City, Mo. in January 2009, following a precipitous drop in its U.K. stock value in mid-2008. Tanfield Group – or Smith U.K., if you will – had earlier been praised by luminaries such as former Prime Minister Tony Blair, who once called Tanfield “UK manufacturing innovation at its best.” But financial analysts became troubled because claims the company made about matters such as vehicle orders could not be verified. The company was accused of exercising poor disclosure standards and weak financial controls, according to the London Telegraph.
It’s hard to believe the bureaucrats responsible for approving U.S. Department of Energy stimulus grants looked at Smith’s history under Tanfield Group (which still owns roughly ¼ of Smith-U.S.) and thought they were a good “bet” (a term President Obama likes to use) for future success. Tanfield is traded on London’s Alternative Investment Market, which Telegraph business journalist Ben Bland has called a “circus” with “far too many clowns.” Of Tanfield – and other puffed-up companies like it – he wrote, “The crazed band of retail investors who follow these shares get drunk on greed and optimism in the good times, buying up stock on the back of wild bulletin board rumors or the vague hope that there is ‘good news in the offing.’” That “froth” evaporates quickly in difficult economic times, Bland wrote.
“The success stories can be staggering but the wipeouts are all too common,” Bland wrote about AIM in an August 2008 column.
The Tanfield disaster, whose cash evaporation led the company to lose 97 percent of its value in 2008, prompted inquiries by the London Stock Exchange and by the U.K. Accountancy and Actuarial Discipline Board. The investigation by the latter is still ongoing – in November it will have been two years since it was initiated.
Fast-forward to January 2009 when Smith-U.S. was established in Kansas City, and the management team put in place didn’t show much of a track record to demonstrate worthiness of investment either – private or public. The founders of Smith-U.S. did not come from the automobile or electricity businesses. CEO Bryan Hansel and Chief Technology Officer Robin Mackie (an engineer who cites no specific automotive experience in his bio) both emerged from Evo Medical Solutions, an international manufacturer of home respiratory devices.
Upon this shaky foundation Energy Secretary Steven Chu’s stimulus-spreading lieutenants apparently saw a worthwhile “investment” of taxpayers’ money. First came a $10 million award in August 2009, and then an additional $22 million for an “electric truck demonstration program” in March 2010. With those funds Hansel and Mackie were able to show private investors that the company looked a little better on paper than they really were. Smith Electric also could go to companies like Frito-Lay and Coca-Cola, which would use the electric trucks only in inner cities – where the routes are short and don’t need the lengthy recharging times during the day – and let them have them at minimal cost, thanks to the huge taxpayer-funded subsidies.
But that wasn’t the only Smith Electric absurdity. Besides nearly giving away its trucks, Smith-U.S. agreed to buy Smith-U.K. from Tanfield for $15 million in cash, payable in 20 equal installments, plus other financing and ownership considerations. So Tanfield’s British investors can thank U.S. taxpayers for helping take the Smith Electric turkey off their hands.
Predictably, the horror story continues in Kansas City. Based on the combined statements of Smith UK and Smith U.S., the companies together lost $17.5 million in 2009. In 2010 the losses reached $30.3 million, $52.5 million in 2011, and $27.3 million through June 30 of this year.
Kansas City Business Journal says Smith has announced it will reduce its 2012 truck production from 640 vehicles to 380. The company attributed its diminished expectations to “supplier problems,” but massive losses and giving away your product for pennies on the dollar certainly doesn’t help either. As for the “green jobs” that have been created, Smith’s most recent report on the Recovery.gov Web site states that of the $2.54 million received in “development funds” (which doesn’t include the pass-through funds that go to truck owners like Frito-Lay), 7.72 full-time equivalent jobs were created. That works out to about $328,700 per job.
The story of Smith Electric looks a lot like that of one of the taxpayer-funded suppliers it has blamed for its woes, battery maker A123 Systems. Despite having received hundreds of millions of dollars from the Energy Department, A123 has suffered similar annual losses and has seen its stock price plummet from nearly $26 shortly after its September 2009 IPO to about 29 cents yesterday, with NASDAQ recently warning A123 it would be delisted if its share price didn’t get back over $1 in the next few months.
Smith-U.S. now seems to think an IPO of its own will act as a life preserver for the company, or at least keep it viable until perhaps a bargain hunter comes along to save the day, also similar to what A123’s executives hoped. That prospect is increasingly unlikely, so, buyer beware.
Paul Chesser is an associate fellow for the National Legal and Policy Center and publishes CarolinaPlottHound.com, an aggregator of North Carolina news.