GPB Capital Holdings Automotive LP released an SEC Form 10 yesterday. The form opens by citing the ongoing litigation against, and criminal indictment of, the “General Partner” (Scientologist David Gentile) and his former principal officer (Jeffry Schneider) and the devastating possible fallout from this:
We and the General Partner are involved in material litigation arising from the operations of the Partnership. The owner and former principal officer of the General Partner was indicted for, among other charges, securities fraud on February 4, 2021, and a monitor was appointed by a US District Court to oversee our operations. As a result, we and our dealerships are subject to litigation risks relating to the automotive retail business operations which could lead to manufacturer terminations of our rights to operate dealerships selling their vehicle brands, lenders terminating or adversely modifying our financing arrangements, other vendors terminating or adversely modifying business relationships, loss of employees and other adverse results. Resolving litigation disputes can be costly and time consuming.
The first bullet point on page 3 contains a devastating admission:
We have determined that there is substantial doubt as to our ability to continue as a going concern, due to the expiration of the facility for the majority of our dealerships within 12 months, as well as certain other factors. Our inability to extend the maturity of our credit facility, or replace the credit facility, prior to its maturity in February 2022 would materially adversely affect our financial condition, results of operations, cash flows and business operations.
Page 80 elaborates on what appears to be the looming insolvency of GPB’s Automotive Fund:
Management has determined that the following factors exist that raise substantial doubt about the Partnership’s ability to continue as a going concern:
• As of December 31, 2020, the Partnership and its subsidiaries had total cash and restricted cash of $135.4 million, of which $3.5 million was held directly by and available to satisfy general obligations of the Partnership. Included in total cash on hand is $26.9 million held by certain subsidiaries of the Partnership that is available for use and upstreaming without restriction. The balance of $105.0 million was held by GPB Prime (the Partnership’s largest subsidiary) and is restricted to use and upstreaming to the Partnership pursuant to restrictions imposed by its lender. At December 31, 2020, obligations of the Partnership and its subsidiaries, excluding GPB Prime, due within one year exceeded its available cash on hand. As such, the Partnership does not believe that cash on hand and cash flow generated internally will be adequate to repay its liabilities arising from normal business operations when they come due, unless it obtains additional sources of financing.
• The Partnership relies on its ability to upstream funds from its operating subsidiaries to meet its obligations in the normal course of business and also to allocate to other subsidiaries in need. The Partnership and GPB Prime are party to financing agreements with M&T Bank as part of an eight-member credit syndication (the M&T Credit Agreement). Borrowings under the M&T Credit Agreement are available for the purposes of financing the purchase of new, used and loaner vehicles, and for providing operational liquidity in the form of mortgages and term debt. Amendments to the M&T Credit Agreement dated September 21, 2018 and June 14, 2019 restricted GPB Prime’s ability to pay distributions, make additional requests for delayed draw loans, make any additional acquisitions (other than those already in process at that date) greater than $2.0 million, or to make any distribution to the Partnership as well as pay any put, redemption, or equity recapture options or agreements to any person. Our ability to meet our obligations over the shorter and longer term is dependent upon freeing up the restrictions that currently do not allow the upstreaming of funds from certain of our operating subsidiaries and negotiating extensions or replacement of our subsidiaries’ financing arrangements.
• GPB Prime’s M&T Credit Agreement expires and becomes fully due and payable in February 2022. Management and GPB Prime are currently in discussion with third party lenders to meet some or all of its short term and longer term liquidity needs including negotiating in good faith with M&T Bank to extend or renew the expiring Credit Agreement. The Partnership has implemented additional measures to address these factors including but not limited to the sale of real estate assets held by subsidiaries other than GPB Prime and the deferral of management fees payable to the General Partner by the Partnership. However, there can be no assurance that the Partnership and/or GPB Prime will be able to obtain sufficient additional liquidity or renew its debt on terms acceptable to them or us. See also “Footnote 17. Commitments and Contingencies” for discussion of the role of the Monitor with respect to the Partnership’s use of cash as well as indemnification obligations to GPB.
There are other blockbuster statements, admissions actually, in the Form 10:
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Our strategy depends upon on substantial capital and we may not have access to consistent financing sources on favorable terms.
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Our Limited Partners may not receive distributions and our distributions may not grow over time.
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• Expenses related to GPB and Highline are significant. We need to make substantial profits to avoid depletion of our assets and provide a return to our Limited Partners.
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• There are potential conflicts of interest between GPB and its affiliates and the Partnership that could impact our returns.
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• Limited Partners may be subject to filing requirements and may be subject to short-swing profits under the Exchange Act as a result of an investment in us. It can be burdensome to comply with filing requirements.
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• We will expend significant financial and other resources to comply with the requirements of being a public entity. These requirements may place a strain on our systems and resources.
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• We have concluded that there are pervasive material weaknesses in our system of internal control over financial reporting, which if not remediated could materially and adversely affect our ability to timely and accurately report our results of operations and financial condition.
The compensation table for Highline Management, the so-called operating arm of GPB responsible for day to day operations, shows the key players running that part of the GPB Capital structure. These executives are long-time GPB Capital executives reassigned to Highline Management, the so-called operating arm of GPB:
There is a significant amount of detail in this report that will be of interest to those following the developments at GPB Capital. The role of Scientologist David Gentile and other Scientologists in the GPB Capital structure remain a subject of focus for this blog. Likewise, Mike Frost and his his “Austin Lake Technologies” also remain an area of focus.
We will offer further comments in future blog posts. Here is the Form 10:
Categories: The Scientology Money Project
Among the various nuggets contained in this, IMO the most telling one is this one sentence: “Our strategy depends upon on [sic] substantial capital and we may not have access to consistent financing sources on favorable terms.”
In other words, “we have an unsustainable business model, we’re overextended and running out of money.” In light of where they’re at legally (both civil and criminal) and the substantial defects that have been exposed not only in the business operations but also in its governance, it’s safe to say that lenders and investors are both running for the hills.
No matter how much they are “upstreaming” to the cult, these are not the kind of problems that Hubbard’s dilettante “management tech”, an org board or the investment in a new telex system will fix.
Scientology operators are a lot like drug dealers: You can go to their house and find it furnished with all the valuables that were once yours.
1. A “going concern” warning is indeed a significant issue. However, it is not by itself a “proof” that GPB or related entities are going out of business, though that’s probably going to happen. Auditors must issue a “going concern” warning when certain circumstances are met. To protect investors, auditors don’t have any discretion about whether to issue the warning. If the conditions are met, they must include the warning. Plenty of businesses get “going concern” warnings and recover completely, but many do, of course, collapse. I would have been far more surprised if the filings DIDN’T have a “going concern” warning. Again, this is an accounting requirement and isn’t proof of where things actually are.
2. The stuff about moving money upstream basically means that if the are going to continue to operate the automotive business, they can’t take any money out of it for distributions or for shoring up other portfolios. That’s an understandable requirement of the banks who have loaned GPB Automotive tens or hundreds of millions of dollars to finance the inventory. They want to make sure they’re paid back, and the last thing they want is to see their money moved outside the dealership network where it’s harder for them to recover.
Unfortunately, GPB’s business model probably depended on the ability to move money between portfolio companies to shore up whichever ones were doing badly at the moment. The idea (if they were even smart enough to think of it organically) was like 1960s “conglomerates” — have a broad mish-mosh of all kinds of businesses so you can move money between them when the economic cycle for one is doing well and the economic cycle of another is doing poorly. Conglomerates fell out of fashion when people realized it was really hard to have deep expertise in all the businesses a conglomerate owned — helicopters, washing machines, shoes and Hostess Twinkies have nothing in common, and there was no synergy at all. That’s GPB’s portfolio in a nutshell as well.
Because they can’t shuffle money around and because they can’t pay distributions, they can’t save any of the other businesses which might be faltering. So this is likely the first domino ready to fall, and if others are going to follow, they can’t sacrifice this one to save the others.
It goes without saying that investors are unlikely to see a dime in further distribtions from GPB, and will likely lose most if not all of their initial investment.
3. Most of the issues in those 1-2 line bullet points are standard boilerplate and don’t really have much bearing on whether GPB sinks or swims.
I am always particularly offended when companies include a line like “We will expend significant financial and other resources to comply with the requirements of being a public entity. These requirements may place a strain on our systems and resources.” That’s just pathetic whining and bitching. And it’s basically code for “we really hate regulations that try to hold us accountable for screwing our investors.”
If you want the benefits of being a public entity, like access to lots more investors than you could get with shitty Reg D offerings, then you have to play the game the way the big kids play it. This sort of crap started to appear in filings when Sarbanes-Oxley was passed to stop the accounting hanky-panky that cost investors hundreds of billions in losses back in 2004. For a long time, companies had to invest heavily in modifying their internal systems to be compliant with financial disclosure in the law. However, you basically can’t buy an accounting software package today that’s not Sarbanes-Oxley compliant. There’s minimal incremental cost for compliance other than a few hundred grand in audit costs every year. And being a public entity is definitely worth it.