Remember when one month ago, just as Elon Musk's bizarre descent into twitter paranoia was beginning, the Tesla CEO infamously lashed out at The Economist (i.e., the messenger) for citing a Jefferies research report according to which Tesla would need to raise as much as $3BN in capital this year. Musk's petulant response: "The Economist used to be boring, but smart with a wicked dry wit. Now it’s just boring (sigh). Tesla will be profitable & cash flow+ in Q3 & Q4, so obv no need to raise money."
The Economist used to be boring, but smart with a wicked dry wit. Now it’s just boring (sigh). Tesla will be profitable & cash flow+ in Q3 & Q4, so obv no need to raise money.— Elon Musk (@elonmusk) April 13, 2018
Few took Musk's bluster seriously for one simple reason: it's not the first time it has happened. In fact...
Of course, as we reported last week, Tesla revealed that in Q1 it had burned just over $1billion in cash, a near record $12 million in cash burn each day, thereby only validating worries about a new capital raise, even as its Model 3 production progress rose to just 2,000 cars per week, still more than 50% from the company's own bogey of 5,000/week.
To be sure, just last week Reuters doubled down, writing that production setbacks with its new Model 3 "have cast a shadow over Musk’s promises and judgment. A host of new projects in the pipeline, from a semi truck to an SUV, now appear to some analysts as expensive, time-consuming distractions, even as rival automakers come to market with their own electric offerings." The damning conclusion:
"A capital raise would raise alarm bells with investors as the company continues to burn money."
And while the abovementioned Jefferies' forecast may be aggressive, UBS analyst Colin Langan has estimated that Tesla, which ended 2017 with $3.37 billion in cash, could fall below a cushion of $1 billion at the end of June due to estimated negative free cash flow of $1.6 billion in the first half of the year. Some, like Bernstein, put that estimate higher, at negative $1.8 billion.
It gets worse, because if one subtracts another $1.2 billion for 2018 debt refinancing and accrued liabilities reduces Tesla’s cash level to $600 million.
In short, Tesla - with its chronic production delays - will certainly need to raise capital, although one can see why Musk, who has repeatedly underestimated his capital requirements and has repeatedly raised money, whether through equity or debt, even after claiming it had no need to do so.
The only question is whether it will do so when it can, at preferential terms, or when it has to at terms dictated by the market.
Meanwhile, “The company’s financial predictions may be losing credibility within the financial community,” wrote Cowen & Co analyst Jeffrey Osborne in a recent note to clients. Not only that, but the financial community is becoming increasingly concerned about Musk's fragile state of mind after last week's conference call fiasco.
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So in what was much needed intervention by the adults in the room, in Tesla's latest 10-Q filed this morning, the company refuted Musk's bluster, and warned that a capital raise may be unavoidable:
Here is the latest "liquidity" section update:
As of March 31, 2018, we had $2.67 billion of cash and cash equivalents. Balances held in foreign currencies had a U.S. dollar equivalent of $882.5 million and consisted primarily of Chinese yuan, euros and Norwegian kroner. Our sources of cash are predominately from our deliveries of vehicles, sales and installations of our energy storage products and solar energy systems, proceeds from debt facilities, proceeds from financing funds and proceeds from equity offerings.
Our sources of liquidity and cash flows enable us to fund ongoing operations, research and development projects, investments in tooling and manufacturing equipment for the production ramp of Model 3, the continued construction of Gigafactory 1 and the continued expansion of our retail stores, service centers, mobile repair services and Supercharger network. Once we have achieved a 5,000 weekly production rate for Model 3, we intend to incorporate our cumulative experience to continue to increase output on our existing manufacturing lines beyond 5,000 vehicles per week, and then add incremental capacity in a capital-efficient manner to ultimately achieve a weekly production rate of 10,000 vehicles. At this stage, we are expecting total 2018 capital expenditures to be slightly below $3 billion. Ultimately, our capital expenditures will develop in line with Model 3 production, our profitability and our operating cash generation. We continually evaluate our capital expenditure needs and may raise additional capital to fund the rapid growth of our business.
Although one can see where Elon and his lawyers got into a screaming match, even if the lawyers got the final word:
We expect that our current sources of liquidity together with our projection of cash flows from operating activities will provide us with adequate liquidity over at least the next 12 months. A large portion of our future expenditures is to fund our growth, and we can adjust our capital and operating expenditures by operating segment, including future expansion of our product offerings, stores, service centers, delivery centers and Supercharger network. We may need or want to raise additional funds in the future, and these funds may not be available to us when we need or want them, or at all.
We expect that Tesla's expectations will be dramatically revised in the next 3-6 months.
Finally, from the risk factors:
We may need or want to raise additional funds and these funds may not be available to us when we need them. If we cannot raise additional funds when we need or want them, our operations and prospects could be negatively affected.
And of course:
Our business may not continue to generate cash flow from operations in the future sufficient to satisfy our obligations under our existing indebtedness, and any future indebtedness we may incur, and to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive.
But wait, it gets better, or rather worse, because it appears that Tesla's impressive revenue beat reported last week was largely thanks to an accounting gimmick, and the adoption of new revenue standards as disclosed on page 10 of the 10-Q.
And a brief explanation:
We have adopted the new revenue recognition standard ASC 606 effective January 1, 2018. This impacts the way we account for vehicle sales with a resale value guarantee and vehicles leased through our leasing partners, which now generally qualify to be accounted for as sales with a right of return. In addition, for certain vehicles sales with a resale value guarantee and vehicles leased through leasing partners prior to 2018, we have ceased recognizing lease revenue starting in 2018 and now record the associated cumulative adjustment to equity under the modified retrospective approach.
Automotive revenue includes revenues related to deliveries of new vehicles, and specific other features and services that meet the definition of a performance obligation under the new revenue standard, including internet connectivity, access to our Supercharger network and future over-the-air software updates.
In other words, on an apples to apples basis, it is increasingly unclear if the company is even growing at the top line. It is all too clear what is taking place at the cash burn level.
Amusingly, a clear preview of what happens next is also posted clearly in the 10-Q:
... any negative perceptions about our long-term business prospects, even if exaggerated or unfounded, would likely harm our business and make it more difficult to raise additional funds if needed.