Tesla Discloses: We Were In Material Compliance With All Financial Debt Covenants…

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Whitney Tilson’s email to investors discussing Tesla‘s 10-Q, two more warning flags; and his thoughts on Tesla’s Autonomy Day and a friend’s response to Marcelo Lima’s tweet.

Tesla just released its 10-Q for the first quarter (attached). I haven’t had a chance to digest it fully yet, but two things caught my eye:

a) On page 12, the company disclosed revenue of $216 million from “Automotive regulatory credits” (also known as Zero Emission Vehicle Credits), up from only $1 million in the previous quarter. Tesla didn’t disclose this information in its first quarter earnings release or conference call last Wednesday – and it should have. It’s highly material because, without it, Tesla’s losses for the quarter, instead of $702 million, would have exceeded $900 million! Here’s a Financial Times article with more on this topic: Tesla: a strange case of credits. Excerpt:

ZEV credits are state incentives designed to push automakers to create electric cars. In California, and other states, automakers have to earn them to partially offset sales of internal combustion engine cars. Tesla, having generated a surplus of credits over the years, frequently sells them to other manufacturers who need to hit their quotas.

Such sales are essentially pure (gross) profit, leading to a focus on their impact as the company attempts to become consistently profitable.

b) On the top of page 22, Tesla disclosed that: “As of March 31, 2019, we were in material compliance with all financial debt covenants…”

This is slightly – but perhaps importantly – different from the same line in Q3 2018 10-Q, which reads: “As of September 30, 2018, we were in compliance with all financial debt covenants…”

“In material compliance” isn’t the same as “in compliance.” Trust me, every word in Tesla’s SEC filings is carefully reviewed by top lawyers. The introduction of the word “material” means that Tesla is out of compliance with at least one of its financial debt covenants.

Add two more huge warning flags to the long list of them at Tesla…

Tesla’s 1Q19 10Q

In response to Marcelo Lima’s tweet in my last email…

Marcelo Lima

…I watched Tesla’s entire Autonomy Day and it did indeed appear impressive, with a ton of technical jargon and big claims, delivered with absolute certainty.

But I suspect it’s mostly BS for three reasons:

1) Musk has proven himself to be a pathological liar;

2) Tesla is in BAD shape and Musk knew on Monday when he made this presentation that the company was about to report horrific earnings, so he was especially desperate; and

3) The ideas that Tesla has developed by far the best chip in the world, has concluded that LIDAR isn’t necessary, etc. strains credulity. It’s not like the engineers working on this at Waymo, Uber, etc. are idiots…

A friend of mine has some very wise thoughts on this… and the mistake many people are making when evaluating Tesla:

Response to Marcelo Lima:  I agree 100% that “it’s worth watching” Tesla’s autonomy/robotaxi presentation from last Monday.  Indeed, it is essential for any investor, long or short, just like he writes.

But you know what else is equally 100% “worth watching”?  To attend or otherwise watch the equivalent presentations by all the other automakers and their Tier-1 suppliers, on this and other comparative subjects.

I have found a pattern in the Tesla debate, and that is that those who attend or listen only to Tesla-hosted events on this-or-that subject — not only autonomy/robotaxi, but manufacturing techniques, paint shop tech, infotainment systems, driver ergonomics, interior composition, off-road capabilities, thermal management, crash testing, suspension design, powertrain economics, logistics supply chain management, towing capability and stability — and literally dozens of other subjects, get a one-sided view.

The analogy would be, for example, someone who only attended AMD presentations, but never met with Nvidia’s or Intel’s people for their presentations and argument.  Or someone from the remotest rural tribe in the most primitive lands on Earth arriving in America for the first time, and after having visited a Burger King for the first time, declares himself an expert on hamburgers, confidently declaring that Burger King makes the best burger in America.  Never tried Five Guys, Shake Shack, Habit Burger, Smashburger….

For example, I almost never see any discussion among those who appear to base their Tesla autonomy optimism on meeting with Tesla only, about the fact that the Cadillac CT6 remains the only car in the U.S. market where the driver is allowed to take the hands off the wheel.  This car has been in the market for 18 months already with this functionality.

One might therefore say that Cadillac is at least 18 months ahead of Tesla in the area of autonomous technology — an advantage Tesla itself said will take at least another 18 months until it expects to be allowed to get to that point.  So, by Tesla’s own implied admission, Cadillac (GM) is 3 years ahead of Tesla in this field. And that doesn’t even account for what GM will have in 18 months from now, that it hasn’t told us about yet. So, GM’s autonomous advantage over Tesla could be more than just 36 months.  We’ll see.

I noticed that Marcelo Lima had also expressed admiration on his Twitter feed for Tesla’s argument that LIDAR was not necessary for a higher degree of autonomy, such as Level 3, 4 or 5.  Tesla makes the argument that a human being effectively has a camera only (eyes) and therefore a car shouldn’t need a LIDAR either.

I don’t think Tesla’s argument is an impossible one, certainly not in the long run, but it’s making things a lot harder in the short run.  Tesla itself admits that the car needs to have one or more radars. Well, a human being doesn’t have a radar built into its skull either, does it?  Same with LIDAR. The reality right now is that the problem of automotive autonomy is so hard, and the downside if you crash the car — especially at speed — is so high, that you realistically have to use every technological tool in the arsenal if you are going to maximize the chance of a reliable autonomous product and performance.  If you are not taking advantage of LIDAR, the automaker (Tesla in this case) would be opening itself up to the severest form of litigation and recall risk, if a Tesla should ever get involved in an accident when the driver had his hands off the wheel and eyes off the road.

The reality is that even WITH a LIDAR, getting to Level 3, 4 or 5 is already nearly impossible for many years to come.  Unique among technologies as far as I know, automakers are LESS optimistic now in getting to those higher levels of autonomy — 3, 4 and 5 — than they were even 2, 3, 4 or 5 years ago.  You would know this if you talked to all the automakers — not only Tesla.

Everyone in the industry are amazed at the new and improved technologies — sensor and computer hardware — and they all are improving their software, but the problem itself seems to be further away in the distance.  The realization of what it will take to fully validate a socially acceptable product is sinking in, and it’s not looking pretty in terms of a timeline. I avoid talking in absolutes, such as “always” and “never” but this problem is simply looking further away for a “solution” than it did, to almost all industry participants, 2-3-4-5 years ago.  It’s almost reminding me of The League of Nations and The United Nations as “solutions” to achieving world peace: Very elusive at best.

While I have you on the line, I recommend keeping an eye on this Tesla unit sales tracker:

https://evsalestracker.com/#/Tesla  It follows only Tesla and Jaguar (Jaguar’s electric car is outselling Tesla Model S and X in Europe now, as is the Audi eTron).

This tracker has proven remarkably accurate thus far.  It overestimated Tesla’s sales in Q1, but by a smaller margin than most (very few people came close to the actual 63,000 number).  For Q2, it is now estimating a beyond-catastrophic 56,861 units sold. Considering Tesla provided Q2 guidance of 90,000 to 100,000 just this week, if this tracker overestimated last quarter, and is merely “right” this time…. Well, I think you can figure out how catastrophic that would be for Tesla on a multitude of levels.

Most specifically, let’s assume Tesla is now going to race out and try to do a follow-on stock offering no later than May.  If it does that, while maintaining a 90,000 to 100,000 unit guidance for Q2 — and the actual result comes in lower than 90,000, let alone anywhere near the ballpark of this 56,861 estimate, that would be problematic, wouldn’t it?  I assume it would be an embarrassment for the underwriters too. Would Tesla and its underwriters be sued into oblivion?

Then again, Tesla and Musk have tended to work more under the philosophy of asking for forgiveness after the fact, than permission in advance.

For all that is fair, just and prudent, underwriters should wait to consider backing a Tesla stock offering until after Tesla reports Q2 results.  Anything before then would be like trying to cross a trench warfare minefield on the Eastern Front in 1917: Expect lots of damage, including to your reputation as an underwriter.

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