Tesla, Inc. 10-Q Summary: Quarter Ended September 30, 2010
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2010. Tesla Motors, Inc. (Tesla) designs, develops, manufactures, and sells high-performance fully electric vehicles and advanced electric vehicle powertrain components. The company's primary product is the Tesla Roadster, with the Model S sedan in development for a planned 2012 commercial introduction. During the quarter, Tesla completed its Initial Public Offering (IPO) on July 2, 2010, and a concurrent private placement with Toyota Motor Corporation.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2010 | Nine Months Ended Sept 30, 2010 | Three Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2009 |
|---|---|---|---|---|
| Total Revenues | $31.2 million | $80.5 million | $45.5 million | $93.4 million |
| Gross Profit | $9.3 million | $19.4 million | $7.7 million | $7.8 million |
| Net Loss | $(34.9) million | $(103.0) million | $(4.6) million | $(31.5) million |
| Cash and Cash Equivalents | $96.6 million (as of Sept 30, 2010) | |||
| Restricted Cash | $145.6 million (as of Sept 30, 2010) | |||
| Long-Term Debt | $56.6 million (DOE Loan Facility) |
Note: All figures in millions unless otherwise noted. Data derived from Condensed Consolidated Statements of Operations and Balance Sheets.
Material Changes vs. Prior Period
- Revenue Decline: Automotive sales revenue decreased significantly compared to the prior year periods. This is attributed to the fulfillment of a backlog of pre-2009 reservations in 2009, whereas 2010 sales reflect current demand levels. However, the company introduced a new revenue stream, "Development Services," generating $7.9 million in the quarter and $12.6 million for the nine months, primarily from agreements with Daimler and Toyota.
- Increased Operating Expenses: Operating expenses rose sharply to $47.1 million for the quarter (from $12.0 million in 2009) and $114.6 million for the nine months (from $36.7 million in 2009). This increase is driven by higher R&D costs for the Model S, increased headcount, and a significant rise in stock-based compensation ($13.3 million for the nine months vs. $0.4 million in 2009).
- Capital Structure Transformation: Following the July 2010 IPO, all convertible preferred stock was automatically converted into common stock. The company raised $188.8 million in the IPO and $50.0 million from a Toyota private placement.
- Accounting Correction: The company identified an error in 2009 regarding stock-based compensation expense, resulting in a $2.4 million adjustment recorded in the second quarter of 2010.
Guidance, Outlook, and Risks
Outlook and Management Commentary: Management expects to continue incurring operating and net losses until at least the launch of the Model S in mid-2012. The company anticipates that losses will increase significantly in future periods due to investments in the Model S, manufacturing facility build-out in Fremont, California, and expanded sales and marketing activities. The company expects its cash on hand, combined with proceeds from the IPO, Toyota investment, and the DOE Loan Facility, to fund operations for the next 24 months.
Key Risks and Contingencies:
- DOE Loan Facility: Access to the remaining $408.4 million of the $465 million DOE loan is contingent upon meeting specific milestones related to the Model S development and manufacturing facility build-out.
- Model S Execution: Significant risks exist regarding the ability to design, manufacture, and launch the Model S on time and within budget. The company has no experience with high-volume manufacturing.
- Customer Concentration: Powertrain sales and development services revenue are heavily dependent on Daimler and Toyota. Daimler has indicated plans to produce its own batteries by 2012, which could reduce future demand for Tesla's components.
- Supply Chain: The company relies on single-source suppliers for critical components, including Lotus for the Roadster chassis. Disruptions could halt production.
- Regulatory and Legal: Risks include potential challenges to the company's direct-to-consumer sales model in various states, environmental remediation costs at the Fremont facility, and potential product liability claims.
Investor Verification Checklist
- DOE Milestone Compliance: Verify Tesla's progress against the specific milestones required to draw down the remaining $408.4 million from the Department of Energy loan facility.
- Model S Timeline and Budget: Monitor updates on the Model S production schedule and capital expenditure requirements for the Fremont facility to assess the risk of cost overruns or delays.
- Powertrain Contract Renewals: Confirm the status of future supply agreements with Daimler and Toyota, given Daimler's stated intent to vertically integrate battery production.
- Reservation Conversion Rates: Track the conversion of Model S reservations (approx. 3,000 as of Sept 30, 2010) into actual sales, noting that these are refundable until a purchase agreement is signed.
- Stock-Based Compensation: Review future stock-based compensation expenses, which are expected to remain high due to the IPO and ongoing equity incentive plans.