Elon Musk clarifies financing round, says Tesla to be cash flow positive by December 2012

Last week misconceptions floated in the press stemming from SEC financial filings, and this week Elon Musk takes to the blog to explain the truth, and predict the company will be cash flow positive next month.

Last week, overshadowing the Supercharger network announcement, some SEC filings by Tesla Motors created what Elon Musk today called "misconceptions" when "journalists gained the wrong impression" of what the filings meant. Those articles had the tone of the sky is falling because Tesla Motors is running short of money and the Dept. of Energy (DOE) is calling on Tesla to repay the loans early. In a blog post today, Elon Musk made his best attempt to clarify the situation, to reiterate that Tesla Motors is about to become cash flow positive, next month, and to explain the circumstance around the repayment terms for the DOE loan.

The blog post began by explaining that the company was in a quiet period required by SEC rules, because of a round of fundraising. That quiet period prevented Tesla's management from speaking about the misconceptions floating in the press. Further, because prospectuses are required to spell out all known risk factors, even the highly unlikely ones, Musk says they "described a relatively pessimistic scenario for Tesla, which was incorrectly interpreted by some to be what we thought was the most likely scenario."

At the June shareholders meeting, Musk claimed the company would become "cash flow positive" by 2013. How? Because of Tesla Model S sales. By the end of 2013 the sales projections are 25,000 units of the Model S. Musk claimed that Tesla would become cash flow positive on only 8,000 unit sales, and that at that time the company had orders in hand for 10,000 units. In late August, Musk reiterated the claim to a Dow Jones reporter with largely the same line of reasoning.

Musk's blog post today now claims "we expect Tesla to become cash flow positive at the end of next month." That is, the end of November 2012, which is a bit ahead of the previous prediction.

As for the round of financing, Musk talks about having a "global supply chain" that is susceptible to "floods, fires, hurricanes or earthquakes" which can cause "supply chain interruptions and halt production" and that raising more capital would "protect against such an event." The company had just gone through such a crisis, with a supplier whose factory flooded, causing production delays.

Manufacturing of the Tesla Model S is a little bit behind what they would like. Musk explains this as "we are at the steepest portion of our production ramp" and that the company produced 100 vehicles in the last week of September, up from the 25 vehicles produced the first week of September. The increased production was due to overcoming supply constraints, and that if those constraints had not affected production Musk claims they would have exceeded the target of producing 500 vehicles in the 3rd quarter. Instead Tesla produced 359 vehicles in the 3rd quarter, delivering 250 to customers, and have produced the 500th vehicle body.

Turning to the Tesla's loan from the Dept. of Energy, which accounted for 1/3rd of the capital raised recently, Musk gave two clarifications.

First, Tesla "never asked for or even hinted at postponing repayment of the loan." Instead the company suggested that holding "nine months of principal payments in advance in a reserved account was a bit extreme," and that this "was never part of our original loan agreement." Musk said the DOE agreed and reduced the advance payment reserve to six months. He went on to say that Tesla has always made its DOE payments on time.

Second, the assumptions of many about the DOE desire for advance payment of the overall loan is exactly the opposite of the truth. Musk says the DOE believes that Tesla will be highly successful, and accumulate a lot of cash, but the DOE is concerned that Tesla might then choose not to pay off the loan more quickly than is actually required. Rather than worrying about Tesla's survival, the DOE doesn't want a delay in the loan repayment.

That is a request, to not delay loan repayment, which Musk is happy to oblige. Not only that, he is putting Tesla's money where his mouth is, and Tesla has already made a payment that will prefund the loan payment due in March 2013.

To close Musk wrote about the DOE Advanced Technology Manufacturing Program, a Bush-era program which has been incorrectly tarnished as an Obama-era program. The purpose was to accelerate development of sustainable transportation technology. In the case of Tesla, the company was able to take control of a disused automobile factory, preserve its role as an automobile factory, building a manufacturing base in the U.S. when so many companies are going elsewhere for manufacturing, and cause the creation of 3,500 jobs.