Barely a week since finalizing the terms for a $465 million low cost federal government loan, Tesla Motors Inc. has filed for an initial public offering, disclosing among other financial information that the electric-car maker is deep in the red.
Market watchers have bundled the maker of luxury sports all-electric vehicles as one of the likely exits of 2010, so the filing doesn’t come as a surprise. It does, though, bring to light many details about the company headed by Musk and backed by a who’s who of Silicon Valley.
Back in February 2009, Musk addressed Tesla enthusiasts and customers in a newsletter, indicating Tesla would reach profitability by the second half of 2009, thanks to a $40 million Christmas present Tesla received from investors in December 2008. Later in August, Musk proudly declared that Tesla reached profitability for the first time after analysts had doubted the company could meet that target. The company said then it recorded $1 million in earnings on $20 million in revenue during the month.
But according to Tesla’s IPO filing, the company came nowhere close to profitability during most of the year, recording a bottom-line loss of $31.5 million for the first nine months of the year. The losses have improved compared with the $57.2 million in 2008 and $78 million in 2007 on high R&D costs, but Tesla states it will continue to reap losses for at least the forseeable future.
“If we are to ever achieve profitability it will be dependent upon the successful development and successful commercial introduction and acceptance of automobiles such as the Model S, which may not occur,” Tesla said in the filing.
Risky, unprofitable ventures haven’t been well-received by the public markets, and this offering will test investors’ appetite for risk. Tesla will eventually need to prove that it can build these cars profitably.
Still, Tesla’s sales are growing fast, bringing in $93.4 million in the first nine months of 2009, while the cost of those sales were $85.6 million. Sales in 2008 were just $580,000, as Tesla started selling its Tesla Roadster, its first vehicle, to the masses toward the end of that year.
The most basic Tesla Roadster retails for $109,000, before the tax incentives. Tesla had sold a total 937 Roadsters by Dec. 31, of which a large number had been reserved in previous years, the filing says. It also says that 324 of those sales had been recognized in the quarter ended Sept. 30, 2009. At the end of the year, the company had reservations for 220 Roadsters and 2,000 of its Model S sedans.
The offering document doesn’t disclose how many shares each shareholder will be cashing in. As is well-known, it shows Chief Executive Elon Musk is by far the largest shareholder, with 81 million shares held by its Elon Musk Revocable Trust. Musk also has an undetermined amount of shares to be issued to him from warrants due at the IPO. Other backers with at least a 5% stake listed by the filing include Blackstar Investco, which is 60% owned by Daimler AG and 40% owned by Abu Dhabi’s Aabar Blackstar Holdings; VantagePoint Venture Partners; Valor Equity Partners and Abu Dhabi’s Al Wahada Capital Investment.
Other firms that have invested in Tesla, include Capricorn Management, Compass Venture Partners, Draper Fisher Jurvetson, Fjord Capital Partners, J.P. Morgan Bay Area Equity Fund, Technology Partners and Westly Group.
Of note, the DOE will get 9.3 million shares of Tesla’s common stock when it exercises a warrant in connection with the closing of the loan, at an exercise price of $2.5 per share. The DOE also was assured that 50% of the net proceeds from the IPO will be set aside to fund a dedicated account under the loan facility to fund project costs, which will then be reimbursed by the DOE.
Tesla said it anticipates capital expenditures will reach between $100 million and $125 million in the current year.
COMMENTARY: I have been hearing rumors about this IPO for several weeks now, and this comes as no surprise. Tesla has 200 Roadsters on back order, but what is encouraging is that Tesla has already received 2,000 orders for the Model S, a 225-mile sedan priced at about $60,000.
Tesla is obviously under the gun to generate revenues and start production of the Model S or customers will start getting antsy. They must also meet certain DOE benchmarks which are summarized in the S-1 filing.
Personally, I don't believe the first Model S will come off of the assembly line until 2011. They still have to finish designing a final production version of the Model S, locate a plant facility, do all the build-outs, install the equipment and hire the production plant workers. If they can do this over the next year, they will be damn lucky.
Tesla's gross margins were a paltry 8% of sales 2009, so if they start producing the Model S in 2011 and only produce 2,000 vehicles (current backlog of the Model S), their gross profit will be about $10 million. Their operating expenses including R&D expenses will probably be about $65 million (guess), so doing the math they will probably lose about $55 million on the low end.
Tesla has not made any unit sales forecasts, but I have done a quick and dirty estimate, and Tesla's breakeven is somewhere between 10,000 and 12,000 units. Tesla will go through that $465 million DOE loan and $100 million IPO money very quickly, most of it spent on the new Model 2 production facility and final design work, and this doesn't leave a lot for working capital. I figure they will need to raise more capital sometime in 2012-2013, provided they can reach breakeven.
The IPO window is slowly starting to open up, and according to Rennaissance Capital the number of S-1's filed in January 2010 alone were 15. In the entire year 2009, there were 120 IPO filings, the lowest number since 2004. IPO's peaked at 374 in 2007, the highest since the 695 IPO filings in 2000.
Courtesy of an article dated January 29, 2010 appearing in The Wall Street Journal's Venture Capital Dispatch
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