Now that our financing round is complete, I would like to clear up some misconceptions that arose last week as a result of our filing a public market financial prospectus. SEC rules rightly limit interaction with the press during a financing round to prevent companies from promoting stock. Unfortunately, this made it difficult for me to respond properly when some journalists gained the wrong impression.
Public company financing documents are fundamentally about ensuring investors are informed about every possible risk, even those that are highly improbable, and one has to describe those risks using language that is discomforting at best. Consistent with those principles, we described a relatively pessimistic scenario for Tesla, which was incorrectly interpreted by some to be what we thought was the most likely scenario.
Most importantly, what did not come across well was that we raised the funds simply for risk reduction. Barring any disasters internally or with suppliers, Tesla is actually on the verge of becoming cash flow positive and will not have to spend any of the money raised, at least until we embark upon a major new vehicle program. In the public call with investors, I tried to make this point, but perhaps should have emphasized it more: we expect Tesla to become cash flow positive at the end of next month.
However, given that we do have a global supply chain and that floods, fires, hurricanes or earthquakes can cause supply chain interruptions and halt production, we thought it would make sense to raise capital to protect against such an event. In fact, an important consideration in doing this financing round was that we went through just such a crisis recently with a supplier that had a flood in their factory. This caused a shortfall in shipments and delayed production until we could find another solution.
As for the reduced vehicle delivery guidance in Q3 and Q4 of this year, it is unfortunate that we are at the steepest portion of our production ramp. This gives the appearance of being much further behind than we actually are. Our production rate in the last week of September was roughly 100 vehicles, four times greater than our production in the first week of September as we overcame supply constraints. If the calendar were simply shifted a few weeks to the right, Tesla would have exceeded the 500 vehicle delivery target for the third quarter. In fact, I am pleased to report that we completed production of 359 vehicles last quarter (delivering over 250 of those to customers) and have already made our 500th vehicle body. While we are indeed a few weeks later than we would like, this is perhaps not a terrible outcome for a product as advanced and complex as the Model S, particularly given that Tesla is doing manufacturing of full vehicles for the first time with a new team and new suppliers.
Finally, there are two important points that should be clarified regarding the loan that Tesla has from the Department of Energy, which only constitutes a third of our capital raised to date:
1. In discussions with the DOE, Tesla has never asked for or even hinted at postponing repayment of the loan. We did suggest that holding nine months worth of principal payments in *advance* in a reserved account was a bit extreme and, moreover, was never part of our original loan agreement. The DOE agreed and reduced the advance payment reserve account to six months. At the risk of being repetitive: Tesla has always made its DOE payments on time and has never asked to delay repayment ever. I don't know how to state this more clearly.
2. The DOE's desire for advance payment of the overall loan stems from a concern that is the complete opposite of what many assume. The DOE believes Tesla will be highly successful and accumulate a large amount of cash, but that we may then choose not to pay off the loan any sooner than is currently required. Far from being worried about our survival, the DOE is highly bullish about our future and doesn't want us to delay early repayment of the loan if we have the cash on hand to do so.
The DOE has simply asked if we would be willing to repay the loan early if we have excess cash. The answer is unequivocally yes and I am happy to announce that we will be initiating an advance payment today to prefund the principal payment that is due in March 2013. The purpose of the DOE Advanced Technology Manufacturing Program was to serve as a catalyst for accelerating sustainable transport technology, which is in the best interests of all Americans and ultimately people throughout the world. In the case of Tesla, the result has been a resurgence in American manufacturing ability and the creation of over 3500 high quality jobs. Nonetheless, we have a duty at Tesla, having accepted this loan as a portion of our capital, to repay it at the earliest opportunity. We will do exactly that.
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Certain statements in this blog post, such as cash flow expectations, are "forward-looking statements" that are subject to risks and uncertainties. These forward-looking statements are based on management’s current expectations. Various important factors could cause actual results to differ materially, including the risks identified in our SEC filings. Tesla disclaims any obligation to update this information.