I’m short Tesla and have filed complaints to the SEC about various items concerning the company that they need to be aware of and have on their radar, much of which they’re aware of and some perhaps less so. I’ll get into some important points regarding its financial situation, but first consider the buyout itself. The Supposed Buyout Who is going to buy this company at $420 when they can simply buy it in the market at $350? It’s a tiny, unprofitable, cash-burning, massively indebted, capital-intensive car company with material liquidity problems that’s supposedly worth a 35% premium to GM and 90% premium to Ford? The Saudis, who Musk and his lawyers mentioned in the drivel posted to tesla.com this morning, are already overextended with the PIF and don’t have spare tens of billions of dollars lying around. Let's say as an aggressive estimate, 50% of shareholders agree to stay onboard at $420 while meeting SEC rules regarding shareholder limits for private companies. You need $35bn-$36bn in debt. Who exactly will furnish that? On top of the $10bn+ it soon requires just to maintain operations. It burns some $800 million in cash per quarter. It has nothing to service it on top of its pre-existing debt load and various anchors it is already struggling with even outside of the core automotive business (e.g., SolarCity debt obligations). Its liquidity situation is tenuous to the point where it's collateralized its top asset (Fremont assembly plant) to simply stretch out its revolving credit agreement and is resorting to suppliers for financing. Needless to say, these are desperate measures. Why is the company stashing over half a billion dollars’ worth of auto ABS in a special purpose entity when automotive production is core to its business operations? Why is it changing the definition of what production entails? What about its mounting legal problems over a plethora of issues (now likely including the SEC)? These undoubtedly have something to do with the recent flood of executive departures. And on that note, did Tesla drop its directors and officers insurance? There were disclosures about this in the 2016 and 2017 10-K’s. Why was the D&O language dropped from the 2018 10-K? Why did Tesla not, as a basic procedural measure, submit an 8-K regarding this purported buyout? Either there are conflicts within the board and/or between the board and Musk. Musk’s showmanship and the distorted public understanding of his business accomplishments have magnified the value of this company that’s been built up so heavily on audacious lies and undelivered promises that aren’t the least bit surprising given his operational and engineering incompetence. It’s telling that Tesla’s former chief of engineering Dave Lyons metaphorically summarized the situation: “He is absolutely burning the ships to shore. There is no way back. The only way to go is forward and through.” Next quarter, expect this company to add up a bevy of one-time items to juice earnings. Cash burn rates will also become more obvious than they were last quarter given the large amount of customer deposits embedded in its cash account and extended accounts payable. Financials Let’s do some basic math regarding the financing of the sale itself: Take June 30 cash, even include customer deposits that it doesn’t technically own, some $2.4bn. Subtract out Q3 FCF assuming days payable outstanding (DPO) goes from 82 to 72 ($1.2bn); subtract out Q4 FCF ($350mm); subtract out Q4 debt maturities (some $300mm); subtract out China cash (~$200mm); subtract out banking fees required for supposedly the largest MBO of all-time (call it $100mm). Then consider the fact that Tesla’s asset based line requires the company to end the year with $1.8bn in accessible liquidity, of which $1.4bn will cover the convertible notes due next year and $400mm as a buffer. They are, however, not contractually obligated to have a cash buffer (as of January 1, 2019) for the convertibles due in November 2019, so that leaves the company $1.0bn short (rather than $1.4bn if this were the case) unless they get the funding from somewhere. The ZEV credit market is drying up, which casts doubt on how much of this type of one-time revenue (with 100% margin) they can still legitimately generate from those. A DPO of 82 is an incredible figure. More suppliers are requiring cash-on-delivery or filing liens so they aren’t so strung out by the company. Consider the math that each one-day reduction in DPO for Q3 and Q4 costs Tesla $50mm. They also cannot materially raise debt because of past depletion of the $2bn basket-related permitted indebtedness covenant covered per the terms of their asset backed line. So what do they do? Raise more equity to dilute current shareholders? How is this impacted by the recent set of investigations that have been opened? Banks open themselves to litigation risk. Raise enough debt to terminate the asset backed line while leaving enough to fund operations for multiple quarters? The problem is that as a cash-burning company, Tesla is not able to service its existing liabilities without a steady diet of capital raises. However, with “investor protection” laws designed to stamp out pyramid schemes, it’s uncertain how much debt the company will be able to raise unless it’s through the conduit of a debtor-in-possession lending facility, which needs to be approved by a court. A $70bn MBO/LBO could realistically take over a year to close, meaning they need bridge financing into 2019 to cover their losses. They need to raise, at minimum, another $10bn from the capital markets. Musk Himself There are widespread misunderstandings of Musk’s actual business accomplishments, and his engineering and operational talents, which are very limited. The bevy of myths: 1. “He founded PayPal” False. He was not a founder or co-founder of PayPal. He cofounded a different online bank, X.com, in November 1999 that merged with Confinity in March 2000. The combined company was named X.com. PayPal was Confinity’s product; it was not in any way Musk’s conception. Musk was named CEO of X.com, but only lasted six months due to conflicts with other employees and investors and was replaced by Peter Thiel. Ebay bought PayPal in 2002; as X.com’s largest shareholder, Musk was the largest beneficiary of the sale. Musk had very little to do with the concept of PayPal and made little contribution to it from an operational standpoint. 2. “He founded Tesla” False. He was an early-stage investor in the company back in 2004 and didn’t become CEO until October 2008. Musk was indeed a founder in Solar City. That company could not operate as a going concern on its own. To avoid bankruptcy, it was effectively bailed out by Tesla. Its debt is still a material anchor on Tesla’s operations and its bond yields have blown out over the past year. 3. “He is a great engineer and thinks of stuff that nobody else does” No. The Boring Company is the same concept as the subway system, a 19th century invention, applied to underground vehicle transport. This is not an efficient or cost-effective means of transport. The hyperloop is simply a larger version of pneumatic tubes. They are perhaps most known to people as those things at bank drive-thrus where you put your check in the cylindrical tube, press the button, and the contents are transferred to the teller on the inside of the bank. The London Stock Exchange used these in the 1850s to transport paper messages. Corporations also used to use pneumatic tubes to fulfill the same purposes before email/computerized communication. The idea is to use it for humans instead. This is the stuff that 1st-graders think of. It is not a novel concept. The problem, going back decades, has been economics. It’s the same regarding electric cars. Electric cars, first developed in the 1880s, were more common than gasoline cars until the early 20th century because range and cost were issues. SpaceX uses the same rocket technology as was developed in the early 1960s, such as Saturn IB. Musk does very little with the company from an operational and engineering standpoint. We know it burns a lot of money, though it has some very talented aerospace engineers on staff. It also has the government as a customer. Trying to rescue the Thai soccer team… he called the device he provided a “submarine.” This is disingenuous. In reality, it was an off-the-shelf cylindrical container with a cap on each end of it. It was useless, as a basic look at the path out would have made obvious. When divers got the “glory” for saving the team and one of those individuals pointed out the uselessness of Musk’s conical container, he called him a pedophile. Musk’s talent is in raising capital. That’s about as far as it goes.