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  • Writer's picturePivotal Capital

Tesla's 3Q'18 Risk Factors Are Already Becoming Reality

Risk factors are an important part of every public company's quarterly and annual SEC filings - But Friday's news that Tesla is laying off 7% of its workforce poses a serious question for investors: Are these still risks, or are they already reality?


When reading any quarterly report (SEC Form 10-Q) or annual report (SEC Form 10-K), one of the most important parts to read closely are the risk factors disclosed by the company. Appropriately designated as "ITEM 1A. RISK FACTORS" this is where management lays out the potential issues the company may face going forward. For those familiar with the Tesla ($TSLA) story, it is not surprising that this portion of the company's filings is quite long. And, as shown below, these are not the only risks facing the company's business and financial results.

The above statement appears on page 52 of Tesla's 3Q'18 Form 10-Q. What follows is an elaborate list of risks to the company's financial performance, spanning an impressive 17 pages. Since 99% of investors never actually read these quarterly reports, I thought I'd go ahead and do it for you. In doing so, I realized that many of these may no longer just be "risks" but instead are already reality.

Risk Factor #1: "We may be unable to meet our growing vehicle production, sales and delivery plans and servicing needs, any of which could harm our business and


Source: TSLA 3Q'18 SEC Form 10-Q, p. 53

It is no secret that Tesla customers have been in production/delivery/service hell for some time now. Whether it is waiting months for repairs due to lack of parts, spending hours on hold with the service department or sitting in line for hours at the local Supercharging Station, it has become abundantly clear that this risk factor has, in fact, already become reality. But wait, there's more: the reliability of the Model 3 "which (they) only recently commenced producing at volume" is much, MUCH, worse than they expected. This Edmunds article is just one of many reports on the Model 3's quality issues. Here is a typical tweet from a frustrated Model 3 owner to Tesla. Like many other frustrated owners who do not have a blue check-mark, this customer received no reply from @Tesla or @Elonmusk.

Risk Factor #2: "If our vehicles or other products that we sell or install fail to perform as expected, our ability to develop, market and sell our products and services

could be harmed."

Source: TSLA 3Q'18 SEC Form 10-Q, p. 55

Considering the fact that Tesla has already had to make recalls in China (though not entirely their fault), the quality issues I mentioned above (and we have seen all over twitter) are clearly another "risk" that has become reality. Not to mention the fact that Tesla's "Full Self-Driving" is complete vaporware - it is clear that they have been unable to detect and fix any defects in their products prior to sale. As they state in the last sentence of the above paragraph, this could have a material adverse impact on the company's business, financial condition, operating results and prospects.

Risk Factor #3: "If we fail to scale our business operations and otherwise manage future growth and adapt to new conditions effectively as we rapidly grow our company, including internationally, we may not be able to produce, market, sell and service our products successfully."

Source: TSLA 3Q'18 SEC Form 10-Q, p. 56

This one is especially relevant in light of Friday's news. Just look at the last sentence of the paragraph: "and find and hire a significant number of additional manufacturing, engineering, service, electrical, installation, construction and administrative personnel"

If the inability to rapidly grow the company is a serious risk, I would say that rapidly shrinking the company's headcount is sufficient evidence that this "risk" from Q3 is now the reality for Tesla.

Risk Factor #4: "We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend

or insure against such claims."

Source: TSLA 3Q'18 SEC Form 10-Q, p. 57

If I was long this stock, this would absolutely scare the hell out of me. As of this January 9, 2019 tweet, PlainSite had identified 505 legal actions against Tesla. And that's not even the scary part. According to the 10-Q, Tesla SELF-INSURES against the risk of product liability claims. For those of us unfamiliar with the term, this means that Tesla will have to pay these claims from company funds (as they state in the last sentence of the above paragraph). They also state that "a successful product liability claim against us could require us to pay a substantial monetary reward." Just imagine what a few hundred successful claims could cost the company. These law suits alone could render the company insolvent. Another "risk" that is quickly becoming reality for Tesla.

If you'd like to take a look at the full list of legal actions against the company, you can do so here, thanks to the hard-working people over at PlainSite.

Risk Factor #5: "If we are unable to establish and maintain confidence in our long-term business prospects among consumers, analysts and within our industries,

then our financial condition, operating results, business prospects and stock price may suffer materially."

Source: TSLA 3Q'18 SEC Form 10-Q, p. 58

This one is very important for Tesla. They have survived over the years thanks to an abundance of positive press, analyst notes and ridiculous price targets from morons like Cathie Wood of ARK Invest. I don't know where she went to business school, but my Alma mater certainly did not teach the "Hopes and Dreams" valuation method that she uses. Nonetheless, most recent Tesla coverage has been much more skeptical. Even Elon's favorite bank, Goldman Sachs, wanted no part of SpaceX's recent attempt to raise capital. Goldman, who has underwritten many $TSLA securities in the past, maintains a "Sell" rating on the company, with a price target of $225. Even long-time bull Adam Jonas of Morgan Stanley has an "equal weight" rating on the stock, with a $291 price target. This "risk" is well on its way to becoming reality and, in my opinion, a Moody's downgrade will be coming soon as well.

Risk Factor #6: "Our vehicles and energy storage products make use of lithium-ion battery cells, which have been observed to catch fire or vent smoke and flame, and

such events have raised concerns, and future events may lead to additional concerns, about the batteries used in automotive applications."

Source: TSLA 3Q'18 SEC Form 10-Q, p. 59

This is a serious risk, not just to Tesla's brand, but to their customers and their customers' families. If Martin Tripp's allegations against the company are true, there are a few hundred Model 3s out there whose batteries have holes in them. This is a serious safety concern. However, even if Tripp's allegations aren't true, Tesla batteries have caught fire before. Remember this infamous video of a Model S going up in flames in Santa Monica last summer? More recently, a Model S caught fire while parked in Los Gatos, California. Then, two hours later it caught fire again after being towed to a body shop. The news coverage of this was great - you can see the video below:

This is yet another "risk" that is well on its way to becoming reality. As the owner said "what if this had happened while the car was in my garage?... My wife certainly does not want me to buy another Tesla." I would say that is the type of adverse publicity that "could negatively affect our brand and harm our business, prospects, financial condition and operating results." as they stated in the 10-Q.


That's all I can handle for tonight. I will have to call this "Part 1" because I have many more Q3 risk factors to cover - these 6 came up in the first 7 pages of the 17 page risk factors section of the 3Q'18 10-Q. I think it is clear to most people now that this company is in serious trouble. In my opinion, the end is near for Tesla - it is looking ever more likely that the $920M in convertible debt due on March 1st will need to be paid in cash and even if they can survive that - the reality I have described above will put the nail in the coffin. Only one question remains: will the Board of Directors finally wake up and file for Chapter 11, or let Elon run full speed ahead into Chapter 7 liquidation?

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