Tesla’s New, Voluminous Risk Disclosures

Tesla (NASDAQ:TSLA) recently disclosed about thirty pages of risks to its earnings, a sizable number. Risk disclosures are standard boilerplate for publicly traded companies, but the scope of Tesla’s admissions reveal some eye-brow raising details -- including warnings about customers getting electrocuted by its electric cars if users try to hack them.

Tesla is so worried about its reputation that, for the first time, it warned in its disclosures that buyers could fry themselves if they use “unsafe charging outlets” or try to customize its vehicles. “Automobile enthusiasts may seek to ‘hack’ our vehicles to modify its performance which could compromise vehicle safety systems,” it said. Tesla noted, for instance, that customers “have installed large speaker systems that may impact the electrical systems of the vehicle.”

This is a big deal for Tesla. It can’t control what customers do to its technologically advanced cars, which appear not to be beautiful or powerful enough for some car buyers who want to pimp their Tesla ride. If it goes haywire on them, it’s Tesla that takes the hits to its brand.

Tesla added: “We have not tested, nor do we endorse, such changes or products,” noting, “such unauthorized modifications could reduce the safety of our vehicles, and any injuries from such modifications could result in adverse publicity which would negatively affect our brand and harm our business, prospects, financial condition, and operating results.”

Yet another headache for Tesla, which also admits in its SEC filings that it hasn’t been profitable since it launched in 2003, except for the first quarter of 2013; it went public in 2010.  Last year Tesla spilled $294 million in red ink on $3.2 billion in revenue, and its cash flow is virtually nil. Tesla’s stock has ricocheted over the past 52 weeks, to an intra-day trading high of $291.42 per share down to a low of $177.22 a share.

Despite all that, Tesla shares are valued at $25.5 billion, 42% of GM’s market cap. Last year Tesla delivered 31,655 vehicles, below estimates, compared to GM’s record 9.9 million vehicles sold last year. Tesla has to simultaneously build not just the electric cars, but also the factories for the batteries and the vehicles, as well as the supercharging stations to recharge the cars. It’s getting tax subsidies for its $5 billion Gigafactory; it has just about $1.9 billion in cash and equivalents on the balance sheet.

However, Tesla founder Elon Musk is optimistic. He said last month Tesla will have positive cash flow by the third quarter. Even though profits on a GAAP basis are still five years away, Musk is forecasting Tesla’s market cap would equal Apple’s (NASDAQ:AAPL) gargantuan valuation in ten years.

Optimism to Wall Street analysts on earnings conference calls are one thing. The devil is in the details, or rather, the footnotes, when it comes to possible hits to any future earnings -- the stumbling blocks to being in the black.

Though its Model S recently won an overall five star safety rating by the National Highway Traffic Safety Administration, it does say its lithium-ion battery cells “have been observed to catch fire or vent smoke and flame, and such events have raised concerns.” Last year, federal safety regulators closed a probe into whether Tesla’s design made its electric car vulnerable to fires. Tesla cars burst into flames on at least two known occasions in 2013; the company has moved to rectify the problem.

Tesla, which also sells its battery packs to Toyota and Daimler, notes that this type of battery has caught fire in laptop computers and cell phones. However, cell manufacturers are pursuing alternative lithium-ion battery cell chemistries to improve safety, Tesla says.

Tesla also said it’s continuing to build out its Supercharging stations in the United States, Europe and Asia, which it needs to sell its Model S vehicles. But as with any business, it must secure suitable locations, permits, negotiate leases with landowners and deal with utility companies.

It admitted it may “be unable to expand the Supercharger network as fast as we intend or as the public expects, or to place the charging stations in places our customers believe to be optimal.” It does say it will not be charging customers to access this network in addition to what they have already paid for their electric vehicles.

The other problem for Tesla: Servicing the cars for customers. “We have limited experience servicing our vehicles, especially in certain regions outside of the United States,” it said. “If we are unable to address the service requirements of our existing and future customers, our business will be materially and adversely affected.”

Given all these obstacles, it’s interesting that Tesla is largely in the hands of one man. Tesla said it is “highly dependent on the services of Elon Musk,” its chief executive officer and best marketer. Musk owns 26.7% of the company; together with other executives, insiders own about 28%, a concentration which may “prevent new investors from influencing significant corporate decisions,” Tesla said.