The TSLA Saga Jan 25

Today is about Elon’s debt and how it relates to events

Digging into several hundred pages SEC filings was not what I had in mind for my weekend, but once I combed through the numbers the first time, I felt that it is important enough to drop all my other activities. Remember this as you read on. The reality is grey.

In the beginning

Elon’s Paypal payoff was $165 million which translate to approximately $80 million after tax (more if spread out over time). Then an interesting thing happened in 2003. On 2003 July 22,  Elon got a loan from Goldman Sachs in the tune of 125 Million with the intent to purchase TSLA stock. ( Filing )

Then the following series of events happened ( TSLA seed funding histories ). The exact details of the seed funding rounds have been removed from the Internet. I am a bit sad that I did not save the details. So they are approximately as follows:

TSLA series A investment round of 7.5 million (12,880,324) by Elon 2003 July
TSLA series B investment round of $14million by Elon
TSLA series C investment round of $30million May 2006
TSLA series D investment round of $45million  May 2007
TSLA series E investment round of $40million December 2008

Musk’s investment in TSLA after 2008: $70 million

Musk’s investment in SpaceX after 2008: $100 million

Which approximately translate to the $205 million in total capital if we factor in living cost of $10million per year + divorce cost.

Even though the realization that Elon’s take over of the company from Eberheart was done with the blessing of Goldman Sachs might leave a bad taste in some. The fact that he went more than all in, 150% more than all his net worth into both SpaceX and Tesla, is what stood out in my point of view. I have not heard of this in my life up until this point.

Goldman’s blessing, in my opinion, is probably better than the alternative of a super slow progression to bankruptcy. Having Goldman Sachs as your ally means things gets smoothed out for you everywhere you turn. It does, however, sucks for Eberheart the original founder since, in a normal world without loans, nobody would’ve been able to wrest control from him.

Snapshot:

Elon’s TSLA share 28 303 34 at unknown prices.

Elon’s ownership percentage at 28.4%

Elon’s cash reserve at almost 0, sleeping at Sergey’s place.

Goldman Loans $125 million

All funds everywhere else locked up in divorce proceedings to force him to give in to Justine’s terms. On top of having to pay monthly legal fees for himself and his ex-wife Justine. This further exacerbated TSLA and SpaceX’s financial turmoil.

This. This is rock bottom.

IPO

June 29 2010 TSLA IPO at $17, Elon’s ownership stood at 28 303 341 shares = $481 million USD and he sold 908 958 = $15 452 286 in cash.

Snapshot

Elon’s TSLA share 28 303 34 at unknown prices.

Elon’s ownership percentage at 28.4%

Elon’s cash reserve at $15 million.

Goldman Loans $125 million

TSLA capital raise

The following events are more muddy and hard to evaluate.

Elon’s option grant

12/4/2009           3,355,986           6.63           12/4/2009
12/4/2009           3,355,986           6.63           vesting

2013 May 16 ELon borrows 150 million from Goldman to buy tsla $91.5, of which $99 197 803 is used

2013 May 16 Elon borrows 25 million from Morgan stanley to buy TSLA $91.5

2015 May  83 974 shares purchase @$248 which is $20 million

2015 May 175 million borrowed by Elon from Morgan Stanley
http://ir.teslamotors.com/secfiling.cfm?filingID=1193125-15-290590&CIK=1318605

2015 August TSLA sold 2.7million shares @ $242 to raise capital, generating 642 million. Elon buys $20 million worth

Snapshot:

Elon’s TSLA share 35,001,294

Elon’s estimated living cost since 2008 at $10mil per year = $70mil

Goldman Loans $275 million

Morgan Stanley Loans $200 Million

Elon’s Free cash reserve at $130 million.

The Goldman and Morgan Hedge

A very simple game theory about what Goldman would do goes as follows:

Banks as market makers do not want to assume any risks. Therefore, everything that they take on needs to be balanced. Giving the equivalent amount of $175 million loan to Elon means that they need to hedge it somewhere. The simplest way to hedge it is to naked short sell the stocks. This way, they get the cash from naked shorting TSLA stocks, and then make a loan to Elon from these stocks to generate income from the interest. Goldam may very well have the ability to naked sell short shares that are pre IPO, but if we assume no such ability and they sold short the shares during IPO at $17, the following should occur.

Since Goldman lent Elon $150 million they need to sell approximately 9 million shares to balance out the loan. If Elon posted all his shares as collateral, then they will proceed to write covered calls for 21millon more shares which should result in 210 000 call contracts at various strike prices.

The 2013 capital raise means that a further 1.6 million shares needs to be shorted to balance out the loan. With Morgan Stanley further shorting 0.27 million shares to balance out a $25 million loan.

In May 2015, Elon further borrowed $175 million. The share prices around that time averages around $230. So to offset that 0.75 million shares needs to be short.

From these, we can draw some conclusions:

• The base shares short of a TSLA stock should be: 9 + 1.6 + 0.27 + 0.75 = 11.62 million shares short
• Adam Jonas, as a Morgan Stanley analyst, has skins in the game and should not be considered a neutral voice. His firm has $200 million in the game.
• Until Elon repays all his loans, the short interest will remain elevated.

Something in the future

I find it strange that Elon left $130 million cash reserve on the table. I do not believe he is about to fund another venture since he already have too much on his plate. Therefore it is in preparation of adding to his share holdings in a future offering. Elon has a habit of adding at least 10% to any offering if he is not a major investor in that round so as to not dilute his % ownership. At $200 per share, Elon will probably buy in 500 000 shares. Which makes the potential next offering at a potential 5 million shares. This is approximately a $1 billion dollars funding round that should cover TSLA’s operating cost for 12 months.

So on May 2015, Elon was anticipating that Free Cash Flow will not be positive for the next 12 months and will need funding. One capital raise already happened in August for about 6 months of funding and Elon has dry powder to raise another one for 12 months if Model X rollout did not go as planned. As we get closer to April, the likelyhood of a raise increases if the prospect of Free Cash Flow gets further away.

This uncertainty of Free Cash Flow is not something management can be sure about and hence why we are here today. Like the recent Falcon Wing debacle. Any incompetence in any of the suppliers can result in a 12 month delay due to retooling.