Tesla's record net loss in the first quarter and fast-burn through cash is raising questions about the company's future and whether it will be able to pay all of its bills.
Wednesday's results showed Tesla tearing through US$745.3 million ($1.06 billion) in cash in the first quarter, which may put pressure on it to borrow more money or sell additional shares to raise additional cash.
Tesla struggled to produce the mass-market Model 3 electric car during the quarter, falling short of production estimates. Strong sales of the car are key to generating cash to pay operating expenses, fund capital spending and make upcoming debt payments.
Production problems have been so bad that CEO Elon Musk has tweeted he's sleeping at the plant and that automation is overrated and more humans are needed to build the cars.
In April, Tesla said it wouldn't need to return to markets for more capital because it expected to generate cash from sales of the Model 3. But it has had trouble getting them out the door to several hundred thousand people who put down $1,000 deposits to order one.
The company said in a note to investors Wednesday that Model 3 production is on the rise and that it expects to post at least positive net income excluding stock-based compensation, and positive cash flow in the third and fourth quarters.
It also expects full profitability in those quarters under generally accepted accounting principles.
"This is primarily based on our ability to reach Model 3 production volume of 5,000 units per week," the company stated.
In its letter, Tesla said Model 3 production hit 2,270 per week at the end of April, the third straight week that it hit over 2,000. But it was far short of the 5,000 vehicles per week that Tesla said was needed to achieve profitability.
The company said it improved battery module production during the quarter, overcoming a large bottleneck, and it now expects to hit 5,000 Model 3s per week, or 20,000 per month, by around early July.
Tesla also expects five to six additional days of production down time for Model 3 production at its Fremont, California, plant during the second quarter. This is on top of four to five days in April.
Tesla admitted that it made a mistake by adding too much automation too quickly at the factory. "We have temporarily dialed back automation and introduced certain semi-automated or manual processes while we work to eventually have full automation take back over," the company said.
Tesla posted a record US$709.6m net loss in the first quarter, which amounts to a loss of $4.19 per share. Excluding one-time expenses such as stock-based compensation, the company lost $3.35 per share. Revenue grew by 26 per cent from a year ago to US$3.4b.
The giant loss in a critical quarter for the 15-year-old company beat Wall Street estimates. Analysts polled by FactSet expected an adjusted loss of $3.54 per share. Revenue exceeded estimates of US$3.28b.
During the quarter the company burned cash at a rate of US$57m per week.
Moody's Investor Service downgraded Tesla's debt into junk territory back in March, warning at the time that Tesla didn't have cash to cover US$3.7b for normal operations, capital expenses and debt that come due early next year. At the end of last year the company had a total of US$9.5b in long-term debt.
"The negative outlook reflects the likelihood that Tesla will have to undertake a large, near-term capital raise in order to refund maturing obligations and avoid a liquidity shortfall," Moody's wrote in a note to investors.
Tesla Inc., which has had only two profitable quarters in its nearly eight years as a public company.
The company said it will reduce capital spending for 2018 from US$3.4b to US$3b.
The Model 3 starts at US$35,000 but can easily top US$50,000 with options. The company's plant has wildly missed Musk's production forecasts. When production started last summer he promised to build 20,000 Model 3s during the month of December. Instead, Tesla made only 2,425 during the entire fourth quarter.
Then Tesla forecast 10,000 Model 3s per month at the end of the first quarter. As it turned out, just under 9,800 were assembled from January through March, Tesla said in April. The Fremont factory was shut down for four or five days last month to clear production bottlenecks, Tesla said.
Tesla has predicted high sales and strong cash flow in the third quarter. "As a result Tesla does not require an equity or debt raise this year, apart from standard credit lines," the company said.
The Model 3 is the most important piece of Tesla's plan to become a mainstream automaker. At one point it had more than 500,000 potential buyers on a waiting list. But in April the company conceded that some had canceled, although it refused to give numbers. Tesla said reservations "remained stable" through the first quarter.