Electric car maker Tesla (TSLA) ended the second quarter with a record $ 8.6 billion in cash on balance sheet. While this number certainly seems good for the company, there were also $ 14 billion in debt and financial leases at the end of Q2, as well as billions in other liabilities. Some investors have been wondering for a while if there will be another capital increase, perhaps one around next month’s Battery Day. Technically, Tesla has already raised another large chunk of capital, and it’s just waiting for the proceeds. Today I will explain how this all works.
For the purposes of this article, I’m currently ignoring Tesla’s convertible debt. Some of the company’s debts could be exchanged for equity, which would reduce the amount of cash needed to repay these loans. Because some of these debts have not been required for a few years, I will not discuss this angle in depth today. I just want to focus on something that could happen in the coming weeks or, maybe, months.
You may remember that Tesla unveiled a new performance award for CEO in early 2018, as this proxy submission details – “the independent members of the board began preliminary talks on how they can continue to encourage Mr. Musk to Tesla to lead its development through the next phase “. The following describes the key components for today’s discussion, which are based on millionaires of operational and market cap.
The CEO’s Performance Award for 2018 consists of a 10-year maximum term option to purchase 20,264,042 shares of Tesla’s common stock, equally divided between 12 separate tranches each equivalent to 1% of the issue and deferred shares of Tesla’s common stock at the time of subsidy, at an exercise price of $ 350.02 per share.
As you probably know by now, Elon Musk has qualified for two of those tranches so far this year, thanks to the rising market cap as well as operational goals that were achieved. A third operating milestone has been reached, so at this point we are just waiting for the company’s 6 month average market cap to reach $ 200 billion to reach the third tranche. As the chart below shows, Tesla is slowly crawling to that level, which would be hit on September 9 if the average closing of the stock ahead is equal to Monday’s closing price. Due to a dramatic collapse, Elon Musk will be eligible for the third tranche during Q3, which will also speed up some action based on action.
(Data purchased from Yahoo Finance for quotation data and Tesla SEC submissions for outstanding shares, shown here)
Each of those tranches allows Musk to buy nearly 1.7 million shares of Tesla acquisition at $ 350.02 per share. If this third tranche is hit, he will have the option to exercise options for more than 5.066 million shares (not counting other options where he is eligible) for the above price. That exercise would cost him more than $ 1.77 billion, but at the close of Monday, those shares would be worth just under $ 9.3 billion.
Where does that $ 1.77 billion go? Well, it goes into Tesla’s cash stack on the balance sheet. The excellent share count would result in more than 5 million as a result, leaving investors a little more hydrated. Although Elon Musk probably did not have the cash in his pocket to do this, he was able to borrow the money with his shares as collateral, which he already does in some respects, as a moneyless exercise. Uncle Sam would also be happy, because Elon Musk would also have a big tax bill to pay, but that’s not very important here, unless you expect Democrats to win big in November and raise taxes going forward.
If the proxy entry linked above details, there are also tens of thousands of additional shares that certain other executives could exercise that would bring Tesla in cash. As you read through the quarterly / annual subscriptions, Tesla has recently raised hundreds of millions of dollars each year by exercising these options and other related stock sales (not counting formal capital increases).
For those who are wondering if Tesla will have a new capital increase in the near future, now, the ball is already in a meaningful tone. By the end of September, Elon Musk’s massive pay package should have hit three tranches by 2018. Exercising these tranches would give the CEO no more than 5 million shares of Tesla net, and the company would receive nearly $ 1.8 billion in revenue. At the rate, things are going well at the moment, which could be worth about a year of capital expenditures.
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