The wrong kind of charge at Tesla Motors…

June 17, 2010

Taking a private company public involves tremendous financial and human resources, as well as a lot of time. It’s common to see several versions of a registration statement before the company finally sells its stock to the public, and that is certainly true for Tesla Motors, Inc., which has now filed five amendments to the registration statement it filed January 29, 2010.

If you don—t follow Tesla, it’s the company that sells sporty electric cars with the line that ——an electric car need not be a driving sacrifice. Up until now, a Tesla has cost more than $100,000. But the Model S, which Tesla wants to build at its Fremont, California manufacturing plant, will be released in 2012 for the comparatively low price of $49,900. Tesla expects demand for the Model S to be good, and it has plans to roll out an even less expensive electric car a few years down the road.

While reading the amended registration statement that Tesla filed June 15, we noticed that this month, Tesla identified a costly error that related to some stock options the company granted in the 4th quarter of 2009. Some of the options vested immediately, and Tesla stated:

—We erroneously accounted for the expense on a straight-line basis over the term of the award, while expense recognition should always be at least commensurate with the number of awards vesting during the period. As a result, selling, general and administrative expenses and net loss for the year ended December 31, 2009 were understated by $2.7 million.

Tesla added that the error didn—t impact the value of the stock options; and since those are a non-cash item, the error also won—t impact the net cash figure stated for operating activities.

Although it characterized the error as a serious one, Tesla said it didn’t constitute a material weakness. It explained the difference as follows:

——We also evaluated this control deficiency in the context of our internal control over financial reporting and based on the magnitude, nature and extent of the error, determined that such deficiency would be considered a significant deficiency. A significant deficiency is a deficiency or a combination of deficiencies, in internal control over financial reporting, that is less severe than a material weakness, yet important enough to merit attention by those responsible for the oversight of the company’s financial reporting.

The company plans to correct the error by recording an additional stock-based compensation expense of $2.4 million for the three-month period that ends June 30, 2010.

Hopefully the accountants will soon work out any remaining bugs, and Tesla can start on its journey to profitability.

Image source: jurvetson via Flickr

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