Tesla CEO Elon Musk and Bloom Energy CEO K.R. Sridhar seem to be avoiding disclosure of important material information as required by law and the Securities and Exchange Commission.
I recall a time when material events that were relevant to stockholders were lawfully disclosed with the filing of an 8-K form, often submitted within four business days of the event.
What makes a corporate event material and worthy of reporting on an 8-K?
The SEC requires disclosure of, say, the close of an acquisition, changes in a company’s financial state, making a material agreement or declaring a bankruptcy. A public firm must disclose material impairments, changes in accounting firms or corporate governance, and a whole slew of other material circumstances.
So, if Tesla acquires a company — that needs to be disclosed.
Tesla acquires a company
Last quarter, CEO Elon Musk suggested that Tesla’s “delivery hell” stemmed from lack of carriers to transport its vehicles.
On November 15, Musk tweeted a remedy: “We bought some trucking companies & secured contracts with major haulers to avoid trucking shortage mistake of last quarter.”
Musk wants to reduce the time it takes to get a car from the factory to the customer and says that Model 3 orders placed by November 30 can be delivered in the U.S. by December 31.
Musk added that skipping rail “saves over a month for East Coast deliveries,” explaining, “All things considered, it’s better to use trucks. Single load/unload & direct to owner location.”
Josh Wolfe, fund director of Lux Capital, tweeted a response: “All things considered, makes no sense. First principles? Using lots of trucks instead of trains — is NOT environmentally friendly. Accelerates CO2 emissions and dirty diesel and decelerates world’s transition to sustainable energy.”
Putting aside for now the wisdom of acquiring an auto carrier company, where is the 8-K filing noting the acquisition? What company or companies were bought and how much was paid? Wouldn’t a reasonable investor want to know this?
This is certainly not Tesla’s first non-documented material event. That entire $420 “funding secured” fiasco was unencumbered by securities compliance. Would investment in the Chinese factory or an agreement to build the factory warrant disclosure?
Bloom’s $100 million expense not material?
Which brings us to Bloom Energy, builder of fossil fuel-powered solid oxide fuel cells. Dan Primack of Axios uncovered Bloom’s filing of a construction permit request to replace its fuel cell fleet in Delaware, its largest deployment. The project would entail replacing about 150 of the 200-kilowatt power-generating units.
Primack points out that Bloom’s IPO filing in July didn’t mention the fuel cells would need to be replaced at a cost of between $100 million and $150 million, a figure revealed by Axios. Bloom’s earnings call and its 10-Q filing did not mention the imminent expense either.
That’s a substantial sum given Bloom’s $79 million loss on $190 million in revenue in its most recent quarter.
“It is hard to argue that this isn't material information that Bloom should have shared with investors, particularly given how it could impact shareholder liquidity and the company's path to profitability,” according to Primack.
Primack contacted three experts who “believe Bloom's upcoming expenses are material” and cited a “soft" test for public disclosure: Is it something a "reasonable investor would want to know"?
Bloom disagreed with Primack in a statement: "There will be incremental cost for replacing these systems. However, there will also be a savings in future service cost for these newer generation systems [that] will cover the incremental cost. We’re very confident that there will be no material adverse cost to the company from the upgrade. It’s part of the normal process of our business.”
The current units will be replaced with more fuel-efficient systems.
The project is routine, according to David McCulloch, VP of communications at Bloom, as quoted in Delaware Business Now.
“Replacing systems is very much business-as-usual for Bloom. Our business model assumes that we will replace systems as part of maintenance upgrades. There’s nothing new here.”
Bloom’s financial declarations would be more credible if CEO Sridhar’s first post-IPO announcement had not been that the company would be “cash-flow positive and GAAP-profitable this year,” an assertion the company quickly walked back.
Bloom’s stock is currently trading at $14.61 per share and has erased all of its 2018 gains.
Reining in Musk
Companies have been skirting regulations and externalizing their liabilities since the invention of the company through time to Enron and, in the news this week, Nissan’s CEO Carlos Ghosn.
But it’s hard not to connect the current crisis in governmental corruption and compliance with these high-profile lapses in corporate ethics.
In any case, it’s the SEC’s role to enforce federal securities laws and regulate the nation’s securities industry and stock exchanges.
And the SEC has stepped in to rein in Elon Musk. Musk’s settlement with the SEC has him stepping down as chairman for three years (replaced by Robyn Denholm), saddled with a $20 million fine, and subject to new governance rules and the addition of two independent directors.
Additionally, the SEC wants to protect investors with “disclosure controls or procedures in place to determine whether Musk’s tweets contained information required to be disclosed in Tesla’s SEC filings” and additional controls and procedures to oversee Musk’s communications.
There’s still room for improvement in Tesla’s (and Bloom’s) compliance — and in the SEC’s enforcement of its mandates.