Tesla Motors
TESLA MOTORS INC (Form: 10-Q, Received: 11/02/2016 06:08:34)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-34756

Tesla Motors, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

91-2197729

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

3500 Deer Creek Road

Palo Alto, California

 

94304

(Address of principal executive offices)

 

(Zip Code)

(650) 681-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

 

 

 

Accelerated filer

 

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

As of October 25, 2016, there were 149,891,190 shares of the registrant’s Common Stock outstanding.

 

 

 

 


 

TESLA MOTORS, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2016

INDEX

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

4

 

 

Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

 

4

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015

 

5

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015

 

6

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

 

7

 

 

Notes to Consolidated Financial Statements

 

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

 

Controls and Procedures

 

36

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

37

Item 1A.

 

Risk Factors

 

38

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

54

Item 3.

 

Defaults Upon Senior Securities

 

54

Item 4.

 

Mine Safety Disclosures

 

54

Item 5.

 

Other Information

 

54

Item 6.

 

Exhibits

 

54

 

 

 

 

 

SIGNATURES

 

55

 

 

 

 

 


 

Forward-Looking Statements

The discussions in this Quarterly Report on Form 10-Q contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, future profitability, future delivery of automobiles, projected costs, expectations regarding demand and acceptance for our technologies, future acquisitions, growth opportunities and trends in the market in which we operate, prospects, plans and objectives of management and the statements made below under the heading “Management Opportunities, Challenges and Risks.” The words “anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “might”, “plans”, “projects”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.

 

 

 

 

 


 

P ART I. FINANCIAL INFORMATION

I TEM 1.

FINANCIAL STATEMENTS

Tesla Motors, Inc.

Consolidated Balance Sheets

(in thousands, except per share data)

(unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,084,257

 

 

$

1,196,908

 

Restricted cash and marketable securities

 

 

23,711

 

 

 

22,628

 

Accounts receivable

 

 

326,895

 

 

 

168,965

 

Inventory

 

 

1,604,571

 

 

 

1,277,838

 

Prepaid expenses and other current assets

 

 

132,978

 

 

 

115,667

 

Total current assets

 

 

5,172,412

 

 

 

2,782,006

 

Operating lease vehicles, net

 

 

2,949,297

 

 

 

1,791,403

 

Property, plant and equipment, net

 

 

4,309,048

 

 

 

3,403,334

 

Restricted cash

 

 

90,994

 

 

 

31,522

 

Other assets

 

 

70,646

 

 

 

59,674

 

Total assets

 

$

12,592,397

 

 

$

8,067,939

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,606,284

 

 

$

916,148

 

Accrued liabilities

 

 

695,018

 

 

 

422,798

 

Deferred revenue

 

 

625,899

 

 

 

423,961

 

Resale value guarantees

 

 

204,054

 

 

 

136,831

 

Customer deposits

 

 

690,364

 

 

 

283,370

 

Current portion of long-term debt and capital leases

 

 

260,771

 

 

 

627,927

 

Total current liabilities

 

 

4,082,390

 

 

 

2,811,035

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital leases

 

 

2,443,420

 

 

 

2,021,093

 

Deferred revenue

 

 

581,202

 

 

 

446,105

 

Resale value guarantees

 

 

2,056,068

 

 

 

1,293,741

 

Other long-term liabilities

 

 

737,559

 

 

 

364,976

 

Total liabilities

 

 

9,900,639

 

 

 

6,936,950

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Convertible senior notes (Notes 8)

 

 

11,270

 

 

 

47,285

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock; $0.001 par value; 100,000 shares authorized; no shares issued and

   outstanding

 

 

 

 

 

 

Common stock; $0.001 par value; 2,000,000 shares authorized as of September 30, 2016 and

   December 31, 2015; 149,825 and 131,425 shares issued and outstanding as of

   September 30, 2016 and December 31, 2015

 

 

150

 

 

 

131

 

Additional paid-in capital

 

 

5,530,928

 

 

 

3,409,452

 

Accumulated other comprehensive income (loss)

 

 

25,310

 

 

 

(3,556

)

Accumulated deficit

 

 

(2,875,900

)

 

 

(2,322,323

)

Total stockholders' equity

 

 

2,680,488

 

 

 

1,083,704

 

Total liabilities and stockholders' equity

 

$

12,592,397

 

 

$

8,067,939

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

 

4

 


 

Tesla Motors, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automotive

 

$

1,917,442

 

 

$

769,015

 

 

$

3,849,558

 

 

$

2,417,247

 

Automotive leasing

 

 

231,285

 

 

 

83,540

 

 

 

507,085

 

 

 

206,718

 

Total automotive revenue

 

 

2,148,727

 

 

 

852,555

 

 

 

4,356,643

 

 

 

2,623,965

 

Services and other

 

 

149,709

 

 

 

84,234

 

 

 

358,858

 

 

 

207,680

 

Total revenues

 

 

2,298,436

 

 

 

936,789

 

 

 

4,715,501

 

 

 

2,831,645

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automotive

 

 

1,355,102

 

 

 

582,545

 

 

 

2,895,483

 

 

 

1,808,576

 

Automotive leasing

 

 

161,959

 

 

 

46,184

 

 

 

310,176

 

 

 

118,284

 

Total automotive cost of revenues

 

 

1,517,061

 

 

 

628,729

 

 

 

3,205,659

 

 

 

1,926,860

 

Services and other

 

 

144,640

 

 

 

76,564

 

 

 

345,863

 

 

 

199,846

 

Total cost of revenues

 

 

1,661,701

 

 

 

705,293

 

 

 

3,551,522

 

 

 

2,126,706

 

Gross profit

 

 

636,735

 

 

 

231,496

 

 

 

1,163,979

 

 

 

704,939

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

214,302

 

 

 

178,791

 

 

 

588,448

 

 

 

527,657

 

Selling, general and administrative

 

 

336,811

 

 

 

236,367

 

 

 

976,173

 

 

 

633,578

 

Total operating expenses

 

 

551,113

 

 

 

415,158

 

 

 

1,564,621

 

 

 

1,161,235

 

Income (loss) from operations

 

 

85,622

 

 

 

(183,662

)

 

 

(400,642

)

 

 

(456,296

)

Interest income

 

 

2,858

 

 

 

327

 

 

 

6,351

 

 

 

758

 

Interest expense

 

 

(46,713

)

 

 

(29,308

)

 

 

(133,706

)

 

 

(80,234

)

Other expense, net

 

 

(11,756

)

 

 

(15,431

)

 

 

(9,952

)

 

 

(24,503

)

Income (loss) before income taxes

 

 

30,011

 

 

 

(228,074

)

 

 

(537,949

)

 

 

(560,275

)

Provision for income taxes

 

 

8,133

 

 

 

1,784

 

 

 

15,628

 

 

 

7,991

 

Net income (loss)

 

$

21,878

 

 

$

(229,858

)

 

$

(553,577

)

 

$

(568,266

)

Net income (loss) per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

 

$

(1.78

)

 

$

(3.94

)

 

$

(4.47

)

Diluted

 

$

0.14

 

 

$

(1.78

)

 

$

(3.94

)

 

$

(4.47

)

Weighted average shares used in computing net income (loss) per

   share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

148,991

 

 

 

129,006

 

 

 

140,581

 

 

 

127,225

 

Diluted

 

 

156,935

 

 

 

129,006

 

 

 

140,581

 

 

 

127,225

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

5

 


 

Tesla Motors, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income (loss)

 

$

21,878

 

 

$

(229,858

)

 

$

(553,577

)

 

$

(568,266

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gain on derivatives and short-term marketable

   securities, net of tax

 

 

3,349

 

 

 

11

 

 

 

48,359

 

 

 

219

 

Reclassification adjustment for net gains included in net

   income (loss)

 

 

(14,246

)

 

 

 

 

 

(15,523

)

 

 

 

Foreign currency translation adjustment

 

 

2,014

 

 

 

(9,192

)

 

 

(3,970

)

 

 

(24,182

)

Other comprehensive income (loss)

 

 

(8,883

)

 

 

(9,181

)

 

 

28,866

 

 

 

(23,963

)

Comprehensive income (loss)

 

$

12,995

 

 

$

(239,039

)

 

$

(524,711

)

 

$

(592,229

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

6

 


 

Tesla Motors, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(553,577

)

 

$

(568,266

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

620,160

 

 

 

278,867

 

Stock-based compensation

 

 

246,512

 

 

 

142,359

 

Amortization of discount on convertible debt

 

 

63,924

 

 

 

51,376

 

Inventory write-downs

 

 

50,289

 

 

 

23,303

 

Loss on disposal of property and equipment

 

 

12,181

 

 

 

8,800

 

Non-cash interest and other operating activities

 

 

21,735

 

 

 

11,011

 

Foreign currency transaction loss

 

 

10,422

 

 

 

35,583

 

Changes in operating assets and liabilities, net of impact of business acquisition

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(110,510

)

 

 

78,373

 

Inventories and operating lease vehicles

 

 

(1,798,214

)

 

 

(1,091,382

)

Prepaid expenses and other current assets

 

 

34,636

 

 

 

(35,962

)

Other assets

 

 

(2,586

)

 

 

(14,297

)

Accounts payable and accrued liabilities

 

 

697,528

 

 

 

89,238

 

Deferred revenue

 

 

256,187

 

 

 

186,255

 

Customer deposits

 

 

409,139

 

 

 

20,314

 

Resale value guarantees

 

 

322,244

 

 

 

249,548

 

Other long-term liabilities

 

 

44,310

 

 

 

40,230

 

Net cash provided by (used in) operating activities

 

 

324,380

 

 

 

(494,650

)

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Purchases of property and equipment excluding capital leases, net of sales

 

 

(759,190

)

 

 

(1,223,628

)

Maturities of short-term marketable securities

 

 

16,667

 

 

 

 

Business acquisition

 

 

 

 

 

(12,260

)

Increase in other restricted cash

 

 

(79,156

)

 

 

(23,383

)

Net cash used in investing activities

 

 

(821,679

)

 

 

(1,259,271

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in public offerings

 

 

1,701,734

 

 

 

750,000

 

Proceeds from issuance of convertible and other debt

 

 

1,685,279

 

 

 

183,972

 

Repayments of convertible and other debt

 

 

(1,678,475

)

 

 

 

Collateralized lease borrowing

 

 

557,669

 

 

 

359,951

 

Proceeds from exercise of stock options and other stock issuances

 

 

153,461

 

 

 

94,026

 

Principal payments on capital leases

 

 

(30,447

)

 

 

(72,906

)

Common stock and debt issuance costs

 

 

(18,072

)

 

 

(16,558

)

Net cash provided by financing activities

 

 

2,371,149

 

 

 

1,298,485

 

Effect of exchange rate changes on cash and cash equivalents

 

 

13,499

 

 

 

(24,241

)

Net increase (decrease) in cash and cash equivalents

 

 

1,887,349

 

 

 

(479,677

)

Cash and cash equivalents at beginning of period

 

 

1,196,908

 

 

 

1,905,713

 

Cash and cash equivalents at end of period

 

$

3,084,257

 

 

$

1,426,036

 

Supplemental noncash investing activities

 

 

 

 

 

 

 

 

Acquisition of property and equipment included in accounts payable and accrued

   liabilities

 

$

459,472

 

 

$

313,850

 

Estimated fair value of facilities under build-to-suit leases

 

$

236,538

 

 

$

64,552

 

 

The accompanying notes are an integral part of these consolidated financial statements.

7

 


 

Tesla Motors, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 - Overview of the Company

Tesla Motors, Inc. (Tesla, we, us or our) was incorporated in the state of Delaware on July 1, 2003. We design, develop, manufacture and sell high-performance fully electric vehicles and energy products. We have wholly-owned subsidiaries in North America, Europe and Asia. The primary purpose of these subsidiaries is to market, manufacture, sell and/or service our vehicles and energy products.

  

 

 

 

Note 2 - Summary of Significant Accounting Policies

Public Offering

In May 2016, we completed a public offering of common stock and sold a total of 7,915,004 shares of our common stock for total cash proceeds of approximately $1.7 billion, net of underwriting discounts and offering costs.

Acquisition

On July 31, 2016, we entered into a definitive agreement to acquire SolarCity Corporation, which designs, finances and installs solar power systems . Pursuant to the definitive agreement, each issued and outstanding share of the common stock of SolarCity would be converted into the right to receive 0.110 (the Exchange Ratio) shares of Tesla common stock. SolarCity options and restricted stock unit awards would be converted into corresponding equity awards in respect of Tesla common stock based on the Exchange Ratio, with the awards retaining the same vesting and other terms and conditions as in effect immediately prior to consummation of the Merger. This acquisition is subject to various closing conditions, including the receipt by each company, at a separate meeting of its stockholders scheduled to take place on November 17, 2016, of the affirmative vote of at least the minimum number of its non-interested stockholders as specified in the definitive agreement.

 

Basis of Consolidation

The consolidated financial statements include the accounts of Tesla and its wholly-owned subsidiaries. Intercompany balances and transactions between consolidated entities have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities and accompanying notes.  Estimates are used for, but not limited to, determining the selling price of products and services in multiple element revenue arrangements and determining the amortization period of these elements , residual value of operating lease vehicles, inventory valuation, warranties, fair value of financial instruments, depreciable lives of property and equipment, inputs used to value stock-based compensation including volatility, expected terms of stock option awards and forfeiture rates, income taxes, and contingencies. Actual results could differ from those estimates.

Unaudited Interim Financial Statements

The accompanying consolidated balance sheet as of September 30, 2016, the consolidated statements of operations and consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015 and the consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015, and other information disclosed in the related notes are unaudited. The consolidated balance sheet as of December 31, 2015, was derived from our audited consolidated financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission.

The accompanying interim consolidated financial statements and related disclosures have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for a fair statement of the results of operations for the periods presented. The consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.

8

 


 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) No. 2014-09,   Revenue from Contracts with Customers (Topic 606) , which amends the existing accounting standards for revenue recognition. The new guidance provides a new model to determine when and over what period revenue is recognized. Under this new model, revenue is recognized as goods or services are delivered in an amount that reflects the consideration we expect to collect.  In March 2016, the FASB issued an ASU,  Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , which clarifies the principal versus agent guidance in the new revenue recognition standard. In April 2016, the FASB issued an ASU,  Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing , which clarifies the guidance on accounting for licenses of intellectual property and identifying performance obligations in the new revenue recognition standard. In May 2016, the FASB issued an ASU,  Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedient , which clarifies the transition, collectability, noncash consideration and the presentation of sales and other similar taxes in the new revenue recognition standard. The guidance is effective for fiscal years beginning after December 15, 2017; early adoption is permitted for periods beginning after December 15, 2016. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have not yet selected a transition method and are evaluating the impact of adopting this guidance.

 

In August 2014, the FASB issued Accounting Standards Update No. ASU 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and, if so, provide certain footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, including interim reporting periods thereafter. We do not anticipate that adopting this guidance will have an impact on the financial statements and are currently evaluating the potential impact to our footnote disclosures.

In April 2015, the FASB issued new authoritative accounting guidance on simplifying the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We have retrospectively adopted this standard as of March 31, 2016, and as a result, on the December 31, 2015, consolidated balance sheet we reclassified $9.6 million as a reduction in prepaid expenses and other current assets, along with $15.0 million reduction in other assets, with a corresponding reduction in the aggregate carrying value of the Company’s long term debt liabilities. Similarly, as a result of the change in carrying value of long term debt, $5.2 million was reclassified out of additional paid in capital and into mezzanine equity on the December 31, 2015 consolidated balance sheet.

In February 2016, the FASB issued Accounting Standards Update No. 2016 - 02,  Leases   (Topic 842) . The new standard is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The standard will require lessees to report most leases as assets and liabilities on the balance sheet, while lessor accounting will remain substantially unchanged. The standard requires a modified retrospective transition approach for existing leases, whereby the new rules will be applied to the earliest year presented. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09,  Compensation — Stock Compensation (Topic 718) : Improvements to Employee Share-Based Payment Accounting (“ASU  2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entitie s, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In August 2016, the FASB issued Accounting Standards Update No. ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (Topic 230) .  ASU 2016-15 addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.  We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

9

 


 

Revenue Recognition

We recognize revenue for products and services when: (i) a persuasive evidence of an arrangement exists; (ii) delivery has occurred and there are no uncertainties regarding customer acceptance; (iii) pricing or fees are fixed or determinable; and (iv) collection is reasonably assured.

Automotive revenue includes revenues related to deliveries of new vehicles, sales of regulatory credits to other automotive manufacturers, and specific other elements that meet the definition of a deliverable under multiple-element accounting guidance including free internet connectivity, free access to our Supercharger network, and free future over the air software updates. These deliverables are valued on a stand-alone basis and we recognize their revenue over our performance period, which is generally the eight-year life of the vehicle, except for internet connectivity which is over the free four year period. If we sell a deliverable separately, we use that pricing to determine its fair value; otherwise, we use our best estimated selling price by considering costs used to develop and deliver the service, third party pricing of similar options, and other information which may be available.

Starting in the third quarter of 2016, we started to separately present automotive leasing revenue and related cost of revenue. All prior periods have been reclassified to conform to this presentation.  Automotive leasing revenue includes revenue recognized under lease accounting guidance for our direct leasing programs as well as programs with resale value guarantees. See “Resale Value Guarantees and Other Financing Programs” and “Vehicle Leasing Program” for further details.

Services and other revenue consists of repair and maintenance services, service plans and merchandise, sales of pre-owned Tesla vehicles, sales of electric vehicle powertrain components and systems to other manufacturers, Tesla Energy products, and sales of non-Tesla vehicle trade-ins.

As of September 30, 2016, we had deferred $57.5 million, $84.7 million, $52.7 million, and $8.0 million related to the purchase of vehicle maintenance and service plans, access to our Supercharger network, internet connectivity, and future software updates, respectively. As of December 31, 2015, we had deferred $53.6 million, $49.5 million, $32.4 million, and $2.7 million related to these same performance obligations, respectively.

Resale Value Guarantees and Other Financing Programs

Vehicle sales to customers with a residual value guarantee     

Through June 30, 2016, we offered resale value guarantees or similar buy-back terms to all customers who purchase vehicles and who financed their vehicle through one of our specified commercial banking partners. Subsequent to June 30, 2016, this program is available only in certain international markets.  Under this program, customers have the option of selling their vehicle back to us during the guarantee period for a determined resale value. Guarantee periods generally range from 36 to 39 months.  Although we receive full payment for the vehicle sales price at the time of delivery, we are required to account for these transactions as operating leases.  The amount of sale proceeds equal to the resale value guarantee is deferred until the guarantee expires or is exercised.  The remaining sale proceeds are deferred and recognized on a straight line basis over the stated guarantee period to automotive leasing revenue. The guarantee period expires at the earlier of the end of the guarantee period or the pay-off of the initial loan.  We capitalize the cost of these vehicles to operating lease vehicles on our Consolidated Balance Sheets as operating lease vehicles, net, and depreciate their value, less salvage value, to cost of automotive leasing revenue over the same period.  

In cases when a customer retains ownership of a vehicle at the end of the guarantee period, the resale value guarantee liability and any remaining deferred revenue balances related to the vehicle are settled to automotive leasing revenue and the net book value of the leased vehicle is expensed to costs of automotive leasing revenue. In cases when customers return the vehicle back to us during the guarantee period, we purchase the vehicle from the customer in an amount equal to the resale value guarantee and settle any remaining deferred balances to automotive leasing revenue and we reclassify the net book value of the vehicle on our balance sheet to pre-owned vehicle inventory. As of September 30, 2016 and December 31, 2015, $204.1 million and $136.8 million of the guarantees were exercisable by customers within the next twelve months.

10

 


 

Vehicle sales to leasing partners with a residual value guarantee

We also offer resale value guarantees in connection with automobile sales to certain bank leasing partners.  As we have guaranteed the value of these vehicles and as the vehicles are leased to end-customers, we account for these transactions as interest bearing collateralized borrowings as required under ASC 840 - Leases .  Under this program, cash is received for the full price of the vehicle and is recorded within resale value guarantees for the long-term portion and deferred revenue for the current portion.  We accrete the deferred revenue amount to automotive leasing revenue on a straight line basis over the guarantee period and accrue interest expense based on our borrowing rate.  We capitalize vehicles under this program to operating lease vehicles, net, on our Consolidated Balance Sheets and we record depreciation from these vehicles to cost of automotive leasing revenues during the period the vehicle is under a lease arrangement.  Cash received for these vehicles, net of revenue recognized during the period, is classified as collateralized lease borrowings within cash flows from financing activities in our Consolidated Statements of Cash Flows.

At the end of the lease term, we settle our liability in cash by either purchasing the vehicle from the leasing partner for the resale value guarantee amount, or paying a shortfall to the guarantee amount the leasing partner may realize on the sale of the vehicle.  Any remaining balances within deferred revenue and resale value guarantee will be settled to automotive revenue.  In cases where the bank retains ownership of the vehicle after the end of our guarantee period, we expense the net value of the leased vehicle to costs of automotive leasing revenue .  The maximum cash we could be required to pay under this program, should we decide to repurchase all vehicles, is $742.0 million at September 30, 2016.

As of September 30, 2016 and December 31, 2015, we had $1.0 billion and $527.5 million of such borrowings recorded in resale value guarantees and $250.4 million and $120.5 million recorded in deferred revenue liability, respectively. As of September 30, 2016 and December 31, 2015, we had a total of $79.5 million and $33.6 million in account receivables from our leasing partners.

On a quarterly basis, we assess the estimated market values of vehicles under our resale value guarantee program to determine if we have sustained a loss on any of these contracts. As we accumulate more data related to the resale values of our vehicles or as market conditions change, there may be material changes to their estimated values.

11

 


 

Account activity related to our resale value guarantee and similar programs consisted of the following for the periods presented (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2016

 

Operating Lease Vehicles

 

 

 

 

 

 

 

 

Operating lease vehicles—beginning of period

 

$

2,126,581

 

 

$

1,556,529

 

Net increase in operating lease vehicles

 

 

375,287

 

 

 

1,085,551

 

Depreciation expense recorded in cost of automotive leasing revenues

 

 

(71,454

)

 

 

(179,087

)

Additional depreciation expense recorded in cost of automotive leasing revenues as

   a result of early cancellation of resale value guarantee

 

 

(5,509

)

 

 

(11,166

)

Additional depreciation expense recorded in cost of automotive leasing revenues

   result of expiration and exercises of resale value guarantee

 

 

(55,009

)

 

 

(55,009

)

Increases to inventory from vehicles returned under our trade-in program

 

 

(18,718

)

 

 

(45,640

)

Operating lease vehicles—end of period

 

$

2,351,178

 

 

$

2,351,178

 

 

 

 

 

 

 

 

 

 

Deferred Revenue

 

 

 

 

 

 

 

 

Deferred revenue—beginning of period

 

$

851,684

 

 

$

679,132

 

Net increase in deferred revenue from new vehicle deliveries and reclassification of

   collateralized borrowing from long-term to short-term

 

 

188,113

 

 

 

574,226

 

Amortization of deferred revenue and short-term collateralized borrowing recorded in

   automotive leasing revenue

 

 

(125,411

)

 

 

(330,093

)

Additional revenue recorded in automotive leasing revenue as a result of early

   cancellation of resale value guarantee

 

 

(1,521

)

 

 

(4,333

)

Recognition of deferred revenue resulting from return of vehicle under trade-in program

 

 

(3,456

)

 

 

(9,523

)

Deferred revenue—end of period

 

$

909,409

 

 

$

909,409

 

 

 

 

 

 

 

 

 

 

Resale Value Guarantee

 

 

 

 

 

 

 

 

Resale value guarantee liability—beginning of period

 

$

2,007,347

 

 

$

1,430,573

 

Increase in resale value guarantee

 

 

361,434

 

 

 

1,013,369

 

Reclassification from long-term to short-term collateralized borrowing

 

 

(33,129

)

 

 

(79,171

)

Additional revenue recorded in automotive leasing revenue as a result of early

   cancellation of resale value guarantee

 

 

(4,291

)

 

 

(10,110

)

Release of resale value guarantee resulting from return of vehicle under trade-

   in program

 

 

(15,516

)

 

 

(38,816

)

Release of resale value guarantee resulting from expiration and exercises of resale

   value guarantee

 

 

(55,722

)

 

 

(55,722

)

Resale value guarantee liability—end of period

 

$

2,260,123

 

 

$

2,260,123

 

 

 

 

 

Vehicle Leasing Program

We offer a leasing program in the United States, Canada, the UK and Germany. Qualifying customers are permitted to lease a vehicle directly from Tesla generally for 36 or 48 months. At the end of the lease term, customers have the option of either returning the vehicle to us or purchasing it for a determined residual value. We account for these leasing transactions as operating leases and recognize leasing revenues over the contractual term and record the depreciation of these vehicles to cost of automotive leasing revenues. As of September 30, 2016 and December 31, 2015, we had deferred $61.6 million and $25.8 million of lease-related upfront payments which will be recognized on a straight-line basis over the contractual term of the individual leases. Lease revenues are recorded in automotive leasing revenue and were $31.4 million and $72.0 million for the three and nine months ended September 30, 2016. Lease revenues for the three and nine months ended September 30, 2015, were $11.5 million and $27.4 million, respectively.

 

 

12

 


 

Warranties

We provide a manufacturer’s warranty on all new and certified pre-owned vehicles, production powertrain components and systems, and energy products we sell.  We accrue a manufacturer’s warranty reserve which includes our best estimate of the projected costs to repair or to replace items under warranty. These estimates are based on actual claims incurred to-date and an estimate of the nature, frequency and costs of future claims. These estimates are inherently uncertain and changes to our historical or projected warranty experience may cause material changes to our warranty reserve in the future. The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued liabilities, while the remaining amount is classified as long-term within other long-term liabilities.

Accrued warranty activity consisted of the following for the periods presented (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Accrued warranty—beginning of period

 

$

216,459

 

 

$

164,595

 

 

$

180,754

 

 

$

129,043

 

Warranty costs incurred

 

 

(16,571

)

 

 

(21,593

)

 

 

(56,734

)

 

 

(50,666

)

Net changes in liability for pre-existing warranties, including

   expirations and foreign exchange impact

 

 

(19,523

)

 

 

1,306

 

 

 

(12,889

)

 

 

12,635

 

Provision for warranty

 

 

46,454

 

 

 

26,026

 

 

 

115,688

 

 

 

79,322

 

Accrued warranty—end of period

 

$

226,819

 

 

$

170,334

 

 

$

226,819

 

 

$

170,334

 

 

Our warranty reserves do not include projected warranty costs associated with our vehicles subject to lease accounting, as costs to repair these vehicles are expensed as incurred. The warranty reserve increased primarily due to incremental vehicle deliveries, offset by actual claims and an overall decrease in accrual rates for vehicles, batteries, and drive units due to improved reliability. For the three and nine months ended September 30, 2016, warranty costs incurred for vehicles subject to lease accounting were $7.2 million and $12.3 million, and for the three and nine months ended September 30, 2015, costs were $1.8 million and $6.0 million. Warranty expense is recorded as a component of cost of automotive revenue and cost of automotive leasing revenue.  

Inventory Valuation

Inventories are stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on a first-in, first-out basis. We record inventory write-downs for excess or obsolete inventories based upon assumptions about current and future demand forecasts. If our inventory on hand is in excess of our future demand forecast, the excess amounts are written off.

We also review inventory to determine whether its carrying value exceeds the net amount realizable upon the ultimate sale of the inventory. This requires us to determine the estimated selling price of our vehicles less the estimated cost to convert inventory on hand into a finished product. After inventory is written-down, a new, lower-cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

Should our estimates of future selling prices or production costs change, additional and potentially material increases to this reserve may be required. A small change in our estimates may result in a material charge to our reported financial results.

Concentration of Risk

Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, restricted cash and accounts receivable. Our cash equivalents are primarily invested in money market funds with high credit quality financial institutions in the United States. At times, these deposits and securities may be in excess of insured limits. We invest cash not required for use in operations in high credit quality securities based on our investment policy. Our investment policy provides guidelines and limits regarding credit quality, investment concentration, investment type, and maturity that we believe will provide liquidity while reducing risk of loss of capital. Our investments are currently of a short-term nature and include U.S. treasury bills.

As of September 30, 2016 and December 31, 2015, our accounts receivable were derived primarily from amounts to be received from financial institutions and leasing companies offering various financing products to our customers, sales of regulatory credits, as well as the development and sales of powertrain components and systems to automotive original equipment manufacturers (OEMs).   As of September 30, 2016, we have two customers who individually account for 17% and 14% of our accounts receivable, respectively.  

13

 


 

Supply Risk

The majority of our suppliers are currently single source suppliers, despite efforts to qualify and obtain components from multiple sources whenever feasible. The loss of any single or limited source supplier or the disruption in the supply of components from these suppliers could lead to vehicle design changes, increased costs and delays in vehicle deliveries to our customers, which could hurt our relationships with our customers and result in negative publicity, damage to our brand and a material and adverse effect on our business, prospects, financial condition and operating results.

Stock-Based Compensation

We use the fair value method of accounting for our stock options and restricted stock units (RSUs) granted to employees and our Employee Stock Purchase Plan (ESPP) to measure the cost of employee services received in exchange for the stock-based awards. The fair value of stock options and ESPP are estimated on the grant date and offering date using the Black-Scholes option-pricing model. The fair value of RSUs is measured on the grant date based on the closing fair market value of our common stock. The resulting cost is recognized over the service period, which is generally four years for stock options and RSUs and six months for the ESPP. Stock-based compensation expense is recognized on a straight-line basis, net of estimated forfeitures.

For performance-based awards, stock-based compensation expense is recognized over the expected performance achievement period of individual performance milestones when the achievement of each individual performance milestone becomes probable.

For performance-based awards with a vesting schedule based entirely on the attainment of both performance and market conditions, stock-based compensation expense is recognized for each pair of performance and market conditions over the longer of the implicit or derived service period of the performance and market conditions, beginning at the point in time that the relevant performance condition is considered probable of being met.

Derivative Financial Instruments

In November 2015, we implemented a program to hedge the foreign currency exposure risk related to certain forecasted inventory purchases denominated in Japanese yen.  The derivative instruments we use are foreign currency forward contracts and are designated as cash flow hedges with maturity dates of 12 months or less. We do not enter into derivative contracts for trading or speculative purposes.  

The bank counterparties in all contracts expose Tesla to credit-related losses in the event of their nonperformance. However, to mitigate that risk, Tesla only contracts with counterparties who meet the Company’s minimum requirements under its counterparty risk assessment process. Tesla monitors ratings, credit spreads, and potential downgrades on at least a quarterly basis. Based on our on-going assessment of counterparty risk, the Company will adjust its exposure to various counterparties. We generally enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. However, we do not have any master netting arrangements in place with collateral features.

Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on derivatives, net of any reclassifications, our available-for-sale marketable securities, and foreign currency translation adjustment that have been excluded from the determination of net income (loss).

Net Income (Loss) per Share of Common Stock

Our basic and diluted net income (loss) per share of common stock is calculated by dividing net income (loss) by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the number of shares underlying outstanding stock options and warrants as well as our convertible senior notes, are not included when their effect is antidilutive.

14

 


 

The following table sets forth the computation of basic and diluted net income (loss) per share for the three months ended September 30, 2016 (in thousands, except per share amounts):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Basic net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

21,878

 

 

$

(229,858

)

 

$

(553,577

)

 

$

(568,266

)

Weighted-average shares used in computing basic net income

   (loss) per share

 

 

148,991

 

 

 

129,006

 

 

 

140,581

 

 

 

127,225

 

Basic net income (loss) per share

 

$

0.15

 

 

$

(1.78

)

 

$

(3.94

)

 

$

(4.47

)

Diluted net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

21,878

 

 

$

(229,858

)

 

$

(553,577

)

 

$

(568,266

)

Weighted-average shares used in computing basic net income

   (loss) per share

 

 

148,991

 

 

 

129,006

 

 

 

140,581

 

 

 

127,225

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee share based awards

 

 

5,911

 

 

 

 

 

 

 

 

 

 

Convertible senior notes

 

 

1,571

 

 

 

 

 

 

 

 

 

 

Warrants issued in May 2013

 

 

462

 

 

 

 

 

 

 

 

 

 

Weighted-average shares used in computing diluted net income

   (loss) per share

 

 

156,935

 

 

 

129,006

 

 

 

140,581

 

 

 

127,225

 

Diluted net income (loss) per share

 

$

0.14

 

 

$

(1.78

)

 

$

(3.94

)

 

$

(4.47

)

 

The following table presents the potential weighted common shares outstanding that were excluded from the computation of diluted net income (loss) per share of common stock for the periods presented:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Employee share based awards

 

 

5,666,686

 

 

 

14,917,083

 

 

 

16,527,336

 

 

 

15,426,144

 

Convertible senior notes

 

 

 

 

 

2,710,738

 

 

 

1,959,492

 

 

 

2,454,778

 

Warrants issued May 2013

 

 

 

 

 

1,463,838

 

 

 

629,782

 

 

 

1,084,627

 

 

Since we expect to settle the principal amount of our outstanding convertible senior notes in cash, we use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of our common stock for a given period exceeds the conversion price of $124.52, $359.87 and $359.87 per share for the convertible senior notes due 2018 (2018 Notes), convertible senior notes due 2019 (2019 Notes), and convertible senior notes due 2021 (2021 Notes).

Income Taxes

There are transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. As of September 30, 2016 and December 31, 2015, the aggregate balances of our gross unrecognized tax benefits were $162.8 million and $99.3 million. $158.1 million and $95.7 million of these aggregate balances would not give rise to changes in our effective tax rate since these tax benefits would increase a deferred tax asset which is currently offset by a full valuation allowance.

 

 

Note 3 - Fair Value of Financial Instruments

The carrying values of our financial instruments including cash equivalents, marketable securities, accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short-term nature. As a basis for determining the fair value of certain of our assets and liabilities, we follow a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level III) unobservable inputs in which there is little or no market data which requires us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Our financial assets that are measured at fair value on a recurring basis consist of cash equivalents and marketable securities.

15

 


 

All of our cash equivalents and current restricted cash, which are comprised primarily of money market funds, are classified within Level I of the fair value hierarchy because they are valued using quoted market pri ces or market prices for identical securities. Our restricted short-term marketable securities are classified within Level I of the fair value hierarchy.

As of September 30, 2016 and December 31, 2015, the fair value hierarchy for our financial assets that are carried at fair value was as follows (in thousands), and unrealized gains (losses) on all financial assets for all periods presented were less than $1.0 million:

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

Fair

Value

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Fair

Value

 

 

Level I

 

 

Level II

 

 

Level   III

 

Money market funds

 

$

2,391,562

 

 

$

2,391,562

 

 

$

 

 

$

 

 

$

297,810

 

 

$

297,810

 

 

$

 

 

$

 

U.S. treasury bills

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,664

 

 

 

16,664

 

 

 

 

 

 

 

Total

 

$

2,391,562

 

 

$

2,391,562

 

 

$

 

 

$

 

 

$

314,474

 

 

$

314,474

 

 

$