Tesla Motors
Tesla, Inc. (Form: 10-Q, Received: 11/03/2017 06:07:48)

 

 

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, 2017

OR

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

Commission File Number: 001-34756

Tesla, 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth 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

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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 27, 2017, there were 168,067,395 shares of the registrant’s common stock outstanding.

 

 

 

 


 

TESLA, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2017

INDEX

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

4

 

 

Consolidated Balance Sheets

 

4

 

 

Consolidated Statements of Operations

 

5

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

6

 

 

Consolidated Statements of Cash Flows

 

7

 

 

Notes to Consolidated Financial Statements

 

8

Item 2.

 

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

 

31

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

40

Item 4.

 

Controls and Procedures

 

41

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

42

Item 1A.

 

Risk Factors

 

43

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

Item 3.

 

Defaults Upon Senior Securities

 

58

Item 4.

 

Mine Safety Disclosures

 

58

Item 5.

 

Other Information

 

58

Item 6.

 

Exhibits

 

58

 

 

 

 

 

SIGNATURES

 

61

 

 

 


 

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, projected costs, profitability, expected cost reductions, capital adequacy, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. 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 these forward-looking statements, and you should not place undue reliance on these forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results or events to differ materially from the plans, intentions or expectations disclosed in these 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

ITEM 1. FINANCIAL STATEMENTS

Tesla, Inc.

Consolidated Balance Sheets

(in thousands, except for par values)

(unaudited)

 

  

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,530,030

 

 

$

3,393,216

 

Restricted cash

 

 

138,181

 

 

 

105,519

 

Accounts receivable, net

 

 

607,734

 

 

 

499,142

 

Inventory

 

 

2,471,382

 

 

 

2,067,454

 

Prepaid expenses and other current assets

 

 

321,406

 

 

 

194,465

 

Total current assets

 

 

7,068,733

 

 

 

6,259,796

 

Operating lease vehicles, net

 

 

3,834,234

 

 

 

3,134,080

 

Solar energy systems, leased and to be leased, net

 

 

6,287,965

 

 

 

5,919,880

 

Property, plant and equipment, net

 

 

9,394,397

 

 

 

5,982,957

 

Intangible assets, net

 

 

372,238

 

 

 

376,145

 

Goodwill

 

 

45,236

 

 

 

 

MyPower customer notes receivable, net of current portion

 

 

463,878

 

 

 

506,302

 

Restricted cash, net of current portion

 

 

408,544

 

 

 

268,165

 

Other assets

 

 

231,849

 

 

 

216,751

 

Total assets

 

$

28,107,074

 

 

$

22,664,076

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,385,778

 

 

$

1,860,341

 

Accrued liabilities and other

 

 

1,477,784

 

 

 

1,210,028

 

Deferred revenue

 

 

951,734

 

 

 

763,126

 

Resale value guarantees

 

 

543,336

 

 

 

179,504

 

Customer deposits

 

 

686,084

 

 

 

663,859

 

Current portion of long-term debt and capital leases

 

 

324,224

 

 

 

984,211

 

Current portion of solar bonds and promissory notes issued to related parties

 

 

100,000

 

 

 

165,936

 

Total current liabilities

 

 

6,468,940

 

 

 

5,827,005

 

Long-term debt and capital leases, net of current portion

 

 

9,581,616

 

 

 

5,860,049

 

Solar bonds issued to related parties, net of current portion

 

 

100

 

 

 

99,164

 

Convertible senior notes issued to related parties

 

 

2,481

 

 

 

10,287

 

Deferred revenue, net of current portion

 

 

1,082,870

 

 

 

851,790

 

Resale value guarantees, net of current portion

 

 

2,410,220

 

 

 

2,210,423

 

Other long-term liabilities

 

 

2,382,830

 

 

 

1,891,449

 

Total liabilities

 

 

21,929,057

 

 

 

16,750,167

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests in subsidiaries

 

 

402,943

 

 

 

367,039

 

Convertible senior notes (Note 11)

 

 

357

 

 

 

8,784

 

Equity

 

 

 

 

 

 

 

 

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; 168,017 and 161,561

   shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

168

 

 

 

161

 

Additional paid-in capital

 

 

8,989,022

 

 

 

7,773,727

 

Accumulated other comprehensive gain (loss)

 

 

21,250

 

 

 

(23,740

)

Accumulated deficit

 

 

(4,298,960

)

 

 

(2,997,237

)

Total stockholders' equity

 

 

4,711,480

 

 

 

4,752,911

 

Noncontrolling interests in subsidiaries

 

 

1,063,237

 

 

 

785,175

 

Total liabilities and equity

 

$

28,107,074

 

 

$

22,664,076

 

 

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

 

 

4


 

Tesla, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

  

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automotive sales

 

$

2,076,731

 

 

$

1,917,442

 

 

$

6,125,643

 

 

$

3,849,558

 

Automotive leasing

 

 

286,158

 

 

 

231,285

 

 

 

813,462

 

 

 

507,085

 

Total automotive revenues

 

 

2,362,889

 

 

 

2,148,727

 

 

 

6,939,105

 

 

 

4,356,643

 

Energy generation and storage

 

 

317,505

 

 

 

23,334

 

 

 

818,229

 

 

 

50,009

 

Services and other

 

 

304,281

 

 

 

126,375

 

 

 

713,168

 

 

 

308,849

 

Total revenues

 

 

2,984,675

 

 

 

2,298,436

 

 

 

8,470,502

 

 

 

4,715,501

 

Cost of revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automotive sales

 

 

1,755,622

 

 

 

1,355,102

 

 

 

4,724,849

 

 

 

2,895,483

 

Automotive leasing

 

 

175,224

 

 

 

161,959

 

 

 

516,683

 

 

 

310,176

 

Total automotive cost of revenues

 

 

1,930,846

 

 

 

1,517,061

 

 

 

5,241,532

 

 

 

3,205,659

 

Energy generation and storage

 

 

237,288

 

 

 

24,281

 

 

 

592,823

 

 

 

50,553

 

Services and other

 

 

367,401

 

 

 

120,359

 

 

 

852,446

 

 

 

295,310

 

Total cost of revenues

 

 

2,535,535

 

 

 

1,661,701

 

 

 

6,686,801

 

 

 

3,551,522

 

Gross profit

 

 

449,140

 

 

 

636,735

 

 

 

1,783,701

 

 

 

1,163,979

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

331,622

 

 

 

214,302

 

 

 

1,023,436

 

 

 

588,448

 

Selling, general and administrative

 

 

652,998

 

 

 

336,811

 

 

 

1,794,210

 

 

 

976,173

 

Total operating expenses

 

 

984,620

 

 

 

551,113

 

 

 

2,817,646

 

 

 

1,564,621

 

(Loss) income from operations

 

 

(535,480

)

 

 

85,622

 

 

 

(1,033,945

)

 

 

(400,642

)

Interest income

 

 

5,531

 

 

 

2,858

 

 

 

13,406

 

 

 

6,351

 

Interest expense

 

 

(117,109

)

 

 

(46,713

)

 

 

(324,896

)

 

 

(133,706

)

Other expense, net

 

 

(24,390

)

 

 

(11,756

)

 

 

(83,696

)

 

 

(9,952

)

(Loss) income before income taxes

 

 

(671,448

)

 

 

30,011

 

 

 

(1,429,131

)

 

 

(537,949

)

(Benefit) provision for income taxes

 

 

(285

)

 

 

8,133

 

 

 

40,640

 

 

 

15,628

 

Net (loss) income

 

 

(671,163

)

 

 

21,878

 

 

 

(1,469,771

)

 

 

(553,577

)

Net loss attributable to noncontrolling interests and

   redeemable noncontrolling interests in subsidiaries

 

 

(51,787

)

 

 

 

 

 

(183,721

)

 

 

 

Net (loss) income attributable to common stockholders

 

$

(619,376

)

 

$

21,878

 

 

$

(1,286,050

)

 

$

(553,577

)

Net (loss) income per share of common stock attributable to

   common stockholders, basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(3.70

)

 

$

0.15

 

 

$

(7.80

)

 

$

(3.94

)

Diluted

 

$

(3.70

)

 

$

0.14

 

 

$

(7.80

)

 

$

(3.94

)

Weighted average shares used in computing net income (loss)

   per share of common stock, basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

167,294

 

 

 

148,991

 

 

 

164,897

 

 

 

140,581

 

Diluted

 

 

167,294

 

 

 

156,935

 

 

 

164,897

 

 

 

140,581

 

 

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

 

 

5


 

Tesla, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

  

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net (loss) income attributable to common stockholders

 

$

(619,376

)

 

$

21,878

 

 

$

(1,286,050

)

 

$

(553,577

)

Unrealized gain (loss) on derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gain

 

 

 

 

3,349

 

 

 

 

 

48,359

 

Less: Reclassification adjustment for net gains into

   net loss

 

 

 

 

(14,246

)

 

 

(5,570

)

 

 

(15,523

)

Net unrealized (loss) gain on derivatives

 

 

 

 

 

(10,897

)

 

 

(5,570

)

 

 

32,836

 

Foreign currency translation adjustment

 

 

10,289

 

 

 

2,014

 

 

 

50,560

 

 

 

(3,970

)

Other comprehensive income (loss)

 

 

10,289

 

 

 

(8,883

)

 

 

44,990

 

 

 

28,866

 

Comprehensive (loss) income

 

$

(609,087

)

 

$

12,995

 

 

$

(1,241,060

)

 

$

(524,711

)

 

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

 

 

6


 

Tesla, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(1,469,771

)

 

$

(553,577

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,166,397

 

 

 

620,160

 

Stock-based compensation

 

 

332,412

 

 

 

246,512

 

Amortization of debt discounts and issuance costs

 

 

60,613

 

 

 

69,861

 

Inventory write-downs

 

 

98,347

 

 

 

50,289

 

Loss on disposal of fixed assets

 

 

59,640

 

 

 

12,181

 

Foreign currency transaction loss

 

 

35,933

 

 

 

10,422

 

Loss on the acquisition of SolarCity

 

 

29,796

 

 

 

 

Non-cash interest and other operating activities

 

 

109,729

 

 

 

15,798

 

Changes in operating assets and liabilities, net of effect of business combinations

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(105,643

)

 

 

(110,510

)

Inventories

 

 

(418,970

)

 

 

(345,331

)

Operating lease vehicles

 

 

(1,083,140

)

 

 

(1,452,883

)

Prepaid expenses and other current assets

 

 

(123,832

)

 

 

34,636

 

MyPower customer notes receivable and other assets

 

 

17,628

 

 

 

(2,586

)

Accounts payable and accrued liabilities

 

 

170,326

 

 

 

697,528

 

Deferred revenue

 

 

329,007

 

 

 

256,187

 

Customer deposits

 

 

3,815

 

 

 

409,139

 

Resale value guarantee

 

 

141,044

 

 

 

322,244

 

Other long-term liabilities

 

 

76,124

 

 

 

44,310

 

Net cash (used in) provided by operating activities

 

 

(570,545

)

 

 

324,380

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

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

 

 

(2,628,126

)

 

 

(759,190

)

Maturities of short-term marketable securities

 

 

 

 

 

16,667

 

Purchase of solar energy systems, leased and to be leased

 

 

(547,085

)

 

 

 

Increase in restricted cash

 

 

(172,733

)

 

 

(79,156

)

Business combination, net of cash acquired

 

 

(109,147

)

 

 

 

Net cash used in investing activities

 

 

(3,457,091

)

 

 

(821,679

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in public offering

 

 

400,175

 

 

 

1,701,734

 

Proceeds from issuance of convertible and other debt

 

 

5,401,158

 

 

 

1,685,279

 

Repayments of convertible and other debt

 

 

(2,442,942

)

 

 

(1,678,475

)

Repayments of borrowings under solar bonds issued to related parties

 

 

(165,000

)

 

 

 

Collateralized lease borrowings

 

 

416,427

 

 

 

557,669

 

Proceeds from exercise of stock options and other stock issuances

 

 

239,328

 

 

 

153,461

 

Principal payments on capital leases

 

 

(69,496

)

 

 

(30,447

)

Common stock and debt issuance costs

 

 

(50,530

)

 

 

(18,072

)

Purchase of convertible note hedges

 

 

(204,102

)

 

 

 

Proceeds from settlement of convertible note hedges

 

 

269,456

 

 

 

 

Proceeds from issuance of warrants

 

 

52,883

 

 

 

 

Payments for settlement of warrants

 

 

(219,538

)

 

 

 

Proceeds from investment by noncontrolling interests in subsidiaries

 

 

691,918

 

 

 

 

Distributions paid to noncontrolling interests in subsidiaries

 

 

(190,715

)

 

 

 

Net cash provided by financing activities

 

 

4,129,022

 

 

 

2,371,149

 

Effect of exchange rate changes on cash and cash equivalents

 

 

35,428

 

 

 

13,499

 

Net increase in cash and cash equivalents

 

 

136,814

 

 

 

1,887,349

 

Cash and cash equivalents, beginning of period

 

 

3,393,216

 

 

 

1,196,908

 

Cash and cash equivalents, end of period

 

$

3,530,030

 

 

$

3,084,257

 

Supplemental noncash investing and financing activities

 

 

 

 

 

 

 

 

Acquisition of property and equipment included in liabilities

 

$

963,664

 

 

$

459,472

 

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

 

$

278,741

 

 

$

236,538

 

 

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

 

7


 

Tesla, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 1 – Overview

Tesla, Inc. (“Tesla”, the “Company”, “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 design, manufacture, install and sell solar energy generation and energy storage products. Our Chief Executive Officer, as the chief operating decision maker (“CODM”), organizes the Company, manages resource allocations and measures performance among two operating segments: (i) automotive and (ii) energy generation and storage.

 

Note 2 – Summary of Significant Accounting Policies

Unaudited Interim Financial Statements

The consolidated balance sheet as of September 30, 2017, the consolidated statements of operations and the consolidated statements of comprehensive loss for the three and nine months ended September 30, 2017 and 2016 and the consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016, as well as other information disclosed in the accompanying notes, are unaudited. The consolidated balance sheet as of December 31, 2016 was derived from the audited consolidated financial statements as of that date. The interim consolidated financial statements and the accompanying notes should be read in conjunction with the annual consolidated financial statements and the accompanying notes contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

The interim consolidated financial statements and the accompanying notes 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 years or interim periods.

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation in the consolidated financial statements and the accompanying notes. Such reclassifications had no effect on previously reported results of operations. Starting in the fourth quarter of 2016, we have reclassified the revenue and cost of revenue of our energy storage products from ‘services and other’ into ‘energy generation and storage’ for all periods presented in order to align with our reportable segments.

Resale Value Guarantees and Other Financing Programs

Vehicle sales to customers with a resale value guarantee

Prior to June 30, 2016, we offered resale value guarantees or similar buy-back terms to all customers who purchase vehicles and who financed their vehicles through one of our specified commercial banking partners. Since 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 on the 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 where 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. If a customer returns the vehicle 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 used vehicle inventory. As of September 30, 2017 and December 31, 2016, $279.9 million and $179.5 million, respectively, of the guarantees were exercisable by customers within a 12-month period from each such date.

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Vehicle sales to leasing partners with a resale value guarantee

We also offer resale value guarantees in connection with automobile sales to certain 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 the 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 the 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 leasing revenue. In cases where the leasing partner 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 amount we could be required to pay under this program, should we decide to repurchase all vehicles, was $1.18   billion and $855.9 million as of September 30, 2017 and December 31, 2016, respectively, including $263.5 million within a 12-month period from September 30, 2017 .

As of September 30, 2017 and December 31, 2016, we had $1.57 billion and $ 1.18 billion , respectively, of such borrowings recorded in resale value guarantees and $341.0   million and $ 289.1  million, respectively, recorded in deferred revenue liability . As of September 30, 2017 and December 31, 2016, we had a total of $46.5 million and $57.0 million, respectively, 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.

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Activity related to our resale value guarantee and similar programs consisted of the following (in thousands):

 

  

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating Lease Vehicles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease vehicles—

   beginning of period

 

$

2,835,674

 

 

$

2,126,581

 

 

$

2,462,061

 

 

$

1,556,529

 

Net increase in operating lease vehicles

 

 

237,853

 

 

 

375,287

 

 

 

904,767

 

 

 

1,085,551

 

Depreciation expense recorded in cost

   of automotive leasing revenues

 

 

(96,995

)

 

 

(71,454

)

 

 

(269,012

)

 

 

(179,087

)

Additional depreciation expense recorded in

   cost of automotive leasing revenues as

   a result of early cancellation of resale

   value guarantee

 

 

(2,416

)

 

 

(5,509

)

 

 

(14,631

)

 

 

(11,166

)

Additional depreciation expense recorded in

   cost of automotive leasing revenues

   as a result of expiration

 

 

(32,489

)

 

 

(55,009

)

 

 

(105,378

)

 

 

(55,009

)

Increases to inventory from vehicles

   returned under our trade-in program

   and exercises of resale value guarantee

 

 

(14,700

)

 

 

(18,718

)

 

 

(50,880

)

 

 

(45,640

)

Operating lease vehicles—end of period

 

$

2,926,927

 

 

$

2,351,178

 

 

$

2,926,927

 

 

$

2,351,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue—beginning of period

 

$

1,006,600

 

 

$

851,684

 

 

$

916,652

 

 

$

679,132

 

Net increase in deferred revenue from new

   vehicle deliveries and reclassification of

   collateralized borrowing from long-term

   to short-term

 

 

155,133

 

 

 

188,113

 

 

 

559,996

 

 

 

574,226

 

Amortization of deferred revenue and

   short-term collateralized borrowing

   recorded in automotive leasing

   revenue

 

 

(171,763

)

 

 

(125,411

)

 

 

(474,949

)

 

 

(330,093

)

Additional revenue recorded in automotive

   leasing revenue as a result of early

   cancellation of resale value guarantee

 

 

(394

)

 

 

(1,521

)

 

 

(2,746

)

 

 

(4,333

)

Recognition of deferred revenue resulting

   from return of vehicle under trade-in

   program, expiration, and exercises of

   resale value guarantee

 

 

(3,118

)

 

 

(3,456

)

 

 

(12,495

)

 

 

(9,523

)

Deferred revenue—end of period

 

$

986,458

 

 

$

909,409

 

 

$

986,458

 

 

$

909,409

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resale Value Guarantee

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Resale value guarantee liability—beginning

   of period

 

$

2,835,849

 

 

$

2,007,347

 

 

$

2,389,927

 

 

$

1,430,573

 

Increase in resale value guarantee

 

 

240,134

 

 

 

361,434

 

 

 

922,342

 

 

 

1,013,369

 

Reclassification from long-term to

   short-term collateralized borrowing

 

 

(74,252

)

 

 

(33,129

)

 

 

(189,733

)

 

 

(79,171

)

Additional revenue recorded in automotive

   leasing revenue as a result of early

   cancellation of resale value guarantee

 

 

(1,322

)

 

 

(4,291

)

 

 

(9,570

)

 

 

(10,110

)

Release of resale value guarantee resulting

   from return of vehicle under trade-in

   program and exercises

 

 

(14,372

)

 

 

(15,516

)

 

 

(54,205

)

 

 

(38,816

)

Release of resale value guarantee resulting

   from expiration of resale value guarantee

 

 

(32,481

)

 

 

(55,722

)

 

 

(105,205

)

 

 

(55,722

)

Resale value guarantee liability—end of

   period

 

$

2,953,556

 

 

$

2,260,123

 

 

$

2,953,556

 

 

$

2,260,123

 

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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, 2017 and December 31, 2016, the aggregate balances of our gross unrecognized tax benefits were $300.0 million and $203.9 million, respectively, of which $292.9 million and $198.3 million, respectively, would not give rise to changes in our effective tax rate since these tax benefits would increase a deferred tax asset that is currently fully offset by a valuation allowance.

Net Loss per Share of Common Stock Attributable to Common Stockholders

Basic net income (loss) per share of common stock attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards, warrants and convertible senior notes using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income (loss) per share of common stock attributable to common stockholders when their effect is dilutive. Since we expect to settle in cash the principal outstanding under the 0.25% Convertible Senior Notes due in 2019, the 1.25% Convertible Senior Notes due in 2021 and the 2.375% Convertible Senior Notes due in 2022, we use the treasury stock method when calculating their potential dilutive effect, if any. The following table presents the potentially dilutive shares that were excluded from the computation of diluted net income (loss) per share of common stock attributable to common stockholders, because their effect was anti-dilutive:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Stock-based awards

 

 

8,855,128

 

 

 

5,666,686

 

 

 

10,177,154

 

 

 

16,527,336

 

Convertible senior notes

 

 

1,908,572

 

 

 

 

 

 

2,559,810

 

 

 

1,959,492

 

Warrants

 

 

414,996

 

 

 

 

 

 

658,345

 

 

 

629,782

 

Concentration of Risk

Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, restricted cash, accounts receivable and interest rate swaps. Our cash balances are primarily invested in money market funds or on deposit at high credit quality financial institutions in the United States. At times, these deposits may be in excess of insured limits. As of September 30, 2017, no customer represented 10% or more of our total accounts receivable balance. As of December 31, 2016, one customer represented 10% or more of our total accounts receivable balance. The risk of concentration for our interest rate swaps is mitigated by transacting with several highly rated multinational banks. We maintain reserves for any amounts that we consider uncollectible.

Supply Risk

We are dependent on our suppliers, the majority of which are single source suppliers, and the inability of these suppliers to deliver necessary components of our products in a timely manner at prices, quality levels and volumes acceptable to us, or our inability to efficiently manage these components from these suppliers, could have a material adverse effect on our business, prospects, financial condition and operating results.

11


 

Warranties

We provide a manufacturer’s warranty on all new and certified used vehicles, production powertrain components and systems and energy products we sell. In addition, we also provide a warranty on the installation and components of the solar energy systems we sell for periods typically between 10 to 30 years. We accrue a warranty reserve for the products sold by us, which includes our best estimate of the projected costs to repair or 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 given our relatively short history of sales, and changes to our historical or projected warranty experience may cause material changes to the warranty reserve in the future. The warranty reserve does not include projected warranty costs associated with our vehicles subject to lease accounting and our solar energy systems under lease contracts or power purchase agreements, as the costs to repair these warranty claims are expensed as incurred. The portion of the warranty reserve expected to be incurred within the next 12 months is included within accrued liabilities and other while the remaining balance is included within other long-term liabilities on our consolidated balance sheets. Warranty expense is recorded as a component of cost of revenues. Accrued warranty activity consisted of the following (in thousands):

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Accrued warranty—beginning of period

 

$

343,279

 

 

$

216,459

 

 

$

266,655

 

 

$

180,754

 

Warranty costs incurred

 

 

(39,481

)

 

 

(16,571

)

 

 

(87,881

)

 

 

(56,734

)

Net changes in liability for pre-existing warranties,

   including expirations and foreign exchange impact

 

 

4,768

 

 

 

(19,523

)

 

 

7,239

 

 

 

(12,889

)

Provision for warranty

 

 

60,156

 

 

 

46,454

 

 

 

182,709

 

 

 

115,688

 

Accrued warranty—end of period

 

$

368,722

 

 

$

226,819

 

 

$

368,722

 

 

$

226,819

 

For the three and nine months ended September 30, 2017, warranty costs incurred for vehicles accounted for as operating leases or collateralized debt arrangements were $10.8 million and $24.3 million, respectively, and for the three and nine months ended September 30, 2016, such costs were $7.2 million and $12.3 million, respectively.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers , to replace the existing revenue recognition criteria for contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Deferral of the Effective Date , to defer the effective date of ASU No. 2014-09 to interim and annual periods beginning after December 15, 2017, with early adoption permitted. Subsequently, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations , ASU No. 2016-10, Identifying Performance Obligations and Licensing , ASU No. 2016-11, Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting , ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients , and ASU No. 2016-20, Technical Corrections and Improvements , to clarify and amend the guidance in ASU No. 2014-09. We currently expect to adopt the ASUs on January 1, 2018 on a modified retrospective basis through a cumulative adjustment to equity. The adoption of the ASUs might accelerate the revenue recognition of certain vehicle sales to customers or leasing partners with a resale value guarantee, which may qualify to be accounted for as sales with a right of return as opposed to the current accounting as operating leases or collateralized lease borrowings. Our interpretation is subject to change as a result of future changes in market conditions, incentives or program offerings. Upon adoption of the ASUs, we currently estimate an increase to equity in the range of $550.0 million to $750.0 million, including the impact of adjusting deferred revenue for investment tax credit balances. We are continuing to assess the impact of adopting the ASUs on the consolidated financial statements, and we are continuing to adjust our accounting processes accordingly.

In February 2016, the FASB issued ASU No. 2016-02, Leases , to require lessees to recognize all leases, with certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. The ASU also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We currently expect to adopt the ASU on January 1, 2019. We will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. We intend to elect the available practical expedients upon adoption. Upon adoption, we expect the consolidated balance sheet to include a right of use asset and liability related to substantially all of our lease arrangements. We are continuing to assess the impact of adopting the ASU on our financial position, results of operations and related disclosures and have not yet concluded whether the effect will be material.

In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments , to clarify when a contingent put or call option to accelerate the repayment of debt is an embedded derivative. The ASU is effective for interim and