Tesla Motors
Tesla, Inc. (Form: 10-Q, Received: 05/10/2017 06:10:53)

 

 

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 March 31, 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 April 30, 2017, there were 164,259,736 shares of the registrant’s common stock outstanding.

 

 

 

 

 

 


 

TESLA, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 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 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

 

30

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

38

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

39

Item 1A.

 

Risk Factors

 

40

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

56

Item 3.

 

Defaults Upon Senior Securities

 

56

Item 4.

 

Mine Safety Disclosures

 

56

Item 5.

 

Other Information

 

56

Item 6.

 

Exhibits

 

56

 

 

 

 

 

SIGNATURES

 

57

 

 

 

 

 


 

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

I TEM 1.

FINANCIAL STATEMENTS

Tesla, Inc.

Consolidated Balance Sheets

(in thousands, except for par values)

(unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,006,593

 

 

$

3,393,216

 

Restricted cash

 

 

88,946

 

 

 

105,519

 

Accounts receivable, net

 

 

440,349

 

 

 

499,142

 

Inventory

 

 

2,220,336

 

 

 

2,067,454

 

Prepaid expenses and other current assets

 

 

271,665

 

 

 

194,465

 

Total current assets

 

 

7,027,889

 

 

 

6,259,796

 

Operating lease vehicles, net

 

 

3,452,595

 

 

 

3,134,080

 

Solar energy systems, leased and to be leased, net

 

 

6,085,990

 

 

 

5,919,880

 

Property, plant and equipment, net

 

 

7,016,551

 

 

 

5,982,957

 

Intangible assets, net

 

 

388,608

 

 

 

376,145

 

Goodwill

 

 

40,984

 

 

 

 

MyPower customer notes receivable, net of current portion

 

 

486,350

 

 

 

506,302

 

Restricted cash, net of current portion

 

 

330,223

 

 

 

268,165

 

Other assets

 

 

224,536

 

 

 

216,751

 

Total assets

 

$

25,053,726

 

 

$

22,664,076

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,075,333

 

 

$

1,860,341

 

Accrued liabilities and other

 

 

1,460,367

 

 

 

1,210,028

 

Deferred revenue

 

 

841,494

 

 

 

763,126

 

Resale value guarantees

 

 

248,536

 

 

 

179,504

 

Customer deposits

 

 

616,398

 

 

 

663,859

 

Current portion of long-term debt and capital leases

 

 

829,080

 

 

 

984,211

 

Current portion of solar bonds issued to related parties

 

 

174,231

 

 

 

165,936

 

Total current liabilities

 

 

6,245,439

 

 

 

5,827,005

 

 

 

 

 

 

 

 

 

 

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

 

 

7,148,416

 

 

 

5,860,049

 

Solar bonds issued to related parties, net of current portion

 

 

100

 

 

 

99,164

 

Convertible senior notes issued to related parties

 

 

10,440

 

 

 

10,287

 

Deferred revenue, net of current portion

 

 

955,078

 

 

 

851,790

 

Resale value guarantees, net of current portion

 

 

2,444,058

 

 

 

2,210,423

 

Other long-term liabilities

 

 

2,081,822

 

 

 

1,891,449

 

Total liabilities

 

 

18,885,353

 

 

 

16,750,167

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests in subsidiaries

 

 

364,296

 

 

 

367,039

 

Convertible senior notes (Notes 11)

 

 

7,283

 

 

 

8,784

 

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

   March 31, 2017 and December 31, 2016;  164,164 and 161,561

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

 

 

161

 

 

 

161

 

Additional paid-in capital

 

 

8,351,514

 

 

 

7,773,727

 

Accumulated other comprehensive loss

 

 

(20,769

)

 

 

(23,740

)

Accumulated deficit

 

 

(3,343,187

)

 

 

(2,997,237

)

Total stockholders' equity

 

 

4,987,719

 

 

 

4,752,911

 

Noncontrolling interests in subsidiaries

 

 

809,075

 

 

 

785,175

 

Total liabilities and equity

 

$

25,053,726

 

 

$

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 March 31,

 

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

Automotive

 

$

2,035,060

 

 

$

901,892

 

Automotive leasing

 

 

254,540

 

 

 

124,172

 

Total automotive revenue

 

 

2,289,600

 

 

 

1,026,064

 

Energy generation and storage

 

 

213,944

 

 

 

22,728

 

Services and other

 

 

192,726

 

 

 

98,256

 

Total revenues

 

 

2,696,270

 

 

 

1,147,048

 

Cost of revenues

 

 

 

 

 

 

 

 

Automotive

 

 

1,496,649

 

 

 

713,149

 

Automotive leasing

 

 

166,026

 

 

 

66,167

 

Total automotive cost of revenues

 

 

1,662,675

 

 

 

779,316

 

Energy generation and storage

 

 

151,773

 

 

 

18,113

 

Services and other

 

 

213,876

 

 

 

97,151

 

Total cost of revenues

 

 

2,028,324

 

 

 

894,580

 

Gross profit

 

 

667,946

 

 

 

252,468

 

Operating expenses

 

 

 

 

 

 

 

 

Research and development

 

 

322,040

 

 

 

182,482

 

Selling, general and administrative

 

 

603,455

 

 

 

318,210

 

Total operating expenses

 

 

925,495

 

 

 

500,692

 

Loss from operations

 

 

(257,549

)

 

 

(248,224

)

Interest income

 

 

3,090

 

 

 

1,251

 

Interest expense

 

 

(99,346

)

 

 

(40,625

)

Other income (expense), net

 

 

(18,098

)

 

 

9,177

 

Loss before income taxes

 

 

(371,903

)

 

 

(278,421

)

Provision for income taxes

 

 

25,278

 

 

 

3,846

 

Net loss

 

 

(397,181

)

 

 

(282,267

)

Net loss attributable to noncontrolling interests and redeemable

   noncontrolling interests in subsidiaries

 

 

(66,904

)

 

 

 

Net loss attributable to common stockholders

 

$

(330,277

)

 

$

(282,267

)

Net loss per share of common stock attributable to common stockholders,

   basic and diluted

 

$

(2.04

)

 

$

(2.13

)

Weighted average shares used in computing net loss per share of

   common stock, basic and diluted

 

 

162,129

 

 

 

132,676

 

 

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 March 31,

 

 

 

2017

 

 

2016

 

Net loss attributable to common stockholders

 

$

(330,277

)

 

$

(282,267

)

Other comprehensive gain (loss), net of tax:

 

 

 

 

 

 

 

 

Unrealized gains (losses) on derivatives:

 

 

 

 

 

 

 

 

Change in net unrealized gain (loss)

 

 

 

 

 

20,805

 

Less: Reclassification adjustment for net (gains) losses into net loss

 

 

(5,570

)

 

 

 

Net unrealized gain (loss) on derivatives

 

 

(5,570

)

 

 

20,805

 

Foreign currency translation adjustment

 

 

8,541

 

 

 

(3,684

)

Other comprehensive income

 

 

2,971

 

 

 

17,121

 

Comprehensive loss

 

$

(327,306

)

 

$

(265,146

)

 

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

 

 

6

 


 

Tesla, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

  

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(397,181

)

 

$

(282,267

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

376,602

 

 

 

156,460

 

Stock-based compensation

 

 

103,717

 

 

 

89,658

 

Amortization of discount on convertible debt

 

 

30,337

 

 

 

20,613

 

Inventory write-downs

 

 

26,918

 

 

 

13,010

 

Loss on disposal of property and equipment

 

 

41,120

 

 

 

26,171

 

Foreign currency transaction loss (gain)

 

 

5,064

 

 

 

(9,356

)

Loss on the acquisition of SolarCity

 

 

11,571

 

 

 

 

Non-cash interest and other operating activities

 

 

(5,179

)

 

 

7,135

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

91,541

 

 

 

(159,327

)

Inventories and operating lease vehicles

 

 

(583,479

)

 

 

(512,671

)

Prepaid expenses and other current assets

 

 

(75,504

)

 

 

(9,134

)

Other assets and MyPower notes receivable

 

 

8,006

 

 

 

(6,862

)

Accounts payable and accrued liabilities

 

 

2,531

 

 

 

60,593

 

Deferred revenue

 

 

103,941

 

 

 

89,671

 

Customer deposits

 

 

(51,004

)

 

 

100,804

 

Resale value guarantee

 

 

184,579

 

 

 

150,636

 

Other long-term liabilities

 

 

56,609

 

 

 

15,261

 

Net cash used in operating activities

 

 

(69,811

)

 

 

(249,605

)

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

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

 

 

(552,624

)

 

 

(216,859

)

Purchase of solar energy systems, leased to be leased

 

 

(219,948

)

 

 

 

Increase in other restricted cash

 

 

(45,224

)

 

 

(16,960

)

Business combination, net of cash acquired

 

 

(109,147

)

 

 

 

Net cash used in investing activities

 

 

(926,943

)

 

 

(233,819

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in public offering

 

 

400,175

 

 

 

 

Proceeds from issuance of convertible and other debt

 

 

1,838,166

 

 

 

430,000

 

Repayments of convertible and other debt

 

 

(690,945

)

 

 

 

Repayments of borrowings under solar bonds issued to related parties

 

 

(90,000

)

 

 

 

Collateralized lease borrowings

 

 

186,355

 

 

 

241,763

 

Proceeds from exercise of stock options and other stock issuances

 

 

57,307

 

 

 

52,838

 

Principal payments on capital leases

 

 

(18,303

)

 

 

(8,128

)

Common stock and debt issuance costs

 

 

(11,094

)

 

 

(1,038

)

Purchase of convertible note hedges

 

 

(204,102

)

 

 

 

Proceeds from issuance of warrants

 

 

52,883

 

 

 

 

Proceeds from investment by noncontrolling interests in subsidiaries

 

 

142,003

 

 

 

 

Distributions paid to noncontrolling interests in subsidiaries

 

 

(63,696

)

 

 

 

Net cash provided by financing activities

 

 

1,598,749

 

 

 

715,435

 

Effect of exchange rate changes on cash and cash equivalents

 

 

11,382

 

 

 

12,870

 

Net increase in cash and cash equivalents

 

 

613,377

 

 

 

244,881

 

Cash and cash equivalents, beginning of period

 

 

3,393,216

 

 

 

1,196,908

 

Cash and cash equivalents, end of period

 

$

4,006,593

 

 

$

1,441,789

 

Supplemental noncash investing and financing activities

 

 

 

 

 

 

 

 

Acquisition of property and equipment included in accounts payable and accrued liabilities

 

$

654,322

 

 

$

235,829

 

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

 

 

65,244

 

 

 

39,034

 

 

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 energy products. In addition, as a result of our acquisition of SolarCity Corporation (“SolarCity”) on November 21, 2016, we also design, manufacture, install and sell or lease solar energy systems, or sell electricity generated by our solar energy systems to customers. Our Chief Executive Officer, as the chief operating decision maker (“CODM”), organizes the Company, manages resource allocations and measures performance among two 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 March 31, 2017, the consolidated statements of operations and the consolidated statements of comprehensive loss for the three months ended March 31, 2017 and 2016 and the consolidated statements of cash flows for the three months ended March 31, 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.

Resale Value Guarantees and Other Financing Programs

Vehicle sales to customers with a resale value guarantee

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 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. 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 March 31, 2017 and December 31, 2016, $197.3 million and $179.5 million, respectively, of the guarantees were exercisable by customers within the next twelve months.

8

 


 

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 cash we could be required to pay under this program, should we decide to repurchase all vehicles, was $977.4 million as of March 31, 2017, including $51.2 million within the next twelve months .

As of March   31, 2017 and December 31, 2016, we had $1.29 billion and $ 1.18 billion , respectively, of such borrowings recorded in resale value guarantees and $311.7 million and $ 289.1 million, respectively, recorded in deferred revenue liability . As of March 31, 2017 and December 31, 2016, we had a total of $50.3 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.

9

 


 

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

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Operating Lease Vehicles

 

 

 

 

 

 

 

 

Operating lease vehicles—beginning of period

 

$

2,462,061

 

 

$

1,556,529

 

Net increase in operating lease vehicles

 

 

414,361

 

 

 

413,981

 

Depreciation expense recorded in cost of automotive

   leasing revenues

 

 

(78,856

)

 

 

(44,818

)

Additional depreciation expense recorded in cost of automotive

   leasing revenues as a result of early cancellation of resale value

   guarantee

 

 

(8,423

)

 

 

(3,086

)

Additional depreciation expense recorded in cost of automotive

   leasing revenues result of expiration

 

 

(41,432

)

 

 

 

Increases to inventory from vehicles returned under our trade- in

   program and exercises of resale value guarantee

 

 

(15,312

)

 

 

(13,296

)

Operating lease vehicles—end of period

 

$

2,732,399

 

 

$

1,909,310

 

 

 

 

 

 

 

 

 

 

Deferred Revenue

 

 

 

 

 

 

 

 

Deferred revenue—beginning of period

 

$

916,652

 

 

$

679,132

 

Net increase in deferred revenue from new vehicle deliveries and

   reclassification of collateralized borrowing from long-term to

   short-term

 

 

238,687

 

 

 

225,764

 

Amortization of deferred revenue and short-term collateralized

   borrowing recorded in automotive leasing revenue

 

 

(137,668

)

 

 

(97,748

)

Additional revenue recorded in automotive leasing revenue as a

   result of early cancellation of resale value guarantee

 

 

(1,737

)

 

 

(2,996

)

Recognition of deferred revenue resulting from return of vehicle

   under trade-in program, expiration, and exercises of resale

   value guarantee

 

 

(5,432

)

 

 

(3,184

)

Deferred revenue—end of period

 

$

1,010,502

 

 

$

800,968

 

 

 

 

 

 

 

 

 

 

Resale Value Guarantee

 

 

 

 

 

 

 

 

Resale value guarantee liability—beginning of period

 

$

2,389,927

 

 

$

1,430,573

 

Increase in resale value guarantee

 

 

418,721

 

 

 

381,499

 

Reclassification from long-term to short-term

   collateralized borrowing

 

 

(48,384

)

 

 

(22,826

)

Additional revenue recorded in automotive leasing revenue as a

   result of early cancellation of resale value guarantee

 

 

(6,142

)

 

 

(2,501

)

Release of resale value guarantee resulting from return of vehicle

   under trade-in program and exercises

 

 

(20,199

)

 

 

(11,247

)

Release of resale value guarantee resulting from expiration of resale

   value guarantee

 

 

(41,330

)

 

 

 

Resale value guarantee liability—end of period

 

$

2,692,593

 

 

$

1,775,498

 

Income Taxes

There are transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. As of March 31, 2017 and December 31, 2016, the aggregate balances of our gross unrecognized tax benefits were $219.4 million and $203.9 million, respectively, of which $213.2 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.

10

 


 

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 1.5% Convertible Senior Notes due in 2018, 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 March 31,

 

 

 

2017

 

 

2016

 

Stock-based awards

 

 

9,738,595

 

 

 

16,267,953

 

Convertible senior notes

 

 

2,370,788

 

 

 

1,955,136

 

Warrants

 

 

595,104

 

 

 

344,392

 

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 March 31, 2017, no 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.

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. 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, 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. Warranty expense is recorded as a component of cost of revenues. Accrued warranty activity consisted of the following (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Accrued warranty—beginning of period

 

$

266,655

 

 

$

180,754

 

Warranty costs incurred

 

 

(23,016

)

 

 

(15,704

)

Net changes in liability for pre-existing warranties, including

   expirations and foreign exchange impact

 

 

(3,510

)

 

 

3,384

 

Provision for warranty

 

 

66,822

 

 

 

30,271

 

Accrued warranty—end of period

 

$

306,951

 

 

$

198,705

 

11

 


 

For the three months ended March 31, 2017 and 2016, warranty costs incurred for vehicles accounted for as operating leases or collateralized debt arrangements were $6.1 million and $2.5 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. Adoption of the ASUs is either retrospective to each prior period presented or retrospective with a cumulative adjustment to accumulated deficit as of the adoption date. We have not yet selected a transition method, and we are currently evaluating the impact of adopting the ASU.

In February 2016, the FASB issued ASU No. 2016-02, Leases , to require lessees to recognize most leases 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. Adoption of the ASU is modified retrospective. We are currently obtaining an understanding of the ASU but plan to adopt the ASU on January 1, 2019.

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 annual periods beginning after December 15, 2016, with early adoption permitted. Adoption of the ASU is modified retrospective. We adopted the ASU on January 1, 2017, but the ASU did not have an impact on the consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting , to simplify the accounting for the income tax effects from share-based compensation, the accounting for forfeitures and the accounting for statutory income tax withholding, among others. In particular, the ASU requires all income tax effects from share-based compensation to be recognized in the consolidated statement of operations when the awards vest or are settled, the ASU permits accounting for forfeitures as they occur, and the ASU permits a higher level of statutory income tax withholding without triggering liability accounting. Adoption of the ASU is modified retrospective, retrospective and prospective, depending on the specific provision being adopted. We adopted the ASU on January 1, 2017. Our gross U.S. deferred tax assets increased by $909.1 million as a result of our adoption, which was fully offset by a corresponding increase to our valuation allowance. In addition, we now account for forfeitures as they occur.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments , to reduce the diversity in practice with respect to the presentation of certain cash flows. The ASU is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of the ASU is retrospective. We are currently obtaining an understanding of the ASU but plan to adopt the ASU on January 1, 2018, which will impact the classifications within the consolidated statements of cash flows.

In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory , to require the recognition of the income tax effects from an intra-entity transfer of an asset other than inventory. The ASU is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of the ASU is modified retrospective. We early adopted the ASU on January 1, 2017. Our adoption did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU No.   2016-18, Statement of Cash Flows: Restricted Cash , to require the statement of cash flows to present restricted cash as a part of the beginning and ending balances of cash and cash equivalents. The ASU is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of the ASU is retrospective. We plan to adopt the ASU on January 1, 2018, which will impact the classifications within the consolidated statements of cash flows.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment , to change the determination of the amount of goodwill impairment to the excess of the carrying amount of a reporting unit over the reporting unit’s fair value. The ASU is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Adoption of the ASU is prospective. We have not yet selected an adoption date, and the ASU will have a currently undetermined impact on the consolidated financial statements.

 

12

 


 

Note 3 – Business Combinations

Grohmann Acquisition

On January 3, 2017 we completed our acquisition of Grohmann Engineering GmbH (“Grohmann”), a company that specializes in the design, development and sale of automated manufacturing systems, for $109.5 million in cash. We acquired Grohmann to improve the speed and efficiency of our manufacturing processes.

At the time of acquisition, we entered into an incentive compensation arrangement for up to a maximum of $25.8 million of payments contingent upon continued service with us for 36 months after the acquisition date. Such payments would have been accounted for as compensation expense in the periods earned. However, during the three months ended March 31, 2017, we terminated the incentive compensation arrangement and accelerated the payments thereunder. As a result, we recorded the entire $25.8 million as compensation expense during this period, which was included in selling, general and administrative expense in our consolidated statements of operations.

Fair Value of Assets Acquired and Liabilities Assumed

We accounted for the Grohmann acquisition using the purchase method of accounting for business combinations under ASC 805, Business Combinations . The total purchase price is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.

As we finalize the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period (a period not to exceed 12 months). Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives and the expected future cash flows and related discount rates, can materiality impact our results of operations. Significant inputs used for the model included the amount of cash flows, the expected period of the cash flows and the discount rates. The finalization of the purchase accounting assessment may result in a change in the valuation of the intangible assets acquired and the related taxes, which may have a material impact on our results of operations and financial position.

The preliminary allocation of the purchase price is based on management’s estimate of the acquisition date fair values of the assets acquired and liabilities assumed, as follows (in thousands):

 

Assets acquired:

 

 

 

Cash and cash equivalents

$

334

 

Accounts receivable

 

42,947

 

Inventory

 

10,031

 

Property, plant and equipment

 

44,030

 

Intangible assets

 

21,723

 

Prepaid expenses and other assets, current and non-current

 

1,998

 

Total assets acquired

$

121,063

 

Liabilities assumed:

 

 

 

Accounts payable

 

(19,975

)

Accrued liabilities

 

(12,403

)

Debt and capital leases, current and non-current

 

(9,220

)

Other long-term liabilities

 

(10,049

)

Total liabilities assumed

$

(51,647

)

Net assets acquired

$

69,416

 

Goodwill

 

40,065

 

Total purchase price

$

109,481

 

Goodwill represented the excess of the purchase price over the fair value of the net assets acquired and was primarily attributable to the expected synergies from potential monetization opportunities and from integrating Grohmann’s technology into our automotive business as well as the acquired talent. Goodwill is not deductible for U.S. income tax purposes and is not amortized. Rather, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value.

13

 


 

Identifiable Intangible Assets Acquired

A preliminary assessment of the fair value of identified intangible assets and their respective useful lives are as follows (in thousands, except for estimated useful life):

 

 

As of March 31, 2017

 

 

Approximate

Fair Value

 

 

Estimated

Useful Life

(in years)

 

Developed technology

$

12,528

 

 

 

10

 

Software

 

3,341

 

 

 

3

 

Customer relations

 

3,236

 

 

 

6

 

Trade name

 

1,775

 

 

 

7

 

Other

 

843

 

 

 

2

 

Total intangible assets

$

21,723

 

 

 

 

 

Grohmann’s results of operations since the acquisition date have been included within the automotive segment in our consolidated statements of operations. Actual and pro forma results of operations have not been separately presented because they were not material.

SolarCity Acquisition

On November 21, 2016 we completed our acquisition of SolarCity for a total purchase price of $2.1 billion in stock . We are currently finalizing our estimates of the fair values of the solar energy systems, leased and to be leased, identifiable intangible assets, deferred revenue, deferred taxes and noncontrolling interests assumed . Fair value adjustments recorded during the measurement period (a period not to exceed 12 months) may have a material impact on our consolidated financial statements. During the three months ended March 31, 2017, we recorded an $11.6 million measurement period adjustment to the acquisition date fair value of certain assets as previously reported in our Form 10-K for the year ended December 31, 2016. The measurement period adjustment was recorded as a loss to other income (expense), net, in our consolidated statement of operations for the three months ended March 31, 2017, to reduce the gain on acquisition initially recognized during the period ended December 31, 2016.

 

Note 4 – Goodwill and Intangible Assets

Goodwill increased to $41.0 million as of March 31, 2017 due to our acquisition of Grohmann and the impact of foreign currency translation adjustments.

Information regarding our acquired intangible assets as of March 31, 2017 was as follows (in thousands):

 

 

 

As of March 31, 2017

 

 

 

Gross   Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net Carrying

Amount

 

Finite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

$

125,889

 

 

$

(5,894

)

 

$

119,995

 

Trade name

 

 

45,275

 

 

 

(3,180

)

 

 

42,095

 

Favorable contracts and leases, net

 

 

112,817

 

 

 

(2,808

)

 

 

110,009

 

Other

 

 

34,099

 

 

 

(4,422

)

 

 

29,677

 

Total finite-lived intangible assets:

 

$

318,080

 

 

$

(16,304

)

 

$

301,776

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

IPR&D

 

 

86,832

 

 

 

 

 

 

86,832

 

Total infinite-lived intangible assets:

 

 

86,832

 

 

 

 

 

 

86,832

 

Total intangible assets

 

$

404,912

 

 

$

(16,304

)

 

$

388,608

 

14

 


 

The acquired in-process research and development (“IPR&D”) is accounted for as an indefinite-lived asset until the completion or abandonment of the associated research and development efforts. If the research and development efforts are successfully completed and commercial feasibility is reached, the IPR&D would be amortized over its then estimated useful life. If the research and development efforts are not completed or are abandoned, the IPR&D might be impaired. The fair va lue of the IPR&D was estimated using the replacement cost method under the cost approach, based on the historical acquisition costs and expenses of the technology adjusted for estimated developer’s profit, opportunity cost and obsolescence factor. We expec t to complete the research and development efforts in the second half of 2017, but there can be no assurance that the commercial feasibility will be achieved. The nature of the research and development efforts consists principally of planning, designing an d testing the technology for viability in manufacturing. If commercial feasibility is not achieved, we would likely look to other alternative technologies.

As of March 31, 2017, total future amortization expense for intangible assets was estimated as follows (in thousands):

 

 

 

Total

 

Nine months ending December 31, 2017

 

$

28,670

 

2018

 

 

37,514

 

2019

 

 

37,514

 

2020

 

 

35,675

 

2021

 

 

34,709

 

Thereafter

 

 

127,694

 

Total

 

$

301,776

 

 

 

Note 5 – Fair Value of Financial Instruments

ASC 820 , Fair Value Measurements , states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability . The three-tiered fair value hierarchy, which prioritizes which inputs should be used in measuring fair value, is comprised of: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than quoted prices in active markets that are observable either directly or indirectly and (Level III) unobservable inputs for which there is little or no market data. The fair value hierarchy requires the use of observable market data when available in determining fair value. Our assets and liabilities that were measured at fair value on a recurring basis were as follows (in thousands):

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

Fair Value

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Fair Value

 

 

Level I

 

 

Level II

 

 

Level III

 

Money market funds

 

$

2,727,155

 

 

$

2,727,155

 

 

$

 

 

$

 

 

$

2,226,322

 

 

$

2,226,322

 

 

$

 

 

$

 

Interest rate swaps

 

 

1,022

 

 

 

 

 

 

1,022

 

 

 

 

 

 

1,490

 

 

 

 

 

 

1,490

 

 

 

 

Total

 

$

2,728,177

 

 

$

2,727,155

 

 

$

1,022

 

 

$

 

 

$

2,227,812

 

 

$

2,226,322

 

 

$

1,490

 

 

$

 

All of our cash equivalents and short-term marketable securities were classified within Level I of the fair value hierarchy because they were valued using quoted prices in active markets. Our interest rate swaps were classified within Level II of the fair value hierarchy because they were valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates. During the three months ended March 31, 2017, there were no transfers between the levels of the fair value hierarchy.

Interest Rate Swaps

We enter into fixed-for-floating interest rate swap agreements to swap variable interest payments on certain debt for fixed interest payments, as required by certain of our lenders. We do not designate our interest rate swaps as hedging instruments. Accordingly, our interest rate swaps are recorded at fair value on the consolidated balance sheets within other assets or other long-term liabilities, with any changes in their fair values recognized as other income (expense), net, in the consolidated statements of operations and with any cash flows recognized as investing activities in the consolidated statements of cash flows. Our interest rate swaps outstanding were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

 

 

Aggregate Notional Amount

 

 

Gross Asset at Fair Value

 

 

Gross Liability at Fair Value

 

 

Gross Gains

 

 

Gross Losses

 

Interest rate swaps

 

$

754,591

 

 

$

8,953

 

 

$

9,975

 

 

$

688

 

 

$

1,250

 

15

 


 

Disclosure of Fair Values

Our financial instruments that are not re-measured at fair value include accounts receivable, customer notes receivable, rebates receivable, accounts payable, accrued liabilities, customer deposits, convertible senior notes, the participation interest, solar asset-backed notes, solar loan-backed notes, Solar Bonds and long-term debt. The carrying values of these financial instruments other than customer notes receivable, convertible senior notes, the participation interest, solar asset-backed notes, Solar Bonds and long-term debt approximated their fair values.

We estimate the fair value of convertible senior notes using commonly accepted valuation methodologies and market-based risk measurements that are indirectly observable, such as credit risk (Level II) . In addition, we estimate the fair value of customer notes receivable, the participation interest, solar asset-backed notes, solar loan-backed notes and Solar Bonds based on rates currently offered for instruments with similar maturities and terms (Level III). The following table presents the estimated fair values and the carrying values (in thousands):

 

 

 

March 31,2017

 

 

December 31, 2016

 

 

 

Carrying   Value

 

 

Fair Value

 

 

Carrying   Value

 

 

Fair Value

 

MyPower customer notes receivable

 

$

492,627

 

 

$

492,627

 

 

$

513,002

 

 

$

513,002

 

Convertible senior notes

 

 

3,801,009

 

 

 

4,570,495

 

 

 

2,957,288

 

 

 

3,205,641

 

Participation interest

 

 

17,055

 

 

 

17,322

 

 

 

16,713

 

 

 

15,025

 

Solar asset-backed notes

 

 

434,829

 

 

 

436,896

 

 

 

442,764

 

 

 

428,551

 

Solar loan-backed notes

 

 

268,021

 

 

 

278,770

 

 

 

137,024

 

 

 

132,129

 

 

Note 6 – Inventory

As of March 31, 2017 and December 31, 2016, our inventory consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Raw materials

 

$

693,499

 

 

$

680,339

 

Work in process

 

 

254,684

 

 

 

233,746

 

Finished goods

 

 

1,141,556

 

 

 

1,016,731

 

Service parts