Note 3 - Acquisition of SolarCity

Transaction Overview

On November 21, 2016 (the “Acquisition Date”), we completed our acquisition of SolarCity. As of the acquisition date, our CEO was the chair of SolarCity’s Board of Directors. Pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), each issued and outstanding share of SolarCity common stock was converted into 0.110 (the “Exchange Ratio”) shares of Tesla common stock. SolarCity options and restricted stock unit awards were assumed by Tesla and 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 the acquisition.

Fair Value of Consideration Transferred

The acquisition date fair value of the consideration transferred totaled $2.1 billion, which consisted of the following (in thousands, except for share and per share amounts):


Total fair value of Tesla common stock issued (11,124,497 shares issued at $185.04 per share)	$	2,058,477
Fair value of replacement Tesla stock options and restricted stock units for vested SolarCity awards		87,500
Total purchase price	$	2,145,977

In addition, we also assumed unvested SolarCity awards of $95.9 million which will be recognized as stock-based compensation expense over the remaining requisite service period. Per ASC 805, Business Combinations, the replacement of stock options or other share-based payment awards in conjunction with a business combination represents a modification of share-based payment awards that must be accounted for in accordance with ASC 718, Compensation—Stock Compensation. As a result of our obligation to issue replacement awards, a portion of the fair-value-based measure of replacement awards is included in measuring the purchase consideration transferred in the business combination. To determine the portion of the replacement awards that is part of the purchase consideration, we measured the fair value of both the replacement awards and the historical awards as of the Acquisition Date, in accordance with ASC 718. The fair value of the replacement awards, whether vested or unvested, was included in the purchase consideration to the extent that pre-acquisition services had been rendered.

Transaction costs of $21.7 million were expensed as incurred in selling, general and administrative expense of our Consolidated Statements of Operations.

Fair Value of Assets Acquired and Liabilities Assumed

We accounted for the 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 and noncontrolling interests 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) in 2017. 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. Specifically, we used discounted cash flows model to value the acquired solar energy systems, leased and to be leased, as well as the noncontrolling interests in subsidiaries. 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 asset acquired, liabilities assumed and taxes 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	$	213,523
Accounts receivable		74,619
Inventory		191,878
Solar energy systems, leased and to be leased		5,781,496
Property, plant and equipment		1,056,312
MyPower notes, net of current portion		509,712
Restricted cash		129,196
Intangible assets		356,510
Prepaid expenses and other assets, current and non-current		199,864
Total assets acquired	$	8,513,110
Liabilities assumed:
Accounts payable	$	230,078
Accrued liabilities		238,590
Debt and capital leases, current and non-current		3,403,840
Financing obligations		121,290
Deferred revenue, current and non-current		271,128
Other liabilities		950,423
Total liabilities assumed	$	5,215,349
Net assets acquired	$	3,297,761

Noncontrolling interests redeemable and non-redeemable	$	1,066,517
Capped call options associated with 2014 convertible notes		(3,460	)
Total net assets acquired	$	2,234,704
Gain on acquisition of SolarCity Corporation		(88,727	)
Total purchase price	$	2,145,977

The total preliminary purchase allocation reflects our preliminary estimates and is subject to revision as additional information in relation to the fair value of the inventories, solar energy systems, leased to be leased, identifiable intangible assets, deferred revenue, deferred taxes, and noncontrolling interests assumed becomes available.

Gain on acquisition

The accounting guidance requires that a gain resulting from the fair value of acquired net assets being greater than the consideration paid to acquire the net assets be recorded as a gain included in the results of operations on the acquisition date. We recognized a gain on acquisition of $88.7 million in the fourth quarter of 2016, which is recorded in other income (expense), net on our Consolidated Statements of Operations.

We reassessed the recognition and measurement of identifiable assets and liabilities acquired and concluded that all acquired assets and liabilities were recognized and that the valuation procedures and resulting estimates of fair values were appropriate. The primary factor contributing to the gain relates to the change in the overall price of our common stock from the time that the Merger Agreement was executed on July 31, 2016 to the acquisition date. During this time, our stock price decreased from $230.01 to $185.04, which in turn reduced the fair value of the consideration.

Identifiable intangible assets

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 December 31, 2016
	Approximate Fair Value		Estimated Useful Life (in years)
Developed technology	$	113,361		7
Trade name		43,500		5
Favorable contracts and leases, net		112,817		15
IPR&D		86,832	N/A
Total intangible assets	$	356,510

Acquired in-process research and development (IPR&D) is an intangible asset accounted for as an indefinite-lived asset until the completion or abandonment of the associated research and development effort. If the research and development effort associated with the IPR&D is successfully completed and commercial feasibility is reached, then the IPR&D intangible asset will be amortized over its estimated useful life to be determined at the date the effort is completed. The research and development efforts associated with these IPR&D intangible assets are expected to be completed in the second half of 2017. The fair value of the IPR&D is determined using the replacement cost method under the cost approach. The replacement cost is estimated based on the historical acquisition cost of the technology and historical R&D expenses incurred, adjusted for an estimated developer’s profit, opportunity cost and obsolescence factor in accordance with accepted valuation methodologies. At the time of acquisition, we expect that all acquired IPR&D will reach technological feasibility, but there can be no assurance that the commercial viability of these products will actually be achieved. The nature of the efforts to develop the acquired technologies into commercially viable products consists principally of planning, designing, and testing the technology for viability in manufacturing. If commercial viability were not achieved, we would likely look to other alternative technologies. If the related R&D project is not completed in a timely manner or the R&D project is terminated or abandoned, we may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value.

Unaudited Pro Forma Financial Information

Our consolidated financial statements for 2016 include SolarCity’s results of operations from the Acquisition Date through December 31, 2016. Net revenues and operating loss attributable to SolarCity during this period and included in our consolidated financial statements were $84.1 million and $68.2 million, respectively.

The following unaudited pro forma information gives effect to the acquisition of SolarCity as if the acquisition had occurred on January 1, 2015 and had been included in our Consolidated Statements of Operations for 2015 and 2016.

	Year Ended
	2016			2015

Revenue	$	7,539,077		$	4,354,324
Net loss attributable to common stockholders		(609,395	)		(1,017,223	)
Net loss per share of common stock, basic and Diluted	$	(4.23	)	$	(7.30	)
Weighted-average shares used in computing net loss per share of common stock, basic and diluted		144,212			139,327

The unaudited pro forma financial information includes adjustments to give effect to pro forma events that are directly attributable to the acquisition. The pro forma financial information includes adjustments to amortization and depreciation for solar energy systems, leased to be leased, intangible assets acquired, the effect of acquisition on deferred revenue and noncontrolling interests, and transaction costs related to the acquisition. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods. The unaudited pro forma financial information does not give effect to the potential impact of current financial conditions, regulatory matters, or any anticipated synergies, operating efficiencies, or cost savings that may be associated with the acquisition. Consequently, actual results will differ from the unaudited pro forma financial information presented.