tsla-10q_20170331.htm

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:

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.

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.

	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.

	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.

	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.

	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.

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.

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.

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.

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.

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.

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

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.

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:

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.

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.

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):

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.

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.

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.

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):

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.

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):

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.

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.

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

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 value 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 expect 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 and 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):

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.

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):

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

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

Finished goods inventory included vehicles in transit to fulfill customer orders, new vehicles available for immediate sale at our retail and service center locations, pre-owned Tesla vehicles and energy storage products.

For solar energy systems, leased and to be leased, we commence transferring component parts from inventory to construction in progress, a component of solar energy systems, leased and to be leased, once a lease contract with a customer has been executed and installation has been initiated. Additional costs incurred on the leased systems, including labor and overhead, are recorded within construction in progress.

We write-down inventory for any excess or obsolete inventories or when we believe that the net realizable value of inventories is less than the carrying value. During the three months ended March 31, 2017 and 2016, we recorded write-downs of $21.0 million and $12.7 million, respectively, in cost of revenues.

Solar energy systems, leased and to be leased, net, consisted of the following (in thousands):

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		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

	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

	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

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

	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

	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

							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

	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		130,597		136,638
Total	$	2,220,336	$	2,067,454