UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock	TSLA	The Nasdaq Global Select Market

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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	☐	Smaller reporting company	☐
Emerging growth company	☐

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

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

As of October 21, 2019, there were 180,244,858 shares of the registrant’s common stock outstanding.

TESLA, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations	5
	Consolidated Statements of Comprehensive Income (Loss)	6
	Consolidated Statements of Redeemable Noncontrolling Interests and Equity	7
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	51
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 3.	Defaults Upon Senior Securities	71
Item 4.	Mine Safety Disclosures	71
Item 5.	Other Information	71
Item 6.	Exhibits	71
SIGNATURES		73

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,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Tesla, Inc.

Consolidated Balance Sheets

(in millions, except for par values)

(unaudited)

	September 30,			December 31,
	2019			2018
Assets
Current assets
Cash and cash equivalents	$	5,338		$	3,686
Restricted cash		233			193
Accounts receivable, net		1,128			949
Inventory		3,581			3,113
Prepaid expenses and other current assets		660			366
Total current assets		10,940			8,307
Operating lease vehicles, net		2,253			2,090
Solar energy systems, net		6,168			6,271
Property, plant and equipment, net		10,190			11,330
Operating lease right-of-use assets		1,234			—
Intangible assets, net		351			282
Goodwill		186			68
MyPower customer notes receivable, net of current portion		398			422
Restricted cash, net of current portion		255			398
Other assets		820			572
Total assets	$	32,795		$	29,740
Liabilities
Current liabilities
Accounts payable	$	3,468		$	3,405
Accrued liabilities and other		2,497			2,094
Deferred revenue		1,045			630
Resale value guarantees		441			503
Customer deposits		665			793
Current portion of long-term debt and finance leases		2,030			2,568
Total current liabilities		10,146			9,993
Long-term debt and finance leases, net of current portion		11,313			9,404
Deferred revenue, net of current portion		1,140			991
Resale value guarantees, net of current portion		38			329
Other long-term liabilities		2,676			2,710
Total liabilities		25,313			23,427
Commitments and contingencies (Note 14)
Redeemable noncontrolling interests in subsidiaries		600			556
Equity
Stockholders' equity
Preferred stock; $0.001 par value; 100 shares authorized;    no shares issued and outstanding		—			—
Common stock; $0.001 par value; 2,000 shares authorized; 180 and    173 shares issued and outstanding as of September 30, 2019 and December 31,    2018, respectively		0			0
Additional paid-in capital		12,348			10,249
Accumulated other comprehensive loss		(120	)		(8	)
Accumulated deficit		(6,188	)		(5,318	)
Total stockholders' equity		6,040			4,923
Noncontrolling interests in subsidiaries		842			834
Total liabilities and equity	$	32,795		$	29,740

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

4

Tesla, Inc.

Consolidated Statements of Operations

(in millions, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenues
Automotive sales	$	5,132		$	5,878		$	13,809		$	11,558
Automotive leasing		221			221			644			634
Total automotive revenues		5,353			6,099			14,453			12,192
Energy generation and storage		402			399			1,095			1,183
Services and other		548			326			1,646			860
Total revenues		6,303			6,824			17,194			14,235
Cost of revenues
Automotive sales		4,014			4,406			11,124			9,027
Automotive leasing		117			119			340			361
Total automotive cost of revenues		4,131			4,525			11,464			9,388
Energy generation and storage		314			330			956			1,036
Services and other		667			445			2,096			1,212
Total cost of revenues		5,112			5,300			14,516			11,636
Gross profit		1,191			1,524			2,678			2,599
Operating expenses
Research and development		334			351			998			1,104
Selling, general and administrative		596			730			1,947			2,167
Restructuring and other		—			27			161			130
Total operating expenses		930			1,108			3,106			3,401
Income (loss) from operations		261			416			(428	)		(802	)
Interest income		15			7			34			17
Interest expense		(185	)		(175	)		(515	)		(488	)
Other income, net		85			23			70			36
Income (loss) before income taxes		176			271			(839	)		(1,237	)
Provision for income taxes		26			17			68			36
Net income (loss)		150			254			(907	)		(1,273	)
Net income (loss) attributable to noncontrolling interests and    redeemable noncontrolling interests in subsidiaries		7			(57	)		60			(157	)
Net income (loss) attributable to common stockholders	$	143		$	311		$	(967	)	$	(1,116	)
Net income (loss) per share of common stock attributable to    common stockholders
Basic	$	0.80		$	1.82			(5.54	)	$	(6.56	)
Diluted	$	0.78		$	1.75			(5.54	)	$	(6.56	)
Weighted average shares used in computing net income (loss) per    share of common stock
Basic		179			171			176			170
Diluted		184			178			176			170

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

5

Tesla, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in millions)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income (loss)	$	150		$	254		$	(907	)	$	(1,273	)
Other comprehensive loss:
Foreign currency translation adjustment		(114	)		(10	)		(112	)		(25	)
Comprehensive income (loss)		36			244			(1,019	)		(1,298	)
Less: Comprehensive income (loss) attributable to noncontrolling    interests and redeemable noncontrolling interests in subsidiaries		7			(57	)		60			(157	)
Comprehensive income (loss) attributable to common stockholders	$	29		$	301		$	(1,079	)	$	(1,141	)

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

6

Tesla, Inc.

Consolidated Statements of Redeemable Noncontrolling Interests and Equity

(in millions, except per share data)

(unaudited)

													Accumulated
	Redeemable							Additional					Other			Total			Noncontrolling
	Noncontrolling			Common Stock				Paid-In		Accumulated			Comprehensive			Stockholders'			Interests in			Total
Three Months Ended September 30, 2018	Interests			Shares		Amount		Capital		Deficit			Income			Equity			Subsidiaries			Equity
Balance as of June 30, 2018	$	540			171	$	0	$	9,657	$	(5,768	)	$	18		$	3,907		$	821		$	4,728
Exercises of conversion feature of convertible senior notes		—			0		0		0		—			—			0			—			0
Common stock issued		—			1		0		95		—			—			95			—			95
Stock-based compensation		—			—		—		206		—			—			206			—			206
Contributions from noncontrolling interests		76			—		—		—		—			—			—			37			37
Distributions to noncontrolling interests		(19	)		—		—		—		—			—			—			(51	)		(51	)
Buy-outs of noncontrolling interests		(3	)		—		—		0		—			—			0			—			0
Net (loss) income		(43	)		—		—		—		311			—			311			(14	)		297
Other comprehensive loss		—			—		—		—		—			(10	)		(10	)		—			(10	)
Balance as of September 30, 2018	$	551			172	$	0	$	9,958	$	(5,457	)	$	8		$	4,509		$	793		$	5,302

													Accumulated
	Redeemable							Additional					Other			Total			Noncontrolling
	Noncontrolling			Common Stock				Paid-In		Accumulated			Comprehensive			Stockholders'			Interests in			Total
Nine Months Ended September 30, 2018	Interests			Shares		Amount		Capital		Deficit			Income			Equity			Subsidiaries			Equity
Balance as of December 31, 2017	$	398			169	$	0	$	9,178	$	(4,973	)	$	33		$	4,238		$	997		$	5,235
Adjustments for prior periods from adopting ASC 606		8			—		—		—		623			—			623			(89	)		534
Adjustments for prior periods from adopting Accounting Standards Update No. 2017-05		—			—		—		—		9			—			9			—			9
Reclass from mezzanine equity to equity for Convertible Senior Notes due in 2018		—			—		—		0		—			—			0			—			0
Exercises of conversion feature of convertible senior notes		—			0		0		0		—			—			—			—			—
Common stock issued		—			3		0		220		—			—			220			—			220
Stock-based compensation		—			—		—		560		—			—			560			—			560
Contributions from noncontrolling interests		248			—		—		—		—			—			—			118			118
Distributions to noncontrolling interests		(49	)		—		—		—		—			—			—			(127	)		(127	)
Buy-outs of noncontrolling interests		(3	)		—		—		0		—			—			0			—			0
Net loss		(51	)		—		—		—		(1,116	)		—			(1,116	)		(106	)		(1,222	)
Other comprehensive loss		—			—		—		—		—			(25	)		(25	)		—			(25	)
Balance as of September 30, 2018	$	551			172	$	0	$	9,958	$	(5,457	)	$	8		$	4,509		$	793		$	5,302

7

													Accumulated
	Redeemable							Additional					Other			Total			Noncontrolling
	Noncontrolling			Common Stock				Paid-In		Accumulated			Comprehensive			Stockholders'			Interests in			Total
Three Months Ended September 30, 2019	Interests			Shares		Amount		Capital		Deficit			Loss			Equity			Subsidiaries			Equity
Balance as of June 30, 2019	$	580			179	$	0	$	12,052	$	(6,331	)	$	(6	)	$	5,715		$	854		$	6,569
Common stock issued		—			1		0		78		—			—			78			—			78
Issuance of common stock upon acquisition, net of transaction costs		—			—		—		1		—			—			1			—			1
Stock-based compensation		—			—		—		217		—			—			217			—			217
Contributions from noncontrolling interests		12			—		—		—		—			—			—			51			51
Distributions to noncontrolling interests		(11	)		—		—		—		—			—			—			(51	)		(51	)
Net income (loss)		19			—		—		—		143			—			143			(12	)		131
Other comprehensive loss		—			—		—		—		—			(114	)		(114	)		—			(114	)
Balance as of September 30, 2019	$	600			180	$	0	$	12,348	$	(6,188	)	$	(120	)	$	6,040		$	842		$	6,882

														Accumulated
	Redeemable							Additional						Other			Total			Noncontrolling
	Noncontrolling			Common Stock				Paid-In			Accumulated			Comprehensive			Stockholders'			Interests in			Total
Nine Months Ended September 30, 2019	Interests			Shares		Amount		Capital			Deficit			Loss			Equity			Subsidiaries			Equity
Balance as of December 31, 2018	$	556			173	$	0	$	10,249		$	(5,318	)	$	(8	)	$	4,923		$	834		$	5,757
Adjustments for prior periods from adopting ASC 842		—			—		—		—			97			—			97			—			97
Conversion feature of Convertible Senior Notes due in 2024		—			—		—		491			—			—			491			—			491
Purchase of convertible note hedges		—			—		—		(476	)		—			—			(476	)		—			(476	)
Sales of warrants		—			—		—		174			—			—			174			—			174
Common stock issued		—			3		0		173			—			—			173			—			173
Issuance of common stock in May 2019 public offering at 243.00 per share,     net of issuance costs of $15		—			3		0		847			—			—			847			—			847
Issuance of common stock upon acquisition, net of transaction costs		—			1		0		220			—			—			220			—			220
Stock-based compensation		—			—		—		672			—			—			672			—			672
Contributions from noncontrolling interests		53			—		—		—			—			—			—			100			100
Distributions to noncontrolling interests		(49	)		—		—		—			—			—			—			(112	)		(112	)
Buy-outs of noncontrolling interests		—			—		—		(8	)		—			—			(8	)		—			(8	)
Other		—			—		—		6			—			—			6			—			6
Net income (loss)		40			—		—		—			(967	)		—			(967	)		20			(947	)
Other comprehensive loss		—			—		—		—			—			(112	)		(112	)		—			(112	)
Balance as of September 30, 2019	$	600			180	$	0	$	12,348		$	(6,188	)	$	(120	)	$	6,040		$	842		$	6,882

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

8

Tesla, Inc.

Consolidated Statements of Cash Flows

(in millions)

(unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash Flows from Operating Activities
Net loss	$	(907	)	$	(1,273	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization and impairment		1,577			1,404
Stock-based compensation		617			544
Amortization of debt discounts and issuance costs		138			121
Inventory write-downs		167			60
Loss on disposals of fixed assets		69			133
Foreign currency transaction gains		(102	)		(7	)
Non-cash interest and other operating activities		189			22
Operating cash flow related to repayment of discounted convertible notes		(188	)		—
Changes in operating assets and liabilities, net of effect of business combinations:
Accounts receivable		(150	)		(686	)
Inventory		(485	)		(1,111	)
Operating lease vehicles		(467	)		(189	)
Prepaid expenses and other current assets		(236	)		(31	)
Other non-current assets		46			(62	)
Accounts payable and accrued liabilities		142			1,628
Deferred revenue		625			284
Customer deposits		(114	)		10
Resale value guarantee		(112	)		(58	)
Other long-term liabilities		171			74
Net cash provided by operating activities		980			863
Cash Flows from Investing Activities
Purchases of property and equipment excluding finance leases, net of sales		(915	)		(1,776	)
Purchases of solar energy systems		(68	)		(189	)
Purchase of intangible assets		(5	)		—
Business combinations, net of cash acquired		(45	)		(7	)
Net cash used in investing activities		(1,033	)		(1,972	)
Cash Flows from Financing Activities
Proceeds from issuances of common stock in public offerings		848			—
Proceeds from issuances of convertible and other debt		7,119			3,947
Repayments of convertible and other debt		(5,601	)		(3,111	)
Repayments of borrowings issued to related parties		—			(100	)
Collateralized lease repayments		(302	)		(343	)
Proceeds from exercises of stock options and other stock issuances		167			220
Principal payments on finance leases		(223	)		(106	)
Common stock and debt issuance costs		(32	)		(5	)
Purchase of convertible note hedges		(476	)		—
Proceeds from issuance of warrants		174			—
Proceeds from investments by noncontrolling interests in subsidiaries		153			366
Distributions paid to noncontrolling interests in subsidiaries		(211	)		(179	)
Payments for buy-outs of noncontrolling interests in subsidiaries		(8	)		(3	)
Net cash provided by financing activities		1,608			686
Effect of exchange rate changes on cash and cash equivalents and restricted cash		(6	)		(19	)
Net increase (decrease) in cash and cash equivalents and restricted cash		1,549			(442	)
Cash and cash equivalents and restricted cash, beginning of period		4,277			3,965
Cash and cash equivalents and restricted cash, end of period	$	5,826		$	3,523
Supplemental Non-Cash Investing and Financing Activities
Equity issued in connection with business combination	$	207		$	—
Acquisitions of property and equipment included in liabilities	$	375		$	306
Estimated fair value of facilities under build-to-suit leases	$	—		$	62

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

9

Tesla, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 1 – Overview

Tesla, Inc. (“Tesla”, the “Company”, “we”, “us” or “our”) was incorporated in the State of Delaware on July 1, 2003. We design, develop, manufacture and sell high-performance fully electric vehicles and design, manufacture, install and sell solar energy generation and energy storage products. Our Chief Executive Officer, as the chief operating decision maker (“CODM”), organizes the Company, manages resource allocations and measures performance among two operating and reportable segments: (i) automotive and (ii) energy generation and storage.

Note 2 – Summary of Significant Accounting Policies

Unaudited Interim Financial Statements

The consolidated balance sheet as of September 30, 2019, the consolidated statements of operations, the consolidated statements of comprehensive income (loss) and the consolidated statements of redeemable noncontrolling interests and equity for the three and nine months ended September 30, 2019 and 2018 and the consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, as well as other information disclosed in the accompanying notes, are unaudited. The consolidated balance sheet as of December 31, 2018 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, 2018.

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.

Revenue Recognition

Automotive Sales Revenue

Automotive Sales with and without Resale Value Guarantee

Automotive sales revenue includes revenues related to deliveries of new vehicles, and specific other features and services that meet the definition of a performance obligation include access to our Supercharger network, internet connectivity, Autopilot and Full Self-Driving (“FSD”) features and over-the-air software updates. Deferred revenue related to the access to our Supercharger network, internet connectivity, Autopilot and FSD features and over-the-air software updates on automotive sales with and without resale value guarantee amounted to $1.30 billion and $883 million as of September 30, 2019 and December 31, 2018, respectively. Deferred revenue is equivalent to the total transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, as of the balance sheet date. Revenue recognized from the deferred revenue balance as of December 31, 2018 was $177 million for the nine months ended September 30, 2019. From the deferred revenue balance as of January 1, 2018, revenue recognized during the nine months ended September 30, 2018 was $60 million. Of the total deferred revenue on automotive sales with and without resale value guarantees, we expect to recognize $662 million of revenue in the next 12 months. The remaining balance will be recognized over the various performance periods of the obligations, which is up to the eight-year life of the vehicle.

At the time of revenue recognition, we reduce the transaction price and record a sales return reserve against revenue for estimated variable consideration related to future product returns. Such estimates are based on historical experience. On a quarterly basis, we assess the estimated market values of vehicles under our buyback options program to determine whether there will be changes to future product returns. As we accumulate more data related to the buyback values of our vehicles or as market conditions change, there may be material changes to their estimated values. Due to price adjustments we made to our vehicle offerings during the first half of 2019, we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. As a result, along with the estimated variable consideration related to normal future product returns for vehicles sold under the buyback options program, we adjusted our sales return reserve on vehicles previously sold under our buyback options program resulting in a reduction of automotive sales revenues of $555 million for the nine months ended September 30, 2019. If customers elect to exercise the buyback option, we expect to be able to subsequently resell the returned vehicles, which resulted in a corresponding reduction in cost of automotive sales of $451 million for the nine months ended September 30, 2019. The net impact was $104 million reduction in gross profit for the nine months ended September 30, 2019. The total sales return reserve on vehicles previously sold under our buyback options program was $627 million as of September 30, 2019, of which $80 million was short term.

10

Automotive Regulatory Credits

We recognize revenue on the sale of regulatory credits at the time control of the regulatory credits is transferred to the purchasing party as automotive revenue in the consolidated statements of operations. Deferred revenue related to sales of automotive regulatory credits was $140 million and $0 as of September 30, 2019 and December 31, 2018, respectively. We expect to recognize the deferred revenue as of September 30, 2019 over the next 1 to 3 years.

Automotive Leasing Revenue

Automotive leasing revenue includes revenue recognized under lease accounting guidance for our direct leasing programs as well as the two programs with resale value guarantees described below.

Direct Vehicle Leasing Program

We have outstanding leases under our direct vehicle leasing programs in the U.S., Canada and in certain countries in Europe. As of September 30, 2019, the direct vehicle leasing program is offered for new Model S, Model X vehicles in the U.S. and Canada and for new Model 3 vehicles in the U.S. Qualifying customers are permitted to lease a vehicle directly from Tesla for up to 48 months. At the end of the lease term, customers are required to return the vehicles to us or for Model S and Model X leases, may opt to purchase the vehicles for a pre-determined residual value. We account for these leasing transactions as operating leases. We record leasing revenues to automotive leasing revenue on a straight-line basis over the contractual term, and we record the depreciation of these vehicles to cost of automotive leasing revenue.

We capitalize shipping costs and initial direct costs such as the incremental cost of referral fees and sales commissions from the origination of automotive lease agreements as an element of operating lease vehicles, net, and subsequently amortize these costs over the term of the related lease agreement. Our policy is to exclude taxes collected from a customer from the transaction price of automotive contracts. Total capitalized costs were immaterial as of September 30, 2019.

Vehicle Sales to Leasing Partners with a Resale Value Guarantee and a Buyback Option

We offer buyback options in connection with automotive sales with resale value guarantees with certain leasing partner sales in the United States. These transactions entail a transfer of leases, which we have originated with an end-customer, to our leasing partner. As control of the vehicles has not been transferred, these transactions were accounted for as interest bearing collateralized borrowings in accordance with ASC 840, Leases, prior to January 1, 2019. Under this program, cash is received for the full price of the vehicle and the collateralized borrowing value is generally recorded within resale value guarantees and the customer upfront deposit is recorded within deferred revenue. We amortize the deferred revenue amount to automotive leasing revenue on a straight-line basis over the option 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 revenue 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 (repayments) borrowings within cash flows from financing activities in the consolidated statements of cash flows. With the adoption of ASC 842 on January 1, 2019, all new agreements under this program are accounted for as operating leases under ASC 842 and there was no material change in the timing and amount of revenue recognized over the term. Consequently, any cash flows for new agreements are classified as operating cash activities on 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 buyback option amount or paying a shortfall to the option 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. The end customers can extend the lease for a period of up to 6 months. In cases where the leasing partner retains ownership of the vehicle after the end of our option period, we expense the net value of the leased vehicle to cost of automotive leasing revenue. The maximum amount we could be required to pay under this program, should we decide to repurchase all vehicles, was $291 million and $480 million as of September 30, 2019 and December 31, 2018, respectively, including $254 million within a 12-month period from September 30, 2019. As of September 30, 2019 and December 31, 2018, we had $328 million and $558 million, respectively, of such borrowings recorded in resale value guarantees and $47 million and $93 million, respectively, recorded in deferred revenue liability. For the three and nine months ended September 30, 2019, we recognized $43 million and $146 million, respectively, of leasing revenue related to this program, and $89 million and $257 million, respectively, for the same periods in 2018. The net carrying amount of operating lease vehicles under this program was $265 million and $469 million, respectively, as of September 30, 2019 and December 31, 2018.

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Vehicle Sales to Customers with a Resale Value Guarantee where Exercise is Probable

For certain international programs where we have offered resale value guarantees to certain customers who purchased vehicles and where we expect the customer has a significant economic incentive to exercise the resale value guarantee provided to them, we continue to recognize these transactions as operating leases. The process to determine whether there is a significant economic incentive includes a comparison of a vehicle’s estimated market value at the time the option is exercisable with the guaranteed resale value to determine the customer’s economic incentive to exercise. We have not sold any vehicles under this program since the first half of 2017 and all current period activity relates to the exercise or cancellation of active transactions. 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 cost of automotive leasing revenue. If a customer returns the vehicle to us during the guarantee period, we purchase the vehicle from the customer in an amount equal to the resale value guarantee and settle any remaining deferred balances to automotive leasing revenue, and we reclassify the net book value of the vehicle on the consolidated balance sheets to used vehicle inventory. As of September 30, 2019 and December 31, 2018, $151 million and $150 million, respectively, of the guarantees were exercisable by customers within the next 12 months. For the three and nine months ended September 30, 2019, we recognized $32 million and $117 million, respectively, of leasing revenue related to this program, and $30 million and $107 million, respectively, for the same periods in 2018. The net carrying amount of operating lease vehicles under this program was $113 million and $212 million, respectively, as of September 30, 2019 and December 31, 2018.

Services and Other Revenue

Services and other revenue consists of non-warranty after-sales vehicle services, sales of used vehicles, retail merchandise, and sales by our acquired subsidiaries to third party customers.

Revenues related to repair and maintenance services are recognized over time as services are provided and extended service plans are recognized over the performance period of the service contract as the obligation represents a stand-ready obligation to the customer. We sell used vehicles, services, service plans, vehicle components and merchandise separately and thus use standalone selling prices as the basis for revenue allocation to the extent that these items are sold in transactions with other performance obligations. Payment for used vehicles, services, and merchandise are typically received at the point when control transfers to the customer or in accordance with payment terms customary to the business. Payments received for prepaid plans are refundable upon customer cancellation of the related contracts and are included within customer deposits on the consolidated balance sheet. Deferred revenue related to services and other revenue was immaterial as of September 30, 2019 and December 31, 2018.

Energy Generation and Storage Sales

Energy generation and storage sales revenues consists of the sale of solar energy systems and energy storage systems to residential, small commercial, and large commercial and utility grade customers. Upon adoption of the new lease standard (refer to Leases section below for details), energy generation and storage sales revenues include agreements for solar energy systems and power purchase agreements (“PPAs”) that commence after January 1, 2019, as these are now accounted for under ASC 606. We record as deferred revenue any non-refundable amounts that are collected from customers related to fees charged for prepayments and remote monitoring service and operations and maintenance service, which is recognized as revenue ratably over the respective customer contract term. As of September 30, 2019 and December 31, 2018, deferred revenue related to such customer payments amounted to $141 million and $149 million, respectively. Revenue recognized from the deferred revenue balance as of December 31, 2018 was $27 million for the nine months ended September 30, 2019. Revenue recognized from the deferred revenue balance as of January 1, 2018 was $37 million for the nine months ended September 30, 2018.  We have elected the practical expedient to omit disclosure of the amount of the transaction price allocated to remaining performance obligations for energy generation and storage sales with an original expected contract length of one year or less and the amount that we have the right to invoice when that amount corresponds directly with the value of the performance to date. As of September 30, 2019, total transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied for contracts with an original expected length of more than one year was $102 million. Of this amount, we expect to recognize $5 million in the next 12 months and the remaining over a period up to 28 years.

Deferred revenue also includes the portion of rebates and incentives received from utility companies and various local and state government agencies, which is recognized as revenue over the lease term. As of September 30, 2019 and December 31, 2018, deferred revenue from rebates and incentives amounted to $42 million and $37 million, respectively.

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We capitalize initial direct costs from the execution of agreements for solar energy systems and PPAs, which include the referral fees and sales commissions, as an element of solar energy systems, net, and subsequently amortize these costs over the term of the related agreements.

Revenue by source

The following table disaggregates our revenue by major source (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019			2018
Automotive sales without resale value guarantee	$	4,821	$	5,297	$	13,423		$	10,178
Automotive sales with resale value guarantee (1)		177		392		(75	)		1,056
Automotive regulatory credits		134		189		461			324
Energy generation and storage sales (2)		241		259		680			791
Services and other		548		326		1,646			860
Total revenues from sales and services		5,921		6,463		16,135			13,209
Automotive leasing		221		221		644			634
Energy generation and storage leasing (2)		161		140		415			392
Total revenues	$	6,303	$	6,824	$	17,194		$	14,235

(1) We made pricing adjustments to our vehicle offerings during the nine months ended September 30, 2019, which resulted in a reduction of automotive sales with resale value guarantee revenues. Refer to Automotive Sales with and without Resale Value Guarantee section above for details. The amount presented represents automotive sales with resale value guarantee in the three and nine months ended September 30, 2019 net of such pricing adjustments impact.

(2) Following the adoption of ASU No. 2016-02, Leases, solar energy system sales and PPAs that commence after January 1, 2019, where we are the lessor and were previously accounted for as leases, will no longer meet the definition of a lease and will instead be accounted for in accordance with ASC 606 (refer to the Leases section below for details).

Leases

In February 2016, the FASB issued ASU No. 2016-02 (“ASC 842”), Leases, to require lessees to recognize all leases, with certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, ASU No. 2018-11, Targeted Improvements, ASU No. 2018-20, Narrow-Scope Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify and amend the guidance in ASU No. 2016-02. ASC 842 eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. This standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We adopted ASC 842 as of January 1, 2019 using the cumulative effect adjustment approach (“adoption of the new lease standard”). In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to carry forward the historical determination of contracts as leases, lease classification and not reassess initial direct costs for historical lease arrangements. Accordingly, previously reported financial statements, including footnote disclosures, have not been recast to reflect the application of the new standard to all comparative periods presented. The finance lease classification under ASC 842 includes leases previously classified as capital leases under ASC 840.

Agreements for solar energy system leases and PPAs (solar leases) that commence after January 1, 2019, where we are the lessor and would have been accounted for as operating leases no longer meet the definition of a lease upon the adoption of ASC 842 and will instead be accounted for in accordance with ASC 606. Under these two types of arrangements, the customer is not responsible for the design of the energy system but rather approved the energy system benefits in terms of energy capacity and production to be received over the term. Accordingly, the revenue from solar leases commencing after January 1, 2019 are now recognized as earned, based on the amount of capacity provided or electricity delivered at the contractual billing rates, assuming all other revenue recognition criteria have been met. Under the practical expedient available under ASC 606-10-55-18, we recognize revenue based on the value of the service which is consistent with the billing amount. There is no change to the amount and timing of revenue recognition for solar lease arrangements.

We have lease agreements with lease and non-lease components, and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component, from both a lessee and lessor perspective. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease. Additionally, we have determined that the leases previously identified as build-to-suit leasing arrangements under legacy lease accounting (ASC 840), were derecognized pursuant to the transition guidance provided for build-to-suit leases in ASC 842. Accordingly, these leases have been reassessed as operating leases as of the adoption date under ASC 842, and are included on the consolidated balance sheet as of September 30, 2019.

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Operating lease assets are included within operating lease right-of-use assets, and the corresponding operating lease liabilities are included within accrued liabilities and other for the current portion, and within other long-term liabilities for the long-term portion on our consolidated balance sheet as of September 30, 2019. Finance lease assets are included within property, plant and equipment, net, and the corresponding finance lease liabilities are included within current portion of long-term debt and finance leases for the current portion, and within long-term debt and finance leases, net of current portion for the long-term portion on our consolidated balance sheet as of September 30, 2019.

We have elected not to present short-term leases on the consolidated balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments.

Adoption of the new lease standard on January 1, 2019 had a material impact on our interim unaudited consolidated financial statements. The most significant impacts related to the (i) recognition of right-of-use ("ROU") assets of $1.29 billion and lease liabilities of $1.24 billion for operating leases on the consolidated balance sheet, and (ii) de-recognition of build-to-suit lease assets and liabilities of $1.62 billion and $1.74 billion, respectively, with the net impact of $97 million recorded to accumulated deficit, as of January 1, 2019. We also reclassified prepaid expenses and other current asset balances of $142 million and deferred rent balance, including tenant improvement allowances, and other liability balances of $70 million relating to our existing lease arrangements as of December 31, 2018, into the ROU asset balance as of January 1, 2019. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. The standard did not materially impact our consolidated statement of operations and consolidated statement of cash flows.

The cumulative effect of the changes made to our consolidated balance sheet as of January 1, 2019 for the adoption of the new lease standard was as follows (in millions):

	Balances at December 31, 2018			Adjustments from Adoption of New Lease Standard			Balances at January 1, 2019
Assets
Prepaid expenses and other current assets	$	366		$	0		$	366
Property, plant and equipment, net		11,330			(1,617	)		9,713
Operating lease right-of-use assets		—			1,286			1,286
Other assets		572			(141	)		431
Liabilities
Accrued liabilities and other		2,094			118			2,212
Current portion of long-term debt and finance leases		2,568			—			2,568
Long-term debt and finance leases, net of current portion		9,404			—			9,404
Other long-term liabilities		2,710			(687	)		2,023
Equity
Accumulated deficit		(5,318	)		97			(5,221	)

Income Taxes

There are transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. As of September 30, 2019 and December 31, 2018, the aggregate balances of our gross unrecognized tax benefits were $303 million and $253 million, respectively, of which $280 million and $244 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.

On June 7, 2019, the Ninth Circuit Court of Appeals issued a new opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation. This opinion reversed the prior decision of the United States Tax Court.  We do not expect this to have an impact on our consolidated financial statements.  

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Net Income (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. During the nine months ended September 30, 2019, we increased net loss attributable to common stockholders by $8 million to arrive at the numerator used to calculate net loss per share. This adjustment represents the difference between the cash we paid to a financing fund investor for their noncontrolling interest in one of our subsidiaries and the carrying amount of the noncontrolling interest on our consolidated balance sheet, in accordance with ASC 260, Earnings per Share. 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 intend to settle in cash the principal outstanding under the 1.25% Convertible Senior Notes due in 2021, the 2.375% Convertible Senior Notes due in 2022 and the 2.00% Convertible Senior Notes due in 2024, we use the treasury stock method when calculating their potential dilutive effect, if any. Furthermore, in connection with the offerings of our notes, we entered into convertible note hedges (see Note 11, Long-Term Debt Obligations). However, our convertible note hedges are not included when calculating potentially dilutive shares since their effect is always anti-dilutive.

The following table presents the computation of basic and diluted net income (loss) per share of common stock attributable to common stockholders (in millions, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019			2018
Net income (loss) per share of common stock    attributable to common stockholders, basic
Net income (loss) attributable to common stockholders	$	143	$	311	$	(967	)	$	(1,116	)
Less: Buy-out of noncontrolling interest		—		—		8			—
Net income (loss) used in computing net income    (loss) per share of common stock, basic		143		311		(975	)		(1,116	)
Weighted average shares used in computing net    income (loss) per share of common stock, basic		179		171		176			170
Net income (loss) per share of common stock    attributable to common stockholders, basic	$	0.80	$	1.82	$	(5.54	)	$	(6.56	)
Net income (loss) per share of common stock    attributable to common stockholders, diluted
Net income (loss) attributable to common stockholders	$	143	$	311	$	(967	)	$	(1,116	)
Less: Buy-out of noncontrolling interest		—		—		8			—
Net income (loss) used in computing net income    (loss) per share of common stock, diluted		143		311		(975	)		(1,116	)
Weighted average shares used in computing net    income (loss) per share of common stock, basic		179		171		176			170
Add:
Stock-based awards		5		7		—			—
Warrants		—		0		—			—
Weighted average shares used in computing net    income (loss) per share of common stock, diluted		184		178		176			170
Net income (loss) per share of common stock    attributable to common stockholders, diluted	$	0.78	$	1.75	$	(5.54	)	$	(6.56	)

The following table presents the potentially dilutive shares that were excluded from the computation of diluted net loss per share of common stock attributable to common stockholders, because their effect was anti-dilutive (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Stock-based awards		7		3		12		10
Convertible senior notes		1		1		1		2

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Restricted Cash

We maintain certain cash balances restricted as to withdrawal or use. Our restricted cash is comprised primarily of cash as collateral for our sales to lease partners with a resale value guarantee, letters of credit, real estate leases, insurance policies, credit card borrowing facilities and certain operating leases. In addition, restricted cash includes cash received from certain fund investors that have not been released for use by us and cash held to service certain payments under various secured debt facilities. The following table totals cash and cash equivalents and restricted cash as reported on the consolidated balance sheets; the sums are presented on the consolidated statements of cash flows (in millions):

	September 30,		December 31,		September 30,		December 31,
	2019		2018		2018		2017
Cash and cash equivalents	$	5,338	$	3,686	$	2,967	$	3,368
Restricted cash		233		193		159		155
Restricted cash, net of current portion		255		398		397		442
Total as presented in the consolidated statements of cash flows	$	5,826	$	4,277	$	3,523	$	3,965

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, convertible note hedges, 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 U.S. These deposits are typically in excess of insured limits. As of September 30, 2019 and December 31, 2018, no entity 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.

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.

Operating Lease Vehicles

Vehicles that are leased as part of our direct vehicle leasing program, vehicles delivered to leasing partners with a resale value guarantee and a buyback option, as well as vehicles delivered to customers with resale value guarantee where exercise is probable are classified as operating lease vehicles as the related revenue transactions are treated as operating leases (refer to the Resale Value Guarantees Financing Programs under ASC 842 section above for details). Operating lease vehicles are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the expected operating lease term. The total cost of operating lease vehicles recorded on the consolidated balance sheets as of September 30, 2019 and December 31, 2018 was $2.67 billion and $2.55 billion, respectively. Accumulated depreciation related to leased vehicles as of September 30, 2019 and December 31, 2018 was $414 million and $458 million, respectively.

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Warranties

We provide a manufacturer’s warranty on all new and used vehicles, production powertrain components and systems and energy storage products we sell. In addition, we also provide a warranty on the installation and components of the solar energy systems we sell for periods typically between 10 to 30 years. We accrue a warranty reserve for the products sold by us, which includes our best estimate of the projected costs to repair or replace items under warranties and recalls when identified. 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 PPAs, as the costs to repair these warranty claims are expensed as incurred. The portion of the warranty reserve expected to be incurred within the next 12 months is included within accrued liabilities and other while the remaining balance is included within other long-term liabilities on the consolidated balance sheets. Warranty expense is recorded as a component of cost of revenues in the consolidated statements of operations. Due to the magnitude of our automotive business, accrued warranty balance as of September 30, 2019 was primarily related to our automotive segment. Accrued warranty activity consisted of the following (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Accrued warranty—beginning of period	$	941		$	524		$	748		$	402
Warranty costs incurred		(59	)		(54	)		(175	)		(148	)
Net changes in liability for pre-existing warranties, including    expirations and foreign exchange impact		(37	)		(13	)		36			(24	)
Additional warranty accrued from adoption of the new revenue    standard		—			—			—			37
Provision for warranty		138			187			374			377
Accrued warranty—end of period	$	983		$	644		$	983		$	644

For the three and nine months ended September 30, 2019, warranty costs incurred for vehicles accounted for as operating leases or collateralized debt arrangements were $4 million and $16 million, respectively, and for the three and nine months ended September 30, 2018, such costs were $5 million and $17 million, respectively.

Recent Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, to require financial assets carried at amortized cost to be presented at the net amount expected to be collected based on historical experience, current conditions and forecasts. Subsequently, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables arising from operating leases are within the scope of lease accounting standards. Further, the FASB issued ASU No. 2019-04 and ASU No. 2019-05 to provide additional guidance on the credit losses standard. The ASUs are effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Adoption of the ASUs is on a modified retrospective basis. We are currently obtaining an understanding of the ASUs and plan to adopt them on January 1, 2020.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, to simplify the test for goodwill impairment by removing Step 2. An entity will, therefore, perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to the reporting unit. An entity still has the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary. 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 plan to adopt the ASU prospectively on January 1, 2020. The ASU is currently not expected to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that Is a Service Contract. The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Adoption of the ASU is either retrospective or prospective. We plan to adopt the ASU prospectively on January 1, 2020. The ASU is currently not expected to have a material impact on our consolidated financial statements.

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Recently adopted accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases, to require lessees to recognize all leases, with limited exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to legacy lease accounting, ASC 840. The ASU also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, ASU No. 2018-11, Targeted Improvements, ASU No. 2018-20, Narrow-Scope Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify and amend the guidance in ASU No. 2016-02. We adopted the ASUs on January 1, 2019 on a modified retrospective basis through a cumulative adjustment to our beginning accumulated deficit balance. Prior comparative periods have not been recast under this method, and we adopted all available practical expedients, as applicable. Further, solar leases that commence on or after January 1, 2019, where we are the lessor and which were accounted for as leases under ASC 840, will no longer meet the definition of a lease. Instead, solar leases commencing on or after January 1, 2019 will be accounted for under ASC 606. In addition to recognizing operating leases that were previously not recognized on the consolidated balance sheet, our build-to-suit leases were also de-recognized with a net decrease of approximately $97 million to our beginning accumulated deficit after income tax effects, as our build-to-suit leases no longer qualify for build-to-suit accounting and are instead recognized as operating leases. Upon adoption, our consolidated balance sheet include an overall reduction in assets of $473 million and a reduction in liabilities of $570 million. The adoption of the ASUs did not have a material impact on the consolidated statement of operations or the consolidated statement of cash flows.

In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, to simplify the application of current hedge accounting guidance. The ASU expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. We adopted the ASU prospectively on January 1, 2019, and the ASU did not have a material impact on the consolidated financial statements.

In January 2018, the FASB issued ASU No. 2018-01, Land Easement Practical Expedient Transition to Topic 842, to permit an entity to elect a practical expedient to not re-evaluate land easements that existed or expired before the entity’s adoption of ASU No. 2016-02, Leases, and that were not accounted for as leases. The ASU did not have a material impact on the consolidated financial statements.

Note 3 – Business Combinations

Maxwell Acquisition

On May 16, 2019 (the “Acquisition Date”), we completed our strategic acquisition of Maxwell Technologies, Inc. (“Maxwell”), an energy storage and power delivery products company, for its complementary technology and workforce. Pursuant to the related Agreement and Plan of Merger (the “Merger Agreement”), each issued and outstanding share of Maxwell common stock was converted into 0.0193 (the “Exchange Ratio”) shares of our common stock. In addition, Maxwell’s stock option awards and restricted stock unit awards were assumed by us and converted into corresponding equity awards in respect of our 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 Purchase Consideration

The Acquisition Date fair value of the purchase consideration was $207 million (902,968 shares issued at $229.49 per share, the opening price of our common stock on the Acquisition Date).

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 based on their estimated fair values as of the Acquisition Date.  

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 materially 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. During the third quarter of 2019, we finalized our estimate of the Acquisition Date fair values of the assets acquired and the liabilities assumed and there were no changes to the fair values of the assets acquired and the liabilities assumed.  

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The 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 millions):

Assets acquired:
Cash and cash equivalents	$	32
Accounts receivable		24
Inventory		32
Property, plant and equipment		27
Operating lease right-of-use assets		10
Intangible assets		105
Prepaid expenses and other assets, current and non-current		3
Total assets acquired		233
Liabilities and equity assumed:
Accounts payable		(10	)
Accrued liabilities and other		(28	)
Debt and financial leases, current and non-current		(44	)
Deferred revenue, current		(1	)
Other long-term liabilities		(14	)
Additional paid-in capital		(8	)
Total liabilities and equity assumed		(105	)
Net assets acquired		128
Goodwill		79
Total purchase price	$	207

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 integrating Maxwell’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, we assess goodwill for impairment annually in the fourth quarter, 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.

Identifiable Intangible Assets Acquired

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

	Fair Value		Useful Life (in years)
Developed technology	$	102		9
Customer relations		2		9
Trade name		1		10
Total intangible assets	$	105

Maxwell’s results of operations since the Acquisition Date have been included within the automotive segment. Standalone and pro forma results of operations have not been presented because they were not material to the consolidated financial statements.

Other Acquisitions

During the nine months ended September 30, 2019, we completed various other acquisitions generally for the related technology and workforce. Total consideration for these acquisitions was $96 million, of which $80 million was paid in cash. In aggregate, $36 million was attributed to intangible assets, $41 million was attributed to goodwill within the automotive segment, and $19 million was attributed to net assets assumed. Goodwill is not deductible for U.S. income tax purposes. The identifiable intangible assets were related to purchased technology, with estimated useful lives of one to nine years.

Standalone and pro forma results of operations have not been presented because they were not material to the consolidated financial statements, either individually or in aggregate.

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Note 4 – Goodwill and Intangible Assets

Goodwill increased $118 million from $68 million as of December 31, 2018 to $186 million as of September 30, 2019 primarily due to completed business combinations during the nine months ended September 30, 2019 (see Note 3, Business Combinations).

Information regarding our intangible assets including assets recognized from our acquisitions was as follows (in millions):

	September 30, 2019										December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Other			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Other			Net Carrying Amount
Finite-lived intangible assets:
Developed technology	$	291	$	(62	)	$	0		$	229	$	152	$	(40	)	$	1		$	113
Trade names		3		(1	)		0			2		45		(44	)		0			1
Favorable contracts and leases, net		113		(22	)		—			91		113		(17	)		—			96
Other		38		(14	)		0			24		36		(12	)		1			25
Total finite-lived intangible assets		445		(99	)		—			346		346		(113	)		2			235
Indefinite-lived intangible assets:
Gigafactory 1 water rights		5		—			—			5		—		—			—			—
In-process research and     development (“IPR&D”)		60		—			(60	)		—		60		—			(13	)		47
Total indefinite-lived intangible    assets		65		—			(60	)		5		60		—			(13	)		47
Total intangible assets	$	510	$	(99	)	$	(60	)	$	351	$	406	$	(113	)	$	(11	)	$	282

In April 2019, the Company determined to abandon further development efforts on the IPR&D and therefore impaired the remaining $47 million in the quarter ended June 30, 2019, in restructuring and other expenses.

Total future amortization expense for intangible assets was estimated as follows (in millions):

Three months ending December 31, 2019	$	13
2020		50
2021		49
2022		48
2023		42
Thereafter		144
Total	$	346

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 millions):

	September 30, 2019										December 31, 2018
	Fair Value			Level I		Level II			Level III		Fair Value			Level I		Level II			Level III
Money market funds (cash and    cash equivalents & restricted cash)	$	1,413		$	1,413	$	—		$	—	$	1,813		$	1,813	$	—		$	—
Interest rate swap asset		1			—		1			—		12			—		12			—
Interest rate swap liability		(41	)		—		(41	)		—		(1	)		—		(1	)		—
Total	$	1,373		$	1,413	$	(40	)	$	—	$	1,824		$	1,813	$	11		$	—

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All of our money market funds 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 nine months ended September 30, 2019, 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 millions):

	September 30, 2019						December 31, 2018
	Aggregate Notional Amount		Gross Asset at Fair Value		Gross Liability at Fair Value		Aggregate Notional Amount		Gross Asset at Fair Value		Gross Liability at Fair Value
Interest rate swaps	$	987	$	1	$	41	$	800	$	12	$	1

Our interest rate swaps activity was as follows (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Gross gains	$	—	$	5	$	—	$	18
Gross losses	$	13	$	—	$	51	$	1

Disclosure of Fair Values

Our financial instruments that are not re-measured at fair value include accounts receivable, MyPower customer notes receivable, rebates receivable, accounts payable, accrued liabilities, customer deposits, participation interest and debt. The carrying values of these financial instruments other than the participation interest, the convertible senior notes, the 5.30% Senior Notes due in 2025, the solar asset-backed notes, the solar loan-backed notes and the automotive asset-backed notes approximate their fair values.

We estimate the fair value of the convertible senior notes and the 5.30% Senior Notes due in 2025 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 values of the participation interest, the solar asset-backed notes, the solar loan-backed notes and the automotive asset-backed notes 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 millions):

	September 30, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Convertible senior notes	$	4,207	$	4,867	$	3,661	$	4,347
Senior notes	$	1,781	$	1,620	$	1,779	$	1,575
Participation interest	$	20	$	20	$	19	$	18
Solar asset-backed notes	$	1,159	$	1,205	$	1,183	$	1,207
Solar loan-backed notes	$	175	$	189	$	203	$	212
Automotive asset-backed notes	$	829	$	835	$	1,172	$	1,180

Note 6 – Inventory

Our inventory consisted of the following (in millions):

	September 30,		December 31,
	2019		2018
Raw materials	$	1,284	$	932
Work in process		335		297
Finished goods		1,583		1,581
Service parts		379		303
Total	$	3,581	$	3,113

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

For solar energy systems, we commence transferring component parts from inventory to construction in progress, a component of solar energy systems, 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 and nine months ended September 30, 2019, we recorded write-downs of $24 million and $113 million, respectively, in cost of revenues. During the three and nine months ended September 30, 2018, we recorded write-downs of $12 million and $54 million, respectively, in cost of revenues.

Note 7 – Solar Energy Systems, Net

Solar energy systems, net, consisted of the following (in millions):

	September 30,			December 31,
	2019			2018
Solar energy systems in service	$	6,649		$	6,431
Initial direct costs related to customer solar energy    system lease acquisition costs		102			99
		6,751			6,530
Less: accumulated depreciation and amortization		(666	)		(496	)
		6,085			6,034
Solar energy systems under construction		23			68
Solar energy systems pending interconnection		60			169
Solar energy systems, net (1)	$	6,168		$	6,271

(1) As of September 30, 2019 and December 31, 2018, solar energy systems, net, included $36 million of finance leased assets with accumulated depreciation and amortization of $5 million and $4 million, respectively.

Note 8 – Property, Plant and Equipment

Our property, plant and equipment, net, consisted of the following (in millions):

	September 30,			December 31,
	2019			2018
Machinery, equipment, vehicles and office furniture	$	7,007		$	6,329
Tooling		1,477			1,398
Leasehold improvements		1,029			961
Land and buildings		2,956			4,047
Computer equipment, hardware and software		549			487
Construction in progress		700			807
		13,718			14,029
Less: Accumulated depreciation		(3,528	)		(2,699	)
Total	$	10,190		$	11,330

As of December 31, 2018, the table above included $1.69 billion of gross build-to-suit lease assets. As a result of the adoption of the new lease standard on January 1, 2019, we have de-recognized all build-to-suit lease assets and have reassessed these leases to be operating lease right-of-use assets within the consolidated balance sheet as of September 30, 2019 (see Note 2, Summary of Significant Accounting Policies). This includes construction in progress associated with certain build-to-suit lease costs incurred at our Buffalo, New York manufacturing facility, referred to as Gigafactory 2.

Construction in progress is primarily comprised of tooling and equipment related to the manufacturing of our products and Gigafactory Shanghai construction. Completed assets are transferred to their respective asset classes, and depreciation begins when an asset is ready for its intended use.  Interest on outstanding debt is capitalized during periods of significant capital asset construction and amortized over the useful lives of the related assets. During the three and nine months ended September 30, 2019, we capitalized $6 million and $21 million, respectively, of interest. During the three and nine months ended September 30, 2018, we capitalized $12 million and $47 million, respectively, of interest.

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Depreciation expense during the three and nine months ended September 30, 2019 was $353 million and $987 million, respectively. Depreciation expense during the three and nine months ended September 30, 2018 was $300 million and $797 million, respectively. Gross property and equipment under finance leases as of September 30, 2019 and December 31, 2018 was $1.98 billion and $1.52 billion, respectively. Accumulated depreciation on property and equipment under finance leases as of these dates was $406 million and $232 million, respectively.

Panasonic has partnered with us on Gigafactory 1 with investments in the production equipment that it uses to manufacture and supply us with battery cells. Under our arrangement with Panasonic, we plan to purchase the full output from their production equipment at negotiated prices. As these terms convey a finance lease, as defined in ASC 842, Leases, their production equipment, we consider them to be leased assets when production commences. This results in us recording the cost of their production equipment within property, plant and equipment, net, on the consolidated balance sheets with a corresponding liability recorded to long-term debt and finance leases. For all suppliers and partners for which we plan to purchase the full output from their production equipment located at Gigafactory 1, we have applied similar accounting. As of September 30, 2019 and December 31, 2018, we had cumulatively capitalized costs of $1.65 billion and $1.24 billion, respectively, on the consolidated balance sheets in relation to the production equipment under our Panasonic arrangement. We had cumulatively capitalized total costs for Gigafactory 1, including costs under our Panasonic arrangement, of $5.15 billion and $4.62 billion as of September 30, 2019 and December 31, 2018, respectively.

Note 9 – Other Long-Term Liabilities

Other long-term liabilities consisted of the following (in millions):

	September 30,		December 31,
	2019		2018
Accrued warranty reserve	$	692	$	547
Build-to-suit lease liability		—		1,662
Operating lease right-of-use liabilities		1,028		—
Deferred rent expense		—		59
Financing obligation		42		50
Sales return reserve	547			84
Other noncurrent liabilities		367		308
Total other long-term liabilities	$	2,676	$	2,710

As of December 31, 2018, the table above included $1.66 billion of gross non-current build-to-suit lease liabilities. As a result of the adoption of the new lease standard on January 1, 2019, we have de-recognized all build-to-suit lease liabilities and have reassessed these leases to be operating lease right-of-use liabilities as of September 30, 2019. Due to price adjustments we made to our vehicle offerings during the nine months ended September 30, 2019, we increased our sales return reserve significantly on vehicles previously sold under our buyback options program. Refer to Note 2, Summary of Significant Accounting Policies, for details on these transactions.

Note 10 – Customer Deposits

Customer deposits primarily consisted of cash payments from customers at the time they place an order or reservation for a vehicle or an energy product and any additional payments up to the point of delivery or the completion of installation, including the fair values of any customer trade-in vehicles that are applicable toward a new vehicle purchase. Customer deposits also include prepayments on contracts that can be cancelled without significant penalties, such as vehicle maintenance plans. Customer deposit amounts and timing vary depending on the vehicle model, the energy product and the country of delivery. In the case of a vehicle, customer deposits are fully refundable up to the point the vehicle is placed into the production cycle. In the case of an energy generation or storage product, customer deposits are fully refundable prior to the entry into a purchase agreement or in certain cases for a limited time thereafter (in accordance with applicable laws). Customer deposits are included in current liabilities until refunded or until they are applied towards the customer’s purchase balance. As of September 30, 2019 and December 31, 2018, we held $665 million and $793 million, respectively, in customer deposits.

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Note 11 – Long-Term Debt Obligations

The following is a summary of our debt as of September 30, 2019 (in millions):

	Unpaid						Unused
	Principal		Net Carrying Value				Committed		Contractual			Contractual
	Balance		Current		Long-Term		Amount (1)		Interest Rates			Maturity Date
Recourse debt:
1.25% Convertible Senior Notes due in 2021    ("2021 Notes")		1,380		—		1,289		—		1.25	%	March 2021
2.375% Convertible Senior Notes due in 2022    ("2022 Notes")		978		—		894		—		2.375	%	March 2022
2.00% Convertible Senior Notes due in 2024    ("2024 Notes")		1,840		—		1,361		—		2.00	%	May 2024
5.30% Senior Notes due in 2025    ("2025 Notes")		1,800		—		1,781		—		5.30	%	August 2025
Credit Agreement		1,827		149		1,678		413	3.0% -5.0%			June 2020-July 2023
1.625% Convertible Senior Notes due in 2019		566		567		—		—		1.625	%	November 2019
Zero-Coupon Convertible Senior Notes due in    2020		103		—		96		—		0.0	%	December 2020
Solar Bonds and other Loans		70		15		52		—	3.6%-5.8%			March 2020-January 2031
Total recourse debt		8,564		731		7,151		413
Non-recourse debt:
Warehouse Agreements		586		79		507		514	3.5%-3.7%			September 2021
Canada Credit Facility		47		25		22		—	4.1%-5.9%			November 2022
Term Loan due in 2019		159		159		—		—		6.3	%	December 2019
Term Loan due in 2021		164		8		155		—		5.8	%	January 2021
Solar Revolving Credit Facility		50		—		50		—		6.0	%	June 2022
China Loan Agreements		219		219		—		924		3.9	%	March 2020-September 2020
Cash equity debt		460		9		437		—	5.3%-5.8%			July 2033-January 2035
Solar asset-backed notes		1,187		34		1,125		—	4.0%-7.7%			September 2024-February 2048
Solar loan-backed notes		182		11		164		—	4.8%-7.5%			September 2048-September 2049
Automotive asset-backed notes		832		345		484		—	2.3%-7.9%			December 2019-June 2022
Solar Renewable Energy Credit and    other Loans		25		23		1		9	5.1%-7.9%			December 2019-July 2021
Total non-recourse debt		3,911		912		2,945		1,447
Total debt	$	12,475	$	1,643	$	10,096	$	1,860

The following is a summary of our debt as of December 31, 2018 (in millions):

	Unpaid						Unused
	Principal		Net Carrying Value				Committed		Contractual			Contractual
	Balance		Current		Long-Term		Amount (1)		Interest Rates			Maturity Date
Recourse debt:
0.25% Convertible Senior Notes due in 2019    ("2019 Notes")		920		913		—		—		0.25	%	March 2019
2021 Notes		1,380		—		1,244		—		1.25	%	March 2021
2022 Notes		978		—		871		—		2.375	%	March 2022
2025 Notes		1,800		—		1,779		—		5.30	%	August 2025
Credit Agreement		1,540		—		1,540		231	1% plus LIBOR			June 2020
1.625% Convertible Senior Notes due in 2019		566		541		—		—		1.625	%	November 2019
Zero-Coupon Convertible Senior Notes due in    2020		103		—		92		—		0.0	%	December 2020
Vehicle, Solar Bonds and other Loans		101		1		100		—	1.8%-7.6%			January 2019-January 2031
Total recourse debt		7,388		1,455		5,626		231
Non-recourse debt:
Warehouse Agreements		92		14		78		1,008	3.9%-4.2%			September 2020
Canada Credit Facility		73		32		41		—	3.6%-5.9%			November 2022
Term Loan due in 2019		181		181		—		—		6.1	%	January 2019
Term Loan due in 2021		169		7		162		—		6.0	%	January 2021
Cash equity debt		467		11		442		—	5.3%-5.8%			July 2033-January 2035
Solar asset-backed notes		1,214		28		1,155		—	4.0%-7.7%			September 2024-February 2048
Solar loan-backed notes		210		10		193		—	4.8%-7.5%			September 2048-September 2049
Automotive asset-backed notes		1,178		468		704		—	2.3%-7.9%			December 2019-June 2022
Solar Renewable Energy Credit and    other Loans		27		16		10		18	5.1%-7.9%			December 2019-July 2021
Total non-recourse debt		3,611		767		2,785		1,026
Total debt	$	10,999	$	2,222	$	8,411	$	1,257

(1) Unused committed amounts under some of our credit facilities and financing funds are subject to satisfying specified conditions prior to draw-down (such as pledging to our lenders sufficient amounts of qualified receivables, inventories, leased vehicles and our interests in those leases, solar energy systems and the associated customer contracts, our interests in financing funds or various other assets). Upon draw-down of any unused committed amounts, there are no restrictions on use of available funds for general corporate purposes.

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Recourse debt refers to debt that is recourse to our general assets. Non-recourse debt refers to debt that is recourse to only specified assets of our subsidiaries. The differences between the unpaid principal balances and the net carrying values are due to convertible senior note conversion features, debt discounts or deferred financing costs. As of September 30, 2019, we were in material compliance with all financial debt covenants, which include minimum liquidity and expense-coverage balances and ratios.

2019 Notes

During the first quarter of 2019, we repaid the $920 million in aggregate principal amount of the 2019 Notes.

2024 Notes, Bond Hedges and Warrant Transactions

In May 2019, we issued $1.84 billion in aggregate principal amount of 2.00% Convertible Senior Notes due in May 2024 in a public offering. The net proceeds from the issuance, after deducting transaction costs, were $1.82 billion.

Each $1,000 of principal of the 2024 Notes is initially convertible into 3.2276 shares of our common stock, which is equivalent to an initial conversion price of $309.83 per share, subject to adjustment upon the occurrence of specified events. Holders of the 2024 Notes may convert, at their option, on or after February 15, 2024. Further, holders of the 2024 Notes may convert, at their option, prior to February 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2019 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each trading day; (2) during the five-business day period after any five-consecutive trading day period in which the trading price per $1,000 principal amount of the 2024 Notes for each trading day of such period is less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day, or (3) if specified corporate events occur. Upon conversion, the 2024 Notes will be settled in cash, shares of our common stock or a combination thereof, at our election. If a fundamental change occurs prior to the maturity date, holders of the 2024 Notes may require us to repurchase all or a portion of their 2024 Notes for cash at a repurchase price equal to 100% of the principal amount plus any accrued and unpaid interest. In addition, if specific corporate events occur prior to the maturity date, we would increase the conversion rate for a holder who elects to convert its 2024 Notes in connection with such an event in certain circumstances. As of September 30, 2019, none of the conditions permitting the holders of the 2024 Notes to early convert had been met. Therefore, the 2024 Notes are classified as long-term.

In accordance with GAAP relating to embedded conversion features, we initially valued and bifurcated the conversion feature associated with the 2024 Notes. We recorded to stockholders’ equity $491 million for the conversion feature. The resulting debt discount is being amortized to interest expense at an effective interest rate of 8.68%.

In connection with the offering of the 2024 Notes, we entered into convertible note hedge transactions whereby we have the option to purchase initially (subject to adjustment for certain specified events) 6 million shares of our common stock at a price of $309.83 per share. The cost of the convertible note hedge transactions was $476 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) 6 million shares of our common stock at a price of $607.50 per share. We received $174 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and the sale of the warrants are intended to reduce potential dilution from the conversion of the 2024 Notes and to effectively increase the overall conversion price from $309.83 to $607.50 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheet.

Credit Agreement

In March 2019, we amended and restated the senior asset-based revolving credit agreement (the “Credit Agreement”) to increase the total lender commitments by $500 million to $2.425 billion, and extend the term of substantially all of the total commitments to July 2023.

Warehouse Agreements

In August 2019, our subsidiaries amended the vehicle lease-backed loan and security agreements (the “Warehouse Agreements”) to extend the availability period from August 16, 2019 to August 14, 2020 and extend the maturity date from September 2020 to September 2021.

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China Loan Agreements

In March 2019, one of our subsidiaries entered into a loan agreement with a syndicate of lenders in China for an unsecured facility of up to RMB 3.50 billion (or the equivalent amount drawn in U.S. dollars), to be used for expenditures related to the construction of and production at our Gigafactory Shanghai. Borrowed funds bear interest at an annual rate of: (i) for RMB-denominated loans, 90% of the one-year rate published by the People’s Bank of China, and (ii) for U.S. dollar-denominated loans, the sum of one-year LIBOR plus 1.0%. The loan facility is non-recourse to our assets.

In September 2019, one of our subsidiaries entered into a loan agreement with a lender in China for an unsecured 12-month revolving facility of up to RMB 5.00 billion (or the equivalent drawn in U.S. dollars), to finance vehicles in-transit to China. Borrowed funds bear interest at an annual rate no greater than 90% of the one-year rate published by the People’s Bank of China. The loan facility is non-recourse to our assets.

Solar Revolving Credit Facility

In June 2019, one of our subsidiaries entered into a loan agreement with a bank for a revolving credit facility of up to $50 million. The solar revolving credit facility bears interest at an annual rate of 2.50% plus: (i) for LIBOR loans, at our option, three-month LIBOR or daily LIBOR and (ii) for Base Rate loans, the highest of (a) the Federal Funds Rate plus 0.50%, (b) the Prime Rate, and (c) the three-month LIBOR plus 1.00%.The solar revolving credit facility is secured by certain assets of the subsidiary and was non-recourse to our other assets. 

Term Loan due in 2019

In April 2019, we extended the maturity date of the Term Loan due in 2019 to June 2019. In June 2019, we further extended the maturity date of the Term Loan due in 2019 to December 2019.

Interest Incurred

The following table presents the interest expense related to the contractual interest coupon, the amortization of debt issuance costs and the amortization of debt discounts on our convertible senior notes with cash conversion features, which include the 2018 Notes, the 2019 Notes, the 2021 Notes, the 2022 Notes and the 2024 Notes (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Contractual interest coupon	$	19	$	11	$	45	$	32
Amortization of debt issuance costs		2		2		5		5
Amortization of debt discounts		43		31		104		92
Total	$	64	$	44	$	154	$	129

Note 12 – Leases

We have entered into various non-cancellable operating and finance lease agreements for certain of our offices, manufacturing and warehouse facilities, retail and service locations, equipment, vehicles, and solar energy systems, worldwide. We determine if an arrangement is a lease, or contains a lease, at inception and record the leases in our financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor.

Our leases, where we are the lessee, often include options to extend the lease term for up to 10 years. Some of our leases also include options to terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.

Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Certain operating leases provide for annual increases to lease payments based on an index or rate. We calculate the present value of future lease payments based on the index or rate at the lease commencement date for new leases commencing after January 1, 2019. For historical leases, we used the index or rate as of the adoption date. Differences between the calculated lease payment and actual payment are expensed as incurred. Lease expense for finance lease payments is recognized as amortization expense of the finance lease ROU asset and interest expense on the finance lease liability over the lease term.

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The balances for the operating and finance leases where we are the lessee are presented as follows (in millions) within our consolidated balance sheet:

	September 30, 2019
Operating leases:
Operating lease right-of-use assets	$	1,234
Accrued liabilities and other	$	223
Other long-term liabilities		1,028
Total operating lease liabilities	$	1,251
Finance leases:
Solar energy systems, net	$	31
Property, plant and equipment, net		1,570
Total finance lease assets	$	1,601
Current portion of long-term debt and finance leases	$	387
Long-term debt and finance leases, net of current portion		1,217
Total finance lease liabilities	$	1,604

The components of lease expense are as follows (in millions) within our consolidated statements of operations:

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Operating lease expense:
Operating lease expense (1)	$	110	$	317
Finance lease expense:
Amortization of leased assets	$	78	$	210
Interest on lease liabilities		27		78
Total finance lease expense	$	105	$	288
Total lease expense	$	215	$	605

(1) Includes short-term leases and variable lease costs, which are immaterial.

Other information related to leases where we are the lessee is as follows:

	September 30, 2019
Weighted-average remaining lease term:
Operating leases	6.6 years
Finance leases	4.2 years
Weighted-average discount rate:
Operating leases		6.5	%
Finance leases		6.6	%

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Supplemental cash flow information related to leases where we are the lessee is as follows (in millions):

	Nine Months Ended
	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	262
Operating cash outflows from finance leases (interest payments)	$	76
Financing cash outflows from finance leases	$	223
Leased assets obtained in exchange for finance lease liabilities	$	497
Leased assets obtained in exchange for operating lease liabilities	$	172

As of September 30, 2019, the maturities of our operating and finance lease liabilities (excluding short-term leases) are as follows (in millions):

	Operating		Finance
	Leases		Leases
Three months ending December 31, 2019	$	76	$	122
2020		289		474
2021		256		456
2022		206		576
2023		174		141
Thereafter		562		18
Total minimum lease payments		1,563		1,787
Less: Interest		312		183
Present value of lease obligations		1,251		1,604
Less: Current portion		223		387
Long-term portion of lease obligations	$	1,028	$	1,217

As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2018 and under legacy lease accounting (ASC 840), future minimum lease payments under non-cancellable leases as of December 31, 2018 are as follows (in millions):

	Operating		Finance
	Leases		Leases
2019	$	276	$	417
2020		257		503
2021		230		506
2022		183		24
2023		158		5
Thereafter		524		6
Total minimum lease payments	$	1,628		1,461
Less: Interest				122
Present value of lease obligations				1,339
Less: Current portion				346
Long-term portion of lease obligations			$	993

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Non-cancellable Operating Lease Receivables

Under the new lease standard, we are the lessor of certain vehicle arrangements as described in Note 2, Summary of Significant Accounting Policies. As of September 30, 2019, maturities of our operating lease receivables from customers for each of the next five years and thereafter were as follows (in millions):

Three months ending December 31, 2019	$	155
2020		568
2021		418
2022		251
2023		188
Thereafter		2,458
Total	$	4,038

As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2018 and under legacy lease accounting (ASC 840), future minimum lease payments to be received from customers under non-cancellable leases as of December 31, 2018 are as follows (in millions):

2019	$	502
2020		418
2021		271
2022		187
2023		189
Thereafter		2,469
Total	$	4,036

The above tables do not include vehicle sales to customers or leasing partners with a resale value guarantee as the cash payments were received upfront. For our solar PPA arrangements, customers are charged solely based on actual power produced by the installed solar energy system at a predefined rate per kilowatt-hour of power produced. The future payments from such arrangements are not included in the above table as they are a function of the power generated by the related solar energy systems in the future. Following the adoption of the new lease standard, solar energy system sales and PPAs that commence after January 1, 2019, where we are the lessor and were previously accounted for as leases, will no longer meet the definition of a lease and are therefore not included in the table as of September 30, 2019 (refer to Note 2, Summary of Significant Accounting Policies).

Note 13 – Equity Incentive Plans

In June 2019, we adopted the 2019 Equity Incentive Plan (the “2019 Plan”), and simultaneously terminated the 2010 Equity Incentive Plan (the “2010 Plan”). No new awards will be granted under the 2010 Plan following the adoption of the 2019 Plan, but such termination will not affect outstanding awards under the 2010 Plan. The 2019 Plan has similar terms as the 2010 Plan and provides for the granting of stock options, restricted stock, RSUs, stock appreciation rights, performance units and performance shares to our employees, directors and consultants. Stock options granted under the 2019 Plan may be either incentive stock options or nonstatutory stock options. Incentive stock options may only be granted to our employees. Nonstatutory stock options may be granted to our employees, directors and consultants. Generally, our stock options and RSUs vest over four years and our stock options are exercisable over a maximum period of 10 years from their grant dates. Vesting typically terminates when the employment or consulting relationship ends.

As of September 30, 2019, 11,859,707 shares were reserved and available for issuance under the 2019 Plan.

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2018 CEO Performance Award

In March 2018, our stockholders approved the Board of Directors’ grant of 20,264,042 stock option awards to our CEO (the “2018 CEO Performance Award”) at an exercise price of $350.02 per share. The 2018 CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational milestones (performance conditions) and market conditions, assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Each of the 12 vesting tranches of the 2018 CEO Performance Award will vest upon certification by the Board of Directors that both (i) the market capitalization milestone for such tranche, which begins at $100 billion for the first tranche and increases by increments of $50 billion thereafter, and (ii) any one of the following eight operational milestones focused on revenue or eight operational milestones focused on Adjusted EBITDA have been met for the previous four consecutive fiscal quarters on an annualized basis. Adjusted EBITDA is defined as net income (loss) attributable to common stockholders before interest expense, provision (benefit) for income taxes, depreciation and amortization and stock-based compensation.

Total Annualized Revenue (in billions)	Annualized Adjusted EBITDA (in billions)
$20.0	$1.5
$35.0	$3.0
$55.0	$4.5
$75.0	$6.0
$100.0	$8.0
$125.0	$10.0
$150.0	$12.0
$ 175.0	$14.0

As of September 30, 2019, two operational milestones have been achieved: (i) $20.0 billion total annualized revenue and (ii) $1.5 billion annualized adjusted EBITDA, each subject to the formal certification by our Board of Directors, while no market capitalization milestones have been achieved. Consequently, no shares subject to the 2018 CEO Performance Award have vested as of the date of this filing.

As of September 30, 2019, the following operational milestone was considered probable of achievement:

• Adjusted EBITDA of $3.0 billion

Stock-based compensation expense associated with the 2018 CEO Performance Award is recognized ratably over the longer of the expected achievement period for each pair of market capitalization or operational milestones, beginning at the point in time, which may or may not be the grant date, when the relevant operational milestone is considered probable of being met. In addition, if an operational milestone that was not considered probable at the grant date later becomes probable, we will record at such time cumulative catch-up expense for the service provided between the grant date and such time, which may be material depending on the length of such period. The market capitalization milestone period and the valuation of each tranche are determined using a Monte Carlo simulation and is used as the basis for determining the expected achievement period. The probability of meeting an operational milestone is based on a subjective assessment of our future financial projections. Even though no tranches of the 2018 CEO Performance Award vest unless a market capitalization and a matching operational milestone are both achieved, stock-based compensation expense is recognized only when an operational milestone is considered probable of achievement regardless of how much additional market capitalization must be achieved in order for a tranche to vest. At our current market capitalization, even the first tranche of the 2018 CEO Performance Award will not vest unless our market capitalization were to more than double from the current level and stay at that increased level for a sustained period of time. Additionally, stock-based compensation represents a non-cash expense and is recorded as a selling, general, and administrative operating expense in our consolidated statements of operations.

As of September 30, 2019, we had $431 million of total unrecognized stock-based compensation expense for the operational milestones that were achieved but not vested or were considered probable of achievement, which will be recognized over a weighted-average period of 2.5 years. As of September 30, 2019, we had unrecognized stock-based compensation expense of $1.51 billion for the operational milestones that were considered not probable of achievement. For the three and nine months ended September 30, 2019, we recorded stock-based compensation expense of $56 million and $167 million, respectively, related to the 2018 CEO Performance Award. For the three months ended September 30, 2018, we recorded stock-based compensation expense of $56 million related to this award. From March 21, 2018, when the grant was approved by our stockholders, through September 30, 2018, we recorded stock-based compensation expense of $119 million related to the 2018 CEO Performance Award.

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2014 Performance-Based Stock Option Awards

In 2014, to create incentives for continued long-term success beyond the Model S program and to closely align executive pay with our stockholders’ interests in the achievement of significant milestones by us, the Compensation Committee of our Board of Directors granted stock option awards to certain employees (excluding our CEO) to purchase an aggregate of 1,073,000 shares of our common stock. Each award consisted of the following four vesting tranches with the vesting schedule based entirely on the attainment of the future performance milestones, assuming continued employment and service through each vesting date:

• 1/4th of each award vests upon completion of the first Model X production vehicle;

• 1/4th of each award vests upon achieving aggregate production of 100,000 vehicles in a trailing 12-month period;

• 1/4th of each award vests upon completion of the first Model 3 production vehicle; and

• 1/4th of each award vests upon achieving an annualized gross margin of greater than 30% for any three-year period.

As of September 30, 2019, the following performance milestones had been achieved:

• Completion of the first Model X production vehicle;

• Completion of the first Model 3 production vehicle; and

• Aggregate production of 100,000 vehicles in a trailing 12-month period.

We begin recognizing stock-based compensation expense as each performance milestone becomes probable of achievement. As of September 30, 2019, we had unrecognized stock-based compensation expense of $5 million for the performance milestone that was considered not probable of achievement. For the three and nine months ended September 30, 2019, and for the same periods in 2018, we did not record any additional stock-based compensation related to these awards.

2012 CEO Performance Award

In August 2012, our Board of Directors granted 5,274,901 stock option awards to our CEO (the “2012 CEO Performance Award”). The 2012 CEO Performance Award consists of 10 vesting tranches with a vesting schedule based entirely on the attainment of both performance conditions and market conditions, assuming continued employment and service through each vesting date. Each vesting tranche requires a combination of a pre-determined performance milestone and an incremental increase in our market capitalization of $4.00 billion, as compared to our initial market capitalization of $3.20 billion at the time of grant. As of September 30, 2019, the market capitalization conditions for all of the vesting tranches and the following performance milestones had been achieved:

• Successful completion of the Model X alpha prototype;

• Successful completion of the Model X beta prototype;

• Completion of the first Model X production vehicle;

• Aggregate production of 100,000 vehicles;

• Successful completion of the Model 3 alpha prototype;

• Successful completion of the Model 3 beta prototype;

• Completion of the first Model 3 production vehicle;

• Aggregate production of 200,000 vehicles; and

• Aggregate production of 300,000 vehicles.

We begin recognizing stock-based compensation expense as each milestone becomes probable of achievement. As of September 30, 2019, we had unrecognized stock-based compensation expense of $6 million for the performance milestone that was considered not probable of achievement. For the three and nine months ended September 30, 2019, we recorded no stock-based compensation expense related to the 2012 CEO Performance Award. For the three months ended September 30, 2018, we did not record any stock-based compensation expense related to this award. For the nine months ended September 30, 2018, the stock based compensation we recorded related to this award was immaterial.

Our CEO historically earned a base salary that reflected the applicable minimum wage requirements under California law, and he is subject to income taxes based on such base salary. However, he has never accepted his salary. Commencing in May 2019 at our CEO’s request, we eliminated altogether the earning and accrual of this base salary.

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Summary Stock-Based Compensation Information

The following table summarizes our stock-based compensation expense by line item in the consolidated statements of operations (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Cost of revenues	$	29	$	30	$	91	$	76
Research and development		72		66		216		193
Selling, general and administrative		98		109		307		271
Restructuring and other		—		—		3		4
Total	$	199	$	205	$	617	$	544

We realized no income tax benefit from stock option exercises in each of the periods presented due to cumulative losses and valuation allowances. As of September 30, 2019, we had $1.55 billion of total unrecognized stock-based compensation expense related to non-performance awards, which will be recognized over a weighted-average period of 2.9 years.

Note 14 – Commitments and Contingencies

Operating Lease Arrangement in Buffalo, New York

We have an operating lease through the Research Foundation for the State University of New York (the “SUNY Foundation”) for a manufacturing facility constructed on behalf of the SUNY Foundation and which was substantially completed in April 2018.  We use this facility, referred to as Gigafactory 2, primarily for the development and production of our Solar Roof and other solar products and components, energy storage components, and Supercharger components, and for other lessor-approved functions.  Under the lease and a related research and development agreement, there continues to be, on behalf of the SUNY Foundation, installation of certain utilities and other improvements and acquisition of certain manufacturing equipment designated by us to be used in the manufacturing facility. Following the adoption of ASC 842, we no longer recognize the build-to-suit asset and related depreciation expense or the corresponding financing liability and related amortization for Gigafactory 2 in our consolidated financial statements.   

Operating Lease Arrangement in Shanghai, China

We have an operating lease arrangement for an initial term of 50 years with the local government of Shanghai for land use rights where we are constructing Gigafactory Shanghai. Under the terms of the arrangement, we are required to spend RMB 14.08 billion in capital expenditures, and to generate RMB 2.23 billion of annual tax revenues starting at the end of 2023. If we are unwilling or unable to meet such target or obtain periodic project approvals, in accordance with the Chinese government’s standard terms for such arrangements, we would be required to revert the site to the local government and receive compensation for the remaining value of the land lease, buildings and fixtures. We believe the capital expenditure requirement and the tax revenue target will be attainable even if our actual vehicle production was far lower than the volumes we are forecasting.

Legal Proceedings

Securities Litigation Relating to the SolarCity Acquisition

Between September 1, 2016 and October 5, 2016, seven lawsuits were filed in the Delaware Court of Chancery by purported stockholders of Tesla challenging our acquisition of SolarCity. Following consolidation, the lawsuit names as defendants the members of Tesla’s board of directors as then constituted and alleges, among other things, that board members breached their fiduciary duties in connection with the acquisition. The complaint asserts both derivative claims and direct claims on behalf of a purported class and seeks, among other relief, unspecified monetary damages, attorneys’ fees, and costs. On January 27, 2017, defendants filed a motion to dismiss the operative complaint. Rather than respond to the defendants’ motion, the plaintiffs filed an amended complaint. On March 17, 2017, defendants filed a motion to dismiss the amended complaint. On December 13, 2017, the Court heard oral argument on the motion. On March 28, 2018, the Court denied defendants’ motion to dismiss. Defendants filed a request for interlocutory appeal, but the Delaware Supreme Court denied that request without ruling on the merits but electing not to hear an appeal at this early stage of the case. Defendants filed their answer on May 18, 2018. Mediations were held on June 10 and October 3, 2019, following which the matter did not settle. Fact discovery is complete, and the parties are proceeding with expert discovery. The case is set for trial in March 2020.  

These plaintiffs and others filed parallel actions in the U.S. District Court for the District of Delaware on or about April 21, 2017. They include claims for violations of the federal securities laws and breach of fiduciary duties by Tesla’s board of directors. Those actions have been consolidated and stayed pending the above-referenced Chancery Court litigation.

We believe that claims challenging the SolarCity acquisition are without merit and intend to defend against them vigorously. We are unable to estimate the possible loss or range of loss, if any, associated with these claims.

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Securities Litigation Relating to Production of Model 3 Vehicles

On October 10, 2017, a purported stockholder class action was filed in the U.S. District Court for the Northern District of California against Tesla, two of its current officers, and a former officer. The complaint alleges violations of federal securities laws and seeks unspecified compensatory damages and other relief on behalf of a purported class of purchasers of Tesla securities from May 4, 2016 to October 6, 2017. The lawsuit claims that Tesla supposedly made materially false and misleading statements regarding the Company’s preparedness to produce Model 3 vehicles. Plaintiffs filed an amended complaint on March 23, 2018, and defendants filed a motion to dismiss on May 25, 2018. The court granted defendants’ motion to dismiss with leave to amend.  Plaintiffs filed their amended complaint on September 28, 2018, and defendants filed a motion to dismiss the amended complaint on February 15, 2019.  The hearing on the motion to dismiss was held on March 22, 2019, and on March 25, 2019, the Court ruled in favor of defendants and dismissed the complaint with prejudice.  On April 8, 2019, plaintiffs filed a notice of appeal and on July 17, 2019 filed their opening brief. We filed our opposition on September 16, 2019. We continue to believe that the claims are without merit and intend to defend against this lawsuit vigorously. We are unable to estimate the possible loss or range of loss, if any, associated with this lawsuit.

On October 26, 2018, in a similar action, a purported stockholder class action was filed in the Superior Court of California in Santa Clara County against Tesla, Elon Musk and seven initial purchasers in an offering of debt securities by Tesla in August 2017. The complaint alleges misrepresentations made by Tesla regarding the number of Model 3 vehicles Tesla expected to produce by the end of 2017 in connection with such offering and seeks unspecified compensatory damages and other relief on behalf of a purported class of purchasers of Tesla securities in such offering. Tesla thereafter removed the case to federal court.  On January 22, 2019, plaintiff abandoned its effort to proceed in state court, instead filing an amended complaint against Tesla, Elon Musk and seven initial purchasers in the debt offering before the same judge in the U.S. District Court for the Northern District of California who is hearing the above-referenced earlier filed federal case.  On February 5, 2019, the Court stayed this new case pending a ruling on the motion to dismiss the complaint in such earlier filed federal case. After such earlier filed federal case was dismissed, defendants filed a motion on July 2, 2019 to dismiss this case as well. This case is now stayed pending a ruling from the appellate court on such earlier filed federal case with an agreement that if defendants prevail on appeal in such case, this case will be dismissed. We believe that the claims are without merit and intend to defend against this lawsuit vigorously. We are unable to estimate the possible loss or range of loss, if any, associated with this lawsuit.

Litigation Relating to 2018 CEO Performance Award

On June 4, 2018, a purported Tesla stockholder filed a putative class and derivative action in the Delaware Court of Chancery against Elon Musk and the members of Tesla’s board of directors as then constituted, alleging corporate waste, unjust enrichment and that such board members breached their fiduciary duties by approving the stock-based compensation plan. The complaint seeks, among other things, monetary damages and rescission or reformation of the stock-based compensation plan. On August 31, 2018, defendants filed a motion to dismiss the complaint; plaintiff filed its opposition brief on November 1, 2018 and defendants filed a reply brief on December 13, 2018.  The hearing on the motion to dismiss was held on May 9, 2019. On September 20, 2019, the Court granted the motion to dismiss as to the corporate waste claim but denied the motion as to the breach of fiduciary duty and unjust enrichment claims. Our answer is due December 3, 2019. We believe the claims asserted in this lawsuit are without merit and intend to defend against them vigorously.

Securities Litigation Relating to Potential Going Private Transaction

Between August 10, 2018 and September 6, 2018, nine purported stockholder class actions were filed against Tesla and Elon Musk in connection with Elon Musk’s August 7, 2018 Twitter post that he was considering taking Tesla private. All of the suits are now pending in the U.S. District Court for the Northern District of California. Although the complaints vary in certain respects, they each purport to assert claims for violations of federal securities laws related to Mr. Musk’s statement and seek unspecified compensatory damages and other relief on behalf of a purported class of purchasers of Tesla’s securities. Plaintiffs filed their consolidated complaint on January 16, 2019 and added as defendants the members of Tesla’s board of directors.  The now-consolidated purported stockholder class action was stayed while the issue of selection of lead counsel was briefed and argued before the U.S. Court of Appeals for the Ninth Circuit. The Ninth Circuit has now ruled regarding lead counsel, and we anticipate that our motion to dismiss will be due sometime in November 2019. We believe that the claims have no merit and intend to defend against them vigorously. We are unable to estimate the potential loss, or range of loss, associated with these claims.

Between October 17, 2018 and November 9, 2018, five derivative lawsuits were filed in the Delaware Court of Chancery against Mr. Musk and the members of Tesla’s board of directors as then constituted in relation to statements made and actions connected to a potential going private transaction.  In addition to these cases, on October 25, 2018, another derivative lawsuit was filed in the U.S. District Court for the District of Delaware against Mr. Musk and the members of the Tesla board of directors as then constituted. The Courts in both the Delaware federal court and Delaware Court of Chancery actions have consolidated their respective actions and stayed each consolidated action pending resolution of the above-referenced consolidated purported stockholder class action. We believe that the claims have no merit and intend to defend against them vigorously. We are unable to estimate the potential loss, or range of loss, associated with these claims.

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On March 7, 2019, various stockholders filed a derivative suit in the Delaware Court of Chancery, purportedly on behalf of the Company, naming Elon Musk and Tesla’s board of directors, also related to Mr. Musk’s August 7, 2018 Twitter post that is the basis of the above-referenced consolidated purported stockholder class action as well as Mr. Musk’s February 19, 2019 Twitter post regarding Tesla’s vehicle production. The suit asserts claims for breach of fiduciary duty and seeks declaratory and injunctive relief, unspecified damages, and other relief. Plaintiffs moved for expedited proceedings in connection with the declaratory and injunctive relief.  Briefs were filed on March 13, 2019 and the hearing held on March 18, 2019.  Defendants prevailed, with the Court denying plaintiffs’ request for an expedited trial and granting defendants’ request to stay this action pending the outcome of the above-referenced consolidated purported stockholder class action. 

Settlement with SEC related to Potential Going Private Transaction

On October 16, 2018, the U.S. District Court for the Southern District of New York entered a final judgment approving the terms of a settlement filed with the Court on September 29, 2018, in connection with the actions taken by the U.S. Securities and Exchange Commission (the “SEC”) relating to Elon Musk’s prior statement that he was considering taking Tesla private. Without admitting or denying any of the SEC’s allegations, and with no restriction on Mr. Musk’s ability to serve as an officer or director on the Board (other than as its Chair), among other things, we and Mr. Musk paid civil penalties of $20 million each and agreed that an independent director will serve as Chair of the Board for at least three years, and we appointed such an independent Chair of the Board and two additional independent directors to the Board, and further enhanced our disclosure controls and other corporate governance-related matters. On April 26, 2019, the settlement was amended to modify certain of the previously-agreed disclosure procedures to clarify the application of such procedures, which was subsequently approved by the Court. All other terms of the prior settlement were reaffirmed without modification.

Certain Investigations and Other Matters

We receive requests for information from regulators and governmental authorities, such as the National Highway Traffic Safety Administration, the National Transportation Safety Board, the SEC, the Department of Justice (“DOJ”) and various state, federal and international agencies. We routinely cooperate with such regulatory and governmental requests.

In particular, the SEC has issued subpoenas to Tesla in connection with (a) Elon Musk’s prior statement that he was considering taking Tesla private and (b) certain projections that we made for Model 3 production rates during 2017 and other public statements relating to Model 3 production. The DOJ has also asked us to voluntarily provide it with information about each of these matters and is investigating. Aside from the settlement, as amended, with the SEC relating to Mr. Musk’s statement that he was considering taking Tesla private, there have not been any developments in these matters that we deem to be material, and to our knowledge no government agency in any ongoing investigation has concluded that any wrongdoing occurred. As is our normal practice, we have been cooperating and will continue to cooperate with government authorities. We cannot predict the outcome or impact of any ongoing matters. Should the government decide to pursue an enforcement action, there exists the possibility of a material adverse impact on our business, results of operation, prospects, cash flows, and financial position.

We are also subject to various other legal proceedings and claims that arise from the normal course of business activities. If an unfavorable ruling or development were to occur, there exists the possibility of a material adverse impact on our business, results of operations, prospects, cash flows, financial position and brand.

Indemnification and Guaranteed Returns

We are contractually obligated to compensate certain fund investors for any losses that they may suffer in certain limited circumstances resulting from reductions in U.S. Treasury grants or investment tax credits (“ITC”s). Generally, such obligations would arise as a result of reductions to the value of the underlying solar energy systems as assessed by the U.S. Treasury Department for purposes of claiming U.S. Treasury grants or as assessed by the IRS for purposes of claiming ITCs or U.S. Treasury grants. For each balance sheet date, we assess and recognize, when applicable, a distribution payable for the potential exposure from this obligation based on all the information available at that time, including any guidelines issued by the U.S. Treasury Department on solar energy system valuations for purposes of claiming U.S. Treasury grants and any audits undertaken by the IRS. We believe that any payments to the fund investors in excess of the amounts already recognized by us for this obligation are not probable or material based on the facts known at the filing date.

The maximum potential future payments that we could have to make under this obligation would depend on the difference between the fair values of the solar energy systems sold or transferred to the funds as determined by us and the values that the U.S. Treasury Department would determine as fair value for the systems for purposes of claiming U.S. Treasury grants or the values the IRS would determine as the fair value for the systems for purposes of claiming ITCs or U.S. Treasury grants. We claim U.S. Treasury grants based on guidelines provided by the U.S. Treasury department and the statutory regulations from the IRS. We use fair values determined with the assistance of independent third-party appraisals commissioned by us as the basis for determining the ITCs that are passed-through to and claimed by the fund investors. Since we cannot determine future revisions to U.S. Treasury Department guidelines governing solar energy system values or how the IRS will evaluate system values used in claiming ITCs or U.S. Treasury grants, we are unable to reliably estimate the maximum potential future payments that it could have to make under this obligation as of each balance sheet date.

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We are eligible to receive certain state and local incentives that are associated with renewable energy generation. The amount of incentives that can be claimed is based on the projected or actual solar energy system size and/or the amount of solar energy produced. We also currently participate in one state’s incentive program that is based on either the fair market value or the tax basis of solar energy systems placed in service. State and local incentives received are allocated between us and fund investors in accordance with the contractual provisions of each fund. We are not contractually obligated to indemnify any fund investor for any losses they may incur due to a shortfall in the amount of state or local incentives actually received.

Our lease pass-through financing funds have a one-time lease payment reset mechanism that occurs after the installation of all solar energy systems in a fund. As a result of this mechanism, we may be required to refund master lease prepayments previously received from investors. Any refunds of master lease prepayments would reduce the lease pass-through financing obligation.

Letters of Credit

As of September 30, 2019, we had $216 million of unused letters of credit outstanding.

Note 15 – Variable Interest Entity Arrangements

We have entered into various arrangements with investors to facilitate the funding and monetization of our solar energy systems and vehicles. In particular, our wholly owned subsidiaries and fund investors have formed and contributed cash and assets into various financing funds and entered into related agreements. We have determined that the funds are variable interest entities (“VIEs”) and we are the primary beneficiary of these VIEs by reference to the power and benefits criterion under ASC 810, Consolidation. We have considered the provisions within the agreements, which grant us the power to manage and make decisions that affect the operation of these VIEs, including determining the solar energy systems or vehicles and the associated customer contracts to be sold or contributed to these VIEs, redeploying solar energy systems or vehicles and managing customer receivables. We consider that the rights granted to the fund investors under the agreements are more protective in nature rather than participating.

As the primary beneficiary of these VIEs, we consolidate in the financial statements the financial position, results of operations and cash flows of these VIEs, and all intercompany balances and transactions between us and these VIEs are eliminated in the consolidated financial statements. Cash distributions of income and other receipts by a fund, net of agreed upon expenses, estimated expenses, tax benefits and detriments of income and loss and tax credits, are allocated to the fund investor and our subsidiary as specified in the agreements.

Generally, our subsidiary has the option to acquire the fund investor’s interest in the fund for an amount based on the market value of the fund or the formula specified in the agreements.

Upon the sale or liquidation of a fund, distributions would occur in the order and priority specified in the agreements.

Pursuant to management services, maintenance and warranty arrangements, we have been contracted to provide services to the funds, such as operations and maintenance support, accounting, lease servicing and performance reporting. In some instances, we have guaranteed payments to the fund investors as specified in the agreements. A fund’s creditors have no recourse to our general credit or to that of other funds. None of the assets of the funds had been pledged as collateral for their obligations.

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The aggregate carrying values of the VIEs’ assets and liabilities, after elimination of any intercompany transactions and balances, in the consolidated balance sheets were as follows (in millions):

	September 30,		December 31,
	2019		2018
Assets
Current assets
Cash and cash equivalents	$	107	$	75
Restricted cash		81		131
Accounts receivable, net		44		19
Prepaid expenses and other current assets		10		10
Total current assets		242		235
Operating lease vehicles, net		862		155
Solar energy systems, net		5,083		5,117
Restricted cash, net of current portion		71		65
Other assets		81		56
Total assets	$	6,339	$	5,628
Liabilities
Current liabilities
Accrued liabilities and other		102		133
Deferred revenue		51		21
Customer deposits		8		—
Current portion of long-term debt and finance leases		603		663
Total current liabilities		764		817
Deferred revenue, net of current portion		233		178
Long-term debt and finance leases, net of current portion		1,428		1,238
Other long-term liabilities		29		26
Total liabilities	$	2,454	$	2,259

Note 16 – Related Party Transactions

Related party balances were comprised of the following (in millions):

	September 30,		December 31,
	2019		2018
Convertible senior notes due to related parties	$	3	$	3

Our convertible senior notes are not re-measured at fair value (refer to Note 5, Fair Value of Financial Instruments). As of September 30, 2019 and December 31, 2018, the unpaid principal balance of convertible senior notes due to related parties is $3 million.

In May 2019, our CEO purchased from us 102,880 shares of our common stock in a public offering at the public offering price for an aggregate $25 million.

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Note 17 – Segment Reporting and Information about Geographic Areas

We have two operating and reportable segments: (i) automotive and (ii) energy generation and storage. The automotive segment includes the design, development, manufacturing, sales, and leasing of electric vehicles as well as sales of automotive regulatory credits. Additionally, the automotive segment is also comprised of services and other, which includes non-warranty after-sales vehicle services, sales of used vehicles, retail merchandise, and sales by our acquired subsidiaries to third party customers. The energy generation and storage segment includes the design, manufacture, installation, sales, and leasing of solar energy generation and energy storage products. Our CODM does not evaluate operating segments using asset or liability information. The following table presents revenues and gross margins by reportable segment (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Automotive segment
Revenues	$	5,901	$	6,425	$	16,099	$	13,052
Gross profit	$	1,103	$	1,455	$	2,539	$	2,452
Energy generation and storage segment
Revenues	$	402	$	399	$	1,095	$	1,183
Gross profit	$	88	$	69	$	139	$	147

The following table presents revenues by geographic area based on the sales location of our products (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
United States	$	3,127	$	5,133	$	8,937	$	9,249
China		669		409		2,138		1,445
Netherlands		427		274		788		627
Norway		253		224		1,049		611
Other		1,827		784		4,282		2,303
Total	$	6,303	$	6,824	$	17,194	$	14,235

The revenues in certain geographic areas were impacted by the price adjustments we made to our vehicle offerings during the nine months ended September 30, 2019. Refer to Note 2, Summary of Significant Accounting Policies, for details.

The following table presents long-lived assets by geographic area (in millions):

	September 30,		December 31,
	2019		2018
United States	$	15,545	$	16,741
International		813		860
Total	$	16,358	$	17,601

Note 18 – Restructuring and Other

During the nine months ended September 30, 2019, we carried out certain restructuring actions in order to reduce costs and improve efficiency. As a result, we recognized $50 million of costs primarily related to employee termination expenses and losses from closing certain stores impacting both segments. We recognized $47 million in impairment related to IPR&D intangible asset as we abandoned further development efforts (refer to Note 4, Goodwill and Intangible Assets for details) and $15 million for the related equipment within the energy generation and storage segment. We also incurred a loss of $49 million for closing operations in certain facilities. On the statement of cash flows, the amounts were presented in the captions in which such amounts would have been recorded absent the impairment charges. The employee termination expenses were substantially paid by September 30, 2019, while the remaining amounts were non-cash.

During the second quarter of 2018, we carried out certain restructuring actions in order to reduce costs and improve efficiency. As a result, in the three months ended June 30, 2018, we recognized $34 million of one-time employee termination expenses and estimated losses from sub-leasing a certain facility. Also included within restructuring and other activities was $56 million of expenses (materially all of which were non-cash) from restructuring the energy generation and storage segment, which were comprised of disposals of certain tangible assets, the shortening of the useful life of a trade name intangible asset and a contract termination penalty. In addition, we concluded that a portion of IPR&D is not commercially feasible. Consequently, we recognized an impairment loss of $13 million in the three months ended June 30, 2018. We recognized settlement and legal expenses of $26 million in the three months ended September 30, 2018 for the settlement with the SEC relating to a take-private proposal for Tesla. These expenses were substantially paid by the end of 2018.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q.

Overview

Our mission is to accelerate the world’s transition to sustainable energy. We design, develop, manufacture, lease and sell high-performance fully electric vehicles, solar energy generation systems and energy storage products. We also offer maintenance, installation, operation and other services related to our products.

Automotive

We strive to produce the world’s highest quality vehicles as quickly and as cost-effectively as possible with a priority on workplace health and safety. Our production vehicle fleet includes our Model S sedan and our Model X SUV, which are our highest-performance premium vehicles, and our Model 3, a lower-priced sedan designed for the mass market. We continue to enhance our vehicle offerings with our Autopilot and FSD features, internet connectivity and free over-the-air software updates to provide additional safety, convenience and performance features. In 2020, we plan to launch our next production vehicle—a compact SUV built on the Model 3 platform called Model Y—ahead of schedule by the summer, as well as commence the production of Tesla Semi with limited volumes. In addition, our future electric vehicle product pipeline includes a pickup truck and a new version of the Tesla Roadster.

Energy Generation and Storage

We have revamped our solar business through simplicity, standardization and accessibility by streamlining traditionally complex ordering, permitting, installation and back-end service processes, ultimately making our solar products even more compelling to customers. In addition to retrofit solar energy systems, we offer our Solar Roof product that combines solar energy generation with attractive, integrated styling. Our energy storage products consist of Powerwall, mostly for residential applications, and Powerpack and Megapack, for commercial, industrial and utility-scale applications.

Management Opportunities, Challenges and Risks

Automotive—Demand and Sales

While the markets for alternative fuel vehicles and self-driving technology are increasingly competitive, their growth also creates opportunities for our expansion. We expect to generate incremental global demand for our vehicles by constantly innovating and making them accessible to larger and previously untapped consumer and commercial markets. An important factor in our success will be our Autopilot and FSD technologies that currently enable the driver-assistance features in our vehicles, and in which we are making significant strides through our proprietary and powerful FSD computer and remotely updateable artificial intelligence software. We have begun to roll out our Smart Summon feature that enables vehicles to be remotely summoned over short distances in parking lots and driveways, and continue to develop for future release as part of our FSD package our vehicles’ recognition of traffic lights and stop signs. Ultimately, while we are subject to regulatory constraints over which we have no control, our goal is a fully autonomously-driven future that improves safety and provides our customers with convenience and additional income through participation in an autonomous Tesla ride-hailing network. This network, which will also include our own fleet of vehicles, will also allow us to access a new customer base even as modes of transportation evolve.

We also believe that we have an advantage over our competitors in areas such as our battery and powertrain technology, including our leading motor efficiency and range; our dedication to safety engineering, as demonstrated by the top safety ratings achieved by each of our production vehicles; and our unique in-car entertainment features for Internet search, music services, passenger karaoke, and parked video streaming and gaming. We also recently introduced on a limited basis our first offering for lower-cost, Tesla-specific vehicle insurance, which we will expand to reduce the total cost of ownership of our vehicles. In the third quarter of 2019, Model 3 continued to be the best-selling premium vehicle in the United States and gain market share in Europe. Vehicles traded in to us by Model 3 customers continue to validate a wider addressable market for this vehicle than existing owners of premium vehicles, even as we also prepare to enter new segments with Model Y and a pickup truck. In particular, local production in the first phase of Gigafactory Shanghai will allow us to offer Model 3 in China at competitive local pricing, which we expect to drive further demand and opportunity in the world’s largest market for mid-sized premium sedans.

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On the other hand, we may be impacted by trade policies, political uncertainty and economic cycles involving geographic regions where we have significant operations, which are inherently unpredictable. Sales of vehicles in the automotive industry also tend to be cyclical in many markets, which may expose us to increased volatility. Specifically, it is uncertain as to how such macroeconomic factors will impact us as a company that has been experiencing growth and increasing market share in an industry that has globally been experiencing a recent decline in sales. In addition, the federal tax credit for the purchase of a qualified electric vehicle in the U.S. was reduced to $1,875 for each Tesla vehicle delivered in the third or fourth quarter of 2019, and will finally be reduced to $0 for each Tesla vehicle delivered thereafter. We believe that this sequential phase-out has likely pulled forward some vehicle demand into the periods preceding each reduction, and we may see similar pull-forwards through the remainder of 2019. In the long run, we do not expect a meaningful impact to our sales in the U.S., as we believe that each of our vehicle models offers a compelling proposition even without incentives.

Finally, we make certain adjustments to our product prices from time to time in the ordinary course of business. Such pricing changes may impact our vehicles’ resale values, and in turn our operating results. For example, if we increase our estimates of the volume of vehicles that may potentially be returned to us under pre-existing resale value guarantees provided to customers and partners for certain financing programs, our gross profits may be reduced, as we saw during the first two quarters of 2019.

Automotive—Deliveries and Customer Infrastructure

In the third quarter of 2019, we achieved a new quarterly record for total vehicles delivered. While delivering vehicles at large scale across numerous markets presents logistical challenges, we continue to optimize our manufacturing and delivery patterns. Given our higher volumes and single-factory production at the Tesla Factory until we ramp production at Gigafactory Shanghai, however, we necessarily produce variants (including regional versions) of all of our vehicles in batches in accordance with the demand that we expect for them. If our specific demand expectations for these variants prove inaccurate, we may not be able to timely generate sales matched to the specific vehicles that we produce in the same timeframe, which may negatively impact our deliveries in a particular period.

We continue to expand and invest in our servicing and charging locations and capabilities to keep pace with our customer vehicle fleet and ensure a convenient and efficient customer experience. Despite our rapid growth, our service wait times and the financial impact of our service operations are improving. We also continue to deploy our V3 Supercharger technology, which should shorten individual charging sessions and increase customer throughput rates. However, if our customer vehicles, particularly in the rapidly growing Model 3 fleet, experience unexpected reliability issues, it could outpace and overburden our servicing capabilities and parts inventory.

Automotive—Production

The third quarter of 2019 also marked a new quarterly record for total vehicle production. In addition to growing vehicle production at our Tesla Factory, we are ahead of schedule at Gigafactory Shanghai, where we are producing full Model 3 vehicles on a trial basis with body, paint and general assembly lines and are working towards finalizing manufacturing licenses and other regulatory requirements. In addition to featuring a simplified and cost-effective manufacturing process, Gigafactory Shanghai allows us to access the efficiencies of local supply chains and logistics while avoiding certain local tariffs on U.S.-manufactured vehicles. We are transitioning additional manufacturing processes to Gigafactory Shanghai, which will have a capacity of 150,000 Model 3 vehicles per year when the first phase of production is ramped. Likewise, we continue to build production capability for Model Y at the Tesla Factory, and we have drawn on our past Model 3 production experience to make progress ahead of schedule at a projected cost per unit of capacity that is less than that for Model 3 at the Tesla Factory. However, the ramp and further expansion of Gigafactory Shanghai is subject to a number of uncertainties inherent in all new manufacturing operations, including final approvals under and ongoing compliance with regulatory requirements, potential supply chain constraints, and the pace of bringing production equipment and processes online with the capability to manufacture high-quality units at scale. Ultimately, achieving increased total vehicle production cost-effectively across all of our manufacturing operations will require that we timely address any bottlenecks that may arise as we ramp, establish and maintain sustained supplier capacity, and successfully utilize manufacturing processes at the maximum output rates that we have planned for them.

Energy Generation and Storage Demand, Production and Deployment

We are optimizing ways to reduce customer acquisition costs of our energy generation products by focusing on selling these products directly and efficiently. We have made the online buying experience for our energy products simpler and more accessible by standardizing the offerings for what has traditionally been a cumbersome customized process and offering highly competitive pricing, which should result in cost efficiencies and a larger market. While our retrofit solar system deployments decreased earlier in 2019 as we continue to implement and refine this strategy, deployments increased in the third quarter of 2019 and we expect further growth. In addition, we have launched the third major version of our Solar Roof product, with the first installations planned for the fourth quarter of 2019, and are working to ramp over the remainder of 2019 and into 2020.

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We remain focused on growth for our energy storage products, and achieved a new quarterly deployment record in the third quarter of 2019. After reestablishing certain production at Gigafactory 1 for our energy storage products in 2019 to reduce backlog and shorten customer wait times, we are now focused on further manufacturing efficiencies and improvements in our installation processes as we ramp. We continue to see global opportunities for commercial and utility-scale projects, including with our introduction of the 3 MWh Tesla Megapack, as well as for residential customers impacted by unreliable access to the energy grid or scheduled blackouts.

Automotive Financing Options

We offer financing arrangements for our vehicles in certain markets in North America, Europe and Asia primarily through various financial institutions. We offer resale value guarantees or similar buy-back terms to certain customers who purchase vehicles and who finance their vehicles through one of our specified commercial banking partners. We also offer resale value guarantees in connection with automotive sales to certain leasing partners. Currently, both programs are available only in certain international markets. Resale value guarantees to customers available for exercise within the 12 months following September 30, 2019 totaled $151 million in value.

Vehicle deliveries with the resale value guarantee do not impact our near-term cash flows and liquidity, since we receive the full amount of cash for the vehicle sales price at delivery. While we do not assume any credit risk related to the customer, if a customer exercises the option to return the vehicle to us, we are exposed to liquidity risk that the resale value of vehicles under these programs may be lower than our guarantee, or the volume of vehicles returned to us may be higher than our estimates or we may be unable to resell the used vehicles in a timely manner, all of which could adversely impact our cash flows. To date, we have only had an insignificant percentage of customers who exercised their resale value guarantees and returned their vehicles to us. However, resale prices may inherently fluctuate depending on various factors such as supply and demand of our used vehicles, economic cycles and the pricing of new vehicles, which we adjust from time to time in the ordinary course of business. While we modify our resale value guarantees following such pricing changes if we determine it to be warranted, we cannot do so retrospectively as to outstanding guarantees. Moreover, should market values of our vehicles or customer demand decrease, the accuracy of our estimated rates of return may be impacted materially.

We continuously seek to optimize our vehicle financing options. Currently, we offer leasing directly through our local subsidiaries for Model S, Model X and Model 3 in the U.S. and for Model S and Model X in Canada. We also offer leasing through leasing partners in certain jurisdictions. Leasing through our captive financing entities and our leasing partners exposes us to residual value risk. In addition, for leases offered directly from our captive financing entities, we assume customer credit risk. We plan to continue expanding our financing offerings, including our lease financing options and the financial sources to support them, and to support the overall financing needs of our customers. To the extent that we are unable to arrange such options for our customers on terms that are attractive, our sales, financial results and cash flows could be negatively impacted.

Energy Generation and Storage Financing Options

We offer our customers the choice to purchase and own solar energy systems, to lease such systems, or to purchase the energy that our solar energy systems produce through various contractual arrangements. These contractual arrangements include long-term leases and PPAs. In either arrangement, we install our solar energy system at our customer’s premises and charge the customer a monthly payment, which alternatively may be prepaid at the customer’s option. In the lease arrangement, the monthly payment is fixed. In the PPA arrangement, we charge the customer a rate based on the amount of electricity (measured in kilowatt-hour, or kWh) that the solar energy system actually produces. The leases and PPAs are typically for 20 years with a renewal option, and the specified monthly payments and energy rates may be subject to annual escalations.  We also offer in certain regions solar energy systems on a subscription basis, whereby customers may obtain the use of such systems for a fixed monthly payment.

For customers who want to purchase and own solar energy systems, we also offer solar loans under which a third-party lender provides financing directly to a qualified customer to enable the customer to purchase and own a solar energy system installed by us (and for which we and the customer have entered into a solar energy system sale and installation agreement). We are not a party to the loan agreement between the customer and the third-party lender, and the third-party lender has no recourse against us with respect to the loan.

We also install energy storage systems for both residential and commercial-scale customers.  Energy storage systems may be purchased on a cash basis, without financing, or as part of the purchase and financing of a solar energy system.

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Gigafactory 1

We work together with our suppliers at Gigafactory 1 to integrate production of battery material, cells, modules, battery packs and drive units in one location for vehicles and energy storage products. We are also continuing to invest in Gigafactory 1 to achieve additional production output there. Panasonic has partnered with us on Gigafactory 1 with investments in the production equipment that it uses to manufacture and supply us with battery cells. Under our arrangement with Panasonic, we plan to purchase the full output from their production equipment at negotiated prices. As these terms convey a finance lease, as defined in ASC 842, Leases, we consider their production equipment to be leased assets when production commences. This results in us recording the value of their production equipment within property, plant and equipment, net, on the consolidated balance sheets with a corresponding liability recorded to long-term debt and finance leases. For all suppliers and partners for which we plan to purchase the full output from their production equipment located at Gigafactory 1, we will apply similar accounting. During the three and nine months ended September 30, 2019, we recorded $7 million and $411 million on the consolidated balance sheet.

While we currently believe that Gigafactory 1 will allow us to reach our production targets, our ultimate ability to do so will require us to resolve the types of challenges that are typical of a large-scale manufacturing operation. For example, we have in the past experienced bottlenecks in the assembly of battery modules and cell output at Gigafactory 1, which impacted our production of Model 3. While we continue to resolve such issues at Gigafactory 1 as they arise, given the size and complexity of this undertaking, it is possible that future events could result in increased costs of expanding and operating Gigafactory 1 to meet our production targets or Gigafactory 1 taking longer to ramp further than we currently anticipate.

Gigafactory 2

We have an agreement with the SUNY Foundation related to the construction and use of a facility in Buffalo, New York, referred to as Gigafactory 2, which we have primarily used for the development and production of our Solar Roof and other solar products and components, energy storage components, and Supercharger components, and for other lessor-approved functions. The terms of such agreement require us to comply with a number of covenants, including required hiring and cumulative investment targets, which we have met to date. Overall, we expect our significant operations at Gigafactory 2 and the surrounding Buffalo area to continue, in particular with our ramp and manufacture of Solar Roof, which we are planning to scale over the remainder of 2019 and into 2020. In addition, Panasonic manufactures PV cells and modules in a portion of Gigafactory 2.

Although we expect to meet all applicable covenants with the SUNY Foundation with respect to Tesla’s progress at and plans for Buffalo, any failure to comply with these covenants could obligate us to pay significant amounts to the SUNY Foundation and result in termination of the agreement. Our expectations as to the costs and timelines of our investment and operations at Buffalo, including those associated with acquiring equipment and supporting our operations with respect to our production of Solar Roof there, may prove incorrect, which could subject us to significant expenses to achieve the desired benefits.

Gigafactory Shanghai

We have commenced production of full Model 3 vehicles on a trial basis at Gigafactory Shanghai, which we are constructing in order to increase the affordability of our vehicles for customers in China by reducing transportation and manufacturing costs and eliminating certain tariffs on vehicles imported from the U.S. Subject to a number of uncertainties inherent in all new manufacturing operations, including final approvals under and ongoing compliance with regulatory requirements, potential supply chain constraints, and the pace of bringing production equipment and processes online with the capability to manufacture high-quality units at scale, we expect Gigafactory Shanghai will have a capacity of 150,000 Model 3 vehicles per year when the first phase of production is ramped. Much of the investment in Gigafactory Shanghai has been and will continue to be provided through local debt financing, including a RMB 3.5 billion term facility that our subsidiary entered into in March 2019, supported by limited direct capital expenditures by us, at a lower cost per unit of production capacity than that of Model 3 production at the Tesla Factory.

Other Manufacturing

We continue to expand production capacity at our existing facilities. We also intend to further increase cost-competitiveness in our significant markets through local manufacturing, including of Model 3 and Model Y at a future Gigafactory in Europe for which we are in the late stages of site selection.

Trends in Cash Flow, Capital Expenditures and Operating Expenses

Capital expenditures in 2019 are projected to be slightly below $1.5 billion, to continue to develop our main projects such as the global manufacturing expansion of Model 3, launch and ramp of Model Y, and launch of Tesla Semi, including additional vertical integration of our supply chain and production process, as well as the further expansion of our Supercharger and vehicle service and repair networks. Given the breadth of our various planned projects and our focus on cost efficiency, as we make progress on such projects we may find that our actual spend may be different than previously expected.

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Likewise, we expect operating expenses as a percentage of revenue to continue to decrease in the future as we focus on increasing operational efficiency and process automation, as well as from increases in expected overall revenues from our expanding sales. In particular, our efforts to scale down and optimize our cost structure relative to the size of our business have already manifested in total operating expenses decreasing from $3.4 billion to $3.1 billion during the nine month periods ended September 30, 2018 and 2019, respectively, including restructuring and other charges. Meanwhile, our total revenues increased from $14.2 billion to $17.2 billion, respectively, during such periods.

In March 2018, our stockholders approved the 2018 CEO Performance Award, with vesting contingent on achieving market capitalization and operational milestones. Consequently, we may incur significant additional non-cash stock-based compensation expense over the term of the award as each operational milestone becomes probable of being met. In particular, we will have to record a cumulative catch-up expense at the time each operational milestone becomes probable, which may be material depending on the length of time elapsed from the grant date. See Note 13, Equity Incentive Plans—2018 CEO Performance Award, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details regarding the stock-based compensation relating to the 2018 CEO Performance Award.  

Critical Accounting Policies and Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

For a description of our critical accounting policies and estimates, refer to Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Results of Operations

Revenues

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
(Dollars in millions)	2019		2018		$			%			2019		2018		$			%
Automotive sales	$	5,132	$	5,878	$	(746	)		-13	%	$	13,809	$	11,558	$	2,251			19	%
Automotive leasing		221		221		—			0	%		644		634		10			2	%
Total automotive revenues		5,353		6,099		(746	)		-12	%		14,453		12,192		2,261			19	%
Services and other		548		326		222			68	%		1,646		860		786			91	%
Total automotive & services and other    segment revenue		5,901		6,425		(524	)		-8	%		16,099		13,052		3,047			23	%
Energy generation and    storage segment revenue		402		399		3			1	%		1,095		1,183		(88	)		-7	%
Total revenues	$	6,303	$	6,824	$	(521	)		-8	%	$	17,194	$	14,235	$	2,959			21	%

Automotive & Services and Other Segment

Automotive sales revenue includes revenues related to the sale of new Model S, Model X and Model 3 vehicles, including access to our Supercharger network, internet connectivity, Autopilot and FSD features and over-the-air software updates, as well as sales of regulatory credits to other automotive manufacturers. Our revenue from regulatory credits fluctuates by quarter depending on when a contract is executed with a buyer and when the credits are delivered. For example, our revenue from regulatory credit sales in the three months ended September 30, 2019 was $134 million while it was $216 million in the three months ended March 31, 2019.

Automotive leasing revenue includes the amortization of revenue for Model S, Model X and Model 3 vehicles under direct lease agreements as well as those sold with resale value guarantees accounted for as operating leases under lease accounting. We began offering leasing for Model 3 vehicles in the second quarter of 2019.

Services and other revenue consists of non-warranty after-sales vehicle services, sales of used vehicles, retail merchandise, and sales by our acquired subsidiaries to third party customers.

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Automotive sales revenue decreased $746 million, or 13%, in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018, primarily due to a decrease of 10,255 Model S and Model X cash deliveries, partially offset by an increase of 17,140 Model 3 cash deliveries from production scaling. The higher proportion of Model 3 leases, which was introduced in the second quarter of 2019, and Model 3 deliveries in our overall population of vehicle deliveries as compared to the prior period contributed to the overall decrease of automotive sales revenue despite our overall deliveries increase. Additionally, the deliveries in the three months ended September 30, 2019 were at lower average selling prices due to price adjustments we made to our vehicle offerings in the first half of 2019 and the introduction of lower end Model 3 trims in 2019. There was also a decrease of $55 million in sales of regulatory credits to $134 million in the three months ended September 30, 2019 compared to $189 million in the same period in the prior year.

Automotive sales revenue increased $2.25 billion, or 19%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018, primarily due to an increase of 114,749 Model 3 cash deliveries from production scaling, partially offset by a decrease of 22,924 Model S and Model X cash deliveries. The higher proportion of Model 3 leases, which was introduced in the second quarter of 2019, and Model 3 deliveries in our overall population of vehicle deliveries as compared to the prior period contributed to a smaller increase in automotive sales revenue than our overall deliveries increase. The deliveries in the nine months ended September 30, 2019 were at lower average selling prices due to price adjustments we made to our vehicle offerings in the first half of 2019 and the introduction of lower end Model 3 trims in 2019. Additionally, there was an increase of $137 million in sales of regulatory credits to $461 million in the nine months ended September 30, 2019 compared to $324 million in the same period in the prior year. Due to the price adjustments mentioned above, we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. As a result, along with the estimated variable consideration related to normal future product returns for vehicles sold under the buyback options program, we adjusted our sales return reserve on vehicles previously sold under our buyback options program resulting in a reduction of automotive sales revenues of $555 million. Refer to Note 2, Summary of Significant Accounting Policies, to the consolidated statements included elsewhere in the Quarterly Report on Form 10-Q.

Automotive leasing revenue remained relatively consistent in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. There was an increase in cumulative vehicles under our direct vehicle leasing program, partially due to the introduction of Model 3 leasing in the second quarter of 2019, and an increase in the number of vehicles under leasing programs where our counterparty has elected to retained ownership of the vehicle during or at the end of the guarantee or lease period when compared to the three months ended September 30, 2018. When our counterparty retains ownership under our resale value guarantee leasing programs, any remaining balances within deferred revenue and resale value guarantee are settled to automotive leasing revenue. For customers who retain ownership under our direct vehicle leasing program, we recognize the contractual lease payoffs as automotive leasing revenue. These increases were offset by a decrease in cumulative vehicles under our resale value guarantee leasing programs which are accounted for as operating leases.

   Automotive leasing revenue increased $10 million, or 2%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increase was primarily due to an increase in cumulative vehicles under our direct vehicle leasing program and an increase in the number of vehicles under our resale value guarantee leasing programs where our counterparty has retained ownership of the vehicle during or at the end of the guarantee period when compared to the nine months ended September 30, 2018. When our counterparty retains ownership under our resale value guarantee leasing programs, any remaining balances within deferred revenue and resale value guarantee are settled to automotive leasing revenue. These increases were partially offset by a decrease in cumulative vehicles under our resale value guarantee financing programs which are accounted for as operating leases.

Services and other revenue increased $222 million, or 68%, in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. Services and other revenue increased $786 million, or 91%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increases in the three and nine months ended September, 2019 compared to the same periods in the prior year were primarily due to increases in used vehicle sales from increased volumes of trade-in vehicles, partially offset by lower average selling prices for traded-in Tesla vehicles due to price adjustments we made to our vehicle offerings during the first half of 2019. Additionally, there were increases in non-warranty maintenance services revenue as our fleet continues to grow.

Energy Generation and Storage Segment

Energy generation and storage revenue includes sales of solar energy systems and energy storage products, leasing revenue from solar energy systems under operating leases and PPAs and the sale of solar energy systems incentives.

Energy generation and storage revenue increased by $3 million, or 1%, in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. The increase was primarily due to increases in deployments of Powerpack and Powerwall, partially offset by decreases in deployments of cash and loan solar projects.

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Energy generation and storage revenue decreased by $88 million, or 7%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The decrease was primarily due to a decrease in deployments of cash and loan solar projects and a decrease in revenue recognized for commercial projects, most predominantly $73 million for the South Australia battery project in the prior period. These decreases were partially offset by increases in deployments of Powerpack and Powerwall.

Cost of Revenues and Gross Margin

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
(Dollars in millions)	2019			2018			$			%			2019			2018			$			%
Cost of revenues
Automotive sales	$	4,014		$	4,406		$	(392	)		-9	%	$	11,124		$	9,027		$	2,097			23	%
Automotive leasing		117			119			(2	)		-2	%		340			361			(21	)		-6	%
Total automotive cost of revenues		4,131			4,525			(394	)		-9	%		11,464			9,388			2,076			22	%
Services and other		667			445			222			50	%		2,096			1,212			884			73	%
Total automotive & services and    other segment cost of revenues		4,798			4,970			(172	)		-3	%		13,560			10,600			2,960			28	%
Energy generation and storage segment		314			330			(16	)		-5	%		956			1,036			(80	)		-8	%
Total cost of revenues	$	5,112		$	5,300		$	(188	)		-4	%	$	14,516		$	11,636		$	2,880			25	%
Gross profit total automotive	$	1,222		$	1,574								$	2,989		$	2,804
Gross margin total automotive		23	%		26	%								21	%		23	%
Gross profit total automotive & services and    other segment	$	1,103		$	1,455								$	2,539		$	2,452
Gross margin total automotive & services    and other segment		19	%		23	%								16	%		19	%
Gross profit energy generation and storage    segment	$	88		$	69								$	139		$	147
Gross margin energy generation and storage    segment		22	%		17	%								13	%		12	%
Total gross profit	$	1,191		$	1,524								$	2,678		$	2,599
Total gross margin		19	%		22	%								16	%		18	%

Automotive & Services and Other Segment

Cost of automotive sales revenue includes direct parts, material and labor costs, manufacturing overhead, including depreciation costs of tooling and machinery, shipping and logistics costs, vehicle connectivity costs, allocations of electricity and infrastructure costs related to our Supercharger network, and reserves for estimated warranty expenses. Cost of automotive sales revenues also includes adjustments to warranty expense and charges to write down the carrying value of our inventory when it exceeds its estimated net realizable value and to provide for obsolete and on-hand inventory in excess of forecasted demand.

Cost of automotive leasing revenue primarily includes the amortization of operating lease vehicles over the lease term, as well as warranty expenses recognized as incurred. Cost of automotive leasing revenue also includes vehicle connectivity costs and allocations of electricity and infrastructure costs related to our Supercharger network for vehicles under our leasing programs.

Cost of services and other revenue includes costs associated with providing non-warranty after-sales services, costs to acquire and certify used vehicles, and costs for retail merchandise. Cost of services and other revenue also includes direct parts, materials and labor costs, manufacturing overhead associated with sales by our acquired subsidiaries to third party customers.

Cost of automotive sales revenue decreased $392 million, or 9%, in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018, primarily due to a decrease of 10,255 Model S and Model X cash deliveries, lower average Model 3 costs per unit compared to the prior period primarily due to improvement of manufacturing efficiencies, and reductions of materials costs, including commercial negotiations with suppliers in the three months ended September 30, 2019. The decrease was partially offset by an increase of 17,140 Model 3 cash deliveries and higher average Model S and Model X costs per unit compared to the prior period from discontinuation of lower end trims in 2019.

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Cost of automotive sales revenue increased $2.10 billion, or 23%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018, primarily due to an increase of 114,749 Model 3 cash deliveries and higher average Model S and Model X costs per unit compared to the prior period from discontinuation of lower end trims in 2019. These increases were partially offset by a decrease of 22,924 Model S and Model X cash deliveries and lower average Model 3 costs per unit compared to the prior period primarily due to temporary under-utilization of manufacturing capacity at lower production volumes in the first half of 2018 and other cost efficiencies. Additionally, due to price adjustments we made to our vehicle offerings in the first half of 2019, we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. If customers elect to exercise the buyback options, we expect to be able to subsequently resell the returned vehicles, which resulted in a reduction of automotive cost of sales of $451 million for the nine months ended September 30, 2019. Refer to Note 2, Summary of Significant Accounting Policies, to the consolidated statements included elsewhere in the Quarterly Report on Form 10-Q.

Cost of automotive leasing revenue remained relatively consistent in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. There was a decrease in cumulative vehicles under our resale value guarantee financing programs which are accounted for as operating leases. The decrease was partially offset by an increase in cumulative vehicles under our direct vehicle leasing program and an increase in the number of vehicles under leasing programs where our counterparty has retained ownership of the vehicle during or at the end of the guarantee or lease period when compared to the prior period. When our counterparty retains ownership under our leasing programs, the net book value of the leased vehicle of the lease vehicle is expensed to cost of automotive leasing revenue.

     Cost of automotive leasing revenue decreased $21 million, or 6%, in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The decrease was primarily due to a decrease in cumulative vehicles under our resale value guarantee financing programs which are accounted for as operating leases. The decrease was partially offset by an increase in cumulative vehicles under our direct vehicle leasing program and an increase in the number of vehicles under our resale value guarantee leasing programs where our counterparty has retained ownership of the vehicle during or at the end of the guarantee period when compared to the prior period. When our counterparty retains ownership under our resale value guarantee leasing programs, the net book value of the leased vehicle of the lease vehicle is expensed to cost of automotive leasing revenue.

Cost of services and other revenue increased $222 million, or 50%, in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. Cost of services and other revenue increased $884 million, or 73%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increases in the three and nine months ended September 30, 2019 compared to the same periods in the prior year were primarily due to the costs of used vehicle sales from the increased volumes of trade-in vehicles. Additionally, there were increases in the costs of our new service centers, additional service personnel in existing and new service centers, Mobile Service capabilities, parts distribution centers and investment in new body shops to provide maintenance services to our rapidly growing fleet of vehicles.

Gross margin for total automotive decreased from 26% to 23% in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. The decrease was primarily related to lower Model S and Model X margins from lower average selling prices due to price adjustments we made to our vehicle offerings in the first half of 2019. The decrease was partially offset by a slight improvement of Model 3 margins as we achieved additional manufacturing efficiencies in the production of Model 3 year-over-year while average selling price decreased from introduction of lower end trims, and a higher proportion of Model 3 as a percentage of our total automotive sales compared to the prior period. Reductions of materials costs, including commercial negotiations with suppliers in the three months ended September 30, 2019, also had an offsetting impact to the gross margin decrease.

Gross margin for total automotive decreased from 23% to 21% in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The decrease was primarily related to lower Model S and Model X margins from lower average selling prices due to price adjustments we made to our vehicle offerings in the first half of 2019. Additionally, the price adjustments also resulted in a reduction in gross automotive sales profit of $104 million from the adjustment of our sales return reserve on vehicles previously sold under our buyback options program. The decrease was partially offset by improvement of Model 3 margins compared to the prior period as we achieved additional manufacturing efficiencies in the production of Model 3 and a higher proportion of Model 3 as a percentage of our total automotive sales compared to the prior period.

Gross margin for total automotive & services and other segment decreased from 23% to 19% in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. Gross margin for total automotive & services and other segment decreased from 19% to 16% in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The decreases of gross margin in the three and nine months ended September 30, 2019 compared to the same periods in the prior year were primarily due to the automotive gross margin impacts discussed above.

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Energy Generation and Storage Segment

Cost of energy generation and storage revenue includes direct and indirect material and labor costs, warehouse rent, freight, warranty expense, other overhead costs and amortization of certain acquired intangible assets. In addition, where arrangements are accounted for as operating leases, the cost of revenue is primarily comprised of depreciation of the cost of leased solar energy systems, maintenance costs associated with those systems and amortization of any initial direct costs.

Cost of energy generation and storage revenue decreased by $16 million, or 5%, in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. The decrease was primarily due to a decrease in cost of revenue for cash and loan solar projects from lower deployments. Additionally, there were higher costs in the three months ended September 30, 2018 for our solar energy system lease arrangements due to impairment charges. The decrease was partially offset by increases in cost of revenue for Powerpack and Powerwall from increased deployments, and higher costs from temporary manufacturing under-utilization of our Solar Roof ramp.

Cost of energy generation and storage revenue decreased by $80 million, or 8%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The decrease was primarily due to a decrease in cost of revenue for commercial energy storage projects, most predominantly $73 million for the South Australia battery project in the prior period, and a decrease in cost of revenue for cash and loan solar projects from lower deployments. These decreases were partially offset by increases in cost of revenue for Powerpack and Powerwall from increased deployments, and higher costs from temporary manufacturing under-utilization of our Solar Roof ramp.

Gross margin for energy generation and storage increased from 17% to 22% in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. Energy storage gross margins improved in the three months ended September 30, 2019 compared to the prior period as a result of lower materials costs. Additionally, solar energy system lease arrangement gross margin also increased in the three months ended September 30, 2019 compared to the prior period, as there were higher costs in the three months ended September 30, 2018 for our solar energy system lease arrangements due to impairment charges. These increases were partially offset by lower margins in our cash and loan solar energy system business driven by higher fixed costs per project as a result of lower deployments in the three months ended September 30, 2019 and higher costs from temporary manufacturing under-utilization of our Solar Roof ramp.

Gross margin for energy generation and storage  remained relatively consistent at 13% in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. Energy storage gross margins improved in the nine months ended September 30, 2019 compared to the prior period as a result of lower materials costs, partially offset by lower gross margins in our cash and loan solar energy system business driven by higher fixed costs per project as a result of lower deployments and higher costs from temporary manufacturing under-utilization of our Solar Roof ramp.

Research and Development Expense

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
(Dollars in millions)	2019			2018			$			%			2019			2018			$			%
Research and development	$	334		$	351		$	(17	)		-5	%	$	998		$	1,104		$	(106	)		-10	%
As a percentage of revenues		5	%		5	%								6	%		8	%

Research and development (“R&D”) expenses consist primarily of personnel costs for our teams in engineering and research, manufacturing engineering and manufacturing test organizations, prototyping expense, contract and professional services and amortized equipment expense.

R&D expenses as a percentage of revenue remained relatively consistent in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. R&D expenses as a percentage of revenue decreased in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The decrease was primarily from our focus on increasing operational efficiency and process automation, our efforts to scale down and optimize our cost structure relative to the size of our business, as well as from an increase in overall revenues from our expanding sales.

R&D expenses decreased $17 million, or 5%, in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. The decrease was primarily due to an $18 million decrease in employee and labor related expenses from cost efficiency initiatives.

R&D expenses decreased $106 million, or 10%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The decrease was primarily due to a $71 million decrease in employee and labor related expenses from cost efficiency initiatives and a $26 million decrease in facilities, freight, and depreciation expenses.

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Selling, General and Administrative Expense

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
(Dollars in millions)	2019			2018			$			%			2019			2018			$			%
Selling, general and administrative	$	596		$	730		$	(134	)		-18	%	$	1,947		$	2,167		$	(220	)		-10	%
As a percentage of revenues		9	%		11	%								11	%		15	%

Selling, general and administrative (“SG&A”) expenses generally consist of personnel and facilities costs related to our stores, marketing, sales, executive, finance, human resources, information technology and legal organizations, as well as fees for professional and contract services and litigation settlements.

SG&A expenses as a percentage of revenue decreased in the three and nine months ended September 30, 2019 as compared to the same periods ended September 30, 2018. The decrease was primarily from our focus on increasing operational efficiency and process automation, our efforts to scale down and optimize our cost structure relative to the size of our business. The decrease in the nine months ended September 30, 2019 percentage as compared to the prior period was also due to an increase in overall revenues from our expanding sales.

SG&A expenses decreased $134 million, or 18%, in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. The decrease was primarily due to a $103 million decrease in employee and labor related expenses from decreased headcount and cost efficiency initiatives, and a $25 million decrease in marketing expenses.

SG&A expenses decreased $220 million, or 10%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The decrease was primarily due to a $248 million decrease in employee and labor related expenses from decreased headcount and cost efficiency initiatives, partially offset by a $40 million increase in stock-based compensation expense related to the 2018 CEO Performance Award and stock awards granted for new hires and refresher employee stock grants.

Restructuring and other

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
(Dollars in millions)	2019			2018			$			%			2019			2018			$		%
Restructuring and other	$	—		$	27		$	(27	)		-100	%	$	161		$	130		$	31	24%
As a percentage of revenues		0	%		0	%								1	%		1	%

Restructuring and other expenses decreased $27 million in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. We recognized settlement and legal expenses of $26 million in the three months ended September 30, 2018 for the settlement with the SEC relating to a take-private proposal for Tesla. These expenses were substantially paid by the end of 2018. There were no restructuring actions during the three months ended September 30, 2019.

Restructuring and other expenses increased $31 million, or 24%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. During the nine months ended September 30, 2019, we carried out certain restructuring actions in order to reduce costs and improve efficiency. As a result, we recognized $50 million of costs primarily related to employee termination expenses and losses from closing certain stores impacting both segments. We recognized $47 million in impairment related to IPR&D intangible asset as we abandoned further development efforts (refer to Note 4, Goodwill and Intangible Assets for details) and $15 million for the related equipment within the energy generation and storage segment. We also incurred a loss of $49 million for closing operations in certain facilities. On the statement of cash flows, the amounts were presented in the captions in which such amounts would have been recorded absent the impairment charges. The employee termination expenses were substantially paid by September 30, 2019, while the remaining amounts were non-cash. The restructuring actions during nine months ended September 30, 2019 will result in an estimated cost savings of approximately $62 million for the remainder of 2019.

In addition to the take-private proposal charge in the third quarter of 2018 as discussed above, we carried out certain restructuring actions in order to reduce costs and improve efficiency in the second quarter of 2018. As a result, in the three months ended June 30, 2018, we recognized $34 million of one-time employee termination expenses and estimated losses from sub-leasing a certain facility. Also included within restructuring and other activities was $56 million of expenses (materially all of which were non-cash) from restructuring the energy generation and storage segment, which were comprised of disposals of certain tangible assets, the shortening of the useful life of a trade name intangible asset and a contract termination penalty. In addition, we concluded that a portion of IPR&D is not commercially feasible. Consequently, we recognized an impairment loss of $13 million in the three months ended June 30, 2018.

Interest Expense

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
(Dollars in millions)	2019			2018			$			%			2019			2018			$			%
Interest expense	$	(185	)	$	(175	)	$	(10	)		6	%	$	(515	)	$	(488	)	$	(27	)		6	%
As a percentage of revenues		3	%		3	%								3	%		3	%

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Interest expense increased by $10 million, or 6%, in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. Interest expense increased by $27 million, or 6%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increases were primarily due to an increase in the average carrying balances of interest bearing debt in the three and nine months ended September 30, 2019 as compared to the same periods in the prior year.

Other Income (Expense), Net

	Three Months Ended											Nine Months Ended
	September 30,						Change					September 30,						Change
(Dollars in millions)	2019			2018			$		%			2019			2018			$		%
Other income, net	$	85		$	23		$	62		270	%	$	70		$	36		$	34	94%
As a percentage of revenues		1	%		0	%							0	%		0	%

Other income (expense), net, consists primarily of foreign exchange gains and losses related to our foreign currency-denominated monetary assets and liabilities and changes in the fair values of our fixed-for-floating interest rate swaps. We expect our foreign exchange gains and losses will vary depending upon movements in the underlying exchange rates.

Other income (expense), net, increased  by $62 million, or 270%,   in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. Other income (expense), net, increased  by $34 million, or 94%,   in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. These changes were primarily due to favorable fluctuations in foreign currency exchange rates, partially offset by losses from interest rate swaps related to our debt facilities when compared to the prior period.

Provision for Income Taxes

	Three Months Ended September 30,						Change					Nine Months Ended September 30,						Change
(Dollars in millions)	2019			2018			$		%			2019			2018			$		%
Provision for income taxes	$	26		$	17		$	9		53	%	$	68		$	36		$	32		89	%
Effective tax rate		15	%		6	%							-8	%		-3	%

Our provision for income taxes increased by $9 million, or 53%, in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. Our provision for income taxes increased by $32 million, or 89%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The increases were primarily due to the increases in taxable profits in certain foreign jurisdictions year-over-year.

Net Income (Loss) Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

	Three Months Ended September 30,					Change			Nine Months Ended September 30,					Change
(Dollars in millions)	2019		2018			$		%	2019		2018			$		%
Net income (loss) attributable to    noncontrolling interests and    redeemable noncontrolling    interests in subsidiaries	$	7	$	(57	)	$	64	Not meaningful	$	60	$	(157	)	$	217	Not meaningful

Our net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests was related to financing fund arrangements.

Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests changed unfavorably by $64 million in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018. The change was primarily due to lower activities in our financing fund arrangements.

Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests changed unfavorably by $217 million in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. The change was primarily due to lower activities in our financing fund arrangements and a charge related to buyout of noncontrolling interests.

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Liquidity and Capital Resources

As of September 30, 2019, we had $5.34 billion of cash and cash equivalents. Balances held in foreign currencies had a U.S. dollar equivalent of $616 million and consisted primarily of Chinese yuan, euros and Canadian dollars. Our sources of cash are predominantly from our deliveries of vehicles, sales and installations of our energy storage products and solar energy systems, proceeds from debt facilities, proceeds from financing funds and proceeds from equity offerings.

Our sources of liquidity and cash flows enable us to fund ongoing operations, research and development projects for new products, and development of our main projects such as the global manufacturing expansion of Model 3, launch and ramp of Model Y, and launch of Tesla Semi, including additional vertical integration of our supply chain and production process, as well as the further expansion of our Supercharger and vehicle service and repair networks. We currently expect total 2019 capital expenditures to be slightly below $1.5 billion.

In 2019 and beyond, we will continue to apply our increasing experience and learnings from past and current product ramps to attain a level of capital efficiency per dollar of spend that is significantly greater than historical levels. For example, based on our experience with ramping Model 3 at the Tesla Factory, we have achieved capital spend per unit of Model 3 manufacturing capacity for the first phase of Gigafactory Shanghai that is less than that of the ramp of our line in Fremont and we expect the same for the production ramp of Model Y at the Tesla Factory, particularly given the expected substantial commonality of components between Model Y and Model 3. Considering the pipeline of new products planned at this point, and all other infrastructure growth and investments in Gigafactory 1, Gigafactory 2, Gigafactory Shanghai and future planned manufacturing facilities, we currently estimate that capital expenditures will be between $2.0 to $2.5 billion annually for the next two fiscal years. However, given the breadth of our various planned projects, and our focus on cost efficiency, our cost structure is difficult to predict with accuracy long-term and as we make progress on such projects we may find that our actual spend may be different than previously expected. Moreover, we expect that the cash we generate from our core operations will generally be sufficient to cover our future capital expenditures and to pay down our near-term debt obligations, although we may choose to seek alternative financing sources. For example, much of the investment in Gigafactory Shanghai has been and will continue to be funded through indebtedness arranged through local financial institutions in China, including a RMB 3.5 billion term facility that our subsidiary entered into in March 2019. Moreover, given the length of the transit time between the Tesla Factory and China during which our vehicles, particularly Model S and Model X, are counted as finished goods inventory, our subsidiary entered into a revolving facility of up to RMB 5.0 billion in September 2019 to finance such vehicles in-transit. As always, we continually evaluate our capital expenditure needs and may decide it is best to raise additional capital to fund the rapid growth of our business.

We have an agreement with the SUNY Foundation to spend or incur $5.0 billion in combined capital, operational expenses, costs of goods sold, and other costs in the State of New York during the 10-year period beginning April 30, 2018. We anticipate meeting our applicable obligations to the SUNY Foundation through our operations at this facility and other operations within the State of New York, and we do not believe that we face a significant risk of default.

We expect that our current sources of liquidity together with our projection of cash flows from operating activities will provide us with adequate liquidity over at least the next 12 months. A large portion of our future expenditures is to fund our growth, and we can adjust our capital and operating expenditures by operating segment, including future expansion of our product offerings and our Supercharger and vehicle service and repair networks. We may need or want to raise additional funds in the future, and these funds may not be available to us when we need or want them, or at all. If we cannot raise additional funds when we need or w