Need help answering the steps on the document,

Exhibit 7 (also available as an Excel file on Compass) provides, to the extent available, information on the number of Model S vehicles Tesla produced, beginning in Q3, 2012, and the revenues and cost of revenues, beginning in Q4 2012.

Calculate the average cost per vehicle sold for each quarter from Q4, 2012, through Q4, 2015, using the numbers for units delivered and Automotive cost of sales.

For quarters where both production and shipments are available:

Calculate the number of completed units added to inventory

Calculate the dollar amount that Finished Goods Inventory increased

Divide the dollar amount that Finished Goods Inventory increased by the number of completed units added to inventory for that quarter, to obtain a cost per vehicle added to inventory

Compare the cost per vehicle number from 1.b.iii., with the cost per vehicle sold in 1.a., above.

Evaluate and comment on the differences

From 1.a., above, or 1.b.iii., is there a downward trend in cost per vehicle? Does it seem to fit the learning curve we covered in class?

Calculate the average selling price of a Model S each quarter from Q4, 2012, through Q4, 2015, using the Net Automotive Sales number (after deducting environmental and other credits). Did the average selling price increase over that period, decrease, or remain about the same, with some fluctuation?

Explain the limitations of trying to determine whether costs are declining when using the limited information available in an annual report.

Exhibit 1 provides examples of Teslas notes for Warranty costs and reserves. Exhibit 7 includes a summary of the warranty notes since Tesla first began selling the Model S in Q3 2012. Tesla provides a four-year, 50,000 mile warranty, but the battery and powertrain are warrantied for eight years, with unlimited mileage. Consumer Reports, which rated the Tesla Model S as the highest ranked car it has ever tested, no longer recommends the Model S because of poor reliability.

Using Exhibit 7, and any other information you can obtain, estimate whether the $180.754 million warranty reserve as of December 31, 2015, is adequate to cover warranty costs for the 112, 860 Model S vehicles Tesla has sold to date ($1,602 per vehicle, although warranties are about to expire on vehicles sold in 2012, except for the battery and powertrain). In your analysis, consider that Tesla does not have dealers, so it sometimes drives to an owners location, drops off a loaner car, and drives the owners vehicle to the nearest repair facility and then returns it to the owner once the vehicle has been repaired.

Exhibit 2 provides examples of Teslas inventory notes. Exhibit 7 includes a summary of inventory information since Tesla began selling the Model S in 2012. One way for a firm to manipulate its reported income is to build up an inventory of finished units over several quarters. For example, Tesla will incur selling, general, and administrative costs regardless of the number of vehicles sold. In most instances, it will also record depreciation expense, regardless of the vehicles sold.

After accumulating a large finished goods inventory, a firm can sell the units in inventory, together with current production, to show significantly higher revenues in one quarter, and possibly also report a profit, or at least a smaller loss, in the period when it sells the units in finished goods inventory. That may allow the firm to sell equity or debt.

Is there any indication Tesla built up a finished goods inventory, and then sold that inventory to report higher sales for one quarter, at any point in the last 3 years? If so, identify the quarters when that occurred.

Estimate the effect on the increase in Automotive Sales, Cost of Automotive Sales, and gross margin from selling units out of inventory for any quarter where that occurred.

Exhibit 3 provides examples of Teslas plant, property and equipment note, while Exhibit 7 includes a summary of that information for the past 3 years.

For each quarter, calculate the amount of plant, property, and equipment (PP&E) Tesla had available to produce one vehicle in a quarter.

Is there a trend in PP&E needed to produce one vehicle in a quarter over time?

Recalculate the PP&E per vehicle using a lag of one or two quarters (divide PP&E for a quarter by production from one or two quarters later, since additional PP&E is usually added before a significant increase in production). Does the calculation in this question, 4.c., provide better information that the calculation from question 4.a.? Explain.

Tesla plans to announce its $35,000 Model 3 on March 31, 2015. That vehicle is expected to go on sale in late 2017. To meet that date, Tesla will need to complete its Gigafactory and also build an automotive plant capable of producing 200,000-300,000 Model 3 vehicles per year.

Assume the Model 3 will require the same amount of PP&E as the Model 3, adjusted for price. That is, if the Model S sells for $105,000, assume the Model 3 will require 1/3 the PP&E as a Model S. How much will Tesla need to spend on PP&E for a Model 3 factory capable of producing 250,000 vehicles?

Major automakers have a long history of reducing production costs. For example, a mid-size Honda Accord or Toyota Camry sells for 25-30% more than an Accord or Camry from 12 years ago. However, inflation for that period was 28%, while the newer models are typically larger and have far more features than earlier models.

From your answers to previous questions for this exam, is there evidence that Tesla will be able to produce a low-cost vehicle to compete, for example, with the Chevrolet Volt or Bolt, the Nissan Leaf, or the wide range of newer model electric vehicles that other auto manufacturers plan to introduce in the next few years? Explain.

Tesla Motors, Inc. March 26, 2016 Tesla Motors, Inc. (B) Tesla Motors, Inc. was founded in 2003 to develop and produce luxury all-electric vehicles that could travel long distances. Almost from the start, Tesla has been surrounded by controversy. Several individuals claim to be founders or co-founders and there was even a lawsuit as to who co-founded the firm.1 Tesla Motors reported an $11 million profit for the first quarter of 2013 (Exhibit 4), raised $1 billion from the sale of stock and bonds the week after its earnings announcement, and repaid its DOE loans early. Even though Tesla now has significant losses each quarter, its market value of approximately $31 billion is more than half the market value of BMT, Ford, General Motors, or Honda, and about 75% of Nissan's market value. Net income after tax for each of those five firms exceed Tesla's annual revenues. Reviews of the Tesla Model S The New York Times, Motor Trend, and Consumer Reports recently reviewed Tesla's Model S, a luxury, all-electric sedan with a claimed 265-mile driving range and speeds that may be as fast as a Porsche or Corvette. A September 2012 New York Times review conducted in San Francisco in temperate weather was highly favorable.2 However, a February 2013 New York Times review conducted in cold weather was far less positive. According to the author, driving in cold weather, running the heater, or parking overnight in cold weather all significantly reduced Tesla's claimed 1 Who Cares Who Founded Tesla Motors, The Daily Green, http://www.thedailygreen.com/living-green/blogs/cars-transportation/tesla-motors-lawsuit460709. 2 One Big Step for Tesla, One Giant Step for EVs, The New York Times, http://www.nytimes.com/2012/09/30/automobiles/autoreviews/one-big-step-for-tesla-one-giantleap-for-evs.html?_r=0&pagewanted=all&pagewanted=print. Page 1 of 16 Tesla Motors, Inc. 265-mile driving range.3 Tesla Motors CEO Elon Musk charged that The Times article was blatantly false,4 while The Times author defended his review.5 In its October 2015 issue, Consumer Reports gave Tesla's Model S a rating of 100, but had to rescale its rating system because the Model S received a score of 103 on a scale with a 100 maximum. Consumer Reports rated the Tesla Model S as the best car it has tested, but not suited for travelling long distances. Product design Tesla's Model S has been widely praised for many reasons. It is a zero-emission, all-electric, fullsize sedan. Its battery module includes more than 7,000 18-650 Lithium-ion laptop batteries arranged into a liquid-cooled slab about four inches tall that fits between the wheels, and below the passenger module. By driving over a swapping station; within 90 seconds, a robot can remove the 1,300 pound battery module and install a fully-charged replacement. The battery module is heavy and at the bottom of the vehicle, so the Model S is more stable than other sedans and far less prone to roll-over. The Chevrolet Corvette is the only other vehicle with as low of a center of gravity, and it is a two-seat sports car. Because the battery is below the passenger module, the Model S has exceptional storage, both under the hood and in the trunk. Tesla does not provide vehicle measurements, but Toyota provides comparisons of Toyota vehicles with nearly every other vehicle produced, including the Tesla Model S. According to Toyota, the Toyota Avalon, Toyota's largest sedan, has 14.0 cubic feet of cargo space; the Tesla Model S has 31.6 cubic feet of cargo space. The Model S has also been praised as one of the most attractive sedans on the market. Its lines are clean and sophisticated, and it has a claimed 0.24 drag coefficient, the lowest of any sedan on the market. The Toyota Prius, specifically designed to have a low drag coefficient, and far less attractive, has a .26 drag coefficient. The Model S offers an optional rear-facing, two-passenger seat module with five-point seat belts, which allows the Model S to seat seven passengers. However, passengers in the third-row seats must be a minimum of 37 inches tall, weigh between 35 and 77 pounds, and their heads must not touch the top of the vehicle. The third seat will also not hold child seats. Some reviewers mentioned the Model S has limited second-seat head room. According to Toyota, front headroom in the Model S is 38.8 inches, which is comparable to other sedans, but 3 Stalled Out on Tesla's Electric Highway, The New York Times, http://www.nytimes.com/2013/02/10/automobiles/stalled-on-the-ev-highway.html? ref=automobiles&_r=1&. 4 A Most Peculiar Test Drive, The New York Times, http://www.nytimes.com/2013/02/10/automobiles/stalled-on-the-ev-highway.html? ref=automobiles&_r=1&. 5 That Tesla Data: What It Says and What It Doesn't, The New York Times, http://www.nytimes.com/2013/02/10/automobiles/stalled-on-the-ev-highway.html? ref=automobiles&_r=1& Page 2 of 16 Tesla Motors, Inc. second-row headroom is only 35.3 inches. Toyota reports the following second-seat headroom for other sedans: Toyota Yaris, 37.6 inches; Honda FIT, 39.0 inches; Mini Cooper, 38.4 inches; Nissan Leaf, 37.3 inches; Chevrolet Volt, 36.0 inches. The .24 drag coefficient may be a result of limited second-seat headroom, which may limit its suitability as a five-person sedan for adults. Many items that are standard equipment on luxury vehicles are optional on the Model S, such as leather seats, CD players, and MP3 players. With options, the $75,000, 70 kWh entry level Model S, can sell for above $65,000, while the $125,000, 90 kWh Performance Model can sell for more than $140,000. Battery Warranty Another issue is that Tesla seemingly offers an exceptional battery warranty. Tesla's battery module is comprised of more than 7,000 18-650 lithium-ion batteries, which are also widely used in laptop computers. Tesla's Web site describes the battery warranty as 8 years, with unlimited mileage.6 Tesla claims that its battery's liquid cooling system will significantly extend the life of its batteries. However, as described in Exhibit 1, neither Tesla's basic warranty nor any extended warranty covers the battery pack's charging capacity. An 85 kWh battery will initially power a Model S or Model S Performance for 265 miles (possibly less than 200 miles if weather conditions are not ideal). That warranty limitation on charging capacity may mean the warranty will not cover a five-year old battery that powers the Tesla for fewer than 100 miles. If Tesla Motors failed to repair or replace such a battery, it seems likely that attorneys would file class action law suits against Tesla Motors. Exhibit 1 also describes other Tesla Motors liabilities. Free Electricity for Life at Tesla Supercharger Stations Another Tesla Model S feature is free charging for life at Tesla Superchargers. These Superchargers will recharge a Model S 85 kWh battery to 50% capacity in about 30 minutes, as compared to traditional charging methods that may require eight hours or more to fully charge an 85 kWh battery. Tesla reports that it costs $100,000-$175,000 to install a Supercharging station. That does not include the cost of land, but Tesla has a partnering program were businesses are offered the prestige of having Tesla Superchargers on their premises at no cost to Tesla, in exchange for letting Tesla install at least four charging stations reserved exclusively for Tesla vehicles. Tesla had eight U.S. Supercharging stations in early 2013, but had 129 U.S. Supercharging stations by mid-November 2014. Most Supercharging stations are in relatively inconvenient locations because gas stations and fast-food outlets near interstates may see little benefit from providing exclusive parking spaces that are sometimes unoccupied but reserved, and at other times are occupied for 30-45 minutes by a single vehicle.7 Although it is not always clear where 6 http://www.teslamotors.com/models/options 7 Etherington, Darrell, TechCrunch, July 26, 2013. http://techcrunch.com/2013/07/26/inside-teslas-superchargerpartner-program-the-costs-and-commitments-of-electrifying-road-transport/ Page 3 of 16 Tesla Motors, Inc. they are located, the most common Supercharger locations appear to be in outlet shopping malls, mid-priced motels, and municipal parking facilities, where restrooms are not readily available. The most convenient Supercharger locations are in toll-road plazas and State welcome centers. Dealers Tesla currently sells vehicles through company stores. Nearly every state in the U. S. has laws that prohibit vehicle producers from owning auto dealerships. Some states have laws that only protect existing car dealers, so if a new vehicle manufacturer has no dealers, that manufacturer is allowed to open its own store or dealership. Some states have already modified their franchise laws to prohibit vehicle producers from owning dealerships or stores. 8 In January 2013, Tesla won a lawsuit brought against it by the Massachusetts State Automobile Dealers Association that argued Tesla had violated Massachusetts law by selling cars directly to customers. However, Superior court Judge Kenneth Fishman dismissed the case because Tesla has no dealers in Massachusetts.9 In April 2013 Tesla Motors won a similar lawsuit brought by New York automobile dealers.10 However, Texas has laws that prohibit Tesla from having sales offices in the state and Tesla has been unsuccessful in getting changes to those laws. Regulatory Credits Another issue is that Tesla benefits from two types of governmental credits. First, electric vehicle buyers receive tax credits that do not appear on Tesla's financial statements, but do increase demand for Tesla vehicles. Tesla customers receive a $7,500 Federal Income Tax credit (deduction from Federal income taxes) and a $2,500 State of California Tax credit. Federal tax credits begin phasing out once a producer has sold 200,000 total electric vehicles in the United States.11 If Tesla becomes a volume manufacturer, those incentives will stop. As of September 30, 2015, Tesla has sold approximately 90,000 vehicles worldwide. Second, Tesla receives various environmental credits for producing low-emission or zeroemission vehicles, while other vehicle manufacturers are required to pay environmental penalties for producing polluting vehicles. Tesla is allowed to sell its environmental credits to other firms, and those firms are willing to buy the credits to offset against their environmental penalties. Tesla 8 Tesla CEO Elon Musk Takes on Car Dealers, http://blogs.wsj.com/corporateintelligence/2012/10/22/tesla-ceo-elon-musk-takes-on-car-dealers/. 9 Hirsch, Jerry, Judge dismisses lawsuit against Tesla for setting up car stores, The Los Angeles Times, January 4, 2013, http://www.latimes.com/business/autos/la-fi-hy-tesla-wins-dealer-suit20130104,0,6007556.story. 10 White, Joseph B., Tesla Wins Another Round Against Car Dealers, The Wall Street Journal, April 11, 2013, http://blogs.wsj.com/corporate-intelligence/2013/04/11/tesla-wins-another-roundagainst-car-dealers/. 11 United States Internal Revenue Service Plug-In Electric Drive Vehicle Credit (IRC 30D), http://www.irs.gov/Businesses/Plug-In-Electric-Vehicle-Credit-%28IRC-30-and-IRC-30D%29, May 28, 2013. Page 4 of 16 Tesla Motors, Inc. reported in its 2013 10Q that revenue included $67.9 million of Zero-Emission Vehicle credits and $17.1 million of other credits it received from other automobile producers: During the first quarter of 2013, we recognized $67.9 million in ZEV sales, which contributed to our gross margin. ZEV credit revenue should decline in future quarters relative to our automotive sales as we grow our sales outside the United States and earn fewer credits on the 60 kWh Model S battery variant for those sales that occur in the United States. Other regulatory credit sales recognized during the first quarter of 2013 were $17.1 million. While we will pursue opportunities to monetize ZEV credits we earn from the sales of our vehicles, we do not plan to rely on these sales to be a significant contributor to gross margin, and our business model is not predicated on such ZEV credits.12 Beginning in Q1, 2015, Tesla began reporting regulatory credits in its 8-K, instead of its 10-Qs and 10-Ks. Model 3 Tesla is not currently profitable and is only selling about 13,000 Model S vehicles each quarter. Tesla expects to sell an additional 10,000 Model X SUVs each quarter when production capacity becomes available, possibly in late 2016. To earn profits sufficient to justify its $30 billion market value, investors believe Tesla must build 300,000-500,000 low-cost Model 3 vehicles annually, beginning in 2017 or 2018. Required: 1. Exhibit 7 (also available as an Excel file on Compass) provides, to the extent available, information on the number of Model S vehicles Tesla produced, beginning in Q3, 2012, and the revenues and cost of revenues, beginning in Q4 2012. a. Calculate the average cost per vehicle sold for each quarter from Q4, 2012, through Q4, 2015, using the numbers for units delivered and Automotive cost of sales. b. For quarters where both production and shipments are available: i. ii. iii. Calculate the number of completed units added to inventory Calculate the dollar amount that Finished Goods Inventory increased Divide the dollar amount that Finished Goods Inventory increased by the number of completed units added to inventory for that quarter, to obtain a cost per vehicle added to inventory 12 Tesla Motors 2013 Quarter 1 10-Q, p. 22, May 20, 2013. Page 5 of 16 Tesla Motors, Inc. iv. v. Compare the cost per vehicle number from 1.b.iii., with the cost per vehicle sold in 1.a., above. Evaluate and comment on the differences c. From 1.a., above, or 1.b.iii., is there a downward trend in cost per vehicle? Does it seem to fit the learning curve we covered in class? d. Calculate the average selling price of a Model S each quarter from Q4, 2012, through Q4, 2015, using the Net Automotive Sales number (after deducting environmental and other credits). Did the average selling price increase over that period, decrease, or remain about the same, with some fluctuation? e. Explain the limitations of trying to determine whether costs are declining when using the limited information available in an annual report. 2. Exhibit 1 provides examples of Tesla's notes for Warranty costs and reserves. Exhibit 7 includes a summary of the warranty notes since Tesla first began selling the Model S in Q3 2012. Tesla provides a four-year, 50,000 mile warranty, but the battery and powertrain are warrantied for eight years, with unlimited mileage. Consumer Reports, which rated the Tesla Model S as the highest ranked car it has ever tested, no longer recommends the Model S because of poor reliability. Using Exhibit 7, and any other information you can obtain, estimate whether the $180.754 million warranty reserve as of December 31, 2015, is adequate to cover warranty costs for the 112, 860 Model S vehicles Tesla has sold to date ($1,602 per vehicle, although warranties are about to expire on vehicles sold in 2012, except for the battery and powertrain). In your analysis, consider that Tesla does not have dealers, so it sometimes drives to an owner's location, drops off a loaner car, and drives the owner's vehicle to the nearest repair facility and then returns it to the owner once the vehicle has been repaired. 3. Exhibit 2 provides examples of Tesla's inventory notes. Exhibit 7 includes a summary of inventory information since Tesla began selling the Model S in 2012. One way for a firm to manipulate its reported income is to build up an inventory of finished units over several quarters. For example, Tesla will incur selling, general, and administrative costs regardless of the number of vehicles sold. In most instances, it will also record depreciation expense, regardless of the vehicles sold. After accumulating a large finished goods inventory, a firm can sell the units in inventory, together with current production, to show significantly higher revenues in one quarter, and possibly also report a profit, or at least a smaller loss, in the period when it sells the units in finished goods inventory. That may allow the firm to sell equity or debt. Page 6 of 16 Tesla Motors, Inc. a. Is there any indication Tesla built up a finished goods inventory, and then sold that inventory to report higher sales for one quarter, at any point in the last 3 years? If so, identify the quarters when that occurred. b. Estimate the effect on the increase in Automotive Sales, Cost of Automotive Sales, and gross margin from selling units out of inventory for any quarter where that occurred. 4. Exhibit 3 provides examples of Tesla's plant, property and equipment note, while Exhibit 7 includes a summary of that information for the past 3 years. a. For each quarter, calculate the amount of plant, property, and equipment (PP&E) Tesla had available to produce one vehicle in a quarter. b. Is there a trend in PP&E needed to produce one vehicle in a quarter over time? c. Recalculate the PP&E per vehicle using a lag of one or two quarters (divide PP&E for a quarter by production from one or two quarters later, since additional PP&E is usually added before a significant increase in production). Does the calculation in this question, 4.c., provide better information that the calculation from question 4.a.? Explain. 5. Tesla plans to announce its $35,000 Model 3 on March 31, 2015. That vehicle is expected to go on sale in late 2017. To meet that date, Tesla will need to complete its Gigafactory and also build an automotive plant capable of producing 200,000-300,000 Model 3 vehicles per year. a. Assume the Model 3 will require the same amount of PP&E as the Model 3, adjusted for price. That is, if the Model S sells for $105,000, assume the Model 3 will require 1/3 the PP&E as a Model S. How much will Tesla need to spend on PP&E for a Model 3 factory capable of producing 250,000 vehicles? b. Major automakers have a long history of reducing production costs. For example, a midsize Honda Accord or Toyota Camry sells for 25-30% more than an Accord or Camry from 12 years ago. However, inflation for that period was 28%, while the newer models are typically larger and have far more features than earlier models. From your answers to previous questions for this exam, is there evidence that Tesla will be able to produce a low-cost vehicle to compete, for example, with the Chevrolet Volt or Bolt, the Nissan Leaf, or the wide range of newer model electric vehicles that other auto manufacturers plan to introduce in the next few years? Explain. 6. Page 7 of 16 Tesla Motors, Inc. Exhibit 1 Tesla Motors, Inc. Warranty Notes, Dec 31, 2015 and Sept 30, 2015 Warranties Warranties, December 31, 2015 We provide a manufacturer's warranty on all vehicles, production powertrain components and systems, and Tesla Energy products we sell. We accrue a manufacturer's warranty reserve which includes our best estimate of the projected costs to repair or to replace items under warranty. These estimates are based on actual claims incurred todate and an estimate of the nature, frequency and costs of future claims. These estimates are inherently uncertain and changes to our historical or projected warranty experience may cause material changes to our warranty reserve in the future. The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued liabilities, while the remaining amount is classified as long-term within other long-term liabilities. Accrued warranty activity consisted of the following for the periods presented (in thousands): Year Ended December 31, 2014 2015 Accrued warrantybeginning of period Warranty costs incurred Net changes in liability for pre-existing warranties, including expirations Provision for warranty Accrued warrantyend of period $ $ 129,043 $ (52,760) 53,182 $ (39,903) 1,470 103,001 180,754 18,599 97,165 129,043 $ $ 2013 13,013 (19,160) (2,072) 61,401 53,182 Warranties, September 30, 2015 We provide a manufacturer's warranty on all vehicles, production powertrain components and systems, and Tesla Energy products we sell. We accrue a manufacturer's warranty reserve which includes our best estimate of the projected costs to repair or to replace items under warranty. These estimates are based on actual claims incurred todate and an estimate of the nature, frequency and costs of future claims. These estimates are inherently uncertain and changes to our historical or projected warranty experience may cause material changes to our warranty reserve in the future. The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued liabilities, while the remaining amount is classified as long-term within other long-term liabilities. Accrued warranty activity consisted of the following for the periods presented (in thousands): Three Months Ended September 30, 2015 2014 Accrued warrantybeginning of period Warranty costs incurred Net changes in liability for pre-existing warranties, including expirations Provision for warranty Accrued warrantyend of period $ $ Nine Months Ended September 30, 2015 2014 164,595 $ (21,593) 84,371 $ (11,179) 129,043 $ (50,666) 53,183 (29,750) 1,306 26,026 170,334 $ 14,609 25,934 113,735 $ 12,635 79,322 170,334 $ 24,270 66,032 113,735 Page 8 of 16 Tesla Motors, Inc. Exhibit 2 Tesla Motors, Inc. Inventory Notes, Dec 31, 2015 and Sept 30, 2015 Inventory Note 4 - Inventory, December 31, 2015 As of December 31, 2015 and 2014, our inventory consisted of the following (in thousands): December 31, 2015 Raw materials Work in process Finished goods Service parts Total $ 528,935 163,830 476,512 108,561 1,277,838 $ December 31, 2014 $ $ 392,292 56,114 397,318 107,951 953,675 Finished goods inventory includes vehicles in transit to fulfill customer orders, new vehicles available for immediate sale at our retail and service center locations, and pre-owned Tesla vehicles. The increase in finished goods inventory was primarily due to customer orders that were in transit for delivery at year end. We write down inventory as a result of excess and obsolete inventories, or when we believe that the net realizable value of inventories is less than the carrying value. During the years ended December 31, 2015, 2014 and 2013, we recorded write-downs of $44.9 million, $15.6 million and $8.9 million in cost of automotive sales. Note 4 - Inventory, September 30, 2015 As of September 30, 2015 and December 31, 2014, our inventory consisted of the following (in thousands): September 30, 2015 Raw materials Work in process Finished goods Service parts Total $ $ 393,691 $ 86,587 692,437 121,002 1,293,717 $ December 31, 2014 392,292 56,114 397,318 107,951 953,675 Finished goods inventory includes vehicles in transit to fulfill customer orders, new vehicles available for immediate sale at our retail and service center locations, and pre-owned Tesla vehicles. The increase in finished goods inventory was primarily due to customer orders that were in transit for delivery at quarter-end. Page 9 of 16 Tesla Motors, Inc. Exhibit 3 Tesla Motors, Inc. Property, Plant and Equipment Notes Dec 31, 2015 and Sept 30, 2015 Property, Plant and Equipment Note 5 - Property, Plant and Equipment, December 31, 2015 As of December 31, 2015 and 2014, our property, plant and equipment, net, consisted of the following (in thousands): December 31, 2015 Machinery, equipment and office furniture Tooling Leasehold improvements Building and building improvements Land Computer equipment and software Construction in progress Less: Accumulated depreciation and amortization Total $ $ 1,694,910 $ 550,902 338,392 461,303 60,234 175,512 693,207 3,974,460 (571,126) 3,403,334 $ December 31, 2014 720,746 295,906 230,270 154,362 49,478 98,970 572,125 2,121,857 (292,590) 1,829,267 Construction in progress is comprised primarily of tooling and equipment related to the manufacturing of our Model S and Model X vehicles, Gigafactory construction, and related capitalized interest. Completed assets are transferred to their respective asset class and depreciation begins when the asset is ready for its intended use. Interest expense on outstanding debt is capitalized during the period of significant capital asset construction. Capitalized interest on construction in progress is included in property, plant and equipment, and is amortized over the life of the related assets. During the years ended December 31, 2015 and 2014, we capitalized $41.5 million and $12.8 million of interest expense. We are sometimes involved in construction at our leased facilities primarily related to retail stores, service centers, and certain manufacturing facilities. In accordance with Accounting Standards Codification 840, Leases, for build-to-suit lease arrangements where we are involved in the construction of structural improvements prior to the commencement of the lease or take some level of construction risk, we are considered the owner of the assets and land during the construction period. Accordingly, upon commencement of our construction activities, we record a construction in progress asset and a corresponding financing liability. Once the construction is completed, if the lease meets certain \"sale-leaseback\" criteria, we will remove the asset and related financial obligation from the balance sheet and treat the building lease as an operating lease. If upon completion of construction, the project does not meet the \"sale-leaseback\" criteria, the leased property will be treated as a capital lease and included in building and building improvements in the table above. As of December 31, 2015 and December 31, 2014, the table above includes $206.1 million and $52.4 million of build-to-suit assets. As of December 31, 2015 and December 31, 2014, corresponding financing obligations of $1.3 million and $21.0 million are recorded in accrued liabilities and $201.3 million and $31.4 million are recorded in other long-term liabilities. Depreciation and amortization expense during the years ended December 31, 2015, 2014 and 2013 were $278.7 million, $155.9 million and $83.9 million. Total property and equipment assets under capital lease as of December 31, 2015 and 2014 were $58.1 million and $33.4 million. Accumulated depreciation related to assets under capital lease as of these dates were $22.7 million and $12.8 million. Page 10 of 16 Tesla Motors, Inc. We have acquired land for the site of our Gigafactory and construction activities are ongoing for which we have incurred $317.5 million and $106.6 million of costs as of December 31, 2015 and 2014. Note 5 - Property, Plant and Equipment, September 30, 2015 As of September 30, 2015 and December 31, 2014, our property, plant and equipment consisted of the following (in thousands): September 30, 2015 Machinery, equipment and office furniture Construction in progress Leasehold improvements Tooling Building and building improvements Computer equipment and software Land Less: Accumulated depreciation and amortization Total $ $ 1,519,415 $ 747,046 320,863 439,415 336,212 153,396 60,233 3,576,580 (472,769) 3,103,811 $ December 31, 2014 720,746 572,125 230,270 295,906 154,362 98,970 49,478 2,121,857 (292,590) 1,829,267 We have acquired land for the site of our Gigafactory and have incurred $261.0 million of construction costs as of September 30, 2015. Page 11 of 16 Tesla Motors, Inc. Exhibit 4 Tesla Motors, Inc. Consolidated Statements of Operations, Dec 31, 2015 (In thousands) 2015 Revenues Automotive Services and other Total revenues Cost of revenues Automotive Services and other Total cost of revenues Gross profit Operating expenses Research and development Selling, general and administrative Total operating expenses Loss from operations Interest income Interest expense Other income (expense), net Loss before income taxes Provision for income taxes Net loss Net loss per share of common stock, basic and diluted Weighted average shares used in computing net loss per share of common stock, basic and diluted $ Year Ended December 31, 2014 3,740,973 305,052 4,046,025 $ 3,007,012 191,344 3,198,356 $ 2,823,302 299,220 3,122,522 923,503 $ $ 2,145,749 170,936 2,316,685 881,671 717,900 922,232 1,640,132 (716,629) 1,508 (118,851) (41,652) (875,624) 13,039 (888,663) $ (6.93) $ 464,700 603,660 1,068,360 (186,689) 1,126 (100,886) 1,813 (284,636) 9,404 (294,040) $ (2.36) $ 128,202 124,539 2013 1,921,877 91,619 2,013,496 1,483,321 73,913 1,557,234 456,262 231,976 285,569 517,545 (61,283) 189 (32,934) 22,602 (71,426) 2,588 (74,014) (0.62) 119,421 The accompanying notes are an integral part of these consolidated financial statements. Page 12 of 16 Tesla Motors, Inc. Exhibit 5, Tesla Motors, Inc. Consolidated Balance Sheets, Dec 31, 2015 (In thousands) December 31, 2015 Assets Current assets Cash and cash equivalents Restricted cash and marketable securities Accounts receivable Inventory Prepaid expenses and other current assets Total current assets Operating lease vehicles, net Property, plant and equipment, net Restricted cash Other assets Total assets Liabilities and Stockholders' Equity Current liabilities Accounts payable Accrued liabilities Deferred revenue Resale value guarantees Customer deposits Long-term debt and capital leases Total current liabilities $ $ $ Deferred revenue Long-term debt and capital leases Resale value guarantee Other long-term liabilities Total liabilities Convertible senior notes (Notes 8) Stockholders' equity: Preferred stock; $0.001 par value; 100,000 shares authorized; no shares issued and outstanding Common stock; $0.001 par value; 2,000,000 shares authorized as of December 31, 2015 and 2014, respectively; 131,425 and 125,688 shares issued and outstanding as of December 31, 2015 and 2014, respectively Additional paid-in capital Accumulated other comprehensive loss Accumulated deficit Total stockholders' equity Total liabilities and stockholders' equity December 31, 2014 1,196,908 22,628 168,965 1,277,838 125,229 2,791,568 1,791,403 3,403,334 31,522 74,633 8,092,460 $ 916,148 422,798 423,961 136,831 283,370 633,166 2,816,274 $ $ 1,905,713 17,947 226,604 953,675 76,134 3,180,073 766,744 1,829,267 11,374 43,209 5,830,667 777,946 268,883 191,651 257,587 611,099 2,107,166 446,105 2,040,375 1,293,741 364,976 6,961,471 42,045 58,196 $ 292,271 1,818,785 487,879 154,660 4,860,761 131 3,414,692 (3,556) (2,322,323) 1,088,944 8,092,460 $ 126 2,345,266 (22) (1,433,660) 911,710 5,830,667 Page 13 of 16 Tesla Motors, Inc. Exhibit 6, Tesla Motors, Inc. Statements of Cash Flows, Dec. 31, 2015 (in thousands) Year Ended December 31, 2015 Cash Flows From Operating Activities Net loss Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization Stock-based compensation Amortization of discount on convertible debt Inventory write-downs Amortization of Department of Energy (DOE) loan origination costs Change in fair value of DOE warrant liability Fixed asset disposal Other non-cash operating activities Foreign currency transaction (gain) loss Changes in operating assets and liabilities Accounts receivable Inventories and operating lease vehicles Prepaid expenses and other current assets Other assets Accounts payable and accrued liabilities Deferred revenue Customer deposits Resale value guarantee Other long-term liabilities Net cash provided by (used in) operating activities Cash Flows From Investing Activities Purchases of property and equipment excluding capital leases Withdrawals out of our dedicated DOE account, net (Increase) decrease in other restricted cash Purchases of short-term marketable securities Maturities of short-term marketable securities Business acquisition Net cash used in investing activities Cash Flows From Financing Activities Proceeds from issuance of convertible and other debt Proceeds from issuance of common stock in public offering Proceeds from issuance of warrants Proceeds from exercise of stock options and other stock issuances Proceeds from issuance of common stock in private placement Principal payments on DOE loans Purchase of convertible note hedges Common stock and convertible debt issuance costs Principal payments on capital leases and other debt Collateralized lease borrowing Net cash provided by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental Disclosures Interest paid $ 2014 (888,663) $ 422,590 197,999 72,063 44,940 37,723 26,373 55,765 2013 (294,040) $ (74,014 ) (183,658) (1,050,264) (60,637) (4,493) 414,856 209,681 106,230 249,492 61,968 (57,337 ) (21,705 ) (460,561) (17,533) (434) 87,413 268,098 24,354 236,299 33,027 264,804 (1,634,850) (26,441) (12,260) (1,673,551) $ 106,083 80,737 9,143 8,918 5,558 (10,692) 1,796 1,815 (13,498) 46,267 (1,573,860 ) (29,595) (24,362) 263,345 322,203 36,721 442,295 23,697 (524,499) $ 231,931 156,496 69,734 15,609 14,178 7,471 (1,891 ) (969,885 ) (3,849) (205,841) 189,131 (990,444) (264,224) 14,752 55 (249,417) 2,300,000 389,160 100,455 (603,428) (35,149) (11,179 ) 3,271 2,143,130 (35,525) 1,059,824 845,889 1,905,713 660,000 360,000 120,318 95,307 55,000 (452,337 ) (177,540) (16,901 ) (8,425) 635,422 (6,810 ) 643,999 201,890 845,889 318,972 730,000 106,611 20,000 (17,025) (203,780 ) 568,745 1,523,523 (34,278) (708,805 ) 1,905,713 1,196,908 $ 32,060 $ 20,539 $ $ 9,041 Page 14 of 16 Tesla Motors, Inc. Income taxes paid Supplemental noncash investing activities Acquisition of property and equipment included in accounts payable and accrued liabilities Estimated fair market value of facilities under build-to-suit lease 9,461 3,120 257 267,334 174,749 254,393 50,076 38,789 The accompanying notes are an integral part of these consolidated financial statements. Page 15 of 16 Tesla Motors, Inc. Exhibit 7, Background information Page 16 of 16 ` 2012 Q3 2013 Q4 Q1 Q2 Q3 Revenues and Cost of sales Model S units delivered* Model S units produced 250 350 Automotive sales Environmental and other credits** Net automotive sales Automotive cost of sales Gross margin Automotive cost of sales as a % of net auto sales 2,400 2,750 $294,376 $35,500 $258,876 $278,711 ($19,835) 4,900 5,150 5,900 Quarterly reports, except Q4, which are calculated 2014 Q4 Q1 Q2 Q3 Q4 ` 6,892 6,457 7,579 7,785 9,834 7,535 8,763 11,627 $555,203 $401,535 $430,196 $610,852 $85,000 $69,400 $75,200 $94,600 $470,203 $332,135 $354,996 $516,252 $461,818 $303,599 $324,883 $453,578 $8,385 $28,536 $30,113 $62,674 $618,811 $41,600 $577,211 $462,471 $114,740 $768,242 $55,800 $712,442 $554,104 $158,338 $849,009 $57,100 $791,909 $598,472 $193,437 $956,661 $61,800 $894,861 $694,964 $199,897 Annual reports 2015 Q1 Q2 Q3 Q4 10,045 11,160 11,532 12,807 11,603 13,091 22,533 $893,320 $66,000 $827,320 $631,745 $195,575 $878,090 $27,000 $851,090 $666,386 $184,704 $852,555 $39,000 $813,555 $628,729 $184,826 $1,117,008 $8,000 $1,109,008 $896,442 $212,566 Accrued warranty liability Accrued warranty, beginning of period Warranty costs incurred Change to previous liability Provision for warranty Accrued warranty, end of period $5,723 ($958) $6,220 $13,013 $24,061 $36,877 $53,722 ($784) ($3,107) ($1,601) ($6,392) ($8,060) $3,174 $4,878 ($10,124) $7,577 $14,156 $11,244 $18,359 $17,642 $13,013 $24,062 $36,878 $53,722 $53,180 $53,182 ($9,300) $8,120 $19,930 $71,932 $71,932 ($9,271) $1,541 $20,169 $84,371 $84,371 ($11,179) $14,609 $25,934 $113,735 $113,735 ($10,153) ($5,671) $31,132 $129,043 $129,043 ($11,786) $10,762 $27,282 $155,301 $155,301 ($17,287) $567 $26,014 $164,595 $164,595 ($21,593) $1,306 $26,026 $170,334 $170,334 ($2,094) ($11,165) $23,679 $180,754 $83,974 $163,637 $115,966 $99,734 $164,346 $184,665 $25,525 $24,535 $41,698 $47,874 $38,608 $42,500 $30,845 $62,559 $63,277 $77,860 $102,387 $69,324 $18,704 $17,773 $16,699 $29,423 $42,204 $43,866 $159,048 $268,504 $237,640 $254,891 $347,545 $340,355 $197,779 $64,431 $132,234 $56,286 $450,730 $235,279 $48,110 $250,030 $63,508 $596,927 $361,837 $74,981 $226,023 $89,651 $752,492 $392,292 $56,114 $397,318 $107,951 $953,675 $370,553 $63,058 $492,645 $128,584 $1,054,840 $395,171 $99,116 $597,329 $120,663 $1,212,279 $393,691 $86,587 $692,437 $121,002 $1,293,717 $528,935 $163,830 $476,512 $108,561 $1,277,838 $380,597 $239,557 $117,521 $75,314 $45,020 $50,211 $110,504 $1,018,724 $169,335 $849,389 $468,151 $253,101 $134,172 $85,889 $45,029 $60,910 $193,260 $1,240,512 $204,690 $1,035,822 $607,677 $272,881 $165,826 $106,507 $81,003 $45,201 $368,678 $1,647,773 $243,447 $1,404,326 $720,746 $295,906 $230,270 $154,362 $49,478 $98,970 $572,125 $2,121,857 $292,590 $1,829,267 $819,794 $308,082 $310,235 $198,024 $51,990 $114,824 $763,628 $2,566,577 $342,386 $2,224,191 $918,134 $340,090 $339,398 $243,750 $52,115 $129,143 $1,027,256 $3,049,886 $403,869 $2,646,017 $1,519,415 $439,415 $320,863 $336,212 $60,233 $153,396 $747,046 $3,576,580 $472,769 $3,103,811 $1,694,910 $550,902 $338,392 $461,303 $60,234 $175,512 $693,207 $3,974,460 $571,126 $3,403,334 $1,455 $6,220 Fixed assets Office furniture, machinery, and equipment Tooling Leasehold improvements Building and building improvements Land Computer equipment and software Construction in progress Total Plant, property and equipment at cost Less: accumulated depreciation and amortization Net Plant property, and equipment *In Q4 2015 Tesla did not disclose unit sales. It did report unit sales increased by 76% from 2014. 2014 unit sales = 31,655 Estimated 2015 unit sales = 55,713 2012 2013 2014 2015 112,860 $91,323 $5,000 $86,323 $92,947 ($6,624) $385,699 $1,997,786 $3,192,723 $3,740,973 $40,500 $324,200 $216,300 $345,199 $1,673,586 $2,976,423 $371,658 $1,543,878 $2,310,011 $2,823,302 ($26,459) $129,708 $666,412 Q2+Q2+Q3 Ending inventory Raw materials Work in process Finished goods Service parts Total Total Q3 10Q, YTD $138,843 $126,170 $36,084 $39,628 $26,391 $19,405 $145,077 $531,598 $45,350 $486,248 $223,745 $172,584 $39,224 $50,574 $26,391 $22,125 $75,129 $609,772 $57,543 $552,229 $248,519 $199,096 $50,815 $54,603 $26,391 $26,012 $51,494 $656,930 $74,933 $581,997 $267,979 $211,793 $59,910 $58,492 $26,402 $28,886 $37,082 $690,544 $94,965 $595,579 $292,970 $219,577 $74,396 $62,710 $45,020 $32,281 $43,910 $770,864 $116,382 $654,482 $322,394 $230,385 $94,763 $67,707 $45,020 $42,073 $76,294 $878,636 $140,142 $738,494 **Environmental and ZEV credits Q3, 2012 is an estimate I added $50,000 to Q3 2013 and reduced Q4 by $50,000 I added $30,000 to each of the first 3 quarters in 2014 and reduced Q4 2014 by $90,000 In 2015, Tesla reported environmental credits in its 8-Ks instead of in its financial statements ($2,640) $2,545 $6,315 ($3,424) $10,122 $13,013 $13,013 ($19,160) ($2,072) $61,401 $53,182 $53,182 ($39,903) $18,599 $97,165 $129,043 $129,043 ($52,760) $1,470 $103,001 $180,754