UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31,September 30, 2012

OR

Commission File Number: 001-34756

Tesla Motors, Inc.

(Exact name of registrant as specified in its charter)

(650) 681-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 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  x

As of April 30,October 31, 2012, there were 105,214,400113,778,865 shares of the registrant’s Common Stock outstanding.

TESLA MOTORS, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31,SEPTEMBER 30, 2012

INDEX

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,future profitability, future delivery of automobiles,projected costs, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects,, plans and objectives of management and the statements made below under the heading “Management Opportunities, Challenges and Risks.” The words “anticipates”, “believes”, “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

Tesla Motors, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

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

Tesla Motors, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)

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

Tesla Motors, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

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

Tesla Motors, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

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

Tesla Motors, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Overview of the Company

Tesla Motors, Inc. (Tesla, 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 advanced electric vehicle powertrain components. We have wholly-owned subsidiaries in North America, Europe and Asia. The primary purpose of these subsidiaries is to market and/or service our vehicles.

Since inception, we have incurred significant losses and have used approximately $495$651.1 million of cash in operations through March 31,September 30, 2012. As of March 31,September 30, 2012, we had $243.6$85.7 million in cash and cash equivalents and short-term marketable securities.equivalents. We are currently selling the Tesla Roadster and are developing the Model S sedan which we currently expect to introduce in June 2012. In Februaryand Tesla Roadster.

Public Offering

On September 25, 2012, we revealed an early prototype of our Model X crossover.

Follow-on Offering and Concurrent Private Placements

In June 2011, we completedfiled a follow-onregistration statement on Form S-3 relating to a public offering of common stock in whichstock. On October 3, 2012, we completed the offering and sold a total of 6,095,0007,964,601 shares of our common stock and receivedfor total cash proceeds of $172.7$222.1 million from this transaction, net of underwriting discounts. Concurrent with this offering, we also(which includes 35,398 shares or $1.0 million sold 1,416,000 shares of our common stock to Elon Musk, our Chief Executive Officer and cofounder, and 637,475 sharescofounder), net of our common stockunderwriting discounts. Additionally, as of September 30, 2012, we had incurred offering costs of approximately $0.5 million related to Blackstar Investco LLC, an affiliate of Daimler AG (Daimler) and received total cash proceeds of $59.1 millionthis transaction.

As the public offering was completed in October 2012, this transaction is not reflected in the private placements. No underwriting discounts or commissions were paid in connection with these private placements.condensed consolidated financial statements as of September 30, 2012.

2. Summary of Significant Accounting Policies

Basis of Consolidation

The condensed consolidated financial statements include the accounts of Tesla and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and reported amounts of expenses during the reporting period, including revenue recognition, inventory valuation, warranties, fair value of financial instruments and stock-based compensation. Actual results could differ from those estimates.

Unaudited Interim Financial Statements

The accompanying condensed consolidated balance sheet as of March 31,September 30, 2012, the condensed consolidated statements of operations for the three and nine months ended March 31,September 30, 2012 and 2011, the

condensed consolidated statements of comprehensive loss for the three and nine months ended March 31,September 30, 2012 and 2011 and the condensed consolidated statements of cash flows for the three nine

months ended March 31,September 30, 2012 and 2011 and other information disclosed in the related notes are unaudited. The condensed consolidated balance sheet as of December 31, 2011 was derived from our audited consolidated financial statements at that date. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission.

The accompanying interim condensed consolidated financial statements and related disclosures 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 condensed 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 year or interim period.

Revenue Recognition

We recognize revenues from sales of Model S and the Tesla Roadster, including vehicle options and accessories, vehicle service and sales of emission credits, such as zero emission vehicle and greenhouse gas emission credits, as well as sales of electric vehicle powertrain components and systems, such as battery packs and drive units. We recognize revenue when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and there are no uncertainties regarding customer acceptance; (iii) fees are fixed or determinable; and (iv) collection is reasonably assured.

Warranties

We began recording warranty reserves with the commencement of Tesla Roadster sales in 2008. Initially, Tesla Roadsters were sold with a warranty of four years or 50,000 miles. Subsequently, Tesla Roadsters have been sold with a warranty of three years or 36,000 miles. In June 2012, we commenced deliveries of Model S. Model S is sold with a warranty of four years or 50,000 miles for most vehicle components and eight years or at least 100,000 miles for the battery pack. Accrued warranty activity consisted of the following for the periods presented (in thousands):

We provide a warranty on all vehicle, production powertrain components and systems sales, and we accrue warranty reserves at the time a vehicle or production powertrain component is delivered to the customer. Warranty reserves include management’s best estimate of the projected costs to repair or to replace any items under warranty, based on actual warranty experience as it becomes available and other known factors that may impact our evaluation of historical data. We review our reserves at least quarterly to ensure that our accruals are adequate in meeting expected future warranty obligations, and we will adjust our estimates as needed. Warranty expense is recorded as a component of cost of revenues in the condensed consolidated statements of operations. The portion of the warranty provision which is expected to be incurred within 12 months from the balance sheet date is classified as current, while the remaining amount is classified as long-term liabilities.

Concentration of Risk

Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, marketable securities, restricted cash and accounts receivable. Our cash and cash equivalents are primarily invested in money market funds with high credit quality financial institutions in the United States. At times, these deposits and securities may be in excess of insured limits. We invest cash not required for use in operations in high credit quality securities based on our investment policy. Our investment policy provides guidelines and limits regarding credit quality, investment concentration, investment type, and maturity that we believe will provide liquidity while reducing risk of loss of capital. Investments are of a short-term nature and include investments in corporate debt securities.

As of March 31,September 30, 2012 and December 31, 2011, our accounts receivable were derived primarily from the development of powertrain systems for Toyota Motor Corporation (Toyota) (see Note 9) and sales of powertrain componentssystems as well as sales of emission credits to Daimler.other automobile manufacturers.

The following summarizes the accounts receivable in excess of 10% of our total accounts receivable:

Although there may be multiple suppliers available, many of the components used in our vehicles are purchased by us from a single source. If these single source suppliers fail to satisfy our requirements on a timely basis at competitive prices, we could suffer manufacturing delays, a possible loss of revenues, or incur higher cost of sales, any of which could adversely affect our operating results.

Net Loss per Share of Common Stock

Our basic and diluted net loss per share of common stock is calculated by dividing net loss by the weighted average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the number of shares underlying outstanding stock options warrants and other convertible securities,warrants, are not included when their effect is antidilutive.

The following table presents the potential common shares outstanding that were excluded from the computation of basic and diluted net loss per share of common stock for the periods presented:

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued an accounting standard update, which revises the manner in which companies present comprehensive income in their financial statements. The new guidance removes the presentation options and requires entities to report

components of comprehensive income in either (1) a continuous statement of comprehensive income or

(2) two separate but consecutive statements. The guidance is effective for fiscal years, and interim periods within those years beginning after December 15, 2011. The authoritative guidance also required presentation of adjustments for items that are reclassified from other comprehensive income in the statement where the components of net income and the components of other compressive income are presented, which was indefinitely deferred by the FASB in December 2011. We adopted this authoritative guidance in the first quarter of fiscal 2012. The adoption of this updated guidance did not have a material impact on our condensed consolidated financial statements.

3. Balance Sheet Components

Inventory

As of March 31,September 30, 2012 and December 31, 2011, our inventory consisted of the following (in thousands):

Property, Plant and Equipment

As of March 31,September 30, 2012 and December 31, 2011, our property, plant and equipment, net, consisted of the following (in thousands):

Construction in progress is comprised primarily of assets related to the manufacturing of our Model S, including building improvements at our Tesla Factory in Fremont, California as well as tooling and manufacturing equipment and capitalized interest expense. We will start depreciatingDepreciation of these assets upon commencement of our Model S production.begins when they are ready for their 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 three and nine months ended March 31,September 30, 2012, we capitalized $2.1 million and $5.5 million, respectively. During the three and nine months ended September 30, 2011, we capitalized $1.6$1.1 million and $0.7$2.8 million of interest expense, respectively.

Depreciation and amortization expense during the three and nine months ended March 31,September 30, 2012 was $6.8 million and $13.7 million, respectively. Depreciation and amortization expense during the three and nine months ended September 30, 2011 was $3.8$3.7 million and $3.1$10.5 million, respectively.

Other Assets

As of March 31,September 30, 2012 and December 31, 2011, our other assets consisted of the following (in thousands):

Emission credits are related to the operation of our Tesla Factory and therefore we amortize the emission credits over the same useful life.

Accrued Liabilities

As of March 31,September 30, 2012 and December 31, 2011, our accrued liabilities consisted of the following (in thousands):

Other Long-Term Liabilities

As of March 31,September 30, 2012 and December 31, 2011, our other long-term liabilities consisted of the following (in thousands):

4. Fair Value of Financial Instruments

The carrying values of our financial instruments including cash equivalents, marketable securities, accounts receivable and accounts payable approximate their fair value due to their short-term nature. As a basis for determining the fair value of certain of our assets and liabilities, we established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level III) unobservable inputs in which there is little or no market data which requires us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs

when determining fair value. Our financial assets that are measured at fair value on a recurring basis consist of cash equivalents and marketable securities. Our liabilities that are measured at fair value on a recurring basis consist of our common stock warrant liability.

All of our cash equivalents and current restricted cash, which are comprised primarily of money market funds, are classified within Level I of the fair value hierarchy because they are valued using quoted market prices or market prices for similar securities. Our short-term marketable securities are classified within Level II of the fair value hierarchy and the market approach was used to determine fair value of these investments. Our common stock warrant liability (see Note 6) is classified within Level III of the fair value hierarchy.

As of March 31,September 30, 2012 and December 31, 2011, the fair value hierarchy for our financial assets and financial liabilities that are carried at fair value was as follows (in thousands):

Our available-for-sale marketable securities classified by security type as of March 31, 2012 and December 31, 2011 consisted of the following (in thousands):

All of our marketable securities with gross unrealized losses havehad been in a continuous unrealized loss position for less than twelve months as of March 31, 2012 and December 31, 2011. We have determined that the gross unrealized losses on our marketable securities as of March 31, 2012 and December 31, 2011 were temporary in nature.

The changes in the fair value of our common stock warrant liability were as follows (in thousands):

The estimated fair value of our long-term debt based on a market approach was approximately $281.1$359.4 million (par value of $360.5$465.0 million) and $220.3 million (par value of $276.3 million) as of March 31,September 30, 2012 and December 31, 2011, respectively, and represent Level II valuations. When determining the estimated fair value of our long-term debt, we used a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk.

We operate in various foreign countries, which exposes us to foreign currency exchange risk between the U.S. dollar and various foreign currencies, the most significant of which have been the Japanese yen, euro and British pound and Japanese yen.pound. In order to manage this risk, we enter into selected foreign currency forward contracts. These contracts are not designated as hedges, and as a result, changes in their fair value are recorded in other expense, net, on our condensed consolidated statements of operations. During the three and nine months ended March 31,September 30, 2012 and 2011, net gains and losses related to these instruments were not significant. We had notional amounts on foreign currency exchange contracts outstanding of $18.3$4.9 million and $8.8 million as of March 31,September 30, 2012 and December 31, 2011, respectively.

5. Reservation Payments

Reservation payments consist of payments that allow potential customers to hold a reservation for the future purchase of a Tesla Roadster, Model S, Model X or Model X.Tesla Roadster. These amounts are recorded as current liabilities until the vehicle is delivered. For our Tesla Roadsters, our current purchase agreement requires the payment of an initial nonrefundable deposit which varies based on the country of purchase. For Model S and Model X, we require an initial fully refundable reservation payment of at least $5,000. For customers who have placed a refundable reservation payment with us, theThe reservation payment becomes a nonrefundable deposit once the customer has selected the vehicle specifications and enters into a purchase agreement. We require full payment of the purchase price of the vehicle only upon delivery of the vehicle to the customer. Amounts received by us as reservation payments are generally not restricted as to their use by us. Upon delivery of the vehicle, the related reservation payments are applied against the customer’s total purchase price for the vehicle and recognized in automotive sales as part of the respective vehicle sale.

As of March 31,September 30, 2012, we held reservation payments for undelivered Model S and Model Xvehicles in an aggregate amount of $112.6$138.3 million. As of December 31, 2011, we held reservation payments for undelivered Model Svehicles of $90.0$91.8 million. In order to convert the reservation payments into revenue, we will need to sell vehicles to these customers. All reservation payments for the Model S and Model X are fully refundable until such time that a customer enters into a purchase agreement.

6. Department of Energy Loan Facility

On January 20, 2010, we entered into a loan facility with the Federal Financing Bank (FFB), and the Department of Energy (DOE), pursuant to the Advanced Technology Vehicles Manufacturing (ATVM) Incentive Program. This loan facility was amended in June 2011 to expand our cash investment options, and in February 2012 to modify the timing of certain future financial covenants and funding of the debt service reserve account, and in June 2012 to allow us to effect certain initiatives in our business plan. We entered into another amendment with the DOE in September 2012 to remove our obligation to comply with the current ratio financial covenant as detailed below.of September 30, 2012 and amend the timing of pre-funding the principal payment due in June 2013. We refer to the loan facility with the DOE, as amended, as the DOE Loan Facility. Under the DOE Loan Facility, the FFB has made available to us two multi-draw term loan facilities in an aggregate principal amount of up to $465.0 million. Up to an aggregate principal amount of $101.2 million will behad been made available under the first term loan facility to finance up to 80% of the costs eligible for funding for the powertrain engineering and the build out of a facility to design and manufacture lithium-ion battery packs, electric motors and electric components (the Powertrain Facility). Up to an aggregate principal amount of $363.9 million will behas been made available under the second term loan facility to finance up to 80% of the costs eligible for funding for the development of, and to build out the manufacturing facility for, our Model S sedan (the Model S Facility). Under the DOE Loan Facility, we are responsible for the remaining 20% of the costs eligible for funding under the ATVM Program for the projects as well as any cost overruns for each project. The costs paid by us prior toAs of August 31, 2012, we have fully drawn down the execution of the DOE Loan Facility and related to the Powertrain Facility and the Model S Facility will be applied towards our obligation to contribute 20% of the eligible project costs, and the DOE’s funding of future eligible costs will be adjusted to take this into account. Our obligations for the development of, and the build-out of our manufacturing facility for, Model S is budgeted to be an aggregate of $33 million or approximately 8.5% of the ongoing budgeted cost, plus any cost overruns for the projects. We have paid for the full 20% of the budgeted costs related to our Powertrain Facility andaforementioned facilities.

therefore expect to receive 100% reimbursement from the DOE Loan Facility for ongoing budgeted costs, but will continue to be responsible for cost overruns. On the closing date, we paid a facility fee to the DOE in the amount of $0.5 million.

Our DOE Loan Facility draw-downs werehave been as follows (in thousands):

Our ability to draw down funds under the DOE Loan Facility is conditioned upon several draw conditions. We are currently in compliance with these draw conditions. For the Powertrain Facility, the draw conditions include our achievement of progress milestones relating to the development of the powertrain manufacturing facility and the successful development of commercial arrangements with third parties for the supply of powertrain components. For the Model S Facility, the draw conditions include our achievement of progress milestones relating to the design and development of Model S and the Tesla Factory. Certain advances will be subject to additional conditions to draw-down related to the site on which the applicable project is located. Additionally, the DOE Loan Facility provides for the ability to update milestones should a reasonable need arise.

Advances under the DOE Loan Facility accrue interest at a per annum rate determined by the Secretary of the Treasury as of the date of the advance and will be based on the Treasury yield curve and the scheduled principal installments for such advance. Interest on advances under the DOE Loan Facility is payable quarterly in arrears. Advances under the Powertrain Facility are repayable in 28 equal quarterly installments commencing on December 15, 2012 (or for advances made after such date, in 26 equal quarterly installments commencing on June 15, 2013).2012. All outstanding amounts under the Powertrain Facility will be due and payable on the maturity date of September 15, 2019. Advances under the Model S Facility are repayable in 40 equal quarterly installments commencing on December 15, 2012 (or for advances made after such date, in 38 equal quarterly installments commencing on June 15, 2013). All outstanding amounts under the Model S Facility will be due and payable on the maturity date of September 15, 2022. Advances under the loan facilities may be voluntarily prepaid at any time at a price determined based on interest rates at the time of prepayment for loans made from the Secretary of the Treasury to FFB for obligations with an identical payment schedule to the advance being prepaid, which could result in the advance being prepaid at a discount, at par or at a premium. The loan facilities are subject to mandatory prepayment with net cash proceeds received from certain dispositions, loss events with respect to property and other extraordinary receipts. All obligations under the DOE Loan Facility are secured by substantially all of our property.

Under the DOE Loan Facility, we have committed to pay all costs and expenses incurred to complete the projects being financed in excess of amounts funded under the loan facility. We will be required to maintain, at all times, available cash and cash equivalents of at least 105% of the amounts required to fund this excess over our financing commitment, after taking into account current cash flows

and cash on hand, and reasonable projections of future generation of net cash from operations, losses and expenditures. Loans may be requested under the facilities until January 22, 2013, and we have committed to complete the projects being financed prior to such date.

The DOE Loan Facility documents contain customary covenants that include, among others, a requirement that the projects be conducted in accordance with the business plan for such project, compliance with all requirements of the ATVM Program, and limitations on our and our subsidiaries’ ability to incur indebtedness, incur liens, make investments or loans, enter into mergers or acquisitions, dispose of assets, pay dividends or make distributions on capital stock, pay indebtedness, pay management, advisory or similar fees to affiliates, enter into certain affiliate transactions, enter into new lines of business, and enter into certain restrictive agreements, in each case subject to customary exceptions. The DOE Loan Facility documents also contain customary financial covenants requiring us to maintain a minimum ratio of current assets to current liabilities, and (i) through November 30, 2012, a minimum cash balance, (ii) after September 30, 2012, a limit on capital expenditures, (iii) after June 30, 2013, a maximum leverage ratio, a minimum interest coverage ratio, a minimum fixed charge coverage ratio, and (iv) after March 31, 2014, a maximum ratio of total liabilities to shareholder equity. We are also required to work in good faith with the DOE to develop an early repayment plan for our outstanding DOE Loan Facility on terms that are mutually satisfactory to us and the DOE. We were in compliance with our current applicable financial covenants.covenants as of September 30, 2012. The DOE Loan Facility documents also contain customary events of default, subject in some cases to customary cure periods for certain defaults. In addition, events of default include a failure of Elon Musk, our Chief Executive Officer (CEO), Product Architect and Chairman, and certain of his affiliates, at any time prior to one year after we complete the project relating to the Model S Facility, to own at least 65% of capital stock held by Mr. Musk and such affiliates as of the date of the DOE Loan Facility.

Under the DOE Loan Facility, we have agreed to fund a dedicated debt service reserve account. In February 2012, we fundedpre-funded $15.0 million into this account, an amount equal to all principal and interest that will come due on December 15, 2012, and2012. We have agreed to pre-fund the account with $14.2 million on or before October 15, 2012 we have agreed to fund an amount equal toand $14.6 million on or before February 15, 2013 for all principal and interest that will come due on March 15, 2013 and June 15, 2013.2013, respectively, and make additional payments, beginning June 15, 2013, of between $14.2 million to $14.5 million each quarter to pre-fund the quarterly principal and interest payments that will be due from September 15, 2013 through December 15, 2014. Once we have deposited such amounts, we will not be required to further fundpre-fund such debt service reserve account. As of September 30, 2012, $15.0 million was held in this dedicated account. We have classified this cash as current restricted cash on the condensed consolidated balance sheet.

We have also agreed that, in connection with the sale of our common stock in an IPO, at least 75% of the net offering proceeds will be received by us and, in connection with the sale of our stock in any other follow-on equity offering, at least 50% of the net offering proceeds will be received by us. Offering proceeds may not be used to pay bonuses or other compensation to officers, directors, employees or consultants in excess of the amounts contemplated by our business plan approved by the DOE.

Upon completion of our IPO in 2010, we set aside $100 million to fund a separate dedicated account under our DOE Loan Facility. This dedicated account is used by us to fund any cost overruns for our powertrain and Tesla Factory projects and is used as a mechanism to defer advances under the DOE Loan Facility. This will not affect our ability to draw down the full amount of the DOE loans, but will require us to use the dedicated account to fund certain project costs up front, which costs may then be reimbursed by loans under the DOE Loan Facility once the dedicated account is depleted, or as part of the final advance for the applicable project. We will be required to deposit a portion of these reimbursements into the dedicated account, in an amount equal to up to 30% of the remaining project costs for the applicable project, and these amounts may similarly be used by us to fund project costs and cost overruns and will similarly be eligible for reimbursement by the draw-down of additional loans under the DOE Loan Facility once used in full, or as part of the final advance for the applicable project. Depending on the timing and magnitude of our draw-downs and the funding requirements of the dedicated account, the balance of the dedicated account will fluctuate throughout the period in which we plan to make draw-downs under the DOE Loan Facility. Upon completion of our final advance under the DOE Loan Facility, the balance in the dedicated account will be fully transferred out of the dedicated account. As of March 31, 2012 and December 31, 2011, $19.5 million and $23.5 million were held in this dedicated account, respectively. As we expect to transfer the remainder of this balance within one year, we have classified such cash as current restricted cash on the condensed consolidated balance sheet.

DOE Warrant

In connection with the closing of the DOE Loan Facility, we have also issued a warrant to the DOE to purchase up to 9,255,035 shares of our Series E convertible preferred stock at an exercise price of $2.51 per share. Upon the completion of our IPO on July 2, 2010, this preferred stock warrant became a warrant to purchase up to 3,090,111 shares of common stock at an exercise price of $7.54 per share. Beginning on December 15, 2018 and until December 14, 2022, the shares subject to purchase under the warrant will vest and become exercisable in quarterly amounts depending on the average outstanding balance of the loan during the prior quarter. The warrant may be exercised until December 15, 2023. If we prepay the DOE Loan Facility in part or in full, the total amount of shares exercisable under the warrant will be reduced.

Since the number of shares ultimately issuable under the warrants will vary depending on the average outstanding balance of the loan during the contractual vesting period, and decisions to prepay would be influenced by our future stock price as well as the interest rates on our loans in relation to market interest rates, we measured the fair value of the warrant using a Monte Carlo simulation approach. The Monte Carlo approach simulates and captures the optimal decisions to be made between prepaying the DOE loan and the cancellation of the DOE warrant. For the purposes of the simulation, the optimal decision represents the scenario with the lowest economic cost to us. The total warrant value would then be calculated as the average warrant payoff across all simulated paths discounted to our valuation date. The prepayment feature which allows us to prepay the DOE Loan Facility, and consequently affect the number of shares ultimately issuable under the DOE warrant, was determined to represent an embedded derivative. The use of different assumptions or a different methodology may have a material impact on the estimated fair value. This embedded derivative is inherently valued and accounted for as part of the warrant liability on our condensed consolidated balance sheets. Changes to the fair value of the embedded derivative are reflected as part of the warrant liability re-measurement to fair value at each balance sheet reporting date.

The warrant is recorded at its estimated fair value with changes in its fair value reflected in other expense, net, until its expiration or vesting. The fair value of the warrant at issuance was $6.3 million, and along with the DOE Loan Facility fee of $0.5 million and other debt issuance costs of $0.9 million, represents a cost of closing the loan facility and is being amortized to other expense, net over the expected term of the DOE Loan Facility of approximately 13 years. During the three and nine months ended March 31,September 30, 2012, we amortized $0.2 million and $0.5 million to other expense, net, respectively. During the three and nine months ended September 30, 2011, we amortized $0.2 million and $0.6$0.5 million to other income expense, net, respectively.

The DOE warrant will continue to be recorded at its estimated fair value with changes in the fair value reflected in other expense, net, as the number of shares of common stock ultimately issuable under the warrant is variable until its expiration or vesting. As of March 31,September 30, 2012 and December 31, 2011, the fair value of the DOE warrant was $8.7$9.7 million and $8.8 million, respectively. During the three and

nine months ended March 31,September 30, 2012, we recognized incomeexpense for the change in the fair value of the DOE warrant in the amount of $0.2$1.2 million and during$0.9 million, respectively. During the three and nine months ended March 31,September 30, 2011, we recognized a chargeexpense for the change in the fair value of the DOE warrant in the amount of $1.4$0.3 million and $2.1 million, respectively.

7. Equity Incentive Plans

We account for stock-based compensation by measuring and recognizing the fair value of all stock-based payment awards made to employees based on the estimated grant date fair values, including employee stock options and our employee stock purchase plan. We use the Black-Scholes option pricing model to estimate the value of employee stock options which requires a number of assumptions to determine the model inputs. These include the expected volatility of the stock’s market price, the

expected term of the stock-based awards, the expected risk free rate of interest and any dividend yields. As stock-based compensation expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. We estimate and adjust forfeiture rates based on a periodic review of recent forfeiture activity and expected future employee turnover. As we have been operating as a public company for a period of time that is shorter than our estimated expected option life, we concluded that our historical price volatility does not provide a reasonable basis for input assumptions within the Black-Scholes valuation model when determining the fair value of its stock options. As a result, our expected volatility is based on the historical volatility of a peer group of publicly traded companies.

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

CEO Stock Option Grant

On August 13, 2012, to create incentives for continued long term success beyond the Model S program and to closely align executive pay with increases in stockholder value, our Board of Directors granted 5,274,901 stock options to Elon Musk, our Product Architect and Chief Executive Officer (CEO Grant). The CEO Grant consists of ten vesting tranches with a vesting schedule based entirely on the attainment of both performance conditions and market conditions, assuming continued employment and service to us through each vesting date.

Each of the following ten vesting tranches requires a combination of one of the performance achievements outlined below and an incremental increase in our market capitalization of $4.0 billion, as compared to the initial market capitalization of $3.2 billion.

The term of the CEO Grant will be ten years, so that if any vesting tranches remain unvested after expiration of the CEO Grant, they will be forfeited. In addition, Mr. Musk will forfeit any unvested options if he is terminated as CEO of the Company, whether for cause or otherwise.

We measured the fair value of the CEO Grant using a Monte Carlo simulation approach with the following assumptions: risk-free interest rate of 1.65%, expected term of 10 years, expected volatility of 55% and dividend yield of 0%. Stock-based compensation expense related to the CEO Grant was $0.4 million for the three months ended September 30, 2012.

8. Information about Geographic Areas

We have determined that we operate in one reporting segment which is the design, development, manufacturing and sales of electric vehicles and electric vehicle powertrain components.

The following tables set forth revenues and long-lived assets by geographic area (in thousands):

Revenues

During the three and nine months ended March 31,September 30, 2012, and 2011, we recognized revenues of $17.0$41.0 million and $23.6$66.0 million, respectively, and during the three and nine months ended September 30, 2011, we recognized revenue of $30.9 million and $87.5 million, respectively in the United States, respectively.States.

Long-lived Assets

9. Development ServicesStrategic Partnerships

Toyota RAV4 Program

In July 2010, we and Toyota entered into a Phase 0 agreement to initiate development of an electric powertrain for the Toyota RAV4.RAV4 EV. Under this early phase development agreement, prototypes would be made by us by combining the Toyota RAV4 model with a Tesla electric powertrain. Pursuant

to the agreement, Toyota would pay us up to $9.0 million for the development services to be provided by us. We began producing and delivering prototypes to Toyota during the three months ended September 30, 2010. During the three months ended March 31, 2011, we recognized $1.2 million in development services revenue. As of June 30, 2011, we had delivered all prototypes and as such no further development services revenue under the Phase 0 agreement was recorded during the three months ended March 31, 2012.September 30, 2011. During the nine months ended September 30, 2011, we recognized $7.6 million in development services revenue under this agreement.

In October 2010, we entered into a Phase 1 contract services agreement with Toyota for the development of a validated powertrain system, including a battery pack, power electronics module, motor, gearbox and associated software, which will be integrated into an electric vehicle version of the Toyota RAV4. Pursuant to the agreement, Toyota would pay us up to $60.0 million for the successful completion of certain at risk development milestones and the delivery of prototype samples, including a $5.0 million upfront payment that we received upon the execution of the agreement. During the three and nine months ended March 31, 2012 andSeptember 30, 2011, we completed the various milestones and along with the amortization of our upfront payment and the delivery of certain prototype samples and the amortization of our upfront payment, we recognized $10.7$14.3 million and $14.0$40.9 million in development services revenue, respectively. As ofDuring the three months ended March 31, 2012, allwe completed the remaining development milestonesmilestone and the delivery of prototype samples under the Phase 1 agreement and recognized $10.7 million in development services revenue. No further development services revenue under the Phase 1 agreement have been completed.recorded subsequently.

In July 2011, we entered into a supply and services agreement with Toyota for the supply of a validated electric powertrain system, including a battery, charging system, inverter, motor, gearbox and associated software, which would be integrated into an electric vehicle version of the Toyota RAV4. Additionally, we would provide Toyota with certain services related to the supply of the electric powertrain system. During the three months ended March 31, 2012, we began delivering the electric powertrain system to Toyota for installation intounder the Toyota RAV4 EVsupply and services agreement. During the three and nine months ended September 30, 2012, we recognized revenue of $0.3$10.4 million and $15.1 million in automotive sales.sales, respectively.

Daimler Mercedes-Benz EV Program

During the fourth quarter of 2011, Daimler engaged us to assist with the development of a full electric powertrain for a Daimler Mercedes-Benz vehicle. In the first half of 2012, we received two purchase orders from Daimler related to the development of a full electric powertrain for a Daimler Mercedes-Benz vehicle and recognized $4.3 million in development services revenue during the three months ended June 30, 2012. In May 2012, we executed an agreement with Daimler which covers the significant terms for this development program; however, we have not yet entered into a final development agreement, which includes the development milestones and related payments, as of September 30, 2012.

10. Commitments and Contingencies

Environmental Liabilities

In May 2010, we entered into an agreement to purchase an existing automobile production facility located in Fremont, California from New United Motor Manufacturing, Inc. (NUMMI). NUMMI has previously identified environmental conditions at the Fremont site which affect soil and groundwater, and until recently, were undertaking efforts to address these conditions. These conditions are now being addressed by us and NUMMI. Although we have been advised by NUMMI that it has documented and managed the environmental issues and we completed a reasonable level of diligence on such environmental issues at the time we purchased the facility, we cannot determine the potential costs to remediate any pre-existing contamination with any certainty. Based on management’s best estimate, we

estimated the fair value of the environmental liabilities that we assumed to be $5.3 million. The fair value of these liabilities was determined based on an expected value analysis of the related potential costs to investigate, remediate and manage various environmental conditions that were identified as part of NUMMI’s facility decommissioning activities as well as our own diligence efforts. As we continue with our construction and operating activities, it is reasonably possible that our estimate of environmental liabilities may change materially.

We have reached an agreement with NUMMI under which, over a ten year period, we will pay the first $15.0 million of any costs of any governmentally-required remediation activities for contamination that existed prior to the completion of the facility and land purchase for any known or unknown environmental conditions, and NUMMI has agreed to pay the next $15.0 million for such remediation activities. Our agreement provides, in part, that NUMMI will pay up to the first $15.0 million on our behalf if such expenses are incurred in the first four years of our agreement, subject to our reimbursement of such costs on the fourth anniversary date of the closing.

On the ten-year anniversary of the closing or whenever $30.0 million has been spent on the remediation activities, whichever comes first, NUMMI’s liability to us with respect to remediation activities ceases, and we are responsible for any and all environmental conditions at the Fremont site. At that point in time, we have agreed to indemnify, defend, and hold harmless NUMMI from all liability and we have released NUMMI for any known or unknown claims except for NUMMI’s obligations for representations and warranties under the agreement. As of March 31,September 30, 2012 and December 31, 2011, we have accrued $5.3 million related to these environmental liabilities.

From time to time, we are subject to various legal proceedings that arise from the normal course of business activities. In addition, from time to time, third parties may assert intellectual property infringement claims against us in the form of letters and other forms of communication. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on our results of operations, prospects, cash flows, financial position and brand.

11. Subsequent Events

DOE Loan Facility Draw-DownPublic Offering

In MayOctober 2012, we completed a follow-on offering of common stock in which we sold a total of 7,964,601 shares of our common stock and received an additional loancash proceeds of $222.1 million from this transaction (which includes 35,398 shares or $1.0 million sold to Elon Musk, our Chief Executive Officer and cofounder), net of underwriting discounts.

DOE Loan Facility

In October 2012, we made a pre-funding payment of all principal and interest that will come due on March 15, 2013 into a dedicated debt service reserve account in accordance with the pre-funding requirement under the DOE Loan Facility for $8.1 million at an interest rate of 1.3%.Facility.

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 our condensed consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q.

Overview and Quarter Highlights

We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components. We own our sales and service network, and market and sell our vehicles directly to consumers via the phone and internet, in-person at our corporate events and through our network of Tesla stores. We were incorporated in Delaware in July 2003, opened our first store in Los Angeles, California in May 2008, and introduced our first vehicle, the Tesla Roadster, in early 2008. The Roadster’s proprietary electric vehicle powertrain system is the foundation of our powertrain technology and, with design enhancements, forms the basis for our Model S sedan, our Model X crossover and other future vehicles. We are targeting our second vehicle, the Model S sedan, for a significantly broader customer base than the Tesla Roadster and plan to manufacture Model S in higher volumes than those for the Tesla Roadster. We anticipate that initialcommenced deliveries of Model S will begin in June 2012. We have also recentlyIn February 2012, we revealed an early prototype of the Model X crossover, a vehicle based on the Model S platform. We plan to start Model X production in 2014. We sell our vehicles through our own our sales and service network.

During the three months ended March 31,September 30, 2012, we recognized total revenues of $30.2$50.1 million, a decrease of 39%13% from total revenues of $49.0$57.7 million for the three months ended March 31,September 30, 2011. Automotive sales revenue of $19.2$50.0 million decreased 43%increased 16% from the three months ended March 31,September 30, 2011, primarily reflecting the commencement of deliveries of Model S and production powertrain systems to Toyota Motor Corporation (Toyota) for the RAV4 EV, partially offset by fewer sales of the Tesla Roadster and the completion of the Daimler AG (Daimler) Smart fortwo and A-Class EV powertrain component production programs at the end of 2011 under which we supplied Daimler with battery packs and chargers.2011. Sales of the Tesla Roadster decreased as we concluded sales of the Tesla Roadster in North America during the first quarter partially offset by strong demandof 2012, but continued sales in Europe and Asia, where we are selling our remaining Tesla Roadsters in 2012 until inventory is depleted.Asia. We concluded the production run of our current generation Tesla Roadster in January 2012.2012 and we will continue selling our remaining Tesla Roadsters in Europe and Asia until inventory is depleted.

Development services revenue decreasedIn June 2012, we commenced deliveries of Model S to $10.9 millioncustomers in the United States. Our timely launch of Model S represented an important milestone, transitioning us from significant activities in Model S development and our preparation for vehicle manufacturing at the Tesla Factory, to preparation for volume production in the coming months. During the third quarter of 2012, we achieved another major milestone as we methodically improved our in-house and supply chain capabilities to increase the Model S production rate. Although we produced almost 350 Model S sedans during the quarter, low absorption of factory costs and overhead, manufacturing inefficiencies associated with the production ramp as well as higher initial costs for parts contributed to a negative gross margin of 17% for the three months ended March 31, 2012 from $15.4 million forSeptember 30, 2012. As we transitioned into Model S production and the three months ended March 31, 2011, as we completed our final development services milestones and sample deliveries for the Toyota Motor Corporation (Toyota) RAV4 EV program. We also began supplying Toyota with production powertrain systems for the RAV4 EVTesla Factory became fully operational during the quarter. Revenuequarter, Model S related to these sales is recordedmanufacturing costs, including direct parts, material and labor costs, manufacturing overhead and amortized tooling, and logistics, were fully reflected in cost of automotive sales.

We continued to make progress on the Model S program. We have nearly completed all regulatory approvals and certifications required to begin delivery of Model S to our customers in the United States. Research and development expenses for the three months ended March 31,September 30, 2012 were $68.4$61.9 million, compared to $41.2$54.1 million for the three months ended March 31,September 30, 2011. The higher research and development expenses included costs related to beta prototypereflected our continuing efforts in development and release candidate builds and ongoing detailed testing of systems integration, performance and safety, as well as the entire cost ofModel S, including our manufacturing activities in preparationto homologate Model S for the productionrest of the vehicle atworld and to introduce the Tesla Factory. Research60 kWh and development costs also reflected design and engineering activities related to Model X.40 kWh battery pack options.

We have produced 50 beta and several release candidate prototype Model S cars in the Tesla Factory as of March 31, 2012.

As a result of investments being madewe continued to make in the Tesla Factory and supplier tooling for Model S production, capital expenditures increased to $68.0were $68.5 million for the three months ended March 31,September 30, 2012, compared to $54.3$68.8 million for the three months ended March 31,September 30, 2011. The purchase of the facility and land for the Tesla Factory was completed in October 2010.

In February 2012, we revealed an early prototype of the Model X crossover as the first vehicle we intend to develop by leveraging the Model S platform. As a result of our continued activities to support the expansion of our business such as the launch of Model S, the operation of newly opened stores in 2011, and higher store-related and marketing activities including our Model X event, weWe incurred higher selling, general and administrative expenses of $30.6$37.8 million for the three months ended March 31,September 30, 2012 when compared to expenses of $27.6 million for the three months ended March 31,September 30, 2011. The increased expenses were driven by our continued activities to support the growth of our business including the expansion of our Tesla store network and our Model S service and delivery infrastructure.

Our Model S Model X and powertrain development activities, as well as our capital investments in manufacturing infrastructure, continued to be supportedfunded by our sources of cash, including the final draw-downs under our Department of Energy Loan Facility (DOE Loan Facility) and other sources of cash including cash from the sales of the Model S and Tesla Roadster, cash from the provision of development services and sales of powertrain components, cash received from refundable reservation payments for our Model S and Model X, and cash received from our public offeringsthe sales of powertrain components and private placements.systems. During the three months ended March 31,September 30, 2012, we received $84.3$33.3 million in draw-downs under the DOE Loan Facility, bringingwhich completed our total long-term debt underdraw down of the facility to $360.5 million. As we complete our remaining Model S and powertrain activities in 2012, we expect to continue making draw-downs under the DOE Loan Facility.$465.0 million facility.

As of March 31,September 30, 2012, we had $387.3$108.6 million in principal sources of liquidity from our cash and cash equivalents short-term marketable securities, cash held in our dedicated DOE accounts and the remaining amounts available under the DOE Loan Facility.current restricted cash. This primarily includes our cash and cash equivalents in the amount of $218.6$85.7 million which includes investments in money market funds short-term marketable securities of $25.0 million,and cash of $34.5$15.0 million deposited in dedicated DOE accounts in accordance with the requirements of our DOE Loan Facility and $104.5which will be used for repayment of all principal and interest that will come due on December 15, 2012.