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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

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

As of ~~October 26, 2018,~~July 22, 2019, there were ~~171,732,775~~179,127,239 shares of the registrant’s common stock outstanding.

The discussions in this Quarterly Report on Form 10-Q contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, profitability, expected cost reductions, capital adequacy, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words ~~“anticipates”, “believes”, “could”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”, “will”,~~“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.

	September 30,			December 31,			June 30,			December 31,
	2018			2017			2019			2018
Assets
Current assets
Cash and cash equivalents	$	2,967,504		$	3,367,914		$	4,954,740		$	3,685,618
Restricted cash		158,627			155,323			128,006			192,551
Accounts receivable, net		1,155,001			515,381			1,147,100			949,022
Inventory		3,314,127			2,263,537			3,382,358			3,113,446
Prepaid expenses and other current assets		325,232			268,365			569,748			365,671
Total current assets		7,920,491			6,570,520			10,181,952			8,306,308
Operating lease vehicles, net		2,186,137			4,116,604			2,069,540			2,089,758
Solar energy systems, leased and to be leased, net		6,301,537			6,347,490
Solar energy systems, net								6,200,704			6,271,396
Property, plant and equipment, net		11,246,295			10,027,522			10,082,458			11,330,077
Operating lease right-of-use assets								1,248,277			—
Intangible assets, net		291,476			361,502			327,358			282,492
Goodwill		65,226			60,237			153,475			68,159
MyPower customer notes receivable, net of current portion		422,897			456,652			400,308			421,548
Restricted cash, net of current portion		396,835			441,722			365,547			398,219
Other assets		431,819			273,123			842,978			571,657
Total assets	$	29,262,713		$	28,655,372		$	31,872,597		$	29,739,614
Liabilities
Current liabilities
Accounts payable	$	3,596,984		$	2,390,250		$	3,133,587		$	3,404,451
Accrued liabilities and other		1,990,095			1,731,366			2,622,943			2,094,253
Deferred revenue		570,920			1,015,253			883,293			630,292
Resale value guarantees		604,949			787,333			526,758			502,840
Customer deposits		905,838			853,919			631,107			792,601
Current portion of long-term debt and capital leases		2,106,538			796,549
Current portion of promissory notes issued to related parties		—			100,000
Current portion of long-term debt and finance leases								1,791,085			2,567,699
Total current liabilities		9,775,324			7,674,670			9,588,773			9,992,136
Long-term debt and capital leases, net of current portion		9,669,879			9,415,700
Solar bonds issued to related parties, net of current portion		100			100
Convertible senior notes issued to related parties		2,634			2,519
Long-term debt and finance leases, net of current portion								11,234,401			9,403,672
Deferred revenue, net of current portion		950,126			1,177,799			1,182,042			990,873
Resale value guarantees, net of current portion		455,762			2,309,222			61,200			328,926
Other long-term liabilities		2,555,319			2,442,970			2,655,720			2,710,403
Total liabilities		23,409,144			23,022,980			24,722,136			23,426,010
Commitments and contingencies (Note 12)
Commitments and contingencies (Note 15)
Redeemable noncontrolling interests in subsidiaries		551,264			397,734			580,227			555,964
Convertible senior notes (Note 10)		—			70
Equity
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; 171,578 and 168,797 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively		171			169
Common stock; $0.001 par value; 2,000,000 shares authorized; 179,118 and 172,603 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively								179			173
Additional paid-in capital		9,957,711			9,178,024			12,052,458			10,249,120
Accumulated other comprehensive income		8,271			33,348
Accumulated other comprehensive loss								(5,605	)		(8,218	)
Accumulated deficit		(5,457,315	)		(4,974,299	)		(6,331,639	)		(5,317,832	)
Total stockholders' equity		4,508,838			4,237,242			5,715,393			4,923,243
Noncontrolling interests in subsidiaries		793,467			997,346			854,841			834,397
Total liabilities and equity	$	29,262,713		$	28,655,372		$	31,872,597		$	29,739,614

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

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Revenues
Automotive sales	$	5,878,305		$	2,076,731		$	11,558,051		$	6,125,643		$	5,168,027		$	3,117,865		$	8,676,768		$	5,679,746
Automotive leasing		220,461			286,158			633,713			813,462			208,362			239,816			423,482			413,252
Total automotive revenues		6,098,766			2,362,889			12,191,764			6,939,105			5,376,389			3,357,681			9,100,250			6,092,998
Energy generation and storage		399,317			317,505			1,183,747			818,229			368,208			374,408			692,869			784,430
Services and other		326,330			304,281			859,884			713,168			605,079			270,142			1,098,021			533,554
Total revenues		6,824,413			2,984,675			14,235,395			8,470,502			6,349,676			4,002,231			10,891,140			7,410,982
Cost of revenues
Automotive sales		4,405,919			1,755,622			9,027,055			4,724,849			4,253,763			2,529,739			7,109,972			4,621,136
Automotive leasing		119,283			175,224			360,694			516,683			106,322			136,915			223,414			241,411
Total automotive cost of revenues		4,525,202			1,930,846			9,387,749			5,241,532			4,360,085			2,666,654			7,333,386			4,862,547
Energy generation and storage		330,554			237,288			1,036,190			592,823			325,523			330,273			642,410			705,636
Services and other		444,992			367,401			1,212,335			852,446			743,022			386,374			1,428,555			767,343
Total cost of revenues		5,300,748			2,535,535			11,636,274			6,686,801			5,428,630			3,383,301			9,404,351			6,335,526
Gross profit		1,523,665			449,140			2,599,121			1,783,701			921,046			618,930			1,486,789			1,075,456
Operating expenses
Research and development		350,848			331,622			1,104,073			1,023,436			323,898			386,129			664,072			753,225
Selling, general and administrative		729,876			652,998			2,167,039			1,794,210			647,261			750,759			1,351,190			1,437,163
Restructuring and other		26,184			—			129,618			—			117,345			103,434			160,816			103,434
Total operating expenses		1,106,908			984,620			3,400,730			2,817,646			1,088,504			1,240,322			2,176,078			2,293,822
Income (loss) from operations		416,757			(535,480	)		(801,609	)		(1,033,945	)
Loss from operations														(167,458	)		(621,392	)		(689,289	)		(1,218,366	)
Interest income		6,907			5,531			17,185			13,406			10,362			5,064			19,124			10,278
Interest expense		(175,220	)		(117,109	)		(488,348	)		(324,896	)		(171,979	)		(163,582	)		(329,432	)		(313,128	)
Other income (expense), net		22,876			(24,390	)		36,071			(83,696	)
Income (loss) before income taxes		271,320			(671,448	)		(1,236,701	)		(1,429,131	)
Provision (benefit) for income taxes		16,647			(285	)		35,959			40,640
Net income (loss)		254,673			(671,163	)		(1,272,660	)		(1,469,771	)
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests in subsidiaries		(56,843	)		(51,787	)		(157,086	)		(183,721	)
Net income (loss) attributable to common stockholders	$	311,516		$	(619,376	)	$	(1,115,574	)	$	(1,286,050	)
Net income (loss) per share of common stock attributable to common stockholders, basic and diluted
Other (expense) income, net														(40,756	)		50,911			(15,006	)		13,195
Loss before income taxes														(369,831	)		(728,999	)		(1,014,603	)		(1,508,021	)
Provision for income taxes														19,431			13,707			42,304			19,312
Net loss														(389,262	)		(742,706	)		(1,056,907	)		(1,527,333	)
Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests in subsidiaries														19,072			(25,167	)		53,562			(100,243	)
Net loss attributable to common stockholders													$	(408,334	)	$	(717,539	)	$	(1,110,469	)	$	(1,427,090	)
Net loss per share of common stock attributable to common stockholders
Basic	$	1.82		$	(3.70	)	$	(6.56	)	$	(7.80	)	$	(2.31	)	$	(4.22	)		(6.40	)	$	(8.42	)
Diluted	$	1.75		$	(3.70	)	$	(6.56	)	$	(7.80	)	$	(2.31	)	$	(4.22	)		(6.40	)	$	(8.42	)
Weighted average shares used in computing net income (loss) per share of common stock
Weighted average shares used in computing net loss per share of common stock
Basic		170,893			167,294			170,019			164,897			176,654			169,997			174,831			169,574
Diluted		178,196			167,294			170,019			164,897			176,654			169,997			174,831			169,574

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

													Accumulated
	Redeemable							Additional					Other			Total			Noncontrolling
	Noncontrolling			Common Stock				Paid-In		Accumulated			Comprehensive			Stockholders'			Interests in			Total
Three Months Ended June 30, 2018	Interests			Shares		Amount		Capital		Deficit			Loss			Equity			Subsidiaries			Equity
Balance as of March 31, 2018	$	405,835			169,750	$	170	$	9,418,896	$	(5,051,292	)	$	82,921		$	4,450,695		$	863,876		$	5,314,571
Reclass from mezzanine equity to equity for Convertible Senior Notes due in 2018		—			—		—		2		—			—			2			—			2
Exercises of conversion feature of convertible senior notes		—		0		0			1		—			—			1			—			1
Common stock issued		—			766		1		31,052		—			—			31,053			—			31,053
Stock-based compensation		—			—		—		206,586		—			—			206,586			—			206,586
Contributions from noncontrolling interests		134,340			—		—		—		—			—			—			44,993			44,993
Distributions to noncontrolling interests		(19,537	)		—		—		—		—			—			—			(43,648	)		(43,648	)
Net income (loss)		18,898			—		—		—		(717,539	)		—			(717,539	)		(44,065	)		(761,604	)
Other comprehensive loss		—			—		—		—		—			(64,376	)		(64,376	)		—			(64,376	)
Balance as of June 30, 2018	$	539,536			170,516	$	171	$	9,656,537	$	(5,768,831	)	$	18,545		$	3,906,422		$	821,156		$	4,727,578

														Accumulated
	Redeemable							Additional						Other			Total			Noncontrolling
	Noncontrolling			Common Stock				Paid-In			Accumulated			Comprehensive			Stockholders'			Interests in			Total
Six Months Ended June 30, 2018	Interests			Shares		Amount		Capital			Deficit			Income			Equity			Subsidiaries			Equity
Balance as of December 31, 2017	$	397,734			168,797	$	169	$	9,178,024		$	(4,974,299	)	$	33,348		$	4,237,242		$	997,346		$	5,234,588
Adjustments for prior periods from adopting ASC 606		8,101			—		—		—			623,172			—			623,172			(89,084	)		534,088
Adjustments for prior periods from adopting Accounting Standards Update No. 2017-05		—			—		—		—			9,386			—			9,386			—			9,386
Reclass from mezzanine equity to equity for Convertible Senior Notes due in 2018		—			—		—		70			—			—			70			—			70
Exercises of conversion feature of convertible senior notes		—		0		0			(37	)		—			—			(37	)		—			(37	)
Common stock issued		—			1,719		2		125,069			—			—			125,071			—			125,071
Stock-based compensation		—			—		—		353,411			—			—			353,411			—			353,411
Contributions from noncontrolling interests		172,466			—		—		—			—			—			—			80,571			80,571
Distributions to noncontrolling interests		(30,497	)		—		—		—			—			—			—			(75,702	)		(75,702	)
Net loss		(8,268	)		—		—		—			(1,427,090	)		—			(1,427,090	)		(91,975	)		(1,519,065	)
Other comprehensive loss		—			—		—		—			—			(14,803	)		(14,803	)		—			(14,803	)
Balance as of June 30, 2018	$	539,536			170,516	$	171	$	9,656,537		$	(5,768,831	)	$	18,545		$	3,906,422		$	821,156		$	4,727,578

														Accumulated
	Redeemable							Additional						Other			Total			Noncontrolling
	Noncontrolling			Common Stock				Paid-In			Accumulated			Comprehensive			Stockholders'			Interests in			Total
Three Months Ended June 30, 2019	Interests			Shares		Amount		Capital			Deficit			Loss			Equity			Subsidiaries			Equity
Balance as of March 31, 2019	$	570,284			173,682	$	174	$	10,563,746		$	(5,923,305	)	$	(35,019	)	$	4,605,596		$	862,026		$	5,467,622
Conversion feature of Convertible Senior Notes due in 2024		—			—		—		490,944			—			—			490,944			—			490,944
Purchase of convertible note hedges		—			—		—		(475,824	)		—			—			(475,824	)		—			(475,824	)
Sales of warrants		—			—		—		174,432			—			—			174,432			—			174,432
Common stock issued		—			984		1		17,631			—			—			17,632			—			17,632
Issuance of common stock in May 2019 public offering at 243.00 per share, net of issuance costs of $15,140		—			3,549		3		847,356			—			—			847,359			—			847,359
Issuance of common stock upon acquisition, net of transaction costs		—			903		1		204,458			—			—			204,459			—			204,459
Stock-based compensation		—			—		—		225,595			—			—			225,595			—			225,595
Contributions from noncontrolling interests		10,020			—		—		—			—			—			—			32,025			32,025
Distributions to noncontrolling interests		(26,175	)		—		—		—			—			—			—			(32,184	)		(32,184	)
Other		—			—		—		4,120			—			—			4,120			—			4,120
Net income (loss)		26,098			—		—		—			(408,334	)		—			(408,334	)		(7,026	)		(415,360	)
Other comprehensive income		—			—		—		—			—			29,414			29,414			—			29,414
Balance as of June 30, 2019	$	580,227			179,118	$	179	$	12,052,458		$	(6,331,639	)	$	(5,605	)	$	5,715,393		$	854,841		$	6,570,234

														Accumulated
	Redeemable							Additional						Other			Total			Noncontrolling
	Noncontrolling			Common Stock				Paid-In			Accumulated			Comprehensive			Stockholders'			Interests in			Total
Six Months Ended June 30, 2019	Interests			Shares		Amount		Capital			Deficit			Loss			Equity			Subsidiaries			Equity
Balance as of December 31, 2018	$	555,964			172,603	$	173	$	10,249,120		$	(5,317,832	)	$	(8,218	)	$	4,923,243		$	834,397		$	5,757,640
Adjustments for prior periods from adopting ASC 842		—			—		—		—			96,662			—			96,662			—			96,662
Exercises of conversion feature of convertible senior notes		—		0		0			3			—			—			3			—			3
Conversion feature of Convertible Senior Notes due in 2024		—			—		—		490,944			—			—			490,944			—			490,944
Purchase of convertible note hedges		—			—		—		(475,824	)		—			—			(475,824	)		—			(475,824	)
Sales of warrants		—			—		—		174,432			—			—			174,432			—			174,432
Common stock issued		—			2,013		2		95,583			—			—			95,585			—			95,585
Issuance of common stock in May 2019 public offering at 243.00 per share, net of issuance costs of $15,140		—			3,549		3		847,356			—			—			847,359			—			847,359
Issuance of common stock upon acquisition, net of transaction costs		—			953		1		218,994			—			—			218,995			—			218,995
Stock-based compensation		—			—		—		455,319			—			—			455,319						455,319
Contributions from noncontrolling interests		40,440			—		—		—			—			—			—			48,426			48,426
Distributions to noncontrolling interests		(36,972	)		—		—		—			—			—			—			(60,749	)		(60,749	)
Buy-outs of noncontrolling interests		—			—		—		(7,589	)		—			—			(7,589	)		—			(7,589	)
Other		—			—		—		4,120			—			—			4,120			—			4,120
Net income (loss)		20,795			—		—		—			(1,110,469	)		—			(1,110,469	)		32,767			(1,077,702	)
Other comprehensive income		—			—		—		—			—			2,613			2,613			—			2,613
Balance as of June 30, 2019	$	580,227			179,118	$	179	$	12,052,458		$	(6,331,639	)	$	(5,605	)	$	5,715,393		$	854,841		$	6,570,234

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

	Nine Months Ended September 30,						Six Months Ended June 30,
	2018			2017			2019			2018
Cash Flows from Operating Activities
Net loss	$	(1,272,660	)	$	(1,469,771	)	$	(1,056,907	)	$	(1,527,333	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and impairment		1,404,313			1,166,397			1,046,149			901,488
Stock-based compensation		543,711			332,412			418,241			338,983
Amortization of debt discounts and issuance costs		120,873			60,613			82,123			74,419
Inventory write-downs		59,983			98,347			115,672			46,098
Loss on disposals of fixed assets		132,639			59,640			47,931			118,850
Foreign currency transaction (gains) losses		(6,614	)		35,933			(10,848	)		6,185
Loss related to SolarCity acquisition		—			29,796
Non-cash interest and other operating activities		22,093			109,729			158,699			5,685
Operating cash flow related to repayment of discounted convertible notes								(188,107	)		—
Changes in operating assets and liabilities, net of effect of business combinations:
Accounts receivable		(686,103	)		(105,643	)		(168,312	)		(98,509	)
Inventory		(1,110,611	)		(418,970	)		(352,428	)		(1,055,556	)
Operating lease vehicles		(188,948	)		(1,083,140	)		(175,898	)		(186,208	)
Prepaid expenses and other current assets		(31,532	)		(123,832	)		(139,141	)		(95,194	)
MyPower customer notes receivable and other assets		(62,399	)		17,628
Other non-current assets								42,165			(59,446	)
Accounts payable and accrued liabilities		1,627,997			170,326			49,898			909,720
Deferred revenue		284,417			329,007			476,556			107,497
Customer deposits		9,471			3,815			(160,376	)		42,920
Resale value guarantee		(57,621	)		141,044			(76,332	)		(39,563	)
Other long-term liabilities		74,232			76,124			114,915			(18,076	)
Net cash provided by (used in) operating activities		863,241			(570,545	)		224,000			(528,040	)
Cash Flows from Investing Activities
Purchases of property and equipment excluding capital leases, net of sales		(1,775,746	)		(2,628,126	)
Purchases of solar energy systems, leased and to be leased		(189,869	)		(547,085	)
Purchases of property and equipment excluding finance leases, net of sales								(529,609	)		(1,265,475	)
Purchases of solar energy systems								(43,458	)		(140,375	)
Purchase of intangible assets								(5,333	)		—
Business combinations, net of cash acquired		(6,804	)		(109,147	)		31,012			(5,604	)
Net cash used in investing activities		(1,972,419	)		(3,284,358	)		(547,388	)		(1,411,454	)
Cash Flows from Financing Activities
Proceeds from issuances of common stock in public offerings		—			400,175			848,232			—
Proceeds from issuances of convertible and other debt		3,946,575			5,401,158			5,007,481			3,043,227
Repayments of convertible and other debt		(3,111,242	)		(2,442,942	)		(3,700,332	)		(2,268,716	)
Repayments of borrowings under Solar Bonds issued to related parties		(100,000	)		(165,000	)
Collateralized lease (repayments) borrowings		(343,086	)		416,427
Repayments of borrowings issued to related parties								—			(17,500	)
Collateralized lease repayments								(219,323	)		(200,518	)
Proceeds from exercises of stock options and other stock issuances		219,945			239,328			95,585			125,071
Principal payments on capital leases		(105,867	)		(69,496	)
Principal payments on finance leases								(142,571	)		(48,182	)
Common stock and debt issuance costs		(5,121	)		(50,530	)		(30,376	)		(3,671	)
Purchases of convertible note hedges		—			(204,102	)
Proceeds from settlement of convertible note hedges		—			269,456
Proceeds from issuances of warrants		—			52,883
Payments for settlements of warrants		(5	)		(219,538	)
Purchase of convertible note hedges								(475,824	)		—
Proceeds from issuance of warrants								174,432			—
Proceeds from investments by noncontrolling interests in subsidiaries		366,297			691,918			88,866			253,037
Distributions paid to noncontrolling interests in subsidiaries		(178,511	)		(190,715	)		(148,759	)		(109,545	)
Payments for buy-outs of noncontrolling interests in subsidiaries		(2,921	)		—			(7,589	)		(2,921	)
Net cash provided by financing activities		686,064			4,129,022			1,489,822			770,282
Effect of exchange rate changes on cash and cash equivalents and restricted cash		(18,879	)		35,736			5,471			(12,509	)
Net (decrease) increase in cash and cash equivalents and restricted cash		(441,993	)		309,855
Net increase (decrease) in cash and cash equivalents and restricted cash								1,171,905			(1,181,721	)
Cash and cash equivalents and restricted cash, beginning of period		3,964,959			3,766,900			4,276,388			3,964,959
Cash and cash equivalents and restricted cash, end of period	$	3,522,966		$	4,076,755		$	5,448,293		$	2,783,238
Supplemental Non-Cash Investing and Financing Activities
Equity issued in connection with business combination							$	207,222		$	—
Acquisitions of property and equipment included in liabilities	$	305,974		$	1,021,692		$	287,002		$	335,048
Estimated fair value of facilities under build-to-suit leases	$	61,709		$	173,075		$	—		$	61,709

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

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

The consolidated balance sheet as of ~~September~~June 30, ~~2018,~~2019, the consolidated statements of operations, the consolidated statements of comprehensive loss and the consolidated statements of ~~comprehensive income (loss)~~redeemable noncontrolling interests and equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 and the consolidated statements of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, as well as other information disclosed in the accompanying notes, are unaudited. The consolidated balance sheet as of December 31, ~~2017~~2018 was derived from the audited consolidated financial statements as of that date. The interim consolidated financial statements and the accompanying notes should be read in conjunction with the annual consolidated financial statements and the accompanying notes contained in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

The interim consolidated financial statements and the accompanying notes have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the results of operations for the periods presented. The consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future years or interim periods.

Certain prior period balances have been reclassified to conform to the current period presentation in the consolidated financial statements and the accompanying notes as a result of the adoption of the Accounting Standards Update (“ASU”) 2016-18~~, Statement of Cash Flows: Restricted Cash~~.

~~ASU 2014-09,~~ ~~Revenue - Revenue from Contracts with Custome~~rs. On January 1, 2018, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method. As a policy election, the new revenue standard was applied only to contracts that were not substantially completed as of the date of adoption. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the January 1, 2018 opening balance of accumulated deficit. The prior period consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods.

A majority of our automotive sales revenue is recognized when control transfers upon delivery to customers. For certain vehicle sales where revenue was previously deferred either as an in-substance operating lease, such as certain vehicle sales to customers or leasing partners with a resale value guarantee, we now recognize revenue when the vehicles are shipped as a sale with a right of return. As a result, the corresponding operating lease asset, deferred revenue, and resale value guarantee balances as of December 31, 2017, were reclassified to accumulated deficit as part of our adoption entry. Furthermore, the warranty liability related to such vehicles has been accrued as a result of the change from in-substance operating leases to vehicle sales. Prepayments on contracts that can be cancelled without significant penalties, such as vehicle maintenance plans, have been reclassified from deferred revenue to customer deposits. Refer to the ~~Automotive Revenue~~ ~~and~~ ~~Automotive Leasing Revenue~~ ~~sections below for further discussion of the impact on various categories of vehicle sales.~~

Following the adoption of the new revenue standard, the revenue recognition for our other sales arrangements, including sales of solar energy systems, energy storage products, services, and sales of used vehicles, remained consistent with our historical revenue recognition policy. Under our lease pass-through fund arrangements, we do not have any further performance obligations and therefore reclassified all investment tax credit (“ITC”) deferred revenue as of December 31, 2017, to accumulated deficit as part of our adoption entry. The corresponding effects of the changes to lease pass-through fund arrangements are also reflected in our non-controlling interests in subsidiaries. Additionally, we have considered the impact from any new revenue arrangements in the current year that would have been accounted for differently under ASC 605, Revenue Recognition~~, as an adjustment from adoption of the new revenue standard.~~

~~Accordingly, the cumulative effect of the changes made to our consolidated January 1, 2018 consolidated balance sheet for the adoption of the new revenue standard was as follows (in thousands):~~

~~In accordance with the new revenue standard requirements, the impact of adoption on our consolidated balance sheet was as follows (in thousands):~~

September 30, 2018

As Reported

Balances Without
Adoption of New
Revenue Standard

Effect of Change
Higher / (Lower)

Assets

Accounts receivable

$
1,155,001

$
1,099,914

$
55,087

Inventory

3,314,127

3,431,185

(117,058
)
Prepaid expenses and other current assets

325,232

247,056

78,176

Operating lease vehicles, net

2,186,137

4,177,710

(1,991,573
)
Other assets

431,819

321,847

109,972

Liabilities

Accrued liabilities and other

1,990,095

1,896,319

93,776

Deferred revenue

570,920

1,080,243

(509,323
)
Resale value guarantees

604,949

978,515

(373,566
)
Customer deposits

905,838

850,229

55,609

Deferred revenue, net of current portion

950,126

1,387,829

(437,703
)
Resale value guarantees, net of current portion

455,762

2,016,861

(1,561,099
)
Other long-term liabilities

2,555,319

2,441,543

113,776

Redeemable noncontrolling interests
in subsidiaries

551,264

544,315

6,949

Equity

Accumulated other comprehensive gain

8,271

13,875

(5,604
)
Accumulated deficit

(5,457,315
)

(6,287,370
)

830,055

Noncontrolling interests in subsidiaries

793,467

871,733

(78,266
)

In accordance with the new revenue standard requirements, the impact of adoption on our consolidated statement of operations and consolidated statement of comprehensive loss was as follows (in thousands):

Three Months Ended September 30, 2018

Nine Months Ended September 30, 2018

As Reported

Balances
Without
Adoption of
New Revenue
Standard

Effect of
Change
Higher /
(Lower)

As Reported

Balances
Without
Adoption of
New Revenue
Standard

Effect of
Change
Higher /
(Lower)

Revenues

Automotive sales

$
5,878,305

$
5,399,316

$
478,989

$
11,558,051

$
10,414,408

$
1,143,643

Automotive leasing

220,461

469,837

(249,376
)

633,713

1,237,239

(603,526
)
Energy generation and storage

399,317

408,205

(8,888
)

1,183,747

1,163,935

19,812

Cost of revenues

Automotive sales

4,405,919

4,076,044

329,875

9,027,055

8,231,328

795,727

Automotive leasing

119,283

307,957

(188,674
)

360,694

811,671

(450,977
)

Provision (benefit) for income taxes

16,647

16,984

(337
)

35,959

37,329

(1,370
)
Net income (loss)

254,673

174,812

79,861

(1,272,660
)

(1,489,209
)

216,549

Net loss attributable to noncontrolling
   interests and redeemable
   noncontrolling interests in
   subsidiaries

(56,843
)

(62,138
)

5,295

(157,086
)

(166,752
)

9,666

Net income (loss) attributable to
   common stockholders

311,516

236,950

74,566

(1,115,574
)

(1,322,457
)

206,883

Foreign currency translation
   adjustment

(10,274
)

(4,968
)

(5,306
)

(25,077
)

(4,252
)

(20,825
)
Comprehensive income (loss)

301,242

231,982

69,260

(1,140,651
)

(1,280,279
)

139,628

In accordance with the new revenue standard requirements, the impact of adoption on our consolidated statement of cash flows for the nine months ended September 30, 2018 was an increase in collateralized lease repayments of $304.4 million, from a net financing cash outflow of $38.7 million to a net financing cash outflow of $343.1 million as presented, with an offsetting increase to cash outflows from operations. Additionally, the adjustments to the consolidated balance sheet, consolidated statement of operations and consolidated statement of comprehensive income (loss) identified above would have corresponding impacts within the operating section of the consolidated statement of cash flows.

Automotive sales revenue includes revenues related to deliveries of new vehicles, and specific other features and services that meet the definition of a performance obligation ~~under the new revenue standard, including internet connectivity,~~include access to our Supercharger network, internet connectivity, Autopilot and ~~future~~Full Self-Driving (“FSD”) features and over-the-air software updates. We recognize revenue on automotive sales upon delivery to the customer, which is when the control of a vehicle transfers. Payments are typically received at the point control transfers or in accordance with payment terms customary to the business. Other features and services such as connectivity, Supercharger, and over-the-air software updates are provisioned upon control transfer of a vehicle and recognized over time on a straight-line basis as we have a stand-ready obligation to deliver such services to the customer. We recognize revenue related to these other features and services over the performance period, which is generally the expected ownership life of the vehicle or the eight-year life of the vehicle. Revenue related to Autopilot and full self-driving features is recognized when functionality is delivered to the customer. For our obligations related to automotive sales, we estimate standalone selling price by considering costs used to develop and deliver the service, third-party pricing of similar options and other information that may be available.

At the time of revenue recognition, we reduce the transaction price and record a reserve against revenue for estimated variable consideration related to future product returns. Such estimates are based on historical experience and are immaterial in all periods presented. In addition, any fees that are paid or payable by us to a customer’s lender when we arrange the financing are recognized as an offset against automotive sales revenue.

Costs to obtain a contract mainly relate to commissions paid to our sales personnel for the sale of vehicles. Commissions are not paid on other obligations such as connectivity, access to our Supercharger network, and over-the-air software updates. As our contract costs related to automotive sales are typically fulfilled within one year, the costs to obtain a contract are expensed as incurred. We have elected to recognize the cost for freight and shipping when control over vehicles, parts, or accessories have transferred to the customer as an expense in cost of revenues. Our policy is to exclude taxes collected from a customer from the transaction price of automotive contracts.

We offer resale value guarantees or similar buy-back terms to certain customers who purchase vehicles and who finance their vehicles through one of our specified commercial banking partners. We also offer resale value guarantees in connection with automotive sales to certain leasing partners. Currently, both programs are available only in certain international markets. Under these programs, we receive full payment for the vehicle sales price at the time of delivery and our counterparty has the option of selling their vehicle back to us during the guarantee period, which currently is generally at the end of the term of the applicable loan or financing program, for a pre-determined resale value.

~~With the exception of two programs which are discussed within the~~ ~~Automotive Leasing~~ section, we now recognize revenue when control transfers upon delivery to customers in accordance with the new revenue standard as a sale with a right of return as we do not believe the customer has a significant economic incentive to exercise the resale value guarantee provided to them. The process to determine whether there is a significant economic incentive includes a comparison of a vehicle’s estimated market value at the time the option is exercisable with the guaranteed resale value to determine the customer’s economic incentive to exercise. The performance obligations and the pattern of recognizing automotive sales with resale value guarantees are consistent with automotive sales without resale value guarantees with the exception of our estimate for sales return reserve. Sales return reserves for automotive sales with resale value guarantees are estimated based on historical experience plus consideration for expected future market values. The two programs that are still being recorded as operating leases are discussed in further detail below in ~~Vehicle Sales to Leasing Partners with a Resale Value Guarantee and a Buyback Option~~ ~~and~~ ~~Vehicle Sales to Customers with a Resale Value Guarantee where Exercise is Probable.~~

Prior to the adoption of the new revenue standard, all transactions with resale value guarantees were recorded as operating leases. The amount of sale proceeds equal to the resale value guarantee was deferred until the guarantee expired or was exercised. ~~For certain transactions that were considered interest bearing collateralized borrowings as required under ASC 840,~~ ~~Leases, we also accrued interest expense based on our borrowing rate.~~ The remaining sale proceeds were deferred and recognized on a straight-line basis over the stated guarantee period to automotive leasing revenue. The guarantee period expired at the earlier of the end of the guarantee period or the pay-off of the initial loan. We capitalized the cost of these vehicles on the consolidated balance sheet as operating lease vehicles, net, and depreciated their value, less estimated residual value, to cost of automotive leasing revenue over the same period.

In cases where our counterparty retained ownership of the vehicle at the end of the guarantee period, the resale value guarantee liability and any remaining deferred revenue balances related to the vehicle were settled to automotive leasing revenue, and the net book value of the leased vehicle was expensed to cost of automotive leasing revenue. If our counterparty returned the vehicle to us during the guarantee period, we purchased the vehicle from our counterparty in an amount equal to the resale value guarantee and settled any remaining deferred balances to automotive leasing revenue, and we reclassified the net book value of the vehicle on the consolidated balance sheet to used vehicle inventory.

Deferred revenue ~~activity~~ related to the access to our Supercharger network, internet connectivity, Autopilot and FSD features and over-the-air software updates on automotive sales with and without resale value guarantee ~~consisted~~amounted to $1.19 billion and $882.8 million as of ~~the following (in thousands):~~

June 30, 2019 and December 31, 2018, respectively. Deferred revenue is equivalent to the total transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, as of ~~September~~the balance sheet date. Revenue recognized from the deferred revenue balance as of December 31, 2018 was $113.5 million for the six months ended June 30, ~~2018.~~ 2019 . From the deferred revenue balance as of January 1, 2018, revenue recognized during the ~~nine~~six months ended ~~September~~June 30, 2018 was ~~$60.3~~$44.5 million. Of the total deferred revenue on automotive sales with and without resale value guarantees, we expect to recognize ~~$284.7~~$567.0 million of revenue in the next 12 months. The remaining balance will be recognized over the various performance ~~period as discussed above in~~ ~~Automotive Sales without Resale Value Guarantee~~.

~~California and certain other states have laws in place requiring vehicle manufacturers to ensure that a portion~~periods of the ~~vehicles delivered~~obligations, which is up to the eight-year life of the vehicle.

At the time of revenue recognition, we reduce the transaction price and record a sales return reserve against revenue for sale in that state during each model year are zero-emission vehicles. These laws and regulations provide that a manufacturer of zero-emission vehicles may earn regulatory credits (“ZEV credits”) and may sell excess credits to other manufacturers who apply such credits to comply with these regulatory requirements. Similar regulations exist at the federal level that require complianceestimated variable consideration related to ~~greenhouse gas (“GHG”) emissions~~future product returns. Such estimates are based on historical experience. On a quarterly basis, we assess the estimated market values of vehicles under our buyback options program to determine whether there will be changes to future product returns. As we accumulate more data related to the buyback values of our vehicles or as market conditions change, there may be material changes to their estimated values. Due to price adjustments we made to our vehicle offerings during the six months ended June 30, 2019, we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. As a result, along with the estimated variable consideration related to normal future product returns for vehicles sold under the buyback options program in the second quarter, we adjusted our sales return reserve on vehicles previously sold under our buyback options program resulting in a reduction of automotive sales revenues of $64.1 million and ~~also allow~~$564.6 million for the ~~sale of excess credits by one manufacturer~~three and six months ended June 30, 2019, respectively. If customers elect to ~~other manufacturers. As a manufacturer solely of zero-emission vehicles, we have earned emission credits, such as ZEV and GHG credits, on our vehicles, and~~exercise the buyback option, we expect to ~~continue~~be able to ~~earn these credits~~subsequently resell the returned vehicles, which resulted in a corresponding reduction in automotive cost of sales of $49.6 million and $458.4 million for the ~~future. We enter into contractual agreements with third-parties to purchase our regulatory credits. Payments~~three and six months ended June 30, 2019, respectively. The net impact was $14.5 million and $106.2 million reduction in gross profit for ~~regulatory credits are typically received at~~ the ~~point control transfers to the customer, or in accordance with payment terms customary to the business.~~three and six months ended June 30, 2019, respectively.

We recognize revenue on the sale of regulatory credits at the time control of the regulatory credits is transferred to the purchasing party as automotive revenue in the consolidated ~~statement~~statements of operations. ~~We had no deferred~~Deferred revenue related to sales of automotive regulatory credits was $140.0 million and $0 as of ~~September~~June 30, ~~2018 or~~2019 and December 31, ~~2017.~~2018, respectively. We expect to recognize the deferred revenue as of June 30, 2019 over the next 1 to 3 years.

Automotive leasing revenue includes revenue recognized under lease accounting guidance for our direct leasing programs as well as the two programs with resale value guarantees ~~which continue to qualify for operating lease treatment. Prior to the adoption of the new revenue standard, all programs with resale value guarantees were accounted for as operating leases.~~described below.

We ~~offer~~have outstanding leases under our direct vehicle leasing programs in the U.S., Canada and in certain ~~locations~~countries in ~~North America~~Europe. As of June 30, 2019, the direct vehicle leasing program is offered for new Model S, Model X vehicles in the U.S. and ~~Europe.~~Canada and for new Model 3 vehicles in the U.S. Qualifying customers are permitted to lease a vehicle directly from Tesla for up to 48 months. ~~Currently, the program is only offered to qualified customers in North America.~~ At the end of the lease term, customers have the option of either returning the vehicle to us or purchasing it for a pre-determined residual ~~value.~~value, for Model S and Model X leases. We account for these leasing transactions as operating leases. We record leasing revenues to automotive leasing revenue on a straight-line basis over the contractual term, and we record the depreciation of these vehicles to cost of automotive leasing revenue. For the three and nine months ended September 30, 2018, we recognized $101.1 million and $270.4 million, respectively, of leasing revenues, and $57.2 million and $155.9 million, respectively, for the same periods in 2017. As of September 30, 2018 and December 31, 2017, we had deferred $110.0 million and $96.6 million, respectively, of lease-related upfront payments, which will be recognized on a straight-line basis over the contractual terms of the individual leases.

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

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

We offer buyback options in connection with automotive sales with resale value guarantees with certain leasing partner sales in the United States. These transactions entail a transfer of leases, which we have originated with an end-customer, to our leasing partner. As control of the vehicles has not been transferred, ~~in accordance with the new revenue standard,~~ these transactions ~~continue to be~~were accounted for as interest bearing collateralized borrowings in accordance with ASC 840, Leases. ~~We have not sold any vehicles under this program in the United States since the second half of 2017~~ ~~and all current period activity relates~~, prior to ~~the exercise or cancellation of active transactions.~~January 1, 2019. Under this program, cash is received for the full price of the vehicle and the collateralized borrowing value is generally recorded within resale value guarantees and the customer upfront deposit is recorded within deferred revenue. We amortize the deferred revenue amount to automotive leasing revenue on a straight-line basis over the option period and accrue interest expense based on our borrowing rate. We capitalize vehicles under this program to operating lease vehicles, net, on the consolidated balance ~~sheet,~~sheets, and we record depreciation from these vehicles to cost of automotive leasing revenue during the period the vehicle is under a lease arrangement. Cash received for these vehicles, net of revenue recognized during the period, is classified as collateralized lease (repayments) borrowings within cash flows from financing activities in the consolidated ~~statement~~statements of cash flows. With the adoption of ASC 842 on January 1, 2019, all new agreements under this program are accounted for as operating leases under ASC 842 and there was no material change in the timing and amount of revenue recognized over the term. Consequently, any cash flows for new agreements are classified as operating cash activities on the consolidated statements of cash flows.

At the end of the lease term, we settle our liability in cash by either purchasing the vehicle from the leasing partner for the buyback option amount or paying a shortfall to the option amount the leasing partner may realize on the sale of the vehicle. Any remaining balances within deferred revenue and resale value guarantee will be settled to automotive leasing revenue. The end customers can extend the lease for a period of up to 6 months. In cases where the leasing partner retains ownership of the vehicle after the end of our option period, we expense the net value of the leased vehicle to cost of automotive leasing revenue. The maximum amount we could be required to pay under this program, should we decide to repurchase all vehicles, was ~~$629.1~~$355.7 million and $479.8 million as of ~~September~~June 30, 2019 and December 31, 2018, respectively, including ~~$388.8~~$297.2 million within a 12-month ~~period.~~period from June 30, 2019. As of ~~September~~June 30, 2019 and December 31, 2018, we had ~~$734.3~~$399.8 million and $558.3 million, respectively, of such borrowings recorded in resale value guarantees and ~~$112.5~~$68.7 million and $92.5 million, respectively, recorded in deferred revenue liability. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, we recognized ~~$89.4~~$49.8 million and ~~$256.6~~$102.7 million, respectively, of leasing revenue related to this ~~program.~~

~~On a quarterly basis, we assess~~program, and $84.7 million and $167.2 million, respectively, for the ~~estimated market values~~same periods in 2018. The net carrying amount of operating lease vehicles under ~~our buyback options~~this program ~~to determine if we have sustained a loss on any~~was $332.9 million and $468.5 million as of these contracts. As we accumulate more data related to the buyback values of our vehicles or as market conditions change, there may be material changes to their estimated values, although we have not experienced any material losses during any period to date.June 30, 2019 and December 31, 2018.

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

For certain international programs where we have offered resale value guarantees to certain customers who purchased vehicles and where we expect the customer has a significant economic incentive to exercise the resale value guarantee provided to them, we continue to recognize these transactions as operating leases. The process to determine whether there is a significant economic incentive includes a comparison of a vehicle’s estimated market value at the time the option is exercisable with the guaranteed resale value to determine the customer’s economic incentive to exercise. We have not sold any vehicles under this program since the first half of 2017 and all current period activity relates to the exercise or cancellation of active transactions. The amount of sale proceeds equal to the resale value guarantee is deferred until the guarantee expires or is exercised. The remaining sale proceeds are deferred and recognized on a straight-line basis over the stated guarantee period to automotive leasing revenue. The guarantee period expires at the earlier of the end of the guarantee period or the pay-off of the initial loan. We capitalize the cost of these vehicles on the consolidated balance ~~sheet~~sheets as operating lease vehicles, net, and depreciate their value, less salvage value, to cost of automotive leasing revenue over the same period.

In cases where a customer retains ownership of a vehicle at the end of the guarantee period, the resale value guarantee liability and any remaining deferred revenue balances related to the vehicle are settled to automotive leasing revenue, and the net book value of the leased vehicle is expensed to cost of automotive leasing revenue. If a customer returns the vehicle to us during the guarantee period, we purchase the vehicle from the customer in an amount equal to the resale value guarantee and settle any remaining deferred balances to automotive leasing revenue, and we reclassify the net book value of the vehicle on the consolidated balance ~~sheet~~sheets to used vehicle inventory. As of ~~September~~June 30, 2019 and December 31, 2018, ~~$162.3~~$187.5 million and $149.7 million, respectively, of the guarantees were exercisable by customers within the next 12 months. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, we recognized ~~$30.0~~$37.3 million and ~~$106.7~~$84.8 million, respectively, of leasing revenue related to this ~~program.~~

Energy generation and storage revenues consists of the sale of solar energy and storage systems to residential, small commercial, and large commercial and utility grade customers. Sales of solar energy systems to residential and small scale commercial customers consists of the engineering, design, and installation of the system. Post installation, residential and small scale commercial customers receive a proprietary monitoring system that captures and displays historical energy generation data. Residential and small scale commercial customers pay the full purchase price of the solar energy system up-front. Revenue$76.7 million, respectively, for the ~~design~~same periods in 2018. The net carrying amount of operating lease vehicles under this program was $142.1 million and installation obligation is recognized when control transfers, which is when we install a solar energy system and the system passes inspection by the utility or the authority having jurisdiction. Revenue for the monitoring service is recognized ratably$211.5 million, respectively, as ~~a stand-ready obligation over the warranty period~~ of ~~the solar energy system.~~ Sales of energy storage systems to residential and small scale commercial customers consists of the installation of the energy storage system and revenue is recognized when control transfers, which is when the product has been delivered or, if we are performing installation, when installed and accepted by the customer. Payment for such storage systems are made upon invoice or in accordance with payment terms customary to the business.

For large commercial and utility grade solar energy and storage sales which consist of the engineering, design, and installation of the system, customers make milestone payments that are consistent with contract specific phases of a project. Revenue from such contracts is recognized over time using percentage of completion method based on cost incurred as a percentage of total estimated contract costs. Certain large scale commercial and utility grade solar energy and storage sales also include operations and maintenance service which are negotiated with the design and installation contracts and are thus considered to be a combined contract with the design and installation service. For certain large commercial and utility grade solar and storage systems where percentage of completion method does not apply, revenue is recognized when control transfers, which is when the product has been delivered to the customer for storage systems and when the project has received permission to operate from the utility for solar energy systems. ~~Operations and maintenance service revenue is recognized ratably over the respective contract term. Customer payments for such services are usually paid annually or quarterly in advance.~~

In instances where there are multiple performance obligations in a single contract, we allocate the consideration to the various obligations in the contract based on the relative standalone selling price method. Standalone selling prices are estimated based on estimated costs plus margin or using market data for comparable products. Costs incurred on the sale of residential installations before the solar energy systems are completed are included as work in process within inventory in the consolidated balance sheets. However, any fees that are paid or payable by us to a solar loan lender would be recognized as an offset against revenue. Costs to obtain a contract relate mainly to commissions paid to our sales personnel related to the sale of solar energy and storage systems. As our contract costs related to energy generation and storage sales are typically fulfilled within one year, the costs to obtain a contract are expensed as incurred.

As part of our energy generation and storage contracts, we may provide the customer with performance guarantees that warrant that the underlying energy generation or storage system will meet or exceed the minimum contract energy generation or retention requirements. In certain instances, we may receive a bonus payment if the system performs above a specified level. Conversely, if an energy generation or storage system does not meet the performance guarantee requirements, we may be required to pay liquidated damages. Other forms of variable consideration related to our large commercial and utility grade energy generation and storage contracts include variable customer payments that will be made based on our energy market participation activities. Such guarantees and variable customer payments represent a form of variable consideration and are estimated at contract inception at their most likely amount and updated at the end of each reporting period as additional performance data becomes available. Such estimates are included in the transaction price only to the extent that it is probable a significant reversal of revenue will not occur.

We record as deferred revenue any amounts that are collected from customers related to fees charged for prepayments and remote monitoring service and operations and maintenance service, which is recognized as revenue ratably over the respective customer contract term. As of SeptemberJune 30, ~~2018~~2019 and December 31, 2017, deferred revenue related to such customer payments amounted to $158.7 million and $124.0 million, respectively. Revenue recognized from the deferred revenue balance as of January 1, 2018, was $36.7 million for the nine months ended September 30, 2018. We have elected the practical expedient to omit disclosure of the amount of the transaction price allocated to remaining performance obligations for energy generation and storage sales with an original expected contract length of one year or less. As of September 30, 2018, total transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied for contracts with an original expected length of more than one year was $115.7 million. Of this amount, we expect to recognize $6.7 million in the next 12 months and the remaining over a period up to 30 years.

For revenue arrangements where we are the lessor under operating lease agreements for solar energy systems, including energy storage products, we record lease revenue from minimum lease payments, including upfront rebates and incentives earned from such systems, on a straight-line basis over the life of the lease term, assuming all other revenue recognition criteria have been met. For incentives that are earned based on the amount of electricity generated by the system, we record revenue as the amounts are earned. The difference between the payments received and the revenue recognized is recorded as deferred revenue on the consolidated balance sheet.

For solar energy systems where customers purchase electricity from us under power purchase agreements (“PPA”), we have determined that these agreements should be accounted for as operating leases pursuant to ASC 840. Revenue is recognized based on the amount of electricity delivered at rates specified under the contracts, assuming all other revenue recognition criteria are met.

We record as deferred revenue any amounts that are collected from customers, including lease prepayments, in excess of revenue recognized and operations and maintenance service, which is recognized as revenue ratably over the respective customer contract term. As of September 30, 2018 and December 31, 2017, deferred revenue related to such customer payments amounted to $212.2 million and $206.8 million, respectively. Deferred revenue also includes the portion of rebates and incentives received from utility companies and various local and state government agencies, which are recognized as revenue over the lease term. As of September 30, 2018 and December 31, 2017, deferred revenue from rebates and incentives amounted to $31.8 million and $27.2 million, respectively.

We capitalize initial direct costs from the origination of solar energy system leases or power purchase agreements, which include the incremental cost of contract administration, referral fees and sales commissions, as an element of solar energy systems, leased and to be leased, net, and subsequently amortize these costs over the term of the related lease or power purchase agreement.

Services and other revenue consists of ~~repair and maintenance~~non-warranty after-sales vehicle services, ~~service plans, merchandise,~~ sales of used ~~Tesla~~ vehicles, ~~sales of electric vehicle components to other manufacturers~~retail merchandise, and sales ~~of non-Tesla vehicle trade-ins. There were no significant changes~~by our acquired subsidiaries to ~~the timing or amount of revenue recognition as a result of our adoption of the new revenue standard.~~third party customers.

Revenues related to repair and maintenance services are recognized over time as services are provided and extended service plans are recognized over the performance period of the service contract as the obligation represents a stand-ready obligation to the customer. We sell used vehicles, services, service plans, vehicle components and merchandise separately and thus use standalone selling prices as the basis for revenue allocation to the extent that these items are sold in transactions with other performance obligations. Payment for used vehicles, services, and merchandise are typically received at the point when control transfers to the customer or in accordance with payment terms customary to the business. Payments received for prepaid plans are refundable upon customer cancellation of the related contracts and are included within customer deposits on the consolidated balance sheet. Deferred revenue related to services and other revenue was immaterial as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Energy generation and storage sales revenues consists of the sale of solar energy systems and energy storage systems to residential, small commercial, and large commercial and utility grade customers. Upon adoption of the new lease standard (refer to Leases section below for details), energy generation and storage sales revenues include agreements for solar energy systems and power purchase agreements (“PPAs”) that commence after January 1, 2019, as these are now accounted for under ASC 606. We record as deferred revenue any non-refundable amounts that are collected from customers related to fees charged for prepayments and remote monitoring service and operations and maintenance service, which is recognized as revenue ratably over the respective customer contract term. As of June 30, 2019 and December 31, 2018, deferred revenue related to such customer payments amounted to $148.4 million and $148.7 million, respectively. Revenue recognized from the deferred revenue balance as of December 31, 2018 was $21.8 million for the six months ended June 30, 2019 . Revenue recognized from the deferred revenue balance as of January 1, 2018, was $28.6 million for the six months ended June 30, 2018. We have elected the practical expedient to omit disclosure of the amount of the transaction price allocated to remaining performance obligations for energy generation and storage sales with an original expected contract length of one year or less and the amount that we have the right to invoice when that amount corresponds directly with the value of the performance to date. As of June 30, 2019, total transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied for contracts with an original expected length of more than one year was $102.2 million. Of this amount, we expect to recognize $4.8 million in the next 12 months and the remaining over a period up to 29 years.

Deferred revenue also includes the portion of rebates and incentives received from utility companies and various local and state government agencies, which is recognized as revenue over the lease term. As of June 30, 2019 and December 31, 2018, deferred revenue from rebates and incentives amounted to $35.3 million and $36.8 million, respectively.

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

					Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018		2019		2018		2019			2018
Automotive sales without resale value guarantee	$	5,297,024	$	10,177,777	$	4,918,301	$	2,698,239	$	8,601,682		$	4,880,753
Automotive sales with resale value guarantee		391,784		1,056,438
Automotive sales with resale value guarantee (1)						138,507		365,616		(252,114	)		664,654
Automotive regulatory credits		189,497		323,836		111,219		54,010		327,200			134,339
Energy generation and storage sales		259,288		791,785
Energy generation and storage sales (2)						225,765		234,602		437,865			532,497
Services and other		326,330		859,884		605,079		270,142		1,098,021			533,554
Total revenues from sales and services		6,463,923		13,209,720		5,998,871		3,622,609		10,212,654			6,745,797
Automotive leasing		220,461		633,713		208,362		239,816		423,482			413,252
Energy generation and storage leasing		140,029		391,962
Energy generation and storage leasing (2)						142,443		139,806		255,004			251,933
Total revenues	$	6,824,413	$	14,235,395	$	6,349,676	$	4,002,231	$	10,891,140		$	7,410,982

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

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

We have lease agreements with lease and non-lease components, and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component, from both a lessee and lessor perspective. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease. Additionally, we have determined that the leases previously identified as build-to-suit leasing arrangements under legacy lease accounting (ASC 840), were derecognized

pursuant to the transition guidance provided for build-to-suit leases in ASC 842. Accordingly, these leases have been reassessed as operating leases as of the adoption date under ASC 842, and are included on the consolidated balance sheet as of June 30, 2019.

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

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

Adoption of the new lease standard on January 1, 2019 had a material impact on our interim unaudited consolidated financial statements. The most significant impacts related to the (i) recognition of right-of-use ("ROU") assets of $1.29 billion and lease liabilities of $1.24 billion for operating leases on the consolidated balance sheet, and (ii) de-recognition of build-to-suit lease assets and liabilities of $1.62 billion and $1.74 billion, respectively, with the net impact of $96.7 million recorded to accumulated deficit, as of January 1, 2019. We also reclassified prepaid expenses and other current asset balances of $141.6 million and deferred rent balance, including tenant improvement allowances, and other liability balances of $69.7 million relating to our existing lease arrangements as of December 31, 2018, into the ROU asset balance as of January 1, 2019. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. The standard did not materially impact our consolidated statement of operations and consolidated statement of cash flows.

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

There are transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the aggregate balances of our gross unrecognized tax benefits were ~~$254.3~~$299.1 million and ~~$198.7~~$253.4 million, respectively, of which ~~$245.1~~$278.2 million and ~~$191.0~~$243.8 million, respectively, would not give rise to changes in our effective tax rate since these tax benefits would increase a deferred tax asset that is currently fully offset by a valuation allowance.

On ~~July 24, 2018,~~June 7, 2019, the Ninth Circuit Court of Appeals issued ana new opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation. This opinion reversed the prior decision of the United States Tax Court.

~~On August 7, 2018, the Ninth Circuit Court of Appeals, on its own motion, withdrew its July 24, 2018 opinion in Altera Corp. v. Commissioner.~~ We do not expect this ~~matter~~ to have an impact on our consolidated financial statements.

Basic net income (loss) per share of common stock attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. During the six months ended June 30, 2019, we increased net loss attributable to common stockholders by $7.6 million to arrive at the numerator used to calculate net loss per share. This adjustment represents the difference between the cash we paid to a financing fund investor for their noncontrolling interest in one of our subsidiaries and the carrying amount of the noncontrolling interest on our consolidated balance sheet, in accordance with ASC 260, Earnings per Share. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards, warrants and convertible senior notes using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income (loss) per share of common stock attributable to common stockholders when their effect is dilutive. Since we ~~expect~~intend to settle in cash the principal outstanding under the ~~0.25% Convertible Senior Notes due in 2019, the~~ 1.25% Convertible Senior Notes due in 2021, ~~and~~ the 2.375% Convertible Senior Notes due in 2022 and the 2.00% Convertible Senior Notes due in 2024, we use the treasury stock method when calculating their potential dilutive effect, if any. Furthermore, in connection with the offerings of our ~~bond hedges,~~notes, we entered into convertible note hedges (see Note ~~10,~~ ~~Convertible and~~ 11, Long-Term Debt Obligations). However, our convertible note hedges are not included when calculating potentially dilutive shares since their effect is always anti-dilutive.

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

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Stock-based awards		3,269,543		8,855,128		9,868,777		10,177,154		12,820,081		9,925,584		11,829,378		9,815,543
Convertible senior notes		1,498,987		1,908,572		1,501,726		2,559,810		1,088,699		1,500,618		1,088,699		1,503,118
Warrants		—		414,996		276,703		658,345		—		270,027		—		286,010

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

	September 30,		December 31,		September 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2018		2017		2017		2016		2019		2018		2018		2017
Cash and cash equivalents	$	2,967,504	$	3,367,914	$	3,530,030	$	3,393,216	$	4,954,740	$	3,685,618	$	2,236,424	$	3,367,914
Restricted cash		158,627		155,323		138,181		105,519		128,006		192,551		146,822		155,323
Restricted cash, net of current portion		396,835		441,722		408,544		268,165		365,547		398,219		399,992		441,722
Total as presented in the consolidated statements of cash flows	$	3,522,966	$	3,964,959	$	4,076,755	$	3,766,900	$	5,448,293	$	4,276,388	$	2,783,238	$	3,964,959

Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, restricted cash, accounts receivable, convertible note hedges, and interest rate swaps. Our cash balances are primarily invested in money market funds or on deposit at high credit quality financial institutions in the U.S. These deposits are typically in excess of insured limits. As of ~~September~~June 30, ~~2018,~~2019 , one entity represented 10% or more of our total accounts receivable balance. As of December 31, ~~2017,~~2018, no entity represented 10% of our total accounts receivable balance. The risk of concentration for our interest rate swaps is mitigated by transacting with several highly-rated multinational banks.

We are dependent on our suppliers, the majority of which are single source suppliers, and the inability of these suppliers to deliver necessary components of our products in a timely manner at prices, quality levels and volumes acceptable to us, or our inability to efficiently manage these components from these suppliers, could have a material adverse effect on our business, prospects, financial condition and operating results.

Vehicles that are leased as part of our direct vehicle leasing program, vehicles delivered to leasing partners with a resale value guarantee and a buyback option, as well as vehicles delivered to customers with resale value guarantee where exercise is probable are classified as operating lease vehicles as the related revenue transactions are treated as operating leases (refer to the Resale Value Guarantees Financing Programs under ASC 842 section above for details). Operating lease vehicles are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the expected operating lease term. The total cost of operating lease vehicles recorded on the consolidated balance sheets as of June 30, 2019 and December 31, 2018 was $2.51 billion and $2.55 billion, respectively. Accumulated depreciation related to leased vehicles as of June 30, 2019 and December 31, 2018 was $435.9 million and $457.6 million, respectively.

We provide a manufacturer’s warranty on all new and used vehicles, production powertrain components and systems and energy storage products we sell. In addition, we also provide a warranty on the installation and components of the solar energy systems we sell for periods typically between 10 to 30 years. We accrue a warranty reserve for the products sold by us, which includes our best estimate of the projected costs to repair or replace items under warranties and recalls when identified. These estimates are based on actual claims incurred to date and an estimate of the nature, frequency and costs of future claims. These estimates are inherently uncertain given our relatively short history of sales, and changes to our historical or projected warranty experience may cause material changes to the warranty reserve in the future. The warranty reserve does not include projected warranty costs associated with our vehicles subject to lease accounting and our solar energy systems under lease contracts or ~~power purchase agreements,~~PPAs, as the costs to repair these warranty claims are expensed as incurred. The portion of the warranty reserve expected to be incurred within the next 12 months is included within accrued liabilities and other while the remaining balance is included within other long-term liabilities on the consolidated balance sheet. Due to the adoption of the new revenue standard, automotive sales with resale value guarantees that were previously recorded within operating lease assets require a corresponding warranty accrual, which is included in the table below.sheets. Warranty expense is recorded as a component of cost of ~~revenues.~~revenues in the consolidated statements of operations. Accrued warranty activity consisted of the following (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Accrued warranty—beginning of period	$	524,009		$	343,279		$	401,790		$	266,655		$	843,908		$	465,866		$	747,826		$	401,790
Warranty costs incurred		(54,089	)		(39,481	)		(148,374	)		(87,881	)		(61,237	)		(49,604	)		(115,426	)		(94,285	)
Net changes in liability for pre-existing warranties, including expirations and foreign exchange impact		(13,256	)		4,768			(23,672	)		7,239			5,598			(10,917	)		43,348			(10,416	)
Additional warranty accrued from adoption of the new revenue standard		—			—			37,139			—			—			—			—			37,139
Provision for warranty		187,805			60,156			377,586			182,709			153,223			118,664			265,744			189,781
Accrued warranty—end of period	$	644,469		$	368,722		$	644,469		$	368,722		$	941,492		$	524,009		$	941,492		$	524,009

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, warranty costs incurred for vehicles accounted for as operating leases or collateralized debt arrangements were ~~$4.6~~$5.7 million and ~~$17.4~~$11.3 million, respectively, and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, such costs were ~~$10.8~~$7.0 million and ~~$24.3~~$12.8 million, respectively.

~~In May 2014, the Financial Accounting Standards Board (“FASB”)~~Recently issued ~~ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers, to replace the existing revenue recognition criteria for contracts with customers. In August 2015, the FASB issued ASU No. 2015-14,~~ ~~Deferral of the Effective Date, to defer the effective date of ASU No. 2014-09 to interim and annual periods beginning after December 15, 2017. Subsequently, the FASB issued ASU No. 2016-08,~~ ~~Principal versus Agent Considerations, ASU No. 2016-10,~~ ~~Identifying Performance Obligations and Licensing, ASU No. 2016-11,~~ ~~Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, ASU No. 2016-12,~~ ~~Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20,~~ ~~Technical Corrections and Improvements, to clarify and amend the guidance in ASU No. 2014-09. We~~accounting pronouncements not yet adopted the ASUs on January 1, 2018 on a modified retrospective basis through a cumulative adjustment to accumulated deficit. The adoption of the ASUs changed the timing of revenue recognition to be at delivery for certain vehicle sales to customers or leasing partners with a resale value guarantee, which will therefore qualify to be accounted for as sales with a right of return as opposed to the prior accounting as operating leases or collateralized lease borrowings. Upon adoption of the ASUs, we recorded a decrease to our beginning accumulated deficit of $623.2 million including income tax effects, which were immaterial. Refer to the ~~Revenue Recognition~~ ~~section above for details.~~

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases~~, to require lessees to recognize all leases, with certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. The ASU also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. We currently expect to adopt the ASU on January 1, 2019. We will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. We intend to elect most of the available practical expedients upon adoption. Upon adoption, we expect the consolidated balance sheet to include a right of use asset and liability related to substantially all of our lease arrangements. Further, solar leases and PPAs that commence after January 1, 2019, where we are the lessor and are currently accounted for as leases will no longer meet the definition of a lease with the adoption of this ASU and will instead be accounted for in accordance with ASC 606. We also expect most of our build-to-suit leases to be de-recognized upon adoption as our current build-to-suit leases will no longer qualify for build-to-suit accounting and will instead be recognized as operating leases under ASC 842. Subsequently, in July 2018, the FASB issued ASU No.~~2018-10, Codification Improvements to Topic 842, Leases, and ASU No. 2018-11,~~ ~~Targeted Improvements~~, to clarify and amend the guidance in ASU No. 2016-02. We are continuing to assess the impact of adopting the ASUs on our financial position, results of operations and related disclosures. We anticipate the effect on the consolidated balance sheet to be material. The ASU is currently expected to have no material impact on the consolidated statement of operations.

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

~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~Classification of Certain Cash Receipts and Cash Payments~~, to reduce the diversity in practice with respect to the classification of certain cash receipts and cash payments on the statement of cash flows. The ASU is effective for interim and annual periods beginning after December 15, 2017. Adoption of the ASU is retrospective. We adopted the ASU on January 1, 2018, which did not have a material impact on the consolidated financial statements.

~~In November 2016, the FASB issued ASU No. 2016-18,~~ ~~Statement of Cash Flows: Restricted Cash~~, which requires entities to present the aggregate changes in cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, the statement of cash flows now presents restricted cash and restricted cash equivalents as a part of the beginning and ending balances of cash and cash equivalents. The ASU is effective for interim and annual periods beginning after December 15, 2017. Adoption of the ASU was retrospective. We adopted the ASU on January 1, 2018, which resulted in restricted cash being combined with unrestricted cash reconciling beginning and ending balances. Refer to the ~~Restricted Cash and Deposits~~ ~~section above for the reconciliation.~~

~~In January 2017, the FASB issued ASU No. 2017-01,~~ ~~Clarifying the Definition of a Business~~, to clarify the definition of a business with the objective of assisting entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU is effective for interim and annual periods beginning after December 15, 2017. Adoption of the ASU is prospective. We adopted the ASU on January 1, 2018, which we anticipate will result in more transactions being accounted for as asset acquisitions rather than business acquisitions. Adoption of the guidance had no impact on the financial statements for the nine months ended September 30, 2018.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, to simplify the test for goodwill impairment by removing Step 2. An entity will, therefore, perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the fair value, not to exceed the total amount of goodwill allocated to the reporting unit. An entity still has the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary. The ASU is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Adoption of the ASU is prospective. We ~~have not yet selected an adoption date, and~~plan to adopt the ASU prospectively on January 1, 2020. The ASU is currently not ~~currently~~ expected to have a material impact on ~~the consolidated financial statements.~~

~~In February 2017, the FASB issued ASU No. 2017-05,~~ ~~Gains and Losses from the Recognition of Nonfinancial Assets~~, to clarify the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. The ASU is effective for interim and annual periods beginning after December 15, 2017. We adopted the ASU on January 1, 2018 on a modified retrospective basis through a cumulative adjustment to accumulated deficit. Upon adoption of the ASU, we recorded a decrease to our ~~beginning accumulated deficit of $9.4 million.~~

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Scope of Modification Accounting~~, to provide guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU is effective for interim and annual periods beginning after December 15, 2017. Adoption of the ASU is prospective. We adopted the ASU on January 1, 2018, which did not have a material impact on the consolidated financial statements.

~~In August 2017, the FASB issued ASU No. 2017-12,~~ ~~Targeted Improvements to Accounting for Hedging Activities~~, to simplify the application of current hedge accounting guidance. The ASU expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. Adoption of the ASU is generally modified retrospective. We are currently obtaining an understanding of the ASU and plan to adopt the ASU on January 1, 2019.

~~In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118,~~ ~~Income Tax Accounting Implications of the Tax Cuts and Jobs Act~~ (“SAB 118”), which allows entities to record provisional amounts during a measurement period not exceeding one year from the enactment date of the Act. SAB 118 was codified by the FASB as part of ASU No. 2018-05, ~~Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118~~. As of September 30, 2018, we have not made any measurement period adjustments. Such adjustments may be necessary in future periods due to, among other things, the significant complexity of the Act, additional regulatory guidance that may be issued by the Internal Revenue Service (“IRS”), changes to our analysis, interpretations or assumptions or actions that we may take as a result of the Act. We are continuing to gather information to assess the application of the Act and expect to complete our analysis within the prescribed measurement period. We do not expect any adjustments to have a material impact on the consolidated financial statements due to our historical worldwide loss position and the full valuation allowance on our net U.S. deferred tax assets.

~~In January 2018, the FASB issued ASU No. 2018-01,~~ ~~Land Easement Practical Expedient Transition to Topic 842~~, to permit an entity to elect a practical expedient to not evaluate land easements under ASC 842 that existed or expired before the entity’s adoption of ASC 842 and that were not previously accounted for as leases under ASC 840. The ASU is effective for the same periods as ASU No. 2016-02, and the ASU is not currently expected to have a material impact on the consolidated financial statements.

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

In February 2016, the FASB issued ASU No. 2016-02, Leases, to require lessees to recognize all leases, with limited exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to legacy lease accounting, ASC 840. The ASU also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, ASU No. 2018-11, Targeted Improvements,ASU No. 2018-20, Narrow-Scope Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify and amend the guidance in ASU No. 2016-02. We adopted the ASUs on January 1, 2019 on a modified retrospective basis through a cumulative adjustment to our beginning accumulated deficit balance. Prior comparative periods have not been recast under this method, and we adopted all available practical expedients, as applicable. Further, solar leases that commence on or after January 1, 2019, where we are the lessor and which were accounted for as leases under ASC 840, will no longer meet the definition of a lease. Instead, solar leases commencing on or after January 1, 2019 will be accounted for under ASC 606. In addition to recognizing operating leases that were previously not recognized on the consolidated balance sheet, our build-to-suit leases were also de-recognized with a net decrease of approximately $96.7 million to our beginning accumulated deficit after income tax effects, as our build-to-suit leases no longer qualify for build-to-suit accounting and are instead recognized as operating leases. Upon adoption, our consolidated balance sheet include an overall reduction in assets of $473.3 million and a reduction in liabilities of $570.0 million. The adoption of the ASUs did not have a material impact on the consolidated statement of operations or the consolidated statement of cash flows.

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

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

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

The Acquisition Date fair value of the purchase consideration was $207.2 million (902,968 shares issued at $229.49 per share, the opening price of our common stock on the Acquisition Date)

We accounted for the acquisition using the purchase method of accounting for business combinations under ASC 805, Business Combinations. The total purchase price is allocated to the tangible and identifiable intangible assets acquired and liabilities based on their estimated fair values as of the Acquisition Date.

As we finalize the fair value of assets acquired and liabilities assumed, additional purchase price adjustments may be recorded during the measurement period (a period not to exceed 12 months). Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives and the expected future cash flows and related discount rates, can materially impact our results of operations. Significant inputs used for the model included the amount of cash flows, the expected period of the cash flows and the discount rates. The finalization of the purchase accounting assessment may result in a change in the valuation of the intangible assets acquired and the related taxes, which may have a material impact on our results of operations and financial position.

The preliminary allocation of the purchase price is based on management’s estimate of the Acquisition Date fair values of the assets acquired and liabilities assumed, as follows (in thousands):

Goodwill represented the excess of the purchase price over the fair value of the net assets acquired and was primarily attributable to the expected synergies from integrating Maxwell’s technology into our automotive business as well as the acquired talent. Goodwill is not deductible for U.S. income tax purposes and is not amortized. Rather, we assess goodwill for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value.

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

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

Goodwill increased $85.3 million from December 31, 2018 to June 30, 2019 primarily due to our acquisition of Maxwell.

Information regarding our acquired intangible assets including assets recognized from acquisition of Maxwell was as follows (in thousands):

	September 30, 2018										December 31, 2017									June 30, 2019										December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Other			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Other		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Other			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Other			Net Carrying Amount
Finite-lived intangible assets:
Developed technology	$	152,431	$	(35,049	)	$	1,393		$	118,775	$	125,889	$	(19,317	)	$	1,847	$	108,419	$	254,526	$	(53,577	)	$	1,130		$	202,079	$	152,431	$	(40,705	)	$	1,205		$	112,931
Trade names		45,275		(43,993	)		197			1,479		45,275		(10,924	)		261		34,612		3,175		(710	)		160			2,625		45,275		(44,056	)		170			1,389
Favorable contracts and leases, net		112,817		(14,470	)		—			98,347		112,817		(8,639	)		—		104,178		112,817		(20,281	)		—			92,536		112,817		(16,409	)		—			96,408
Other		35,559		(10,541	)		831			25,849		34,099		(7,775	)		1,137		27,461		37,559		(13,463	)		689			24,785		35,559		(11,540	)		719			24,738
Total finite-lived intangible assets		346,082		(104,053	)		2,421			244,450		318,080		(46,655	)		3,245		274,670		408,077		(88,031	)		1,979			322,025		346,082		(112,710	)		2,094			235,466
Indefinite-lived intangible assets:
IPR&D		60,290		—			(13,264	)		47,026		86,832		—			—		86,832
Gigafactory 1 water rights																					5,333		—			—			5,333		—		—			—			—
In-process research and development (“IPR&D”)																					60,290		—			(60,290	)		—		60,290		—			(13,264	)		47,026
Total indefinite-lived intangible assets		60,290		—			(13,264	)		47,026		86,832		—			—		86,832		65,623		—			(60,290	)		5,333		60,290		—			(13,264	)		47,026
Total intangible assets	$	406,372	$	(104,053	)	$	(10,843	)	$	291,476	$	404,912	$	(46,655	)	$	3,245	$	361,502	$	473,700	$	(88,031	)	$	(58,311	)	$	327,358	$	406,372	$	(112,710	)	$	(11,170	)	$	282,492

~~The in-process research and development (“IPR&D”), which we acquired from SolarCity Corporation (“SolarCity”), is accounted for as an indefinite-lived asset until~~In April 2019, the ~~completion or abandonment of the associated research and development efforts. If the research and~~Company determined to abandon further development efforts ~~are successfully completed and commercial feasibility is reached,~~on the IPR&D ~~would be amortized over its then estimated useful life. If~~and therefore impaired the ~~research and development efforts are not completed or are abandoned,~~remaining $47.0 million in the IPR&D might be impaired. The fair value of the IPR&D was estimated using the replacement cost method under the cost approach, based on the historical acquisition costs and expenses of the technology adjusted for estimated developer’s profit, opportunity cost and obsolescence factor. During the three monthsquarter ended June 30, ~~2018,~~ ~~we concluded that a portion of the IPR&D was not commercially feasible,~~2019, in restructuring and ~~consequently recognized an abandonment loss of $13.3 million in research and development operating~~other expenses. ~~During the three months ended June 30, 2018, $26.5 million of IPR&D was put into production, and~~ we expect to complete the remaining research and development efforts in the fourth quarter of 2018. The nature of the research and development efforts consists principally of planning, designing and testing the technology for viability in manufacturing solar cells and modules. If commercial feasibility is not achieved for the remaining IPR&D, we would likely look to other alternative technologies.

~~The costs associated with one of the trade names acquired by us has been fully amortized as we phased out the use of such trade name in our sales and marketing efforts.~~

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


Three months ending December 31, 2018	$	8,782
2019		34,722
Six months ending December 31, 2019			$	23,222
2020		32,789		44,550
2021		32,789		44,550
2022		32,789		44,550
2023				38,362
Thereafter		102,579		126,791
Total	$	244,450	$	322,025

ASC 820, Fair Value Measurements, states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The three-tiered fair value hierarchy, which prioritizes which inputs should be used in measuring fair value, is comprised of: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than quoted prices in active markets that are observable either directly or indirectly and (Level III) unobservable inputs for which there is little or no market data. The fair value hierarchy requires the use of observable market data when available in determining fair value. Our assets and liabilities that were measured at fair value on a recurring basis were as follows (in thousands):

September 30, 2018

December 31, 2017

Fair Value

Level I

Level II

Level III

Fair Value

Level I

Level II

Level III

Money market funds
   (cash and cash
   equivalents &
   restricted cash)

$
1,474,346

$
1,474,346

$
—

$
—

$
2,163,459

$
2,163,459

$
—

$
—

Interest rate swaps,
   net

17,572

—

17,572

—

59

—

59

—

Total

$
1,491,918

$
1,474,346

$
17,572

$
—

$
2,163,518

$
2,163,459

$
59

$
—

	June 30, 2019										December 31, 2018
	Fair Value			Level I		Level II			Level III		Fair Value		Level I		Level II		Level III
Money market funds (cash and cash equivalents & restricted cash)	$	1,723,321		$	1,723,321	$	—		$	—	$	1,812,828	$	1,812,828	$	—	$	—
Interest rate swap (liability) asset, net		(26,839	)		—		(26,839	)		—		11,070		—		11,070		—
Total	$	1,696,482		$	1,723,321	$	(26,839	)	$	—	$	1,823,898	$	1,812,828	$	11,070	$	—

All of our money market funds were classified within Level I of the fair value hierarchy because they were valued using quoted prices in active markets. Our interest rate swaps were classified within Level II of the fair value hierarchy because they were valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates. During the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, there were no transfers between the levels of the fair value hierarchy.

We enter into fixed-for-floating interest rate swap agreements to swap variable interest payments on certain debt for fixed interest payments, as required by certain of our lenders. We do not designate our interest rate swaps as hedging instruments. Accordingly, our interest rate swaps are recorded at fair value on the consolidated balance sheets within other assets or other long-term liabilities, with any changes in their fair values recognized as other income (expense), net, in the consolidated statements of operations and with any cash flows recognized as investing activities in the consolidated statements of cash flows. Our interest rate swaps outstanding were as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Gross gains	$	5,401	$	440	$	17,811	$	2,989	$	—	$	2,747	$	155	$	12,410
Gross losses		39		1,641		1,244		12,836	$	18,521	$	1,170	$	37,964	$	1,205

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

We estimate the fair value of the convertible senior notes and the 5.30% Senior Notes due in 2025 using commonly accepted valuation methodologies and market-based risk measurements that are indirectly observable, such as credit risk (Level II). In addition, we estimate the fair ~~value~~values of the participation interest, the solar asset-backed notes, the solar loan-backed notes and the automotive asset-backed notes based on rates currently offered for instruments with similar maturities and terms (Level III). The following table presents the estimated fair values and the carrying values (in thousands):

	September 30, 2018				December 31, 2017				June 30, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Convertible senior notes	$	3,851,725	$	4,051,562	$	3,722,673	$	4,488,651	$	4,150,996	$	4,727,156	$	3,660,316	$	4,346,642
Senior notes	$	1,777,948	$	1,516,500	$	1,775,550	$	1,732,500	$	1,780,345	$	1,584,000	$	1,778,756	$	1,575,000
Participation interest	$	18,595	$	18,067	$	17,545	$	17,042	$	19,802	$	19,285	$	18,946	$	18,431
Solar asset-backed notes	$	857,721	$	875,584	$	880,415	$	898,145	$	1,169,430	$	1,214,611	$	1,183,675	$	1,206,755
Solar loan-backed notes	$	202,938	$	209,236	$	236,844	$	248,149	$	189,956	$	202,891	$	203,052	$	211,788
Automotive asset-backed notes	$	417,462	$	418,209	$	—	$	—	$	945,614	$	952,042	$	1,172,160	$	1,179,910

					June 30,		December 31,
	September 30, 2018		December 31, 2017		2019		2018
Raw materials	$	997,476	$	821,396	$	1,095,888	$	931,828
Work in process		358,113		243,181		334,641		296,991
Finished goods		1,657,339		1,013,909		1,600,214		1,581,763
Service parts		301,199		185,051		351,615		302,864
Total	$	3,314,127	$	2,263,537	$	3,382,358	$	3,113,446

Finished goods inventory included vehicles in transit to fulfill customer orders, new vehicles available for immediate sale at our retail and service center locations, used ~~Tesla~~ vehicles and energy storage products. During the third quarter of 2018, we made the decision to utilize some of our fleet cars as service loaners on a long-term basis. As a result, we reclassified $72.8 million of finished goods inventory to property, plant and equipment.products

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

We write-down inventory for any excess or obsolete inventories or when we believe that the net realizable value of inventories is less than the carrying value. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, we recorded write-downs of ~~$12.4~~$24.8 million and ~~$54.3~~$89.0 million, respectively, in cost of revenues. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, we recorded write-downs of ~~$26.2~~$24.6 million and ~~$93.0~~$41.9 million, respectively, in cost of revenues.

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

							June 30,			December 31,
	September 30, 2018			December 31, 2017			2019			2018
Solar energy systems leased to customers	$	6,363,837		$	6,009,977
Solar energy systems in service							$	6,587,439		$	6,430,729
Initial direct costs related to customer solar energy system lease acquisition costs		96,618			74,709			101,197			99,380
		6,460,455			6,084,686			6,688,636			6,530,109
Less: accumulated depreciation and amortization		(439,040	)		(220,110	)		(608,006	)		(495,518	)
		6,021,415			5,864,576			6,080,630			6,034,591
Solar energy systems under construction		118,542			243,847			49,777			67,773
Solar energy systems to be leased to customers		161,580			239,067
Solar energy systems, leased and to be leased – net (1)	$	6,301,537		$	6,347,490
Solar energy systems pending interconnection								70,297			169,032
Solar energy systems, net (1)							$	6,200,704		$	6,271,396

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

							June 30,			December 31,
	September 30, 2018			December 31, 2017			2019			2018
Machinery, equipment, vehicles and office furniture	$	5,950,086		$	4,251,711		$	6,919,869		$	6,328,966
Tooling		1,384,382			1,255,952			1,463,543			1,397,514
Leasehold improvements		943,848			789,751			1,010,893			960,971
Land and buildings		3,995,992			2,517,247			2,839,746			4,047,006
Computer equipment, hardware and software		463,190			395,067			553,265			487,421
Construction in progress		963,136			2,541,588			543,452			807,297
		13,700,634			11,751,316			13,330,768			14,029,175
Less: Accumulated depreciation and amortization		(2,454,339	)		(1,723,794	)
Less: Accumulated depreciation								(3,248,310	)		(2,699,098	)
Total	$	11,246,295		$	10,027,522		$	10,082,458		$	11,330,077

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

Construction in progress is primarily comprised of tooling and equipment related to the manufacturing of our vehicles and ~~a portion of~~ Gigafactory 1Shanghai construction. Completed assets are transferred to their respective asset classes, and depreciation begins when an asset is ready for its intended use. Construction in progress also includes certain build-to-suit lease costs incurred at our Buffalo manufacturing facility, referred to as Gigafactory 2. During the nine months ended September 30, 2018, $604.1 million of costs at Gigafactory 1 and $649.5 million of costs at Gigafactory 2 were transferred to land and buildings from construction in progress as assets were placed in service. Interest on outstanding debt is capitalized during periods of significant capital asset construction and amortized over the useful lives of the related assets. During the three and ~~nine~~six months ended ~~September~~June 30, 2019 , we capitalized $7.1 million and $14.6 million , respectively, of interest. During the three and six months ended June 30, 2018, we capitalized ~~$12.0~~$15.7 million and ~~$46.5~~$34.5 million, respectively, of interest. ~~During the three and nine months ended September 30, 2017, we capitalized $37.3 million and $96.0 million, respectively, of interest.~~

~~As of~~ ~~September 30, 2018~~ ~~and December 31, 2017, the table above included $1.68 billion and $1.63 billion, respectively, of gross build-to-suit lease assets. As of~~ ~~September 30, 2018~~ and December 31, 2017, the corresponding financing liabilities of $109.0 million and $14.9 million, respectively, were recorded in accrued liabilities and $1.62 billion and $1.67 billion, respectively, were recorded in other long-term liabilities on the consolidated balance sheets.

Depreciation ~~and amortization~~ expense during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 was ~~$300.0~~$334.6 million and ~~$797.0~~$634.0 million , respectively. Depreciation ~~and amortization~~ expense during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was ~~$197.5~~$251.8 million and ~~$534.2~~$497.0 million, respectively. Gross property and equipment under ~~capital~~finance leases as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 was ~~$1.40~~$1.96 billion and ~~$688.3 million,~~$1.52 billion, respectively. Accumulated depreciation on property and equipment under ~~capital~~finance leases as of these dates was ~~$193.7~~$339.3 million and ~~$100.6~~$231.6 million, respectively.

Panasonic has partnered with us on Gigafactory 1 with investments in the production equipment that it uses to manufacture and supply us with battery cells. Under our arrangement with Panasonic, we plan to purchase the full output from their production equipment at negotiated prices. As these terms convey ~~to us the right to use,~~a finance lease, as defined in ASC ~~840,~~ 842, Leases, their production equipment, we consider them to be leased assets when production commences. This results in us recording the cost of their production equipment within property, plant and equipment, net, on the consolidated balance sheets with a corresponding liability recorded to long-term debt and ~~capital~~finance leases. For all suppliers and partners for which we plan to purchase the full output from their production equipment located at Gigafactory 1, we have applied similar accounting. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, we had cumulatively capitalized costs of ~~$1.14~~$1.64 billion and ~~$473.3 million,~~$1.24 billion, respectively, on the consolidated balance sheets in relation to the production equipment under our Panasonic arrangement. We had cumulatively capitalized total costs for Gigafactory 1, including costs under our Panasonic arrangement, of ~~$4.47~~$5.08 billion and ~~$3.15~~$4.62 billion as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

~~The liability for receipts from an investor represents~~As of December 31, 2018, the ~~amounts received from the investor under~~table above included $1.66 billion of gross non-current build-to-suit lease liabilities. As a ~~lease pass-through fund arrangement for the monetization~~result of ~~ITCs for solar energy systems not yet placed in service. Due to~~ the adoption of the new ~~revenue~~lease standard ~~automotive sales with resale value guarantees that are now accounted for~~on January 1, 2019, we have de-recognized all build-to-suit lease liabilities and have reassessed these leases to be operating lease right-of-use liabilities as ~~sales with a right~~ of ~~return require a corresponding~~June 30, 2019. Due to price adjustments we made to our vehicle offerings during the six months ended June 30, 2019, we increased our sales return reserve ~~which is included in accrued liabilities and other when the reserve is current and other long-term liabilities when the reserve is non-current~~significantly on ~~the consolidated balance sheets.~~vehicles previously sold under our buyback options program. Refer to Note 2, Summary of Significant Accounting Policies,for details on these transactions.

Customer deposits primarily consisted of cash payments from customers at the time they place an order or reservation for a vehicle or an energy product and any additional payments up to the point of delivery or the completion of installation, including the fair values of any customer trade-in vehicles that are applicable toward a new vehicle purchase. Customer deposits also include prepayments on contracts that can be cancelled without significant penalties, such as vehicle maintenance plans. Customer deposit amounts and timing vary depending on the vehicle model, the energy product and the country of delivery. In the case of a vehicle, customer deposits are fully refundable up to the point the vehicle is placed into the production cycle. In the case of an energy generation or storage product, customer deposits are fully refundable prior to the entry into a purchase agreement or in certain cases for a limited time thereafter (in accordance with applicable laws). Customer deposits are included in current liabilities until refunded or until they are applied towards the customer’s purchase balance. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, we held ~~$905.8~~$631.1 million and ~~$853.9~~$792.6 million, respectively, in customer deposits. Due to the adoption of the new revenue standard, customer deposits now include prepayments on contracts that can be cancelled without significant penalties, such as vehicle maintenance plans, which were previously reported as deferred revenue. As a result, $55.6 million of the increase in the customer deposits balance was from the adoption of the new revenue standard.

The following is a summary of our debt as of ~~September~~June 30, ~~2018~~2019 (in thousands):

	Unpaid						Unused				Unpaid						Unused
	Principal		Net Carrying Value				Committed		Contractual	Contractual	Principal		Net Carrying Value				Committed		Contractual			Contractual
	Balance		Current		Long-Term		Amount*		Interest Rates	Maturity Date	Balance		Current		Long-Term		Amount (1)		Interest Rates			Maturity Date
Recourse debt:
0.25% Convertible Senior Notes due in 2019 ("2019 Notes")	$	920,000	$	901,453	$	—	$	—	0.25%	March 2019
1.25% Convertible Senior Notes due in 2021 ("2021 Notes")		1,380,000		—		1,228,719		—	1.25%	March 2021		1,380,000		—		1,273,206		—		1.25	%	March 2021
2.375% Convertible Senior Notes due in 2022 ("2022 Notes")		977,500		—		863,771		—	2.375%	March 2022		977,500		—		886,513		—		2.375	%	March 2022
2.00% Convertible Senior Notes due in 2024 ("2024 Notes")												1,840,000		—		1,340,143		—		2.00	%	May 2024
5.30% Senior Notes due in 2025 ("2025 Notes")		1,800,000		—		1,777,948		—	5.30%	August 2025		1,800,000		—		1,780,345		—		5.30	%	August 2025
Credit Agreement		1,593,000		—		1,593,000		229,173	1% plus LIBOR	June 2020		1,740,000		141,711		1,598,289		504,993	3.4% -5.5%			June 2020-July 2023
Vehicle and other Loans		2,425		2,425		—		—	1.8%-7.6%	October 2018 - September 2019
2.75% Convertible Senior Notes due in 2018		230,000		231,687		—		—	2.75%	November 2018
1.625% Convertible Senior Notes due in 2019		566,000		—		535,668		—	1.625%	November 2019		565,992		556,575		—		—		1.625	%	November 2019
Zero-Coupon Convertible Senior Notes due in 2020		103,000		—		90,427		—	0.0%	December 2020		103,000		—		94,559		—		0.0	%	December 2020
Solar Bonds		25,283		678		24,841		—	2.6-5.75%	October 2018 - January 2031
Vehicle, Solar Bonds and other Loans												144,668		14,712		126,948		1,000	1.8%-6.8%			September 2019-January 2031
Total recourse debt		7,597,208		1,136,243		6,114,374		229,173				8,551,160		712,998		7,100,003		505,993
Non-recourse debt:
Warehouse Agreements		659,388		110,204		549,184		440,612	3.5%	September 2020		321,650		45,452		276,198		778,350	3.8%-4.1%			September 2020
Canada Credit Facility		59,227		29,297		29,930		—	3.6%-5.1%	November 2021		56,639		28,878		27,761		—	3.6%-5.9%			November 2022
Term Loan due in December 2018		181,746		181,452		—		—	5.8%	December 2018
Term Loan due in January 2021		171,719		6,527		164,389		—	5.8%	January 2021
Revolving Aggregation Credit Facility		210,157		—		207,718		389,843	5.0 - 5.4%	December 2019
Solar Renewable Energy Credit Loan Facility		31,501		13,281		18,048		—	7.9%	July 2021
Term Loan due in 2019												161,944		161,944		—		—		5.9	%	December 2019
Term Loan due in 2021												166,152		7,284		158,313		—		6.1	%	January 2021
Solar Revolving Credit Facility												41,908		—		41,908		—		6.0	%	June 2022
China Loan Agreement												27,478		27,478		—		482,122		3.9	%	March 2020
Cash equity debt		474,555		10,932		448,938		—	5.3-5.8%	July 2033- January 2035		461,926		9,401		438,534		—	5.3%-5.8%			July 2033-January 2035
Solar asset-backed notes		883,806		24,022		833,699		—	4.0 - 7.7%	November 2038- February 2048		1,198,962		33,640		1,135,790		—	4.0%-7.7%			September 2024-February 2048
Solar loan-backed notes		210,249		9,888		193,050		—	4.8-7.5%	September 2048- September 2049		196,924		10,671		179,285		—	4.8%-7.5%			September 2048-September 2049
Automotive asset-backed notes		417,462		311,629		105,833		—	2.3%-4.9%	December 2019 - March 2021		949,951		400,665		544,949		—	2.3%-7.9%			December 2019-June 2022
Solar Renewable Energy Credit and other Loans												24,995		21,417		3,106		27,201	4.4%-8.2%			September 2019-July 2021
Total non-recourse debt		3,299,810		697,232		2,550,789		830,455				3,608,529		746,830		2,805,844		1,287,673
Total debt	$	10,897,018	$	1,833,475	$	8,665,163	$	1,059,628			$	12,159,689	$	1,459,828	$	9,905,847	$	1,793,666

The following is a summary of our debt as of December 31, ~~2017~~2018 (in thousands):

	Unpaid						Unused				Unpaid						Unused
	Principal		Net Carrying Value				Committed		Contractual	Contractual	Principal		Net Carrying Value				Committed		Contractual			Contractual
	Balance		Current		Long-Term		Amount*		Interest Rates	Maturity Date	Balance		Current		Long-Term		Amount (1)		Interest Rates			Maturity Date
Recourse debt:
1.50% Convertible Senior Notes due in 2018 ("2018 Notes")	$	5,512	$	5,442	$	—	$	—	1.50%	June 2018
2019 Notes		920,000		—		869,092		—	0.25%	March 2019
0.25% Convertible Senior Notes due in 2019 ("2019 Notes")												920,000		912,625		—		—		0.25	%	March 2019
2021 Notes		1,380,000		—		1,186,131		—	1.25%	March 2021		1,380,000		—		1,243,496		—		1.25	%	March 2021
2022 Notes		977,500		—		841,973		—	2.375%	March 2022		977,500		—		871,326		—		2.375	%	March 2022
2025 Notes		1,800,000		—		1,775,550		—	5.30%	August 2025		1,800,000		—		1,778,756		—		5.30	%	August 2025
Credit Agreement		1,109,000		—		1,109,000		729,929	1% plus LIBOR	June 2020		1,540,000		—		1,540,000		230,999	1% plus LIBOR			June 2020
Vehicle and other Loans		16,205		15,944		261		—	1.8% - 7.6%	January 2018- September 2019
2.75% Convertible Senior Notes due in 2018		230,000		222,171		—		—	2.75%	November 2018
1.625% Convertible Senior Notes due in 2019		566,000		—		511,389		—	1.625%	November 2019		565,992		541,070		—		—		1.625	%	November 2019
Zero-Coupon Convertible Senior Notes due in 2020		103,000		—		86,475		—	0.0%	December 2020		103,000		—		91,799		—		0.0	%	December 2020
Related Party Promissory Notes due in February 2018		100,000		100,000		—		—	6.5%	February 2018
Solar Bonds		32,016		7,008		24,940		—	2.6% - 5.8%	March 2018- January 2031
Vehicle, Solar Bonds and other Loans												100,928		1,322		100,190		—	1.8%-7.6%			January 2019-January 2031
Total recourse debt		7,239,233		350,565		6,404,811		729,929				7,387,420		1,455,017		5,625,567		230,999
Non-recourse debt:
Warehouse Agreements		673,811		195,382		477,867		426,189	3.1%	September 2019		92,000		13,604		78,396		1,008,000	3.9%-4.2%			September 2020
Canada Credit Facility		86,708		31,106		55,603		—	3.6% - 5.1%	November 2021		73,220		31,766		41,454		—	3.6%-5.9%			November 2022
Term Loan due in December 2018		157,095		156,884		—		19,534	4.8%	December 2018
Term Loan due in January 2021		176,290		5,885		169,352		—	4.9%	January 2021
Revolving Aggregation Credit Facility		161,796		—		158,733		438,204	4.1% - 4.5%	December 2019
Solar Renewable Energy Credit Loan Facility		38,575		15,858		22,774		—	7.3%	July 2021
Term Loan due in 2019												180,624		180,624		—		—		6.1	%	January 2019
Term Loan due in 2021												169,050		6,876		161,453		—		6.0	%	January 2021
Cash equity debt		482,133		12,334		454,421		—	5.3% - 5.8%	July 2033-January 2035		466,837		10,911		441,472		—	5.3%-5.8%			July 2033-January 2035
Solar asset-backed notes		907,241		23,829		856,586		—	4.0% - 7.7%	November 2038-February 2048		1,214,071		28,761		1,154,914		—	4.0%-7.7%			September 2024-February 2048
Solar loan-backed notes		244,498		8,006		228,838		—	4.8% - 7.5%	September 2048-September 2049		210,249		9,888		193,164		—	4.8%-7.5%			September 2048-September 2049
Automotive asset-backed notes												1,177,937		467,926		704,234		—	2.3%-7.9%			December 2019-June 2022
Solar Renewable Energy Credit and other Loans												26,742		16,612		9,836		17,633	5.1%-7.9%			December 2019-July 2021
Total non-recourse debt		2,928,147		449,284		2,424,174		883,927				3,610,730		766,968		2,784,923		1,025,633
Total debt	$	10,167,380	$	799,849	$	8,828,985	$	1,613,856			$	10,998,150	$	2,221,985	$	8,410,490	$	1,256,632

Recourse debt refers to debt that is recourse to our general assets. Non-recourse debt refers to debt that is recourse to only specified assets of our subsidiaries. The differences between the unpaid principal balances and the net carrying values are due to convertible senior note conversion features, debt discounts or deferred financing costs. As of ~~September~~June 30, ~~2018~~,2019, we were in material compliance with all financial debt covenants, which include minimum liquidity and expense-coverage balances and ratios.

During the first quarter of 2019, we repaid the $920.0 million in aggregate principal amount of the 2019 Notes.

~~During the first quarter of 2018, $5.2 million~~In May 2019, we issued $1.84 billion in aggregate principal amount of 2.00% Convertible Senior Notes due in May 2024 in a public offering. The net proceeds from the ~~2018~~issuance, after deducting transaction costs, were $1.82 billion.

Each $1,000 of principal of the 2024 Notes ~~were converted for $5.2 million in cash and 25,745~~is initially convertible into 3.2276 shares of our common ~~stock. As~~stock, which is equivalent to an initial conversion price of $309.83 per share, subject to adjustment upon the occurrence of specified events. Holders of the 2024 Notes may convert, at their option, on or after February 15, 2024. Further, holders of the 2024 Notes may convert, at their option, prior to February 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2019 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a ~~result, we recognized a loss~~period of 30 consecutive trading days ending on ~~debt extinguishment~~the last trading day of immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each trading day; (2) during the five-business day period after any five-consecutive trading day period in which the trading price per $1,000 principal amount of the 2024 Notes for each trading day of such period is less than ~~$0.1 million.~~

98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day, or (3) if specified corporate events occur. Upon conversion, the 2024 Notes will be settled in cash, shares of our common stock or a combination thereof, at our election. If a fundamental change occurs prior to the maturity date, holders of the 2024 Notes may require us to repurchase all or a portion of their 2024 Notes for cash at a repurchase price equal to 100% of the principal amount plus any accrued and unpaid interest. In addition, if specific corporate events occur prior to the maturity date, we would increase the conversion rate for a holder who elects to convert its 2024 Notes in connection with such an event in certain circumstances. As of June 30, ~~2018,~~2019, none of the ~~2018~~conditions permitting the holders of the 2024 Notes to early convert had been met. Therefore, the 2024 Notes are classified as long-term.

In accordance with GAAP relating to embedded conversion features, we initially valued and bifurcated the conversion feature associated with the 2024 Notes. We recorded to stockholders’ equity $490.9 million for the conversion feature. The resulting debt discount is being amortized to interest expense at an effective interest rate of 8.68%.

In connection with the offering of the 2024 Notes, we entered into convertible note hedge transactions whereby we have ~~been completely settled.~~the option to purchase initially (subject to adjustment for certain specified events) 5.9 million shares of our common stock at a price of $309.83 per share. The cost of the convertible note hedge transactions was $475.8 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) 5.9 million shares of our common stock at a price of $607.50 per share. We received $174.4 million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and the sale of the warrants are intended to reduce potential dilution from the conversion of the 2024 Notes and to effectively increase the overall conversion price from $309.83 to $607.50 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheet.

In ~~June 2015,~~March 2019, we ~~entered into a~~amended and restated the senior asset-based revolving credit agreement (the “Credit Agreement”) to increase the total lender commitments by $500.0 million to $2.425 billion, and extend the term of substantially all of the total commitments to July 2023.

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

In June 2019, one of our subsidiaries entered into a loan agreement with a bank for a revolving credit facility of up to $50.0 million. The solar revolving credit facility bears interest at an annual rate of ~~(a) 1% plus~~2.50% plus: (i) for LIBOR loans, at our option, three-month LIBOR or ~~(b)~~daily LIBOR and (ii) for Base Rate loans, the highest of ~~(i)~~(a) the ~~federal funds rate~~Federal Funds Rate plus 0.50%, ~~(ii)~~(b) the ~~lenders’ “prime rate” or (iii) 1%~~Prime Rate, and (c) the three-month LIBOR plus ~~LIBOR. The fee for undrawn amounts is 0.25% per annum. The Credit Agreement~~1.00%.The solar revolving credit facility is secured by certain ~~of our accounts receivable, inventory and equipment. Availability under the Credit Agreement is based on the value of such~~ assets ~~as reduced by certain reserves.~~

On May 3, 2018, the Company and its subsidiary Tesla Motors Netherlands B.V. entered into the Ninth Amendment (the “Ninth Amendment”) to the Credit Agreement. The Ninth Amendment amended the Credit Agreement to permit Tesla to include in its discretion: (i) the Fremont Factory facilities in the U.S. borrowing base and/or (ii) vehicles in and in-transit to Belgium in the Dutch borrowing base.

In February 2018, we fully repaid the $17.5 million in aggregate principal amount of 6.50% promissory notes held by SolarCity’s former Chief Executive Officer that matured. On February 14, 2018, our Chief Executive Officer and SolarCity’s former Chief Technology Officer exchanged their $82.5 million (collectively) in aggregate principal amount of 6.50% promissory notes due in February 2018 for 6.50% promissory notes due in August 2018 in the same amounts. These promissory notes were fully repaid in August 2018.

~~On February 6, 2018, we repaid $453.6 million~~ of the ~~principal outstanding under the Warehouse Agreements. On August 16, 2018, the Warehouse Agreements were amended to extend the availability period from August 17, 2018 to August 16, 2019~~subsidiary and ~~extend the maturity date from September 2019 to September 2020.~~

On February 6, 2018, we transferred receivables related to certain leased vehicles into a special purpose entity (“SPE”) and issued $546.1 million in aggregate principal amount of Automotive Asset-backed Notes, Series 2018-A, backed by these automotive assets to investors. The SPE is wholly owned by us and is consolidated in the financial statements. The proceeds from the issuance, net of discounts and fees, were $543.1 million. The cash flows generated by these automotive assets are used to service the monthly principal and interest payments on the Automotive Asset-backed Notes and satisfy the SPE’s expenses, and any remaining cash is distributed to one of our wholly owned subsidiaries. We recognize revenue earned from the associated customer lease contracts in accordance with our revenue recognition policy. The SPE’s assets and cash flows are not available to our other creditors, and the creditors of the SPE, including the Automotive Asset-backed Note holders, have no recoursewas non-recourse to our other assets. ~~A third-party contracted with us~~

In April 2019, we extended the maturity date of the Term Loan due in 2019 to ~~provide administrative and collection services for these automotive assets.~~June 2019. In June 2019, we further extended the maturity date of the Term Loan due in 2019 to December 2019.

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Contractual interest coupon	$	10,779	$	10,899	$	31,915	$	28,306	$	15,533	$	10,588	$	25,892	$	21,136
Amortization of debt issuance costs		1,677		1,759		4,934		5,274		1,470		1,642		2,940		3,257
Amortization of debt discounts		31,367		29,888		91,751		83,852		33,467		30,525		61,541		60,384
Total	$	43,823	$	42,546	$	128,600	$	117,432	$	50,470	$	42,755	$	90,373	$	84,777

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

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

Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Certain operating leases provide for annual increases to lease payments based on an index or rate. We estimate the annual increase in lease payments based on the index or rate at the lease commencement date, for both our historical leases and for new leases commencing after January 1, 2019. Differences between the estimated lease payment and actual payment are expensed as incurred. Lease expense for finance lease payments is recognized as amortization expense of the finance lease ROU asset and interest expense on the finance lease liability over the lease term.

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

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

Other information related to leases where we are the lessee is as follows (in thousands):

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

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

As of June 30, 2019, we have excluded from the table above an additional operating lease for a facility that has not yet commenced of $55.8 million. This operating lease is expected to commence in the second half of 2019 for an initial lease term of 11.5 years.

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

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

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

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

In May 2019, we completed a public offering of our common stock and issued a total of 3,549,381 shares for total cash proceeds of $847.4 million (including 102,880 shares purchased by our CEO at the public offering price for an aggregate $25.0 million), net of underwriting discounts and offering costs of $15.1 million.

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

As of ~~September~~June 30, ~~2018, 10,069,978~~2019, 12,260,875 shares were reserved and available for issuance under the ~~2010~~2019 Plan.

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


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

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

As of June 30, 2019, the following operational ~~milestones were~~milestone was considered probable of achievement:

Stock-based compensation expense associated with the 2018 CEO Performance Award is recognized ratably over the longer of the expected achievement period for each pair of market capitalization or operational milestones, beginning at the point in time, which may or may not be the grant date, when the relevant operational milestone is considered probable of being met. ~~If additional~~In addition, if an operational ~~milestones become~~milestone that was not considered probable ~~stock-based compensation expense will be recorded in~~at the ~~period it~~grant date later becomes probable, ~~including~~we will record at such time cumulative catch-up expense for the service provided ~~since~~between the grant ~~date.~~date and such time, which may be material depending on the length of such period. The market capitalization milestone period and the valuation of each tranche are determined using a Monte Carlo simulation and is used as the basis for determining the expected achievement period. The probability of meeting an operational milestone is based on a subjective assessment of our future financial projections. Even though no tranches of the 2018

CEO Performance Award vest unless a market capitalization and a matching operational milestone are both achieved, stock-based compensation expense is recognized only when an operational milestone is considered probable of achievement regardless of how much additional market capitalization must be achieved in order for a tranche to vest. At our current market capitalization, even the first tranche of the 2018 CEO Performance Award will not vest unless our market capitalization were to more than double from the current level and stay at that increased level for a sustained period of time. Additionally, stock-based compensation represents a non-cash expense and is recorded as a selling, general, and administrative operating expense onin our consolidated ~~statement~~statements of operations.

As of ~~September~~June 30, ~~2018~~,2019, we had ~~$654.3~~$487.4 million of total unrecognized stock-based compensation expense for the operational milestones that were achieved but not vested or considered probable of achievement, which will be recognized over a weighted-average period of ~~3.3~~2.7 years. As of ~~September~~June 30, ~~2018~~,2019, we had unrecognized stock-based compensation expense of ~~$1.51~~$1.5 billion for the operational milestones that were considered not probable of achievement. ~~From March 21, 2018, when~~For the ~~grant was approved by our stockholders, through September~~three and six months ended June 30, ~~2018,~~2019, we recorded stock-based compensation expense of ~~$118.6~~$55.6 million and $110.7 million, respectively, related to the 2018 CEO Performance Award. For the three months ended ~~September~~June 30, 2018, we recorded stock-based compensation expense of ~~$56.3~~$55.7 million related to this award. From March21, 2018, when the grant was approved by our stockholders, through June 30, 2018, we recorded stock-based compensation expense of $62.4 million related to the 2018 CEO Performance Award.

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

As of ~~September~~June 30, ~~2018~~,2019, the following performance milestones had been achieved:

We ~~began~~begin recognizing stock-based compensation expense as each performance milestone becomes probable of achievement. As of ~~September~~June 30, ~~2018~~,2019, we had unrecognized stock-based compensation expense of ~~$11.2~~$9.9 million for the performance milestone that was considered not probable of achievement. For the three and ~~nine~~six months ended ~~September~~June 30, 2019, and for the same periods in 2018, we did not record any additional stock-based compensation ~~related to these awards. For the three and nine months ended September 30, 2017, we recorded stock-based compensation expense of $0.5 million and $6.8 million, respectively,~~ related to these awards.

In August 2012, our Board of Directors granted 5,274,901 stock option awards to our CEO (the “2012 CEO Performance Award”). The 2012 CEO Performance Award consists of 10 vesting tranches with a vesting schedule based entirely on the attainment of both performance conditions and market conditions, assuming continued employment and service through each vesting date. Each vesting tranche requires a combination of a pre-determined performance milestone and an incremental increase in our market capitalization of $4.00 billion, as compared to our initial market capitalization of $3.20 billion at the time of grant. As of ~~September~~June 30, ~~2018~~,2019, the market capitalization conditions for all of the vesting tranches and the following performance milestones had been achieved:

We ~~began~~begin recognizing stock-based compensation expense as each milestone becomes probable of achievement. As of ~~September~~June 30, ~~2018~~,2019, we had unrecognized stock-based compensation expense of $5.7 million for the performance milestone that was considered not probable of achievement. For the three and six months ended ~~September~~June 30, ~~2018~~,2019, we recorded no stock-based compensation expense related to the 2012 CEO Performance Award. For the ~~nine~~three and six months ended ~~September~~June 30, 2018, ~~we recorded $0.1 million related to this award. For the three and nine months ended September 30, 2017,~~ we recorded stock-based compensation expense of ~~$1.2 million~~$0 and ~~$4.3~~$0.1 million, respectively, related to this award.

Our CEO ~~earns~~historically earned a base salary that ~~reflects~~reflected the ~~currently~~ applicable minimum wage requirements under California law, and he is subject to income taxes based on such base salary. However, he has never accepted his salary. Commencing in May 2019 at our CEO’s request, we eliminated altogether the earning and ~~currently does not accept~~ ~~his~~accrual of this base salary.

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Cost of sales	$	25,037	$	10,166	$	59,203	$	27,663
Cost of revenues									$	34,607	$	21,661	$	61,817	$	45,369
Research and development		65,718		51,066		192,762		158,052		71,474		65,937		143,956		127,044
Selling, general and administrative		113,973		51,421		287,869		146,697		102,948		105,869		209,654		162,693
Restructuring and other		—		—		3,877		—		834		3,877		2,814		3,877
Total	$	204,728	$	112,653	$	543,711	$	332,412	$	209,863	$	197,344	$	418,241	$	338,983

We realized no income tax benefit from stock option exercises in each of the periods presented due to cumulative losses and valuation allowances. As of ~~September~~June 30, ~~2018~~,2019, we had ~~$1.53~~$1.6 billion of total unrecognized stock-based compensation expense related to non-performance awards, which will be recognized over a weighted-average period of ~~2.9~~3.0 years.

We have entered into various non-cancellable operating lease agreements for certain of our offices, manufacturing and warehouse facilities, retail and service locations, equipment, vehicles, solar energy systems and Supercharger sites, throughout the world.

We have ~~a build-to-suit~~an operating lease arrangement with the Research Foundation for the State University of New York (the “SUNY Foundation”) where the SUNY Foundation ~~will construct~~is constructing a ~~solar cell and panel~~ manufacturing facility for the development and production of solar products and components, energy storage components and the assembly of Supercharger components, referred to as Gigafactory 2, with our participation in the design and construction, ~~install~~is installing certain utilities and other improvements and ~~acquire~~is acquiring certain manufacturing equipment designated by us to be used in the manufacturing facility. Following the adoption of ASC 842, we no longer recognize the build-to-suit asset and related depreciation expense or the corresponding financing liability and related amortization for Gigafactory 2 in our consolidated financial statements. During the three months ended March 31, 2018,, we began production at the manufacturing facility, although construction has not been fully completed as of ~~September~~June 30, ~~2018.~~2019.

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

~~Securities Litigation Relating to SolarCity’s Financial Statements and Guidance~~

On March 28, 2014, a purported stockholder class action was filed in the U.S. District Court for the Northern District of California against SolarCity and two of its officers. The complaint alleges violations of federal securities laws and seeks unspecified compensatory damages and other relief on behalf of a purported class of purchasers of SolarCity’s securities from March 6, 2013 to March 18, 2014. After a series of amendments to the original complaint, the District Court dismissed the amended complaint and entered a judgment in our favor on August 9, 2016. The plaintiffs filed a notice of appeal, and on December 4, 2017, the Court heard oral argument on the appeal. On March 8, 2018, the Court upheld the District Court ruling of dismissal and judgment in our favor. The case is concluded.

Between September 1, 2016 and October 5, 2016, seven lawsuits were filed in the Delaware Court of Chancery ~~of the State of Delaware~~ by purported stockholders of Tesla challenging our acquisition of SolarCity. Following consolidation, the lawsuit names as defendants the members of Tesla’s board of directors as then constituted and alleges, among other things, that board members breached their fiduciary duties in connection with the acquisition. The complaint asserts both derivative claims and direct claims on behalf of a purported class and seeks, among other relief, unspecified monetary damages, attorneys’ fees, and costs. On January27, 2017, defendants filed a motion to dismiss the operative complaint. Rather than respond to the defendants’ motion, the plaintiffs filed an amended complaint. On March17, 2017, defendants filed a motion to dismiss the amended complaint. On December13, 2017, the Court heard oral argument on the motion. On March28, 2018, the Court denied defendants’ motion to dismiss. Defendants filed a request for interlocutory appeal, but the Delaware Supreme Court denied that request without ruling on the merits but electing not to hear an appeal at this early stage of the case. Defendants filed their answer on May 18, 2018. ~~This~~ A mediation was held on June 10, 2019, following which the matter did not settle. The parties are proceeding with discovery, and the case ~~will now proceed~~.is set for trial in March 2020.

These plaintiffs and others filed parallel actions in the U.S. District Court for the District of Delaware on or about April21, 2017. ~~Those actions have been consolidated and are stayed pending the Chancery Court litigation.~~ They include claims for violations of the federal securities laws and breach of fiduciary duties by Tesla’s board of directors. ~~That action is~~Those actions have been consolidated and stayed pending the above-referenced Chancery Court litigation.

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

On October10, 2017, a purported stockholder class action was filed in the U.S. District Court for the Northern District of California against Tesla, two of its current officers, and a former officer. The complaint alleges violations of federal securities laws and seeks unspecified compensatory damages and other relief on behalf of a purported class of purchasers of Tesla securities from May4, 2016 to October6, 2017. The lawsuit claims that Tesla supposedly made materially false and misleading statements regarding the Company’s preparedness to produce Model 3 vehicles. Plaintiffs filed an amended complaint on March23, 2018, and defendants filed a motion to dismiss on May25, 2018. The court granted ~~defendant’s~~defendants’ motion to dismiss with leave to amend. Plaintiffs filed their amended complaint on September 28, ~~2018. We intend to file~~2018, and defendants filed a motion to dismiss the amended complaint on February 15, 2019. The hearing on the motion to dismiss was held on March 22, 2019, and on March 25, 2019, the Court ruled in favor of defendants and dismissed the complaint with prejudice. On April 8, 2019, plaintiffs filed a notice of appeal and on July 17, 2019 filed their opening brief. We expect that our response will likely be due in September 2019. We continue to believe that the claims are without merit and intend to defend against this lawsuit vigorously. We are unable to estimate the possible loss or range of loss, if any, associated with this lawsuit.

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

On June 4, 2018, a purported Tesla stockholder filed a putative class and derivative action in the Delaware Court of Chancery against Mr. Musk and the members of Tesla’s board of directors as then constituted, alleging that ~~Tesla’s directors~~such board members breached their fiduciary duties by approving the stock-based compensation plan. The complaint seeks, among other things, monetary damages and rescission or reformation of the stock-based compensation plan. On August 31, 2018, defendants filed a motion to dismiss the ~~complaint.~~complaint; plaintiff filed its opposition brief on November 1, 2018 and defendants filed a reply brief on December 13, 2018. The hearing on the motion to dismiss was held on May 9, 2019, on which we are awaiting a ruling. We believe the claims asserted in this lawsuit are without merit and intend to defend against them vigorously.

Securities Litigation ~~related~~Relating to Potential Going Private Transaction

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

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

On ~~October 17 and 25, 2018,~~March 7, 2019, various stockholders filed a derivative ~~lawsuits were filed~~suit in the Delaware Court of Chancery, ~~against Mr.~~purportedly on behalf of the Company, naming Elon Musk and Tesla’s board of directors, also related to Mr. Musk’s August 7, 2018 Twitter post that is the ~~members~~basis of the above-referenced consolidated purported stockholder class action as well as Mr. Musk’s February 19, 2019 Twitter post regarding Tesla’s ~~Board~~vehicle production. The suit asserts claims for breach of fiduciary duty and seeks declaratory and injunctive relief, unspecified damages, and other relief. Plaintiffs moved for expedited proceedings in ~~relation to statements made~~connection with the declaratory and ~~actions connected to a potential going private transaction. Also~~injunctive relief. Briefs were filed on ~~October 25, 2018, a third derivative lawsuit was filed in federal court in Delaware against Mr. Musk~~March 13, 2019 and the ~~members~~hearing held on March 18, 2019. Defendants prevailed, with the Court denying plaintiffs’ request for an expedited trial and granting defendants’ request to stay this action pending the outcome of the ~~Board. We believe that the claims have no merit and intend to defend against them vigorously. The Company is unable to estimate the potential loss, or range of loss, associated with these claims.~~above-referenced consolidated purported stockholder class action.

admitting or denying any of the SEC’s allegations, and with no restriction on Mr. Musk’s ability to serve as an officer or director on the Board (other than as its Chair), among other things, we and Mr. Musk ~~agreed, among other things, to pay~~paid civil penalties of $20 million each and agreed that ~~we will appoint~~ an independent director will serve as Chair of the Board for at least three years, ~~appoint~~and we appointed such an independent Chair of the Board and two additional independent directors to the Board, and further ~~enhance~~enhanced our disclosure controls and other corporate governance-related matters.

On April 26, 2019, the settlement was amended to modify certain of the previously-agreed disclosure procedures to clarify the application of such procedures, which was subsequently approved by the Court. All other terms of the prior settlement were reaffirmed without modification.

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

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

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

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

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

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

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

As of ~~September~~June 30, ~~2018~~,2019, we had ~~$143.1~~$212.6 million of unused letters of credit ~~outstanding.~~outstanding.

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

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

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

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

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

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

					June 30,		December 31,
	September 30, 2018		December 31, 2017		2019		2018
Assets
Current assets
Cash and cash equivalents	$	73,117	$	55,425	$	90,872	$	75,203
Restricted cash		76,569		33,656		62,446		130,927
Accounts receivable, net		25,932		18,204		42,865		18,702
Prepaid expenses and other current assets		9,306		9,018		8,850		10,262
Total current assets		184,924		116,303		205,033		235,094
Operating lease vehicles, net		802,083		337,089		470,571		155,439
Solar energy systems, leased and to be leased, net		5,091,612		5,075,321
Solar energy systems, net						5,078,928		5,116,728
Restricted cash, net of current portion		54,656		36,999		64,739		65,262
Other assets		56,794		29,555		71,177		55,554
Total assets	$	6,190,069	$	5,595,267	$	5,890,448	$	5,628,077
Liabilities
Current liabilities
Accounts payable	$	32	$	32	$	38	$	32
Accrued liabilities and other		111,360		51,652		91,040		132,774
Deferred revenue		21,537		59,412		34,535		21,345
Customer deposits		443		726
Current portion of long-term debt and capital leases		614,401		196,531
Current portion of long-term debt and finance leases						625,179		662,988
Total current liabilities		747,773		308,353		750,792		817,139
Deferred revenue, net of current portion		219,312		323,919		204,407		177,451
Long-term debt and capital leases, net of current portion		1,103,772		625,934
Long-term debt and finance leases, net of current portion						1,259,682		1,237,707
Other long-term liabilities		28,801		30,536		28,018		26,400
Total liabilities	$	2,099,658	$	1,288,742	$	2,242,899	$	2,258,697

					June 30,		December 31,
	September 30, 2018		December 31, 2017		2019		2018
Solar Bonds issued to related parties	$	100	$	100	$	100	$	100
Convertible senior notes due to related parties	$	3,000	$	3,000	$	2,754	$	2,674
Promissory notes due to related parties	$	—	$	100,000
Due to related parties (primarily accrued interest, included in accrued liabilities and other)	$	239	$	2,509

~~The~~Our convertible senior notes are not re-measured at fair value (refer to Note 5, Fair Value of Financial Instruments). As of June 30, 2019 and December 31, 2018, the unpaid principal balance of convertible senior notes due to related ~~party transactions were primarily from debt held by~~parties is $3.0 million.

In May 2019, our CEO ~~SolarCity’s former CEO and SolarCity’s former Chief Technology Officer. During~~purchased from us 102,880 shares of our common stock in a public offering at the ~~nine months ended September 30, 2018, the promissory notes payable to such parties were fully repaid. Refer to Note 10,~~ ~~Convertible and Long-Term Debt Obligations~~.public offering price for an aggregate $25.0 million.

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Automotive segment
Revenues	$	6,425,096	$	2,667,170	$	13,051,648	$	7,652,273	$	5,981,468	$	3,627,823	$	10,198,271	$	6,626,552
Gross profit	$	1,454,902	$	368,923	$	2,451,564	$	1,558,295	$	878,361	$	574,795	$	1,436,330	$	996,662
Energy generation and storage segment
Revenues	$	399,317	$	317,505	$	1,183,747	$	818,229	$	368,208	$	374,408	$	692,869	$	784,430
Gross profit	$	68,763	$	80,217	$	147,557	$	225,406	$	42,685	$	44,135	$	50,459	$	78,794

The following table presents revenues by geographic area based on ~~where~~the sales location of our products ~~are delivered~~ (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
United States	$	5,132,948	$	1,582,143	$	9,248,776	$	4,380,393	$	3,480,000	$	2,246,637	$	5,809,569	$	4,115,828
China		409,300		563,561		1,445,232		1,531,082		689,735		527,230		1,469,148		1,035,933
Norway										380,373		224,421		796,433		386,741
Netherlands		273,750		67,037		626,835		264,186		248,102		206,550		361,453		353,076
Norway		224,481		225,461		611,222		482,965
Other		783,934		546,473		2,303,330		1,811,876		1,551,466		797,393		2,454,537		1,519,404
Total	$	6,824,413	$	2,984,675	$	14,235,395	$	8,470,502	$	6,349,676	$	4,002,231	$	10,891,140	$	7,410,982

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

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

					June 30,		December 31,
	September 30, 2018		December 31, 2017		2019		2018
United States	$	16,716,027	$	15,587,979	$	15,620,488	$	16,741,409
International		831,805		787,033		662,674		860,064
Total	$	17,547,832	$	16,375,012	$	16,283,162	$	17,601,473

During the first quarter of 2019, we carried out certain restructuring actions in order to reduce costs and improve efficiency. As a result, we recognized $43.5 million of costs primarily related to employee termination expenses for both segments, and losses from closing certain stores. These costs were substantially paid by the end of first quarter of 2019.

During the second quarter of 2019, we recognized $47.0 million in impairment related to IPR&D intangible asset as we abandoned further development efforts (refer to Note 4, Goodwill and Intangible Assets for details) and $15.0 million for the related equipment within the energy generation and storage segment. We also incurred a loss of $48.8 million for closing operations in certain facilities. On the statement of cash flows, these amounts were presented in the captions in which such amounts would have been recorded absent the impairment charges. Additionally, we recognized $6.2 million of employee termination expenses for the three months ended June 30, 2019, which are expected to be substantially paid by the end of the third quarter of 2019, while the remaining amounts were non-cash.

During the second quarter of 2018, we ~~carried-out~~carried out certain restructuring actions in order to reduce costs and improve efficiency. As a result, in the three months ended June 30, 2018, we recognized $34.0 million of one-time employee termination expenses and estimated losses from sub-leasing a certain facility. ~~The employee termination expenses of $26.2 million were substantially paid by the end of the third quarter of 2018, while the remaining amounts were non-cash.~~ Also included within restructuring and other activities was $56.1 million of expenses (materially all of which were non-cash) from restructuring the energy generation and storage segment, which were comprised of disposals of certain tangible assets, the shortening of the useful life of a trade name intangible asset and a contract termination penalty. In addition, we concluded that a ~~small~~ portion of ~~the~~ IPR&D is not commercially feasible. Consequently, we recognized an impairment loss of $13.3 million in the three months ended June 30, ~~2018 (see Note 3,~~ ~~Intangible Assets~~).

In October 2018, a final court order was entered approving the terms of a settlement in connection with the SEC’s legal actions relating to Mr. Musk’s prior consideration during the third quarter of 2018 of a take-private proposal for Tesla. Consequently, we recognized settlement and legal expenses of $25.8 million in the three months ended September 30, 2018 (see Note 12, ~~Commitments and Contingencies). These expenses are expected to be substantially paid by the end of the fourth quarter of~~ 2018.

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

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

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

We strive to produce the world’s highest quality vehicles as quickly and as cost-effectively as possible with a priority on workplace health and safety. Our production vehicle fleet includes our Model S ~~premium~~ sedan and our Model X ~~sport utility vehicle,~~SUV, which are our highest-performance premium vehicles, and our Model 3, a lower-priced sedan designed for the mass market. We continue to enhance our vehicle offerings with ~~enhanced~~our Autopilot ~~options, Internet~~and FSD features, internet connectivity and free over-the-air software updates to provide additional safety, convenience and performance features. Our next production vehicle, slated for launch by fall 2020, will be Model Y, a compact SUV built on the Model 3 platform. In addition, we have several future electric vehicles in our product pipeline, including ~~an electric semi-truck,~~ Tesla Semi, a pickup truck and a new version of the Tesla ~~Roadster and Model Y~~.Roadster.

We ~~lease~~are working on revamping the customer service experience for solar products through simplicity and ~~sell~~accessibility by streamlining traditionally complex ordering, permitting, installation and back-end service processes, ultimately making our solar products even more compelling to consumers. In addition to retrofit solar energy systems, and sell renewable energy and energy storage products to our customers. We have partnered with Panasonic to provide capital and operational support to manufacture PV cells, which will enable high volume integrated tile and PV cell production at our Gigafactory 2 in Buffalo, New York. We are also continuing to iterate onwe offer our Solar Roof product design through intensive reliability testing and are refining the installation process. Accordingly, we expect to ramp production of this product more quickly at Gigafactory 2 during the first half of 2019.that combines solar energy generation with attractive, integrated styling. Our energy storage products, which we manufacture at Gigafactory 1, consist of Powerwall, mostly for residential applications, and Powerpack, for commercial, industrial and utility-scale applications.

We drive demand for our vehicles by continually improving our vehicles through over-the-air software updates, expanding our retail, service and charging infrastructure, and by periodically developing and introducing new passenger and commercial electric vehicle variants and models. Our goal is to produceWhile the ~~world’s highest quality vehicles as quickly and as cost-effectively as possible with a priority on workplace health and safety. The worldwide automotive~~ markets for alternative fuel vehicles and self-driving technology are ~~highly~~increasingly competitive, ~~and~~ we expect them to become even more so. A growing number of companies, including established automakers, have announced plans to expand, and in some cases fully transition to, production of electric or environmentally friendly vehicles, and/or to develop self-driving technologies.

We believe that the unique features of our vehicles, the safety aspects of each of our vehicles, our constant innovation, our growing brand, the increased affordability introduced with Model 3, our global Supercharger network and our future vehicles will continue to generate incremental global demand for our vehicles by constantly innovating and making ~~our vehicles~~them accessible to larger and previously untapped consumer and commercial markets. An important factor in our success will be our Autopilot and FSD technologies that currently enable the driver-assistance features in our vehicles, and in which we are making significant strides through our proprietary and powerful FSD computer and remotely updateable artificial intelligence software. For ~~example,~~our FSD customers, we are now rolling out our Navigate on Autopilot feature in additional markets and refining for general release the ~~third quarter~~ability of ~~2018,~~our vehicles to be remotely summoned in parking lots and react to traffic lights and stop signs. Ultimately, while we ~~delivered more than 83,000 vehicles, including more than 56,000 Model 3 vehicles,~~are subject to regulatory constraints over which was a quarterly record for us. We also believe there may be a larger addressable market for Model 3 than we had previously anticipated, as more than half of the vehicle makes and models that have been traded in to us by new Model 3 customers to date were below $35,000—the price of the base Model 3 that we ultimately intend to offer—which is also significantly lower than the lowest-priced $49,000 Model 3 available in the third quarter of 2018. Moreover, as we have ~~offered only the long-range~~no control, our goal is a fully autonomously-driven future that improves safety and ~~performance variants of Model 3 thus far, we believe that~~provides our customers with convenience and additional income through participation in an autonomous Tesla ride-hailing network, which we will ~~continue to see more demand~~also operate with ~~the introduction of less expensive variants, such as a medium-range Model 3 option in the fourth quarter of 2018, and as we begin sales outside of North America and offer additional financing options.~~ our own vehicles.

We also believe that we have an advantage over our competitors ~~with respect to~~in areas such as our battery and powertrain technology, including our leading motor efficiency, and our dedication to safety engineering, as ~~our vehicles’ EPA-rated range per kWh is superior to that~~most recently demonstrated by Model 3 achieving 5-star safety ratings from the National Highway Traffic Safety Administration and the European New Car Assessment Programme. In the second quarter of ~~other electric vehicles expected to be introduced~~2019, Model 3 remained the best-selling premium vehicle in the ~~near term,~~United States and gained ground on its established premium vehicle competition in Europe. Vehicles traded in to us by Model 3 customers continue to validate a wider addressable market for this vehicle than existing owners of premium vehicles, even as we prepare to enter new segments with Model Y and a pickup truck. In particular, we expect our planned production at Gigafactory Shanghai, which will facilitate our ability to ~~significantly improve our cars through over-the-air software updates. We are producing an expanding number of variants of~~offer Model 3 in ~~accordance with~~China at competitive local pricing, will drive further demand and opportunity.

On the ~~demand that~~other hand, we ~~expect for them, however,~~may be impacted by trade policies, political uncertainty and economic cycles involving geographic regions where we have ~~finite production capabilities with long lead times associated with procuring certain parts. We are also not yet offering the least expensive variants~~significant operations. Sales of Model 3 that we ultimately expect to produce. If our Model 3 demand expectations prove inaccurate or we experience delays in introducing planned additional variants, including as we begin offering Model 3 in new markets, we may not be able to timely generate sales matched to the specific vehicles that we have the capacity to produce.

Our Model 3 production stabilized significantly in the third quarter of 2018, resulting in the production of approximately 4,300 Model 3 vehicles per week during the third quarter of 2018, excluding planned shutdowns, and 5,300 units in the last week of the quarter despite the majority of such vehicles being all-wheel drive versions, which are significantly more complex to build than the rear-wheel drive version. We are focusing on further cost improvements and increasing the affordability of Model 3.

We are continuing to work to increase Model 3 production to approximately 10,000 units per week in the most optimal manner from both a timing and capital expenditures perspective. At the Fremont Factory, we expect to continue to increase our Model 3 production rate to approximately 7,000 units per week with only limited additional capital expenditures, and we believe we can increase that rate to beyond 7,000 units per week with incremental capital expenditures. In China, which is the largest market for electric vehicles in the ~~world, our Model S and Model X sales have been, and will likely continue~~automotive industry also tend to be ~~negatively impacted by recently-increased tariffs imposed by~~cyclical in many markets, which may expose us to increased volatility. In addition, the Chinese government on U.S.-manufactured vehicles. We are seeking to alleviate the impact of such tariffs for Model 3 by developing plans to start producing approximately 3,000 Model 3 vehicles per week in Shanghai, China in the initial phase of our Gigafactory 3, which will have progressively increased levels of localization through local sourcing and manufacturing. However, the timeframe for that is subject to a number of uncertainties, including regulatory approval, supply chain constraints, and the pace of bringing the factory online. Ultimately, achieving increased Model 3 production cost-effectively will require that we timely address any additional bottlenecks that may arise as we continue to ramp, achieve reduced labor hours and increase supplier capacity.

We continue to expect Model S and Model X deliveries to be approximately 100,000 in total in 2018, constrained by the total available supply of cells with the 18650 form factor used in those vehicles. As our sales network continues to expand to new markets, we believe vehicle orders should continue to grow. We have made significant and sustained progress in the material costs and production processes of Model S and Model X, and we will continue to improve manufacturing efficiencies for these vehicles in 2018, although these vehicles are still and for the foreseeable future will likely be impacted by increased import duties on components sourced from China. Furthermore, while increased tariffs on vehicles exported to China have had some negative impact on Model S and Model X sales in China in the near term, we do not expect our global vehicle deliveries to be heavily impacted since we intend to partially divert deliveries to North America and Europe if necessary.

We are also making strides in our customer-facing infrastructure. Delivering vehicles to our customers and the related logistics were challenges in the third quarter of 2018, but we were able to achieve improvements throughout the quarter. We continue to streamline our delivery process to ensure that each delivery session is informative, convenient and quick, and that the overall flow of deliveries is both scalable at volume and more linear throughout each quarter rather than back-ended toward the end of each quarter. For example, we expanded direct deliveries of vehicles to customers’ homes or workplaces. We believe that our ongoing efforts will provide a better customer experience, reduce the stress on our delivery system and be more cost-effective. As sales of Tesla vehicles ramp further, we plan to continue to open new Tesla retail locations, service centers, body shops and delivery hubs around the world, we plan to continue to expand our Mobile Service fleet, and we plan to continue to significantly increase the number of Superchargers and Destination Charging connectors globally. However, we will have to stabilize and sustain our delivery and logistics model to deliver an increasing number of vehicles, and we have only limited experience with this at scale, particularly in markets outside of North America. Moreover, if our growing fleet of customer vehicles, particularly Model 3, experiences unexpected reliability issues, it could overburden our servicing capabilities.

~~In July 2018, we delivered our 200,000~~^th ~~vehicle in the U.S. Under current regulations, the full $7,500~~ federal tax credit for the purchase of a qualified electric vehicle ~~will continue to be available only for any of our new vehicles delivered by the end of 2018~~ in the U.S.~~, and then will be~~ was reduced ~~to $3,750 for each vehicle delivered by the end of the second quarter of 2019, then~~again to $1,875 for each Tesla vehicle delivered byin the ~~end~~third or fourth quarter of 2019, ~~then~~and will finally be reduced to $0 for each Tesla vehicle delivered thereafter. InWe believe that this sequential phase-out has likely pulled forward some vehicle demand into the ~~near term,~~periods preceding each reduction, and we ~~believe this phase-out will pull forward customer orders, before normalizing.~~may see similar pull-forwards through the remainder of 2019. In the long run, we do not expect a meaningful impact to our sales in the U.S., as we believe that each of our ~~vehicles offer~~vehicle models offers a compelling proposition ~~at their full price, and particularly as we work to reduce their price over time.~~even without incentives.

Finally, we continue to evaluate and evolve our retail operations and product offerings in order to maximize our reach and optimize our costs, vehicle line-up and model differentiation, and the purchasing experience. However, there is no guarantee that each step in our evolving strategy will be perceived as intended by prospective customers accustomed to more traditional sales models. Moreover, we make ~~progress with~~certain adjustments to our ~~self-driving technology. Our neural net and functionality continue to improve, and we frequently release minor software updates and~~product prices from time to time ~~release significant version updates, including~~in the ordinary course of business. Such pricing changes may impact our vehicles’ resale values, and in turn our operating results. For example, if we increase our estimates of the volume of vehicles that may potentially be returned to us under pre-existing resale value guarantees provided to customers and partners for certain financing programs, our gross profits may be reduced, as we saw during the first two quarters of 2019.

In the second quarter of 2019, we achieved a ~~new vehicle software architecture~~quarterly record for total vehicles delivered. While delivering vehicles at large scale across numerous markets presents logistical challenges, we have made progress in addressing the manufacturing and delivery patterns that contribute to such issues, by making these processes evenly spread out across each quarter. In addition, our deliveries of Model S and Model X increased from the first quarter of 2019, and we delivered significantly more of these vehicles than we produced during the quarter as we focus on managing our working capital position through inventory reduction. Given our higher volumes and single-factory production, however, we necessarily produce variants (including regional versions) of all of our vehicles in batches in accordance with the demand that we ~~began~~expect for them. If our specific demand expectations for these variants prove inaccurate, we may not be able to ~~release~~timely generate sales matched to ~~eligible~~the specific vehicles that we produce in ~~October 2018. This new architecture~~the same timeframe, which may negatively impact our deliveries in a particular period.

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

We also achieved a quarterly record for total vehicle production in the second quarter of 2019, and continue to grow Model 3 production at our Tesla Factory. Furthermore, we are making progress at our Gigafactory Shanghai, where we expect to begin production of certain trims of Model 3 for China by the end of 2019. The first phase of production at Gigafactory Shanghai will ~~enable~~have a capacity of 150,000 Model 3 vehicles per year when ramped, and will allow us to ~~accelerate deployment~~access the efficiencies of ~~new self-driving features in~~local production, avoid certain local tariffs on U.S.-manufactured vehicles, and implement a simplified and cost-effective second generation manufacturing process for Model 3. Likewise, we have begun preparations for production of Model Y at the ~~future. While~~Tesla Factory, where we ~~are~~expect to leverage our past Model 3 production experience to build using manufacturing capacity that is less costly per unit of capacity than that of our original Model 3 line. However, the timeframe for Gigafactory Shanghai is subject to a number of uncertainties, including regulatory approval, supply chain constraints, ~~over which~~and the pace of installing production equipment and bringing the factory online. Ultimately, achieving increased total vehicle production cost-effectively will require that we timely address any bottlenecks that may arise as we continue to ramp, establish and maintain sustained supplier capacity, and successfully utilize manufacturing processes at the maximum output rates that we have ~~no control,~~planned for them, not only for our ~~ultimate goal is to achieve full autonomy. Additionally, there is growing competition from other automobile~~existing manufacturing capabilities but also for Gigafactory Shanghai and ~~technology companies in~~ the ~~area of self-driving.~~manufacturing buildout for Model Y.

We are ~~continuing~~optimizing ways to reduce customer acquisition costs of our energy generation products, ~~including~~ by ~~cutting advertising spend and shifting our sales strategy significantly to sell~~focusing on selling these products ~~exclusively~~directly and efficiently. We have recently made the online buying experience for our energy products simpler and more accessible by standardizing the offerings for what has traditionally been a cumbersome customized process and offering highly competitive pricing, which should result in ~~Tesla stores with dedicated energy product sales personnel~~cost efficiencies and ona larger market. While our ~~website. As~~retrofit solar system deployments decreased in the second quarter of 2019 from the previous quarter as we continue to implement and refine this strategy, we expect that ~~our solar~~ deployments will ~~remain relatively stable~~stabilize and grow in the ~~short term before growing, including through cross-selling opportunities to our expanding base~~second half of vehicle owners. Our emphasis for retrofit solar products remains on executing projects for upfront cash generation and profitability, rather than absolute volume growth, including by prioritizing residential installations that are combined with our energy storage products.the year.

We are also continuing ~~to iterate~~with design iterations and testing on our Solar Roof product ~~design through intensive reliability testing~~to improve our manufacturing capabilities, and ~~by refining~~we are continuing to expand installations, including to eight states in the ~~installation process. Accordingly, we expect to ramp production of this product more quickly at Gigafactory 2~~United States during the ~~first half~~second quarter of 2019.

We ~~expect~~remain focused on growth for our energy storage products, ~~to experience significant growth,~~ and achieved a quarterly deployment record in the second quarter of 2019. After reestablishing certain production at Gigafactory 1 for our ~~goal remains to triple deployments~~energy storage products in ~~2018. We are continuing to ramp production~~2019, our manufacturing capacity for these products ~~at our Gigafactory 1 over the next several quarters,~~has increased significantly, allowing us to reduce backlog and shorten customer wait times. Moreover, we have seen further manufacturing efficiencies and improvements in our installation processes as we ramp. Demand for our energy storage products remains greater than our current production capacity for energy storage. Moreover, we recently introduced new software features for our Powerwall product to provide additional value for our customers.

Capital expenditures in the fourth quarter of 2018 are expected to support increases in Model 3 production capacity at Gigafactory 1 and the Tesla Factory, and for building additional stores, service centers and Superchargers, as well as the cost to acquire land use rights and our initial design and other expenditures for our planned Gigafactory 3 in Shanghai. We ~~expect total 2018 capital expenditures to be slightly below $2.5 billion.~~

~~Generally, we expect operating expenses as a percentage of revenue to~~also continue to ~~decrease in~~see global opportunities for commercial and utility-scale projects, including to mitigate the ~~future due to significant increases in expected revenues~~costs of electricity and as we focus on increasing operational efficiency. We expect operating expenses to grow on an absolute basis, mainly driven by engineering, design and testing of new products or changes to existing products and higher sales costs associated with expanding our worldwide geographic presence. In addition, we expect operating expenses to increase ~~as a result of increased selling, general and administrative expenses incurred by our~~ energy ~~generation and storage business.~~grid reliability.

In March 2018, our stockholders approved a new 10-year CEO performance award for Elon Musk with vesting contingent on achieving market capitalization and operational milestones. Consequently, we may incur significant ~~additional non-cash stock-based compensation expense over the term of the award as each operational milestone becomes probable of vesting.~~

We offer ~~loans and leases~~financing arrangements for our vehicles in certain markets in North America, Europe and Asia primarily through various financial institutions. We ~~offered~~offer resale value guarantees or similar buy-back terms to ~~all direct~~certain customers who purchase vehicles and who ~~financed~~finance their ~~vehicle~~vehicles through one of our specified commercial banking partners. ~~Subsequent~~We also offer resale value guarantees in connection with automotive sales to ~~June 30, 2016, this program is~~certain leasing partners. Currently, both programs are available only in certain international markets. Resale value guarantees available for exercise within the 12 months following ~~September~~June 30, ~~2018~~2019 totaled ~~$162.3~~$187.5 million in value.

We have adopted the new revenue recognition standard ASC 606 effective January 1, 2018. This impacts the way we account for vehicle sales with a resale value guarantee and vehicles leased through our leasing partners, which now generally qualify to be accounted for as sales with a right of return. In addition, for certain vehicles sales with a resale value guarantee and vehicles leased through leasing partners prior to 2018, we have ceased recognizing lease revenue starting in 2018 and record the associated cumulative adjustment to equity under the modified retrospective approach.

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

We ~~currently~~continuously seek to optimize our vehicle financing options. Currently, we offer ~~vehicle leases~~leasing directly through our local subsidiaries for Model S, Model X and Model 3 in the U.S. and for Model S and Model X ~~directly from Tesla Finance, our captive financing entity. Leasing through Tesla Finance is available~~ in ~~39 states and the District of Columbia. We also offer financing arrangements through our entities in Canada, Germany and the United Kingdom.~~Canada. We also offer leasing through leasing partners in certain jurisdictions. Leasing through our captive financing entities and our leasing partners exposes us to residual value risk. In addition, for leases offered directly from our captive financing entities, we assume customer credit risk. We plan to continue expanding our financing offerings, including our lease financing options and the financial sources to support them, and to support the overall financing needs of our customers. To the extent that we are unable to arrange such options for our customers on terms that are attractive, our sales, financial results and cash flows could be negatively impacted.

We offer our customers the choice to either purchase and own solar energy systems or to purchase the energy that our solar energy systems produce through various contractual arrangements. These contractual arrangements include long-term leases and ~~power purchase agreements.~~PPAs. In both structures, we install our solar energy systems at our customer’s premises and charge the customer a monthly ~~fee.~~fee, which alternatively may be prepaid at the customer’s option. In the lease structure, ~~this~~the monthly payment is fixed with a minimum production guarantee. In the ~~power purchase agreement~~PPA structure, we charge customers a fee per kilowatt-hour, or kWh, based on the amount of electricity the solar energy system actually produces. The leases and ~~power purchase agreements~~PPAs are typically for 20 years with a renewal option, and ~~generally when there is no upfront prepayment,~~ the specified monthly fees ~~are~~may be subject to annual escalations.

For customers who want to purchase and own solar energy systems, we also offer solar loans, whereby a third-party lender provides financing directly to a qualified customer to enable the customer to purchase and own a solar energy system designed, installed and serviced by us. We enter into a standard solar energy system sale and installation agreement with the customer. Separately, the customer enters into a loan agreement with a third-party lender, who finances the full purchase price. We are not a party to the loan agreement between the customer and the third-party lender, and the third-party lender has no recourse against us with respect to the loan.

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

We ~~continue to develop Gigafactory 1 as a facility where we~~ work together with our suppliers at Gigafactory 1 to integrate production of battery material, cells, modules, battery packs and drive units in one location for vehicles and energy storage products. We are also ~~continue~~continuing to invest in ~~the future expansion of~~ Gigafactory 1 ~~and in~~to achieve additional production ~~equipment for battery cell, module and pack production.~~

output there. Panasonic has partnered with us on Gigafactory 1 with investments in the production equipment that it uses to manufacture and supply us with battery cells. Under our arrangement with Panasonic, we plan to purchase the full output from their production equipment at negotiated prices. As these terms convey ~~to us the right to use,~~a finance lease, as defined in ASC ~~840,~~ 842, Leases, we consider their production equipment ~~we consider them~~ to be leased assets when production commences. This results in us recording the value of their production equipment within property, plant and equipment, net, on the consolidated balance sheets with a corresponding liability recorded to long-term debt and ~~capital~~finance leases. For all suppliers and partners for which we plan to purchase the full output from their production equipment located at Gigafactory 1, we will apply similar accounting. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, we recorded ~~additions of $181.8~~$231.2 million and ~~$663.8~~$404.3 million ~~respectively,~~ on the consolidated balance ~~sheets.~~sheet.

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

We have an agreement with the SUNY Foundation ~~for~~related to the construction of a ~~factory capable of producing at least 1.0 gigawatts of solar cells annually~~facility in Buffalo, New York, referred to as Gigafactory ~~2. In December 2016,~~2, where we ~~entered into an agreement with Panasonic under which it manufactures custom PV cells~~have housed the development and ~~modules for us, primarily at Gigafactory 2,~~production of solar products and ~~we will purchase certain quantities of PV cells and modules from Panasonic during the 10-year term.~~

components. The terms of ~~our~~such agreement ~~with the SUNY Foundation~~ require us to comply with a number of covenants, including required hiring and cumulative investment targets, which we have met to date. Overall, we expect our significant operations at Gigafactory 2 and the surrounding Buffalo area to continue, including with our ramp and manufacture of Solar Roof, which we are planning to scale over the remainder of 2019 and into 2020, as well as certain product development and other Tesla operations including manufacturing and assembling Supercharger and energy storage components. In addition, Panasonic manufactures PV cells and modules at Gigafactory 2, which are among our various sources for our solar retrofit installations.

Although we remain on track with our covenants with the SUNY Foundation with respect to Tesla’s progress at and plans for Buffalo, any failure to comply with these covenants could obligate us to pay significant amounts to the SUNY Foundation and result in termination of the agreement. ~~Although we have commenced production at Gigafactory 2, our~~Our expectations as to the ~~cost~~costs and timelines of ~~building the facility,~~our investment and operations at Buffalo, including those associated with acquiring ~~manufacturing~~ equipment and supporting our ~~manufacturing~~ operations with respect to our production of Solar Roof there, may prove incorrect, which could subject us to significant expenses to achieve the desired benefits.

We are constructing Gigafactory Shanghai in order to increase the affordability of Model 3 for customers in China by reducing transportation and manufacturing costs and eliminating certain tariffs on vehicles imported from the U.S. We began locating manufacturing equipment there in the second quarter of 2019 and subject to a number of uncertainties, including regulatory approval, supply chain constraints, and the pace of installing production equipment and bringing the factory online, we expect to begin production of certain trims of Model 3 at Gigafactory Shanghai by the end of 2019. We expect much of the investment in Gigafactory Shanghai to be provided through local debt financing, including a RMB 3.5 billion term facility that our subsidiary entered into in March 2019, supported by limited direct capital expenditures by us. Moreover, we are targeting the capital expenditures per unit of production capacity at this factory to be less than that of our ramp of Model 3 production at the Tesla Factory, from which we have drawn learnings that are allowing us to simplify our manufacturing layout and processes at Gigafactory Shanghai.

We continue to expand production capacity at our ~~Tesla Factory~~existing facilities and construct our planned facilities. We are also exploring ~~additional production~~ways to further increase cost-competitiveness in our significant markets through local manufacturing, including at a future Gigafactory in Europe.

Capital expenditures in 2019 are projected to be approximately $1.5 to 2.0 billion, to continue to develop our main projects as planned including further capacity ~~internationally. For example, in order to significantly increase the affordability of~~expansion and automation for our current Model 3 ~~for customers~~production, Gigafactory Shanghai, Model Y and Tesla Semi, as well as to further expand our Supercharger and vehicle service and repair networks. Given the breadth of our various planned projects and our focus on cost efficiency, as we make progress on such projects we may find that our actual spend may be less than previously expected.

Likewise, we expect operating expenses as a percentage of revenue to continue to decrease in ~~China, where~~the future as we focus on increasing operational efficiency and process automation, as well as from increases in expected overall revenues from our ~~vehicles are subject~~expanding sales. In particular, our efforts to ~~recently-increased tariffs imposed by~~scale down and optimize our cost structure relative to the ~~Chinese government~~size of our business have already manifested in total operating expenses decreasing from $2.3 billion to $2.2 billion during the six month periods ended June 30, 2018 and 2019, respectively, including restructuring and other charges. Meanwhile, our total revenues increased from $7.4 billion to $10.9 billion, respectively, during such periods.

In March 2018, our stockholders approved the 2018 CEO Performance Award, with vesting contingent on ~~vehicles imported~~achieving market capitalization and operational milestones. Consequently, we may incur significant additional non-cash stock-based compensation expense over the term of the award as each operational milestone becomes probable of being met. In particular, we will have to record a cumulative catch-up expense at the time each operational milestone becomes probable, which may be material depending on the length of time elapsed from the ~~U.S.~~grant date. See Note 14, Equity Incentive Plans—2018 CEO Performance Award, ~~we are trying~~ to ~~accelerate our manufacturing timeline there.~~the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details regarding the stock-based compensation relating to the 2018 CEO Performance Award.

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

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

	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change						Three Months Ended June 30,				Change						Six Months Ended June 30,				Change
(Dollars in thousands)	2018		2017		$			%			2018		2017		$			%			2019		2018		$			%			2019		2018		$			%
Automotive sales	$	5,878,305	$	2,076,731	$	3,801,574			183	%	$	11,558,051	$	6,125,643	$	5,432,408			89	%	$	5,168,027	$	3,117,865	$	2,050,162			66	%	$	8,676,768	$	5,679,746	$	2,997,022			53	%
Automotive leasing		220,461		286,158		(65,697	)		-23	%		633,713		813,462		(179,749	)		-22	%		208,362		239,816		(31,454	)		-13	%		423,482		413,252		10,230			2	%
Total automotive revenues		6,098,766		2,362,889		3,735,877			158	%		12,191,764		6,939,105		5,252,659			76	%		5,376,389		3,357,681		2,018,708			60	%		9,100,250		6,092,998		3,007,252			49	%
Services and other		326,330		304,281		22,049			7	%		859,884		713,168		146,716			21	%		605,079		270,142		334,937			124	%		1,098,021		533,554		564,467			106	%
Total automotive & services and other segment revenue		6,425,096		2,667,170		3,757,926			141	%		13,051,648		7,652,273		5,399,375			71	%		5,981,468		3,627,823		2,353,645			65	%		10,198,271		6,626,552		3,571,719			54	%
Energy generation and storage segment revenue		399,317		317,505		81,812			26	%		1,183,747		818,229		365,518			45	%		368,208		374,408		(6,200	)		-2	%		692,869		784,430		(91,561	)		-12	%
Total revenues	$	6,824,413	$	2,984,675	$	3,839,738			129	%	$	14,235,395	$	8,470,502	$	5,764,893			68	%	$	6,349,676	$	4,002,231	$	2,347,445			59	%	$	10,891,140	$	7,410,982	$	3,480,158			47	%

Automotive sales revenue includes revenues related to the sale of new Model S, Model X and Model 3 vehicles, including access to our Supercharger network, internet connectivity, ~~Supercharger access,~~Autopilot and ~~specified~~FSD featuresand over-the-air software updates, ~~for cars equipped with Autopilot hardware,~~ as well as sales of regulatory credits to other automotive manufacturers. Our revenue from ~~non-ZEV~~ regulatory credits generally follows our production and delivery trends as we have long-term contracts with existing customers for the sale of these credits. However, as we do not have long-term contracts for ZEV credit sales, revenue from sale of ZEV credits fluctuatefluctuates by quarter depending on when a contract is executed with a ~~buyer.~~buyer and when the credits are delivered. For example, our revenue from ~~ZEV~~regulatory credit sales in the three months ended ~~December 31, 2017~~June 30, 2019 was ~~$179.1~~$111.2 million while it was $0$216.0 million in the three months ended ~~June 30, 2018.~~March 31, 2019.

Automotive leasing revenue includes the amortization of revenue for Model S, Model X and Model X3 vehicles under direct lease agreements as well as those sold with resale value guarantees accounted for as operating leases under lease accounting. We ~~do not yet offer~~began offering leasing for Model 3 ~~vehicles.~~vehicles in the second quarter of 2019.

Services and other revenue consists of ~~maintenance~~non-warranty after-sales vehicle services, sales of used vehicles, retail merchandise, and ~~sales of electric vehicle components and systems to other manufacturers, as well as~~ sales by our ~~recently~~ acquired subsidiaries to third party customers.

Automotive sales revenue increased ~~$3.80~~$2.05 billion, or ~~183%~~66%, in the three months ended ~~September~~June 30, ~~2018~~2019 as compared to ~~the~~ three months ended ~~September~~June 30, ~~2017,~~2018, primarily due to ~~the~~an increase of 54,863 Model 3 deliveries from our significant production ramp in ~~Model 3 vehicles~~the second half of 2018, delivered at slightly lower average selling prices ~~that were slightly higher in the three months ended September 30, 2018 compared to the prior year.~~year-over-year from deliveries of Model 3 Standard Range and Standard Range Plus. Additionally, there ~~were increases from the recognition of $479.0 million of additional sales due to the adoption of ASC 606,~~ ~~Revenue from Contracts with Customers, and all the related amendments (“new revenue standard”) and~~was an increase of ~~$169.4~~$57.2 million in sales of regulatory credits to ~~$189.5~~$111.2 million in the three months ended ~~September~~June 30, ~~2018~~2019 compared to $54.0 million in the same period in the prior year. The above increases in revenue were offset by a decrease of 4,063 Model S and Model X deliveries at lower average selling prices due to price adjustments we made to our vehicle offerings in the first half of 2019. Additionally, due to these price adjustments, we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. As a result, along with the estimated variable consideration related to normal future product returns for vehicles sold under the buyback options program, we adjusted our sales return reserve on vehicles previously sold under our buyback options program resulting in a reduction of automotive sales revenues of $64.1 million for the three months ended June 30, 2019. Refer to Note 2, Summary of Significant Accounting Policies, to the consolidated statements included elsewhere in the Quarterly Report on Form 10-Q.

Automotive sales revenue increased $3.00 billion, or 53%, in the six months ended June 30, 2019 as compared to the ~~prior period. ZEV credits sales were $52.3 million and non-ZEV regulatory credits sales were $137.2 million in the three~~six months ended ~~September~~June 30, 2018, compared to $0.6 million ZEV credit sales and $19.5 million in non-ZEV regulatory credit sales in the three months ended September 30, 2017. The growth in non-ZEV regulatory credits in the three months ended September 30, 2018 was generally consistent with the volume growth in the quarter compared to the three months ended September 30, 2017.

~~Automotive sales revenue increased $5.43 billion, or 89%, in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017,~~ primarily due to ~~higher volume~~an increase of ~~vehicles delivered~~97,609 Model 3 deliveries from our significant production ramp in the ~~nine months ended September 30,~~second half of 2018, ~~due to the significant ramp in Model 3 vehicles~~ delivered at average selling prices that remained relatively consistent and the recognition of $1.14 billion of additional sales due to the adoption of the new revenue standard. The increase in revenue is offset by a decrease of approximately 3,370 Model S and Model X deliveries excluding the impact of adoption of the new revenue standard, at average selling prices that remained relatively consistent as compared to the prior year.year-over-year. Additionally, there was an increase of ~~$162.7~~$192.9 million in sales of regulatory credits to ~~$323.8~~$327.2 million in the ~~nine~~six months ended ~~September~~June 30, ~~2018 as~~2019 compared to ~~the prior period. ZEV credits sales were $102.6 million and non-ZEV regulatory credits sales were $221.2~~$134.3 million in the ~~nine months ended September 30, 2018, compared to $100.6 million ZEV credit sales and $60.5 million in non-ZEV regulatory credit sales~~same period in the ~~nine months ended September 30, 2017.~~prior year. The ~~growth~~above increases in ~~non-ZEV regulatory credits~~revenue were offset by a decrease of 12,669 Model S and Model X deliveries at lower average selling prices due to price adjustments we made to our vehicle offerings in the ~~nine months ended September 30, 2018 was generally consistent~~first half of 2019. Additionally, due to these price adjustments, we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. As a result, along with the ~~volume growth~~estimated variable consideration related to normal future product returns for vehicles sold under the buyback options program, we adjusted our sales return reserve on vehicles previously sold under our buyback options program resulting in a reduction of automotive sales revenues of $564.6 million. Refer to Note 2, Summary of Significant Accounting Policies, to the consolidated statements included elsewhere in the ~~quarter compared to the nine months ended September 30, 2017.~~Quarterly Report on Form 10-Q.

Automotive leasing revenue decreased ~~$65.7~~$31.5 million, or ~~23%~~13% , in the three months ended ~~September~~June 30, ~~2018~~2019 as compared to the three months ended ~~September~~June 30, ~~2017. Automotive leasing revenue decreased $179.7 million, or 22%, in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.~~2018. The ~~decreases in the three and nine months ended September 30, 2018 compared to the same periods in the prior year were~~decrease was primarily due to a ~~downward adjustment~~decrease in the number of ~~$249.4 million and $603.5 million, respectively, from the adoption~~vehicles under leasing programs where our counterparty has retained ownership of the ~~new~~vehicle during or at the end of the guarantee period when compared to the three months ended June 30, 2018 and a decrease in cumulative vehicles under our resale value guarantee financing programs which are accounted for as operating leases. When our counterparty retains ownership, any remaining balances within deferred revenue ~~standard,~~and resale value guarantee are settled to automotive leasing revenue. The decrease was partially offset by an increase ~~of approximately 45%~~in cumulative vehicles under our direct vehicle leasing program.

Automotive leasing revenue increased $10.2 million, or 2%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The increase was primarily due to an increase in cumulative vehicles under our direct vehicle leasing program and an increase in the number of vehicles under leasing programs where our counterparty has retained ownership of the vehicle during or at the end of the guarantee period when compared to the ~~prior year.~~six months ended June 30, 2018. When our counterparty retains ownership, any remaining balances within deferred revenue and resale value guarantee are settled to automotive leasing revenue. These increases were partially offset by a decrease in cumulative vehicles under our resale value guarantee financing programs which are accounted for as operating leases.

Services and other revenue increased ~~$22.0~~$334.9 million, or 7%124%, ~~during~~in the three months ended ~~September~~June 30, ~~2018~~2019 as compared to the three months ended ~~September~~June 30, ~~2017.~~2018. Services and other revenue increased $564.5 million, or 106%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The ~~increase was~~increases in the three and six months ended June 30, 2019 compared to the same periods in the prior year were primarily due to increases in used vehicle sales from increased volumes of trade-in vehicles, partially offset by lower average selling prices for them due to price adjustments we made to our vehicle offerings during the first half of 2019 and an increase in trade-ins of relatively lower priced non-Tesla vehicles. Additionally, there were increases in non-warranty maintenance services revenue as our fleet continues to grow.

Services and other revenue increased $146.7 million, or 21%, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase was primarily due to an increase in maintenance services revenue as our fleet continues to grow and in used vehicle sales. These increases were partially offset by a decrease in powertrain sales to another automobile manufacturer as we wound down the program in 2017.

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

Energy generation and storage revenue decreased by ~~$81.8~~$6.2 million, or ~~26%~~2%, in the three months ended ~~September~~June 30, ~~2018~~2019 as compared to the three months ended ~~September~~June 30, ~~2017.~~2018. The ~~increase~~decrease was primarily due to ~~higher average priced~~a decrease in deployments of cash and loan solar ~~energy systems deployed at deployment levels that remained relatively consistent and~~projects. The decrease was partially offset by increases in deployments of Powerpack and ~~Powerwall deliveries in the three months ended September 30, 2018 compared to the same period in the prior year.~~Powerwall.

Energy generation and storage revenue ~~increased~~decreased by ~~$365.5~~$91.6 million, or ~~45%~~12%, in the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The ~~increase~~decrease was primarily due to ~~increases~~a decrease in ~~Powerpack~~revenue recognized for commercial projects, most predominantly $72.5 million for the South Australia battery project in the prior period, and ~~Powerwall deliveries and higher priced~~a decrease in deployments of cash and loan solar ~~energy systems deployed at deployment levels that remained relatively consistent compared to the nine months ended September 30, 2017. The increase~~projects. These decreases were partially offset by increases in ~~Powerpack revenue was significant in the nine months ended September 30, 2018 compared to the same period in the prior year due to $72.5 million recognized in the first quarter~~deployments of ~~2018 related to the South Australia battery project.~~Powerwall.

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change						Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
(Dollars in thousands)	2018			2017			$			%			2018			2017			$			%			2019			2018			$			%			2019			2018			$			%
Cost of revenues
Automotive sales	$	4,405,919		$	1,755,622		$	2,650,297			151	%	$	9,027,055		$	4,724,849		$	4,302,206			91	%	$	4,253,763		$	2,529,739		$	1,724,024			68	%	$	7,109,972		$	4,621,136		$	2,488,836			54	%
Automotive leasing		119,283			175,224			(55,941	)		-32	%		360,694			516,683			(155,989	)		-30	%		106,322			136,915			(30,593	)		-22	%		223,414			241,411			(17,997	)		-7	%
Total automotive cost of revenues		4,525,202			1,930,846			2,594,356			134	%		9,387,749			5,241,532			4,146,217			79	%		4,360,085			2,666,654			1,693,431			64	%		7,333,386			4,862,547			2,470,839			51	%
Services and other		444,992			367,401			77,591			21	%		1,212,335			852,446			359,889			42	%		743,022			386,374			356,648			92	%		1,428,555			767,343			661,212			86	%
Total automotive & services and other segment cost of revenues		4,970,194			2,298,247			2,671,947			116	%		10,600,084			6,093,978			4,506,106			74	%		5,103,107			3,053,028			2,050,079			67	%		8,761,941			5,629,890			3,132,051			56	%
Energy generation and storage segment		330,554			237,288			93,266			39	%		1,036,190			592,823			443,367			75	%		325,523			330,273			(4,750	)		-1	%		642,410			705,636			(63,226	)		-9	%
Total cost of revenues	$	5,300,748		$	2,535,535		$	2,765,213			109	%	$	11,636,274		$	6,686,801		$	4,949,473			74	%	$	5,428,630		$	3,383,301		$	2,045,329			60	%	$	9,404,351		$	6,335,526		$	3,068,825			48	%

Gross profit total automotive	$	1,573,564		$	432,043								$	2,804,015		$	1,697,573								$	1,016,304		$	691,027								$	1,766,864		$	1,230,451
Gross margin total automotive		26	%		18	%								23	%		24	%								19	%		21	%								19	%		20	%

Gross profit total automotive & services and other segment	$	1,454,902		$	368,923								$	2,451,564		$	1,558,295								$	878,361		$	574,795								$	1,436,330		$	996,662
Gross margin total automotive & services and other segment		23	%		14	%								19	%		20	%								15	%		16	%								14	%		15	%

Gross profit energy generation and storage segment	$	68,763		$	80,217								$	147,557		$	225,406								$	42,685		$	44,135								$	50,459		$	78,794
Gross margin energy generation and storage segment		17	%		25	%								12	%		28	%								12	%		12	%								7	%		10	%

Total gross profit	$	1,523,665		$	449,140								$	2,599,121		$	1,783,701								$	921,046		$	618,930								$	1,486,789		$	1,075,456
Total gross margin		22	%		15	%								18	%		21	%								15	%		15	%								14	%		15	%

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

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

Costs of services and other revenue includes costs associated with providing ~~maintenance~~ non-warranty after-sales services ~~and~~, costs to acquire and certify used ~~vehicles.~~vehicles, and costs for retail merchandise. Cost of services and other revenue also includes direct parts, material and labor costs, manufacturing overhead associated with ~~the sales of electric vehicle components and systems to other manufacturers and~~ sales by our ~~recently~~ acquired subsidiaries to third party customers.

Cost of automotive sales ~~revenues~~revenue increased ~~$2.65~~$1.72 billion, or ~~151%~~68% , in the three months ended ~~September~~June 30, ~~2018~~2019 as compared to the three months ended ~~September~~June 30, ~~2017. This increase was~~2018, primarily due to ~~higher volume~~an increase of 54,863 Model 3 ~~vehicles delivered~~deliveries from our significant production ramp in the second half of 2018. The increase was partially offset by significant reductions in Model 3 average costs per unit compared to the prior ~~year as there was~~period primarily due to temporary under-utilization of manufacturing capacity at lower production volumes ~~as production ramped~~ in ~~2017.~~the first half of 2018 and other cost efficiencies. Additionally, ~~the increase was~~ due to price adjustments we made to our vehicle offerings in the ~~recognition~~first half of ~~$329.9 million~~2019, we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. If customers elect to exercise the buyback options, we expect to be able to subsequently resell the returned vehicles, which resulted in a reduction of ~~additional~~automotive cost of sales ~~due~~of $49.6 million for the three months ended June 30, 2019. Refer to Note 2, Summary of Significant Accounting Policies, to the ~~adoption of~~consolidated statements included elsewhere in the new revenue standard, offset by lower overall costs for Model S and X cash deliveries from reductions in combined Model S and X average costs per unit as a result of increased manufacturing efficiencies. As the per unit production cost of Model 3 is less than that of Model S or Model X, each incremental delivery of Model 3 has a smaller impactQuarterly Report on ~~the aggregate increase in cost of automotive sales revenues than each incremental delivery of Model S or Model X.~~Form 10-Q.

Cost of automotive sales ~~revenues~~revenue increased ~~$4.30~~$2.49 billion, or ~~91%~~54%, in the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2017. This increase was~~2018, primarily due to ~~higher volume~~an increase of 97,609 Model 3 ~~vehicles delivered~~deliveries from our significant production ramp in the second half of 2018. The increase was partially offset by significant reductions in Model 3 average costs per unit compared to the prior ~~year as there was~~period primarily due to temporary under-utilization of manufacturing capacity at lower production volumes ~~as production ramped~~ in ~~2017.~~the first half of 2018 and other cost efficiencies. Additionally, ~~the increase was~~ due to price adjustments we made to our vehicle offerings in the ~~recognition~~first half of ~~$795.7 million~~2019, we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. If customers elect to exercise the buyback options, we expect to be able to subsequently resell the returned vehicles, which resulted in a reduction of ~~additional~~automotive cost of sales ~~due~~of $458.4 million for the six months ended June 30, 2019. Refer to Note 2, Summary of Significant Accounting Policies, to the ~~adoption of~~consolidated statements included elsewhere in the new revenue standard, offset by lower overall costs for Model S and X cash deliveries from approximately 3,370 less units delivered as compared to the same period last year and reductions in combined Model S and X average costs per unit as a result of increased manufacturing efficiencies. As the per unit production cost of Model 3 is less than that of Model S or Model X, each incremental delivery of Model 3 has a smaller impactQuarterly Report on ~~the aggregate increase in cost of automotive sales revenues than each incremental delivery of Model S or Model X.~~Form 10-Q.

Cost of automotive leasing revenue decreased ~~$55.9~~$30.6 million, or ~~32%~~22%, ~~during~~in the three months ended ~~September~~June 30, ~~2018~~2019 as compared to the three months ended ~~September~~June 30, ~~2017.~~ 2018. The decrease was primarily due to a decrease in the number of vehicles under leasing programs where our counterparty has retained ownership of the vehicle during or at the end of the guarantee period when compared to the prior period, and a decrease in cumulative vehicles under our resale value guarantee financing programs which are accounted for as operating leases. When our counterparty retains ownership, the net book value of the leased vehicle of the lease vehicle is expensed to cost of automotive leasing revenue. The decreases were partially offset by an increase in cumulative vehicles under our direct vehicle leasing program.

Cost of automotive leasing revenue decreased ~~$156.0~~$18.0 million, or ~~30%~~7%, ~~during~~in the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The ~~decreases in the three and nine months ended September 30, 2018 compared to the same periods in the prior year were~~decrease was primarily due to a ~~downward adjustment of $188.7 million and $451.0 million, respectively, from the adoption of the new revenue standard,~~decrease in cumulative vehicles under our resale value guarantee financing programs which are accounted for as operating leases. The decrease was partially offset by ~~increased cost of automotive leasing revenue from~~ an increase ~~of approximately 45%~~ in cumulative vehicles under our direct vehicle leasing program and an increase in the number of vehicles under leasing programs where our counterparty has retained ownership of the vehicle during or at the end of the guarantee period when compared to the prior ~~year.~~period. When our counterparty retains ownership, the net book value of the leased vehicle of the lease vehicle is expensed to cost of automotive leasing revenue.

Cost of services and other revenue increased ~~$77.6~~$356.6 million, or ~~21%~~92%, in the three months ended ~~September~~June 30, ~~2018~~2019 as compared to the three months ended ~~September~~June 30, ~~2017.~~2018. Cost of services and other revenue increased $661.2 million, or 86%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The ~~increase was~~increases in the three and six months ended June 30, 2019 compared to the same periods in the prior year were primarily due to the ~~increase~~costs of used vehicle sales from the increased volumes of trade-in vehicles. Additionally, there were increases in ~~cost~~the costs of our new service centers, additional service personnel in existing and new service centers, ~~mobile service~~Mobile Service capabilities, parts distribution centers and investment in new body shops to provide maintenance services to our rapidly growing fleet of vehicles. ~~The increase was offset by a decrease in the cost of used vehicle sales primarily due to lower value of trade-in vehicles offset by increased volume of trade-in vehicles.~~

Cost of services and other revenue increased $359.9 million, or 42%, in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The increase was primarily due to the increase in cost of our new service centers, additional service personnel in existing and new service centers, mobile service capabilities, parts distribution centers and investment in new body shops to provide maintenance services to our rapidly growing fleet of vehicles. Additionally, there was an overall increase in cost of used vehicle sales from increased volume of trade-in vehicles offset by lower values per trade-in. These increases were partially offset by a decrease in powertrain sales to another automobile manufacturer as we wound down the program in 2017.

Gross margin for total automotive increased from 18% in the three months ended September 30, 2017 to 26% in the three months ended September 30, 2018. The increase is primarily due to improved Model 3, Model S, and Model X gross margins as costs per unit decreased year over year as discussed above and an increase in regulatory credits, which have no associated costs. Additionally, the increase was supplemented by higher automotive leasing gross margins compared to the prior year.

Gross margin for total automotive decreased from ~~24%~~21% to 19% in the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2019 as compared to ~~23% in~~ the ~~nine~~three months ended ~~September~~June 30, 2018. The decrease ~~is mainly~~was primarily related to lower Model S and Model X deliveries at lower margins due to lower average selling prices from price adjustments we made to our vehicle offerings in the ~~higher weighting~~three months ended June 30, 2019. Additionally, the price adjustments also resulted in a reduction in gross automotive sales profit of $14.5 million from the adjustment of our sales return reserve on vehicles previously sold under our buyback options program. The decrease was partially offset by improvement of Model 3 margins compared to the prior period as we achieved significant manufacturing efficiencies in the production of Model 3 in the ~~current year, which has had a lower year to date margin than Model S~~second half of 2018 and ~~X due to temporary under-utilization of manufacturing capacity at lower production volumes in the~~ first half of the year. The impact of the margin dilution from Model 3 was partially offset by improved Model S and Model X combined margins as costs per unit decreased year over year from continuing manufacturing efficiencies and higher automotive leasing gross margins compared to the prior year and an increase in regulatory credits, which have no associated costs.2019.

Gross margin for total automotive ~~& services and other segment increased~~decreased from ~~14%~~20% to 19% in the ~~three~~six months ended ~~September~~June 30, ~~2017~~2019 and 2018. The decrease was primarily related to ~~23%~~lower Model S and Model X deliveries at lower margins due to lower average selling prices from price adjustments we made to our vehicle offerings in the ~~three months ended September 30, 2018.~~first half of 2019. Additionally, the price adjustments also resulted in a reduction in gross automotive sales profit of $106.2 million from the adjustment of our sales return reserve on vehicles previously sold under our buyback options program. The ~~increase is primarily due to improved total automotive gross margins, as discussed above,~~decrease was partially offset by ~~lower services~~improvement of Model 3 margins compared to the prior period as we achieved significant manufacturing efficiencies in the production of Model 3 in the second half of 2018 and ~~other margins from higher costs~~first half of ~~maintenance service.~~2019.

Gross margin for total automotive & services and other segment decreased from ~~20%~~16% to 15% in the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2019 as compared to ~~19%~~the three months ended June 30, 2018. Gross margin for total automotive & services and other segment decreased from 15% to 14% in the ~~nine~~six months ended ~~September~~June 30, 2019 as compared to the six months ended June 30, 2018. The ~~decrease is~~decreases of gross margin in the three and six months ended June 30, 2019 compared to the same periods in the prior year were primarily due to ~~lower total~~the automotive gross ~~margins, as~~margin impacts discussed ~~above, and lower services and other margins from higher costs of maintenance service.~~above.

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

Cost of energy generation and storage revenue ~~increased~~decreased by ~~$93.3~~$4.8 million, or ~~39%~~1%, in the three months ended ~~September~~June 30, ~~2018~~2019 as compared to the three months ended ~~September~~June 30, ~~2017. Costs~~2018. The decrease was primarily due to a decrease in cost of revenue for cash and loan solar energy system increased primarily due to higher costs associated with higher average priced systems deployed in the three months ended September 30, 2018 compared to the same period in the prior year, higher solar energy system material costs, and higher allocation of overhead costsprojects from lower ~~deployment~~deployments. The decrease was partially offset by increases in cost of ~~solar sales~~revenue for Powerpack and ~~leases overall. Additionally, there were higher costs for our solar energy system lease arrangements due to impairment charges in the three months ended September 30, 2018~~Powerwall from increased deployments, and higher costs ~~for energy storage due to increases in Powerpack and Powerwall deliveries.~~from temporary manufacturing under-utilization of our Solar Roof ramp.

Cost of energy generation and storage revenue ~~increased~~decreased by ~~$443.4~~$63.2 million, or ~~75%~~9%, in the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2017. Costs increased for energy storage~~2018 The decrease was primarily due to ~~increases~~a decrease in ~~Powerpack and Powerwall deliveries. The increase in Powerpack~~ cost of revenue ~~was significant in the nine months ended September 30, 2018 compared to the same period in the prior year due to the~~for commercial energy storage projects, most predominantly $72.5 million ~~cost of~~for the South Australia battery project ~~recorded~~ in the ~~first quarter~~prior period, and a decrease in cost of ~~2018. Additionally, costs~~revenue for cash and loan solar ~~energy system~~projects from lower deployments. These decreases were partially offset by increases in cost of revenue for Powerwall from increased ~~primarily due to~~deployments, and higher costs associated with higher average priced systems deployed in the nine months ended September 30, 2018 compared to the same period in the prior year, higher solar energy system material costs, higher allocationfrom temporary manufacturing under-utilization of ~~overhead costs from lower deployment of solar sales and leases overall, and certain warranty related one-time charges.~~our Solar Roof ramp.

Gross margin for energy generation and storage ~~decreased from 25%~~remained relatively consistent at12% in the three months ended ~~September~~June 30, ~~2017~~2019 as compared to ~~17%~~the three months ended June 30, 2018. Energy storage margins improved compared to the prior period as a result of higher average selling prices and certain favorable changes in cost. The increase was partially offset by lower margins in our cash and loan solar energy system business driven by higher fixed costs per project as a result of lower deployments in the three months ended ~~September~~June 30, ~~2018. The decrease is primarily due to the increased~~2019. Additionally, higher costs for solar energy system lease arrangements due to impairment charges in the three months ended September 30, 2018. Additionally, margins improved on our energy storage business as costs for projects delivered in the prior year were higher due tofrom temporary manufacturing under-utilization ~~and one-time costs.~~of our Solar Roof ramp have further offset an increase in margins.

Gross margin for energy generation and storage decreased from ~~28%~~10% to 7% in the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 as compared to ~~12% in~~ the ~~nine~~six months ended ~~September~~June 30, ~~2018~~.2018. The decrease iswas primarily due to ~~the increases~~lower margins in ~~solar~~our cash and loan solar energy system ~~material~~business driven by higher fixed costs ~~higher allocation~~per project as a result of ~~overhead~~lower deployments in the six months ended June 30, 2019. Additionally, higher costs from ~~lower deployment~~temporary manufacturing under-utilization of ~~solar sales and leases overall, and impairment charges on solar energy system lease arrangements. The~~our Solar Roof ramp have further contributed to a decrease ~~is offset by an increase~~ in ~~energy storage margins primarily due to increased manufacturing efficiencies in the current year.~~margins.

	Three Months Ended September 30,						Change					Nine Months Ended September 30,						Change					Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
(Dollars in thousands)	2018			2017			$		%			2018			2017			$		%			2019			2018			$			%			2019			2018			$			%
Research and development	$	350,848		$	331,622		$	19,226		6	%	$	1,104,073		$	1,023,436		$	80,637		8	%	$	323,898		$	386,129		$	(62,231	)		-16	%	$	664,072		$	753,225		$	(89,153	)		-12	%
As a percentage of revenues		5	%		11	%							8	%		12	%							5	%		10	%								6	%		10	%

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

R&D expenses ~~increased $19.2~~as a percentage of revenue decreased in the three and six months ended June 30, 2019 as compared to the same periods ended June 30, 2018. The decrease was primarily from our focus on increasing operational efficiency and process automation, our efforts to scale down and optimize our cost structure relative to the size of our business, as well as from increases in overall revenues from our expanding sales.

R&D expenses decreased $62.2 million, or 6%16%, in the three months ended ~~September~~June 30, ~~2018~~2019 as compared to the three months ended ~~September~~June 30, ~~2017. This increase~~2018. The decrease was primarily due to a ~~$30.6~~$32.2 million ~~increase~~decrease in employee and labor related expenses from ~~headcount growth to support our business expansion, $14.7~~cost efficiency initiatives, a $20.2 million increase in stock-based compensation expense related to an increase in headcount and number of employee stock awards granted for new hire and refresher employee stock grants, and $6.3 million in facilities, freight, and depreciation expenses due to business expansion. These increases were offset by decreases of $20.3 milliondecrease in expensed materials and ~~$16.0~~a $10.1 million ofdecrease in professional and outside service ~~expenses as there were higher costs in the three months ended September 30, 2017 primarily related to Model 3 development.~~expenses.

R&D expenses ~~increased $80.6~~decreased $89.2 million, or 8%12%, in the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2017. This increase~~2018. The decrease was primarily due to a ~~$96.3~~$52.6 million ~~increase~~decrease in employee and labor related expenses from ~~headcount growth to support our business expansion~~cost efficiency initiatives and ~~$36.4~~a $24.7 million ~~increase~~decrease in stock-based compensation expense related to an increase in headcount and number of employee stock awards granted for new hire and refresher employee stock grants. Additionally, there was an increase of $30.9 million in facilities, freight, and depreciation expenses ~~due to business expansion, offset by a $70.5 million decrease in expensed materials as there were higher costs in the nine months ended September 30, 2017 primarily related to Model 3 development.~~.

	Three Months Ended September 30,						Change					Nine Months Ended September 30,						Change					Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
(Dollars in thousands)	2018			2017			$		%			2018			2017			$		%			2019			2018			$			%			2019			2018			$			%
Selling, general and administrative	$	729,876		$	652,998		$	76,878		12	%	$	2,167,039		$	1,794,210		$	372,829		21	%	$	647,261		$	750,759		$	(103,498	)		-14	%	$	1,351,190		$	1,437,163		$	(85,973	)		-6	%
As a percentage of revenues		11	%		22	%							15	%		21	%							10	%		19	%								12	%		19	%

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

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

SG&A expenses ~~increased $76.9~~decreased $103.5 million, or ~~12%~~14%, in the three months ended ~~September~~June 30, ~~2018~~2019 as compared to the three months ended ~~September~~June 30, ~~2017.~~2018. The ~~increase~~decrease was primarily due to an $91.0 million decrease in employee and labor related expenses from decreased headcount.

SG&A expenses decreased $86.0 million, or 6%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The decrease was primarily due to a ~~$62.6~~$145.4 million decrease in employee and labor related expenses from decreased headcount, partially offset by a $47.0 million increase in stock-based compensation expense related to the 2018 CEO Performance Award and stock awards granted for new hires and refresher employee stock grants and $24.4 million increase in office, information technology and facilities-related expenses and sales and marketing activities to support our business expansion. The increase was offset by a decrease of $19.5 million in employee and labor related expenses primarily due to the restructuring actions carried out in the second quarter of 2018 (refer to ~~Restructuring and other~~ ~~below).~~

SG&A expenses increased $372.8 million, or 21%, in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The increase was primarily due to a $158.2 million increase in office, information technology and facilities-related expenses and sales and marketing activities to support our business expansion. Additionally, there was a $141.3 million increase in stock-based compensation expense related to the 2018 CEO Performance Award and stock awards granted for new hires and refresher employee stock grants. ~~To support the continued growth of our business, there was an increase of $61.0 million in employee related expenses and professional service fees.~~

	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change			Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
(Dollars in thousands)	2018			2017			$		%	2018			2017			$		%	2019			2018			$		%			2019			2018			$		%
Restructuring and other	$	26,184		$	—		$	26,184	N/A	$	129,618		$	—		$	129,618	N/A	$	117,345		$	103,434		$	13,911		13	%	$	160,816		$	103,434		$	57,382	55%
As a percentage of revenues		0	%		0	%					1	%		0	%					2	%		3	%							1	%		1	%

During the first quarter of 2019, we carried out certain restructuring actions in order to reduce costs and improve efficiency. As a result, we recognized $43.5 million of costs primarily related to employee termination expenses and losses from closing certain stores. These costs were substantially paid by the end of first quarter of 2019.

During the second quarter of 2019, we recognized $47.0 million in impairment related to IPR&D as we abandoned further development efforts and $15.0 million for the related equipment. We also incurred loss of $48.8 million for closing certain facilities. Additionally, we recognized $6.2 million of employee termination expenses for the three months ended June 30, 2019, which are expected to be substantially paid by the end of the third quarter of 2019, while the remaining amounts were non-cash. The restructuring actions during the first half of 2019 will result in an estimated cost savings of approximately $130.0 million for the remainder of 2019.

During the second quarter of 2018, we carried out certain restructuring actions in order to reduce costs and improve efficiency. As a result, in the three months ended June 30, 2018, we recognized $34.0 million of one-time employee termination expenses and estimated losses from sub-leasing a facility. ~~The employee termination expenses of $26.2 million were substantially paid by the end of the third quarter of 2018, while the remaining amounts were non-cash.~~ Also included within restructuring and other activities was $56.1 million of expenses (materially all of which were non-cash) from restructuring the energy generation and storage segment, which comprised of disposals of certain tangible assets, the shortening of the useful life of a trade name intangible asset and a contract termination penalty. In addition, we concluded that a small portion of the IPR&D is not commercially feasible. Consequently, we recognized an impairment loss of $13.3 million in the three months ended June 30, 2018. ~~The restructuring actions during the second quarter of 2018 will result in a remaining estimated cost savings of approximately $50.0 million for the fourth quarter of 2018.~~

In October 2018, a final court order was entered approving the terms of a settlement in connection with the SEC’s legal actions relating to Mr. Musk’s prior consideration during the third quarter of 2018 of a take-private proposal for Tesla. These expenses are expected to be substantially paid by the end of the fourth quarter of 2018.

~~There were no restructuring actions during the three or nine months ended September 30, 2017.~~

	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change						Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
(Dollars in thousands)	2018			2017			$			%			2018			2017			$			%			2019			2018			$			%			2019			2018			$			%
Interest expense	$	(175,220	)	$	(117,109	)	$	(58,111	)		50	%	$	(488,348	)	$	(324,896	)	$	(163,452	)		50	%	$	(171,979	)	$	(163,582	)	$	(8,397	)		5	%	$	(329,432	)	$	(313,128	)	$	(16,304	)		5	%
As a percentage of revenues		3	%		4	%								3	%		4	%								3	%		4	%								3	%		4	%

Interest expense increased by ~~$58.1~~$8.4 million, or ~~50%~~5%, in the three months ended ~~September~~June 30, ~~2018~~2019 as compared to the three months ended ~~September~~June 30, ~~2017. Interest expense increased by $163.5 million, or 50%, in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.~~2018. The ~~increases in the three and nine months ended September 30, 2018 compared to the same periods in the prior year were~~increase was primarily due to a decrease of $8.7 million in the amount of interest we capitalized from the consolidated ~~statement~~statements of operations to property, plant, and equipment on the consolidated balance sheets. Lower capitalization results in higher interest expense. The amount of interest we capitalize is driven by our construction in progress balance, which ~~has~~ decreased ~~compared to the prior year~~year-over-year due to ~~significant~~our declining Model 3 capital expenditure ramp

Interest expense increased by $16.3 million, or 5%, in ~~2017. Additionally,~~ the ~~increase was due to an increase in our average outstanding indebtedness and the weighted average interest rates~~six months ended June 30, 2019 as compared to the ~~prior year.~~ six months ended June 30, 2018. The increase was primarily due to a decrease of $19.2 million in the amount of interest we capitalized from the consolidated statements of operations to property, plant, and equipment on the consolidated balance sheets. Lower capitalization results in higher interest expense. The amount of interest we capitalize is driven by our construction in progress balance, which decreased year-over-year due to our declining Model 3 capital expenditure ramp. The decrease is partially offset by an increase in interest expenses from our debt as a result of an increase in the average carrying balances of interest bearing debt for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.

	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change			Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
(Dollars in thousands)	2018			2017			$		%	2018			2017			$		%	2019			2018			$			%	2019			2018			$			%
Other income (expense), net	$	22,876		$	(24,390	)	$	47,266	Not meaningful	$	36,071		$	(83,696	)	$	119,767	Not meaningful	$	(40,756	)	$	50,911		$	(91,667	)	Not meaningful	$	(15,006	)	$	13,195		$	(28,201	)	Not meaningful
As a percentage of revenues		0	%		-1	%					0	%		-1	%					-1	%		1	%						0	%		0	%

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

Other income (expense), net, ~~increased~~changed unfavorably by ~~$47.3~~$91.7 million ~~from~~to a loss of ~~$24.4~~$40.8 million in the three months ended ~~September~~June 30, ~~2017 to~~2019 from a gain of ~~$22.9~~$50.9 million in the three months ended ~~September~~June 30, 2018. The change was primarily due to unfavorable fluctuations in foreign currency exchange rates primarily from the U.S. dollar, Chinese yuan and Japanese yen, and losses from interest rate swaps related to our debt facilities when compared to the prior period

Other income (expense), net, ~~increased~~changed unfavorably by ~~$119.8~~$28.2 million ~~from~~to a loss of ~~$83.7~~$15.0 million in the ~~nine~~six months ended ~~September~~June 30, ~~2017 to~~2019 from a gain of ~~$36.1~~$13.2 million in the ~~nine~~six months ended ~~September~~June 30, 2018. The change was primarily due to losses from interest rate swaps related to our debt facilities when compared to the prior period, offset by favorable fluctuations in foreign currency exchange rates.

Our provision for income taxes increased by $5.7 million, or 42%, in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. Our provision for income taxes increased by $23.0 million, or 119%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The increases were primarily due to ~~favorable fluctuations in foreign currency exchange rates and gains from interest rate swaps related to our debt facilities. Additionally, we recognized an $18.2 million loss in~~ the three months ended September 30, 2017 for measurement period adjustments to the acquisition date fair values of certain liabilities as previously reported in our Form 10-K for the year ended December 31, 2016, with no corresponding cost in the current period.

Our provision for income taxes increased by $16.9 million from a benefit of $0.3 million in the three months ended September 30, 2017 to a provision of $16.6 million in the three months ended September 30, 2018. This increase was due to increases in taxable profits in certain foreign ~~jurisdictions.~~

Our provision for income taxes decreased by $4.7 million, or 12%, in the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The decrease was primarily due to the reduction in taxable profits in certain foreign jurisdictions ~~as compared to the same period in the period year.~~year-over-year.

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

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

Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests changed unfavorably by $44.2 million in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. The change was primarily due to lower activities in our financing fund arrangements.

Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests changed unfavorably by $153.8 million in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The change was primarily due to lower activities in our financing fund arrangements and a charge related to buyout of noncontrolling interests.

As of ~~September~~June 30, ~~2018,~~2019, we had ~~$2.97~~$4.95 billion of cash and cash equivalents. Balances held in foreign currencies had a U.S. dollar equivalent of ~~$663.0~~$598.0 million and consisted primarily of Chinese yuan, ~~euros~~Canadian dollar and ~~Canadian dollars.~~euros. Our sources of cash are ~~predominately~~predominantly from our deliveries of vehicles, sales and installations of our energy storage products and solar energy systems, proceeds from debt facilities, proceeds from financing funds and proceeds from equity offerings.

Our sources of liquidity and cash flows enable us to fund ongoing operations, research and development projects for new products, ~~investments in tooling~~development of our main projects including further capacity expansion and ~~manufacturing equipment~~automation for ~~the production ramp of~~our current Model 3 ~~the continued construction of~~production, Gigafactory 1Shanghai, Model Y and ~~the continued~~Tesla Semi, and expansion of our ~~retail stores,~~Supercharger and vehicle service ~~centers, mobile~~and repair ~~services and Supercharger network.~~networks. We currently expect total ~~2018~~2019 capital expenditures to be ~~slightly below $2.5 billion, including the acquisition of land use rights in Shanghai, China~~approximately $1.5 to ~~build Gigafactory 3 and for its initial design and construction expenses.~~$2.0 billion.

In 2019 we expect to continue to increase the Model 3 production rate in our Fremont factory while needing only limited additional capital expenditures. As we continue to expand our existing manufacturing capacity, introduce new products, expand our retail stores, service centers, mobile repair services and ~~Supercharging network,~~beyond, we will continue to utilize our increasing experience and learnings from past and current product ramps to do so at a level of capital efficiency per dollar of spend that we expect to be significantly greater than historical levels. For example, based on our experience with ramping Model 3 at the Tesla Factory, we expect that the capital spend per unit of Model 3 manufacturing capacity at Gigafactory Shanghai will be less than that of the ramp of our line in Fremont. Likewise, based on such experience and the substantial commonality of components we expect between Model Y and Model 3, we believe that the production ramp of Model Y at the Tesla Factory will be significantly faster and cost less per unit of manufacturing capacity compared to that of the ramp of Model 3 there. Considering the pipeline of new products planned at this point, and ~~consistent with our current strategy of using a partner to manufacture cells, as well as considering~~ all other infrastructure growth and ~~expansion of Gigafactories~~investments in Gigafactory 1, Gigafactory 2, Gigafactory Shanghai and 3,future planned manufacturing facilities, we currently estimate that capital expenditures will be between ~~$2.5~~$2.0 to ~~$3.0~~$2.5 billion annually for the next two fiscal years. However, given the breadth of our various planned projects and our focus on cost efficiency, our cost structure is difficult to predict with accuracy long-term and as we make progress on such projects we may find that our actual spend may be less than previously expected. Moreover, we expect that the cash we generate from our core operations will generally be sufficient to cover our future capital expenditures and to pay down our near-term debt obligations, although we may choose to seek alternative financing sources. For example, we expect that much of our investment in Gigafactory 3Shanghai will be funded through indebtedness arranged through local financial institutions in ~~China.~~China, including a RMB 3.5 billion term facility that our subsidiary entered into in March 2019. As always, we continually evaluate our capital expenditure needs and may decide it is best to raise additional capital to fund the rapid growth of our business.

We have an agreement to spend or incur $5.0 billion in combined capital, operational expenses, costs of goods sold and other costs in the State of New York during the 10-year period following ~~full production~~SUNY Foundation’s substantial completion of its construction work at Gigafactory 2. We anticipate meeting these obligations through our operations at ~~Gigafactory 2~~this facility and other operations within the State of New York, and we do not believe that we face a significant risk of default.

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

In addition, we had ~~$1.13~~$1.99 billion of unused committed amounts under our credit facilities and financing funds as of June 30, 2019, some of which are subject to satisfying specified conditions prior to draw-down (such as pledging to our lenders sufficient amounts of qualified receivables, inventories, leased vehicles and our interests in those leases, solar energy systems and the associated customer contracts, our interests in financing funds or various other assets; and contributing or selling qualified solar energy systems and the associated customer contracts or qualified leased vehicles and our interests in those leases into the financing funds). Upon the draw-down of any unused committed amounts, there are no restrictions on the use of such funds for general corporate purposes. For details regarding our indebtedness and financing funds, refer to Note ~~10,~~ ~~Convertible and~~ 11, Long-Term Debt Obligations, and Note ~~13,~~ ~~VIE~~16, Variable Interest Entity Arrangements, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

	Nine Months Ended September 30,						Six Months Ended June 30,
(Dollars in thousands)	2018			2017			2019			2018
Net cash provided by (used in) operating activities	$	863,241		$	(570,545	)	$	224,000		$	(528,040	)
Net cash used in investing activities	$	(1,972,419	)	$	(3,284,358	)	$	(547,388	)	$	(1,411,454	)
Net cash provided by financing activities	$	686,064		$	4,129,022		$	1,489,822		$	770,282

Our cash flows from operating activities are significantly affected by our cash investments to support the growth of our business in areas such as research and development and selling, general and ~~administrative.~~administrative and working capital, especially inventory, which includes vehicles in transit. Our operating cash inflows include cash from vehicle sales, lease payments directly from customers, customer deposits, sales of regulatory credits and energy generation and storage products. These cash inflows are offset by our payments to suppliers for production materials and parts used in our manufacturing process, employee compensation, operating lease payments and interest payments on our financings.

Net cash ~~used in~~from operating activities ~~of $570.5 million during the nine months ended September 30, 2017~~ changed favorably by ~~$1.43 billion~~$752.0 million to net cash provided by operating activities of ~~$863.2~~$224.0 million during the ~~nine~~six months ended ~~September~~June 30, 2019 from net cash used in operating activities of $528.0 million during the six months ended June 30, 2018. This favorable change was primarily due to ~~the decrease in net operating assets and liabilities of $852.5 million and~~ the increase in net income, excluding non-cash expenses and gains, of ~~$581.2~~$836.6 million and the decrease in net operating assets and liabilities of $103.5 million. These favorable changes were partially offset by $188.1 million of the repayment of our 0.25% Convertible Senior Notes due in 2019 which was classified as an operating activity, as this represented an interest payment on the discounted convertible notes. The decrease in net operating assets and liabilities was mainly driven by ana smaller increase in ~~accounts payable and accrued liabilities,~~inventory, as a result of ~~increased expenditures to support our ramp of~~an increase in Model 3 deliveries, and ~~a decrease in operating lease vehicles primarily due to the adoption of the new revenue standard, wherein certain vehicle sales where revenue was previously deferred either as~~ an in-substance operating lease, such as certain vehicle sales to customers or leasing partners with a resale value guarantee, we now recognize revenue when the vehicles are shipped as sale with a right of return. These decreases were partially offset by the increase in ~~accounts receivable and inventory,~~deferred revenue as a result of increased Model 3 ~~and energy products~~ deliveries and ~~production.~~ receipt of regulatory credits which will be delivered at a future date. The increase in cash from certain operating activities was partially offset by a decrease in accounts payable and accrued liabilities.

~~Net cash used in~~Cash flows from investing activities and their variability across each period related primarily to capital expenditures, which were $573.1 million during the ~~nine~~six months ended ~~September~~June 30, ~~2018 decreased by $1.31~~2019 and $1.41 billion ~~as compared to~~during the ~~nine~~six months ended ~~September~~June 30, ~~2017 due to~~2018. Capital expenditures during the ~~$852.4~~six months ended June 30, 2019 were primarily comprised of $529.6 million ~~decrease~~ in purchases of property and equipment, ~~due to higher spend in 2017~~mainly for ~~building~~ Model 3 ~~capacity in Fremont, Gigafactory 1,~~production, and $43.5 million for the ~~expansion of our customer support infrastructure. Additionally, there was a $357.2 million decrease in purchases~~design, acquisition and installation of solar energy systems ~~leased~~with customers.

Capital expenditures during the six months ended June 30, 2018 were $1.27 billion from purchases of property and ~~to be leased~~equipment, mainly for Model 3 production, and ~~a decrease~~$140.4 million for the design, acquisition and installation of ~~$102.3 million in cash spent on acquisitions of businesses.~~solar energy systems with customers.

In 2014, we began construction of Gigafactory 1. We used ~~$592.5~~$109.9 million and ~~$1.22 billion~~$402.4 million of cash towards Gigafactory 1 construction during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Cash flows provided by financing activities during the six months ended June 30, 2019 consisted primarily of $1.82 billion from the issuance of 2.00% Convertible Senior Notes due in 2024 (“2024 Notes”), net of transaction costs, and $847.4 million from the issuance of common stock, net of underwriting discounts and offering costs, in registered public offerings, $229.7 million of net borrowings under our vehicle lease-backed loan and security agreements (the “Warehouse Agreements”), $200.0 million of net borrowings under the Credit Agreement, and $174.4 million from the issuance of warrants in connection with the offering of the 2024 Notes. These cash inflows were partially offset by a $731.9 million portion of the repayment of our 0.25% Convertible Senior Notes due in 2019 that was classified as financing activity, a purchase of convertible note hedges of $475.8 million in connection with the offering of the 2024 Notes, and repayments of $228.0 million of the automotive asset-backed notes. See Note 11, Long-Term Debt Obligations, and Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details regarding our debt obligations and collateralized borrowings, respectively.

Cash flows from financing activities during the ~~nine~~six months ended ~~September~~June 30, 2018 consisted primarily of $546.1 million from the issuance of automobile lease-backed notes ~~$484.0~~and $489.0 million of net borrowings under the Credit ~~Agreement, and $184.9 million net proceeds from investments by fund investors.~~Agreement. Additionally, there were ~~collateralized lease~~net repayments of ~~$343.1~~$172.8 million under the Warehouse Agreements and repayments of automobile lease-backed notes of ~~$128.6 million.~~

Cash flows from financing activities during the nine months ended September 30, 2017 consisted primarily of $966.4 million from issuance of convertible senior notes, $1.80 billion from the issuance of senior notes and $400.2 million from public offering of our common stock, net of underwriter fees. Additionally, we paid $151.2 million for bond hedges, net of the amount we received from the sale of warrants. Furthermore, we received proceeds from vehicle sales to our bank leasing partners of $416.4 million and net proceeds from investments by fund investors of $501.2$85.2 million.

Contractual obligations did not materially change during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 except for debt activity and lease activity, as discussed in more detail in Note ~~10,~~ ~~Convertible and~~ 11, Long-Term Debt Obligations, and ~~additional capital leases of manufacturing equipment.~~Note 12, Leases.

During the periods presented, we did not have relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

We transact business globally in multiple currencies and hence have foreign currency risks related to our revenue, ~~cost~~costs of ~~revenues~~revenue and operating expenses denominated in currencies other than the U.S. dollar primarily the euro, Japanese yen, Canadian dollar, Chinese yuan and Norwegian krone. In general, we are a net receiver of currencies other than the U.S. ~~dollar.~~dollar for our foreign subsidiaries. Accordingly, changes in exchange rates and, in particular, a strengthening of the U.S. dollar have in the past, and may in the future, negatively affect our revenue and other operating results as expressed in U.S. dollars.

We ~~transact business globally in multiple currencies. Our foreign operations expose us~~have also experienced, and will continue to ~~the risk of~~experience, fluctuations in ~~foreign currency exchange rates against the functional currencies~~our net income (loss) as a result of ~~our foreign subsidiaries and against the U.S. dollar. Upon consolidation, as foreign currency exchange rates vary, revenues and expenses may be significantly impacted, and we may record significant~~ gains ~~or losses~~(losses) on the settlement and the re-measurement of ~~our~~ monetary assets and liabilities ~~including~~denominated in currencies that are not the local currency (primarily consisting of our intercompany ~~balances.~~ and cash and cash equivalents balances). For the ~~three~~six months ended ~~September~~June 30, ~~2018,~~2019, we recognized a net foreign currency gain of $10.8 million in other income (expense), net, with our largest ~~foreign currency~~ re-measurement exposures ~~were~~ from the U.S. dollar, Japanese yen ~~euro~~ and ~~Canadian dollar. In~~Chinese yuan as our subsidiaries are denominated in various local currencies. For the ~~nine~~six months ended ~~September~~June 30, 2018, we recognized a net foreign currency ~~exchange gain~~loss of ~~$6.6~~$6.2 million in other income (expense), ~~net.~~net, with our largest re-measurement exposures from Japanese yen, Chinese yuan and Canadian dollar.

We considered the historical trends in foreign currency exchange rates and determined that it is reasonably possible that adverse changes in foreign currency exchange rates of 10% for all currencies could be experienced in the near-term. These ~~reasonably possible adverse~~ changes were applied to our total monetary assets and liabilities denominated in currencies other than our ~~functional~~local currencies ~~as of September 30, 2018~~at the balance sheet date to compute the ~~adverse~~ impact these changes would have had on our income (loss) before income taxes. These changes would have resulted in an adverse impact of ~~$153.9 million.~~$248.3 million at June 30, 2019 and $175.7 million at December 31, 2018.

We are exposed to interest rate risk on our borrowings that bear interest at floating rates. Pursuant to our risk management policies, in certain cases, we utilize derivative instruments to manage some of this risk. We do not enter into derivative instruments for trading or speculative purposes. A hypothetical 10% change in our interest rates would have increased our interest expense for the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 by ~~$5.9 million.~~$4.7 million and $3.6 million, respectively.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that our management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of ~~September~~June 30, ~~2018,~~2019, our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

~~The Company will also further enhance disclosure controls in accordance with~~During the second quarter of 2019, we amended our ~~September 29, 2018~~previous settlement with the SEC regarding Elon Musk’s social media posts on August 7, ~~2018.~~2018 to clarify certain of the disclosure controls agreed in such settlement.

There were no changes in our internal control over financial reporting, as identified in connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act, that occurred during the three months ended ~~September~~June 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~Securities Litigation Relating~~For a description of our material pending legal proceedings, please see Note 15, Commitments and Contingencies, to ~~SolarCity’s Financial Statements~~the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In addition, the following matter is being disclosed pursuant to Item 103 of Regulation S-K because it relates to environmental regulations and ~~Guidance~~

~~On March 28, 2014, a purported stockholder class action was filed in the U.S.~~aggregate civil penalties could potentially exceed $100,000. The Bay Area Air Quality Management District ~~Court~~(the “BAAQMD”) has issued notices of violation to us relating to air permitting for the ~~Northern District~~Tesla Factory, but has not alleged any adverse community or environmental impact, proposed any specific penalties, or initiated formal proceedings. We dispute certain of ~~California against SolarCity~~these allegations, and two of its officers. The complaint alleges violations of federal securities laws and seeks unspecified compensatory damages and other relief on behalf of a purported class of purchasers of SolarCity’s securities from March 6, 2013are working to March 18, 2014. After a series of amendments to the original complaint, the District Court dismissed the amended complaint and entered a judgment in our favor on August 9, 2016. The plaintiffs filed a notice of appeal, and on December 4, 2017, the Court heard oral argument on the appeal. On March 8, 2018, the Court upheld the District Court ruling of dismissal and judgment in our favor. The case is concluded.

Between September 1, 2016 and October 5, 2016, seven lawsuits were filed in the Court of Chancery of the State of Delaware by purported stockholders of Tesla challenging our acquisition of SolarCity. Following consolidation, the lawsuit names as defendants the members of Tesla’s board of directors and alleges, among other things, that board members breached their fiduciary duties in connectionresolve them with the acquisition. The complaint asserts both derivative claims and direct claims on behalf of a purported class and seeks, among other relief, unspecified monetary damages, attorneys’ fees, and costs. On January 27, 2017, defendants filed a motion to dismiss the operative complaint. Rather than respond to the defendants’ motion, the plaintiffs filed an amended complaint. On March 17, 2017, defendants filed a motion to dismiss the amended complaint. On December 13, 2017, the Court heard oral argument on the motion. On March 28, 2018, the Court denied defendants’ motion to dismiss. Defendants filed a request for interlocutory appeal, but the Delaware Supreme Court denied that request, electing not to hear an appeal at this early stage of the case. Defendants filed their answer on May 18, 2018. This case will now proceed.

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

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

On June 4, 2018, a purported Tesla stockholder filed a putative class and derivative action in the Delaware Court of Chancery alleging that Tesla’s directors breached their fiduciary duties by approving the stock-based compensation plan. The complaint seeks, among other things, monetary damages and rescission or reformation of the stock-based compensation plan. On August 31, 2018, defendants filed a motion to dismiss the complaint. We believe the claims asserted in this lawsuit are without merit and intend to defend against them vigorously.

Between August 10, 2018 and September 6, 2018, nine purported stockholder class actions were filed against Tesla and Elon Musk in connection with Elon Musk’s August 7, 2018 Twitter post that he was considering taking Tesla private. All of the suits are now pending in the United States District Court for the Northern District of California. Although the complaints vary in certain respects, they each purport to assert claims for violations of federal securities laws related to Mr. Musk’s statement and seek unspecified compensatory damages and other relief on behalf of a purported class of purchasers of Tesla’s securities. We anticipate that, following the lead plaintiff process, the lead plaintiff will file a consolidated amended complaint. We believe that the claims have no merit and intend to defend against them vigorously. We are unable to estimate the potential loss, or range of loss, associated with these claims.

On October 17 and 25, 2018, derivative lawsuits were filed in Delaware Court of Chancery against Mr. Musk and the members of Tesla’s Board in relation to statements made and actions connected to a potential going private transaction. Also on October 25, 2018, a third derivative lawsuit was filed in federal court in Delaware against Mr. Musk and the members of the Board. We believe that the claims have no merit and intend to defend against them vigorously. The Company is unable to estimate the potential loss, or range of loss, associated with these claims.

On October 16, 2018, the U.S. District Court for the Southern District of New York entered a final judgment approving the terms of a settlement filed with the Court on September 29, 2018, in connection with the actions taken by the U.S. Securities and Exchange Commission (the “SEC”) relating to Elon Musk’s prior statement that he was considering taking Tesla private. Without admitting or denying any of the SEC’s allegations, and with no restriction on Mr. Musk’s ability to serve as an officer or director on the Board (other than as its Chair),BAAQMD. While we and Mr. Musk agreed, among other things, to pay civil penalties of $20 million each and that we will appoint an independent director as Chair of the Board for at least three years, appoint two additional independent directors to the Board, and further enhance our disclosure controls and other corporate governance-related matters.

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

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

You should carefully consider the risks described below together with the other information set forth in this report, which could materially affect our business, financial condition and future results. The risks described below are not the only risks facing our company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.

We have experienced in the past, and may experience in the future, delays or other complications in the design, manufacture, launch, production, delivery and ~~delivery~~servicing ramp of new vehicles and ~~other~~energy products, ~~such~~ as ~~Model 3, our energy storage products and the Solar Roof,~~well as product features, which could harm our brand, business, prospects, financial condition and operating results.

We have previously experienced launch, manufacturing, production and delivery ramp delays or other complications in connection with new vehicle models such as Model S, Model X and Model 3, new vehicle features such as the all-wheel drive dual motor drivetrain on Model S and the second version of our Autopilot hardware, and a significant increase in automation introduced in the manufacture of Model 3. For example, we encountered unanticipated challenges, such as certain supply chain constraints, that led to initial delays in producing Model X. Similarly, we experienced certain challenges in the production of Model 3 that led to delays in its ramp. Moreover, in the areas of Model 3 production where we had challenges ramping fully automated processes, such as portions of the battery module assembly line, ~~part of the~~ material flow system and ~~two steps of~~ the general assembly line, we reduced the levels of automation and introduced semi-automated or manual ~~processes.~~processes, and we also had to address an isolated supplier limitation in the manufacture of Model 3. If issues like these arise or recur, if our remediation measures and process changes do not continue to be successful, or if we experience issues with transitioning to full automation in certain production lines or to other planned manufacturing improvements, or if we experience issues or delays in bringing online our Gigafactory Shanghai in China or commencing and ramping Model 3 production there, we could experience issues in sustaining the Model 3 ramp or ~~additional~~ delays in increasing Model 3 production further. Also, if we encounter difficulties in scaling our delivery or servicing capabilities for Model 3 or future vehicles and products to high volumes in the U.S. or internationally, our financial condition and operating results could suffer. In addition, because our vehicle models may share certain parts, suppliers or production facilities with each other, ~~vehicle models,~~ the volume or efficiency of production with respect to one model may impact the production of other models or lead to bottlenecks that impact the production of all models.

We may also experience similar future delays or other complications in bringing to market and ramping production of new vehicles, such as ~~our~~Model Y, the Tesla Semi, ~~truck,~~ our planned ~~Model Y~~pickup truck and new Tesla Roadster, our energy storage products and Solar Roof, as well as future features and services such as new Autopilot or FSD features and the ~~Solar Roof.~~autonomous Tesla ride-hailing network. Any significant additional delay or other complication in the production of and delivery capabilities for our current products or the development, manufacture, launch, production and delivery and servicing capability ramp of our future products, features and services, including complications associated with expanding our production capacity, supply chain and delivery systems or obtaining or maintaining regulatory approvals, could materially damage our brand, business, prospects, financial condition and operating results.

We have experienced in the past, and may ~~continue to~~ experience ~~delays~~in the future, delays in realizing our projected timelines andcost andvolume targets for the production and ramp of ~~our~~ Model 3, ~~vehicle,~~ which could harm our business,, prospects,, financial condition and operating results.

Our future business depends in large part on our ability to execute on our plans to manufacture, market and sell the Model 3 vehicle, which we are offering at a lower price point and for which we achieved a stabilized production rate relatively recently and are producing at significantly higher volumes than the Model S or Model X vehicles. ~~We commenced~~Moreover, we expect to commence production ~~and initial customer deliveries~~by the end of 2019 of certain trims of Model 3 ~~in July 2017, and since then have achieved a significantly stabilized production rate, including approximately 4,300 vehicles per week during the third quarter of 2018, excluding planned shutdowns.~~ We are continuing to work to increase Model 3 production to approximately 10,000 units per week. At the Fremont Factory, we expect to continue to increase our Model 3 production rate to approximately 7,000 units per week. Moreover, in China, we are developing plans to start producing approximately 3,000 Model 3 vehicles per week for the local market in China in the initial phase of our Gigafactory ~~3, which will have~~Shanghai, and then progressively ~~increased~~increase levels of localization through local sourcing and manufacturing. ~~The~~However, the timeframe for ~~that~~commencing Model 3 production at Gigafactory Shanghai is subject to a number of uncertainties, including regulatory approval, supply chain constraints, and the pace of installing production equipment and bringing the factory online.

We have limited experience to date in manufacturing vehicles at the high volumes that we recently achieved and to which we anticipate ramping further for Model 3, and to be successful, we will need to complete the implementation and ramp of efficient and cost-effective manufacturing capabilities, processes and supply chains necessary to support such ~~volumes.~~volumes, including at Gigafactory Shanghai. We are employing a higher degree of automation in the manufacturing processes for Model 3 than we have previously employed and into continue to implement additional automation. In some cases, we have temporarily reduced the levels of automation and introduced semi-automated or manual processes,~~, for which we are likely to incur~~ at additional labor ~~costs.~~cost, and we also had to address an isolated supplier limitation. Additional bottlenecks may also arise as we continue to ramp production at the Tesla Factory and commence the initial phase of Model 3 production at Gigafactory Shanghai, and it will be important that we address them promptly and in a ~~cost effective~~cost-effective manner. Moreover, our Model 3 production plan has ~~generally~~ required to date significant cumulative investments of cash and management resources, and we ~~expect to deploy~~are deploying certain additional resources as we further progress our ramp and begin production in new locations in the future, such as China.

If one or more of the foregoing assumptions turns out to be incorrect, our ability to meet our Model 3 projections on time and at volumes and prices that are profitable, the demand for and deliveries of Model 3, as well as our business, prospects, operating results and financial condition, may be materially and adversely impacted.

We may be unable to meet our growing vehicle production, sales and delivery plans and servicing needs, any of which could harm our business and prospects.

Our plans call for ~~achieving~~sustaining and ~~sustaining~~further ramping from our significant increases in vehicle production and ~~deliveries, particularly for Model 3, to high volumes in a short amount of time.~~deliveries. Our ability to achieve these plans will depend upon a number of factors, including our ability to utilize installed manufacturing capacity to achieve the planned production yield, further install and ~~further~~ increase capacity asin accordance with our planned ~~while maintaining~~timelines and costs, maintain our desired quality levels and optimize design and production changes, ~~and~~as well as our suppliers’ ability to support our needs. In addition, we have used and may use in the future a number of new manufacturing technologies, techniques and processes for our vehicles, which we must successfully introduce and scale for high-volume production. For example, we have introduced highly automated production lines, aluminum spot welding systems and high-speed blow forming of certain difficult to stamp vehicle parts. We have also introduced unique design features in our vehicles with different manufacturing challenges, such as large display screens, dual motor drivetrain, hardware for our Autopilot ~~hardware~~and FSD features and falcon-wing doors. We have limited experience developing, manufacturing, selling and servicing, and allocating our available resources among, multiple products simultaneously. If we are unable to realize our plans, our brand, business, prospects, financial condition and operating results could be materially damaged.

Concurrent with ~~the significant planned increase in~~ our increasing vehicle production levels, weour success will ~~also need~~depend on our ability to continue to significantly increase sales and deliveries of ~~and servicing capacity for,~~ our vehicles. Although we have a plan for ~~delivering~~selling and ~~servicing significantly~~delivering increased volumes of vehicles, we have limited experience in marketing, selling ~~delivering~~ and ~~servicing~~delivering vehicles at the ~~significantly~~ higher volumes ~~at which~~that we ~~are manufacturing Model 3,~~have achieved. Furthermore, we continue to evaluate and weevolve our retail operations and product offerings in order to maximize our reach and optimize our costs, vehicle line-up and model differentiation, and the purchasing experience. However, there is no guarantee that each step in our evolving strategy will be perceived as intended by prospective customers accustomed to more traditional sales models. We may also face difficulties meeting our sales and delivery ~~and servicing needs~~goals in both existing markets as well as new markets into which we ~~expand.~~expand, such as Europe and China where we saw challenges in initially ramping our logistical channels as we delivered Model 3 there for the first time in the first quarter of 2019. In particular, we are targeting ~~for the first time~~ with Model 3 a mass demographic with a broad range of potential ~~customers. While~~customers, in which we ~~are producing numerous~~have limited experience projecting demand and pricing our products. Given the higher volumes to which we have ramped and our single-factory production, we produce variants (including regional versions) of ~~Model 3~~all of our vehicles in batches in accordance with the demand that we expect for ~~them, we have limited experience projecting~~them. If our specific demand ~~in this demographic and~~expectations for these variants prove inaccurate, we may not be able to timely generate sales matched to the specific vehicles that we ~~have~~produce in the ~~capacity to produce, based on vehicle production line constraints and long lead times for procuring certain parts.~~ same timeframe, which may negatively impact our deliveries in a particular period.

Moreover, because we do not have independent dealer networks, we are responsible for delivering all of our vehicles to our ~~customers.~~customers and meeting their vehicle servicing needs. While we have substantially implemented and improved many aspects of our delivery and service operations, we still have relatively limited experience with such deliveries and servicing at high volumes, particularly in international markets. To accommodate ~~our~~these volumes, we have deployed a number of delivery models, such as deliveries to customers’ homes and ~~workplaces. To the extent that such efforts,~~workplaces, some of which have not been previously tested at scale and in different ~~geographies, are unable~~geographies. Moreover, significant transit time may be required to ~~achieve~~transport vehicles such as Model 3 in volume into new markets for the first time. To the extent that such factors lead to delays in our ~~delivery needs,~~deliveries, our results may be negatively impacted. Finally, ifbecause of our unique expertise with our vehicles, we recommend that our vehicles be serviced by our service centers, Mobile Service technicians or certain authorized professionals that we have specifically trained and equipped. If we experience delays in adding such servicing capacity or experience unforeseen issues with the reliability of Model 3, which we ~~only~~ recently commenced producing at volume, ~~is worse than we expect,~~ it could overburden our servicing ~~capabilities.~~capabilities and parts inventory. If we are unable to ramp up to meet our sales, delivery and servicing targets globally, or our projections on which such targets are based are inaccurate, this could result in negative publicity and damage to our brand and have a material adverse effect on our business, prospects, financial condition and operating results.

Our future growth and success is dependent upon consumers’ willingness to adopt electric vehicles and specifically our vehicles, especially in the mass market demographic which we are targeting with vehicles such as Model 3.

Our growth is highly dependent upon the adoption by consumers of alternative fuel vehicles in general and electric vehicles in particular. Although we have successfully grown demand for our vehicles thus far, there is no guarantee of such future demand, or that our vehicles will not compete with one another in the market. Moreover, the ~~Model 3~~ mass market demographic that we have entered initially with Model 3 is larger, but more competitive, than the demographic for Model S and Model X, and additional electric vehicles are entering the market.

If the market for electric vehicles in general and Tesla vehicles in particular does not develop as we expect, or develops more slowly than we expect, or if demand for our vehicles decreases in ~~key and other~~our markets, our business, prospects, financial condition and operating results could be harmed. We have only recently begun ~~high volume~~high-volume production of vehicles, ~~and~~ are still at an ~~early-stage~~earlier stage and have limited resources relative to our competitors, and the market for alternative fuel vehicles is rapidly evolving. As a result, the market for our vehicles could be affected by numerous factors, such as:

We are dependent on our suppliers, the majority of which are single-source suppliers, and the inability of these suppliers to deliver necessary components of our products according to our schedule and at prices, quality levels and volumes acceptable to us, or our inability to efficiently manage these components, could have a material adverse effect on our financial condition and operating results.

Our products contain numerous purchased parts ~~which~~that we source globally from hundreds of direct ~~suppliers,~~suppliers. We attempt to mitigate our supply chain risk by entering into long-term agreements where it is practical and beneficial to do so, including agreements we entered into with Panasonic to be our manufacturing partner and supplier. Because the majority of ~~whom~~our suppliers are currently single-source suppliers, ~~although~~ we ~~attempt to~~also minimize our risk when we can qualify and obtain components from multiple sources, ~~whenever feasible. Any~~such as with respect to PV panels for our retrofit solar installations, which we purchase from a variety of suppliers. However, any significant ~~unanticipated demand would~~increases in our production may require us to procure additional components in a short amount of time, and in the past we have also replaced certain suppliers because of their failure to provide components that met our quality control standards. While we believe that we will be able to secure additional or alternate sources of supply for most of our components in a relatively short time frame, there is no assurance that we will be able to do so or develop our own replacements for certain highly customized components of our products. Moreover, we have signed long-term agreements with Panasonic to be our manufacturing partner and supplier for lithium-ion cells at Gigafactory 1 in Nevada and PV cells and panels at Gigafactory 2 in Buffalo, New York. If we encounter unexpected difficulties with key suppliers such as Panasonic and if we are unable to fill these needs from other suppliers, we could experience production delays and potential loss of access to important technology and parts for producing, servicing and supporting our products.

This limited, and in many cases ~~single source,~~single-source, supply chain exposes us to multiple potential sources of delivery failure or component shortages for the production of our products, such as those which we experienced in 2012 and 2016 in connection with our slower-than-planned Model S and Model X ramps. Furthermore, unexpected changes in business conditions, materials pricing, labor issues, wars, governmental changes, tariffs, natural disasters such as the March 2011 earthquakes in Japan and other factors beyond our and our suppliers’ control, could also affect our suppliers’ ability to deliver components to us on a timely basis. The loss of any ~~single~~single- or ~~limited source~~limited-source supplier or the disruption in the supply of components from these suppliers could lead to product design changes and delays in product deliveries to our customers, which could hurt our relationships with our customers and result in negative publicity, damage to our brand and a material and adverse effect on our business, prospects, financial condition and operating results.

Changes in our supply chain have also resulted in the past, and may result in the future, in increased cost. We have also experienced cost increases from certain of our suppliers in order to meet our quality targets and development timelines as well as due to our design changes, ~~that we made,~~ and we may experience similar cost increases in the future. Certain suppliers have sought to renegotiate the terms of supply arrangements. Additionally, we are negotiating with existing suppliers for cost reductions, seeking new and less expensive suppliers for certain parts, and attempting to redesign certain parts to make them less expensive to produce. If we are unsuccessful in our efforts to control and reduce supplier costs, our operating results will suffer.

In particular, because we are producing Model 3 and expect to produce Model Y at significantly higher volumes than any of our other products to date, the negative impact of any delays or other constraints with respect to our suppliers for ~~Model 3~~these vehicles could be substantially greater than any supply chain-related issues experienced with respect to our other products. ~~As some of~~We need our ~~suppliers for Model S and Model X do not have the resources, equipment or capability to provide components for the~~ Model 3 ~~that are in line with our requirements, we have engaged a significant number of new~~ suppliers, and wewill also need ~~such~~our Model Y suppliers, to sustainably ramp in accordance with our ~~ongoing ramp of Model 3~~planned volumes and ~~deliver according to our schedule.~~schedules for each vehicle. There is no assurance that these suppliers will ultimately be able to sustainably and timely meet ~~on a sustained basis~~ our cost, quality and volume ~~needs, or do so at the times needed.~~ needs. For example, we may experience issues or delays increasing the level of localization in China through local sourcing and manufacturing ~~in China as we try to accelerate~~at our ~~manufacturing timeline there for the local market.~~Gigafactory Shanghai. Furthermore, as the scale of our vehicle production increases, we will need to accurately forecast, purchase, warehouse and transport to our manufacturing facilities components at much higher ~~volumes than we have experience with.~~volumes. If we are unable to accurately match the timing and quantities of component purchases to our actual needs, including for our different model variants, or successfully implement automation, inventory management and other systems to accommodate the increased complexity in our supply chain, we may incur unexpected production disruption, storage, transportation and write-off costs, which could have a material adverse effect on our financial condition and operating results.

Future problems or delays in expanding Gigafactory 1 or ramping operations there could negatively affect the production and profitability of our products, such as Model 3 and our energy storage products.

To lower the cost of cell production and produce cells in high volume, we have vertically integrated the production of lithium-ion cells and finished battery packs for Model 3 and energy storage products at Gigafactory 1. ~~While~~ Gigafactory 1 began producing lithium-ion cells ~~for energy storage products~~ in ~~January~~ 2017, and ~~has since begun producing lithium-ion cells for Model 3,~~ we have no other direct experience in the production of lithium-ion cells. Given the size and complexity of this undertaking, it is possible that future events could result in issues or delays in further ramping our products and expanding production output at Gigafactory ~~1 taking longer to ramp production and expand than we currently anticipate.~~1. Moreover, ~~as we try to accelerate our manufacturing timeline in China for the local market,~~ we expect that we will need additional production output at Gigafactory 1 to support vehicle production at Gigafactory Shanghai in ~~China as the level of local sourcing and manufacturing there progressively increases.~~part when we commence Model 3 production there. In order to achieve our volume and gross margin targets for Model 3 and ~~the anticipated ramp in production of~~our energy storage products, we must continue to sustain and ramp significant cell production ~~from~~at Gigafactory 1, which, among other things, requires Panasonic to successfully operate and further ramp its ~~all-new~~ cell production lines at significant volumes. Although Panasonic has a long track record of producing high-quality cells at significant volume at its factories in Japan, it has relatively limited experience with cell production at Gigafactory 1. In addition, we produce several components for Model 3, such as battery modules incorporating the lithium-ion cells produced by Panasonic, and drive units, at Gigafactory 1. Some of the manufacturing lines for such components took longer than anticipated to ramp to their full capacity. While we have largely overcome this bottleneck after deploying multiple semi-automated lines and improving our original lines, ~~we continue to identify and address smaller~~additional bottlenecks ~~in order to~~may arise as we continue to increase the production rate. If we are unable to maintain Gigafactory 1 production, ~~at its current levels and costs, and~~ ramp output additionally over time as needed, and do so cost-effectively, or if we or Panasonic are unable to attract, hire and retain a substantial number of highly skilled personnel, our ability to supply battery packs or other components for Model 3 and our other products could be negatively impacted, which could negatively affect our brand and harm our business, prospects, financial condition and operating results.

Any issues or delays in meeting our projected timelines, costs and production capacity for or funding the construction of Gigafactory Shanghai, or any difficulties in generating and maintaining local demand for vehicles manufactured there, could adversely impact our business, prospects, operating results and financial condition.

As part of our continuing work to increase Model 3 production on a sustained basis and make Model 3 affordable in the markets where we plan to offer it, we have begun construction of the initial phase of Gigafactory Shanghai and expect to commence production of certain trims of Model 3 for the local market in China by the end of 2019, and then progressively increase levels of localization through local sourcing and manufacturing. The timeframe for commencing Model 3 production at Gigafactory Shanghai is subject to a number of uncertainties, including regulatory approval, receipt and maintenance of certain manufacturing licenses, supply chain constraints, hiring, training and retention of qualified employees, and the pace of installing production equipment and bringing the factory online. We have limited experience to date with constructing manufacturing facilities abroad, and only recently began to sell Model 3 in China. If we experience any issues or delays in meeting our projected timelines, costs, capital efficiency and production capacity for Gigafactory Shanghai, or in securing and complying with the terms of local debt financing that we intend will largely fund its construction, or in generating and maintaining demand locally for the vehicles we manufacture at Gigafactory Shanghai, our business, prospects, operating results and financial condition could be adversely impacted.

If our vehicles or other products that we sell or install fail to perform as expected, our ability to develop, market and sell our products and services could be harmed.

If our vehicles or our energy products contain defects in design and manufacture that cause them not to perform as expected or that require repair, or certain features of our vehicles such as ~~full self-driving,~~new Autopilot or FSD features take longer than expected to become enabled, or are legally restricted or become subject to onerous regulation, our ability to develop, market and sell our products and services could be harmed. For example, the operation of our vehicles is highly dependent on software, which is inherently complex and may contain latent defects and errors or be subject to external attacks. Issues experienced by vehicle customers have included those related to the software for the 17 inch display screen, the panoramic roof and the 12-volt battery in the Model S and the seats and doors in the Model X. Although we attempt to remedy any issues we observe in our products as effectively and rapidly as possible, such efforts may not be timely, may hamper production or may not be to the satisfaction of our customers. While we have performed extensive internal testing on the products we manufacture, we currently have a limited frame of reference by which to evaluate detailed long-term quality, reliability, durability and performance characteristics of our battery packs, powertrains, vehicles and energy storage products. There can be no assurance that we will be able to detect and fix any defects in our products prior to their sale to or installation for consumers.

Any product defects, delays or legal restrictions on product features, or other failure of our products to perform as expected, could harm our reputation and result in delivery delays, product recalls, product liability claims, and significant warranty and other expenses, and could have a material adverse impact on our business, financial condition, operating results and prospects.

If we fail to scale our business operations and otherwise manage future growth and adapt to new conditions effectively as we rapidly grow our company, including internationally, we may not be able to produce, market, sell and service our products successfully.

Any failure to manage our growth effectively could materially and adversely affect our business, prospects, operating results and financial condition. We expect to continue to expand our operations significantly, including ~~internationally and by a transition to high-volume vehicle production with the ramp of Model 3 and~~ the worldwide sales, delivery and servicing of a significantly higher number of vehicles than our current vehicle ~~fleet in the coming years.~~fleet. Furthermore, we are developing and growing our energy storage product and solar business worldwide, including in countries where we have limited or no previous operating ~~experience in connection with our vehicle business.~~experience. Our future operating results depend to a large extent on our ability to manage our expansion and growth ~~successfully.~~successfully and to correctly forecast demand for our products in different markets. We may not be successful in undertaking this global expansion if we are unable to control expenses and avoid cost overruns and other unexpected operating ~~costs;~~costs, establish sufficient worldwide ~~automobile~~ ~~sales, delivery,~~ service and Supercharger facilities in a timely ~~manner;~~ manner, adapt our products and conduct our operations to meet local ~~requirements;~~ requirements, implement ~~the~~ required local infrastructure, systems and ~~processes;~~processes, and find and hire a significant number of additional manufacturing, engineering, service, electrical installation, construction and administrative personnel.

In particular, we plan to expand our manufacturing capabilities outside of the U.S., where we have limited experience operating a factory or managing related regulatory, financing and other challenges. For example, as part of our continuing work to increase Model 3 production to approximately 10,000 units per week, we are developing plans to start producing approximately 3,000 Model 3 vehicles per week for the local market in China in the initial phase of our Gigafactory 3, although the timeframe for that is subject to a number of uncertainties, including regulatory approval, supply chain constraints, and the pace of bringing the factory online. As we expect to commence our manufacturing activities in China using progressively increased levels of localization through local sourcing and manufacturing, we expect that we will need to initially support manufacturing activities there with production processes at Gigafactory 1. Moreover, local manufacturing ~~may be~~is critical to our expansion and sales in China, which is the largest market for electric vehicles in the world. Our vehicle sales ~~of Model S and Model X~~ in China have been negatively impacted by ~~recently-increased~~certain tariffs ~~imposed by the Chinese government~~ on automobiles manufactured in the U.S., such as our vehicles, and our costs for producing our vehicles in the U.S. have also been affected by ~~recently-increased~~ import duties on certain components sourced from China. If we are not able to establish or experience delays in establishing manufacturing activities in China and other jurisdictions to minimize the impact of such unfavorable tariffs, duties or costs, or ramp our production capabilities at Gigafactory 1 or other facilities to support such vehicle manufacturing activities, our ability to compete in such jurisdictions, and our operating results, business and prospects, will be harmed.

If we are unable to achieve our targeted manufacturing costs for our ~~vehicles, including Model 3,~~products, our financial condition and operating results will suffer.

While we ~~have experienced~~are continuing to and expect in the future to realize cost reductions by both us and our suppliers, there is no guarantee we will be able to achieve sufficient cost savings to reach our gross margin and profitability goals ~~including~~ for ~~the least expensive variant of Model 3 that we ultimately expect to produce.~~our product offerings, or our other financial targets. We incur significant costs related to procuring the materials required to manufacture our ~~vehicles,~~products, assembling ~~vehicles~~products and compensating our personnel. WeIf our efforts to continue to decrease manufacturing costs are not successful, we may ~~also~~ incur substantial costs or cost overruns in utilizing and increasing the production capability of our ~~vehicle~~ manufacturing facilities, such as for Model 3 both in the U.S. and internationally. ~~Furthermore, if we are unable to achieve production cost targets on our vehicles pursuant to our plans, we may not be able to meet our gross margin and other financial targets.~~ Many of the factors that impact our manufacturing costs are beyond our control, such as potential increases in the costs of our materials and components, such as lithium, nickel and other components of our battery cells or aluminum used to produce vehicle body panels. If we are unable to continue to control and reduce our manufacturing costs, our operating results, business and prospects will be harmed.

We face risks associated with our global operations and expansion, including unfavorable regulatory, political, economic, tax and labor conditions, and with establishing ourselves in new markets, all of which could harm our business.

We currently have a global footprint, with domestic and international operations and subsidiaries in various countries and jurisdictions, and we continue to expand and optimize our vehicle service and charging capabilities internationally. Accordingly, we are subject to a variety of legal, political and regulatory requirements and social and economic conditions over which we have little control. For example, we may be impacted by trade policies, political uncertainty and economic cycles involving geographic regions where we have significant operations. Sales of vehicles in the automotive industry also tend to be cyclical in many markets, which may expose us to increased volatility as we expand and adjust our operations and retail strategies.

We are subject to a number of risks associated in particular with international business activities that may increase our costs, impact our ability to sell our products and require significant management attention. These risks include conforming our products to various international regulatory and safety requirements as well as charging and other electric infrastructures, organizing local operating entities, difficulty in establishing, staffing and managing foreign operations, challenges in attracting customers, foreign government taxes, regulations and permit requirements, our ability to enforce our contractual rights, trade restrictions, customs regulations, tariffs and price or exchange controls, and preferences of foreign nations for domestically manufactured products. For example, in China, which is a key market for us, certain products such as automobiles manufactured in the U.S. have become subject to an increased tariff imposed by the government. The tariff could remain in place for an undetermined length of time, be further increased in the future and/or lead consumers to postpone or choose another vehicle brand subject to lower tariffs or no tariffs. Moreover, recently increased import duties on certain components used in our products that are sourced from China may increase our costs and negatively impact our operating results.

Increases in costs, disruption of supply or shortage of materials, in particular for lithium-ion cells, could harm our business.

We may experience increases in the cost or a sustained interruption in the supply or shortage of materials. Any such increase, supply interruption or shortage could materially and negatively impact our business, prospects, financial condition and operating results. We use various materials in our business including aluminum, steel, lithium, nickel, copper and cobalt, as well as lithium-ion cells from suppliers. The prices for these materials fluctuate, and their available supply may be unstable, depending on market conditions and global demand for these materials, including as a result of increased production of electric vehicles and energy storage products by our competitors, and could adversely affect our business and operating results. For instance, we are exposed to multiple risks relating to lithium-ion cells. These risks include:

Our business is dependent on the continued supply of battery cells for the battery packs used in our vehicles and energy storage products. While we believe several sources of the battery cells are available for such battery packs, and expect to eventually rely substantially on battery cells manufactured at our own facilities, we have to date fully qualified only a very limited number of suppliers for the cells used in such battery packs and have very limited flexibility in changing cell suppliers. ~~In particular, we have fully qualified only one supplier for the cells used in battery packs for our current production vehicles.~~ Any disruption in the supply of battery cells from such suppliers could disrupt production of our vehicles and of the battery packs we produce for energy products until such time as a different supplier is fully qualified. Furthermore, fluctuations or shortages in petroleum and other economic conditions may cause us to experience significant increases in freight charges and material costs. Substantial increases in the prices for our materials or prices charged to us, such as those charged by battery cell suppliers, would increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased vehicle prices. Any attempts to increase ~~vehicle~~product prices in response to increased material costs could result in cancellations of ~~vehicle~~ orders and reservations and therefore materially and adversely affect our brand, image, business, prospects and operating results.

We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.

Although we design our vehicles to be the safest vehicles on the road, product liability claims, even those without merit, could harm our business, prospects, operating results and financial condition. The automobile industry in particular experiences significant product liability claims and we face inherent risk of exposure to claims in the event our vehicles do not perform or are claimed to not have performed as expected. As is true for other automakers, our cars have been involved and we expect in the future will be involved in crashes resulting in death or personal injury, and such crashes where Autopilot isor FSD features are engaged are the subject of significant public attention. We have experienced and we expect to continue to face claims arising from or related to misuse or claimed failures of new technologies that we are pioneering, including Autopilot and FSD features in our vehicles. Moreover, as our solar energy systems and energy storage products generate and store electricity, they have the potential to cause injury to people or property. A successful product liability claim against us could require us to pay a substantial monetary award. Our risks in this area are particularly pronounced given the relatively limited number of vehicles and energy storage products delivered to date and limited field experience of our products. Moreover, a product liability claim could generate substantial negative publicity about our products and business and could have a material adverse effect on our brand, business, prospects and operating results. In most jurisdictions, we generally self-insure against the risk of product liability claims for vehicle exposure, meaning that any product liability claims will likely have to be paid from company funds, not by insurance.

The markets in which we operate are highly competitive, and we may not be successful in competing in these industries. We currently face competition from new and established domestic and international competitors and expect to face competition from others in the future, including competition from companies with new technology.

The worldwide automotive market, particularly for alternative fuel vehicles, is highly competitive today and we expect it will become even more so in the future. There is no assurance that our vehicles will be successful in the respective markets in which they compete. A significant and growing number of established and new automobile manufacturers, as well as other companies, have entered or are reported to have plans to enter the alternative fuel vehicle market, including hybrid, plug-in hybrid and fully electric vehicles, as well as the market for self-driving technology and applications. In some cases, such competitors have announced an intention to produce electric vehicles exclusively at some point in the future. Most of our current and potential competitors have significantly greater financial, technical, manufacturing, marketing, vehicle sales ~~networks~~resources and ~~other resources~~networks than we do and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. In particular, some competitors have also announced plans to compete with us in important and large markets for electric vehicles, such as China. Increased competition could result in lower vehicle unit sales, price reductions, revenue shortfalls, loss of customers and loss of market share, which could harm our business, prospects, financial condition and operating results. In addition, our Model 3 vehicle faces competition from existing and future automobile manufacturers in the extremely competitive entry-level premium sedan market, including Audi, BMW, Lexus and Mercedes.

The solar and energy storage industries are highly competitive. We face competition from other manufacturers, developers and installers of solar and energy storage systems, as well as from large utilities. Decreases in the retail prices of electricity from utilities or other renewable energy sources could make our products less attractive to customers and lead to an increased rate of customer defaults under our existing long-term leases and ~~power purchase agreements.~~PPAs. Moreover, solar ~~panel~~product component and lithium-ion battery prices have declined and are continuing to ~~decline. As we increase our battery and solar manufacturing capabilities, including at Gigafactory 1 and Gigafactory 2, future price declines~~decline, which may ~~harm~~adversely impact our ability to ~~produce energy storage systems and solar systems at competitive prices.~~cost-effectively manufacture such components ourselves.

If we are unable to establish and maintain confidence in our long-term business prospects among consumers, analysts and within our industries, then our financial condition, operating results, business prospects and stock price may suffer materially.

Consumers may be less likely to purchase our products if they are not convinced that our business will succeed or that our service and support and other operations will continue in the long term. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing business relationships with us if they are not convinced that our business will succeed. Accordingly, in order to build and maintain our business, we must maintain confidence among customers, suppliers, analysts, ratings agencies and other parties in our long-term financial viability and business prospects. Maintaining such confidence may be particularly complicated by certain factors, such as our limited operating history, negative press, customer unfamiliarity with our products, any delays in scaling manufacturing, delivery and service operations to meet demand, competition and uncertainty regarding the future of electric vehicles or our other products and services, our quarterly production and sales performance compared with market expectations, and any other negative publicity related to us. Many of these factors are largely outside our control, and any negative perceptions about our long-term business prospects, even if exaggerated or unfounded, such as speculation regarding the sufficiency or stability of our management team, could harm our business and make it more difficult to raise additional funds if needed.

Our plan to generate ongoing growth and demand, including by expanding and optimizing our ~~network of Tesla stores, galleries, delivery hubs,~~vehicle service ~~centers~~ and ~~Superchargers,~~charging operations and infrastructure, will require significant cash investments and management resources and may not meet

expectations with respect to additional sales, installations or ~~installations~~servicing of our products or availability of ~~Superchargers.~~public charging solutions.

We plan to generate ongoing growth and demand, including by globally expanding and optimizing our ~~network of Tesla stores, galleries, delivery hubs,~~vehicle service ~~centers, mobile service offerings~~ and ~~Superchargers.~~charging operations and infrastructure. These plans require significant cash investments and management resources and may not meet our expectations with respect to additional sales or installations of our products. This ongoing global expansion, which includes planned entry into markets in which we have limited or no experience selling, delivering, installing and/or servicing our products at scale, and which may pose legal, regulatory, labor, cultural and political challenges that we have not previously encountered, may not have the desired effect of increasing sales and installations and expanding our brand presence to the degree we are anticipating. Furthermore, the increasing number of Tesla vehicles will require us to continue to increase significantly the number of our Supercharger stations and connectors ~~significantly~~ in locations throughout the world. If we fail to do so in a timely manner, our customers could become dissatisfied, which could adversely affect sales of our vehicles. We will also need to ensure we are in compliance with any regulatory requirements applicable to the sale, installation and service of our products, the sale of electricity generated through our solar energy systems and operation of Superchargers in those jurisdictions, which could take considerable time and expense. If we experience any delays or cannot meet customer expectations in expanding our customer infrastructure network, or our expansion plans are not successful in continuing to grow demand, this could lead to a decrease or stagnation in sales or installations of our products and could negatively impact our business, prospects, financial condition and operating results.

We face risks associated with our international operations and expansion, including unfavorable regulatory, political, tax and labor conditions, and with establishing ourselves in new markets, all of which could harm our business.

We currently have international operations and subsidiaries in various countries and jurisdictions that are subject to legal, political and regulatory requirements and social and economic conditions that may be very different from those affecting us domestically. Additionally, as part of our growth strategy, we will continue to expand our sales, delivery, service and Supercharger locations internationally. International expansion requires us to make significant expenditures, including the establishment of local operating entities, hiring of local employees and establishing facilities in advance of generating any revenue.

We are subject to a number of risks associated with international business activities that may increase our costs, impact our ability to sell our products and require significant management attention. These risks include conforming our products to various international regulatory and safety requirements as well as charging and other electric infrastructures, difficulty in establishing, staffing and managing foreign operations, challenges in attracting customers, foreign government taxes, regulations and permit requirements, our ability to enforce our contractual rights; trade restrictions, customs regulations, tariffs and price or exchange controls, and preferences of foreign nations for domestically manufactured products. For example, in China, which is a key market for us, certain products such as automobiles manufactured in the U.S. have become subject to a recently increased tariff imposed by the government, which could remain in place for an undetermined length of time, be further increased in the future and/or lead consumers to postpone or choose another vehicle brand subject to lower tariffs or no tariffs. Moreover, recently increased import duties on certain components used in our products that are sourced from China may increase our costs and negatively impact our operating results.

Our vehicles and energy storage products ~~make~~ use of lithium-ion battery cells that store large amounts of energy, and any incidents in which ~~have been observed to catch fire or vent smoke and flame, and~~ such ~~events have raised concerns, and future events may lead to additional concerns, about the batteries used in automotive applications.~~energy is released unexpectedly could negatively impact our operations.

The battery packs that we produce make use of lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. While we have designed the battery pack to passively contain any single cell’s release of energy without spreading to neighboring cells, there can be no assurance that a field or testing failure of our vehicles or other battery packs that we produce will not occur, which could subject us to lawsuits, product recalls or redesign efforts, all of which would be time consuming and expensive. Also, negative public perceptions regarding the suitability of lithium-ion cells for automotive applications or any future incident involving lithium-ion cells such as a vehicle or other fire, even if such incident does not involve our vehicles or energy storage products, could seriously harm our business.

In addition, we store and recycle a significant number of lithium-ion cells at our facilities and ~~plan to produce~~are producing high volumes of cells and battery modules and packs at Gigafactory 1. Any mishandling of battery cells may cause disruption to the operation of our facilities. While we have implemented safety procedures related to the handling of the cells, there can be no assurance that a safety issue or fire related to the cells would not disrupt our operations. Such ~~damage~~disruptions or injury could lead to adverse publicity and potentially a safety recall. Moreover, any failure of a competitor’s electric vehicle or energy storage product may cause indirect adverse publicity for us and our products. Such adverse publicityissues could negatively affect our brand and harm our business, prospects, financial condition and operating results.

If we fail to effectively grow and manage the residual, financing and credit risks related to our vehicle financing programs, our business may suffer.

We offer ~~vehicle~~ financing arrangements for our vehicles in North America, Europe and Asia primarily through various financial institutions. We also currently offer leasing directly through our local subsidiaries for Model S, Model X and Model 3 in the U.S. and for Model S and Model X ~~through our local subsidiaries~~ in ~~the U.S., Canada, Germany and the UK, including leasing directly through certain of those subsidiaries.~~Canada. Under a lease held directly by us, we typically receive only a very small portion of the total vehicle purchase price at the time of lease, followed by a stream of payments over the term of the lease. The profitability of any vehicles returned to us at the ~~leasing program~~end of their leases depends on our ability to accurately project our vehicles’ residual values at the outset of the leases, and such values may fluctuate prior to the end of their terms depending on various factors such as supply and demand of our used vehicles, economic cycles and the pricing of new vehicles. For example, we have made certain adjustments to our vehicle prices during 2019 to reflect anticipated changes to our cost structure from periodically optimizing our retail strategy, and as a limited accommodation to customers in consideration of a reduction in the electric vehicle federal tax credit. Such pricing changes may impact the residual values of our vehicles. The leasing program also relies on our ability to secure adequate financing and/or business partners to fund and grow this program, and screen for and manage customer credit risk. We expect the ~~need for~~availability of leasing and other financing options will ~~continue to~~ be important ~~to Model S and Model X deliveries and~~ for ~~Model 3 in the long term.~~our vehicle customers. If we are unable to adequately fund our leasing program with internal funds, or partners or other external financing sources, and compelling alternative financing programs are not available for our customers, we may be unable to grow our sales. Furthermore, if our leasing business grows substantially, our business may suffer if we cannot effectively manage the greater levels of residual and credit risks resulting from growth. Finally, if we do not successfully monitor and comply with applicable national, state and/or local financial regulations and consumer protection laws governing lease transactions, we may become subject to enforcement actions or penalties, either of which may harm our business.

Moreover, we have provided resale value guarantees to customers ~~with~~and partners for certain financing programs, under which such ~~customers~~counterparties may sell their vehicles back to us at certain points in time at pre-determined amounts. However, actual resale ~~values.~~values, as with residual values for leased vehicles, are subject to similar fluctuations over the term of the financing arrangements, such as from the vehicle pricing changes discussed above. If the actual resale values of any vehicles resold or returned to us pursuant to these programs are materially lower than the pre-determined amounts we have offered, our ~~estimates, our~~operating results, profitability and/or liquidity could be negatively impacted.

The unavailability, reduction or elimination of, or unfavorable determinations with respect to, government and economic incentives in the U.S. and abroad supporting the development and adoption of electric vehicles, energy storage products or solar energy could have some impact on demand for our products and services.

We and our customers currently benefit from certain government and economic incentives supporting the development and adoption of electric vehicles. In the U.S. and abroad, such incentives include, among other things, tax credits or rebates that encourage the purchase of electric vehicles. In Norway, for example, the purchase of electric vehicles is not currently subject to import taxes, ~~taxes on non-recurring vehicle fees,~~ the 25% value added tax, or the carbon dioxide and weight-based purchase taxes that apply to the purchase of gas-powered vehicles. Notably, the quantum of incentive programs promoting electric vehicles is a tiny fraction of the amount of subsidies that are provided to gas-powered vehicles through the oil and gas industries. Nevertheless, even the limited benefits from such programs could be reduced, eliminated or exhausted. For example, under current regulations, a $7,500 federal tax credit that was available in the U.S. for the purchase of our vehicles is being reduced in phases during, and will sunset at the end of, 2019. We believe that this sequential phase-out has likely pulled forward some vehicle demand into the periods preceding each reduction, and we may see similar pull-forwards through the remainder of 2019. Moreover, in July 2018, a previously available incentive for purchases of Model 3 in Ontario, Canada was cancelled and Tesla buyers in Germany lost access to electric vehicle incentives for a short period of time beginning late ~~last year.~~2017. In April 2017 and January 2016, respectively, previously available incentives in Hong Kong and Denmark that favored the purchase of electric vehicles expired, negatively impacting sales. ~~Moreover, under current regulations, a $7,500 federal tax credit available in the U.S. for the purchase of our vehicles will begin to phase out over the course of 2019. In addition,~~Effective March 2016, California implemented regulations phasing out a $2,500 cash rebate on qualified electric vehicles for high-income ~~consumers, which became effective in March 2016. In certain circumstances, there is pressure from the oil and gas lobby or related special interests to bring about such~~consumers. Such developments ~~which~~ could have some negative impact on demand for our ~~vehicles.~~vehicles, and we and our customers may have to adjust to them.

In addition, certain governmental rebates, tax credits and other financial incentives that are currently available with respect to our solar and energy storage product businesses allow us to lower our ~~installation~~ costs ~~and cost of capital~~ and encourage customers to buy our products and investors to invest in our solar financing funds. However, these incentives may expire on a particular date when the allocated funding is exhausted, reduced or terminated as renewable energy adoption rates increase, ~~often~~sometimes without warning. For example, the U.S. federal government currently offers a 30% ~~investment tax credit (“ITC”)~~ITC for the installation of solar power facilities and energy storage systems that are charged from a co-sited solar power facility. The ITC is currently scheduled to decline in phases, ultimately to 10%, for commercial and ~~expire altogether~~utility systems and to 0% for customer-owned residential systems by January 2022. Likewise, in jurisdictions where net energy metering is currently available, our customers receive bill credits from utilities for energy that their solar energy systems generate and export to the grid in excess of the electric load they use. Several jurisdictions have reduced, altered or eliminated the benefit available under net energy metering, or have proposed to do so. Such reductions in or termination of governmental incentives could adversely impact our results by making our products less competitive for potential customers, increasing our cost of capital and adversely impacting our ability to attract investment partners and to form new financing funds for our solar and energy storage assets. Additionally, the enactment of the Tax Cuts and Jobs Act in the U.S. could potentially increase the cost, and decrease the availability, of renewable energy financing, by reducing the value of depreciation benefits associated with, and the overall investor tax capacity needed to monetize, renewable energy projects. Such changes could lower the overall investment willingness and capacity for such projects available in the market.

Moreover, we and our fund investors claim the ITC and certain state incentives in amounts based on the fair market value of our solar and energy storage systems. Although we obtain independent appraisals to support the claimed fair market values, the relevant governmental authorities have audited such values and in certain cases have determined that they should be lower, and they may do so again in the future. Such determinations may result in adverse tax consequences and/or our obligation to make indemnification or other payments to our funds or fund investors.

Any failure by us to ~~realize the expected benefits of our substantial investments and commitments with respect to the manufacture of PV cells and modules, including if we are unable to~~ comply with the terms of our agreement with the Research Foundation for the State University of New York relating to our Gigafactory 2, could result in negative consequences for our business.

We ~~own certain PV cell and module manufacturing and technology assets, and a build-to-suit~~are party to an operating lease arrangement with the Research Foundation for the State University of New York (the “SUNY Foundation”). This agreement ~~with the SUNY Foundation~~ provides for the construction of Gigafactory 2 in Buffalo, New York, ~~which at full capacity~~where we ~~expect will be capable~~have housed the development and production of ~~producing at least 1.0 gigawatt of PV cells~~solar products and ~~modules annually, including for our Solar Roof.~~components. Under this agreement, we are obligated to, among other things, directly employ specified minimum numbers of Tesla personnel in the State of New York and spend or incur $5.0 billion in combined capital, operational expenses, costs of goods sold and other costs in the State of New York during the 10-year period following the substantial completion of all construction and related infrastructure, the arrival of manufacturing equipment, and the receipt of certain permits and other specified items at Gigafactory 2. IfWhile we expect significant operations at Gigafactory 2 and the surrounding Buffalo area to continue, including with our ramp and manufacture of Solar Roof, if we fail in any year over the course of the term of the agreement to meet these obligations, we would be obligated to pay a “program payment” of $41.2 million to the SUNY Foundation in such year. Any inability on our part to comply with the requirements of this agreement may result in the payment of significant amounts to the SUNY Foundation, the termination of our lease at Gigafactory 2, and/or the need to ~~secure an alternative supply~~adjust certain of ~~PV cells and modules for products such as~~ our operations, in particular our production ramp of Solar Roof. Moreover, if we are unable to utilize our manufacturing and technology assets in accordance with our expectations, we may have to recognize accounting charges pertaining to the write-off of such assets. Any of the foregoing events could have a material adverse effect on our business, prospects, financial condition and operating results.

If we are unable to attract and/or retain key employees and hire qualified personnel, our ability to compete could be harmed.

The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our vehicles and services, and negatively impact our business, prospects and operating results. In particular, we are highly dependent on the services of Elon Musk, our Chief Executive ~~Officer, and Jeffrey B. Straubel, our Chief Technology~~ Officer.

None of our key employees is bound by an employment agreement for any specific term and we may not be able to successfully attract and retain senior leadership necessary to grow our business. Our future success depends upon our ability to attract and retain executive officers and other key technology, sales, marketing, engineering, manufacturing and support personnel, especially to support our high-volume manufacture of vehicles and expansion plans, and any failure or delay in doing so could adversely impact our business, prospects, financial condition and operating results.

Key talent may leave Tesla due to various factors, such as a very competitive labor market for talented individuals with automotive or technology experience, or any negative publicity related to us. In California, Nevada and other regions where we have operations, there is increasing competition for individuals with skillsets needed for our business, including specialized knowledge of electric vehicles, software engineering, manufacturing engineering, and other skills such as electrical and building construction expertise. This competition affects both our ability to retain key employees and hire new ones. Moreover, we ~~recently~~have in the past conducted ~~a reduction~~reductions in force in order to optimize our organizational structure and reduce ~~duplicative~~ costs, and certain senior personnel have also departed for various reasons. Our continued success depends upon our continued ability to hire new employees in a timely manner, especially to support our expansion plans, and to retain current employees or replace departed senior employees with qualified and experienced individuals, which is typically a time-consuming process. Additionally, we compete with both mature and prosperous companies that have far greater financial resources than we do and start-ups and emerging companies that promise short-term growth opportunities. Difficulties in retaining current employees or recruiting new ones could have an adverse effect on our performance and results.

Finally, our compensation philosophy for all of our personnel reflects our startup origins, with an emphasis on equity-based awards and benefits in order to closely align their incentives with the long-term interests of our stockholders. Neither of our most recently-adopted equity incentive plan and employee stock purchase plan, unlike the prior plan that it replaces, contains an “evergreen” provision that permit our board of directors to increase on an annual basis the number of equity-based awards that may be granted to, and shares of our common stock that may be purchased by, our personnel thereunder. Therefore, we will have to periodically seek and obtain approval from our stockholders for future increases to the number of awards that may be granted and shares that may be purchased under such plans. If we are unable to obtain the requisite stockholder approvals to approve and adopt these new plans and obtain future increases to the number of awards that may be granted and shares that may be purchased thereunder, and compensate our personnel in accordance with our compensation philosophy, our ability to retain and hire qualified personnel would be negatively impacted.

We are highly dependent on the services of Elon Musk, our Chief Executive Officer.

We are highly dependent on the services of Elon Musk, our Chief Executive Officer and largest stockholder. Although Mr. Musk spends significant time with Tesla and is highly active in our management, he does not devote his full time and attention to Tesla. Mr. Musk also currently serves as Chief Executive Officer and Chief Technical Officer of Space Exploration Technologies Corp., a developer and manufacturer of space launch vehicles, and is involved in other emerging technology ventures.

We are continuously expanding and improving our information technology systems and use security measures designed to protect our systems against breaches and cyber-attacks. If these efforts are not successful, our business and operations could be disrupted and our operating results and reputation could be harmed.

We are continuously expanding and improving our information technology systems, including implementing new internally developed systems, to assist us in the management of our business. In particular, our volume production of multiple vehicles necessitates continued development, maintenance and improvement of our information technology systems in the U.S. and abroad, including at Gigafactory Shanghai, which include product data management, procurement, inventory management, production planning and execution, sales, service and logistics, dealer management, financial, tax and regulatory compliance systems. We also maintain information technology measures designed to protect us against intellectual property theft, data breaches and other cyber-attacks. The implementation, maintenance and improvement of these systems require significant management time, support and cost. Moreover, there are inherent risks associated with developing, improving and expanding our core systems as well as implementing new systems, including the disruption of our data management, procurement, manufacturing execution, finance, supply chain and sales and service processes. These risks may affect our ability to manage our data and inventory, procure parts or supplies or manufacture, sell, deliver and service vehicles, or achieve and maintain compliance with, or realize available benefits under, tax laws and other applicable regulations.

We cannot be sure that these systems or their required functionality will be effectively implemented, maintained or expanded as planned. If we do not successfully implement, maintain or expand these systems as planned, our operations may be disrupted, our ability to accurately and/or timely report our financial results could be impaired, and deficiencies may arise in our internal control over financial reporting, which may impact our ability to certify our financial results. Moreover, our proprietary information could be compromised or misappropriated and our reputation may be adversely affected. If these systems or their functionality do not operate as we expect them to, we may be required to expend significant resources to make corrections or find alternative sources for performing these functions.

Any unauthorized control or manipulation of our products’ systems could result in loss of confidence in us and our products and harm our business.

Our products contain complex information technology systems. For example, our vehicles and energy storage products are designed with built-in data connectivity to accept and install periodic remote updates from us to improve or update their functionality. We have designed, implemented and tested security measures intended to prevent unauthorized access to our information technology networks, our products and their systems. However, hackers have reportedly attempted, and may attempt in the future, to gain unauthorized access to modify, alter and use such networks, products and systems to gain control of, or to change, our products’ functionality, user interface and performance characteristics, or to gain access to data stored in or generated by our products. We encourage reporting of potential vulnerabilities in the security of our products via our security vulnerability reporting policy, and we aim to remedy any reported and verified vulnerability. Accordingly, we have received reports of potential vulnerabilities in the past and have attempted to remedy them. However, there can be no assurance that vulnerabilities will not be exploited in the future before they can be identified, or that our remediation efforts are or will be successful.

Any unauthorized access to or control of our products or their systems or any loss of data could result in legal claims or proceedings. In addition, regardless of their veracity, reports of unauthorized access to our products, their systems or data, as well as other factors that may result in the perception that our products, their systems or data are capable of being “hacked,” could negatively affect our brand and harm our business, prospects, financial condition and operating results. We have been the subject of such reports in the past.

We are subject to various environmental and safety laws and regulations that could impose substantial costs upon us and negatively impact our ability to operate our manufacturing facilities.

As a manufacturing company, including with respect to facilities such as the Tesla Factory, Gigafactory 1, Gigafactory 2 and Gigafactory 2,Shanghai, we are and will be subject to complex environmental, manufacturing, health and safety laws and regulations at numerous jurisdictional levels in the U.S., China and other locations abroad, including laws relating to the use, handling, storage, recycling, disposal and human exposure to hazardous materials. The costs of compliance, including remediating contamination if any is found on our properties and any changes to our operations mandated by new or amended laws, may be significant. We may also face unexpected delays in obtaining permits and approvals required by such laws in connection with our manufacturing facilities, which would hinder our operation of these facilities. Such costs and delays may adversely impact our business prospects and operating results. Furthermore, any violations of these laws may result in substantial fines and penalties, remediation costs, third party damages, or a suspension or cessation of our operations.

Our business may be adversely affected by any disruptions caused by union activities.

It is ~~common~~not uncommon for employees of certain trades at companies ~~with significant manufacturing operations~~ such as us to belong to a union, which can result in higher employee costs and increased risk of work stoppages. Moreover, regulations in some jurisdictions outside of the U.S. mandate employee participation in industrial collective bargaining agreements and work councils with certain consultation rights with respect to the relevant companies’ operations. Although we work diligently to provide the best possible work environment for our employees, they may still decide to join or seek recognition to form a labor union, or we may be required to become a union signatory. ~~The United Automobile Workers (UAW) has been~~From time to time, labor unions have engaged in ~~a campaign~~campaigns to organize ~~manufacturing~~certain of our operations, ~~at Tesla. As~~as part of ~~that campaign, the UAW has~~which such unions have filed unfair labor practice charges against us with the National Labor Relations Board ~~(NLRB) a series of unfair labor practice charges against Tesla on which a hearing recently concluded.~~(“NLRB”), and they may do so in the future. We cannot predict the timing or outcome of the NLRB’s ~~decision,~~decisions on such existing matters, which we dispute and ancontinue to defend vigorously. Any unfavorable outcome for Tesla may have a negative impact on the perception of Tesla’s treatment of our employees.

Furthermore, we are directly or indirectly dependent upon companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a work stoppage occurs, it could delay the manufacture and sale of our products and have a material adverse effect on our business, prospects, operating results or financial condition.

Our products and services are subject to substantial regulations, which are evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and operating results.

Motor vehicles are subject to substantial regulation under international, federal, state and local laws. We incur significant costs in complying with these regulations and may be required to incur additional costs to comply with any changes to such regulations, and any failures to comply could result in significant expenses, delays or fines. We are subject to laws and regulations applicable to the supply, manufacture, import, sale and service of automobiles internationally. For example, in countries outside of the U.S., we are required to meet standards relating to vehicle safety, fuel economy and emissions, among other things, that are often materially different from requirements in the U.S., thus resulting in additional investment into the vehicles and systems to ensure regulatory compliance in those countries. This process may include official review and certification of our vehicles by foreign regulatory agencies prior to market entry, as well as compliance with foreign reporting and recall management systems requirements.

Additionally, we offer in our vehicles ~~are equipped with a suite of driver-assistance~~Autopilot and FSD features ~~called Autopilot, which help~~that today assist drivers with certain tedious and potentially dangerous aspects of road travel, but which currently require drivers to remain engaged. We are continuing to develop our FSD technology with the goal of achieving full self-driving capability in the future. There is a variety of international, federal and state regulations that may apply to self-driving vehicles, which include many existing vehicle standards that were not originally intended to apply to vehicles that may not have a driver. Such regulations continue to rapidly change, which increases the likelihood of a patchwork of complex or conflicting regulations, or may delay products or restrict self-driving features and availability, any of which could adversely affect our business.

Moreover, as a manufacturer and installer of solar generation and energy storage systems and a supplier of electricity generated and stored by the solar energy and energy storage systems we install for customers, we are impacted by federal, state and local regulations and policies concerning electricity pricing, the interconnection of electricity generation and storage equipment with the electric grid, and the sale of electricity generated by third-party owned systems. For example, existing or proposed regulations and policies would permit utilities to limit the amount of electricity generated by our customers with their solar energy systems, charge fees and penalties to our customers relating to the purchase of energy other than from the grid, adjust electricity rate designs such that the price of our solar products may not be competitive with that of electricity from the grid, restrict us and our customers from transacting under our ~~power purchase agreements~~PPAs or qualifying for government incentives and benefits that apply to solar power, and limit or eliminate net energy metering. If such regulations and policies ~~remain in effect or~~ are adopted, ~~in other jurisdictions,~~ or if other regulations and policies that adversely impact the interconnection or use of our solar and energy storage systems are introduced, they could deter potential customers from purchasing our solar and energy storage products, threaten the economics of our existing contracts and cause us to cease solar and energy storage system sales and operations in the relevant jurisdictions, which could harm our business, prospects, financial condition and results of operations.

Failure to comply with various privacy and consumer protection laws to which we are subject could harm the Company.

Our privacy policy is posted on our website, and any failure by us or our vendor or other business partners to comply with it or with federal, state or international privacy, data protection or security laws or regulations could result in regulatory or litigation-related actions against us, legal liability, fines, damages and other costs. Substantial expenses and operational changes may be required in connection with maintaining compliance with such laws, and in particular certain emerging privacy laws are still subject to a high degree of uncertainty as to their interpretation and application. For example, in May 2018, the General Data Protection Regulation (the “GDPR”) began to fully apply to the processing of personal information collected from individuals located in the European Union. The GDPR has created new compliance obligations and has significantly increased fines for noncompliance. Although we take steps to protect the security of our customers’ personal information, we may be required to expend significant resources to comply with data breach requirements if third parties improperly obtain and use the personal information of our customers or we otherwise experience a data loss with respect to customers’ personal information. A major breach of our network security and systems could have negative consequences for our business and future prospects, including possible fines, penalties and damages, reduced customer demand for our vehicles and harm to our reputation and brand.

We may choose to or be compelled to undertake product recalls or take other similar actions, which could adversely affect our brand image and financial performance.

Any product recall ~~including for solar or charging equipment, in the future~~with respect to our products may result in adverse publicity, damage our brand and adversely affect our business, prospects, operating results and financial condition. For example, certain vehicle recalls that we initiated have resulted from various causes, including a component that could prevent the parking brake from releasing once engaged, a concern with the firmware in the restraints control module in certain right-hand-drive vehicles, industry-wide issues with airbags from a particular supplier, Model X seat components that could cause unintended seat movement during a collision, and concerns of corrosion in Model S power steering assist motor bolts. Furthermore, testing of our ~~vehicles~~products by government regulators or industry groups may require us to initiate ~~vehicle~~product recalls or may result in negative public perceptions about the safety of our ~~vehicles.~~products. In the future, we may at various times, voluntarily or involuntarily, initiate a recall if any of our products or our electric vehicle powertrain components that we have provided to other vehicle OEMs, including any systems or parts sourced from our suppliers, prove to be defective or noncompliant with applicable laws and regulations, such as federal motor vehicle safety standards. Such recalls, whether voluntary or involuntary or caused by systems or components engineered or manufactured by us or our suppliers, could involve significant expense and could adversely affect our brand image in our target markets, as well as our business, prospects, financial condition and results of operations.

Our current and future warranty reserves may be insufficient to cover future warranty claims which could adversely affect our financial performance.

Subject to separate limited warranties for the supplemental restraint system, battery and drive unit, we provide four-year or 50,000-mile limited warranties for the purchasers of new Model 3, Model S and Model X vehicles and either a four-year or 50,000-mile limited warranty or a two-year or 100,000-mile maximum odometer limited warranty for the purchasers of used Model S or Model X vehicles certified and sold by us. The limited warranty for the battery and drive unit for new Model S and Model X vehicles covers the drive unit for eight years, as well as the battery for a period of eight years (or for certain older vehicles, 125,000 miles if reached sooner than eight years), although the battery’s charging capacity is not covered under any of our warranties or Extended Service plans; the limited warranty for used Model S and Model X vehicles does not extend or otherwise alter the terms of the original battery and drive unit limited warranty for such used vehicles specified in their original New Vehicle Limited Warranty. For the battery and drive unit on our current new Model 3 vehicles, we offer an eight-year or 100,000-mile limited warranty for our ~~standard range~~Standard Range, Standard Range Plus or mid-range battery and an eight-year or 120,000-mile limited warranty for our long-range battery, with minimum 70% retention of battery capacity over the warranty period. In addition, customers of new Model S and Model X vehicles have the opportunity to purchase an Extended Service plan for the period after the end of the limited warranty for their new vehicles to cover additional services for up to an additional four years or 50,000 ~~miles, provided it is purchased within a specified period of time.~~miles.

For energy storage products, we provide limited warranties against defects and to guarantee minimum energy retention levels. For example, we currently guarantee that each Powerwall 2 product will maintain at least ~~70-80%~~70% or 80% (depending on the region of installation) of its stated energy capacity after 10 years, and that each Powerpack 2 product will retain specified minimum energy capacities in each of its first ~~10 to~~ 15 years of use. For our Solar Roof, we currently offer a warranty on the glass tiles for the lifetime of a customer’s home and a separate warranty for the energy generation capability of the solar tiles. We also offer extended warranties, availability guarantees and capacity guarantees for periods of up to 20 years at an additional cost at the time of purchase, as well as workmanship warranties to customers who elect to have us install their systems.

Finally, customers who lease solar energy system leases or buy energy from us under ~~solar energy system leases or power purchase agreements~~PPAs are covered by warranties equal to the length of the agreement term, which is typically 20 years. Systems purchased for cash are covered by a workmanship warranty of up to ~~10 years, with extended warranties available at additional cost.~~20 years. In addition, we pass through to our customers the inverter and panel manufacturers’ warranties, which generally range from 510 to 25 ~~years, subjecting us to the risk that the manufacturers may later cease operations or fail to honor their underlying warranties.~~years. Finally, we provide a performance guarantee with our leased solar energy systems that compensates a customer on an annual basis if their system does not meet the electricity production guarantees set forth in their lease. Under these performance guarantees, we bear the risk of production shortfalls resulting from an inverter or panel failure. These risks are exacerbated in the event the panel or inverter manufacturers cease operations or fail to honor their warranties.

If our warranty reserves are inadequate to cover future warranty claims on our products, our business, prospects, financial condition and operating results could be materially and adversely affected. Warranty reserves include our management’s best estimate of the projected costs to repair or to replace items under warranty. These estimates are based on actual claims incurred ~~to-date~~to date and an estimate of the nature, frequency and costs of future claims. Such estimates are inherently uncertain and changes to our historical or projected experience, especially with respect to products such as Model 3 and Solar Roof that ~~are new~~we have recently introduced and/or that we expect to produce at significantly greater volumes than our past products, may cause material changes to our warranty reserves in the future.

Our insurance strategy may not be adequate to protect us from all business risks.

We may be subject, in the ordinary course of business, to losses resulting from products liability, accidents, acts of God and other claims against us, for which we may have no insurance coverage. As a general matter, we do not maintain as much insurance coverage as many other companies do, and in some cases, we do not maintain any at all. Additionally, the policies that we do have may include significant deductibles or self-insured retentions, and we cannot be certain that our insurance coverage will be sufficient to cover all future losses or claims against us. A loss that is uninsured or which exceeds policy limits may require us to pay substantial amounts, which could adversely affect our financial condition and operating results.

Our financial results may vary significantly from period-to-period due to fluctuations in our operating costs and other factors.

We expect our period-to-period financial results to vary based on our operating costs, which we anticipate will ~~increase significantly in future periods~~fluctuate as ~~we continue to ramp production of Model 3, expand Gigafactory 1, open new Tesla stores and service centers with maintenance and repair capabilities, open new Supercharger locations, ramp production~~the pace at Gigafactory 2, commence manufacturing operations in China, including by building and commencing operation of Gigafatory 3, increase our sales and marketing activities, and increase our general and administrative functions to support our growing operations. Moreover,which we ~~expect to~~ continue to design, develop and manufacture new ~~and future~~ products and increase ~~our~~ production capacity by expanding our current manufacturing facilities and adding future ~~facilities.~~facilities, such as Gigafactory Shanghai, may not be consistent or linear between periods. Additionally, our revenues from period-to-period may fluctuate as we introduce existing products to new markets for the first time and as we develop and introduce new products. As a result of these factors, we believe that quarter-to-quarter comparisons of our financial results, especially in the short term, are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. Moreover, our financial results may not meet expectations of equity research analysts, ratings agencies or investors, who may be focused only on quarterly financial results. If any of this occurs, the trading price of our stock could fall substantially, either suddenly or over time.

Servicing our indebtedness requires a significant amount of cash, and there is no guarantee that we will have sufficient cash flow from our business to pay our substantial indebtedness.

As of ~~September~~June 30, ~~2018,~~2019, we and our subsidiaries had outstanding ~~$10.90~~$12.16 billion in aggregate principal amount of indebtedness (see Note ~~10, Convertible and~~ 11, Long-Term Debt Obligations, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). Our substantial consolidated indebtedness may increase our vulnerability to any generally adverse economic and industry conditions. We and our subsidiaries may, subject to the limitations in the terms of our existing and future indebtedness, incur additional debt, secure existing or future debt or recapitalize our debt.

Pursuant to their terms, holders of our ~~0.25% Convertible Senior Notes due 2019,~~ 1.25% Convertible Senior Notes due 2021, ~~and~~ 2.375% Convertible Senior Notes due 2022 ~~(collectively,~~and 2.00% Convertible Senior Notes due 2024 (together, the “Tesla Convertible Notes”) may convert their respective Tesla Convertible Notes at their option prior to the scheduled maturities of the respective Tesla Convertible Notes under certain circumstances. Upon conversion of the applicable Tesla Convertible Notes, we will be obligated to deliver cash and/or shares in respect of the principal amounts thereof and the conversion value in excess of such principal amounts on such Tesla Convertible Notes. Moreover, our subsidiary’s ~~2.75% Convertible Senior Notes due 2018,~~ 1.625% Convertible Senior Notes due 2019 and Zero-Coupon Convertible Senior Notes due 2020 ~~(collectively,~~(together, the “Subsidiary Convertible Notes”) are convertible into shares of our common stock at conversion prices ranging from $300.00 to $759.36 per share. Finally, holders of the Tesla Convertible Notes and the Subsidiary Convertible Notes will have the right to require us to repurchase their notes upon the occurrence of a fundamental change at a purchase price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change purchase date.

Our ability to make scheduled payments of the principal and interest on our indebtedness when due or to make payments upon conversion or repurchase demands with respect to our convertible notes, or to refinance our indebtedness as we may need or desire, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to satisfy our obligations under our existing indebtedness, and any future indebtedness we may incur, and to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance existing or future indebtedness will depend on the capital markets and our financial condition at such time. In addition, our ability to make payments may be limited by law, by regulatory authority or by agreements governing our future indebtedness. We may not be able to engage in any of these activities or engage in these activities on desirable terms or at all, which could result in a default on our existing or future indebtedness and have a material adverse effect on our business, results of operations and financial condition.

Our debt agreements contain covenant restrictions that may limit our ability to operate our business.

The terms of certain of our credit facilities, including our senior secured asset based revolving credit agreement, contain, and any of our other future debt agreements may contain, covenant restrictions that limit our ability to operate our business, including restrictions on our ability to, among other things, incur additional debt or issue guarantees, create liens, repurchase stock or make other restricted payments, and make certain voluntary prepayments of specified debt. In addition, under certain circumstances we are required to comply with a fixed charge coverage ratio. As a result of these covenants, our ability to respond to changes in business and economic conditions and engage in beneficial transactions, including to obtain additional financing as needed, may be restricted. Furthermore, our failure to comply with our debt covenants could result in a default under our debt agreements, which could permit the holders to accelerate our obligation to repay the debt. If any of our debt is accelerated, we may not have sufficient funds available to repay it.

We may need or want to raise additional funds and these funds may not be available to us when we need them. If we cannot raise additional funds when we need or want them,, our operations and prospects could be negatively ~~affected~~.affected.

The design, manufacture, sale, installation and/or servicing of automobiles, energy storage products and solar products is a capital intensive ~~business.~~business, and the specific timing of cash inflows and outflows may fluctuate substantially from period to period. Until we are consistently generating positive free cash flows, we may need or want to raise additional funds through the issuance of equity, equity-related or debt securities or through obtaining credit from financial institutions to fund, together with our principal sources of liquidity,, the costs of developing and manufacturing our current or future vehicles,, energy storage products and/or solar products, to pay any significant unplanned or accelerated expenses or for new significant strategic investments, or to refinance our significant consolidated indebtedness, even if not required to do so by the terms of such indebtedness. We need sufficient capital to fund our ongoing operations, ramp vehicle production, continue research and development projects ~~establish sales, delivery~~for new products, continue to develop our main projects including further capacity expansion and automation for our current Model 3 production, Gigafactory Shanghai, Model Y and Tesla Semi, as well as further expand our Supercharger and vehicle service ~~centers, build~~ and ~~deploy Superchargers, expand Gigafactory 1,~~ ~~ramp production at Gigafactory 2, build and begin to operate Gigafactory 3 and to make the investments in tooling and manufacturing capital required to introduce new vehicles, energy storage products and solar products.~~repair networks. We cannot be certain that additional funds will be available to us on favorable terms when required, or at all. If we cannot raise additional funds when we need them, our financial condition, results of operations, business and prospects could be materially and adversely affected.

Additionally, we use capital from third-party investors to enable our customers’ access to our solar energy systems with little or no upfront cost. The availability of this financing depends upon many factors, including the confidence of the investors in the solar energy industry, the quality and mix of our customer contracts, any regulatory changes impacting the economics of our existing customer contracts, changes in law (including tax law), risks or government incentives associated with these financings, and our ability to compete with other renewable energy companies for the limited number of potential investors. Moreover, while interest rates remain at low levels, they have risen in recent periods. If the rate of return required by investors rises as a result of a rise in interest rates, it will reduce the present value of the customer payment streams underlying, and therefore the total value of, our financing structures, increasing our cost of capital. If we are unable to establish new financing funds on favorable terms for third-party ownership arrangements, we may be unable to finance the installation of our solar energy systems for our lease or ~~power purchase agreement~~PPA customers’ systems, or our cost of capital could increase and our liquidity may be negatively impacted, which would have an adverse effect on our business, financial condition and results of operations.

We could be subject to liability, penalties and other restrictive sanctions and adverse consequences arising out of certain governmental investigations and proceedings.

We are cooperating with certain government investigations as discussed in ~~Part II, Item 1, “Legal Proceedings”~~Note 15, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. ~~Aside from the settlement with the SEC discussed below relating to Mr. Musk’s statement that he was considering taking Tesla private, to~~To our knowledge, no government agency in any ongoing investigation has concluded that any wrongdoing occurred. However, we cannot predict the outcome or impact of any ongoing matters, and there exists the possibility that we could be subject to liability, penalties and other restrictive sanctions and adverse consequences if the SEC, the DOJ, or any other government agency were to pursue legal action in the future. Moreover, we expect to incur costs in responding to related requests for information and subpoenas, and if instituted, in defending against any governmental proceedings.

For example, on October 16, 2018, the U.S. District Court for the Southern District of New York entered a final judgment approving the terms of a settlement filed with the Court on September 29, 2018, in connection with the actions taken by the SEC relating to ~~Elon~~Mr. Musk’s statement on August 7, 2018 that he was considering taking Tesla private. ~~We agreed in~~Pursuant to the settlement, ~~to,~~we, among other things, ~~pay~~paid a civil penalty of $20 million, ~~appoint~~appointed an independent director as the Chair of the Board, ~~for at least three years, appoint~~appointed two additional independent directors to ~~the Board,~~our board of directors, and made further ~~enhance~~enhancements to our disclosure controls and other corporate governance-related matters. On April 26, 2019, this settlement was amended to clarify certain of the previously-agreed disclosure procedures, which was subsequently approved by the Court. All other terms of the prior settlement were reaffirmed without modification. Although we intend to continue to comply with the terms and requirements of the settlement, if there is a lack of compliance or an alleged lack of compliance, additional enforcement actions or other legal proceedings may be instituted against us.

If we update or discontinue the use of our manufacturing equipment more quickly than expected, we may have to shorten the useful lives of any equipment to be retired as a result of any such update, and the resulting acceleration in our depreciation could negatively affect our financial results.

We have invested and expect to continue to invest significantly in what we believe is state of the art tooling, machinery and other manufacturing equipment for our various product lines, and we depreciate the cost of such equipment over their expected useful lives. However, manufacturing technology may evolve rapidly, and we may decide to update our manufacturing process with cutting-edge equipment more quickly than expected. Moreover, ~~because we have limited experience to date with high-volume manufacturing,~~ we are continually implementing learnings as our engineering and manufacturing expertise and efficiency increase, which may result in our ability to manufacture our products using less of our currently installed equipment. Alternatively, as we ramp and mature the production of ~~Model 3~~our products to higher levels, our learnings may cause us to discontinue the use of already installed equipment in favor of different or additional equipment. The useful life of any equipment that would be retired early as a result would be shortened, causing the depreciation on such equipment to be accelerated, and our results of operations could be negatively impacted.

We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial results.

~~Our revenues~~We transact business globally in multiple currencies and have foreign currency risks related to our revenue, costs of revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the euro, Japanese yen, Canadian dollar, Chinese yuan and Norwegian krone. To the extent we have significant revenues denominated in such foreign currencies, are not completely matched. As we have increased vehicle deliveries in markets outside of the U.S., we have much higher revenues than costs denominated in other currencies such as the euro, Norwegian krone, pound sterling and Canadian dollar. Anyany strengthening of the U.S. dollar would tend to reduce our revenues as measured in U.S. dollars, as we have historically experienced. In addition, a portion of our costs and expenses have been, and we anticipate will continue to be, denominated in foreign currencies, including the Japanese yen. If we do not have fully offsetting revenues in these currencies and if the value of the U.S. dollar depreciates significantly against these currencies, our costs as measured in U.S. dollars as a percent of our revenues will correspondingly increase and our margins will suffer. Moreover, while we undertake limited hedging activities intended to offset the impact of currency translation exposure, it is impossible to predict or eliminate such impact. As a result, our operating results could be adversely affected.

We may face regulatory limitations on our ability to sell vehicles directly which could materially and adversely affect our ability to sell our electric vehicles.

We sell our vehicles directly to ~~consumers. We~~consumers using means that we believe will maximize our reach, currently including through our website and our own stores. While we intend to continue to leverage our most effective sales strategies, we may not be able to sell our vehicles through ~~this sales model~~our own stores in each state in the U.S., as some states have laws that may be interpreted to impose limitations on this direct-to-consumer sales model. In ~~certain~~some states, ~~in which we are not able to obtain dealer licenses,~~ we have also opened galleries ~~which are~~to educate and inform customers about our products, but such locations do not ~~full retail locations.~~

actually transact in the sale of vehicles. The application of these state laws to our operations continues to be difficult to predict. Laws in some states have limited our ability to obtain dealer licenses from state motor vehicle regulators and may continue to do so.

In addition, decisions by regulators permitting us to sell vehicles may be challenged by dealer associations and others as to whether such decisions comply with applicable state motor vehicle industry laws. We have prevailed in many of these lawsuits and such results have reinforced our continuing belief that state laws were not designed to prevent our distribution model. In some states, there have also been regulatory and legislative efforts by dealer associations to propose laws that, if enacted, would prevent us from obtaining dealer licenses in their states given our current sales model. A few states have passed legislation that clarifies our ability to operate, but at the same time limits the number of dealer licenses we can obtain or stores that we can operate. We have also filed a lawsuit in federal court in Michigan challenging the constitutionality of the state’s prohibition on direct sales as applied to our business.

Internationally, there may be laws in jurisdictions we have not yet entered or laws we are unaware of in jurisdictions we have entered that may restrict our sales or other business practices. Even for those jurisdictions we have analyzed, the laws in this area can be complex, difficult to interpret and may change over time. Continued regulatory limitations and other obstacles interfering with our ability to sell vehicles directly to consumers could have a negative and material impact our business, prospects, financial condition and results of operations.

We may need to defend ourselves against intellectual property infringement claims, which may be time-consuming and could cause us to incur substantial costs.

Others, including our competitors, may hold or obtain patents, copyrights, trademarks or other proprietary rights that could prevent, limit or interfere with our ability to make, use, develop, sell or market our products and services, which could make it more difficult for us to operate our business. From time to time, the holders of such intellectual property rights may assert their rights and urge us to take licenses, and/or may bring suits alleging infringement or misappropriation of such rights. WeWhile we endeavor to obtain and protect the intellectual property rights that we expect will allow us to retain or advance our strategic initiatives, there can be no assurance that we will be able to adequately identify and protect the portions of intellectual property that are strategic to our business, or mitigate the risk of potential suits or other legal demands by our competitors. Accordingly, we may consider the entering into licensing agreements with respect to such rights, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur, and such licenses could significantly increase our operating expenses. In addition, if we are determined to have infringed upon a third party’s intellectual property rights, we may be required to cease making, selling or incorporating certain components or intellectual property into the goods and services we offer, to pay substantial damages and/or license royalties, to redesign our products and services, and/or to establish and maintain alternative branding for our products and services. In the event that we were required to take one or more such actions, our business, prospects, operating results and financial condition could be materially adversely affected. In addition, any litigation or claims, whether or not valid, could result in substantial costs, negative publicity and diversion of resources and management attention.

Tesla is a highly-visible public company whose products, business, results of operations, statements and actions are often scrutinized by critics whose influence could negatively impact the perception of our brand and the market value of our common stock.

Tesla is a highly-visible public company whose products, business, results of operations, statements and actions are well-publicized. Such attention includes frequent criticism of us by a range of third-parties. Our continued success depends on our ability to focus on executing on our mission and business plan while maintaining the trust of our current and potential customers, employees, stockholders and business partners. Any negative perceived actions of ours could influence the perception of our brand or our leadership by our customers, suppliers or investors, which could adversely impact our business prospects, operating results and the market value of our common stock.

Our facilities or operations could be damaged or adversely affected as a result of disasters.

Our corporate headquarters, the Tesla Factory and Gigafactory 1 are located in seismically active regions in Northern California and ~~Nevada.~~Nevada, and our Gigafactory Shanghai is located in a flood-prone area. If major disasters such as earthquakes, floods or other events occur, or our information system or communications network breaks down or operates improperly, our headquarters and production facilities may be seriously damaged, or we may have to stop or delay production and shipment of our products. We may incur expenses relating to such damages, which could have a material adverse impact on our business, operating results and financial condition.

The trading price of our common stock has been highly volatile and could continue to be subject to wide fluctuations in response to various factors, some of which are beyond our control. Our common stock has experienced an intra-day trading high of $387.46 per share and a low of ~~$244.59~~$176.99 per share over the last 52 weeks. The stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. In particular, a large proportion of our common stock has been and may continue to be traded by short sellers which may put pressure on the supply and demand for our common stock, further influencing volatility in its market price. Public perception and other factors outside of our control may additionally impact the stock price of companies like us that garner a disproportionate degree of public attention, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. Moreover, stockholder litigation like this has been filed against us in the past. While we are continuing to defend such actions vigorously, any judgment against us or any future stockholder litigation could result in substantial costs and a diversion of our management’s attention and resources.

We may fail to meet our publicly announced guidance or other expectations about our business, which could cause our stock price to decline.

We may provide from time to time guidance regarding our expected financial and business performance, ~~such as~~which may include projections regarding sales and production, as well as anticipated future revenues, gross margins, profitability and cash flows. Correctly identifying key factors affecting business conditions and predicting future events is inherently an uncertain process, and our guidance may not ultimately be ~~accurate.~~accurate and has in the past been inaccurate in certain respects, such as the timing of new product manufacturing ramps. Our guidance is based on certain assumptions such as those relating to anticipated production and sales volumes ~~and~~(which generally are not linear throughout a given period), average sales prices, supplier and commodity costs, and planned cost reductions. If our guidance is not accurate or varies from actual results due to our inability to meet our assumptions or the impact on our financial performance that could occur as a result of various risks and uncertainties, the market value of our common stock could decline significantly.

Transactions relating to our convertible notes may dilute the ownership interest of existing stockholders, or may otherwise depress the price of our common stock.

The conversion of some or all of the Tesla Convertible Notes or the Subsidiary Convertible Notes would dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of any of such notes. Our Subsidiary Convertible Notes have been historically, and the other Tesla Convertible Notes may become in the future, convertible at the option of their holders prior to their scheduled terms under certain circumstances. If holders elect to convert their convertible notes, we could be required to deliver to them a significant number of shares of our common stock. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the convertible notes may encourage short selling by market participants because the conversion of such notes could be used to satisfy short positions, or anticipated conversion of such notes into shares of our common stock could depress the price of our common stock.

Moreover, in connection with each issuance of the Tesla Convertible Notes, we entered into convertible note hedge transactions, which are expected to reduce the potential dilution and/or offset potential cash payments we are required to make in excess of the principal amount upon conversion of the applicable Tesla Convertible Notes. We also entered into warrant transactions with the hedge counterparties, which could separately have a dilutive effect on our common stock to the extent that the market price per share of our common stock exceeds the applicable strike price of the warrants on the applicable expiration dates. In addition, the hedge counterparties or their affiliates may enter into various transactions with respect to their hedge positions, which could also cause or prevent an increase or a decrease in the market price of our common stock or the convertible notes.

Elon Musk has pledged shares of our common stock to secure certain bank borrowings. If Mr. Musk were forced to sell these shares ~~pursuant~~in order to ~~a margin call that he could not avoid or~~ satisfy his loan obligations, such sales could cause our stock price to decline.

Certain banking institutions have made extensions of credit to Elon Musk, our Chief Executive Officer, a portion of which was used to purchase shares of common stock in certain of our public offerings and private placements at the same prices offered to third party participants in such offerings and placements. We are not a party to these loans, which are partially secured by pledges of a portion of the Tesla common stock currently owned by Mr. Musk. If the price of our common stock were to decline substantially, ~~and Mr. Musk were unable to avoid or satisfy a margin call with respect to his pledged shares,~~ Mr. Musk may be forced by one or more of the banking institutions to sell shares of Tesla common stock ~~in order~~ to ~~remain within the margin limitations imposed under the terms of~~satisfy his ~~loans.~~loan obligations if he could not do so through other means. Any such sales could cause the price of our common stock to decline further.

Anti-takeover provisions contained in our governing documents, applicable laws and our convertible notes could impair a takeover attempt.

Our certificate of incorporation and bylaws afford certain rights and powers to our board of directors that could contribute to the delay or prevention of an acquisition that it deems undesirable. We are also subject to Section 203 of the Delaware General Corporation Law and other provisions of Delaware law that limit the ability of stockholders in certain situations to effect certain business combinations. In addition, the terms of our convertible notes require us to repurchase such notes in the event of a fundamental change, including a takeover of our company. Any of the foregoing provisions and terms that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

In connection with the offering of the 2018 Notes in 2013, we sold warrants to each of Goldman, Sachs & Co. and Morgan Stanley & Co. LLC (the “Warrantholders”). Between September 6, 2018 and September 28, 2018, we issued an aggregate of 105,218 shares of our common stock to the Warrantholders pursuant to their exercise of such warrants, which were net of the applicable exercise prices. Such shares were issued pursuant to an exemption from registration provided by Rule 3(a)(9) of the Securities Act of 1933.None.

~~None.~~As announced on July 24, 2019, J.B. Straubel is departing from his position as our Chief Technical Officer. Mr. Straubel intends to continue to serve at Tesla in a senior advisor capacity.

See Index to Exhibits at the end of this Quarterly Report on Form 10-Q for the information required by this Item.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations	5
	Consolidated Statements of Comprehensive ~~Income (Loss~~Loss)	6
	Consolidated Statements of ~~Cash Flows~~Redeemable Noncontrolling Interests and Equity	7
	~~Notes to~~ Consolidated ~~Financial~~ Statements of Cash Flows	89
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3637
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4950
Item 4.	Controls and Procedures	4950

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	5051
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7069
Item 3.	Defaults Upon Senior Securities	7069
Item 4.	Mine Safety Disclosures	7069
Item 5.	Other Information	7069
Item 6.	Exhibits	7069

SIGNATURES		7271

	Nine Months Ended September 30, 2018
Deferred revenue on automotive sales with and without resale value guarantee— beginning of period	$	475,919
Additions		365,376
Net changes in liability for pre-existing contracts		(7,930	)
Revenue recognized		(71,874	)
Deferred revenue on automotive sales with and without resale value guarantee— end of period	$	761,491

Assets acquired:
Cash and cash equivalents	$	31,662
Accounts receivable		24,157
Inventory		32,080
Property, plant and equipment		26,748
Operating lease right-of-use assets		9,524
Intangible assets		105,495
Prepaid expenses and other assets, current and non-current		3,191
Total assets acquired		232,857
Liabilities and equity assumed:
Accounts payable		(9,547	)
Accrued liabilities and other		(27,565	)
Debt and financial leases, current and non-current		(43,870	)
Deferred revenue, current		(1,345	)
Other long-term liabilities		(13,871	)
Additional paid-in capital		(8,051	)
Total liabilities and equity assumed		(104,249	)
Net assets acquired		128,608
Goodwill		78,614
Total purchase price	$	207,222

	September 30, 2018		December 31, 2017
Accrued warranty reserve, net of current portion	$	459,398	$	276,289
Build-to-suit lease liability, net of current portion		1,622,059		1,665,768
Deferred rent expense, net of current portion		57,643		46,820
Financing obligation, net of current portion		53,976		67,929
Liability for receipts from an investor		—		29,713
Sales return reserve, net of current portion		78,387		—
Other noncurrent liabilities		283,856		356,451
Total other long-term liabilities	$	2,555,319	$	2,442,970


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

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

	Balances at December 31, 2017			Adjustments from Adoption of New Revenue Standard			Balances at January 1, 2018
Assets
Inventory	$	2,263,537		$	(27,009	)	$	2,236,528
Prepaid expenses and other current assets		268,365			51,735			320,100
Operating lease vehicles, net		4,116,604			(1,808,932	)		2,307,672
Other assets		273,123			68,355			341,478
Liabilities
Accrued liabilities and other		1,731,366			74,487			1,805,853
Deferred revenue		1,015,253			(436,737	)		578,516
Resale value guarantees		787,333			(295,909	)		491,424
Customer deposits		853,919			56,081			910,000
Deferred revenue, net of current portion		1,177,799			(429,771	)		748,028
Resale value guarantees, net of current portion		2,309,222			(1,346,179	)		963,043
Other long-term liabilities		2,442,970			104,767			2,547,737
Redeemable noncontrolling interests in subsidiaries		397,734			8,101			405,835
Equity
Accumulated other comprehensive income		33,348			15,221			48,569
Accumulated deficit		(4,974,299	)		623,172			(4,351,127	)
Noncontrolling interests in subsidiaries		997,346			(89,084	)		908,262

	September 30, 2018
	As Reported			Balances Without Adoption of New Revenue Standard			Effect of Change Higher / (Lower)
Assets
Accounts receivable	$	1,155,001		$	1,099,914		$	55,087
Inventory		3,314,127			3,431,185			(117,058	)
Prepaid expenses and other current assets		325,232			247,056			78,176
Operating lease vehicles, net		2,186,137			4,177,710			(1,991,573	)
Other assets		431,819			321,847			109,972
Liabilities
Accrued liabilities and other		1,990,095			1,896,319			93,776
Deferred revenue		570,920			1,080,243			(509,323	)
Resale value guarantees		604,949			978,515			(373,566	)
Customer deposits		905,838			850,229			55,609
Deferred revenue, net of current portion		950,126			1,387,829			(437,703	)
Resale value guarantees, net of current portion		455,762			2,016,861			(1,561,099	)
Other long-term liabilities		2,555,319			2,441,543			113,776
Redeemable noncontrolling interests in subsidiaries		551,264			544,315			6,949
Equity
Accumulated other comprehensive gain		8,271			13,875			(5,604	)
Accumulated deficit		(5,457,315	)		(6,287,370	)		830,055
Noncontrolling interests in subsidiaries		793,467			871,733			(78,266	)

	Balances at December 31, 2018			Adjustments from Adoption of New Lease Standard			Balances at January 1, 2019
Assets
Prepaid expenses and other current assets	$	365,671		$	(300	)	$	365,371
Property, plant and equipment, net		11,330,077			(1,617,373	)		9,712,704
Operating lease right-of-use assets		—			1,285,617			1,285,617
Other assets		571,657			(141,322	)		430,335
Liabilities
Accrued liabilities and other		2,094,253			117,717			2,211,970
Current portion of long-term debt and finance leases		2,567,699			—			2,567,699
Long-term debt and finance leases, net of current portion		9,403,672			—			9,403,672
Other long-term liabilities		2,710,403			(687,757	)		2,022,646
Equity
Accumulated deficit		(5,317,832	)		96,662			(5,221,170	)

	Fair Value		Useful Life (in years)
Developed technology	$	102,095		9
Customer relations		2,000		9
Trade name		1,400		10
Total intangible assets	$	105,495

	June 30, 2019
Operating leases:
Operating lease right-of-use assets	$	1,248,277

Accrued liabilities and other	$	220,092
Other long-term liabilities		1,030,797
Total operating lease liabilities	$	1,250,889

Finance leases:
Solar energy systems, net	$	31,288
Property, plant and equipment, net		1,620,995
Total finance lease assets	$	1,652,283

Current portion of long-term debt and finance leases	$	331,257
Long-term debt and finance leases, net of current portion		1,328,554
Total finance lease liabilities	$	1,659,811

	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
Operating lease expense:
Operating lease expense (1)	$	106,101	$	207,338

Finance lease expense:
Amortization of leased assets	$	75,060	$	132,325
Interest on lease liabilities		26,906		50,467
Total finance lease expense	$	101,966	$	182,792

Total lease expense	$	208,067	$	390,130

	June 30, 2019
Weighted-average remaining lease term:
Operating leases	6.6 years
Finance leases	4.4 years

Weighted-average discount rate:
Operating leases		6.4	%
Finance leases		6.6	%

	Six Months Ended
	June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	170,405
Operating cash outflows from finance leases (interest payments)	$	49,067
Financing cash outflows from finance leases	$	142,571
Leased assets obtained in exchange for new finance lease liabilities	$	468,723
Leased assets obtained in exchange for new operating lease liabilities	$	119,267

	Operating		Finance
	Leases		Leases
Six months ending December 31, 2019	$	147,583	$	237,862
2020		279,622		372,881
2021		247,142		654,080
2022		198,809		559,243
2023		166,428		10,297
Thereafter		517,982		17,223
Total minimum lease payments		1,557,566		1,851,586
Less: Interest		306,677		191,775
Present value of lease obligations		1,250,889		1,659,811
Less: Current portion		220,092		331,257
Long-term portion of lease obligations	$	1,030,797	$	1,328,554

Six months ending December 31, 2019	$	278,034
2020		493,508
2021		343,819
2022		207,032
2023		187,467
Thereafter		2,460,362
Total	$	3,970,222

2019	$	501,625
2020		418,299
2021		270,838
2022		186,807
2023		188,809
Thereafter		2,469,732
Total	$	4,036,110

		Tesla, Inc.

Date: ~~November 1, 2018~~July 28, 2019		/s/ ~~Deepak Ahuja~~Zachary J. Kirkhorn
		~~Deepak Ahuja~~Zachary J. Kirkhorn
		Chief Financial Officer
		(Principal Financial Officer ~~Principal Accounting Officer~~ and Duly Authorized Officer)