Form 10-Q TESLA MOTORS INC For: Sep 30

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November 7, 2014 5:09 PM EST

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�

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September�30, 2014

�

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

Commission File Number: 001-34756

Tesla Motors, Inc.

(Exact name of registrant as specified in its charter)

�

Delaware

�

91-2197729

(State or other jurisdiction of

incorporation or organization)

�

(I.R.S. Employer

Identification No.)

�

3500 Deer Creek Road

Palo Alto, California

�

94304

(Address of principal executive offices)

�

(Zip Code)

(650) 681-5000

(Registrant�s telephone number, including area code)

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

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

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

�


Large�accelerated�filer	�	x	��	Accelerated�filer	�	�

Non-accelerated filer	�	��(Do not check if a smaller reporting company)	��	Smaller�reporting�company	�	�

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

As of October 31, 2014, there were 125,381,798 shares of the registrant�s Common Stock outstanding.

TESLA MOTORS, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2014

INDEX

�


�	�	�	��	Page		�
PART I.	�	FINANCIAL INFORMATION	��

Item�1.	�	Financial Statements (Unaudited)	��	�	4	��
	�	Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	��	�	4	��
	�	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013	��	�	5	��

	�	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	��	�	6	��
	�	Notes to Condensed Consolidated Financial Statements	��	�	7	��
Item�2.	�	Management�s Discussion and Analysis of Financial Condition and Results of Operations	��	�	22	��
Item�3.	�	Quantitative and Qualitative Disclosures About Market Risk	��	�	38	��
Item�4.	�	Controls and Procedures	��	�	39	��

PART�II.	�	OTHER INFORMATION	��

Item�1.	�	Legal Proceedings	��	�	40	��
Item�1A.	�	Risk Factors	��	�	40	��
Item�2.	�	Unregistered Sales of Equity Securities and Use of Proceeds	��	�	78	��
Item�3.	�	Defaults Upon Senior Securities	��	�	78	��
Item�5.	�	Other Information	��	�	78	��
Item�6.	�	Exhibits	��	�	78	��

SIGNATURES			��	�	79	��

Forward-Looking Statements

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

PART I. FINANCIAL INFORMATION

ITEM�1.

FINANCIAL STATEMENTS

Tesla Motors, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

�


�	��	September�30, 2014		�	�	December�31, 2013		�
Assets	��				�
Current assets	��				�
Cash and cash equivalents	��	$	2,370,735	��	�	$	845,889	��
Restricted cash and marketable securities	��	�	17,331	��	�	�	3,012	��
Accounts receivable	��	�	156,889	��	�	�	49,109	��
Inventory	��	�	752,492	��	�	�	340,355	��
Prepaid expenses and other current assets	��	�	65,467	��	�	�	27,574	��
	��	�	�	�	�	�	�	�
Total current assets	��	�	3,362,914	��	�	�	1,265,939	��
	��	�	�	�	�	�	�	�
Operating lease vehicles, net	��	�	617,743	��	�	�	382,425	��
Property, plant and equipment, net	��	�	1,404,326	��	�	�	738,494	��
Restricted cash	��	�	9,090	��	�	�	6,435	��
Other assets	��	�	43,460	��	�	�	23,637	��
	��	�	�	�	�	�	�	�
Total assets	��	$	5,437,533	��	�	$	2,416,930	��
	��	�	�	�	�	�	�	�
Liabilities and Stockholders� Equity	��				�
Current liabilities	��				�
Accounts payable	��	$	649,362	��	�	$	303,969	��
Accrued liabilities	��	�	194,571	��	�	�	108,252	��
Deferred revenue	��	�	161,570	��	�	�	91,882	��
Capital lease obligations, current portion	��	�	9,592	��	�	�	7,722	��
Customer deposits	��	�	227,056	��	�	�	163,153	��
Convertible senior notes	��	�	597,626	��	�	�	182	��
	��	�	�	�	�	�	�	�
Total current liabilities	��	�	1,839,777	��	�	�	675,160	��
	��	�	�	�	�	�	�	�
Capital lease obligations, less current portion	��	�	12,806	��	�	�	12,855	��
Deferred revenue, less current portion	��	�	254,321	��	�	�	181,180	��
Convertible senior notes, less current portion	��	�	1,786,635	��	�	�	586,119	��
Resale value guarantee	��	�	397,742	��	�	�	236,299	��
Other long-term liabilities	��	�	125,997	��	�	�	58,197	��
	��	�	�	�	�	�	�	�
Total liabilities	��	�	4,417,278	��	�	�	1,749,810	��
	��	�	�	�	�	�	�	�
Commitments and contingencies (Notes 6 and 10)	��				�
Convertible senior notes	��	�	62,161	��	�	�	��	��
Stockholders� equity	��				�
Preferred stock; $0.001 par value; 100,000,000 shares authorized; no shares issued and outstanding	��	�	��	��	�	�	��	��
Common stock; $0.001 par value; 2,000,000,000 shares authorized as of September�30, 2014 and December�31, 2013, respectively; 125,366,171 and 123,090,990 shares issued and outstanding as of September�30, 2014 and December�31, 2013, respectively	��	�	125	��	�	�	123	��
Additional paid-in capital	��	�	2,284,010	��	�	�	1,806,617	��
Accumulated deficit	��	�	(1,326,041	)�	�	�	(1,139,620	)�
	��	�	�	�	�	�	�	�
Total stockholders� equity	��	�	958,094	��	�	�	667,120	��
	��	�	�	�	�	�	�	�
Total liabilities and stockholders� equity	��	$	5,437,533	��	�	$	2,416,930	��
	��	�	�	�	�	�	�	�

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

�

Tesla Motors, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(Unaudited)

�

��

Three Months Ended
September�30,

�

Nine Months Ended
September�30,

�

��

2014

�

2013

�

2014

�

2013

�

Revenues

��

�

Automotive sales

��

849,009

��

�

430,196

��

�

2,236,062

��

�

1,386,934

��

Development services

��

�

2,795

��

�

1,150

��

�

5,633

��

�

11,343

��

�

Total revenues

��

�

851,804

��

�

431,346

��

�

2,241,695

��

�

1,398,277

��

Cost of revenues

��

�

Automotive sales

��

�

598,472

��

�

324,883

��

�

1,615,047

��

�

1,090,300

��

Development services

��

�

1,481

��

�

3,595

��

�

6,674

��

�

8,304

��

�

Total cost of revenues

��

�

599,953

��

�

328,478

��

�

1,621,721

��

�

1,098,604

��

Gross profit

��

�

251,851

��

�

102,868

��

�

619,974

��

�

299,673

��

Operating expenses

��

�

Research and development

��

�

135,873

��

�

56,351

��

�

325,135

��

�

163,523

��

Selling, general and administrative

��

�

155,107

��

�

77,071

��

�

406,690

��

�

184,080

��

�

Total operating expenses

��

�

290,980

��

�

133,422

��

�

731,825

��

�

347,603

��

�

Loss from operations

��

�

(39,129

)�

�

(30,554

)�

�

(111,851

)�

�

(47,930

)�

Interest income

��

�

300

��

�

��

�

907

��

�

��

Interest expense

��

�

(29,062

)�

�

(6,492

)�

�

(72,183

)�

�

(26,705

)�

Other income (expense), net

��

�

(3,090

)�

�

(740

)�

�

2,401

��

�

18,018

��

�

Loss before income taxes

��

�

(70,981

)�

�

(37,718

)�

�

(180,726

)�

�

(56,520

)�

Provision for income taxes

��

�

3,727

��

�

778

��

�

5,685

��

�

1,230

��

�

Net loss

��

(74,708

)�

�

(38,496

)�

�

(186,411

)�

�

(57,750

)�

��

�

Net loss per share of common stock, basic and diluted

��

(0.60

)�

�

(0.32

)�

�

(1.50

)�

�

(0.49

)�

��

�

Weighted average shares used in computing net loss per share of common stock, basic and diluted

��

�

124,910,569

��

�

121,862,497

��

�

124,216,526

��

�

118,282,194

��

�

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

�

Tesla Motors, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

�


�	��	Nine Months Ended September 30,						�
�	��	2014		�	�	2013		�
Cash Flows From Operating Activities	��				�
Net loss	��	$	(186,411	)�	�	$	(57,750	)�
Adjustments to reconcile net loss to net cash provided by operating activities:	��				�
Depreciation and amortization	��	�	163,955	��	�	�	68,498	��
Stock-based compensation	��	�	111,980	��	�	�	55,566	��
Inventory write-downs	��	�	14,495	��	�	�	6,788	��
Amortization of discount on convertible debt	��	�	55,634	��	�	�	5,344	��
Change in fair value of Department of Energy (DOE) warrant liability	��	�	��	��	�	�	(10,692	)�
Amortization of DOE loan origination costs	��	�	��	��	�	�	5,558	��
Fixed asset disposals	��	�	11,052	��	�	�	1,017	��
Other non-cash operating activities	��	�	4,503	��	�	�	1,188	��
Foreign currency transaction (gain) loss	��	�	(2,707	)�	�	�	3,778	��
Changes in operating assets and liabilities	��				�
Accounts receivable	��	�	(109,172	)�	�	�	(20,716	)�
Inventories and operating lease vehicles	��	�	(672,663	)�	�	�	(358,417	)�
Prepaid expenses and other current assets	��	�	(29,517	)�	�	�	(9,115	)�
Other assets	��	�	(5,671	)�	�	�	42	��
Accounts payable	��	�	171,198	��	�	�	25,421	��
Accrued liabilities	��	�	82,697	��	�	�	34,333	��
Deferred revenue	��	�	142,494	��	�	�	190,039	��
Customer deposits	��	�	71,143	��	�	�	2,256	��
Resale value guarantee	��	�	161,782	��	�	�	159,010	��
Other long-term liabilities	��	�	44,273	��	�	�	28,669	��
	��	�	�	�	�	�	�	�
Net cash provided by operating activities	��	�	29,065	��	�	�	130,817	��
	��	�	�	�	�	�	�	�
Cash Flows From Investing Activities	��				�
Purchases of property and equipment, excluding capital leases	��	�	(601,224	)�	�	�	(174,790	)�
Purchase of short-term marketable securities	��	�	(205,831	)�	�	�	��	��
Maturities of short-term marketable securities	��	�	189,131	��	�	�	��	��
Decrease in other restricted cash	��	�	(289	)�	�	�	126	��
Withdrawals out of our dedicated DOE accounts, net	��	�	��	��	�	�	14,752	��
	��	�	�	�	�	�	�	�
Net cash used in investing activities	��	�	(618,213	)�	�	�	(159,912	)�
	��	�	�	�	�	�	�	�
Cash Flows From Financing Activities	��				�
Proceeds from issuance of convertible debt	��	�	2,300,000	��	�	�	660,000	��
Proceeds from issuance of warrants	��	�	389,160	��	�	�	120,318	��
Proceeds from exercise of stock options and other stock issuances	��	�	89,925	��	�	�	82,219	��
Purchase of convertible note hedges	��	�	(603,428	)�	�	�	(177,540	)�
Convertible debt issuance costs	��	�	(35,150	)�	�	�	(16,374	)�
Principal payments on capital leases and other debt	��	�	(8,702	)�	�	�	(6,380	)�
Proceeds from issuance of common stock in public offering	��	�	��	��	�	�	360,000	��
Proceeds from issuance of common stock in private placement	��	�	��	��	�	�	55,000	��
Principal payments on DOE loans	��	�	��	��	�	�	(452,337	)�
	��	�	�	�	�	�	�	�
Net cash provided by financing activities	��	�	2,131,805	��	�	�	624,906	��
	��	�	�	�	�	�	�	�
Effect of exchange rate changes on cash and cash equivalents	��	�	(17,811	)�	�	�	(2,585	)�
Net increase in cash and cash equivalents	��	�	1,542,657	��	�	�	595,811	��
Cash and cash equivalents at beginning of period	��	�	845,889	��	�	�	201,890	��
	��	�	�	�	�	�	�	�
Cash and cash equivalents at end of period	��	$	2,370,735	��	�	$	795,116	��
	��	�	�	�	�	�	�	�
Supplemental disclosure of noncash investing activities:	��				�
Acquisition of property and equipment included in accounts payable and accrued liabilities	��	$	190,677	��	�	$	24,708	��
Estimated fair market value of facilities under build-to-suit lease (Note 3)	��	�	21,276	��	�	�	��	��

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

�

Tesla Motors, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Overview of the Company

Tesla Motors, Inc. (Tesla, we, us or our) was incorporated in the state of Delaware on July�1, 2003. We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components. We have wholly-owned subsidiaries in North America, Europe and Asia.�The primary purpose of these subsidiaries is to market, manufacture, sell and/or service our vehicles.

Public Offerings

In March 2014, we issued $800.0 million principal amount of 0.25% convertible senior notes due March 2019 (2019 Notes) and $1.20 billion principal amount of 1.25% convertible senior notes due March 2021 (2021 Notes) in a public offering. In connection with the issuance of these 2019 Notes and 2021 Notes, we entered into convertible note hedge transactions for which we paid an aggregate $524.7�million. In addition, we sold warrants and received aggregate proceeds of approximately $338.4 million from the sale of the warrants. Taken together, we received total cash proceeds of approximately $1.78 billion, net of underwriting discounts and offering costs.

In April 2014, we issued an additional $120.0 million aggregate principal amount of 2019 Notes and $180.0 million aggregate principal amount of 2021 Notes, pursuant to the exercise in full of the overallotment options of the underwriters of our March 2014 public offering. In connection with the issuance of these additional notes, we entered into convertible note hedge transactions and paid an aggregate $78.7�million. In addition, we sold warrants and received aggregate proceeds of approximately $50.8 million from the sale of the warrants. Taken together, we received total cash proceeds of approximately $267.6 million, net of underwriting discounts and offering costs (see Note 6).

2. Summary of Significant Accounting Policies

Basis of Consolidation

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

Use of Estimates

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

�

Unaudited Interim Financial Statements

The accompanying condensed consolidated balance sheet as of September�30, 2014, the condensed consolidated statements of operations for the three and nine months ended September�30, 2014 and 2013 and the condensed consolidated statements of cash flows for the nine months ended September�30, 2014 and 2013 and other information disclosed in the related notes are unaudited.�The condensed consolidated balance sheet as of December�31, 2013 was derived from our audited consolidated financial statements at that date.�The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Form�10-K for the year ended December�31, 2013 filed with the Securities and Exchange Commission.

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

During the three months ended June�30, 2014, we began separately presenting the effect of exchange rate changes on our cash and cash equivalents in our condensed consolidated statements of cash flows due to our growing operations in foreign currency environments. Prior period amounts have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued an accounting update which amends the existing accounting standards for revenue recognition. The new guidance provides a unified model to determine when and how revenue is recognized. The guidance is effective for fiscal years beginning after December�15, 2016. We are currently evaluating the impact of adopting this guidance on our condensed consolidated financial statements.

Revenue Recognition

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

For Model S sales, revenue is generally recognized when all risks and rewards of ownership are transferred to our customers. In certain circumstances, we may deliver a vehicle to a customer without all of the options ordered by the customer, provided that such options do not limit the functionality of the vehicle. In such cases, we continue to defer the related revenue based on the undelivered items� fair value, as evidenced by the contractual price of the option in stand-alone transactions, where available, or using the selling price hierarchy where such prices do not exist. Additionally, if a customer purchases a vehicle option that requires us to provide services in the future, we defer the related revenue based on the undelivered items� fair value and recognize the associated revenue over our expected performance period. As of September�30, 2014, we had deferred $37.6 million, $21.9 million and $9.1 million related to the purchase of vehicle maintenance and service plans, access to our Supercharger network and Model S connectivity, respectively. As of December�31, 2013, we had deferred $27.6 million, $10.3 million and $0.7 million related to these same performance obligations, respectively.

�

Model S Leasing Program

In April 2014, we began offering a leasing program to qualified small and medium-sized businesses in the United States and Canada for Model S. Qualifying customers are permitted to lease a Model S for 36 months, after which time they have the option of either returning the vehicle to us or purchasing it for a pre-determined residual value. We account for these leasing transactions as operating leases and accordingly, we recognize leasing revenues over the contractual term of the individual leases and record cost of automotive sales equal to the depreciation of the leased vehicles. As of September�30, 2014, we had deferred $4.5 million of lease-related upfront payments which will be recognized on a straight-line basis over the contractual term of the individual leases. Lease revenues are recorded in automotive sales and for the three and nine months ended September�30, 2014, we recognized $1.1 million and $1.3 million, respectively.

Resale Value Guarantee

We offer a resale value guarantee or similar buy-back terms to all customers who purchased a Model S in the United States and who financed their vehicle through one of our specified commercial banking partners. Under the program, Model S customers have the option of selling their vehicle back to us during the period of 36 to 39 months after delivery for a pre-determined resale value. Although we receive the full amount of cash for the vehicle sales price at delivery, we account for transactions under the resale value guarantee program as operating leases.

Account activity related to our resale value guarantee program consisted of the following for the periods presented (in thousands):

�


�	�	Three�months�ended September 30, 2014		�	�	Nine�months�ended September�30,�2014		�
Operating lease vehicles under the resale value guarantee program�beginning of period	�	$	515,780	��	�	$	376,979	��
Increase in operating lease vehicles under the resale value guarantee program	�	�	81,836	��	�	�	251,962	��
Depreciation expense recorded in cost of automotive sales	�	�	(16,868	)�	�	�	(44,348	)�
Additional depreciation expense recorded in cost of automotive sales as a result of early cancellation of resale value guarantee	�	�	(2,079	)�	�	�	(5,924	)�
	�	�	�	�	�	�	�	�
Operating lease vehicles under the resale value guarantee program�end of period	�	$	578,669	��	�	$	578,669	��
	�	�	�	�	�	�	�	�
Deferred revenue�beginning of period	�	$	305,277	��	�	$	230,856	��
Increase in deferred revenue related to Model S deliveries with resale value guarantee	�	�	60,991	��	�	�	186,979	��
Amortization of deferred revenue recorded in automotive sales	�	�	(31,182	)�	�	�	(80,030	)�
Additional revenue recorded in automotive sales as a result of early cancellation of resale value guarantee	�	�	(1,515	)�	�	�	(4,234	)�
	�	�	�	�	�	�	�	�
Deferred revenue�end of period	�	$	333,571	��	�	$	333,571	��
	�	�	�	�	�	�	�	�
Resale value guarantee liability�beginning of period	�	$	345,192	��	�	$	236,298	��
Increase in resale value guarantee	�	�	53,917	��	�	�	165,222	��
Additional revenue recorded in automotive sales as a result of early cancellation of resale value guarantee	�	�	(1,367	)�	�	�	(3,778	)�
	�	�	�	�	�	�	�	�
Resale value guarantee liability�end of period	�	$	397,742	��	�	$	397,742	��
	�	�	�	�	�	�	�	�

Warranties

We provide a warranty on all vehicles, production powertrain components and systems sales, and we accrue warranty reserves upon delivery to the customer. Warranty reserves include 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 and an estimate of the nature, frequency and costs of future claims. These estimates are inherently uncertain and changes to our historical or projected experience may cause material changes to our warranty reserves in the future. The portion of the warranty provision expected to be incurred within 12 months is classified as current within accrued liabilities, while the remaining amount is classified as long-term within other long-term liabilities. During the third quarter of 2014, we extended the warranty on our Model S drive unit to eight years from four.

�

Accrued warranty activity consisted of the following for the periods presented (in thousands):

�

��

Three Months Ended
September 30,

�

Nine Months Ended
September 30,

�

��

2014

�

2013

�

2014

�

2013

�

Accrued warranty�beginning of period

��

84,371

��

�

36,877

��

�

53,183

��

�

13,012

��

Warranty costs incurred

��

�

(11,179

)�

�

(6,392

)�

�

(29,750

)�

�

(11,100

)�

Changes in liability for pre-existing warranties, including expirations

��

�

14,609

��

�

4,878

��

�

24,270

��

�

8,052

��

Provision for warranty

��

�

25,934

��

�

18,359

��

�

66,032

��

�

43,758

��

�

Accrued warranty�end of period

��

113,735

��

�

53,722

��

�

113,735

��

�

53,722

��

�

Our warranty reserves do not include projected warranty costs associated with our operating lease vehicles and vehicles sold with resale value guarantee and similar buy-back terms as such actual warranty costs are expensed as incurred. For the three and nine months ended September�30, 2014, warranty costs incurred for our resale value guarantee vehicles were $2.1 million and $5.1 million, respectively. For the three and nine months ended September�30, 2013, warranty costs incurred for our resale value guarantee vehicles were $0.7 million and $1.1 million, respectively. Warranty expense is recorded as a component of cost of revenues.

Concentration of Risk

Credit Risk

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

As of September�30, 2014 and December�31, 2013, our accounts receivable were derived primarily from amounts to be received from commercial financial institutions for approved financing arrangements between our customers and the financial institutions, sales of regulatory credits, as well as the development and sales of powertrain components and systems to automotive original equipment manufacturers (OEMs).

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

�


�	��	September�30, 2014		�	�	December�31, 2013		�
Customer A	��	�	16	%�	�	�	0	%�
Customer B	��	�	13	%�	�	�	4	%�
Customer C	��	�	10	%�	�	�	8	%�
Customer D	��	�	8	%�	�	�	30	%�

Supply Risk

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

�

Net Loss per Share of Common Stock

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

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

�

��

Three Months Ended
September 30,

�

��

Nine Months Ended
September 30,

�

��

2014

�

��

2013

�

��

2014

�

��

2013

�

Stock options

��

�

13,401,664

��

�

14,390,740

��

�

13,718,928

��

�

13,126,128

��

Convertible senior notes

��

�

2,633,925

��

�

852,987

��

�

2,294,291

��

�

453,255

��

Warrant issued in May 2013

��

�

1,350,038

��

�

��

�

846,860

��

�

��

Restricted stock units

��

�

435,528

��

�

8,870

��

�

314,202

��

�

��

Employee stock purchase plan

��

�

15,115

��

�

16,401

��

�

15,115

��

�

16,401

��

Since we expect to settle the principal amount of our outstanding convertible senior notes in cash, we use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of our common stock for a given period exceeds the conversion price of $124.52, $359.87 and $359.87 per share for the convertible senior notes due 2018 (2018 Notes), 2019 Notes and 2021 Notes, respectively.

Uncertain Tax Positions

As of September�30, 2014 and December�31, 2013, the aggregate balances of our gross unrecognized tax benefits were $25.6 million and $13.4 million, respectively, of which $23.4 million and $11.8 million, respectively, would not affect our effective tax rate as the tax benefits would increase a deferred tax asset which is currently offset by a full valuation allowance.

3. Balance Sheet Components

Inventory

As of September�30, 2014 and December�31, 2013, our inventory consisted of the following (in thousands):

�


�	��	September�30, 2014		�	��	December�31, 2013		�
Raw materials	��	$	361,837	��	��	$	184,665	��
Work in process	��	�	74,981	��	��	�	42,500	��
Finished goods	��	�	226,023	��	��	�	69,324	��
Service parts	��	�	89,651	��	��	�	43,866	��
	��	�	�	�	��	�	�	�
Total	��	$	752,492	��	��	$	340,355	��
	��	�	�	�	��	�	�	�

Finished goods primarily include Model S vehicles that were in-transit to our foreign locations for customer delivery.

�

Property, Plant and Equipment

As of September�30, 2014 and December�31, 2013, our property, plant and equipment, net, consisted of the following (in thousands):

�


�	��	September�30, 2014		�	�	December�31, 2013		�
Machinery, equipment and office furniture	��	$	607,677	��	�	$	322,394	��
Tooling	��	�	272,881	��	�	�	230,385	��
Leasehold improvements	��	�	165,826	��	�	�	94,763	��
Building and building improvements	��	�	106,507	��	�	�	67,707	��
Computer equipment and software	��	�	81,003	��	�	�	42,073	��
Land	��	�	45,201	��	�	�	45,020	��
Construction in progress	��	�	368,678	��	�	�	76,294	��
	��	�	�	�	�	�	�	�
	��	�	1,647,773	��	�	�	878,636	��
Less: Accumulated depreciation and amortization	��	�	(243,447	)�	�	�	(140,142	)�
	��	�	�	�	�	�	�	�
Total	��	$	1,404,326	��	�	$	738,494	��
	��	�	�	�	�	�	�	�

Construction in progress is comprised primarily of assets related to the manufacturing of our Model X and Model S, including building improvements at our Tesla Factory in Fremont, California as well as tooling and manufacturing equipment and capitalized interest expense. In March 2014, we entered into a lease agreement for a facility located in Lathrop, California.�We concluded that based on our facts and circumstances, the lease meets the criteria for treatment as a build-to-suit lease arrangement. Accordingly, upon the commencement of our construction activities, we recorded construction in progress and a corresponding financing liability of $19.2 million related to this facility. Depreciation of construction in progress begins when the assets are ready for their intended use. Interest expense on outstanding debt is capitalized during the period of significant capital asset construction. Capitalized interest on construction in progress is included in property, plant and equipment, and is amortized over the life of the related assets. During the three and nine months ended September�30, 2014, we capitalized $3.7 million and $6.9 million of interest expense, respectively. During the three and nine months ended September�30, 2013, we capitalized $0.4 million and $2.3 million of interest expense, respectively.

Depreciation and amortization expense during the three and nine months ended September�30, 2014 were $40.2 million and $105.1 million, respectively. Depreciation and amortization expense during the three and nine months ended September�30, 2013 were $21.2 million and $58.8 million, respectively. Total property and equipment assets under capital lease as of September�30, 2014 and December�31, 2013 were $32.2 million and $23.3 million, respectively. Accumulated depreciation related to assets under capital lease as of these dates were $10.7 million and $5.0 million, respectively.

We have acquired land for the site of our Gigafactory and have begun initial construction activities on the site and have incurred $18.8 million of costs as of September�30, 2014.

�

Other Assets

As of September�30, 2014 and December�31, 2013, our other assets consisted of the following (in thousands):

�


�	��	September�30, 2014		�	��	December�31, 2013		�
Debt issuance costs, net	��	$	21,425	��	��	$	7,315	��
Emission permits	��	�	13,420	��	��	�	13,930	��
Other	��	�	8,615	��	��	�	2,392	��
	��	�	�	�	��	�	�	�
Total	��	$	43,460	��	��	$	23,637	��
	��	�	�	�	��	�	�	�

Emission permits are related to the operation of our Tesla Factory; therefore, we amortize the emission permits over the same useful life as that of the Tesla Factory. Debt issuance costs, net as of September�30, 2014, include costs associated with our 2018 Notes, 2019 Notes and 2021 Notes (see Note 6).

Accrued Liabilities

As of September�30, 2014 and December�31, 2013, our accrued liabilities consisted of the following (in thousands):

�


�	��	September�30, 2014		�	��	December�31, 2013		�
Accrued purchases	��	$	58,658	��	��	$	19,023	��
Payroll and related costs	��	�	46,057	��	��	�	26,535	��
Taxes payable	��	�	40,825	��	��	�	38,067	��
Accrued warranty, current portion	��	�	36,814	��	��	�	19,917	��
Environmental liabilities, current portion	��	�	6,632	��	��	�	2,132	��
Accrued interest	��	�	4,748	��	��	�	741	��
Other	��	�	837	��	��	�	1,837	��
	��	�	�	�	��	�	�	�
Total	��	$	194,571	��	��	$	108,252	��
	��	�	�	�	��	�	�	�

Other Long-Term Liabilities

As of September�30, 2014 and December�31, 2013, our other long-term liabilities consisted of the following (in thousands):

�


�	��	September�30, 2014		�	��	December�31, 2013		�
Accrued warranty, less current portion	��	�	76,922	��	��	�	33,265	��
Build to suit finance obligation, less current portion	��	�	20,536	��	��	�	��	��
Deferred rent liability	��	�	11,429	��	��	�	9,886	��
Asset retirement obligations	��	�	5,461	��	��	�	2,115	��
Deferred tax liabilities	��	�	5,247	��	��	�	5,233	��
Environmental liabilities, less current portion	��	�	391	��	��	�	3,364	��
Other	��	�	6,011	��	��	�	4,334	��
	��	�	�	�	��	�	�	�
Total	��	$	125,997	��	��	$	58,197	��
	��	�	�	�	��	�	�	�

�

We established asset retirement obligations pursuant to lease agreements under which we are required to restore the properties to their original condition. The obligations are recorded at the inception of the lease based on estimates of the actions to be taken and related costs. Adjustments are made when necessary to reflect actual results.

In March 2014, we entered into a lease agreement for a facility located in Lathrop, California.�We concluded that based on our facts and circumstances, the lease meets the criteria for treatment as a build-to-suit lease arrangement.�Accordingly, upon the commencement of our construction activities, we recorded construction in progress and a corresponding financing liability of $19.2�million related to this facility.

4. Fair Value of Financial Instruments

The carrying values of our financial instruments including cash equivalents, marketable securities, accounts receivable and accounts payable approximate their fair value due to their short-term nature. As a basis for determining the fair value of certain of our assets and liabilities, we established a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level III) unobservable inputs in which there is little or no market data which requires us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Our financial assets that are measured at fair value on a recurring basis consist of cash equivalents and marketable securities. Our liabilities that were measured at fair value on a recurring basis consisted of our common stock warrant liability, which expired in May 2013.

All of our cash equivalents and current restricted cash, which are comprised primarily of money market funds, are classified within Level I of the fair value hierarchy because they are valued using quoted market prices or market prices for similar securities. Our restricted short-term marketable securities are classified within Level II of the fair value hierarchy.

As of September�30, 2014 and December�31, 2013, the fair value hierarchy for our financial assets that are carried at fair value was as follows (in thousands):

�

��

September�30, 2014

�

��

December�31, 2013

�

��

Fair
Value

�

��

Level I

�

��

Level�II

�

��

Level�III

�

��

Fair
Value

�

��

Level I

�

��

Level�II

�

��

Level�III

�

Money market funds

��

1,685,123

��

1,685,123

��

460,313

��

460,313

��

U.S. treasury bills

��

�

16,683

��

�

16,683

��

�

��

�

��

�

��

�

��

�

��

�

��

�

��

�

��

�

��

�

��

�

��

�

��

�

��

�

Total

��

1,701,806

��

1,701,806

��

460,313

��

460,313

��

�

��

�

��

�

��

�

��

�

��

�

��

�

��

�

Our available-for-sale marketable securities classified by security type as of September�30, 2014 consisted of the following (in thousands):

�

��

September�30, 2014

�

��

Amortized
Cost

�

��

Gross
Unrealized
Gains

�

��

Gross
Unrealized
Losses

�

��

Fair�Value

�

U.S. treasury bills

��

�

16,667

��

�

��

�

��

�

16,683

��

�

The changes in the fair value of our common stock warrant liability (see Note 6) were as follows (in thousands):

�


�	��	Nine�Months�Ended September�30,�2013		�
Fair value, beginning of period	��	$	10,692	��
Change in fair value	��	�	(10,692	)�
	��	�	�	�
Fair value, end of period	��	$	��	��
	��	�	�	�

The estimated fair value of our 2018 Notes based on a market approach was approximately $1.33 billion (par value $659.8 million) as of September�30, 2014 and $914.9 million (par value of $660.0 million) as of December�31, 2013, respectively, and represent a Level II valuation. The estimated fair value of our 2019 Notes and 2021 Notes based on a market approach was approximately $876.3 million (par value $920.0 million) and $1.31 billion (par value of $1.38 billion) as of September�30, 2014, respectively, and represents a Level II valuation. When determining the estimated fair value of our long-term debt, we used a commonly accepted valuation methodology and market-based risk measurements that are indirectly observable, such as credit risk.

5. Customer Deposits

Customers are required to make an initial deposit to place an order for their vehicle.�Customer deposits vary depending on the vehicle model and country of delivery. These amounts are recorded as current liabilities until the vehicle is delivered. While payment for the remaining balance of the purchase price of the vehicle is generally collected at time of delivery to the customer, in some cases partial or full payment may be collected prior to delivery. Such payments are recorded as customer deposits.

As of September�30, 2014 and December�31, 2013, we held customer deposits of $227.1 million and $163.2 million, respectively.

6. Convertible and Long-term Debt Obligations

0.25% and 1.25% Convertible Senior Notes and Bond Hedge and Warrant Transactions

In March 2014, we issued $800.0�million principal amount of 0.25% convertible senior notes due 2019 (2019 Notes) and $1.20 billion principal amount of 1.25% convertible senior notes due 2021 (2021 Notes) in a public offering. In April 2014, we issued an additional $120.0 million aggregate principal amount of 2019 Notes and $180.0 million aggregate principal amount of 2021 Notes, pursuant to the exercise in full of the overallotment options of the underwriters of our March 2014 public offering. The total net proceeds from these offerings, after deducting transaction costs, were approximately $905.8�million from 2019 Notes and $1.36 billion from 2021 Notes, respectively. We incurred $14.2�million and $21.4 million, respectively, of debt issuance costs in connection with the 2019 Notes and the 2021 Notes, which we initially recorded in other assets and are amortizing to interest expense using the effective interest method over the contractual terms of these notes.�The interest rates are fixed at 0.25% and 1.25%�per annum and are payable semi-annually in arrears on March�1 and September�1 of each year, commencing on September�1, 2014. During the three and nine months ended September�30, 2014, we recognized $1.0 million and $2.2 million of interest expense, respectively, related to the amortization of debt issuance costs and $4.9 million and $11.2 million of accrued coupon interest expense, respectively.

Each $1,000 of principal of these notes will initially be convertible into 2.7788�shares of our common stock, which is equivalent to an initial conversion price of approximately $359.87 per share, subject to adjustment upon the occurrence of specified events.�Holders of these notes may convert their Notes at their option on or after December�1, 2018 for the 2019 Notes and on or after December�1, 2020 for the 2021 Notes.�Further, holders of these notes may convert their notes at their option prior to the respective dates above, only under the following circumstances: (1)�during any fiscal quarter beginning after the fiscal quarter ending June�30, 2014, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the last 30�consecutive trading days of the

�

immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the applicable notes on each applicable trading day; (2)�during the five business day period following any five consecutive trading day period in which the trading price for the applicable notes is less than 98% of the average of the closing sale price of our common stock for each day during such five trading day period; or (3)�if we make specified distributions to holders of our common stock or if specified corporate transactions occur.�Upon conversion of the 2019 Notes, we would pay or deliver as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.�Upon conversion of the 2021 Notes, we would pay the holders in cash for the principal amount and, if applicable, shares of our common stock (subject to our right to deliver cash in lieu of all or a portion of such shares of our common stock) based on a daily conversion value.�If a fundamental change occurs prior to the maturity date, holders of these notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount of the notes, plus any accrued and unpaid interest.�In addition, if specific corporate events occur prior to the applicable maturity date, we will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event in certain circumstances. During the third quarter of 2014, the closing price of our common stock did not meet or exceed 130% of the applicable conversion price of our 2019 Notes and 2021 Notes on at least 20 of the last 30 consecutive trading days of the quarter; furthermore, no other conditions allowing holders of these notes to convert have been met as of September�30, 2014. Therefore, the 2019 Notes and 2021 Notes are not convertible during the fourth quarter of 2014 and are classified as long-term debt. Should the closing price conditions be met in the fourth quarter of 2014 or a future quarter, the Notes will be convertible at their holders� option during the immediately following quarter.

In accordance with accounting guidance on embedded conversion features, we valued and bifurcated the conversion option associated with the notes from the respective host debt instrument and initially recorded the conversion option of $188.1 million for the 2019 Notes and $369.4 million for the 2021 Notes in stockholders� equity.�The resulting debt discounts on the 2019 Notes and 2021 Notes are being amortized to interest expense at an effective interest rate of 4.89% and 5.96%, respectively, over the contractual terms of the notes.�During the three and nine months ended September�30, 2014, we recognized $19.6 million and $44.1 million of interest expense, respectively, related to the amortization of the debt discount.�As of September�30, 2014, the net carrying value of 2019 Notes and 2021 Notes was $751.2 million and $1.04 billion, respectively.

In connection with the offering of these notes in March 2014, we entered into convertible note hedge transactions whereby we have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 5.6�million shares of our common stock at a price of approximately $359.87 per share.�The total cost of the convertible note hedge transactions was $524.7�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) a total of approximately 2.2�million shares of our common stock at a price of $512.66 for the 2019 Notes and a total of approximately 3.3�million shares of our common stock at a price of $560.64 per share for 2021 Notes. We received $338.4�million in cash proceeds from the sale of these warrants.�Similarly, in connection with the issuance of additional notes in April 2014, we entered into convertible note hedge transactions and paid an aggregate $78.7�million. In addition, we sold warrants to purchase (subject to adjustment for certain specified events) a total of approximately 0.3�million shares of our common stock at a strike price of $512.66 per share for the warrants relating to 2019 Notes, and a total of approximately 0.5�million shares of our common stock at a strike price of $560.64 per share for the warrants relating to 2021 Notes. We received aggregate proceeds of approximately $50.8 million from the sale of the warrants. Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to offset any actual dilution from the conversion of these notes and to effectively increase the overall conversion price from $359.87 to $512.66 per share in the case of warrants relating to 2019 Notes and from $359.87 to $560.64 in the case of warrants relating to 2021 Notes.�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 condensed consolidated balance sheet as of September�30, 2014.

1.50%�Convertible Senior Notes and Bond Hedge and Warrant Transactions

In May 2013, we issued $660.0�million aggregate principal amount of 2018 Notes in a public offering. The net proceeds from the offering, after deducting transaction costs, were approximately $648.0�million. We incurred $12.0�million of debt issuance costs in connection with 2018 Notes which we initially recorded in other assets and are amortizing to interest expense using the effective interest method over the contractual term of 2018 Notes. The interest under 2018 Notes is fixed at 1.50%�per annum and is payable semi-annually in arrears on June�1 and December�1 of each year, commencing on December�1, 2013. During the three and nine months ended September�30, 2014, we recognized $0.5 million and $1.5 million of interest expense, respectively, related to the amortization of debt issuance costs and $2.5 million and $7.3 million of accrued coupon interest expense, respectively. During the three and nine months ended September�30, 2013, we recognized $0.5 million and $0.7 million of interest expense related to the amortization of debt issuance costs and $2.5 million and $3.6 million of accrued coupon interest expense, respectively.

In accordance with accounting guidance on embedded conversion features, we valued and bifurcated the conversion option associated with 2018 Notes from the host debt instrument and initially recorded the conversion option of $82.8 million in stockholders� equity. The resulting debt discount on 2018 Notes is being amortized to interest expense at an effective interest rate of 4.29% over the contractual term of the notes. During the three and nine months ended September�30, 2014, we recognized $3.9 million and $11.5 million of interest expense, respectively, related to the amortization of the debt discount. During the three and nine months ended September�30, 2013, we recognized $3.8 million and $5.4 million of interest expense, respectively, related to the amortization of the debt discount. As of September�30, 2014, the net carrying value of 2018 Notes was $597.6 million.

In connection with the offering of the 2018 Notes, we entered into convertible note hedge transactions whereby we have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 5.3�million shares of our common stock at a price of approximately $124.52 per share. The cost of the convertible note hedge transactions was $177.5�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) a total of approximately 5.3�million shares of our common stock at a price of $184.48 per share. We received $120.3�million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to offset any actual dilution from the conversion of the 2018 Notes and to effectively increase the overall conversion price from $124.52 to $184.48 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 in the condensed consolidated balance sheet.

During the third quarter of 2014, the closing price of our common stock exceeded 130% of the applicable conversion price of our 2018 Notes on at least 20 of the last 30 consecutive trading days of the quarter; therefore, holders of 2018 Notes may convert their notes during the fourth quarter of 2014. As such, we classified the $597.6 million carrying value of our 2018 Notes as current liabilities and classified $62.2 million, representing the difference between the aggregate principal of our 2018 Notes of $659.8 million and the carrying value of 2018 Notes, as mezzanine equity on our condensed consolidated balance

�

sheet as of September�30, 2014. Similarly, debt issuance costs were classified as other current assets as of September�30, 2014. Should the closing price conditions be met in the fourth quarter of 2014 or a future quarter, 2018 Notes will be convertible at their holders� option during the immediately following quarter.

Full Repayment of DOE Loan Facility and Expiration of DOE Warrant

On January�20, 2010, we entered into a loan facility with the Federal Financing Bank (FFB), and the Department of Energy (DOE), pursuant to the Advanced Technology Vehicles Manufacturing Incentive Program. We refer to the loan facility with the DOE as the DOE Loan Facility. Under the DOE Loan Facility, the FFB had made available to us two multi-draw term loan facilities in an aggregate principal amount of $465.0 million. As of August�31, 2012, we had fully drawn down the aforementioned facilities.

In connection with the closing of the DOE Loan Facility, we issued in January 2010 a warrant to the DOE to purchase up to 9,255,035 shares of our Series E convertible preferred stock at an exercise price of $2.51 per share. Upon the completion of our initial public offering on July�2, 2010, this preferred stock warrant became a warrant to purchase up to 3,090,111 shares of common stock at an exercise price of $7.54 per share.

In March 2013, we entered into an amendment with the DOE under which we agreed to repay all outstanding principal and interest payments under the DOE Loan Facility by December�15, 2017 prior to the warrant vesting start date of December�15, 2018; therefore, the DOE warrant was no longer expected to vest and its fair value was reduced to zero as of March�31, 2013. During the three months ended March�31, 2013, we recognized other income for the reduction of the fair value of the DOE warrant in the amount of $10.7�million.

In May 2013, in connection with the closing of our offerings of common stock and 2018 Notes, we paid $451.8 million to settle all outstanding loan amounts of $441.0 million under the DOE Loan Facility, including principal and interest, as well as an early repayment penalty of $10.8 million which was recorded in interest expense for the year ended December�31, 2013. Upon termination of the DOE Loan Facility, $29.3 million previously held in a dedicated debt service account was released by the DOE.

7. Equity Incentive Plans

Performance-based Stock Option Grant

In January 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 our company, the Compensation Committee of our Board of Directors granted stock options to certain employees to purchase 782,500 shares of our common stock. Each such grant consists of four vesting tranches with a vesting schedule based entirely on the attainment of future performance milestones, assuming continued employment and service to us through each vesting date.

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1/4th of the shares subject to the options are scheduled to vest upon completion of the first Model X Production Vehicle;

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1/4th of the shares subject to the options are scheduled to vest upon achieving aggregate vehicle production of 100,000 vehicles in a trailing 12-month period;

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1/4th of the shares subject to the options are scheduled to vest upon completion of the first Gen III Production Vehicle; and

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1/4th of the shares subject to the options are scheduled to vest upon achievement of annualized gross margin of greater than 30.0% in any three years.

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As of September�30, 2014, the following performance milestone was considered probable of achievement.

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Completion of the first Model X Production Vehicle.

For the three and nine months ended September�30, 2014, we recorded stock-based compensation expense of $2.9 million and $9.2 million related to this grant, respectively.

2012 CEO Grant

In August 2012, our Board of Directors granted 5,274,901 stock options to our CEO (2012 CEO Grant). The 2012 CEO Grant consists of ten vesting tranches with a vesting schedule based entirely on the attainment of both performance conditions and market conditions, assuming continued employment and service to us through each vesting date.

Each of the ten vesting tranches requires a combination of one of the ten pre-determined performance milestones and an incremental increase in our market capitalization of $4.0 billion, as compared to the initial market capitalization of $3.2 billion measured at the time of the 2012 CEO Grant.

As of September�30, 2014, the market conditions for six vesting tranches and the following performance milestone were achieved:

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Successful completion of the Model X Alpha Prototype.

As of September�30, 2014, the following three performance milestones were considered probable of achievement:

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Successful completion of the Model X Beta Prototype;

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Completion of the first Model X Production Vehicle; and

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Successful completion of the Model 3 Alpha Prototype.

For the three and nine months ended September�30, 2014, we recorded stock-based compensation expense of $3.8 million and $18.2 million, respectively. For the three and nine months ended September�30, 2013, we recorded stock-based compensation expense of $3.6 million and $8.8 million, respectively.

No cash compensation has been received by our CEO for his services to the company.

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Summary Stock-Based Compensation Information

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

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Three Months Ended
September�30,

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��

Nine Months Ended
September�30,

�

��

2014

�

��

2013

�

��

2014

�

��

2013

�

Cost of sales

��

5,383

��

3,017

��

12,401

��

5,616

��

Research and development

��

�

16,639

��

�

8,707

��

�

45,006

��

�

24,916

��

Selling, general and administrative

��

�

17,136

��

�

9,715

��

�

54,572

��

�

25,034

��

�

��

�

��

�

��

�

Total

��

39,158

��

21,439

��

111,979

��

55,566

��

�

��

�

��

�

��

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8. Segment Information

We operate as one reportable segment which is the design, development, manufacturing and sales of electric vehicles and electric vehicle powertrain components. During the nine months ended September�30, 2014, we recognized revenues of $984.0 million in the United States, $371.7�million in Norway and $342.8 million in China. In 2013, our revenues were derived primarily from sales in the United States. Substantially all of our long-lived assets are in the United States.

9. Strategic Partnerships

Daimler Mercedes-Benz B-Class EV Program

During the fourth quarter of 2011, Daimler engaged us to assist with the development of a full electric powertrain for a Daimler Mercedes-Benz B-Class electric vehicle. During the fourth quarter of 2012, we entered into a development agreement to assist Daimler with the development of a full electric powertrain for a Daimler Mercedes-Benz B-Class EV vehicle. Pursuant to the development agreement, Daimler will pay us up to $33.2 million for the successful completion of certain at risk development milestones and the delivery of prototype samples. During the three and nine months ended September�30, 2014, we completed the final development milestone, delivered prototype samples and recognized $2.8 million and $5.6 million in development services revenue, respectively. During the three and nine months ended September�30, 2013, we completed various milestones, delivered prototype samples and recognized $1.2 million and $11.3 million in development services revenue, respectively, related to the Mercedes-Benz B-Class EV program.

Toyota RAV4 Program

In July 2011, we entered into a supply and services agreement with Toyota for the supply of a validated electric powertrain system, including a battery pack, charging system, inverter, motor, gearbox and associated software for integration into the electric vehicle version of the Toyota RAV4. Additionally, we provide Toyota with certain services related to the supply of the electric powertrain system. During the three and nine months ended September�30, 2014, we recognized revenue of $7.2 million and $38.5 million in automotive sales revenue, respectively. During the three and nine months ended September�30 2013, we recognized revenue of $7.2 million and $34.9 million in automotive sales revenue, respectively. Our production activities under this program ended in the third quarter of 2014.

10. Commitments and Contingencies

Environmental Liabilities

In May 2010, we entered into an agreement to purchase an existing automobile production facility located in Fremont, California from New United Motor Manufacturing, Inc. (NUMMI). NUMMI has previously identified environmental conditions at the Fremont site which could affect soil and groundwater, and until recently, were undertaking efforts to address these conditions. These conditions

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are now being addressed by us and NUMMI. Although we have been advised by NUMMI that it has documented and managed the environmental issues and we completed a reasonable level of diligence on such environmental issues at the time we purchased the facility, we cannot determine the potential costs to remediate any pre-existing contamination with any certainty. Based on management�s best estimate, at the time of the facility purchase, we estimated the fair value of the environmental liabilities that we assumed to be $5.3 million. The fair value of these liabilities was determined based on an expected value analysis of the related potential costs to investigate, remediate and manage various environmental conditions that were identified as part of NUMMI�s facility decommissioning activities as well as our own diligence efforts.

We reached an agreement with NUMMI under which, over a ten year period, we will pay the first $15.0 million of any costs of any governmentally-required remediation activities for contamination that existed prior to the completion of the facility and land purchase for any known or unknown environmental conditions, and NUMMI has agreed to pay the next $15.0 million for such remediation activities. Our agreement provides, in part, that NUMMI will pay up to the first $15.0 million on our behalf if such expenses are incurred in the first four years of our agreement, subject to our reimbursement of such costs on the fourth anniversary date of the closing. Through September�30, 2014, remediation costs of $3.1 million had been incurred by NUMMI.

On the ten-year anniversary of the closing or whenever $30.0 million has been spent on the remediation activities, whichever comes first, NUMMI�s liability to us with respect to remediation activities ceases, and we are responsible for any and all environmental conditions at the Fremont site. At that point in time, we have agreed to indemnify, defend, and hold harmless NUMMI from all liability and we have released NUMMI for any known or unknown claims except for NUMMI�s obligations for representations and warranties under the agreement. As of September�30, 2014 and December�31, 2013, we accrued a total of $7.0 million and $5.5 million related to these environmental liabilities, respectively. As we continue with our construction and operating activities, actual costs may differ materially from our estimates.

Other Commitments and Contingencies

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

In November 2013, a putative securities class action lawsuit was filed against Tesla in U.S. District Court, Northern District of California, alleging violations of, and seeking remedies pursuant to, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint, made claims against Tesla and its CEO, Elon Musk, sought damages and attorney�s fees on the basis of allegations that, among other things, Tesla and Mr.�Musk made false and/or misleading representations and omissions, including with respect to the safety of Model S. This case was brought on behalf of a putative class consisting of certain persons who purchased Tesla�s securities between August�19, 2013 and November�17, 2013. On September�26, 2014, the trial court, upon the motion of Tesla and Mr.�Musk, dismissed the complaint with prejudice, and indicated that a formal written order will be forthcoming.

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ITEM�2.

MANAGEMENT�S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q.

Overview and Quarter Highlights

We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components. We are currently producing and selling our second vehicle, the Model S sedan. Model S is a four door, five-passenger premium sedan that offers exceptional performance, functionality and attractive styling. The Model S inherited many of the electric powertrain innovations we introduced with our first vehicle, the Tesla Roadster. We commenced deliveries of Model S in June 2012 and have delivered approximately 47,000 vehicles through September�30, 2014. We recently announced the availability of our Dual Motor Model S and intend to start delivering these vehicles to customers, starting with a performance-optimized version, in December 2014.

We are continuing to develop our Model X crossover vehicle and currently intend to commence customer deliveries in the third quarter of 2015. After the Model X, our goal is to introduce the Model 3, a lower priced sedan designed for the mass market, in 2017.

We sell our vehicles through our own sales and service network which we are continuing to grow globally. We are also continuing to build a network of Superchargers in the United States, Europe and Asia to allow Model S owners to have the ability to travel long distances without a limitation on range by charging their cars at a very fast rate for free.

During the three months ended September�30, 2014, we recognized total revenues of $851.8 million, an increase of $420.5 million over total revenues of $431.3 million for the three months ended September�30, 2013. This growth in revenues was primarily driven by growth of Model S deliveries worldwide, including in Europe and China, an increase in regulatory credit sales, and an increase in powertrain sales to Daimler AG (Daimler) for the Mercedes-Benz B-Class Electric Drive.

Gross margin for the three months ended September�30, 2014 was 29.6%, an increase from 24.5% for the three months ended September�30, 2013. Higher regulatory credit sales, higher vehicle production volume, supply chain efficiencies and component cost reductions, partially offset by one-time manufacturing inefficiencies associated with transitioning to our new final assembly line, contributed to the year-over-year increase in gross margin.

Research and development (R&D) expenses for the three months ended September�30, 2014 were $135.9 million, an increase from $56.4 million for the three months ended September�30, 2013. R&D expenses in the third quarter of 2013 included activities to develop the right hand drive version of Model S as well as to homologate Model S for markets outside of North America. Higher R&D expenses in the third quarter of 2014 reflected our accelerated engineering work on Model X as well as development work on our dual motor powertrain and on other programs.

During 2013, we significantly increased our sales and service footprint both in North America and Europe, as well as accelerated the roll-out of our Supercharging network. With the continued global expansion of our customer support infrastructure and the business in general in 2014, selling, general and administrative (SG&A) expenses were $155.1 million for the three months ended September�30, 2014, compared to $77.1 million for the three months ended September�30, 2013.

We ended the quarter with $2.39 billion in cash and cash equivalents and current restricted cash and short-term marketable securities, which was a significant increase from cash of $848.9 million held at the end of 2013. This increase was primarily driven by our issuance of an aggregate of $2.30 billion of convertible senior notes in 2014. In connection with the issuance of these notes, we entered into convertible note hedge and warrant transactions. For more information on the notes,

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convertible note hedge and warrant transactions, see Note 6 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q under Item�1. Financial Information.

We expect that our current sources of liquidity together with our current projections of cash flow from operating activities will provide us adequate liquidity based on our current plans. However, if market conditions are favorable, we may evaluate alternatives to opportunistically pursue liquidity options.

Management Opportunities, Challenges and Risks

In October 2014, we revealed our dual motor all-wheel drive version of Model S and our Autopilot system. These announcements have significantly increased our weekly Model S order rate. Based on net orders since that announcement, excluding the extraordinary initial demand peak, we are confident of a 50% increase in both net orders and deliveries for Model S alone in 2015. Moreover, we expect that demand for Model S will continue to increase worldwide as we grow our customer support infrastructure and continue to broaden the appeal of our products, and as consumer awareness improves.

In order to meet this anticipated demand, and to prepare for Model X anticipated demand, we are executing a plan to increase our combined Model S and Model X production capacity to over 2,000 units per week by the end of 2015. In August 2014, we began our production ramp by transitioning to our new final assembly line and upgrading our body center. We are planning further investments in production capacity during 2015, including upgrading our paint shop and building a new body shop for Model X. We expect our annual production will increase by over 50% each year for the next several years.

Our recent production capacity expansion contributed to a production week of over 1,000 vehicles near the end of the third quarter of 2014. However, the ramp to our target production rate took longer than expected due to system integration challenges, reducing our production by almost 2,000 vehicles during the third quarter. Despite entering the fourth quarter with this production deficit, we still expect to produce about 35,000 cars for 2014. However, the loss of these cars in the third quarter means fewer available to deliver in the fourth quarter and our ability to ramp up production in the fourth quarter is constrained by the complexity of launches related to dual motor and autopilot hardware. Consequently, we expect to be able to deliver only about 33,000 vehicles in 2014, which is 50% above 2013 deliveries but 5 � 7% lower than our prior estimates for 2014. Any unexpected issues with the continued ramp of our production line or the launch of Dual Motor Model S could affect our ability to achieve these revised delivery targets. One of the significant actions we intend to take in order to reduce manufacturing complexity is simplify our product offering by reducing options and powertrain combinations. We believe this will enhance our ability to scale production in 2015.

Through the first half of 2013, we had delivered Model S vehicles solely to customers in North America. In August 2013, we started European deliveries of Model S and in April 2014, we commenced deliveries into Asia, starting in China. Based on our current projections, we expect our long-term sales outside of North America will increase to almost half of our worldwide automotive sales. We will continue to price Model S in markets outside of the United States the same as the price for Model S in the United States, with the addition of only unavoidable taxes, customs duties and transportation costs.

We plan to expand in China as quickly as possible because we believe that the country could be one of our largest markets within a few years. In addition to increased deliveries into China, we have recently commenced deliveries in Japan and Hong Kong. As compared to markets in the United States and Europe, we have relatively limited experience in Asian markets; thus, we may face difficulties meeting our future delivery plans in Asia.

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In April 2013, we began offering a resale value guarantee to all customers who purchased a Model S in the United States and financed their vehicle through one of our specified commercial banking partners. We introduced this program in Canada in October 2013 and into certain European markets in October 2014. Under the program, Model S customers have the option of selling their vehicle back to us during the period of 36 to 39 months after delivery for a pre-determined resale value. In certain markets, we also offer buy back guarantees to financial institutions which obligate us to repurchase, and the institution to sell us, the vehicles for a pre-determined price. We account for these transactions as operating leases and accordingly, we defer and amortize to automotive sales revenue the initial purchase consideration less guaranteed repurchase amount on a straight-line basis, over the contractual term of the guarantee program. Similarly, we capitalize and depreciate the cost of the respective operating lease vehicles less expected salvage value to cost of automotive sales over the same period. If a customer decides not to sell their vehicle back to us by the end of the resale value guarantee term, the amount of the resale value guarantee and operating lease vehicle net book value are then recognized in automotive sales and cost of automotive sales, respectively.

The resale value guarantee amount represents management�s best estimate as to the resale value of the Model S vehicle and related vehicle options during the 36 to 39 month period after delivery. We are depreciating our operating lease vehicles to expected salvage value of our operating lease vehicles at the end of their economic useful life (i.e., the end of their expected operating lease term), and we will adjust our depreciation estimates as needed if the expected salvage value decreases in future periods. As we accumulate more actual data related to the resale experience of Model S, we may be required to make significant changes to our estimates.

During the third quarter of 2013, we provided the resale value guarantee to 1,877 Model S deliveries in North America and to 1,190 Model S deliveries during the third quarter of 2014. To date, we have provided the resale value guarantee to approximately 8,800 customers in North America. Model S deliveries with the resale value guarantee currently do not impact our cash flows and liquidity, since we receive the full amount of cash for the vehicle sales price at delivery. However, this program has adversely impacted our near-term revenues and operating results by requiring the deferral of revenues and costs into future periods under lease accounting. Although lease accounting will continue to adversely impact our revenues and operating results as this and similar programs initially ramp up, as time passes, the amortization of existing deferred revenues and costs will begin to partially offset this adverse impact. Furthermore, while we do not assume any credit risk related to the customer, we are exposed to the risk that the vehicles� resale value may be lower than our estimates and the volume of vehicles returned to us may be higher than our estimates which could adversely impact our gross margin.

In April 2014, we launched Tesla Finance in the United States to offer leasing to small and medium-sized businesses. We expanded this program to consumers in the United States in October 2014. Leasing through Tesla Finance is now available in 37 states, the District of Columbia and in 4 provinces of Canada. We leased 347 vehicles during the third quarter of 2014 and expect to increase our leasing activities significantly during the rest of 2014.

Our U.S. leases are offered directly from Tesla as well as through a bank partner. In both cases, leasing exposes us to residual value risk and will adversely impact our near-term revenues and operating results by requiring the deferral of revenues and costs into future periods under lease accounting. In addition, for leases offered directly from Tesla Finance (but not for those offered through our bank partner), we will not receive the full amount of the cash for the vehicle price at delivery and will assume customer credit risk.

We continue to evaluate a number of other customer financing products, either directly through Tesla Finance or indirectly through third party financial institutions, as a way to better serve our growing customer base. If customer interest in these financing options is significant, we may be directly or indirectly subject to resale value risk for the Model S.

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In addition to sales of Model S, we recognize automotive sales from our supply of powertrain systems to OEMs. During the second quarter of 2014, we began production deliveries to Daimler for the Mercedes-Benz B Class Electric Drive and continued these deliveries in the third quarter of 2014. Additionally, we substantially completed our production and sales activities for the Toyota RAV4EV during the third quarter of 2014.

Significant cost improvements for Model S were achieved in 2013 and have continued in 2014, including part cost reductions as well as manufacturing efficiencies. We expect some of these trends to continue as we execute on our roadmap of achieving further component cost reductions and benefit from economies of scale. In the third quarter of 2014, one-time manufacturing inefficiencies related to the transition to our new final assembly line increased the cost of all vehicles produced during the quarter and negatively impacted our gross margin for the quarter. Moreover, as we expect to deliver about half of these vehicles within the fourth quarter, we expect a similar negative impact on our fourth quarter margins. We expect our automotive gross margin (excluding zero emission vehicle (ZEV) credit sales) to increase from third quarter 2014 levels to greater than 28% by the end of the fourth quarter of 2014, as manufacturing efficiencies and part costs continue to improve. Factors weighing on the automotive gross margin for the full quarter include delivery of vehicles built in Q3 with lower manufacturing efficiency and slightly lower average selling prices from weaker European currencies. Model S gross margin itself is generally higher than automotive gross margin, which is moderately suppressed due to the significantly lower gross margin on powertrain sales. If we are not able to achieve the planned cost reductions from our various cost savings and process improvement initiatives, our ability to reach our gross margin goals would be negatively affected.

We recognized $129.8 million in ZEV credit sales in 2013 which contributed to our gross margin. Although ZEV credit revenue was strong in 2013, over 90% of ZEV credit sales were recognized during the first half of 2013 with only $10.4 million recognized during the three months ended September�30, 2013. During the three months ended September�30, 2014, we recognized $76.1 million in ZEV credit sales as a result of one-time contracts with various OEMs. Since we do not expect this level of activity in future quarters, we expect the contribution of ZEV credit revenue to be lower in the future. While we will pursue opportunities to monetize ZEV credits we earn from the sale of our vehicles, we do not plan to rely on these sales to be a contributor to gross margin and our business model and financial plan are not predicated on such ZEV credits. Other regulatory credit sales recognized during the three months ended September�30, 2014 were $16.7 million, compared to $14.8 million for the three months ended September�30, 2013.

In February 2012, we revealed an early prototype of the Model X crossover as the first vehicle we intend to develop by leveraging the Model S platform. We continue to test the Alpha prototypes and are in the process of building the first Beta prototypes. We recently decided to build in significantly more validation testing time to achieve the best Model X possible. We also expect this will enable a more rapid production ramp as compared to the production ramp for Model S in 2012. In anticipation of this effort, we now expect Model X deliveries to start in the third quarter of 2015. Our ability to launch the Model X program on time and cost efficiently is dependent upon a variety of factors, including supplier readiness, engineering completion and the successful completion of our validation testing.

We plan to continue to expand our stores and service infrastructure in order to expand our geographical presence and to provide better service in areas with a high concentration of Model S customers. We also complement our store strategy with sales capability within service centers to more rapidly and efficiently expand our retail footprint. We

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continue to build service infrastructure in advance of demand to ensure that after-sale services are available when and where needed. For the remainder of 2014, the rate of location openings will be fastest in Asia, followed by Europe, and then North America.

At the end of May 2013, we announced the significant expansion of our Supercharger network as well as plans to reduce charging time at our Superchargers. Since the time of our announcement, we have been installing Superchargers at an accelerating pace. We are continuing to expand our network in North America and have increased our rate of deployment in Europe and Asia. If we experience difficulties in finding suitable sites, negotiating leases or obtaining required permits for such locations, our planned expansion of such Superchargers could be delayed.

We are developing the Tesla Gigafactory, a facility where we intend to work together with our suppliers to integrate battery precursor material, cell, module and battery pack production in one location. In June 2014, we broke ground on the Gigafactory outside of Reno, Nevada. Construction continued during the third quarter of 2014 at an accelerated pace with first cells expected to be produced in 2016 for use in Model S and Model X.

We plan to use the battery packs manufactured at the Gigafactory for our vehicles, initially for Model S and Model X, and later for our Model 3 vehicle, and stationary storage applications. The Gigafactory is currently expected to attain full production capacity in 2020, which is anticipated to be sufficient for the production of approximately 500,000 vehicles annually as well as stationary storage applications. By the time the Gigafactory reaches full, annualized production in 2020, we expect battery pack production capacity to reach 50 GWh. Of this, we expect to build 35 GWh of cell production capacity at the Gigafactory and purchase 15 GWh of cells from other manufacturers, potentially including Panasonic.

We believe that the Gigafactory will allow us to achieve a major reduction in the cost of our battery packs of greater than 30% on a per kWh basis by the end of the first year of volume production of Model 3. The total capital expenditures associated with the Gigafactory through 2020 are expected to be $4-5 billion, of which approximately $2 billion is expected to come from Tesla. A modular build strategy is enabling us to scale construction, capital requirements and capacity commensurate with growing demand.

While our plan is to produce lithium-ion cells and finished battery packs at the Gigafactory, our plans for such production are at a very early stage. We have no experience in the production of lithium-ion cells, and accordingly we intend to engage partners with significant experience in cell production. We recently formalized our agreement with Panasonic to partner on the Gigafactory. Panasonic will invest in production equipment that it will use to manufacture and supply us with battery cells. We will prepare and provide the land, buildings and utilities for the Gigafactory, invest in production equipment for battery module and pack production and be responsible for the overall management of the Gigafactory. Additional Gigafactory partners will be finalized shortly to create a fully integrated industrial complex. Although planning discussions with production and supply chain partners continue to progress well, to date we have not formalized any agreements with any other partners. In addition, the cost of building and operating the Gigafactory could exceed our current expectations and the Gigafactory may take longer to bring online than we anticipate.

Operating expenses and capital expenditures have significantly increased in 2014 and will continue to do so as we continue to invest in the long-term growth of the company. For the rest of 2014, we will continue to significantly expand production capacity for Model S and Model X, continue the construction of the Gigafactory, invest in our customer support infrastructure, continue the development of Model X and start early design work on Model 3. Our R&D expenses in particular are continuing to increase as design and engineering work accelerates on Model X and overall product development but is expected to decrease as a percentage of revenue over time. R&D expenses for the fourth quarter of 2014 are expected

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to grow sequentially by approximately 10% as compared to the third quarter of 2014. Our SG&A expenses will continue to grow in absolute terms as we expand our customer and corporate infrastructure globally. SG&A expenses for the fourth quarter of 2014 are also expected to grow sequentially by approximately10% as compared to the third quarter of 2014. We plan to spend about $350 million in capital expenditures in the fourth quarter of 2014 as we continue to invest in additional production capacity, accelerate the pace of Gigafactory construction, and continue vehicle development and our global expansion.

During the third quarter of 2014, certain conditions with respect to the closing prices of our common stock in accordance with the terms of our 2018 convertible senior notes (2018 Notes) were met and accordingly, 2018 Notes are convertible at the holders� option during the fourth quarter of 2014. Upon conversion of 2018 Notes, we will be obligated to pay cash for the principal amount of the converted notes and we may also have to deliver shares of our common stock in respect of such converted notes. Any conversion of the notes prior to their maturity or acceleration of the repayment of the notes could have a material adverse effect on our cash flows, business, results of operations and financial condition. Should such closing price conditions continue to be met in the fourth quarter of 2014 or a future quarter, 2018 Notes will be convertible by their holders during the immediately following quarter. Similarly, if certain conditions are met with respect to our 2019 Notes or 2021 Notes in the fourth quarter of 2014 or a future quarter, the 2019 Notes or 2021 Notes will be convertible by their holders during the immediately following quarter.

Critical Accounting Policies and Estimates

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

For a description of our critical accounting policies and estimates, please refer to the �Critical Accounting Policies and Estimates� section of our Management�s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form�10-K for the year ended December�31, 2013, as filed with the Securities and Exchange Commission (SEC). In addition, please refer to Note 2, �Summary of Significant Accounting Policies,� to our Condensed Consolidated Financial Statements included under Part�I, Item�1 of this Quarterly Report on Form�10-Q.

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Results of Operations

The following table sets forth our condensed consolidated statements of operations data for the periods presented (in thousands):

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��

Three Months Ended
September�30,

�

Nine Months Ended
September�30,

�

��

2014

�

2013

�

2014

�

2013

�

Revenues

��

�

Automotive sales

��

849,009

��

�

430,196

��

�

2,236,062

��

�

1,386,934

��

Development services

��

�

2,795

��

�

1,150

��

�

5,633

��

�

11,343

��

�

Total revenues

��

�

851,804

��

�

431,346

��

�

2,241,695

��

�

1,398,277

��

Cost of revenues

��

�

Automotive sales

��

�

598,472

��

�

324,883

��

�

1,615,047

��

�

1,090,300

��

Development services

��

�

1,481

��

�

3,595

��

�

6,674

��

�

8,304

��

�

Total cost of revenues

��

�

599,953

��

�

328,478

��

�

1,621,721

��

�

1,098,604

��

Gross profit

��

�

251,851

��

�

102,868

��

�

619,974

��

�

299,673

��

Operating expenses

��

�

Research and development

��

�

135,873

��

�

56,351

��

�

325,135

��

�

163,523

��

Selling, general and administrative

��

�

155,107

��

�

77,071

��

�

406,690

��

�

184,080

��

�

Total operating expenses

��

�

290,980

��

�

133,422

��

�

731,825

��

�

347,603

��

Loss from operations

��

�

(39,129

)�

�

(30,554

)�

�

(111,851

)�

�

(47,930

)�

Interest income

��

�

300

��

�

��

�

907

��

�

��

Interest expense

��

�

(29,062

)�

�

(6,492

)�

�

(72,183

)�

�

(26,705

)�

Other income (expense), net

��

�

(3,090

)�

�

(740

)�

�

2,401

��

�

18,018

��

�

Loss before income taxes

��

�

(70,981

)�

�

(37,718

)�

�

(180,726

)�

�

(56,520

)�

Provision for income taxes

��

�

3,727

��

�

778

��

�

5,685

��

�

1,230

��

�

Net loss

��

(74,708

)�

�

(38,496

)�

�

(186,411

)�

�

(57,750

)�

��

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Revenues

Automotive Sales

Automotive sales, which include vehicle, options and related sales, and powertrain component and related sales, consisted of the following for the periods presented (in thousands):

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��

Three Months Ended
September 30,

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��

Nine Months Ended
September 30,

�

��

2014

�

��

2013

�

��

2014

�

��

2013

�

Vehicle, options and related sales

��

818,119

��

422,004

��

2,164,491

��

1,351,056

��

Powertrain component and related sales

��

�

30,890

��

�

8,192

��

�

71,570

��

�

35,878

��

�

��

�

��

�

��

�

Total automotive sales

��

849,009

��

430,196

��

2,236,062

��

1,386,934

��

�

��

�

��

�

��

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Automotive sales during the three and nine months ended September�30, 2014 were $849.0 million and $2.24 billion, an increase from $430.2 million and $1.39 billion during the three and nine months ended September�30, 2013, respectively. Vehicle, options and related sales represent revenues related to deliveries of Model S, including vehicle options, accessories and destination charges, vehicle service and sales of regulatory credits to other automotive manufacturers. Powertrain component and related sales represent the sales of electric vehicle powertrain components and systems, such as battery packs and drive units, to other manufacturers.

Vehicle, options and related sales during the three and nine months ended September�30, 2014 were $818.1 million and $2.16 billion, an increase from $422.0 million and $1.35 billion during the three and nine months ended September�30, 2013, respectively. The increase in vehicle, options and related sales was primarily driven by Model S deliveries in Europe and China which commenced in August 2013 and April 2014, respectively. During the three and nine months ended September�30, 2014, we delivered 7,785 and 21,821 Model S vehicles, respectively. During the three and nine months ended June�30, 2013, we delivered 5,516 and 15,585 Model S vehicles, respectively.

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program, Model S customers have the option of selling their vehicle back to us during the period of 36 to 39 months for a pre-determined resale value. We account for transactions under the resale value guarantee program as operating leases and accordingly, we defer and amortize to revenues the initial purchase consideration less resale value guarantee amount on a straight-line basis, over the contractual term of the guarantee program. If a customer decides not to sell their vehicle back to us by the end of the resale value guarantee term, the amount of the resale value guarantee is then recognized in automotive sales. During the three and nine months ended September�30, 2014, we delivered 1,190 and 3,578 Model S vehicles under the resale value guarantee program, respectively.�During the three and nine months ended September�30, 2013, we delivered 1,877 and 3,512 Model S vehicles under the resale value guarantee program.�As of September�30, 2014 and December�31, 2013, we had $333.6 million and $230.9 million in related deferred revenues and $397.7 million and $236.3 million in resale value guarantees, respectively. During the three and nine months ended September�30, 2014, we recognized revenue of $32.7 million and $84.3 million in automotive sales related to this program, respectively. During the three and nine months ended September�30, 2013, we recognized revenue of $9.4 million and $11.3 million, respectively, in automotive sales related to this program.

In April 2014, we began offering a direct leasing program to small and medium-sized businesses in the United States for Model�S. We expanded this program to consumers in the United States in October 2014. Qualifying customers are permitted to lease a Model�S for 36 months, after which time they have the option of either returning the vehicle to us or purchasing it for a pre-determined residual value. We account for these leasing transactions as operating leases and accordingly, we recognize leasing revenues over the contractual term of the individual leases. Lease revenues are recorded in automotive sales and for the three and nine months ended September�30, 2014, we recognized $1.1 million and $1.3 million, respectively.

Powertrain component and related sales for the periods presented were related to powertrain component sales to Daimler under the Mercedes-Benz B-Class Electric Drive program which commenced in April 2014 and to Toyota under the RAV4 EV program. Powertrain component and related sales for the three and nine months ended September�30, 2014 was $30.9 million and $71.6 million, respectively, an increase from $8.2 million and $35.9 million during the three and nine months ended September�30, 2013, respectively. During the third quarter of 2014, we completed the RAV4 EV program.

Development Services

Development services represent arrangements where we develop electric vehicle powertrain components and systems for other automobile manufacturers, including the design and development of battery packs, drive units and chargers to meet customers� specifications.

During the fourth quarter of 2012, we entered into a development agreement with Daimler to assist with the development of a full electric powertrain for a Mercedes-Benz B-Class EV. Development services revenue for the three and nine months ended September�30, 2014 relates primarily to completion of the final development milestone and the delivery of prototype samples to Daimler under this program while development services revenue for the three and nine months ended September�30, 2013 includes revenues for the achievement of various milestones and from the delivery of prototype samples to Daimler under this program. During the three and nine months ended September�30, 2014, we recognized development services revenue of $2.8 million and $5.6 million, respectively. During the three and nine months ended September�30, 2013, we recognized development services revenue of $1.2 million and $11.3 million, respectively. As of September�30, 2014, we have completed our development services under this program.

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Cost of Revenues and Gross Profit

Cost of revenues includes cost of automotive sales and costs related to our development services.

Cost of automotive sales during the three and nine months ended September�30, 2014 was $598.5 million and $1.62 billion, an increase from $324.9 million and $1.09 billion for the three and nine months ended September�30, 2013, respectively.

Cost of automotive sales includes direct parts, material and labor costs, manufacturing overhead, including amortized tooling costs, royalty fees, shipping and logistic costs and reserves for estimated warranty expenses. Cost of automotive sales 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.

In April 2013, we began offering a resale value guarantee to all customers who purchased a Model S in the United States and financed their vehicle and vehicle options through one of our specified commercial banking partners. We also offer this program in certain countries outside of the United States. Under the program, we capitalize the cost of Model S into operating lease vehicles and depreciate the respective operating lease vehicles less expected salvage value to cost of automotive sales on a straight-line basis, over the contractual term of the guarantee program. If a customer decides not to sell their vehicle back to us by the end of the resale value guarantee term, the remaining operating lease vehicle net book value is then recognized in automotive sales. As of September�30, 2014 and December�31, 2013, we recorded $578.7 million and $377.0 million in operating lease vehicles, net, related to Model S deliveries with the resale value guarantee. During the three and nine months ended September�30, 2014, we recognized $18.9 million and $50.3 million in cost of automotive sales, respectively, related to operating lease vehicle depreciation under this program. During the three and nine months ended September�30, 2013, we recognized $5.9 million and $7.3 million, respectively, in cost of automotive sales related to operating lease vehicle depreciation under this program. Our warranty reserves do not include projected warranty costs associated with our resale value guarantee vehicles as such actual warranty costs are expensed as incurred. For the three and nine months ended September�30, 2014, warranty costs incurred for our resale value guarantee vehicles were $2.1 million and $5.1 million, respectively. For the three and nine months ended September�30, 2013, warranty costs incurred for our resale value guarantee vehicles was $0.7 million and $1.1 million, respectively.

In April 2014, we began offering a direct leasing program for Model S to small and medium-sized businesses in the United States. We expanded this program to consumers in the United States in October 2014. Qualifying customers are permitted to lease Model S for 36 months, after which time they have the option of either returning the vehicle to us or purchasing it for a pre-determined residual value. We account for these leasing transactions as operating leases and depreciate the respective operating lease vehicles less expected salvage value on a straight-line basis over the contractual term of the individual leases. As of September�30, 2014, we recorded $35.0�million in operating lease vehicles, net, related to Model S deliveries under this program. During the three and nine months ended September�30, 2014, we recognized $0.6�million and $0.7�million, respectively, in cost of automotive sales related to operating lease vehicle depreciation under this program.

Gross profit during the three and nine months ended September�30, 2014 was $251.9 million and $620.0 million, an increase from $102.9 million and $299.7 million during the three and nine months ended September�30, 2013, respectively. The increase in gross profit was primarily due to higher regulatory credit sales and manufacturing and supply chain efficiencies as well as component cost reductions, partially offset by one-time manufacturing inefficiencies associated with transitioning to our new final assembly line.

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Research and Development Expenses

Research and development (R&D) expenses consist primarily of personnel costs for our teams in engineering and research, supply chain, quality, manufacturing engineering and manufacturing test organizations, prototyping expense, contract and professional services and amortized equipment expense. Also included in R&D expenses are development services costs that we incur, if any, prior to the finalization of agreements with our development services customers as reaching a final agreement and revenue recognition is not assured. Development services costs incurred after the finalization of an agreement are recorded in cost of revenues.

R&D expenses during the three months ended September�30, 2014 were $135.9 million, an increase from $56.4 million during the three months ended September�30, 2013. Higher R&D expenses in the third quarter of 2014 reflected our accelerated engineering work on Model X as well as development work on our dual motor powertrain and other development programs. The $79.5�million increase in R&D expenses consisted primarily of a $25.3 million increase in expensed materials primarily to support Model X development, a $24.5 million increase in employee compensation expenses, a $21.1 million increase in costs related to accelerated engineering work on Model X as well as dual motor powertrain and other development programs, and a $5.7�million increase in stock-based compensation expense related to a larger number of outstanding equity awards due to additional headcount and generally an increasing common stock valuation associated with newer grants.

R&D expenses during the nine months ended September�30, 2014 were $325.1 million, an increase from $163.5 million during the nine months ended September�30, 2013. The $161.6�million increase in R&D expenses consisted primarily of a $53.0 million increase in employee compensation expenses, a $43.5 million increase in costs related to Model X, dual motor powertrain and right-hand drive Model�S engineering, design and testing activities, an $41.6 million increase in expensed materials primarily to support our Model X, dual motor powertrain and right-hand drive Model�S development, a $18.9�million increase in stock-based compensation expense related to a larger number of outstanding equity awards due to additional headcount and generally an increasing common stock valuation associated with newer grants and $3.7 million information technology and facilities-related costs to support the growth of our business.

Selling, General and Administrative Expenses

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

SG&A expenses during the three months ended September�30, 2014 were $155.1 million, an increase from $77.1 million during the three months ended September�30, 2013. SG&A expenses increased primarily from higher headcount and costs to support an expanded retail, service and Supercharger footprint as well as the general growth of the business. The $78.0�million increase in our SG&A expenses consisted primarily of a $34.5 million increase in office, information technology and facilities-related costs to support the growth of our business as well as sales and marketing activities to handle our expanding market presence, a $33.9�million increase in employee compensation expenses related to higher sales and marketing headcount to support sales activities worldwide and higher general and administrative headcount to support the expansion of the business, a $2.2�million increase in stock-based compensation expense related to a larger number of outstanding equity awards due to additional headcount and generally an increasing common stock valuation associated with newer grants and a $1.4 million increase in professional and outside services costs.

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SG&A expenses during the nine months ended September�30, 2014 were $406.7 million, an increase from $184.1 million during the nine months ended September�30, 2013. The $222.6�million increase in our SG&A expenses consisted primarily of a $100.7 million increase in employee compensation expenses related to higher sales and marketing headcount to support sales activities worldwide and higher general and administrative headcount to support the expansion of the business, a $94.3 million increase in office, information technology and facilities-related costs to support the growth of our business as well as sales and marketing activities to handle our expanding market presence, a $27.7�million increase in stock-based compensation expense related to a larger number of outstanding equity awards due to additional headcount and generally an increasing common stock valuation associated with newer grants and a $4.4 million increase in professional and outside services costs.

Interest Expense

Interest expense during the three and nine months ended September�30, 2014 was $29.1 million and $72.2 million, an increase from $6.5 million and $26.7 million during the three and nine months ended September�30, 2013. We incurred interest expense during three and nine months ended September�30, 2014 primarily from our 2018 Notes, 2019 Notes and 2021 Notes and capitalized interest to assets under construction related to significant asset construction. During the three and nine months ended September�30, 2014, we capitalized $3.7 million and $6.9 million of interest expense to construction in progress, respectively. Interest expense during the three and nine months ended September�30, 2013 was related primarily to the early repayment fee, interest and the amortization of the remaining loan origination costs associated with the repayment and extinguishment of our then outstanding Department of Energy (DOE) loan principal of $439.6 million as well as our 2018 Notes. During the three and nine months ended September�30, 2013, we capitalized $0.4 million and $2.3 million of interest expense to construction in progress, respectively.

In March 2014, we issued $800.0�million aggregate principal amount of 2019 Notes and $1.20 billion aggregate principal amount of 2021 Notes in a public offering. In April 2014, we issued an additional $120.0 million aggregate principal amount of the 2019 Notes and $180.0 million aggregate principal amount of the 2021 Notes, pursuant to the exercise in full of the overallotment options of the underwriters of our March 2014 public offering. We incurred approximately $35.6 million of debt issuance costs in connection with these notes, which we initially recorded in other assets and are amortizing to interest expense using the effective interest method over the contractual terms of the notes. The interest rates are fixed at 0.25% and 1.25%�per annum for the 2019 Notes and 2021 Notes, respectively, and are payable semi-annually in arrears on March�1 and September�1 of each year, commencing on September�1, 2014. During the three and nine months ended September�30, 2014, we recognized $1.0 million and $2.2 million of interest expense, respectively, related to the amortization of debt issuance costs and $4.9 million and $11.2 million of accrued coupon interest expense, respectively.

In accordance with accounting guidance on embedded conversion features, we valued and bifurcated the conversion option associated with these notes from the respective host debt instrument and initially recorded the conversion option of $188.1 million for the 2019 Notes and $369.4 million for the 2021 Notes in stockholders� equity.�The resulting debt discounts on the 2019 Notes and 2021 Notes are being amortized to interest expense at an effective interest rate of 4.89% and 5.96%, respectively, over the contractual terms of these notes.�During the three and nine months ended September�30, 2014, we recognized $19.6 million and $44.1 million of interest expense, respectively, related to the amortization of the debt discount.

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In May 2013, we issued $660.0 million aggregate principal amount of 2018 Notes in a public offering. We incurred $12.0 million of debt issuance costs in connection with the issuance of 2018 Notes which we recorded in other assets and are amortizing to interest expense using the effective interest method over the contractual term of 2018 Notes. Under the terms of 2018 Notes, 1.50% coupon interest per annum on the principal amount of the notes is payable semi-annually in arrears on June�1 and December�1 of each year, commencing on December�1, 2013. During the three and nine months ended September�30, 2014, we recognized $3.0 million and $8.8 million of interest expense, respectively, related to the amortization of debt issuance costs and accrued coupon interest. During the three and nine months ended September�30, 2013, we recognized $3.0 million and $4.3 million of interest expense, respectively, related to the amortization of debt issuance costs and accrued coupon interest.

Similar to the 2019 and 2021 Notes, we valued and bifurcated the conversion option associated with 2018 Notes from the host debt instrument and initially recorded the conversion option of $82.8 million in stockholders� equity. The resulting debt discount on 2018 Notes is being amortized to interest expense at an effective interest rate of 4.29% over the contractual term of 2018 Notes.

During the three and nine months ended September�30, 2014, we recognized $3.9 million and $11.5 million of interest expense, respectively, related to the amortization of the debt discount. During the three and nine months ended September�30, 2013, we recognized $3.8 million and $5.4 million of interest expense, respectively, related to the amortization of the debt discount.

Other Income (Expense), Net

Other income (expense), net, consists primarily of the change in the fair value of our DOE common stock warrant liability and foreign exchange gains and losses related to our foreign currency-denominated assets and liabilities. We expect our foreign exchange gains and losses will vary depending upon movements in the underlying exchange rates. Prior to the expiration of the DOE warrant in May 2013, the DOE warrant had been carried at its estimated fair value with changes in its fair value reflected in other income (expense), net.

Other expense, net, during the three months ended September�30, 2014 was $3.1 million, an increase from $0.7 million during the three months ended September�30, 2013. The $2.4�million increase in our other expense, net, is primarily attributable to unfavorable foreign currency exchange impact from our foreign currency-denominated assets.

Other income, net, during the nine months ended September�30, 2014 was $2.4 million, a decrease from $18.0 million during the nine months ended September�30, 2013. In March 2013, we entered into a fourth amendment to the DOE Loan Facility which, among other things, accelerated the maturity date of our DOE loans to December�15, 2017; therefore, the DOE warrant was no longer expected to vest. We recorded the reduction in fair value of our DOE common stock warrant liability of $10.7 million in other income, net, during the three months ended March�31, 2013. Other income, net, during the nine months ended September�30, 2014 and 2013 was also attributable to the favorable foreign currency exchange impact from our foreign currency-denominated assets and liabilities.

Provision for Income Taxes

Our provision for income taxes during the three and nine months ended September�30, 2014 was $3.7 million and $5.7 million, compared to $0.1 million and $1.2 million during the three and nine months ended September�30, 2013, respectively. The increase during the three and nine months ended September�30, 2014 was due primarily to the increase in taxable income in our international jurisdictions, following the commencement of European Model S deliveries in August 2013 and Model S deliveries in China in April 2014.

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Liquidity and Capital Resources

As of September�30, 2014, we had $2.37 billion in principal sources of liquidity available from our cash and cash equivalents, including $1.69 billion of money market funds.

Other sources of cash include cash from our deliveries of Model S, customer deposits for Model S and Model X, sales of regulatory credits, cash from the provision of development services, and sales of powertrain components and systems. We expect that our current sources of liquidity, including cash and cash equivalents, together with our current projections of cash flow from operating activities, will continue to provide us with adequate liquidity based on our current plans. These capital sources will enable us to fund our ongoing operations, continue research and development projects, including those for our planned Model X crossover and certain future products, such as Model 3, establish and expand our stores, service centers and Supercharger network and to make the investments in tooling and manufacturing capital required to introduce Model X and to continue to ramp up production of Model S as well as make investments in the Tesla Gigafactory. We may seek additional capital resources to partially fund certain long-term growth initiatives.

As of October�31, 2014, we had 235 Supercharger stations open in North America, Europe and Asia. We expect to continue making investments in the Supercharger network.

If market conditions are favorable, we may evaluate alternatives to opportunistically pursue liquidity options. Also, should prevailing economic conditions and/or financial, business or other factors adversely affect the estimates of our future cash requirements, we could be required to fund our cash requirements through additional or alternative sources of financing. We cannot be certain that additional funds will be available to us on favorable terms when required, or at all.

0.25% and 1.25% Convertible Senior Notes and Bond Hedge and Warrant Transactions

In March 2014, we issued $800.0�million aggregate principal amount of 0.25% convertible senior notes due 2019 (2019 Notes) and $1.20 billion aggregate principal amount of 1.25% convertible senior notes due 2021 (2021 Notes) in a public offering. The net proceeds from the offering, after deducting transaction costs, were approximately $787.6�million from the 2019 Notes and $1.18 billion from the 2021 Notes, respectively. We incurred $12.4�million and $18.7 million, respectively, of debt issuance costs in connection with these notes, which we initially recorded in other assets and are amortizing to interest expense using the effective interest method over the contractual terms of these notes.�The interest rates are fixed at 0.25% and 1.25%�per annum for the 2019 and 2021 Notes, respectively, and are payable semi-annually in arrears on March�1 and September�1 of each year, commencing on September�1, 2014.

In connection with the offering of these notes, we entered into convertible note hedge transactions whereby we have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 5.6�million shares of our common stock at a price of $359.87 per share.�The total cost of the convertible note hedge transactions was $524.7�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) a total of approximately 2.2�million shares of our common stock at a price of $512.66 for the 2019 Notes and a total of approximately 3.3�million shares of our common stock at a price of $560.64 per share for the 2021 Notes. We received $338.4�million in cash proceeds from the sale of these warrants.�Taken together, the purchase of the convertible note hedges and the sale of warrants are

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intended to offset any actual dilution from the conversion of these notes and to effectively increase the overall conversion price from $359.87 to $512.66 per share in the case of warrants relating to the 2019 Notes and from $359.87 to $560.64 in the case of warrants relating to the 2021 Notes.

In April 2014, we issued an additional $120.0 million aggregate principal amount of the 2019 Notes and $180.0 million aggregate principal amount of the 2021 Notes, pursuant to the exercise in full of the overallotment options of the underwriters of our March 2014 public offering. The net proceeds from this offering, after deducting transaction costs, were approximately $118.2�million from the 2019 Notes and $177.3 million from the 2021 Notes. We incurred $1.8�million and $2.7 million, respectively, of debt issuance costs in connection with these notes, which we initially recorded in other assets and are amortizing to interest expense using the effective interest method over the contractual terms of these notes. In connection with the issuance of these additional notes, we entered into convertible note hedge transactions and paid an aggregate $78.7�million. In addition, we sold warrants to purchase (subject to adjustment for certain specified events) a total of approximately 0.3�million shares of our common stock at a strike price of $512.66 per share for the warrants relating to the 2019 Notes, and a total of approximately 0.5�million shares of our common stock at a strike price of $560.64 per share for the warrants relating to the 2021 Notes. We received aggregate proceeds of approximately $50.8 million from the sale of the warrants.

During the third quarter of 2014, the closing price of our common stock did not meet or exceed 130% of the applicable conversion price of our 2019 Notes and 2021 Notes on at least 20 of the last 30 consecutive trading days of the quarter; furthermore, no other conditions allowing holders of these notes to convert have been met as of September�30, 2014. Therefore, the 2019 Notes and 2021 Notes are not convertible during the fourth quarter of 2014 and are classified as long-term debt. Should the closing price conditions be met in the fourth quarter of 2014 or a future quarter, the Notes will be convertible at their holders� option during the immediately following quarter.

1.50%�Convertible Senior Notes and Bond Hedge and Warrant Transactions

In May 2013, we issued $660.0�million aggregate principal amount of 1.50% convertible senior notes due 2018 (2018 Notes) in a public offering. The net proceeds from the offering, after deducting transaction costs, were approximately $648.0�million. We incurred $12.0�million of debt issuance costs in connection with the issuance of 2018 Notes which we have recorded in other assets and are amortizing to interest expense using the effective interest method over the contractual term of 2018 Notes. The interest under 2018 Notes is fixed at 1.50%�per annum and is payable semi-annually in arrears on June�1 and December�1 of each year, commencing on December�1, 2013.

During the third quarter of 2014, the closing price of our common stock exceeded 130% of the applicable conversion price of our 2018 Notes on at least 20 of the last 30 consecutive trading days of the quarter; therefore, holders of 2018 Notes may convert their notes during the fourth quarter of 2014. Should the closing price conditions be met in the fourth quarter of 2014 or a future quarter, 2018 Notes will be convertible at their holders� option during the immediately following quarter.

Furthermore, under current market conditions, we expect that almost none of 2018 Notes will be converted in the short term.

In connection with the offering of 2018 Notes, we entered into convertible note hedge transactions whereby we have the option to purchase (subject to adjustment for certain specified events) a total of approximately 5.3�million shares of our common stock at a price of approximately $124.52 per share. The cost of the convertible note hedge transactions was $177.5�million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase (subject to adjustment for

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certain specified events) a total of approximately 5.3�million shares of our common stock at a price of $184.48 per share. We received $120.3�million in cash proceeds from the sale of these warrants. Taken together, the purchase of the convertible note hedges and the sale of warrants are intended to offset any actual dilution from the conversion of 2018 Notes and to effectively increase the overall conversion price from $124.52 to $184.48 per share.

For more information on 2018 Notes, 2019 Notes and 2021 Notes, see Note 6 to our Condensed Consolidated Financial Statements included under Part 1, Item�1 of this Quarterly Report on Form 10-Q.

Customer Deposits

Summary of Cash Flows

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�	��	Nine�Months�Ended September�30,						�
�	��	2014		�	�	2013		�
�	��	(in thousands)						�
Net cash provided by operating activities	��	$	29,065	��	�	$	130,817	��
Net cash used in investing activities	��	�	(618,213	)�	�	�	(159,912	)�
Net cash provided by financing activities	��	�	2,131,805	��	�	�	624,906	��

Cash Flows from Operating Activities

Our cash flows from operating activities are significantly affected by our cash investments to support the growth of our business in areas such as manufacturing, research and development and selling, general and administrative. Our operating cash flows are also affected by our working capital needs to support growth and fluctuations in inventory, personnel related expenditures, accounts payable and other current assets and liabilities.

Net cash provided by operating activities was $29.1�million during the nine months ended September�30, 2014 net of adjustments for non-cash items such as depreciation and amortization of $164.0 million, $112.0 million related to stock-based compensation expense, $55.6 million related to the amortization of debt discount on our convertible senior notes, $11.1 million related to fixed assets disposals and inventory write-downs of $14.5 million. Significant operating cash inflows were comprised primarily of automotive sales of $2.24 billion, a $348.5 million net increase in deferred revenue, resale value guarantee and other long-term liabilities primarily associated with Model S deliveries with the resale value guarantee, a $71.1 million net increase in customer deposits and $5.6 million of development services revenue, partially offset by a $109.2 million increase in accounts receivable primarily related to receivables from our financing partners and OEM customers due to higher regulatory credit sales. Significant operating cash outflows for the nine months ended September�30, 2014 were primarily related to $1.62 billion of cost of revenues, $731.8 million of operating expenses, a $672.7 million increase in inventory and operating lease vehicles and a $29.5 million increase in prepaid expenses and other current assets, partially offset by a $253.9 million increase in accounts payable and accrued liabilities primarily due to the timing of vendor payments.

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Net cash provided by operating activities was $130.8�million during the nine months ended September�30, 2013 net of adjustments for non-cash items such as depreciation and amortization of $68.5 million, $55.6 million related to stock-based compensation expense, inventory write-downs of $6.8 million, $5.6 million related to the amortization of all remaining DOE loan origination costs as a result of the repayment of our outstanding loans under the DOE Loan Facility and $5.3 million related to the amortization of debt discount on our Notes, partially offset by other income associated with the reduction in fair value of the DOE common stock warrant liability of $10.7 million. Significant operating cash inflows were comprised primarily of automotive sales of $1.39 billion, a $377.7 million net increase in deferred revenue, resale value guarantee and other long-term liabilities primarily associated with Model S deliveries with the resale value guarantee, $11.3 million of development services revenue and a $2.3 million net increase in customer deposits, partially offset by a $20.7 million increase in accounts receivable due to the regulatory credit sales recognized at the end of the third quarter and receivables from our financing partners. Significant operating cash outflows for the nine months ended September�30, 2013 were primarily related to $1.10 billion of cost of revenues, a $358.4 million increase in inventory and operating lease vehicles, $347.6 million of operating expenses, and a $9.1 million increase in prepaid expenses and other current assets, partially offset by a $59.8 million increase in accounts payable and accrued liabilities primarily due to the timing of vendor payments.

Cash Flows from Investing Activities

Cash flows from investing activities primarily relate to capital expenditures to support our growth in operations, including investments in Model S manufacturing and our stores, service and Supercharger network infrastructure, as well as restricted cash that we were required to maintain in relation to facility lease agreements, equipment financing, certain vendor credit policies and our DOE Loan Facility.

Net cash used in investing activities was $618.2 million during the nine months ended September�30, 2014 primarily related to $601.2 million in purchases of capital equipment and tooling and $205.8 million in purchases of short-term marketable securities, partially offset by a $189.1 million in maturity and sales of short-term marketable securities.

Net cash used in investing activities was $159.9 million during the nine months ended September�30, 2013 primarily related to $174.8 million in purchases of capital equipment and tooling, including $18.5 million related to the purchase of additional land at our Fremont factory and a transfer of $14.5 million into our dedicated DOE accounts in accordance with the provisions of the DOE Loan Facility, partially offset by a $29.3 million net transfer out of our dedicated DOE account as a result of the termination of our DOE Loan Facility.

Cash Flows from Financing Activities

Net cash provided by financing activities was $2.13 billion during the nine months ended September�30, 2014 and was comprised primarily of the $2.30 billion aggregate issuance of 2019 Notes and 2021 Notes, $389.2 million from the sale of warrants in March and April 2014 in connection with the issuance of these notes, and $89.9 million received from the exercise of common stock options by employees and the purchase of common stock under our employee stock purchase plan, partially offset by $603.4 million related to the purchase of convertible note hedges in March and April 2014 in connection with the issuance of these notes, $35.2 million of issuance costs and $8.7 million related to principal payments on our capital leases.

Net cash provided by financing activities was $624.9 million during the nine months ended September�30, 2013 was comprised primarily of $660.0 million from our Notes offering in May 2013, $415.0 million received from our public offering of common stock and concurrent private placement

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completed in May 2013, $120.3 million from the sale of warrants in May 2013 as part of our Notes offering, and $82.2 million received from the exercise of common stock options by employees and the purchase of common stock under our employee stock purchase plan; partially offset by $452.3 million related to our repayment of all outstanding loan principal under the DOE Loan Facility, $177.5 million related to the purchase of convertible note hedges in May 2013 as part of our Notes offering, $16.4 million of Notes and common stock issuance costs, $12.7 million related to our planned quarterly repayment of loan principal under the DOE Loan Facility and $6.4 million related to principal payments on our capital leases.

Contractual Obligations

During the third quarter of 2014, certain conditions with respect to the closing prices of our common stock in accordance with the terms of our 2018 Notes were met and therefore, holders of 2018 Notes may convert their notes during the fourth quarter of 2014. As such, we classified the $597.6 million carrying value of our 2018 Notes as current liabilities on our condensed consolidated balance sheet as of September�30, 2014. Should such closing price conditions be met in the fourth quarter of 2014 or a future quarter, 2018 Notes will be convertible by their holders during the immediately following quarter. Similarly, if certain conditions are met with respect to our 2019 Notes and 2021 Notes in the fourth quarter of 2014 or a future quarter, the 2019 Notes and 2021 Notes will be convertible by their holders during the immediately following quarter.

The following table sets forth, as of September�30, 2014, our cash obligations related to our 2018 Notes, 2019 Notes and 2021 Notes that will affect our future liquidity for the following periods (in thousands):

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��

Year Ended December�31,

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��

Total

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��

2014

�

��

2015

�

��

2016

�

��

2017

�

��

2018

�

��

2019�and
thereafter

�

2018 Notes

��

699,323

��

699,323

��

2019 Notes

��

�

930,350

��

�

��

�

2,300

��

�

2,300

��

�

2,300

��

�

2,300

��

�

921,150

��

2021 Notes

��

�

1,492,125

��

�

��

�

17,250

��

�

17,250

��

�

17,250

��

�

17,250

��

�

1,423,125

��

�

��

�

��

�

��

�

��

�

��

�

��

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Total

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3,121,798

��

699,323

��

19,550

��

19,550

��

19,550

��

19,550

��

2,344,275

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��

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��

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��

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There have been no other material changes from the future contractual obligations disclosed in our Annual Report on Form 10-K for the year ended December�31, 2013.

Off-Balance Sheet Arrangements

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

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ITEM�3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

Our revenues and costs denominated in foreign currencies are not completely matched. We commenced deliveries of Model S in June 2012 to customers in North America and to European customers in August 2013. We recently introduced Model S to China, Hong Kong and Japan and plan to start deliveries in Australia by the end of 2014. Through September�30, 2014, a majority of our revenues have been denominated in U.S. dollars. However, we have materially greater revenues than expenses denominated in the Chinese yuan and Norwegian krona, and materially greater expenses than revenues denominated in the Japanese yen. Accordingly, if the value of the U.S. dollar depreciates significantly against currencies where expenses exceed revenues, our costs as measured in U.S. dollars as a percent of our revenues will correspondingly increase which may adversely impact our operating results. Conversely, as the value of the U.S. dollar appreciates significantly against currencies where revenues exceed expenses, our revenues as measured in U.S. dollars may be reduced.

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As a result of a favorable foreign currency exchange impact from foreign currency-denominated assets and liabilities, especially related to the Japanese yen, we recorded gains of $2.5 million on foreign exchange transactions in other income, net, for the three months ended September�30, 2014.

Interest Rate Risk

We had cash and cash equivalents totaling $2.37�billion as of September�30, 2014. A portion of our cash and cash equivalents was invested in money market funds. Our cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. We believe that we do not have any material exposure to changes in the fair value as a result of changes in interest rates due to the short term nature of our cash equivalents.

As of September�30, 2014, we had $2.96 billion aggregate principal amount of convertible senior notes outstanding and capital lease obligations of $22.4�million, all of which are fixed rate instruments. Therefore, our results of operations are not subject to fluctuations in interest rates.

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ITEM�4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September�30, 2014. The term �disclosure controls and procedures,� as defined in Rules�13a-15(e)�and 15d-15(e)�under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC�s rules�and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company�s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of September�30, 2014, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting which occurred during the period covered by this Quarterly Report on Form�10-Q, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

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ITEM�1.

LEGAL PROCEEDINGS

Securities Litigation

In November 2013, a putative securities class action lawsuit was filed against Tesla in U.S. District Court, Northern District of California, alleging violations of, and seeking remedies pursuant to, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint, which made claims against Tesla and its CEO, Elon Musk, sought damages and attorney�s fees on the basis of allegations that, among other things, Tesla and Mr.�Musk made false and/or misleading representations and omissions, including with respect to the safety of Model S. This case was brought on behalf of a putative class consisting of certain persons who purchased Tesla�s securities between August�19, 2013 and November�17, 2013. On September�26, 2014, the trial court, upon the motion of Tesla and Mr.�Musk, dismissed the complaint with prejudice, and indicated that a formal written order will be forthcoming.

Other Matters

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

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ITEM�1A.

RISK FACTORS

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.

Risks Related to Our Business and Industry

We may be unable to increase production and deliveries of Model S in line with our plans, both of which could harm our business and prospects.

Since we began manufacturing and delivering Model S in June 2012, we have significantly increased production and deliveries, and our plans call for an even greater increase in production and deliveries going forward. As part of this effort, we recently completed a new final assembly line and added more automation to our body shop at the Fremont factory. Our ability to further ramp-up high volume Model S production, including for the Dual Motor Model S, which we will soon begin producing for the first time, will depend upon a number of factors, including our ability to use these new manufacturing processes as planned while maintaining our desired quality levels, our suppliers� ability to deliver quality parts to us in a timely manner, and efficiently making design changes to ensure consistently high quality. The Model S is an all new vehicle which we are producing with new employees using new equipment and therefore our production processes are still maturing and we have limited experience with them. To produce a vehicle that meets our quality standards requires us to carefully analyze each step of our production plan, improve the efficiency of our manufacturing processes and continue to train our employees. Our suppliers also must produce new products in sufficient quantities and quality to meet our demand. Certain suppliers have experienced delays in meeting our demand or have sought to renegotiate the terms of the supply arrangements, and we continue to focus on supplier capabilities and constraints. Any disruption in increasing our production level of Model S in line with our plans could materially damage our brand, business, prospects, financial condition and operating results.

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In addition, for Model S we have introduced a number of new manufacturing technologies and techniques, such as aluminum spot welding systems, which have not been widely adopted in the automotive industry; and the Model S has a number of new and unique design features, such as a 17 inch display screen, retractable exterior door handles, and all-new dual motor and autopilot hardware, each of which poses unique manufacturing challenges. Model S production and deliveries will continue to require significant resources and we may experience unexpected delays or difficulties that could harm our ability to maintain full manufacturing capacity for Model S, or cause us to miss planned production targets, any of which could have a material adverse effect on our financial condition and operating results. Additionally, sustaining high volume production and doing so in a manner that avoids significant cost overruns, including as a result of factors beyond our control such as problems with suppliers and vendors, may be difficult.

Concurrent with the significant increase in our planned production levels, we will also need to continue to significantly increase our deliveries of Model S vehicles. We have limited experience in delivering a high volume of Model S vehicles, and, in particular, to locations outside of the United States We may face difficulties meeting our delivery and growth plans in Asia and the right hand drive markets we have entered and will enter later this year, which may impact our ability to achieve our worldwide delivery goals. If we are unable to ramp up to meet our delivery goals globally to match our production rate of Model S, this could result in negative publicity, damage our brand and have a material adverse effect on our business, prospects, financial condition and operating results.

Our ability to grow volume production and deliveries for Model S is subject to certain risks and uncertainties, including:

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that our suppliers will be able and willing to deliver components on a timely basis and in the necessary quantities, quality and at acceptable prices to produce Model S in volume and reach our financial targets;

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that we will be able to complete any necessary adjustments to the vehicle design or manufacturing processes of Model S in a timely manner that meets our production plan and allows for high quality vehicles;

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that we will be able to quickly ramp production of Dual Motor Model S to keep up with demand;

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that we will be able to ramp sales of Model S throughout Asia, especially China, pursuant to our current timeline;

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that we will be able to adequately respond in a timely manner to any problems that may arise with our vehicles;

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that we will be able to schedule and complete deliveries at our planned higher volume production levels;

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that the equipment or tooling which we have purchased or which we select, including those that are part of our higher capacity production line that recently became operational, will be able to accurately manufacture the vehicle within specified design tolerances, and will not suffer from unexpected breakdowns or damage which could negatively affect the rate needed to produce vehicles in volume;

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that we will be able to comply with environmental, workplace safety, customs and similar regulations required to operate our manufacturing facilities;

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that we will be able to maintain and improve quality controls as we transition to a higher level of in-house manufacturing process; and

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that the information technology systems that we are currently expanding and improving upon will be effective to manage higher volume production.

Finally, detailed long-term testing of quality, reliability and durability of Model S is ongoing and any negative results from such testing could cause production or delivery delays, cost increases, or lower quality of our Model S vehicles.

Our long-term success will be dependent upon our ability to design, build and achieve market acceptance of new vehicle models, specifically Model S and new vehicle models such as Model X and Model 3.

Our long-term success is dependent on market acceptance of the Model S sedan and future electric vehicles we introduce. In the United States, there is no guarantee that Model S will continue to be successfully accepted by the general public, especially in the long-term. As we expand in Europe and Asia, there is no guarantee that customers in these markets will embrace our vehicles and if they do not, demand for our vehicles could be lower than our expectations.

Moreover, there can be no assurance that we will be able to design future electric vehicles that will meet the expectations of our customers or that our future models, including the Model X crossover, will become commercially viable. To date, we have publicly revealed only an early prototype of the Model X. Work continues on the finalization of Model X with the testing of Alpha prototypes and initial builds of the first Beta prototypes. To the extent that we are not able to build Model X in accordance with the expectations created by the early prototype and our announced specifications and schedule, customers may cancel their reservations, our future sales could be harmed and investors may lose confidence in us.

In addition, we have also announced our intent to develop Model 3 which we expect to produce at the Tesla Factory after the introduction of Model X. We intend to offer this vehicle at a lower price point and expect to produce it at higher volumes than our Model S. Importantly, we anticipate producing Model 3 for the mass market and thus we will need a high-volume supply of lithium-ion cells at reasonable prices.

While we intend each of our production vehicles and their variants to meet a distinct segment of the automotive market, our vehicles may end up competing with each other which may delay sales and associated revenue to future periods. Also, if we fail to accurately anticipate demand for each of our vehicles, this could result in inefficient expenditures and production delays. Furthermore, historically, automobile customers have come to expect new and improved vehicle models to be introduced frequently. In order to meet these expectations, we may be required to introduce on a regular basis new vehicle models as well as enhanced versions of existing vehicle models. As automotive technologies change, including those specific to electric vehicles, we anticipate our customers will expect us to upgrade or adapt our vehicles and introduce new models in order to continue to provide vehicles with the latest technology. To date, we have limited experience simultaneously designing, testing, manufacturing, upgrading, adapting and selling our electric vehicles as well as limited experience allocating our available resources among the design and production of multiple vehicles.

We may experience significant delays in the design, manufacture and launch of Model X, as well as future vehicles such as Model 3, which could harm our business and prospects.

We expect Model X deliveries to start in the third quarter of 2015. Any significant delay in the design, manufacture and launch of Model X could materially damage our brand, business, prospects,

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financial condition and operating results. Automobile manufacturers often experience delays in the design, manufacture and commercial release of new vehicle models. We experienced significant delays in launching the Tesla Roadster, which resulted in additional costs and adverse publicity for our business. In 2012, we also experienced delays in the ramp of Model S. We may experience further delays in launching Model X which may result in cost overruns and adverse publicity. Work continues on the finalization of Model X with the testing of Alpha prototypes and initial builds of the first Beta prototypes. Furthermore, we have not yet evaluated, qualified or selected all of our suppliers for the planned production of Model X. We may not be able to engage suppliers for the components in a timely manner, at an acceptable price or in the necessary quantities. We will also need to do extensive testing to ensure that Model X is in compliance with applicable NHTSA safety regulations and obtain EPA and CARB certification to emission regulations prior to beginning volume production and delivery of the vehicles. If we are not able to manufacture and deliver Model X or future vehicles such as Model 3 in a timely manner and consistent with our production timeline, budget and cost projections, our business, prospects, operating results and financial condition will be negatively impacted and our ability to grow our business will be harmed.

Problems or delays in bringing the Gigafactory online and operating it in line with our expectations could negatively affect us.

To lower the cost of cell production and produce cells in volume to allow us to grow quickly, we intend to integrate the production of lithium-ion cells and finished battery packs for our vehicles at our new Gigafactory. Our Gigafactory plan, however is at an early stage. While we recently entered into various formal agreements with Panasonic on the Gigafactory, we have very little experience in building a factory of the size and scope planned for the Gigafactory, and no experience directly in the production of lithium-ion cells. In addition, to date we have not finalized agreements with additional Gigafactory partners that will be co-located at the Gigafactory. Also, the cost of building and operating the Gigafactory could exceed our current expectations and the Gigafactory may take longer to bring online than we anticipate. If we are unable to build the Gigafactory in a timely manner to produce high volumes of quality lithium-ion cells at reasonable prices, then our ability to supply battery packs to our vehicles, including Model 3, according to our schedule and/or at a price that allows us to sell them profitably and in the quantities we estimate could be constrained. Any such problems or delays with Gigafactory could negatively affect our brand and harm our business, prospects, financial condition and operating results.

If our vehicles or vehicles that contain our powertrains fail to perform as expected, or if we suffer product recalls, our ability to develop, market and sell our electric vehicles could be harmed.

Our vehicles or vehicles that contain our powertrains such as the Toyota RAV4 EV or the Mercedes-Benz B-Class EV may contain defects in design and manufacture that may cause them not to perform as expected or that may require repair. For example, our vehicles are highly dependent on software to operate. Software products are inherently complex and often contain defects and errors when first introduced, and changes to software may have unexpected effects. Model S issues experienced by customers include those related to the software for the 17 inch display screen, the panoramic roof and the 12 volt battery. Although we attempt to remedy the Model S issues experienced by our customers in a rapid manner, such efforts may not be timely or up to the satisfaction of our customers.

While we have performed extensive internal testing, we currently have a limited frame of reference by which to evaluate the long-term performance of our battery packs, powertrains and vehicles. Specifically, we have only a limited amount of data by which to evaluate Model S, upon which our

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business prospects depend, due to the fact that we only recently began production in June 2012. There can be no assurance that we will be able to detect and fix any defects in the vehicles prior to their sale to consumers.

We have experienced product recalls, including in May 2009,�October 2010, and June 2013, all of which were unrelated to our electric powertrain. In May 2009, we initiated a product recall after we determined that a condition caused by insufficient torquing of the rear inner hub flange bolt existed in some of our Tesla Roadsters, as a result of a missed process during the manufacture of the Tesla Roadster glider, which is the partially assembled Tesla Roadster that does not contain our electric powertrain. In October 2010, we initiated a product recall for some of our Tesla Roadsters after the 12 volt, low voltage auxiliary cable in a single vehicle chafed against the edge of a carbon fiber panel in the vehicle causing a short, smoke and possible fire behind the right front headlamp of the vehicle. In June 2013, we initiated a recall of slightly more than a thousand Model S vehicles to inspect and repair rear seat strikers that may have been compromised during the assembly process. Rear seat strikers are used to retain the rear seat backs in an upright position. Failure of this component may have resulted in the collapse of the rear seat back during a crash. Although the cost of this recall was not material, and limited to a small number of total Model S�s produced, we may experience additional recalls in the future, which could adversely affect our brand in our target markets, as well as our business, prospects and results of operations.

Moreover, in January 2014 we implemented a firmware update to address issues with certain Universal Mobile Connector NEMA 14-50 adapters, which are part of the charging units and are not part of the vehicles themselves, potentially overheating during charging. We further announced that we would provide upgraded NEMA 14-50 adapters to our customers as an additional safeguard. If such measures do not adequately address the underlying concerns, our business, prospects and results of operations could be harmed.

Our electric vehicles may not perform consistent with customers� expectations or consistent with other vehicles currently available. For example, our electric vehicles may not have the durability or longevity of current vehicles, and may not be as easy to repair as other vehicles currently on the market. Additionally, while Model S recently achieved an overall five star safety rating by NHTSA, there is no guarantee that future model years or variants or other Tesla vehicles will also attain such safety ratings, and any such rating is not a guarantee of safe product design or that any individual vehicle will be free of any defect or failure.

Any product defects or any other failure of our performance electric vehicles to perform as expected could harm our reputation and result in adverse publicity, lost revenue, delivery delays, product recalls, product liability claims, harm to our brand and reputation, and significant warranty and other expenses, and could have a material adverse impact on our business, financial condition, operating results and prospects.

We are dependent on our suppliers, the majority of which are single source suppliers, and the inability of these suppliers to continue to deliver, or their refusal to deliver, necessary components of our vehicles in a timely manner at prices, quality levels, and volumes acceptable to us would have a material adverse effect on our financial condition and operating results.

Model S contains numerous purchased parts which we source globally from over 300 direct suppliers, the majority of whom are currently single source suppliers for these components. While we obtain components from multiple sources whenever possible, similar to other automobile manufacturers, the majority of the components used in our vehicles are purchased by us from single sources. To date we have not qualified alternative sources for most of the single sourced components used in our vehicles and we do not maintain long-term agreements with a number of our suppliers.

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While we believe that we may be able to establish alternate supply relationships and can obtain or engineer replacement components for our single source components, we may be unable to do so in the short term, or at all, at prices or costs that are favorable to us. In particular, while we believe that we will be able to secure alternate sources of supply for most of our single sourced components in a relatively short time frame, qualifying alternate suppliers or developing our own replacements for certain highly customized components of our vehicles may be time consuming, costly and may force us to make additional modifications to a vehicle�s design.

This supply chain exposes us to multiple potential sources of delivery failure or component shortages for Model S, as well as for our powertrain component sales activities. For example, earthquakes similar to the one that occurred in Japan in March 2011 could negatively impact our supply chain. We have in the past experienced source disruptions in our supply chains, including those relating to our slower-than-anticipated ramp in our Model S production goals for 2012. We may experience additional delays in the future with respect to Model S and any other future vehicle we may produce. In addition, because we have written agreements in place with the majority, but not all, of our suppliers, this may create uncertainty regarding certain suppliers� obligations to us, including but not limited to, those regarding warranty and product liability. Changes in business conditions, wars, governmental changes and other factors beyond our control or which we do not presently anticipate, could also affect our suppliers� ability to deliver components to us on a timely basis. Furthermore, if we experience significantly increased demand, or need to replace certain existing suppliers, there can be no assurance that additional supplies of component parts will be available when required on terms that are favorable to us, at all, or that any supplier would allocate sufficient supplies to us in order to meet our requirements or fill our orders in a timely manner. In the past, we have replaced certain suppliers because of their failure to provide components that met our quality control standards. The loss of any single or limited source supplier or the disruption in the supply of components from these suppliers could lead to delays in vehicle deliveries to our customers, which could hurt our relationships with our customers and also materially and adversely affect our financial condition and operating results.

Changes in our supply chain have resulted in the past, and may result in the future, in increased cost and delay. 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 design changes that we made, and we may experience similar cost increases in the future. 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 cheaper to produce. If we are unsuccessful in our efforts to control and reduce supplier costs, our operating results will suffer. Additionally, cost reduction efforts may interrupt or harm our normal production processes, thereby harming Model S quality or reducing Model S production output.

Furthermore, a failure by our suppliers to provide the components in a timely manner or at the level of quality necessary to manufacture our performance electric vehicles such as Model S could prevent us from fulfilling customer orders in a timely fashion which could result in negative publicity, damage our brand and have a material adverse effect on our business, prospects, financial condition and operating results.

Finally, in October 2013, we entered into an amendment to our existing supply agreement with Panasonic Corporation in order to address our anticipated short- to medium-term lithium-ion battery cell needs. While we expect that this supply agreement, as amended, will provide us with sufficient cells for the next few years, we may not be able to meet our long-term needs, including for Model 3 and other

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programs we may introduce, without securing additional suppliers or other sources for cells.�We have recently signed an agreement with Panasonic to be our partner in the Gigafactory and be responsible for, among other things, manufacturing cells from there for use in our products. If we encounter unexpected difficulties with our current suppliers, including Panasonic, and if we are unable to fill these needs from other suppliers, we could experience production delays, which could have a material adverse effect on our financial condition and operating results.

Our future growth is dependent upon consumers� willingness to adopt electric vehicles.

Our growth is highly dependent upon the adoption by consumers of, and we are subject to an elevated risk of any reduced demand for, alternative fuel vehicles in general and electric vehicles in particular. If the market for electric vehicles in North America, Europe and Asia does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition and operating results will be harmed. The market for alternative fuel vehicles is relatively new, rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing consumer demands and behaviors.

Other factors that may influence the adoption of alternative fuel vehicles, and specifically electric vehicles, include:

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perceptions about electric vehicle quality, safety (in particular with respect to lithium-ion battery packs), design, performance and cost, especially if adverse events or accidents occur that are linked to the quality or safety of electric vehicles, such as those related to the Chevrolet Volt battery pack fires or incidents involving Model S;

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perceptions about vehicle safety in general, in particular safety issues that may be attributed to the use of advanced technology, including vehicle electronics and regenerative braking systems;

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negative perceptions of electric vehicles, such as that they are more expensive than non-electric vehicles and are only affordable with government subsidies;

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the limited range over which electric vehicles may be driven on a single battery charge and the effects of weather on this range;

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the decline of an electric vehicle�s range resulting from deterioration over time in the battery�s ability to hold a charge;

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varied calculations for driving ranges achievable by EVs, which is inherently difficult given numerous factors affecting battery range;

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concerns about electric grid capacity and reliability, which could derail our past and present efforts to promote electric vehicles as a practical solution to vehicles which require gasoline;

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concerns by potential customers that if their battery pack is not charged properly, it may become unusable and may need to be replaced;

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the availability of alternative fuel vehicles, including plug-in hybrid electric vehicles;

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improvements in the fuel economy of the internal combustion engine;

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the availability of service for electric vehicles;

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consumers� desire and ability to purchase a luxury automobile or one that is perceived as exclusive;

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the environmental consciousness of consumers;

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volatility in the cost of oil and gasoline;

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consumers� perceptions of the dependency of the United States on oil from unstable or hostile countries;

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government regulations and economic incentives promoting fuel efficiency and alternate forms of energy as well as tax and other governmental incentives to purchase and operate electric vehicles;

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access to charging stations, standardization of electric vehicle charging systems and consumers� perceptions about convenience and cost to charge an electric vehicle; and

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perceptions about and the actual cost of alternative fuel.

In addition, reports have suggested the potential for extreme temperatures to affect the range or performance of electric vehicles, and based on our own internal testing, we estimate that our vehicles may experience a material reduction in range when operated in extremely cold temperatures. To the extent customers have concerns about such reductions or third party reports which suggest reductions in range greater than our estimates gain widespread acceptance, our ability to market and sell our vehicles, particularly in colder climates, may be adversely impacted.

Additionally, we will become subject to regulations that require us to alter the design of our vehicles, which could negatively impact consumer interest in our vehicles. For example, our electric vehicles make less noise than internal combustion vehicles. Due to concerns about quiet vehicles and vision impaired pedestrians, in January 2011, Congress passed and the President signed the Pedestrian Safety Enhancement Act of 2010. The new law requires NHTSA to establish minimum sounds for electric vehicles and hybrid electric vehicles when travelling at low speeds. NHTSA issued a notice of proposed rulemaking in 2013 and plans to finalize a rule as soon as sometime in 2014 with an effective date that could be implemented as early as September�1, 2015. This will begin a three year phase-in schedule for establishing these minimum sounds in all electric and hybrid electric vehicles. Adding this artificial noise may cause current or potential customers not to purchase our electric vehicles, which would materially and adversely affect our business, operating results, financial condition and prospects.

If we fail to manage future growth effectively as we rapidly grow our company, especially internationally, we may not be able to produce, market, sell and service our vehicles successfully.

Any failure to manage our growth effectively could materially and adversely affect our business, prospects, operating results and financial condition. We continue to expand our operations significantly in North America as well as in Europe and Asia. Our future operating results depend to a large extent on our ability to manage this expansion and growth successfully. Risks that we face in undertaking this global expansion include:

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finding and training new personnel, especially in new markets such as Europe and Asia;

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controlling expenses and investments in anticipation of expanded operations;

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establishing or expanding sales, service and Supercharger facilities in a timely manner;

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adapting our products to meet local requirements in countries around the world; and

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implementing and enhancing manufacturing, logistics and administrative infrastructure, systems and processes.

We intend to continue to hire a significant number of additional personnel, including manufacturing personnel, design personnel, engineers and service technicians. Because our high-performance vehicles are based on a different technology platform than traditional internal combustion engines, we may not be able to hire individuals with sufficient training in electric vehicles, and we will need to expend significant time and expense training the employees we do hire. Competition for individuals with experience designing, manufacturing and servicing electric vehicles is intense, and we may not be able to attract, assimilate, train or retain additional highly qualified personnel in the future, the failure of which could seriously harm our business, prospects, operating results and financial condition.

If we are unable to adequately reduce the manufacturing costs of Model S, control manufacturing costs for Model X or otherwise control the costs associated with operating our business, our financial condition and operating results will suffer.

Our production costs for Model S were high initially due to start-up costs at the Tesla Factory, manufacturing inefficiencies including low absorption of fixed manufacturing costs, higher logistics costs due to the immaturity of our supply chain, and higher initial prices for component parts during the initial period after the launch and ramp of Model S. As we have gradually ramped production of Model S, manufacturing costs per vehicle have decreased. While we expect further cost reductions to be realized by both us and our suppliers during the next several quarters, there is no guarantee we will be able to achieve sufficient cost savings to reach our gross margin and profitability goals.

We incur significant costs related to procuring the raw materials required to manufacture our high-performance electric cars, assembling vehicles and compensating our personnel. We may also incur substantial costs or cost overruns in increasing the production capability of Model S and powertrain manufacturing facilities and the recent launch in Asia. Furthermore, if we are unable to produce Model X pursuant to our plan due to cost overruns or other unexpected costs, we may not be able to meet our gross margin targets.

Furthermore, many of the factors that impact our operating costs are beyond our control. For example, the costs of our raw materials and components, such as lithium-ion battery cells or aluminum used to produce body panels, could increase due to shortages as global demand for these products increases. Indeed, if the popularity of electric vehicles exceeds current expectations without significant expansion in battery cell production capacity and advancements in battery cell technology, shortages could occur which would result in increased material costs to us or potentially limit our ability to expand production. Additionally, we may be required to incur substantial marketing costs and expenses to promote our vehicles, including through the use of traditional media such as television, radio and print, even though our marketing expenses to date have been relatively limited as we have to date relied upon unconventional marketing efforts. If we are unable to keep our operating costs aligned with the level of revenues we generate, our operating results, business and prospects will be harmed.

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

We occasionally provide guidance regarding our expected financial and business performance, such as projections regarding the number of vehicles we hope to sell, produce or deliver in future periods and anticipated future revenues, gross margins, profitability and cash flows. Correctly identifying the key factors affecting business conditions and predicting future events is inherently an uncertain process. Our guidance is based in part on assumptions which include, but are not limited to, assumptions regarding:

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our ability to achieve anticipated production and sales volumes and projected average sales prices for Model S and Model X in North America, Europe and Asia;

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supplier and commodity-related costs; and

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planned cost reductions.

Such guidance may not always be accurate or may vary from actual results due to our inability to meet our assumptions and the impact on our financial performance that could occur as a result of the various risks and uncertainties to our business as set forth in these risk factors, or because of the way that applicable accounting rules require us to treat new product and service offerings that we may offer. We offer no assurance that such guidance will ultimately be accurate, and investors should treat any such guidance with appropriate caution. If we fail to meet our guidance or if we find it necessary to revise such guidance, even if such failure or revision is seemingly insignificant, investors and analysts may lose confidence in us and the market value of our common stock could be materially and adversely affected.

Our vehicles make use of lithium-ion battery cells, 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.

The battery pack in our vehicles and the battery packs that we sell to Toyota and Daimler 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. Extremely rare incidents of laptop computers, cell phones and electric vehicle battery packs catching fire have focused consumer attention on the safety of these cells.

These events have raised concerns about the batteries used in automotive applications. To address these questions and concerns, a number of cell manufacturers are pursuing alternative lithium-ion battery cell chemistries to improve safety. We have designed the battery pack to passively contain any single cell�s release of energy without spreading to neighboring cells. However, we have delivered only a limited number of our vehicles to customers and have limited field experience with them. We have also only delivered a limited number of battery packs to Toyota and Daimler. Accordingly, 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 damage the vehicle or lead to personal injury or death and may subject us to lawsuits. We may have to recall our vehicles or participate in a recall of a vehicle that contains our battery packs, and redesign our battery packs, 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 us, could seriously harm our business.

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In addition, we store a significant number of lithium-ion cells at our manufacturing facility. 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 or injury would likely lead to adverse publicity and potentially a safety recall. Moreover, any failure of a competitor�s electric vehicle, especially those that use a high volume of commodity cells similar to Tesla�s vehicles, may cause indirect adverse publicity for us and our electric vehicles. Such adverse publicity would negatively affect our brand and harm our business, prospects, financial condition and operating results.

We have a history of losses and have to deliver significant cost reductions to achieve sustained, long-term profitability and long-term commercial success.

We have had net losses on a GAAP basis in each quarter since our inception, except for the first quarter of 2013. Even if we are able to continue to increase Model S production and sales and begin to produce and sell Model X, there can be no assurance that we will be profitable. In order to achieve profitability as well as long-term commercial success, we must continue to achieve our planned cost reductions, control our operational costs while producing quality vehicles, increase our production rate, maintain strong demand in North America, and grow demand abroad in Europe and Asia. Failure to do one or more of these things could prevent us from achieving sustained, long-term profitability.

The introduction of our resale value guarantee and leasing programs may result in lower revenues and profits and exposes us to resale risk to the extent many customers elect to return their vehicles to us and the residual values are lower than our estimates.

In 2013 we began offering a resale value guarantee to all customers who purchased a Model S in the United States and Canada and financed their vehicle through one of our specified commercial banking partners. In April and October of 2014, we started offering leasing to business customers and individual customers, respectively, including through Tesla Finance, our captive finance company. Both the resale value guarantee program and leasing offered through Tesla Finance lower our revenues as compared to cash purchases and both expose us to the risk that any vehicles repurchased or returned to us under the programs may be resold by us for prices less than we estimate.

Under the resale value guarantee program, Model S customers have the option of selling their vehicle back to us during the period of 36 to 39 months following delivery for a pre-determined resale value.�As a result of this resale value guarantee and customers having the option of selling their vehicles to us, we apply lease accounting to such purchases, which defers the recognition of the associated revenues over time instead of full recognition at vehicle delivery. Although the resale value guarantee does not impact our cash flows and liquidity at the time of vehicle delivery, a significant uptake under this program could have a significant adverse impact on our near term GAAP revenues and operating results.

Under the leasing program offered through Tesla Finance, we lease vehicles directly to customers. Customers have the option of purchasing their vehicles at the stated value in the leasing contract or returning their vehicles to us. We apply lease accounting to such purchases. Unlike the resale value guarantee program, we may receive only a very small portion of the price of the vehicle from our customers at the time of purchase, and instead will receive a stream of lease payments. To the extent we expand this program and are unable to secure appropriate financing, our cash flow and liquidity, as well as our near term GAAP revenues and operating results, could be negatively impacted. Furthermore, we are exposed to the risk that customers fail to pay their lease payments on time and according to the terms of our leasing contracts.

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Under both programs, we are exposed to the risk that the vehicles� resale value may be lower than our estimates and the volume of vehicles returned to us may be higher than our estimates, which could impact our future cash flows and/or profitability. Currently, there is only a very limited secondary market for our electric vehicles in particular, and electric vehicles in general, on which to base our estimates, and such a secondary market may not develop in the future. Our residual value and return volume estimates could prove to be incorrect, either of which could harm our financial condition and operating results.

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

We may experience increases in the cost or a sustained interruption in the supply or shortage of raw materials. Any such increase or supply interruption could materially and negatively impact our business, prospects, financial condition and operating results. We use various raw materials in our business including aluminum, steel, nickel and copper. The prices for these raw materials fluctuate depending on market conditions and global demand for these materials 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:

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the inability or unwillingness of current battery manufacturers to build or operate battery cell manufacturing plants to supply the numbers of lithium-ion cells required to support the growth of the electric or plug-in hybrid vehicle industry as demand for such cells increases;

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disruption in the supply of cells due to quality issues or recalls by battery cell manufacturers;

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an increase in the cost of raw materials, such as nickel used in lithium-ion cells, or aluminum used in the body of Model S; and

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fluctuations in the value of the Japanese yen against the U.S. dollar as our battery cell purchases are currently denominated in Japanese yen.

Our business is dependent on the continued supply of battery cells for our vehicles� battery packs as well as for the battery packs we produce for other automobile manufacturers. While we believe several sources of the battery cells are available for such battery packs, we have fully qualified only one supplier for the cells used in such battery packs and have very limited flexibility in changing cell suppliers. Any disruption in the supply of battery cells from such vendors could disrupt production of Model S and of the battery packs we produce for other automobile manufacturers 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 raw material costs. Substantial increases in the prices for our raw materials or prices charged to us, such as those charged by our battery cell manufacturers, would increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased electric vehicle prices. There can be no assurance that we will be able to recoup increasing costs of raw materials by increasing vehicle prices. Any attempts to increase Model S or future vehicle prices in response to increased raw material costs could be viewed negatively by our customers, result in cancellations of vehicle orders and reservations and could materially and adversely affect our brand, image, business, prospects and operating results.

Our success could be harmed by negative publicity regarding our company or our products, particularly Model S.

Occasionally, third parties evaluate or publish stories regarding our vehicles. For example, in 2013 the New York Times published a review of the Model S and our Supercharger network on a route from

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Washington, D.C. to Boston. Despite instructions to the contrary regarding proper charging of the vehicle, the reporter did not follow all recommendations, and therefore the Model S failed to complete the journey under its own power and the NY Times reporter published a negative review. The story created a negative public perception about Model S, its capabilities and the Supercharger network. To the extent that negative comments about us or our products are believed by the public, this may cause current or potential customers not to purchase our electric vehicles, including Model S and Model X, which can materially and adversely affect our business, operating results, financial conditions and prospects.

Our distribution model is different from the predominant current distribution model for automobile manufacturers, which makes evaluating our business, operating results and future prospects difficult.

Our distribution model is not common in the automobile industry today, particularly in the United States. We plan to continue to sell our performance electric vehicles in company-owned Tesla stores and over the internet. While we believe our approach is important to the success of our technology and vehicles, this model of vehicle distribution is relatively new and unproven, especially in the United States, and subjects us to substantial risk as it requires, in the aggregate, a significant expenditure and provides for slower expansion of our distribution and sales systems than may be possible by utilizing a more traditional dealer franchise system. For example, we do not utilize long-established sales channels developed through a franchise system to increase our sales volume, which may harm our business, prospects, financial condition and operating results. Moreover, we compete with companies with well-established distribution channels.

We have opened Tesla stores in North America, Europe and the Asia Pacific Region, many of which have been open for only a short period of time. We have relatively limited experience distributing and selling our performance vehicles through our Tesla stores, especially in Asia. Our success will depend in large part on our ability to effectively develop our own sales channels and marketing strategies. Implementing our business model is subject to numerous significant challenges, including obtaining permits and approvals from local and state authorities, and we may not be successful in addressing these challenges. The concept and layout of our interactive stores, which are typically located in high profile retail centers, is different than what has previously been used in automotive sales. We do not know whether our store strategy will continue to be successful. We may incur additional costs in order to improve or change our retail strategy.

Other aspects of our distribution model also differ from those used by traditional automobile manufacturers. For example, we do not anticipate that we will ever carry a significant amount of vehicle inventory at our stores and customers may need to wait up to a few months from the time they place an order until the time they receive their vehicle. This type of custom manufacturing is unusual in the premium sedan market in the United States and it is unproven whether the average customer will be willing to wait this amount of time for such a vehicle. If customers do not embrace this ordering and retail experience, our business will be harmed.

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.

We may become subject to product liability claims, which could harm our business, prospects, operating results and financial condition. The automobile industry experiences significant product liability claims and we face inherent risk of exposure to claims in the event our vehicles do not perform as expected or malfunction resulting in personal injury or death. Our risks in this area are particularly pronounced given the limited number of vehicles delivered to date and limited field experience of those

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vehicles. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our vehicles and business and inhibit or prevent commercialization of other future vehicle candidates which would have material adverse effect on our brand, business, prospects and operating results. We self-insure against the risk of product liability claims, meaning that any product liability claims will have to be paid for from company funds, not by insurance. Any lawsuit seeking significant monetary damages may have a material adverse effect on our reputation, business and financial condition. We may not be able to secure additional product liability insurance coverage on commercially acceptable terms or at reasonable costs when needed, particularly if we do face liability for our products and are forced to make a claim under such a policy.

We are currently expanding and improving our information technology systems. If these implementations are not successful, our business and operations could be disrupted and our operating results could be harmed.

We are currently 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 Model S necessitates continued development, maintenance and improvement of our information technology systems in the U.S. and abroad, which include product data management, procurement, inventory management, production planning and execution, sales, service and logistics, dealer management, financial, tax and regulatory compliance systems. These systems support our operations and enable us to produce Model S and future vehicles like Model X in volume. 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 expanded systems or their required functionality will be effectively implemented or sufficiently maintained. If we do not successfully implement, improve or maintain these systems, 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. 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.

We may not realize the benefits of our Supercharger network, which could harm our business, brand and operating results.

We continue to deploy Tesla Superchargers in the United States, Europe and Asia. Tesla Superchargers are a network of charging stations designed to provide fast-charge capability to owners of Model S vehicles with the Supercharging option.�We intend to expand the Tesla Supercharger network throughout the U.S., Canada, Europe and Asia, but we may be unable to do so due to a number of factors, including the inability to secure, or delays in securing, suitable locations and permits, problems negotiating leases with landowners or obtaining required permits for such locations, difficulties in interfacing with the infrastructures of various utility companies and greater than expected costs and difficulties of installing, maintaining and operating the network.

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We may also be unable to expand the Supercharger network as fast as we intend or as the public expects, or to place the charging stations in places our customers believe to be optimal. Furthermore, even where Superchargers exist, the increasing number of Model S vehicles as well as future vehicles such as Model X may oversaturate the available charging bays at such Superchargers, leading to increased wait times and dissatisfaction for customers. In addition, as we have announced that we will not be charging our customers to access this network in addition to what they have already paid for their vehicles, any significant unexpected costs that we encounter will entirely be borne by us and may harm our operating results. Although our Supercharger network is intended to address customer concerns regarding long-distance travel, this network may not result in increased reservations or sales of Model S or future vehicles like Model X.�If our Supercharger network is not expanded as currently planned or as quickly as planned, we may not realize the benefits of our Supercharger network and our business and operating results could be materially affected.

If we are unable to design, develop, market and sell new electric vehicles that address additional market opportunities, our business, prospects and operating results will suffer.

We may not be able to successfully develop new electric vehicles, address new market segments or develop a significantly broader customer base.�In 2012, we publicly revealed an early prototype of the Model X crossover as the first vehicle we intend to develop by leveraging the Model S platform. We have also announced our intent to develop Model 3 based on a smaller platform than the Model S which we expect to produce at the Tesla Factory after the introduction of Model�X. Model 3 is currently planned to be a lower cost, smaller sedan designed for the mass market. Therefore, we intend to manufacture Model 3 in significantly higher volumes than Model S and there can be no assurance we can successfully scale our business accordingly. In addition, we have not yet finalized the design, engineering or component sourcing plans for Model 3 and there are no assurances that we will be able to bring this vehicle to market at the price point and in the volume that we currently intend, if at all. The market for vehicles in the price range we expect for Model 3 is much more competitive than for Model S and�Model X, and therefore margins are likely to be lower compared to Model�S and Model X margins. Our efforts to manufacture and sell a sufficiently profitable Model 3 may not be as successful, and therefore our business, prospects and operating results may suffer. Our failure to address additional market opportunities would harm our business, prospects, financial condition and operating results.

The automotive market is highly competitive, and we may not be successful in competing in this industry. We currently face competition from new and established competitors and expect to face competition from others in the future.

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. Other automobile manufacturers entered the electric vehicle market at the end of 2010 and we expect additional competitors to enter this market. With respect to Model S, we face competition from existing and future automobile manufacturers in the extremely competitive premium sedan market, including Audi, BMW, Lexus and Mercedes.

Many established and new automobile manufacturers have entered or have announced plans to enter the alternative fuel vehicle market. Mitsubishi has been selling its fully electric iMiEV in Japan since April 2010 and Nissan has been selling the fully electric Nissan Leaf since December 2010. In the past few years, Ford has introduced the fully electric Ford Focus, Renault has introduced the fully electric Renault Fluence, and Fiat has introduced the Fiat 500e, among others. Moreover, BMW has introduced the fully electric BMW i3 and Volkswagen plans to introduce its fully electric e-Golf in 2014. In addition, several manufacturers, including General Motors, Toyota, Ford, and Honda, are each selling hybrid vehicles, and certain of these manufacturers have announced plug-in versions of their hybrid vehicles. For example, in December 2010, General Motors introduced the Chevrolet Volt, which is a plug-in hybrid vehicle that operates purely on electric power for a limited number of miles, at which time an internal combustion engine engages to recharge the battery pack.

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Moreover, it has been reported that many of the other large OEMs, such as Daimler, Lexus and Audi, are also developing electric vehicles. Several new start-ups have also entered or announced plans to enter the market for performance electric vehicles. Finally, electric vehicles have already been brought to market in China and other foreign countries and we expect a number of those manufacturers to enter the United States market as well.

Most of our current and potential competitors have significantly greater financial, technical, manufacturing, marketing and other resources than we do and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. Virtually all of our competitors have more extensive customer bases and broader customer and industry relationships than we do. In addition, almost all of these companies have longer operating histories and greater name recognition than we do. Our competitors may be in a stronger position to respond quickly to new technologies and may be able to design, develop, market and sell their products more effectively. Additionally, we have not in the past, and do not currently, offer customary discounts on our vehicles like most of our competitors do.

We expect competition in our industry to intensify in the future in light of increased demand for alternative fuel vehicles, continuing globalization and consolidation in the worldwide automotive industry. Factors affecting competition include product quality and features, innovation and development time, pricing, reliability, safety, fuel economy, customer service and financing terms. Increased competition may lead to lower vehicle unit sales and increased inventory, which may result in a further downward price pressure and adversely affect our business, financial condition, operating results and prospects. Our ability to successfully compete in our industry will be fundamental to our future success in existing and new markets and our market share. There can be no assurances that we will be able to compete successfully in our markets. If our competitors introduce new cars or services that compete with or surpass the quality, price or performance of our cars or services, we may be unable to satisfy existing customers or attract new customers at the prices and levels that would allow us to generate attractive rates of return on our investment. Increased competition could result in price reductions and revenue shortfalls, loss of customers and loss of market share, which could harm our business, prospects, financial condition and operating results.

Demand in the automobile industry is highly volatile, which may lead to lower vehicle unit sales and adversely affect our operating results.

Volatility of demand in the automobile industry may materially and adversely affect our business, prospects, operating results and financial condition. The markets in which we currently compete and plan to compete in the future have been subject to considerable volatility in demand in recent periods. For example, according to automotive industry sources, sales of passenger vehicles in North America during the fourth quarter of 2008 were over 30% lower than those during the same period in the prior year. Demand for automobile sales depends to a large extent on general, economic, political and social conditions in a given market and the introduction of new vehicles and technologies. As a new automobile manufacturer and low volume producer, we have less financial resources than more established automobile manufacturers to withstand changes in the market and disruptions in demand. As our business grows, economic conditions and trends in other countries and regions where we currently or will sell our electric vehicles, such as Europe and Asia, will impact our business, prospects and operating results as well. Demand for our electric vehicles may also be affected by factors directly impacting automobile price or the cost of purchasing and operating automobiles, such as sales and financing incentives, prices of raw materials and parts and components, cost of fuel and governmental regulations, including tariffs,

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import regulation and other taxes. Volatility in demand may lead to lower vehicle unit sales and increased inventory, which may result in further downward price pressure and adversely affect our business, prospects, financial condition and operating results. These effects may have a more pronounced impact on our business given our relatively smaller scale and financial resources as compared to many incumbent automobile manufacturers.

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

Our vehicles are highly technical products that require maintenance and support. If we were to cease or cut back operations, even years from now, buyers of our vehicles from years earlier might have much more difficulty in maintaining their vehicles and obtaining satisfactory support. As a result, consumers may be less likely to purchase our vehicles now if they are not convinced that our business will succeed or that our operations will continue for many years. 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. If we are required to curtail our expansion plans in the future as we have done in the past, this may result in negative perceptions regarding our long-term business prospects and may lead to cancellations of Model S or Model X orders and reservations.

Accordingly, in order to build and maintain our business, we must maintain confidence among customers, suppliers, analysts and other parties in our liquidity and long-term business prospects. In contrast to some more established automakers, we believe that, in our case, the task of maintaining such confidence may be particularly complicated by factors such as the following:

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our limited operating history;

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unfamiliarity with or uncertainty about Model X and future Tesla vehicles;

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uncertainty about the long-term marketplace acceptance of alternative fuel vehicles generally, or electric vehicles specifically;

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the perceived prospect that we will need ongoing infusions of external capital to fund our planned operations;

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the size of our expansion plans in comparison to our existing capital base and scope and history of operations; and

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the prospect or actual emergence of direct, sustained competitive pressure from more established automakers, which may be more likely if our initial efforts are perceived to be commercially successful.

Many of these factors are largely outside our control, and any negative perceptions about our long-term business prospects, even if exaggerated or unfounded, would likely harm our business and make it more difficult to raise additional funds when needed.

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We have limited experience servicing our vehicles, especially in certain regions outside of the United States, and we are using a different service model from the one typically used in the industry. If we are unable to address the service requirements of our existing and future customers, our business will be materially and adversely affected.

If we are unable to successfully address the service requirements of our existing and future customers and meet customer expectations regarding service, our business and prospects will be materially and adversely affected. We have limited experience servicing our vehicles, especially in Europe and Asia. Servicing electric vehicles is different than servicing vehicles with internal combustion engines and requires specialized skills, including high voltage training and servicing techniques. If we are unable to satisfactorily service our customers and the various service related issues that they are facing and may face in the future, our ability to generate customer loyalty, grow our business and sell additional Model S vehicles could be impaired.

We service our performance electric vehicles through our company-owned Tesla service centers, certain of our stores, and through our mobile service technicians known as the Tesla Rangers. However, certain service centers have been open for short periods, such as those outside of the United States, and to date we have only limited experience servicing our performance vehicles at these locations. We will need to open new standalone service centers in locations around the world and hire and train significant numbers of new employees to staff these service centers and act as Tesla Rangers in order to successfully maintain our fleet of delivered performance electric vehicles. We only implemented our Tesla Rangers program in October 2009 and have limited experience in deploying them to service our customers� vehicles. There can be no assurance that these service arrangements or our limited experience servicing our vehicles will adequately address the service requirements of our customers to their satisfaction, or that we will have sufficient resources to meet these service requirements in a timely manner as the volume of vehicles we are able to deliver annually increases.

We do not expect to be able to open Tesla service centers in all the geographic areas in which our existing and potential customers may reside. In order to address the service needs of customers who are not in geographical proximity to our service centers, we plan to either transport those vehicles to the nearest Tesla store or service center for servicing or deploy our mobile Tesla Rangers to service the vehicles at the customer�s location. These special arrangements may be expensive and we may not be able to recoup the costs of providing these services to our customers. In addition, a number of potential customers may choose not to purchase our vehicles because of the lack of a more widespread service network. If we do not adequately address our customers� service needs, our brand and reputation will be adversely affected, which in turn, could have a material and adverse impact on our business, financial condition, operating results and prospects.

Traditional automobile manufacturers in the United States do not provide maintenance and repair services directly. Consumers must rather service their vehicles through franchised dealerships or through third party maintenance service providers. We do not have any such arrangements with third party service providers and it is unclear when or even whether such third party service providers will be able to acquire the expertise to service our vehicles. At this point, we anticipate that we will be providing substantially all of the service for our vehicles for the foreseeable future. As our vehicles are placed in more locations, we may encounter negative reactions from our consumers who are frustrated that they cannot use local service stations to the same extent as they have with their conventional automobiles and this frustration may result in negative publicity and reduced sales, thereby harming our business and prospects.

In addition, the motor vehicle industry laws in many states require that service facilities be available with respect to vehicles physically sold from locations in the state. Whether these laws would also require that service facilities be available with respect to vehicles sold over the internet to consumers in a state in which we have no physical presence is uncertain. While we believe our Tesla Ranger program and our practice of transporting customers� vehicles to our nearest Tesla service center would satisfy regulators in these circumstances, without seeking formal regulatory guidance, there are no assurances that regulators will not attempt to require that we provide physical service facilities in their states. Further, certain state franchise laws which prohibit manufacturers from being licensed as a dealer or acting in the capacity of

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dealer also restrict manufacturers from providing vehicle service. If issues arise in connection with these laws, certain aspects of Tesla�s service program would need to be restructured to comply with state law, which may harm our business.

We may not succeed in maintaining and strengthening the Tesla brand, which would materially and adversely affect customer acceptance of our vehicles and components and our business, revenues and prospects.

Our business and prospects are heavily dependent on our ability to develop, maintain and strengthen the Tesla brand. Any failure to develop, maintain and strengthen our brand may materially and adversely affect our ability to sell the Model S, Model X, Model 3 and other future planned electric vehicles, and sell our electric powertrain components. If we do not continue to establish, maintain and strengthen our brand, we may lose the opportunity to build a critical mass of customers. Promoting and positioning our brand will likely depend significantly on our ability to provide high quality electric cars and maintenance and repair services, and we have very limited experience in these areas. Any problems associated with the Toyota RAV4 EV and Mercedes-Benz B-Class EV, both of which use a Tesla powertrain, or the Model X may hurt the Tesla brand.

In addition, we expect that our ability to develop, maintain and strengthen the Tesla brand will also depend heavily on the success of our marketing efforts. To date, we have limited experience with marketing activities as we have relied primarily on the internet, word of mouth and attendance at industry trade shows to promote our brand. To further promote our brand, we may be required to change our marketing practices, which could result in substantially increased advertising expenses, including the need to use traditional media such as television, radio and print. The automobile industry is intensely competitive, and we may not be successful in building, maintaining and strengthening our brand. Many of our current and potential competitors, particularly automobile manufacturers headquartered in Detroit, Japan and the European Union, have greater name recognition, broader customer relationships and substantially greater marketing resources than we do. If we do not develop and maintain a strong brand, our business, prospects, financial condition and operating results will be materially and adversely impacted.

If our vehicle owners customize our vehicles or change the charging infrastructure with aftermarket products, the vehicle may not operate properly, which could harm our business.

Automobile enthusiasts may seek to �hack� our vehicles to modify its performance which could compromise vehicle safety systems. Also, we are aware of customers who have customized their vehicles with after-market parts that may compromise driver safety. For example, some customers have installed seats that elevate the driver such that airbag and other safety systems could be compromised. Other customers have changed wheels and tires, while others have installed large speaker systems that may impact the electrical systems of the vehicle. We have not tested, nor do we endorse, such changes or products. In addition, customer use of improper external cabling or unsafe charging outlets can expose our customers to injury from high voltage electricity. Such unauthorized modifications could reduce the safety of our vehicles and any injuries resulting from such modifications could result in adverse publicity which would negatively affect our brand and harm our business, prospects, financial condition and operating results.

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Our plan to expand our network of Tesla stores, service centers and Superchargers will require significant cash investments and management resources and may not meet our expectations with respect to additional sales of our electric vehicles. This ongoing global expansion may not have the desired effect of increasing sales and expanding our brand presence to the degree we are anticipating. Furthermore, there can be no assurances that we will be able to expand on the budget or timeline we have established. We will also need to ensure we are in compliance with any regulatory requirements applicable to the sale and service of our vehicles in those jurisdictions, which could take considerable time and expense. If we experience any delays in expanding our network of Tesla stores, service centers and Superchargers, this could lead to a decrease in sales of our vehicles and could negatively impact our business, prospects, financial condition and operating results. We have opened Tesla stores and service centers in major metropolitan areas throughout North America, Europe and Asia, and we plan to open additional stores and service centers worldwide to support our ongoing worldwide Model S rollout. We have also rapidly expanded our Supercharger network in the U.S., Europe and China. However, we may not be able to expand at a sufficient rate and our planned expansion will require significant cash investment and management resources, as well as efficiency in the execution of establishing these locations and in hiring and training the necessary employees to effectively sell and service our vehicles.

Furthermore, certain states and foreign jurisdictions may have permit requirements, franchise dealer laws or similar laws or regulations that may preclude or restrict our ability to open stores or sell vehicles out of such states and jurisdictions. Any such prohibition or restriction may lead to decreased sales in such jurisdictions, which could harm our business, prospects and operating results. See Risk Factor �We may face regulatory limitations on our ability to sell vehicles directly or over the internet which could materially and adversely affect our ability to sell our electric vehicles.��Additionally, we may face potential difficulties in finding suitable Supercharger sites in desired locations, negotiating leases or obtaining required permits for such locations.

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

We face various risks associated with our international operations and expansion. We currently have international operations and subsidiaries in various countries and jurisdictions in Europe and Asia that are subject to the legal, political, regulatory and social requirements and economic conditions in these jurisdictions. Additionally, as part of our growth strategy, we will continue to expand our sales, maintenance, repair and Supercharger services internationally, particularly in China. However, we have limited experience to date selling and servicing our vehicles internationally, as well as limited experience installing and operating Superchargers internationally, and 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 electric vehicles and require significant management attention. These risks include:

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conforming our vehicles to various international regulatory and safety requirements where our vehicles are sold, or homologation;

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difficulty in establishing, staffing and managing foreign operations;

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difficulties attracting customers in new jurisdictions;

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foreign government taxes, regulations and permit requirements, including foreign taxes that we may not be able to offset against taxes imposed upon us in the United States, and foreign tax and other laws limiting our ability to repatriate funds to the United States;

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fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities we undertake;

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our ability to enforce our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as do the United�States, Japan and European countries, which increases the risk of unauthorized, and uncompensated, use of our technology;

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United States and foreign government trade restrictions, customs regulations, tariffs and price or exchange controls;

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foreign labor laws, regulations and restrictions;

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preferences of foreign nations for domestically produced vehicles;

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changes in diplomatic and trade relationships;

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political instability, natural disasters, war or events of terrorism; and

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the strength of international economies.

Additionally, as we have expanded into new international markets, we have faced challenges with ensuring that our charging equipment works successfully with the charging infrastructure in such markets.�For example, we have encountered such challenges in Norway.�These types of issues could also arise as we enter into and expand in other new markets, such as China.�If customers experience problems with the way our charging equipment works with the local charging infrastructure, or we are unable to adapt our equipment to resolve such problems, then the viability and acceptance of our vehicles in such markets could be materially and adversely affected.

If we fail to successfully address these risks, our business, prospects, operating results and financial condition could be materially harmed.

Foreign currency movements relative to the U.S. dollar could harm our financial results.

Our revenues and costs denominated in foreign currencies are not completely matched. As we increase Model S deliveries in markets outside of the United States, we may have greater revenues than costs denominated in other currencies such as the Norwegian kroner, Chinese yuan and the euro, in which case a strengthening of the dollar would tend to reduce our revenues as measured in U.S. dollars. 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, the euro, the Chinese yuan and the British pound. 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 (especially against the Japanese yen), our costs as measured in U.S. dollars as a percent of our revenues will correspondingly increase and our margins will suffer. As a result, our operating results could be adversely affected.

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Developments in alternative technologies or improvements in the internal combustion engine may materially adversely affect the demand for our electric vehicles.

Significant developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects in ways we do not currently anticipate. Any failure by us to develop new or enhanced technologies or processes, or to react to changes in existing technologies, could materially delay our development and introduction of new and enhanced electric vehicles, which could result in the loss of competitiveness of our vehicles, decreased revenue and a loss of market share to competitors.

The unavailability, reduction or elimination of, or uncertainty regarding, government and economic incentives in the U.S. and abroad could have a material adverse effect on our business, financial condition, operating results and prospects.

Any reduction, elimination of government and economic incentives because of policy changes, the reduced need for such incentives due to the customer base of our electric vehicles, fiscal tightening or other reasons may result in the diminished competitiveness of the alternative fuel vehicle industry generally or our electric vehicles in particular. This could materially and adversely affect our growth as well as our business, prospects, financial condition and operating results, as our growth depends, in part, on the availability and amounts of government incentives. For example, we currently benefit from certain exemptions in the United States, such as from California state sales and use taxes. Also, government programs have been enacted in Europe favoring the purchase of electric vehicles, including disincentives that discourage the use of gas-powered vehicles. In Norway, for example, the purchase of electric vehicles is not currently subject to import taxes, taxes on non-recurring vehicle fees, or the 25% value added tax or other purchase taxes that apply to the purchase of gas-powered vehicles. In the event that such government programs are reduced or eliminated, or the available benefits thereunder are exhausted earlier than anticipated, sales of electric vehicles, including our Model S, could be adversely affected. In addition, customers in certain markets may delay taking delivery of their Tesla vehicles if they believe that certain EV incentives will be available at a later date, and this may negatively affect our ability to achieve our planned delivery targets.

Our strategic relationships with third parties, such as Daimler, Toyota and Panasonic, are subject to various risks which could adversely affect our business and future prospects.

Our strategic relationships third parties, such as Daimler, Toyota and Panasonic, pose various risks to us, including potential loss of access to important technology and vehicle parts, potential loss of business and adverse publicity to our brand image if there are defects or other problems discovered with the electric powertrain components that Daimler and Toyota have incorporated into their vehicles. In addition, these third parties may not perform as expected under our agreements with them, and we may have disagreements or disputes with these third parties. The occurrence of any of the foregoing could adversely affect our business, prospects, financial condition and operating results.

Any failure to execute on the Daimler B-Class EV program could hurt our reputation as well as our profitability on this program.

We have worked with Daimler to develop a full electric powertrain for a Daimler Mercedes-Benz B-Class EV vehicle. We have substantially completed our development services under this B-Class program and commenced production of electric powertrains and battery packs for Daimler. The supply agreement for these products contemplates customary obligations of us such as timely deliveries, warranty and product defect obligations. If we fail to meet these obligations, or if we exceed our current cost projections for producing these products, our profitability on this program will suffer and this could have a negative impact on our operating results.

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The operation of our vehicles is different from internal combustion engine vehicles and our customers may experience difficulty operating them properly, including difficulty transitioning between different methods of braking.

We have designed our vehicles to minimize inconvenience and inadvertent driver damage to the powertrain. In certain instances, these protections may cause the vehicle to behave in ways that are unfamiliar to drivers of internal combustion vehicles. For example, we employ regenerative braking to recharge the battery pack in most modes of vehicle operation. Our customers may become accustomed to using this regenerative braking instead of the wheel brakes to slow the vehicle. However, when the vehicle is at maximum charge, the regenerative braking is not needed and is not employed by the vehicle. Accordingly, our customers may have difficulty shifting between different methods of braking. In addition, we use safety mechanisms to limit motor torque when the powertrain system reaches elevated temperatures. In such instances, the vehicle�s acceleration and speed will decrease. Finally, if the driver permits the battery pack to substantially deplete its charge, the vehicle will progressively limit motor torque and speed to preserve the charge that remains. The vehicle will lose speed and ultimately coast to a stop. Despite several warnings about an imminent loss of charge, the ultimate loss of speed may be unexpected.

There can be no assurance that our customers will operate the vehicles properly, especially in these situations. Any accidents resulting from such failure to operate our vehicles properly could harm our brand and reputation, result in adverse publicity and product liability claims, and have a material adverse effect on our business, prospects, financial condition and operating results. In addition, if consumers dislike these features, they may choose not to buy additional cars from us, which could also harm our business and prospects.

If we are unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.

We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position. Any failure to keep up with advances in electric vehicle technology would result in a decline in our competitive position which would materially and adversely affect our business, prospects, operating results and financial condition. Our research and development efforts may not be sufficient to adapt to changes in electric vehicle technology. As technologies change, we plan to upgrade or adapt our vehicles and introduce new models in order to continue to provide vehicles with the latest technology, in particular battery cell technology. However, our vehicles may not compete effectively with alternative vehicles if we are not able to source and integrate the latest technology into our vehicles. For example, we do not currently manufacture battery cells, which makes us dependent upon other suppliers of battery cell technology for our battery packs.

If we are unable to attract and/or retain key employees and hire qualified management, technical, vehicle engineering and manufacturing personnel, our ability to compete could be harmed and our stock price may decline.

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 as well as cause our stock price to decline. In particular, we are highly dependent on the services of Elon Musk, our Chief Executive Officer, Product Architect and Chairman of our Board of Directors, and JB Straubel, our Chief Technical Officer. None of our key employees is bound by an employment agreement for any specific term. There can be no assurance that we will 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 our executive officers and other key technology, sales, marketing, engineering, manufacturing and support personnel and any failure to do so could adversely

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impact our business, prospects, financial condition and operating results. We have in the past and may in the future experience difficulty in retaining members of our senior management team as well as technical, vehicle engineering and manufacturing personnel due to various factors, such as a very competitive labor market for talented individuals with automotive experience. In addition, we do not have �key person� life insurance policies covering any of our officers or other key employees.

Currently in Northern California, there is increasing competition for talented individuals with the specialized knowledge of electric vehicles, software engineers, manufacturing engineers and other skilled employees and this competition affects both our ability to retain key employees and hire new ones. Our continued success depends upon our continued ability to hire new employees in a timely manner and retain current employees. Additionally, we compete with many mature and prosperous companies in Northern California that have far greater financial resources than we do and thus can offer current or perspective employees more lucrative incentive packages than we can. Any difficulties in retaining current employees or recruiting new ones would have an adverse effect on our performance.

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, Product Architect, Chairman of our Board of Directors 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, a developer and manufacturer of space launch vehicles, and Chairman of SolarCity, a solar equipment installation company.

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 an automobile manufacturer, we and our operations, both in the United States and abroad, are subject to national, state, provincial and/or local environmental, health and safety laws and regulations, including laws relating to the use, handling, storage, disposal and human exposure to hazardous materials. Environmental and health and safety laws and regulations can be complex, and we expect that our business and operations will be affected by future amendments to such laws or other new environmental and health and safety laws which may require us to change our operations, potentially resulting in a material adverse effect on our business. These laws can give rise to liability for administrative oversight costs, cleanup costs, property damage, bodily injury and fines and penalties. Capital and operating expenses needed to comply with environmental, health and safety laws and regulations can be significant, and violations may result in substantial fines and penalties, third party damages, suspension of production or a cessation of our operations.

Contamination at properties formerly owned or operated by us, as well as at properties we will own and operate, and properties to which hazardous substances were sent by us, may result in liability for us under environmental laws and regulations, including, but not limited to the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), which can impose liability for the full amount of remediation-related costs without regard to fault, for the investigation and cleanup of contaminated soil and ground water, for building contamination and impacts to human health and for damages to natural resources. The costs of complying with environmental laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future, could have a material adverse effect on our financial condition or operating results. We may face unexpected delays in obtaining the necessary permits and approvals required by environmental laws in connection with our manufacturing facilities that could require significant time and financial resources and negatively impact our ability to operate these facilities, which would adversely impact our business prospects and operating results.

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New United Motor Manufacturing, Inc. (NUMMI) has previously identified environmental conditions at the Tesla Factory which could affect soil and groundwater, and has undertaken efforts to address these conditions. Although we have been advised by NUMMI that it has documented and managed the environmental issues at the Fremont site, we cannot currently determine with certainty the total potential costs to remediate pre-existing contamination, and we may be exposed to material liability as a result of the existence of any environmental contamination at the Fremont site.

As the owner of the Fremont site, we may be responsible under federal and state laws and regulations for the entire investigation and remediation of any environmental contamination at the Fremont site, whether it occurred before or after the date we purchased the property. We have reached an agreement with NUMMI under which, over a ten year period, we will pay the first $15.0 million of any costs of any governmentally-required remediation activities for contamination that existed prior to the closing of the purchase for any known or unknown environmental conditions (Remediation Activities), and NUMMI has agreed to pay the next $15.0 million for such Remediation Activities. Our agreement provides, in part, that NUMMI will pay up to the first $15.0 million on our behalf if such expenses are incurred in the first four years of our agreement, subject to our reimbursement of such costs on the fourth anniversary date of the closing. Through September 30, 2014, remediation costs of $3.1 million had been incurred by NUMMI.

On the ten-year anniversary of the closing or whenever $30.0 million has been spent on Remediation Activities, whichever comes first, NUMMI�s liability to us with respect to Remediation Activities ceases, and we are responsible for any and all environmental conditions at the Fremont site. At that point in time, we have agreed to indemnify, defend, and hold harmless NUMMI from all liability, including attorney fees, or any costs or penalties it may incur arising out of or in connection with any claim relating to environmental conditions and we have released NUMMI for any known or unknown claims except for NUMMI�s obligations for representations and warranties under the agreement. As of September�30, 2014, we have accrued $7.0 million related to these environmental liabilities.

There are no assurances that NUMMI will perform its obligations under our agreement and NUMMI�s failure to perform would require us to undertake these obligations at a potentially significant cost and risk to our ability to increase the production capacity of, and operate, our Tesla Factory. Any Remediation Activities or other environmental conditions at the Fremont site could harm our operations and the future use and value of the Fremont site and could delay our production plans for Model S.

Our business may be adversely affected by union activities.

Although none of our employees are currently represented by a labor union, it is common throughout the automobile industry generally for many employees at automobile companies to belong to a union, which can result in higher employee costs and increased risk of work stoppages. Our employees may join or seek recognition to form a labor union, or we may be required to become a union signatory. Our automobile production facility in Fremont, California was purchased from NUMMI. Prior employees of NUMMI were union members and our future work force at this facility may be inclined to vote in favor of forming a labor union. We are also 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 performance electric vehicles and have a material adverse effect on our business, prospects, operating results or financial condition. The mere fact that our labor force could be unionized may harm our reputation in the eyes of some investors and thereby negatively affect our stock price. Consequently, the unionization of our labor force could negatively impact the company�s health.

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

Our performance electric vehicles, the sale of motor vehicles in general and the electronic components used in our vehicles are subject to substantial regulation under international, federal, state, and local laws. We have incurred, and expect to incur in the future, significant costs in complying with these regulations.

Regulations related to the electric vehicle industry and alternative energy are currently evolving and we face risks associated with changes to these regulations, such as in the United States:

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the imposition of a carbon tax or the introduction of a cap-and-trade system on electric utilities could increase the cost of electricity;

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increasingly stringent Clean Air Act emission regulations affecting power plants used to generate electricity could increase the cost of electricity;

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changes to the regulations governing the assembly and transportation of lithium-ion battery packs, such as the UN Recommendations of the Safe Transport of Dangerous Goods Model Regulations or regulations adopted by the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA) could increase the cost of lithium-ion battery packs or restrict their transport;

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the amendment or rescission of the federal law and regulations mandating increased fuel economy in the United States, referred to as the Corporate Average Fuel Economy (CAFE) standards, could reduce new business opportunities for our powertrain sales and development activities;

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the amendment or rescission of federal greenhouse gas tailpipe emission regulations administered by EPA under the authority of the Clean Air Act could reduce new business opportunities for our powertrain sales and development activities;

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the amendment or rescission of California�s zero emission vehicle regulations administered by the California Air Resources Board under the California Health�& Safety Code could reduce new business opportunities for our powertrain sales and development activities, as well as our ability to monetize ZEV credits not only in California, but also in the eleven additional states that have adopted the California program;

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increased sensitivity by regulators to the needs of established automobile manufacturers with large employment bases, high fixed costs and business models based on the internal combustion engine could lead them to pass regulations that could reduce the compliance costs of such established manufacturers or mitigate the effects of government efforts to promote alternative fuel vehicles; and

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changes to regulations governing the export of our products could increase our costs incurred to deliver products outside the United States or force us to charge a higher price for our vehicles in such jurisdictions.

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In addition, as the automotive industry moves towards greater use of electronics for vehicle systems, NHTSA and other regulatory bodies may in the future increase regulation for these electronic systems as concerns about distracted driving increase. Such concerns could affect electronic systems in Model S, including those used with the 17 inch display screen in Model S, which could reduce the appeal of Model S or require adjustments to the display screen�s functionality.

As we are currently delivering vehicles in Europe and Asia, we also become subject to additional laws and regulations applicable to the import, sale and service of automobiles in those regions, with which we have little or no experience complying. For example, we are required to meet vehicle-specific regulatory requirements that, in many cases, are materially different from U.S. requirements, thus resulting in additional investment into the vehicles and systems to ensure regulatory compliance. Unlike the U.S., we must also proactively obtain advanced approval from regulatory agencies in order to certify or homologate our vehicles and enter into respective markets. This process necessitates review and inspection of vehicles prior to market entry by foreign regulatory officials. In addition, we must comply with regulations applicable to vehicles after they enter the market, including foreign reporting requirements and recall management systems.

To the extent the laws change, some or all of our vehicles may not comply with applicable international, federal, state or local laws, which would have an adverse effect on our business. Compliance with changing regulations could be burdensome, time consuming, and expensive. To the extent compliance with new regulations is cost prohibitive, our business, prospects, financial condition and operating results will be adversely affected.

We retain certain personal information about our customers and may be subject to various privacy and consumer protection laws.

Our collection, use, retention, security and transfer of personal information of our customers is subject to federal, state, and international laws. These laws continue to be enacted and may be inconsistent from jurisdiction to jurisdiction. Complying with changing international laws may cause us to incur substantial costs, expose usto legal liability or require us to change our business practices. 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. 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 serious negative consequences for our businesses and future prospects, including possible fines, penalties and damages, reduced customer demand for our vehicles, and harm to our reputation and brand.

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

Any product recall in the future may result in adverse publicity, damage our brand and adversely affect our business, prospects, operating results and financial condition. We previously experienced product recalls in May 2009,�October 2010 and June 2013, none of which was related to our electric powertrain. In April 2009, we determined that a condition caused by insufficient torquing of the rear inner hub flange bolt existed in some of our Tesla Roadsters, as a result of a missed process during the manufacture of the Tesla Roadster glider. In October 2010, we initiated a product recall after the 12 volt, low voltage auxiliary cable in a single vehicle chafed against the edge of a carbon fiber panel in the

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vehicle causing a short, smoke and possible fire behind the right front headlamp of the vehicle. In June 2013, we initiated a recall of slightly more than one thousand Model S vehicles to inspect and repair rear seat strikers that may have been compromised during the assembly process. Rear seat strikers are used to retain the rear seat backs in an upright position. Failure of this component may have resulted in collapse of the rear seat back during a crash. Finally, in January 2014, we implemented a firmware update to address issues with certain Universal Mobile Connector NEMA 14-50 adapters, which are part of the charging units and are not part of the vehicles themselves, potentially overheating during charging. In the future, we may at various times, voluntarily or involuntarily, initiate a recall if any of our vehicles, including Model S, or our electric powertrain components prove to be defective or noncompliant with applicable federal motor vehicle safety standards. Such recalls, voluntary or involuntary, involve significant expense and diversion of management attention and other resources, 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.

If our warranty reserves are inadequate to cover future warranty claims on our vehicles, our business, prospects, financial condition and operating results could be materially and adversely affected. Warranty reserves include 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 and an estimate of the nature, frequency and costs of future claims. These estimates are inherently uncertain and changes to our historical or projected experience may cause material changes to our warranty reserves in the future. Subject to separate limited warranties for the supplemental restraint system and battery, we provide a four year or 50,000 mile New Vehicle Limited Warranty for the purchasers of Model�S. The New Vehicle Limited Warranty for Model�S also covers the drive unit for eight years and the battery for a period of eight years or 125,000 miles or unlimited miles, depending on the size of the vehicle�s battery; although the battery�s charging capacity is not covered under the New Vehicle Limited Warranty or any Extended Service plan.

In addition, customers have the opportunity to purchase an Extended Service plan for the period after the end of the New Vehicle Limited Warranty for Model�S to cover additional services for an additional four years or 50,000 miles, provided it is purchased within a specified period of time. The New Vehicle Limited Warranty and Extended Service plans for the Tesla Roadster and Model�S are subject to certain limitations, exclusions or separate warranties, including certain wear items, such as tires, brake pads, paint and general appearance, and battery performance, and is intended to cover parts and labor to repair defects in material or workmanship in the vehicle including the body, chassis, suspension, interior, electronic systems, powertrain and brake system. We have previously provided our Tesla Roadster customers with a battery replacement option to replace the battery in their vehicles at any time after the expiration of the New Vehicle Limited Warranty but before the tenth anniversary of the purchase date of their vehicles. Additionally, in 2013, as part of our ongoing efforts to improve the customer ownership experience, we expanded the battery pack warranty and also eliminated the annual service requirement that was needed to keep the New Vehicle Limited Warranty in effect. Should this change in warranty coverage lead to an increase in warranty claims, we may need to record additional warranty reserves which would negatively affect our profitability.

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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.�While we currently maintain general liability, automobile, property, workers� compensation, and directors� and officers� insurance policies, 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, and we cannot be certain that our insurance coverage will be sufficient to cover all future 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 fluctuations in our operating costs and the seasonality of our business.

We expect our period-to-period operating results to vary based on our operating costs which we anticipate will increase significantly in future periods as we, among other things, design, develop and manufacture Model X and future products, increase the production capacity at our manufacturing facilities to produce vehicles at higher volumes, develop the Gigafactory, open new Tesla service centers with maintenance and repair capabilities, open new Supercharger locations, increase our sales and marketing activities, and increase our general and administrative functions to support our growing operations. As a result of these factors, we believe that quarter-to-quarter comparisons of our operating 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 operating results may not meet expectations of equity research analysts or investors. If any of this occurs, the trading price of our common stock could fall substantially, either suddenly or over time.

Additionally, sales of new cars in the automobile industry typically decline over the winter season and are generally higher during the spring and summer months. We anticipate that our sales of Model�S and future models may have similar seasonality, but, our limited operating history makes it difficult for us to judge the exact nature or extent of the seasonality of our business. Our operating results could also suffer if we do not achieve revenue consistent with our expectations for this seasonal demand because many of our expenses are based on anticipated levels of annual revenue.

Unauthorized control or manipulation of our vehicles� systems may cause them to operate improperly or not at all, or compromise their safety and data security, which could result in loss of confidence in us and our vehicles and harm our business.

There have been reports of vehicles of other automobile manufacturers being �hacked� to grant access and operation of the vehicles to unauthorized persons and would-be thieves.�Our vehicles, and in particular Model S, are technologically advanced machines requiring the interoperation of numerous complex and evolving hardware and software systems.�Subject to our customers� ability to opt out pursuant to our privacy policy, Model S is designed with built-in data connectivity to accept and install periodic remote updates from us to improve or update the functionality of these systems.�Although we have designed, implemented and tested security measures to prevent unauthorized access to our vehicles and their systems, our information technology networks and communications with our vehicles may be vulnerable to interception, manipulation, damage, disruptions or shutdowns due to attacks by hackers or breaches due to errors by personnel who have access to our networks and systems.�Any such attacks or breaches could result in unexpected changes to our vehicles� functionality, user interface and performance characteristics.�Hackers may also use similar means to gain access to data stored in or generated by the vehicle, such as its current geographical position, previous and stored destination address history and web browser �favorites.��Any such unauthorized control of vehicles or access to or loss of information could result in legal claims or proceedings and negative publicity, which would negatively affect our brand and harm our business, prospects, financial condition and operating results.

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The range and power of our electric vehicles on a single charge declines over time, and this may negatively influence potential customers� decisions whether to purchase our vehicles.

The range and power of our electric vehicles on a single charge declines principally as a function of usage, time and charging patterns as well as other factors. How a customer uses their Tesla vehicle, the frequency of recharging the battery pack at a low state of charge and the means of charging can result in additional deterioration of the battery pack�s ability to hold a charge over the long term. For example, we currently expect that our battery pack for the Tesla Roadster will retain approximately 70% of its ability to hold its initial charge after approximately 100,000 miles or seven years, which will result in a decrease to the vehicle�s initial range and power. Deterioration of the Model S battery pack is expected to be less than the Roadster, however, such battery pack deterioration and the related decrease in range and power over time as well as any perceived deterioration or fluctuation in range may negatively influence potential customer decisions whether to purchase our vehicles, which may harm our ability to market and sell our vehicles.

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.

The design, manufacture, sale and servicing of automobiles is a capital intensive business. We expect that our principal sources of liquidity will provide us adequate liquidity based on our current plans. However, until we are consistently generating positive free cash flows, if the costs for developing and manufacturing Model�X exceed our expectations or if we incur any significant unplanned expenses or embark on or accelerate new significant strategic investments, such as the Gigafactory, we may need to raise additional funds through the issuance of equity, equity-related or debt securities or through obtaining credit from government or financial institutions. This capital will be necessary to fund our ongoing operations, continue research and development projects, including those for our planned Model X crossover and Model 3 vehicle, establish sales and service centers, build and deploy Superchargers and to make the investments in tooling and manufacturing capital required to introduce Model X. 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 adversely affected.

If we fail to effectively manage the residual, financing and credit risks for our recently launched Model S leasing program, our business may suffer.

We recently introduced a leasing program in the United States and Canada through our captive finance company, Tesla Finance.�The profitability of the leasing program depends on our ability to accurately project residual values, secure adequate financing and/or business partners to fund and grow this program, and manage customer credit risk.�If actual residual values of Model S vehicles are below our estimates, we may suffer lower profitability or potentially have losses. If we are unable to adequately fund our leasing program with either internal funds or external financing sources, we may be unable to grow our sales. Additionally, if we do not properly screen customers for ability to pay their leases on time, we may be exposed to excessive credit risks and associated losses. 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 federal and state 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.

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

We sell our vehicles from our Tesla stores as well as over the internet. We may not be able to sell our vehicles through this sales model in each state in the United States as many states have laws that may be interpreted to prohibit internet sales by manufacturers to residents of the state or to impose other limitations on this sales model, including laws that prohibit manufacturers from selling vehicles directly to consumers without the use of an independent dealership or without a physical presence in the state. In certain states in which we are not able to obtain dealer licenses, we have worked with state regulators to open galleries, which are locations where potential customers can view our vehicles but are not full retail locations. It is possible that a state regulator could later determine that the activities at our gallery constitute unlicensed sales of motor vehicles.

In many states, the application of state motor vehicle laws to our specific sales model is largely untested under state motor vehicle industry laws and is being determined by a fact specific analysis of numerous factors, including whether we have a physical presence or employees in the applicable state, whether we advertise or conduct other activities in the applicable state, how the sale transaction is structured, the volume of sales into the state, and whether the state in question prohibits manufacturers from acting as dealers. As a result of the fact specific and largely untested nature of these issues, and the fact that applying these laws intended for the traditional automobile distribution model to our sales model allows for some interpretation and discretion by the regulators, the manner in which the applicable authorities are applying their state laws to our distribution model 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 subject to challenges as to whether such decisions comply with applicable state motor vehicle industry laws. For example, in October 2012, vehicle dealer associations in New York and Massachusetts filed lawsuits to revoke the dealer license issued to Tesla Motors New York in New York and to limit the business activity of Tesla Motors MA, Inc. in Massachusetts. These lawsuits have been dismissed, and in one recent court decision, the Supreme Court of Massachusetts held that state franchise laws like the one in Massachusetts do not restrict a manufacturer, like Tesla, that does not use franchised dealers from selling its vehicles directly to consumers. Such results have reinforced our continuing belief that state laws were not designed to prevent our distribution model. A similar litigation was recently filed in the state of Ohio and subsequently dismissed. Possible additional challenges in other states, if successful, could restrict or prohibit our ability to sell our vehicles to residents in such states. In some states, there have also been regulatory and legislative efforts by vehicle dealer associations to propose bills and regulations that, if enacted, would prevent us from obtaining dealer licenses in their states given our current sales model. Such examples recently occurred in New Jersey, where the Motor Vehicle Commission, at the behest of the local automobile dealer lobby, passed a new regulation which purported to invalidate our sales licenses in the state, and in Michigan, where the state�s automobile dealer association managed to add language into an unrelated bill that had the effect of impairing our right to sell vehicles through Tesla stores in Michigan. We have brought a lawsuit in New Jersey to invalidate that regulation, which we believe to be unlawful, and we are evaluating legislative and litigation solutions to remedy the situation in Michigan. Other states, such as New York, Ohio and Pennsylvania, 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 are also registered as both a motor vehicle manufacturer and dealer in Canada, Australia, and Japan, and have obtained licenses to sell vehicles in other places such as Hong Kong and China. Furthermore, while we have performed an analysis of the principal laws in the European Union relating to

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our distribution model and believe we comply with such laws, we have not performed a complete analysis in all foreign jurisdictions in which we may sell vehicles. Accordingly, 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.

We may need to defend ourselves against patent or trademark infringement claims, which may be time-consuming and would cause us to incur substantial costs.

Companies, organizations or individuals, including our competitors, may hold or obtain patents, trademarks or other proprietary rights that would prevent, limit or interfere with our ability to make, use, develop, sell or market our vehicles or components, which could make it more difficult for us to operate our business. From time to time, we may receive inquiries from holders of patents or trademarks regarding their proprietary rights. Companies holding patents or other intellectual property rights may bring suits alleging infringement of such rights or otherwise assert their rights and seek licenses. In addition, if we are determined to have infringed upon a third party�s intellectual property rights, we may be required to do one or more of the following:

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cease selling, incorporating or using vehicles or offering goods or services that incorporate or use the challenged intellectual property;

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pay substantial damages;

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obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms or at all;

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redesign our vehicles or other goods or services; or

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establish and maintain alternative branding for our products and services.

In the event of a successful claim of infringement against us and our failure or inability to obtain a license to the infringed technology or other intellectual property right, 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 and diversion of resources and management attention.

We may also face claims that our use of technology licensed or otherwise obtained from a third party infringes the rights of others. In such cases, we may seek indemnification from our licensors/suppliers under our contracts with them. However, indemnification may be unavailable or insufficient to cover our costs and losses, depending on our use of the technology, whether we choose to retain control over conduct of the litigation, and other factors.

Our patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from interfering with our commercial use of our products.

The status of patents involves complex legal and factual questions and the breadth of patented claims is uncertain. We cannot be certain that we are the first creator of inventions covered by pending

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patent applications or the first to file patent applications on these inventions, nor can we be certain that our pending patent applications will result in issued patents or that any of our issued patents will afford sufficient protection in the event a competitor claims that we are infringing its patents. In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued U.S. patents will result in issued patents in those foreign jurisdictions. In addition, others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our business, prospects, financial condition and operating results.

Our trademark applications in certain countries remain subject to outstanding opposition proceedings.

We currently sell and market our products and services in various countries under our Tesla marks. We have filed trademark applications for our Tesla marks and opposition proceedings to trademark applications of third parties in various countries in which we currently sell and plan to sell our products and services. Certain of our trademark applications are subject to outstanding opposition proceedings brought by owners or applicants alleging prior applications for or use of similar marks. If we cannot resolve these oppositions and thereby secure registered rights in these countries, our ability to challenge third party users of the Tesla marks will be reduced and the value of the marks representing our exclusive brand name in these countries will be diluted. In addition, there is a risk that the prior rights owners could in the future take actions to challenge our use of the Tesla marks in these countries. Such actions could have a severe impact on our position in these countries and may inhibit our ability to use the Tesla marks in these countries. If we were prevented from using the Tesla marks in any or all of these countries, we would need to expend significant additional financial and marketing resources on establishing an alternative brand identity in these markets.

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

Our corporate headquarters in Palo Alto, Tesla Factory in Fremont and additional component manufacturing facilities in Lathrop are located in Northern California, a region known for seismic activity. If major disasters such as earthquakes, fires, floods, hurricanes, wars, terrorist attacks, computer viruses, pandemics 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. In addition, our lease for our Palo Alto facility permits the landlord to terminate the lease following a casualty event if the needed repairs are in excess of certain thresholds and we do not agree to pay for any uninsured amounts. We may incur expenses relating to such damages, which could have a material adverse impact on our business, operating results and financial condition.

If our suppliers fail to use ethical business practices and comply with applicable laws and regulations, our brand image could be harmed due to negative publicity.

Our core values, which include developing the highest quality electric vehicles while operating with integrity, are an important component of our brand image, which makes our reputation particularly sensitive to allegations of unethical business practices. We do not control our independent suppliers or their business practices. Accordingly, we cannot guarantee their compliance with ethical business practices, such as environmental responsibility, fair wage practices, appropriate sourcing of raw materials, and compliance with child labor laws, among others. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations.

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Violation of labor or other laws by our suppliers or the divergence of an independent supplier�s labor or other practices from those generally accepted as ethical in the United States or other markets in which we do business could also attract negative publicity for us and our brand. This could diminish the value of our brand image and reduce demand for our performance electric vehicles if, as a result of such violation, we were to attract negative publicity. If we, or other manufacturers in our industry, encounter similar problems in the future, it could harm our brand image, business, prospects, financial condition and operating results.

Servicing our convertible senior notes requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.

We incurred $660.0 million in aggregate principal amount of senior indebtedness in May 2013 when we issued pursuant to registered public offerings 1.50% convertible senior notes due 2018 (2018 Notes). In March and April 2014, we incurred an additional $920.0 million and $1.38 billion, respectively, in aggregate principal amount of senior indebtedness by issuing pursuant to registered public offerings 0.25% convertible senior notes due 2019 (2019 Notes) and 1.25% convertible senior notes due 2021 (2021 Notes and together with the 2018 Notes and 2019 Notes, collectively, the Notes). Our ability to make scheduled payments of the principal when due, to make quarterly interest payments or to make payments upon conversion or to refinance the Notes, 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 the Notes 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 the Notes or future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the Notes or future indebtedness.

Pursuant to their terms, holders may convert their Notes at their option at any time prior to the final three-month period of the scheduled term of the respective Notes only under certain circumstances. For example, holders may generally convert their Notes at their option during a quarter (and only during such quarter) if the last reported sale price of our common stock for at least 20�trading days (whether or not consecutive) during a period of 30�consecutive trading days ending on the last trading day of the immediately preceding quarter is greater than or equal to 130% of the conversion price for such series of Notes on each applicable trading day. This condition has been met in in each quarter of 2014 for the 2018 Notes, and consequently the 2018 Notes are convertible in the fourth quarter of 2014. This conversion feature also applies to the 2019 Notes and 2021 Notes for any quarter commencing with the third quarter of 2014 if the sales price condition for the applicable series of the 2019 and 2021 Notes is met in the immediately preceding quarter. Such condition has not been met in any applicable quarter and consequently the 2019 and 2021 Notes have not been and are not convertible in the fourth quarter of 2014. Upon conversion of the Notes, we will be obligated to make cash payments in respect of the principal amounts thereof, and we may also have to deliver cash and, if applicable, shares of our common stock, in respect of such Notes. Any conversion of the Notes prior to their maturity, or acceleration of the repayment of the Notes or future indebtedness after any applicable notice or grace periods could have a material adverse effect on our business, results of operations and financial condition. Even if holders do not elect to convert their Notes, if the Notes become convertible we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material adverse impact on our reported financial results.

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In addition, holders of the Notes will have the right to require us to purchase 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. However, we may not have enough available cash or be able to obtain financing at the time we are required to make purchases of Notes surrendered therefor or Notes being converted. In addition, our ability to purchase the Notes or to pay cash upon conversions of the Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to purchase Notes at a time when the purchase is required by the indenture or to pay cash payable on future conversions of the Notes as required by the indenture would constitute a default under the indenture. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and purchase the Notes or make cash payments upon conversions thereof.

We may still incur substantially more debt or take other actions, which would intensify the risks discussed above.

We and our subsidiaries are not restricted under the terms of the indenture governing the Notes, or the indenture, from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture that could have the effect of diminishing our ability to make payments on the Notes when due.

The classification of our Notes may have a material effect on our reported financial results.

Holders may convert their Notes at their option at any time prior to the final three-month period of the scheduled term of the respective Notes only under certain circumstances. For example, holders may generally convert their Notes at their option during a quarter (and only during such quarter) if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding quarter is greater than or equal to 130% of the conversion price for such series of Notes on each trading day. This condition was met for the 2018 Notes in the first and second quarters of 2014, and consequently the 2018 Notes were convertible by their holders during the second quarter of 2014 and are convertible during the third quarter of 2014. This conversion feature also applies to the 2019 Notes and the 2021 Notes for any quarter commencing with the third quarter of 2014 if the sales price condition for the applicable series of Notes is met in the immediately preceding quarter. Such condition was not met in the second quarter of 2014 and consequently the 2019 and 2021 Notes are not convertible in the third quarter of 2014. If the Notes become convertible prior to their scheduled maturity dates, we would be required to reclassify such Notes and the related debt issuance costs as current liabilities and certain portions of our equity outside of equity to mezzanine equity, which would have an adverse impact on our reported financial results for such quarter, and could have an adverse impact on the market price of our common stock.

Risks Related to the Ownership of our Common Stock

Concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions.

As of September�30, 2014, our executive officers, directors and their affiliates beneficially owned, in the aggregate, approximately 27.8% of our outstanding shares of common stock. In particular, Elon Musk, our Chief Executive Officer, Product Architect and Chairman of our Board of Directors, beneficially owned approximately 26.5�% of our outstanding shares of common stock as of September�30, 2014. As a result, these stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these stockholders.

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The trading price of our common stock is likely to continue to be volatile.

Our shares of common stock began trading on the Nasdaq Global Select Market in 2010 and, therefore, the trading history for our common stock has been limited. In addition, 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 $291.42 per share and a low of $116.10 per share over the last 52 weeks.

In addition, 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. Broad market and industry factors may seriously affect the market price of companies� stock, including ours, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock during the period following a securities offering. 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. For example, a shareholder litigation like this was filed against us in 2013. While the trial court recently dismissed the plaintiffs� complaint with prejudice, this litigation (if the trial court�s order is successfully appealed) or others like it could result in substantial costs and a diversion of our management�s attention and resources.

A substantial portion of our total outstanding shares are held by a small number of insiders and investors and may be sold in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our common stock.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market in the future, and the perception that these sales could occur may also depress the market price of our common stock. Stockholders owning a substantial portion of our total outstanding shares are entitled, under contracts providing for registration rights, to require us to register shares of our common stock owned by them for public sale in the United States, subject to the restrictions of Rule 144. In addition, we have registered shares previously issued or reserved for future issuance under our equity compensation plans and agreements, a portion of which are related to outstanding option awards. Subject to the satisfaction of applicable exercise periods and, in certain cases, lock-up agreements, the shares of common stock issued upon exercise of outstanding options will be available for immediate resale in the United States in the open market. Sales of our common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause our stock price to fall and make it more difficult to sell shares of our common stock.

Conversion of the Notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their Notes, or may otherwise depress the price of our common stock.

The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of any of the Notes. As described in the Risk Factor �Servicing our convertible senior notes requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt,��the Notes due 2018 were convertible by their holders during the second quarter of 2014 and are convertible during the third quarter of 2014. Moreover, these Notes, and commencing with the third quarter of 2014, the Notes due 2019 and

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Notes due 2021, may become convertible in future periods if a condition to conversion for the Notes is met. Such condition was not met in the second quarter of 2014 and consequently the 2019 and 2021 Notes are not convertible in the third quarter of 2014. 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 Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.

The convertible note hedge and warrant transactions we entered into in connection with the issuance of Notes may affect the value of the Notes and our common stock.

In connection with each issuance of the Notes, we entered into convertible note hedge transactions with the hedge counterparties. The convertible note hedge transactions cover, subject to customary anti-dilution adjustments, the number of shares of our common stock that initially underlay the applicable Notes. The convertible note hedge transactions 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 Notes. We also entered into warrant transactions with the hedge counterparties relating to the same number of shares of our common stock, subject to customary anti-dilution adjustments. However, the warrant transactions 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 modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the applicable Notes (and are likely to do so during any observation period related to a conversion of Notes). This activity could also cause or prevent an increase or a decrease in the market price of our common stock or the Notes.

We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the prices of the Notes or the shares of our common stock. In addition, we do not make any representation that the hedge counterparties have engaged or will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Mr.�Musk borrowed funds from affiliates of certain underwriters in our public offerings and/or private placements and has pledged shares of our common stock to secure these borrowings. The forced sale of these shares pursuant to a margin call could cause our stock price to decline and negatively impact our business.

Beginning in June 2011, banking institutions that are affiliated with certain underwriters of our completed public offerings of common stock and Notes made extensions of credit to Elon Musk and the Elon Musk Revocable Trust dated July�22, 2003, or the Trust, a portion of which Mr.�Musk used to purchase shares of common stock in our public offering in May 2013 and private placements in June 2011 and June 2013. Interest on such loans accrues at market rates and the banking institutions received customary fees and expense reimbursements in connection with these loans.

We are not a party to these loans, which are full recourse against Mr.�Musk and the Trust and are secured by pledges of a portion of the Tesla common stock currently owned by Mr.�Musk and the Trust and other shares of capital stock of unrelated entities owned by Mr.�Musk and the Trust. The terms of these loans were negotiated directly between Mr.�Musk and the applicable banking institutions.

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If the price of our common stock declines, Mr.�Musk may be forced by one or more of the banking institutions to provide additional collateral for the loans or to sell shares of Tesla common stock in order to remain within the margin limitations imposed under the terms of his loans. The loans between these banking institutions on the one hand, and Mr.�Musk and the Trust on the other hand, prohibit the non-pledged shares currently owned by Mr.�Musk and the Trust from being pledged to secure any other loans. These factors may limit Mr.�Musk�s ability to either pledge additional shares of Tesla common stock or sell shares of Tesla common stock as a means to avoid or satisfy a margin call with respect to his pledged Tesla common stock in the event of a decline in our stock price that is large enough to trigger a margin call. Any sales of common stock following a margin call that is not satisfied may cause the price of our common stock to decline further.

Anti-takeover provisions contained in our certificate of incorporation and bylaws, the provisions of Delaware law, and the terms of our convertible notes could impair a takeover attempt.

Our certificate of incorporation, bylaws, Delaware law and the terms of our Notes contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:

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creating a classified board of directors whose members serve staggered three-year terms;

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authorizing �blank check� preferred stock, which could be issued by the board without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

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limiting the liability of, and providing indemnification to, our directors and officers;

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limiting the ability of our stockholders to call and bring business before special meetings;

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requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

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controlling the procedures for the conduct and scheduling of board and stockholder meetings; and

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providing the board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section�203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.

Any provision of our certificate of incorporation or bylaws or Delaware law 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.

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In addition, the terms of the convertible notes require us to repurchase the convertible notes in the event of a fundamental change. A takeover of our company would trigger an option of the holders of the convertible notes to require us to repurchase the convertible notes. This may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to our stockholders or investors in the convertible notes.

The fundamental change repurchase feature of the Notes may delay or prevent an otherwise beneficial attempt to take over our company.

The terms of the Notes require us to repurchase the Notes in the event of a fundamental change. A takeover of our company would trigger options by the respective holders of the applicable Notes to require us to repurchase such Notes. This may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to our stockholders or investors in the Notes.

If securities or industry analysts publishing research or reports about us, our business or our market change their recommendations regarding our stock adversely or cease to publish research or reports about us, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

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ITEM�2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

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ITEM�3.

DEFAULT UPON SENIOR SECURITIES

None.

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ITEM�5.

OTHER INFORMATION

None.

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ITEM�6.

EXHIBITS

See Index to Exhibits at end of report.

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SIGNATURES

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.

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	�	�	�	Tesla Motors, Inc.

Date: November�7, 2014	�	�	�	/s/ Deepak Ahuja
	�	�	�	Deepak Ahuja
	�	�	�	Chief Financial Officer
	�	�	�	(Principal�Financial�Officer,�Principal�Accounting�Officer�and Duly Authorized Officer)

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INDEX TO EXHIBITS

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Exhibit
Number

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Incorporated by Reference

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Filed
Herewith

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Exhibit Description

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Form

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File�No.

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Exhibit

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Filing�Date

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��10.1

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Agreement between Panasonic Corporation and the Registrant dated July�31, 2014

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��10.2**

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General Terms and Conditions between Panasonic Corporation and the Registrant dated October 1, 2014

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��10.3**

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Production Pricing Agreement between Panasonic Corporation and the Registrant dated October 1, 2014

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��10.4**

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Investment Letter Agreement between Panasonic Corporation and the Registrant dated October 1, 2014

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��31.1

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Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Executive Officer

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Rule 13a-14(a) / 15(d)-14(a) Certification of Principal Financial Officer

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��32.1*

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Section 1350 Certifications

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101.INS

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XBRL Instance Document

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101.SCH

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XBRL Taxonomy Extension Schema Document

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101.CAL

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XBRL Taxonomy Extension Calculation Linkbase Document

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101.DEF

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XBRL Taxonomy Extension Definition Linkbase Document

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101.LAB

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XBRL Taxonomy Extension Label Linkbase Document

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101.PRE

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XBRL Taxonomy Extension Presentation Linkbase Document

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*	Furnished herewith

**	Confidential treatment has been requested for portions of this exhibit

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Exhibit 10.1

CONFIDENTIAL

Letter Agreement

This Letter Agreement (�Agreement�) is entered into effective as of July�31, 2014 (�Effective Date�) by and between Tesla Motors, Inc., a Delaware corporation located at 3500 Deer Creek Road, Palo Alto, California, 94304, United States (�Tesla�), and Panasonic Corporation, 1006 Kadoma, Kadoma City, Osaka 571-8506, Japan (�Panasonic�). Tesla and Panasonic are each referred to herein as a �Party� and such entities are collectively referred to herein as the �Parties.� In consideration of the mutual promises and agreements contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties agree as follows:

PURPOSE

Tesla desires to engage Panasonic to manufacture and supply cylindrical lithium-ion battery cells (the �Goods�) for use in Tesla products and, in connection with that purpose, Panasonic desires to engage the operations set forth above within a manufacturing facility owned by Tesla (the �Giga-Factory�).

Article 1. The Parties hereby agree that Panasonic, by itself or through its subsidiary, will engage in the manufacture and supply of the Goods for use in Tesla products within the Giga-Factory. The terms and conditions with respect to such operations and sales will be reflected in a separate written agreement.

Article 2. For the purpose set forth in Article 1 above (the �Purpose�), Panasonic will be responsible for the investments for equipment, machineries, tooling, jigs, dies, gauges, fixtures and molds required to manufacture and supply the Goods within Giga-Factory; provided, however, that the schedule, amount, contents and other conditions with respect to each such investment will be separately approved in writing by the Parties.

Article 3. For the Purpose, Tesla will be responsible for preparing and providing to Panasonic the land, buildings and utilities required to manufacture and supply the Goods within the Giga-Factory.

Article 4. Tesla hereby acknowledges and agrees that it will continue to purchase from Panasonic the Goods manufactured in its factories located in Japan for Tesla electric vehicle Models S and X. To that end, the Parties shall negotiate in good faith an amendment to the supply agreement dated October�5, 2011 governing such purchases.

Article 5. This Agreement will commence on the Effective Date and may be terminated by mutual written agreement of the Parties.

Article 6. This Agreement is subject to the terms and conditions of the non-disclosure agreement dated July�31, 2014, by and between Tesla and Panasonic (�NDA�), which is hereby incorporated by reference into this Agreement. The existence, terms and conditions of this Agreement constitute Confidential Information of the Parties, and may not be disclosed by either Party without the other Party�s prior written consent. Either Party may make an announcement, press release and other publication regarding this Agreement only by the mutual written agreement between the Parties.

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�Letter Agreement	�	Page 1 of 2�

CONFIDENTIAL

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Article 7. This Agreement will be governed by and construed under and in accordance with the laws of the State of California, without regard to principles of conflicts of law. The UN Convention on Contracts for the International Sale of Goods will not apply to the Contract. Tesla and Panasonic will first endeavor to resolve through good faith negotiations any dispute arising under this Agreement. Any dispute arising out of or relating to this Agreement that is not resolved through negotiation shall be settled exclusively by final and binding arbitration conducted in accordance with the arbitration provision in the NDA.

Article 8. This Agreement constitutes the entire agreement between the Parties with respect to its subject matter and supersedes all prior agreements and understandings pertaining to such subject matter, both oral and written, between the Parties. This Agreement may not be amended, modified or discharged, nor may any of its terms be waived, except in writing signed by an authorized representative of both Parties. Neither this Agreement nor any rights or obligations under this Agreement shall be assignable or otherwise transferable by either Party to this Agreement to any third party. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which taken together constitute one agreement.

IN WITNESS WHEREOF, the Parties have, by their duly authorized representatives, executed this Agreement.

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Tesla Motors, Inc.			�	�	Panasonic Corporation

By:	�	/s/ JB Straubel	�	�	By:	�	/s/ Yoshio Ito
Name: JB Straubel			�	�	Name: Yoshio Ito
Title: Chief Technology Officer			�	�	Title: Senior Managing Director, Member of the Board President, Automotive & Industrial Systems Company Panasonic Corporation

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�Letter Agreement	�	Page 2 of 2�

Exhibit 10.2

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CONFIDENTIAL	�	Confidential Treatment Requested by Tesla Motors, Inc.

GENERAL TERMS AND CONDITIONS

These General Terms and Conditions (�General Terms�) are entered into effective as of October�1, 2014 (�Effective Date�) by and between Tesla Motors, Inc., a Delaware corporation located at 3500 Deer Creek Road, Palo Alto, California, 94304 (�Tesla�), on the one hand, and Panasonic Corporation (�Seller�), on the other hand. Each Tesla and Seller entity is referred to herein as a �Party� and such entities are collectively referred to herein as the �Parties.�

PURPOSE

Tesla desires to engage Seller to develop, supply, and support products for use in Tesla Products and, in connection with that purpose, Seller desires to lease space within a manufacturing facility owned by Tesla (the �Factory�). These General Terms shall govern the relationship of the Parties.

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1.	Production Planning and Order Process.

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1.1	Production Planning.

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(a)

Each month during the Term, Tesla will provide a rolling monthly forecast of its anticipated requirements for Goods for the following periods of time: (i)�for the next [***] for each forecast provided until Seller has invested in Seller�s Property required for Seller�s manufacture, supply and/or provision of Goods at the Factory in volumes up to an annual aggregate energy capacity of thirty-five gigawatt-hours (35 GWh); and (ii)�for the next [***] for each forecast provided thereafter. Tesla�s forecast is non-binding and provided for planning purposes only. At a monthly meeting led by Tesla (�Production Meeting�), the Parties shall review in good faith Tesla�s forecast, the supply chain and other requirements to manufacture per Tesla�s forecast, any potential or actual constraints on Seller�s ability to manufacture Goods in accordance with Tesla�s forecast, and other business- and production-related issues. The Parties may also mutually agree to invite sub-suppliers that are colocated at the Factory to attend the Production Meeting. The Parties will then establish a production plan and/or update the existing production plan for manufacture and delivery of Goods based on the applicable Lead Time(s). Seller shall not withhold, condition or delay its consent to Tesla�s proposed production plan if Seller is capable of meeting Tesla�s forecast, based on such factors as supply chain constraints, labor constraints, and the performance capability of the Property. The agreed plan is the �Production Plan.� The Parties may agree in writing to adjust the Production Plan at any time.

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(b)

At the Production Meeting, the Parties shall also discuss in good faith (i)�Seller�s progress in achieving the operational targets set forth in the Contract and the Production Plan, (ii)�Seller�s proposed procurement, transportation, installation, or configuration at the Factory of Seller�s Property in connection with the Contract and the Production Plan, and (iii)�additional topics proposed by Tesla and/or Seller. Seller shall not invest in Seller�s Property without Tesla�s prior written consent for each investment. For clarification, each investment by or for Seller in Seller�s Property required for Seller�s manufacture, supply and/or provision of Goods at the Factory for Tesla will be subject to a separate written agreement between the Parties and Seller will not be obliged to make any such investment without the separate written agreement.

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(c)

Except as otherwise agreed in writing by Tesla and Seller, the Parties shall, for the purpose of exploring the cost effectiveness of the Goods, simplifying logistics, reducing Lead Time, and other agreed reasons, use Commercially Reasonable Efforts to cause Seller�s sub-suppliers required for production of Goods at the Factory to establish operations at the Factory on or around the mutually-agreed timing. For the avoidance of doubt, Tesla acknowledges that Seller cannot guarantee that its sub-suppliers will agree to establish operations at the Factory.

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1.2

Offer. The Authorized Purchasers will issue one or more Purchase Orders in accordance with the approved Production Plan and (unless agreed otherwise) at least [***], specifying quantities and delivery days for Goods as contemplated therein (each such order is a �Production Order�). The Authorized Purchasers may also issue Purchase Orders to Seller for Goods, including development parts (each such order is a �Discrete Order�). Purchase Orders will be issued on a rolling basis [***]. Purchase Orders accepted by Seller are binding to the extent set forth in Section�1.5.

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1.3

Acceptance. Seller shall accept or reject each Purchase Order as follows: [***] after receipt of a Production Order which conforms to the Production Plan; and [***] after receipt of either a Discrete Order or a Production Order which does not conform to the Production Plan. If Seller cannot meet the terms set forth in a Purchase Order, Seller will inform Tesla and propose alternative terms. If Tesla accepts such alternative terms, Tesla shall issue a revised Purchase Order that includes such alternative terms. Alternative terms are expressly rejected unless incorporated into a Purchase Order. Notwithstanding the foregoing, Seller may only reject a Production Order to the extent it fails to conform to the terms of the Production Plan, and Seller shall be deemed to have waived any objections and accepted the Production Order if Seller fails to object in writing within the timeframe specified above. Seller�s acceptance of a Purchase Order is referred to as the �Acceptance�.

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1.4

Terms of the Contract. Upon Seller�s Acceptance, the terms of the relevant Purchase Order, together with the terms in the other relevant Contract Documents, will become a binding contract between Tesla and Seller (each, a �Contract�). Acceptance is expressly limited to the terms provided by the Contract. Terms in any invoice and any other modifications, counterproposals, or counteroffers proposed by Seller to a Purchase Order are expressly rejected and shall not become part of the Contract.

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1.5

Purchase Order Liability. Tesla may, at any time and without any liability to Seller, adjust the volume(s) of Goods under any Contract, up or down, as follows upon written notice: (a)�by up to [***] for Goods to be delivered [***]after the date of Tesla�s notice, provided that such timeframe is within the applicable Lead Time and such timeframe shall be increased by the period of time reasonably required for Seller to ship materials from its current offshore suppliers (not to exceed a total of [***]) (for example, by giving notice on January�15, Tesla may adjust the volume of Goods to be delivered between [***]; (b)�[***] after the date of Tesla�s notice, provided that such timeframe is within the applicable Lead Time and such timeframe shall be increased by the period of time reasonably required for Seller to ship materials from its current offshore suppliers (not to exceed a total of [***]) (for example, by giving notice on January�15, Tesla may adjust the volume of Goods to be delivered between [***]; and (c)�[***], subject only to Seller�s actual capacity, labor constraints and supply chain constraints, for Goods to be delivered after the period of time following such notice that is equal to the applicable Lead Time. Seller shall be deemed to automatically consent to any such adjustment pursuant to this Section�1.5 without the need for a written consent.

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1.6

Purchase Commitment. Tesla will commit to purchase all conforming and non-defective Goods during the Term and pursuant to the Production Plan up to an annual aggregate energy capacity of thirty-five gigawatt-hours (35 GWh); provided, however, that: (a)�[***]; (b)�the Goods [***]; and (c)�market conditions support the purchase of Goods in volumes contemplated by the Production Plan, but without limiting Tesla�s commitments in written agreements between the Parties for investments in Seller�s Property as contemplated in Section�1.1(b).

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2.	Goods.

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2.1

Quantity. Quantities and delivery dates shall be as stated in the applicable Purchase Order accepted by Seller, unless otherwise agreed to in writing by the Parties. If Seller has reason to believe that its ability to deliver any Goods is or may be constrained, Seller shall [***]notify Tesla setting forth the cause for the anticipated delay. Any oral communication shall be [***]confirmed in writing.

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2.2	Changes.

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(a)

Seller shall not make any change to: (i)�the Goods without Tesla�s prior written consent, which Tesla may withhold in its sole but reasonable discretion; (ii)�its manufacturing process in a manner that could result in non-conforming or defective Goods or that could impact operations at the Factory of one or more other companies (i.e. Tesla and/or a colocated sub-supplier) without Tesla�s prior written consent, which Tesla will not unreasonably withhold; and (iii)�its suppliers in a manner that could result in non-conforming or defective Goods or that could impact operations at the Factory of one or

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more other companies (i.e. Tesla and/or a colocated sub-supplier) without prior written notice to Tesla, provided that (A)�Seller shall consider any objections by Tesla in good faith and discuss the proposed change with Tesla in good faith, and (B)�Seller shall not make any such change that will, or is reasonably likely to, adversely affect any of the following with respect to the Goods: [***].

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(b)

[***]. If [***], Seller shall use Commercially Reasonable Efforts to notify Tesla in writing within [***] after receipt of such request or proposal and prior to making the change if such change will affect [***], and Seller shall also provide the basis for such determination. If Seller proposes a change hereunder, Tesla will use Commercially Reasonable Efforts to respond to Seller�s proposal within [***]. Tesla and Seller will negotiate in good faith on [***] in connection with [***], but the [***] shall not [***] due to [***] unless [***]. For clarification, Seller is not obliged to make such change requested or proposed by Tesla unless [***] or other appropriate [***] in connection with such change is agreed between the Parties in writing.

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2.3	[*]. Tesla may propose that Seller [*]. In such case, Seller will discuss with Tesla and consider such proposal in good faith.

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2.4	Tesla Responsibilities.

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(a)

In order to facilitate Seller�s performance of its obligations under the Contract, Tesla will perform those tasks and fulfill those responsibilities of Tesla (including, as applicable, provision of Tesla-Supplied Items) as expressly set forth in these General Terms and/or the Contract (�Tesla Responsibilities�). Seller�s performance of its obligations may be dependent in some circumstances on Tesla�s timely and effective performance of the Tesla Responsibilities and timely decisions and approvals by Tesla.

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(b)

Tesla�s failure to perform any of the Tesla Responsibilities (or cause them to be performed) will not constitute grounds for termination by Seller except as provided in Section�13.3 (Termination); provided, however, that Seller�s nonperformance of its obligations under these General Terms and/or the Contract will be excused if and to the extent (i)�such nonperformance results from Tesla�s failure to perform any Tesla Responsibilities, and (ii)�Seller provides Tesla with reasonable notice of such nonperformance and, if requested by Tesla, uses Commercially Reasonable Efforts to perform notwithstanding Tesla�s failure to perform. If Seller�s use of Commercially Reasonable Efforts to perform its obligations in such a circumstance would cause Seller to incur significant uncompensated expenses, Seller may notify Tesla. In that case, Seller�s obligation to continue its efforts to work around Tesla�s failure to perform Tesla Responsibilities will be subject to Tesla agreeing to reimburse Seller for its actual, reasonable and incremental uncompensated expenses. The Parties shall also discuss in good faith Seller�s actual and reasonable out-of-pocket costs and expenses caused by Tesla�s failure to perform any Tesla Responsibility (e.g. loss of material, increased labor costs) and, subject to Section�12 (Liability), Tesla will be responsible for reimbursing such costs and expenses which Seller cannot mitigate or avoid using Commercially Reasonable Efforts.

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(c)

From time to time, Tesla may provide Seller with access to proprietary computer systems and technologies owned and operated by Tesla and/or its Affiliates (the �Systems�) to facilitate the performance of Seller�s obligations under the Contract. Seller is not obliged to use the Systems unless agreed by Seller in writing. Seller will only use the Systems for the business purposes of Tesla. Tesla may periodically monitor all uses of the Systems as allowed by law and review user access records maintained by Seller. To the maximum extent permitted by applicable Law, Seller�s users will have no expectation of privacy in connection with their use of the Systems. Seller shall be solely responsible for obtaining and maintaining the hardware and software it uses which are necessary to properly access the Systems and perform its obligations under the Contract.

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3.	Delivery.

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3.1

Packing and Shipment. Tesla may specify the method of transportation and the type and number of packing slips and other documents to be provided with each shipment. The Parties shall discuss in good faith and agree on the manner in which Seller will pack and ship Goods, including labeling and hazardous

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CONFIDENTIAL	�	Confidential Treatment Requested by Tesla Motors, Inc.

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materials instructions. If Tesla has not provided packing or shipping instructions, Seller will pack and ship Goods in accordance with industry standards (with reference to the lithium-ion battery cell industry). If Seller is required to use Tesla�s returnable packaging, the Parties will discuss in good faith the responsibility for cleaning and maintaining such returnable packaging.

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3.2	Delivery Terms. Seller will deliver Goods in strict accordance with the Contract terms. Unless otherwise stated in the Contract, Goods will be delivered [***] and title and risk of loss will transfer upon receipt of the Goods by Tesla.

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3.3

Time is of the Essence. TIME IS OF THE ESSENCE AS TO DELIVERY OF ALL GOODS. If Seller does not deliver any Goods in accordance with the Production Plan then, subject to Sections 2.4 (Tesla Responsibilities) and 12.2 (Force Majeure) and except for any other cause attributable to Tesla, Seller shall be in Default. In addition to any other obligations to which Seller shall be subject to under the Contract, if Seller cannot meet the delivery dates and/or quantities of Goods specified in the Contract, Seller will promptly notify Tesla and the Authorized Purchaser and: (a)�Seller shall provide substitute goods at the agreed price in the Contract from its operations at the Factory or elsewhere; and (b)�if Seller cannot provide substitute goods within a reasonable time, the Authorized Purchaser may cancel any remaining portion(s) of the relevant Contract(s) without liability to Seller, in which case the required volumes set forth in writing between the Parties (e.g. Production Plan) shall be reduced.

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3.4

Over-Shipments. If Seller delivers more Goods than specified in an Order, the Parties shall discuss the over-shipment in good faith and Seller shall, at its sole discretion, either: (a)�accept the return of the Goods delivered in excess of the Order [***] (the �Excess Goods�), or (b)�allow the Authorized Purchaser to retain the Excess Goods [***], in which case the Authorized Purchaser may also in its sole discretion reduce the quantities for future deliveries under the Production Plan and under its Order(s) by the quantity of Excess Goods.

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3.5

[***]. During the Term, Seller shall not [***] Goods which are manufactured at the Factory, [***] unless: (a)�Tesla gives prior written consent, which Tesla may withhold in its sole but reasonable discretion; and (b)�[***], as reasonably determined by both Parties based on a good faith discussion, [***]. Prior to [***] under this Section, Tesla shall, as reasonably requested by Seller, provide to Seller the information reasonably required for Seller to comply with sub-paragraph (b)�above, including, the [***].

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4.	Invoicing and Payment.

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4.1	[*]. Seller shall provide Tesla [*]. Such information shall be deemed to be Seller�s Highly Confidential Information under the NDA.

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4.2	Pricing. The pricing and pricing methodology applicable to the Goods shall be set forth in the then-current Pricing Agreement.

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4.3

Invoicing. Invoices will be in the currency specified in the Pricing Agreement, unless otherwise agreed, and will be sent to Tesla�s Accounts Payable Department as reasonably directed by Tesla. The invoice will detail the Goods for which payment is being requested, and the applicable Purchase Order number. Charges associated with shipping for which Tesla is responsible will be invoiced separately.

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4.4

Payment. Except as otherwise provided in the Contract, Tesla will pay Seller�s charges [***] days after receipt of each invoice; provided, however, that (i)�Tesla may withhold payment of any invoiced charges that Tesla disputes in good faith; (ii)�payment of any charges shall not be deemed an approval of such charges or acceptance of non-conforming Goods, and Tesla or the Authorized Purchaser may later dispute such charges; and (iii)�Tesla�s or the Authorized Purchaser�s payment of charges shall not relieve Seller of any of its warranties or other obligations under the Contract. If any Authorized Purchaser is repeatedly late or early in making payment, the Parties shall discuss in good faith whether to adjust the then-current payment terms and pricing methodology.

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4.5

[***]. If any Authorized Purchaser fails to pay undisputed amounts due in a timely manner which are in a material amount, Seller may give notice to Tesla and the Parties shall within a reasonable time discuss in good faith at a meeting with senior representatives of both Parties. If the Authorized Purchaser fails to pay promptly after the meeting, [***] until Tesla or the Authorized Purchaser pays the undisputed amounts in full which are past due.

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CONFIDENTIAL	�	Confidential Treatment Requested by Tesla Motors, Inc.

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4.6

Credits; Customs. Credits or benefits related to taxes and export/import duties resulting from the Contract, including trade credits, export credits or the rights to the refund of duties, taxes, or fees, belong to Tesla unless otherwise prohibited by applicable law. Seller shall retain all information related to the Goods and/or materials therefor (as applicable) as required by United States and any other applicable customs authorities, and shall provide all such information and certificates related to the Goods and/or materials therefor (as applicable) (including NAFTA Certificates of Origin) necessary to permit Tesla to receive these benefits or credits. Seller will provide Tesla with all information and records relating to the Goods necessary for Tesla to: (a)�receive these benefits, credits, and rights; (b)�fulfill any customs obligations, origin marking or labeling requirements, and certification or local content reporting requirements; (c)�claim preferential duty treatment under applicable trade preference regimes; and (d)�participate in any duty deferral or free trade zone programs of the country of import. If and to the extent applicable, Seller (or, if applicable, its supplier) will obtain export licenses and authorizations and pay export taxes, duties, and fees related to the Goods and/or materials therefor (as applicable) which are imposed, levied or otherwise payable prior to delivery of such Goods and/or materials (as applicable) to the Authorized Purchaser unless otherwise stated in the Contract, in which case Seller will provide all information and records necessary to enable Tesla to obtain those export licenses or authorizations.

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4.7

Taxes.

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(a)

This Section�4.7 sets forth the allocation of responsibility between the Parties for taxes arising out of or in relation to these General Terms and each Contract.

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(b)

Unless otherwise stated in the Contract, including the then-current Pricing Agreement, the Contract price includes all applicable federal, state, provincial, and local taxes other than sales, value added, or similar turnover taxes or charges. The Goods purchased from Seller are for resale which is exempt from all sales, use, value added or similar taxes, and Seller will not charge sales, use, value added or similar taxes on its invoices to Tesla for Goods provided that Tesla has provided Seller a valid resale certificate for Seller�s records. If Seller is required by law to pay or collect from Tesla any taxes or charges, Seller will separately invoice Tesla for such taxes or charges subject to Section�4.6 (Credits).

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(c)

Subject to Section�4.8(b) above, each Party will remain responsible for and shall pay (without reimbursement) any and all taxes that are assessed on any goods or services used or consumed by such Party (or its Affiliates) in performing its obligations under the Contract where the tax is imposed on such Party�s (or its Affiliates�) acquisition or use of the goods or services in the performance of such obligations, and other personal property taxes on property owned or leased by such Party (or its Affiliates) unless otherwise expressly provided in the Contract.

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(d)

Each Party shall be responsible for any: (i)�taxes on its (or its Affiliates�) revenue, net income or gross receipts; (ii)�franchise, business and occupational taxes (or similar in nature) on its business activities, and (iii)�employer-related taxes with respect to its personnel (e.g. employee taxes, workers compensation and unemployment insurance).

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(e)

The Parties agree to cooperate with each other to enable each to more accurately determine its own tax liability and to minimize such liability to the extent legally permissible.

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5.	Product Warranties.

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5.1	Product Warranties.

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(a)

Seller represents and warrants to Tesla and the relevant Authorized Purchaser(s) that: (i)�during a period ending [***] from the date of Seller�s [***] of the Goods, the Goods will be free from defects in design, workmanship and material and will comply with the Specifications, and (ii)�during the period ending [***] after the date of Seller�s [***] of the Goods, the Goods shall [***] (which may include [***] under the agreed conditions) (the foregoing timeframes are, as applicable, the �Warranty Period�). Tesla hereby acknowledges and agrees that if Goods are not defective and/or

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CONFIDENTIAL	�	Confidential Treatment Requested by Tesla Motors, Inc.

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�	comply with the applicable Specifications, it does not mean that a Tesla battery pack, Module and/or Tesla Product cannot be defective for some other reason, including, without limitation, improper design or manufacturing by Tesla or a third party.

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(b)

Exclusions. Notwithstanding anything herein to the contrary, the warranties in Section�5.1(a) will not apply to damage or Non-Conformities in Goods to the extent caused by any of the following:

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(i)

the design, manufacture and/or function of the overall system, equipment and/or goods of which the Goods are part (e.g. Module, Tesla Product);

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(ii)

accident or act of God;

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(iii)

[***];

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(iv)

misuse, neglect, abuse, mishandling, misapplication, modification, alteration by Tesla, the relevant Authorized Purchaser or any third party, or improper installation, service, operation, storage, shipment, testing, checkout or maintenance by Tesla, the relevant Authorized Purchaser or any third party;

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(v)

failure by Tesla, the relevant Authorized Purchaser or any third party to follow (A)�the reasonable instructions, cautions, warnings, and notes set forth in the Specifications, and/or (B)�any other reasonable direction from Seller;

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(vi)

[***] in a Good due to any cause other than [***]; or

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(vii)

[***] in a Good due to any cause other than [***].

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5.2

New Items; Title. Seller further represents and warrants to Tesla and the Authorized Purchasers that, upon delivery to the Authorized Purchaser, the Goods will: (i)�be new (and not refurbished), unless expressly approved otherwise in writing by Tesla in each case; and (ii)�be free and clear of any and all liens, security interests, and encumbrances of any nature, with title vesting solely in the Authorized Purchaser.

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5.3	Inspection. The Authorized Purchaser will inspect each shipment of Goods within [*] after receipt, using Commercially Reasonable Efforts to evaluate whether the Goods conform to the warranties set forth herein (including []) within [**] after receipt.

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5.4	Procedure. If an Authorized Purchaser gives written notice during the Warranty Period in good faith that Goods fail to conform to any of the warranties in Section�5.1 (as applicable, a �Non-Conformity�):

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(a)

The Authorized Purchaser will, if requested by Seller, provide all available information regarding the alleged Non-Conformity in the Goods, including: [***] of the Tesla battery pack and/or Module;

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(b)

Seller may require return of the Goods and/or inspect the Goods to verify the existence of a Non-Conformity [***];

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(c)

Tesla shall use Commercially Reasonable Efforts to support Seller�s verification of the existence of a Non-Conformity, and the Parties shall discuss the alleged Non-Conformity in good faith;

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(d)

In the event of a disagreement or dispute as to the existence of a Non-Conformity, the Parties will [***] and whether such Non-Conformity resulted from a breach of Seller�s warranties as set forth in Section�5.1(a);

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(e)

Seller shall, within [***], provide replacement conforming Goods which are new (and not refurbished) for each Good which has a Non-Conformity as follows unless otherwise agreed in writing between the Parties: (i)�for each such Good [***]; and (ii)�for each such Good [***]. If Tesla and Seller agree based on a good-faith discussion that the affected Good has a Non-Conformity, Panasonic shall replace the Good in accordance with the foregoing. If Tesla and Seller do not agree based on a good-faith discussion whether the affected Good has a Non-Conformity and Seller does not establish that the Good is free of any Non-Conformity either within [***] after the Authorized

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CONFIDENTIAL	�	Confidential Treatment Requested by Tesla Motors, Inc.

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Purchaser�s notice or a longer time approved in writing by the Authorized Purchaser in its sole but reasonable discretion, [***]. If Seller establishes that the affected Good does not have a Non-Conformity within the timeframe referenced above (i.e. [***] or an approved longer period), Seller will not be obligated to replace the Good under this Section�5.

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(f)

Any replacement pursuant to this Section�5 shall be [***] and, subject to Section�5.9 [***] below, (A)�the replacement shall be [***], and (B)�[***]; and

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(g)

If Seller instructs Tesla in writing to destroy and/or recycle any Goods with an actual or alleged Non-Conformity, Seller shall [***].

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5.5

Future Performance. All representations and warranties of Seller extend to future performance of the Goods during the Warranty Period and are not modified, waived or discharged by delivery, inspection, tests, acceptance or payment. Tesla�s approval of any design, drawing, material, process or specifications in good faith will not relieve Seller of these representations and warranties. The warranties set forth in this Section�5 shall survive acceptance and payment by Tesla and the termination or expiration of the Contract.

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5.6

Application of Warranties. Seller agrees that the warranties set forth in this Section�5 extend to all Goods, notwithstanding the fact that such Goods delivered to Authorized Purchasers under the Contract may be produced, in whole or in part, by any of Seller�s divisions, parent, subsidiaries, Affiliates, or suppliers and, therefore, such warranties shall not be disclaimed or otherwise limited in any way merely due to the fact that any Goods have been produced by any such entity.

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5.7

Disclaimer. THE WARRANTIES SET FORTH IN THESE GENERAL TERMS ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES WITH RESPECT TO THE GOODS, WHETHER ARISING FROM A COURSE OF DEALING, COURSE OF PERFORMANCE OR TRADE USAGE, OR WHETHER ORAL, WRITTEN, EXPRESS, IMPLIED OR STATUTORY, ALL OF WHICH ARE HEREBY WAIVED BY TESLA, AUTHORIZED PURCHASERS AND SELLER. THE EMPLOYEES AND AGENTS OF EACH PARTY ARE NOT AUTHORIZED TO MAKE MODIFICATIONS TO SUCH WARRANTIES, OR ADDITIONAL WARRANTIES BINDING ON SUCH PARTY; ACCORDINGLY, ADDITIONAL STATEMENTS, WHETHER ORAL OR WRITTEN, DO NOT CONSTITUTE WARRANTIES AND SHOULD NOT BE RELIED UPON BY THE OTHER PARTY.�FOR THE AVOIDANCE OF DOUBT, TESLA UNDERSTANDS THAT THE GOODS [***] (I)�[***], (II) [***], OR (III) ANY OTHER CONDITIONS DIFFERENT FROM THOSE FOR WHICH THE GOODS WERE ORIGINALLY DESIGNED, AND THAT TESLA SHOULD TAKE PROPER STEPS TO [***]. NO ACTION, SUIT OR ARBITRATION SHALL BE BROUGHT ON AN ALLEGED BREACH OF THE WARRANTIES SET FORTH IN THESE GENERAL TERMS MORE THAN [***] MONTHS FOLLOWING THE EXPIRATION OF THE APPLICABLE WARRANTY PERIOD.

�

5.8	Quality Plan Requirements and Approval.

�

(a)

Seller will supply Goods in accordance with a mutually-agreed quality plan (�Quality Plan�) which is developed during the design development process, during the Production Part Approval Process (PPAP), and/or as listed in the applicable Specifications. Only after the Quality Plan for the Goods is approved by Tesla shall the Goods be allowed to be shipped for use in Tesla Products. Seller shall submit a mutually-agreed quantity of samples of a standard production run of Goods to Tesla per a mutually-agreed Quality Plan. The responsibility for the cost and expense of such samples will be determined by the mutual agreement between the Parties.

�

(b)

As part of the Quality Plan and during PPAP, (i)�the Parties shall include [***] in the Specification for each Good as related to [***], and (ii)�[***].

�

(c)

Seller shall also provide Tesla with the following: for any process change subsequent to the initial PPAP, Seller shall submit a Process Change Request (�PCR�) explaining the requested change and providing a report summarizing Seller�s testing and validation processes for the requested change.

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Seller shall also submit to Tesla for evaluation a mutually-agreed quantity of samples of the Goods incorporating the PCR features, produced on mass production equipment. The responsibility for the cost and expense of such samples will be determined by the mutual agreement between the Parties. Only after the PCR is submitted and approved by Tesla shall the Goods be allowed to be shipped for use in Tesla Products.

�

(d)

Seller agrees that the Goods shall conform to the Quality Requirements attached hereto as Exhibit 1.

�

5.9

[***]. If, with respect to Goods, Modules and/or Tesla Products, [***], Seller shall be liable for the [***]. Notwithstanding the foregoing, Seller shall not be liable under this paragraph to the extent that [***]. Seller�s liability set forth in [***] and in no event shall Seller be liable for any lost goodwill, profit, revenue or savings in connection with [***]. To the extent permitted by applicable law, Tesla shall (a)�notify Seller promptly after becoming aware of [***] in connection with the [***], to the extent related to the Goods, (b)�consult with Seller in good faith regarding such [***], and (c)�provide such information as reasonably requested by Seller from time to time with respect to the [***]. Seller shall not be responsible or liable for [***] if (A)�the affected Goods were [***], as determined by the Agreed Tests; or (B)�[***] was caused by [***]; or (C)�[***] occurred more than [***] after the delivery of such affected Goods to the Authorized Purchaser.

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5.10

Corrective Action. Seller will promptly notify Tesla in writing if Seller becomes aware of any ingredient, component, design or defect in the Goods that is or may become harmful to persons or property or fails to meet the Specifications or other requirements of the Contract. Seller will promptly develop, document and implement corrective actions in accordance with all mutually-agreed quality control policies and standards, including by: (a)�promptly investigating and reporting on the root cause of the problem; (b)�remedying the cause of the problem for future production and resuming performance in accordance with the Contract; (c)�implementing and notifying Tesla of measures taken by Seller to prevent recurrences if the problem is otherwise likely to recur; and (d)�making written recommendations to Tesla for improvements in procedures.

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6.	Representations and Warranties.

�

6.1

General. Each Party represents and warrants that it (and its Affiliates to the extent applicable): (a)�will perform all of its obligations under these General Terms and the Contract in a professional and workmanlike manner, consistent with industry standards and in accordance with all of the terms of these General Terms and the Contract; and (b)�has the right and ability to enter into, perform the obligations under and agree to the covenants contained in these General Terms and each Contract. Seller further represents that: (c)�[***]. Tesla further represents that: (d)�each obligation of any Tesla entity under a Contract is binding on all Tesla entities which are Parties to these General Terms as if each such Tesla entity had agreed to the obligation.

�

6.2

Operations. Seller will: (a)�if and to the extent relevant to the Contract and applicable to Seller, comply with all of the following: industry-standard and/or mutually-agreed supplier quality and development process program requirements, quality control and safety standards, and procedures and inspection systems, including Exhibit 1, the Global Automotive Declarable Substance List (�GADSL�), and as applicable EU Directives 2002/95/EC (Restriction on Hazardous Substances or �RoHS�) and 2006/66/EC (re: batteries and accumulators and waste batteries and accumulators), as each may be amended from time to time; (b)�provide an accurate and complete International Material Data System (�IMDS�) submission for each non-prototype Good; and (c)�provide all information reasonably required for Tesla to comply with its legal obligations, such as the California Transparency in Supply Chains Act of 2010 and (if and to the extent applicable to the Goods) Section�1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as the conflict minerals provision), as each may be amended from time to time. Upon request by Tesla, Seller shall provide evidence of its compliance with each of the foregoing and as reasonably requested by Tesla for purposes of Tesla�s compliance with its legal obligations.

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6.3	Compliance with Laws and Tesla Policies.

�

(a)

Each Party will, at its cost and expense, obtain all necessary regulatory approvals, licenses, and permits (collectively, �Permits�) applicable to its business and comply with all Laws applicable to its business or the performance of its obligations under these General Terms and each Contract, as such Laws may be revised from time to time. Seller will provide Tesla with accurate material safety data sheets regarding the Goods and, if requested by Tesla, submit to Tesla evidence of such compliance. Each Party will also provide the other Party with all information reasonably required in order for the other Party to comply with Laws applicable to it.

�

(b)

To the extent not prohibited by Law, each Party will promptly notify the other Party in writing of any investigation or inquiry into whether such Party (or any of its subcontractors) is charged with failing to comply with any Laws that may or will impact, or are otherwise applicable to, such Party�s performance under these General Terms and/or the Contract.

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(c)

Seller will comply with any Tesla policies, standards, rules, and procedures (collectively, �Tesla Policies�) applicable to performance of Seller�s obligations under the Contract and/or to the Factory which are disclosed to Seller in writing and approved by Seller, as such Tesla Policies may be revised from time to time subject to Seller�s approval, and Seller shall not unreasonably withhold, condition, or delay its approval for any such Tesla Policy or any changes thereto.

�

6.4

Debarment. During the Term, Seller represents and warrants that it shall not be: (i)�debarred, suspended, excluded or disqualified from doing business with the United States Government; (ii)�listed on the Excluded Parties List System maintained by the General Services Administration of the United States Government (found at www.epls.gov); or (iii)�a Person with which U.S. Persons are prohibited from transacting business of the type contemplated by the Contract or with which U.S. Persons must limit their interactions to types approved by the US Department of Treasury, Office of Foreign Assets Control (�OFAC�), such as by Law, executive order, trade embargo or restriction, economic sanction, or lists published by OFAC. Seller agrees to immediately notify Tesla in writing in the event Seller breaches any of the preceding representations and warranties or has reason to believe that it will become in breach of any of the preceding representations and warranties. Such breach of any representation or warranty under this Section�6.4 shall be deemed a Default under the Contract for which Tesla may immediately terminate the Contract without being required to provide notice or permit Seller to cure such Default.

�

7.	Indemnification.

�

7.1

Indemnification by Seller. Seller agrees to indemnify, defend and hold harmless Tesla, its Affiliates, and their respective directors, officers, employers and agents (collectively �Tesla Indemnitees�) from and against any and all costs, fees, penalties, expenses, third-party damages, attorneys� fees and all other liabilities to any third party whatsoever (�Losses�), arising out of any Claim against any Tesla Indemnitee which arises from or relates to any actual or alleged:

�

(a)

except to the extent that the Claim pertains to Tesla Products and/or Modules, infringement of any Intellectual Property Right relating to Goods or any portion thereof, on its own or in combination with other goods or services;

�

(b)

challenge to Tesla�s sole right, title and interest in the Factory, Goods or the Tesla Property, or right to possession of Tesla Property, in each case brought by any third party supplier to Seller or agent to Seller, including toolmakers, subcontractors, and lending institutions; or

�

(c)

Personal injury (including death) or property damage to the extent caused by a defect in design, workmanship and material (during or after the Warranty Period) and/or non-conformity (with reference to the applicable Specifications within the Warranty Period) in one or more Goods; provided, however, that:

�

(i)

the foregoing obligation shall not apply to the extent that: (A)�Tesla was aware of or, in the exercise of reasonable care, should have been aware of the existence of such defect and/or

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non-conformity; (B)�the Losses were caused by the Tesla Products, including but not limited to Tesla�s battery packs, Modules (including circuit and equipment matching issues), and their respective assembly, manufacture or placement, sale, use, operation, storage, and/or transportation; and/or (C)�the Losses were caused by [***] if (x)�the affected Goods were part of [***]; or (y)�such [***] was caused by [***]; or (z)�such [***] occurred more than [***] years after the delivery of such affected Goods to the Authorized Purchaser; and

�

(ii)

to the extent permitted by Law, the liabilities of Seller pursuant to this Section�7.1(c) will not [***] (the [***]), and the Tesla Indemnitees shall not be indemnified or held harmless in connection with such Losses [***].

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7.2

Indemnification by Tesla. Tesla agrees to indemnify, defend and hold harmless Seller, its Affiliates, and their respective directors, officers, employers and agents (collectively �Seller Indemnitees�) from and against any and all Losses arising out of any Claim against any Seller Indemnitee which arises from or relates to any actual or alleged:

�

(a)

infringement of any Intellectual Property Right to the extent caused by Tesla Products and/or Modules in which the Goods are used;

�

(b)

challenge to Seller�s sole right, title and interest in materials, work-in-process, Goods or Seller Property, or right to possession of Seller Property, in each case brought by any third party supplier to Tesla or agent to Tesla, including toolmakers, subcontractors, and lending institutions; or

�

(c)

Either (i)�defects or quality issues with respect to Tesla Products, including but not limited to Tesla�s battery packs and Modules, (including circuit and equipment matching issues) and their respective assembly, manufacture or placement, sale, use, operation, storage, and/or transportation, or (ii)�[***] if (A)�the affected Goods were [***]; or (B)�such [***] is caused by [***]; or (C)�such [***] occurred more than [***] years after the delivery of such affected Goods to the Authorized Purchaser; provided, however, that: (A)�the foregoing obligation shall not apply to the extent that the Losses were caused by [***]; and (B)�to the maximum extent permitted by Law, the liabilities of Tesla pursuant to this Section�7.2(c) will not [***] (the [***]), and the Seller Indemnitees shall not be indemnified or held harmless in connection with such Losses [***].

�

7.3

Procedure. The Party seeking indemnification by the other Party under this Section�7 (the �Indemnified Party�) will give prompt written notice of the Claim for which indemnification is sought. Failure to give notice will not diminish the indemnifying Party�s obligation under this Section if it has or receives knowledge of the existence of the Claim by any other means or if the failure does not materially prejudice its ability to defend the Claim. The indemnifying Party may select legal counsel to represent the indemnified Party (said counsel to be reasonably satisfactory to the indemnified Party) and otherwise control the defense and, subject to the other terms of this Section�7.3, resolution of the Claim. If the indemnifying Party elects to control the defense of such Claim, the indemnified Party may at its option participate in the defense of any Claim with its own counsel at its own expense; provided that such indemnified Party shall not resolve the Claim without the prior written consent of the indemnifying Party. If the Claim is one that cannot by its nature be defended solely by the indemnifying Party, then the indemnified Party will make available information and assistance as the indemnifying Party may reasonably request, at the indemnifying Party�s expense. The indemnifying Party may not, without the prior written consent of the indemnified Party, (i)�consent to the entry of any judgment or enter into any settlement that provides for injunctive or other non-monetary relief affecting any indemnified Party, or (ii)�consent to the entry of any judgment or enter into any settlement unless such judgment or settlement provides for an unconditional and full release of the indemnified Party and does not diminish any of such Party�s rights under these General Terms and/or the Contract or result in additional fees or charges to the indemnified Party. The indemnified Party may not make any party admissions in respect of a Claim if the indemnifying Party elects to control the defense of the Claim. For avoidance of doubt, the indemnifying Party may invoke any applicable statutes of limitations in conducting the defense of any such Claim.

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7.4

Limitations. To the maximum extent permitted by applicable law and subject to [***] (as applicable), the Parties� respective obligations under this Section�7 will apply even if an Indemnified Party�s conduct has contributed to the Losses, but the obligation to indemnify will not apply to the extent that Losses were caused by such Indemnified Party. Each Party�s obligation to defend and indemnify under this Section�7 will also apply regardless of whether the Claim arises in tort, negligence, contract, warranty, strict liability or otherwise.

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7.5

Infringement Claims. If any Goods become, or in Seller�s reasonable opinion is likely to become, the subject of an infringement or misappropriation Claim, Seller will promptly notify Tesla (the �Infringement Notice�) and, at Seller�s expense and in addition to indemnifying Tesla Indemnitees as provided in this Section�7 (Indemnification) and to the other rights Tesla may have under these General Terms: (a)�promptly secure the right to continue manufacturing and selling the Goods; or (b)�if this cannot be accomplished with Commercially Reasonable Efforts, then replace or modify the Goods to make it non-infringing or without misappropriation; provided, however, that any such replacement or modification may not degrade the performance or quality of the Goods or disrupt Tesla�s business operations; or (c)�if neither of the foregoing can be accomplished by Seller with Commercially Reasonable Efforts, then, no earlier than [***] after the date of Seller�s Infringement Notice, [***]. During the foregoing [***] period of time and unless prohibited by Law, Seller shall not suspend delivery of Goods in accordance with the Production Plan and Seller shall not [***] as the direct result of such infringement or misappropriation Claim. If Seller chooses to stop selling Goods to Tesla pursuant to this Section (but not if Seller is prohibited by Law from selling such Goods), Seller will be deemed to be in Default and Tesla may exercise its termination and other rights and remedies.

�

Confidentiality. Tesla�s mutual non-disclosure agreement as of the Effective Date or, if applicable, the signed non-disclosure agreement then in effect between the Parties (�NDA�) sets forth the Parties� respective confidentiality obligations hereunder. The NDA is hereby incorporated by reference in these General Terms and the Contract, and the terms and conditions of the NDA will continue in force throughout the Term and thereafter during the Confidentiality Period (as defined in the NDA).

�

9.	Property.

�

9.1

Property. The tooling, jigs, dies, gauges, fixtures, molds, patterns, other equipment (collectively, the �Tooling�), as well as the supplies, materials, and other tangible property that are or will be used by Seller to manufacture, store, and transport Goods, or used to develop or make Goods for Tesla (such Tooling, supplies, materials and other tangible property shall collectively be referred to as the �Property�) will be owned by Tesla if Tesla has [***] (�Tesla Property�); provided, however, that Property will not be deemed to be Tesla Property if Tesla has [***]. �Seller�s Property� means all Property which (a)�is owned and/or used by Seller in connection with these General Terms and/or the Contract(s) and (b)�is not Tesla Property. Seller will not purchase on the account of or charge Tesla for any Tesla Property except as authorized in a Purchase Order. Title to Tesla Property shall transfer to Tesla upon Tesla�s payment in full for such Property.

�

(a)

Seller will assign to Tesla contract rights or claims in which Seller has an interest with respect to Tesla Property and execute bills of sale, financing statements, or other documents requested by Tesla or required to evidence Tesla�s ownership of Tesla Property.

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(b)

Seller will have no interest in Tesla Property paid for by Tesla except as an at-will bailee. To the extent permitted by law, Seller waives any lien or similar right it may have with respect to Tesla Property. Tesla is responsible for personal property taxes assessed against Tesla Property.

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9.2

Operations and Maintenance. Seller will: (a)�subject to Section�1.1(b) above, [***] procure, transport, install and configure at the Factory the Seller�s Property by the Parties� agreed target date (e.g., as required for [***]); (b)�subject to Section�1.1(b) above and [***], procure, transport, install and configure at the Factory additional Seller�s Property as reasonably required to deliver Goods in accordance with the Contract and the Production Plan; (c)�[***] maintain all Seller�s Property used by Seller in good condition and repair, normal wear and tear excepted; (d)�furnish, maintain in good condition, replace and improve all

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Seller�s Property reasonably required to deliver Goods in accordance with the Contract and the Production Plan; (e)�use Tesla Property only for the manufacture, storage, and transport of Goods for Tesla unless Tesla otherwise approves in writing; and (f)�at Tesla�s request and expense, mark Tesla Property as belonging to Tesla. Further, (g)�Seller will not remove, sell, or dispose of any Seller�s Property from the Factory without Tesla�s prior written consent if and to the extent that such Property is reasonably required to manufacture and deliver Goods in accordance with the Contract and/or Production Plan and Tesla shall not unreasonably withhold, condition or delay such consent if and to the extent that such Property is not reasonably required for such purposes; (h)�all replacement parts, additions, improvements, and accessories to Tesla Tooling will become part of Tesla Tooling; and (i)�Tesla will, at its expense, be responsible for procuring, maintaining in good condition, replacing and improving all Tesla Property which Tesla is expressly required to provide hereunder as a Tesla Responsibility, if any, in order to enable Seller to perform its obligations under the Contract and the Production Plan.

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9.3

Tesla�s Rights of Possession, Equitable Relief. Tesla has the right to the sole, unencumbered, unqualified, and absolute possession of Tesla Property at any time, as elected by Tesla and Seller will immediately release to Tesla upon request, and Tesla may retake immediate possession of Tesla Property at any time with or without cause and without payment of any kind unless otherwise provided in the Contract. Tesla will be responsible for transportation costs with respect to Tesla Property.

�

9.4

Waiver of Liens. As a continuing condition of Seller�s possession or use of Tesla Property, Seller shall ensure that no third party obtains any lien or other right in Tesla Property and hereby waives and relinquishes, and agrees to obtain from any third parties who might claim any such lien (including without limitation mechanic�s liens) or right, their written waiver and relinquishment of all rights, if any, to any lien or other right of retention whatsoever with respect to Tesla Property.

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10.

Intellectual Property.

�

10.1

Covenant Not to Sue. Seller and its Affiliates covenant not to bring, assist others in bringing, or otherwise assert against Tesla and/or its Affiliates, and their respective successors and assigns, any claim for infringement of any of Seller�s and/or any of its Affiliates� Intellectual Property Right incorporated in the Goods arising from any of the following: [***]. For the avoidance of doubt, the foregoing covenant extends to any application of one or more Goods if, at the time of sale of one or more Good(s) to Tesla, (a)�Seller knows that Tesla and/or its Affiliates plans to use such Good(s) in such application or (b)�the application by Tesla and/or its Affiliates is publicly available and/or disclosed.

�

10.2

Independent Efforts and Similar Goods. Provided there is no infringement of the other Party�s Intellectual Property Rights, nothing in these General Terms or the Contract will impair either Party�s right to develop, manufacture, purchase, use, sell or market, directly or indirectly, alone or with others, products or services competitive with those offered by the other Party.

�

10.3	No Implied Rights. Except for the rights expressly transferred in these General Terms or the Contract, nothing therein will operate to transfer any interest in Intellectual Property Rights by implication, estoppel or otherwise.

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11.

Factory Colocation.

�

11.1	Factory Lease.

�

(a)

Tesla shall, at its cost and expense and as a Tesla Responsibility, procure the land and construct buildings thereon to be used as the Factory. Upon completion of construction of the Factory, the Parties shall negotiate in good faith, finalize and sign a lease setting forth the terms and conditions of Seller�s lease rights at the Factory (the �Factory Lease�). The Factory Lease shall: (i)�provide that Tesla will provide Seller with the sufficient space and utilities for Seller to enable to perform its obligations under these General Terms and the Contract(s); (ii)�specify [***] pursuant to the Pricing Agreement; (iii)�[***]; (iv)�specify that [***], unless otherwise provided in this General Terms; and (v)�describe the area(s) leased to Seller to be used for Seller�s manufacturing of Goods at the Factory; (vi)�define each Party�s financial and other responsibilities for utilities (e.g. gas, electric, water and

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treatment of waste water); (vii)�specify that the Factory Lease will be subject to any restrictions generally applicable to the Factory and/or Tesla�s real property; and (viii)�allocate responsibility between the Parties for environmental aspects of the Utilities (defined below); and (ix)�include terms and conditions consistent with those set forth in this Section�11 and in the Pricing Agreement. The Parties shall negotiate the Factory Lease in good faith and, should no Factory Lease be entered into between the Parties by [***] (the �Lease Target Date�), Seller may terminate these General Terms and the remaining portion(s) of any Contract without any liability whatsoever to Tesla. The Parties may extend the Lease Target Date by mutual written agreement. The Factory Lease shall, upon execution by the Parties, be incorporated into these General Terms and immediately supersede and replace this Section�11.1 in its entirety without any further action of the Parties.

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(b)

Tesla will, at its cost and expense and as a Tesla Responsibility, install, configure, maintain in good working order, and furnish the utilities required for Seller to perform its obligations under these General Terms and the Contract(s) and as agreed between the Parties (collectively, the �Utilities�), including gas, electric, water, and treatment of waste water.

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(c)

The Parties shall discuss in good faith and sign a mutually-agreed matrix to describe each Party�s responsibility for various construction and/or operational activities at the Factory. The Parties shall also discuss in good faith the general configuration of Seller�s leased area(s) at the Factory to enable its performance under the Contract and Production Plan. Tesla must approve permanent fixtures and improvements in advance. Tesla and Sanyo will work together to obtain necessary permits relating to Seller�s leased area(s) at the Factory.

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(d)

Tesla will provide to Seller Personnel assigned to work at the Factory the reasonable use thereof. Seller will use the Factory for the sole purpose of performing its obligations under these General Terms or the Contract. Seller will be responsible for any damage to the Factory caused by Seller Personnel normal wear and tear excepted.

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(e)

Seller will permit Tesla and its agents and representatives to enter the area(s) leased to Seller if reasonably required for: (A)�an emergency at any time; (B)�a law enforcement or government inspection at any time; (C)�Tesla personnel upon an agreed amount of notice, if and to the extent related to employee health�& safety (EHS), security, audit (e.g., PPAP) or as separately approved by Seller in good faith; or (D)�maintenance or repair of Tesla Property used by or for Seller.

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(f)

If Tesla sells, transfers, assigns or otherwise disposes of the land and buildings covered by the Factory Lease and/or the Utilities to its Affiliates or a third party, any such sale, transfer, assignment or disposal shall be subject to any and all of Seller�s rights under the Factory Lease. Tesla shall not, during the term of Factory Lease, lease the Seller space covered by the Factory Lease to Tesla�s Affiliates or any other third party without Seller�s prior written consent.

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11.2	Seller Personnel.

�

(a)

Responsibility for Seller Personnel. Seller will manage, supervise and provide direction to Seller Personnel and cause them to comply with the obligations and restrictions applicable to Seller under these General Terms and/or Contract. Each Party is responsible for the acts and omissions of its own personnel under or relating to these General Terms and/or the Contract. Seller is responsible for validating the identity of and ensuring that Seller Personnel assigned to perform work hereunder (i)�have the legal right to work in the country(ies) in which they are assigned to work, and (ii)�conform to all reasonable and applicable Tesla Policies disclosed to Seller and approved by Seller (such approval not to be unreasonably withheld, conditioned or delayed) with respect to personal and professional conduct at the Factory (including adherence to general safety, behavior, and security practices). From time to time, the Parties may also, in conjunction with the Production Meeting, consult in good faith regarding staffing requirements for Seller Personnel at the Factory.

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(b)

Background Checks. Prior to assigning any Seller Personnel to work at the Factory, Seller shall perform a background check of each person or, in the case of employees or agents of a subcontractor, Seller shall cause the subcontractor to conduct such a background check. Such background checks

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may have been performed as part of Seller�s standard pre-employment screening process and will include the following, at a minimum but only to the extent permitted by applicable Law: (i)�social security verification (for US employees); and (ii)�felony and misdemeanor criminal checks. To the extent permitted by applicable Law, Tesla may require Seller to provide written evidence of the background checks on Seller Personnel at any time. Unless prohibited by Law, neither Party may assign any person to perform work at the Factory who was convicted of any criminal offense involving dishonesty, a breach of trust, money laundering, or who has been convicted of a felony crime within the last seven years without the other Party�s prior written consent.

�

11.3	Extension of Lease. Following expiration or termination of these General Terms, Seller shall be entitled to extend the duration of the Factory Lease as follows:

�

(a)

If Tesla terminates for Seller�s Default, Seller may continue its lease rights for [***]. Seller shall [***] and Seller shall [***].

�

(b)

If these General Terms expire or in the event of a termination for force majeure by either Party or termination for a Change of Control Event affecting the other Party, Seller may continue its lease rights for [***]. Seller shall [***] and the Parties shall negotiate in good faith a potential extension of the Factory Lease. In case of termination for force majeure or Change of Control by either Party, Tesla shall be responsible for [***]; provided, however, that Tesla will have sole financial responsibility with respect to any Tesla-Supplied Items and/or Utilities which were installed by Tesla (including the construction activities for which Tesla is solely responsible pursuant to the mutually-agreed matrix described in Section�11.1(c)). The Parties shall also, in connection with any such expiration or termination, discuss in good faith [***]. In the case of expiration (but not termination for force majeure or for Change of Control), Tesla acknowledges that it will be responsible for [***] provided that (i)�Seller has used best efforts to [***], (ii)�the [***] are mutually agreed in writing and in advance; provided, however, that such Tesla�s approval shall not be unreasonably withheld, delayed or conditioned, and (iii)�Tesla shall not be responsible for any such [***]. Tesla will provide an estimated cost or profit for [***], and Seller will determine whether to [***]. Seller shall have financial responsibility for [***] if it chooses to [***]; provided, however, that Tesla shall pay Seller [***]. If Seller chooses to [***], Seller shall not be obligated to [***]. If Seller chooses to [***], Tesla shall bear [***], and if [***], Tesla will [***]. If Seller fails to [***], Seller will be deemed to have [***] and Tesla will [***] in its sole discretion and at Tesla�s sole expense or profit. For avoidance of doubt, Seller shall have no liability for Tesla�s failure to [***] in connection with any such [***]. In no event shall Tesla sell, lease, assign or otherwise transfer such Seller�s Property to any third party other than for [***]. Except as set forth in this paragraph, each Party shall be responsible for its own costs and expenses related to such expiration or termination.

�

(c)

If Seller terminates for Tesla�s Default, Seller may: (i)�elect to continue its lease rights for [***] without [***] and Seller may [***] and, if applicable, [***]; and (ii)�[***] the following [***], which will be considered [***] for purposes of Section�12.1(f) to these General Terms: [***].

�

(d)

If Seller terminates these General Terms and the Contract(s) due to a Change of Control Event with respect to Tesla, Seller may, in its sole discretion and in addition to the remedies contemplated in Section�11.3(b), choose to continue its lease rights for [***].

�


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12.

Liability.

�

12.1	Limitations of Liability and Exclusions.

�

(a)

Except as provided in Section�12.1(e), Tesla�s liability to Seller under these General Terms and all Contracts (including termination, expiration or cancellation) shall not exceed the following:

�

(i)

with respect to each investment by or for Seller in Seller�s Property as contemplated in Section�1.1(b) above and in the then-current Pricing Agreement, the agreed amount(s) due and payable therefor pursuant to these General Terms and the then-current Pricing Agreement;

�

(ii)

with respect to Goods or other items delivered by Seller pursuant to a Contract, [***] in accordance with the applicable Contract;

�

(iii)

with respect to amounts for which Tesla is expressly responsible pursuant to these General Terms � including Sections 2.4 (Tesla Responsibilities), 11.3 (Extension of Lease), and 13.4 (Obligations Upon Termination) if and to the extent applicable � and/or other relevant agreements between the Parties in connection with these General Terms (e.g., Factory Lease) if and to the extent applicable, the amounts due and payable therefor;

�

(iv)

with respect to Claims which are [***], [***]; and

�

(v)

for other damages which are recoverable pursuant to these General Terms and/or a Contract due to one or more events giving rise to liability in a rolling period of [***], [***].

�

(b)

Except as provided in Section�12.1(e), Seller�s total liability to Tesla under these General Terms and/or any Contract shall not exceed the following: (i)�for Claims which are [***], [***]; and (ii)�for one or more events giving rise to liability in a rolling period of [***], [***] the following (�Seller�s General Cap�): (A)�[***], or (B)�[***].

�

(c)

Except as provided in Section�12.1(e) and notwithstanding anything to the contrary in Sections 12.1(a) or 12.1(b) above, each Party shall be liable if it [***]; provided, however, that such liability shall not exceed [***].

�

(d)

Except as provided in Section�12.1(e) and to the extent permitted by applicable law, neither Party will be liable to the other Party for any anticipated profits, loss of revenue or savings, loss of goodwill, depreciation cost due to reduced production capacity, cost of capital, production downtime costs, interest, penalties or incidental, special, indirect, consequential, punitive, multiple, or exemplary damages or liabilities in connection with these General Terms and/or any Contract, whether for breach of contract, late payment, property damage, personal injury, illness, or death or otherwise, even if such Party was advised or was aware of the possibility of such damages or liabilities.

�

(e)

The limitations and exclusions of liability set forth in Sections 12.1(a), 12.1(b), 12.1(c) and 12.1(d) will not apply with respect to damages attributable to: (i)�a Party�s intentional torts, unlawful conduct, willful misconduct, or gross negligence; or (ii)�Losses related to Claims that are [***]. Further, the exclusions of liability set forth in Section�12.1(d) will not apply with respect to damages attributable to: (iii)�Losses related to Claims that are [***].

�

(f)

The Parties acknowledge and agree that the following will be considered direct damages and that neither Party will assert that they are types of damages that are excluded under Section�12.1(d) to the extent they result from the failure of a Party (or entities or persons for whom a Party is responsible) to perform in accordance with these General Terms and/or the Contract:

�

(i)

costs and expenses for which a Party is expressly responsible under these General Terms or a Contract, including costs and expenses related to [***] and Tesla�s obligations to pay [***] paid by Seller [***];

�

(ii)

the actual and reasonable damages, losses, costs and expenses incurred by Tesla as a direct result of Seller�s Default pursuant to Section�3.3 (Time is of the Essence);

�

(iii)

actual and reasonable damages, losses, costs and expenses incurred by Tesla as contemplated in Section�5.9 [***];

�

(iv)

payments, fines, penalties or interest imposed by a governmental body or regulatory entity, to the extent caused by the other Party, the other Party�s Affiliates, or their respective agents and subcontractors;

�


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�

(v)

actual and reasonable damages, losses, costs and expenses as a direct result of Seller�s failure to comply with its obligations under [***], but only to the extent that [***];

�

(vi)

amounts for which a Party is expressly responsible pursuant to these General Terms (including Sections 2.4 (Tesla Responsibilities), 11.3 (Extension of Lease), and 13.4 (Obligations Upon Termination)), the then-current Pricing Agreement, and/or each Contract;

�

(vii)

damages in tort attributable to the �simple� or �ordinary� negligence of a Party, its employees and/or agents in a manner related to these General Terms, a Contract and/or the Factory;

�

(viii)

actual and reasonable costs and expenses to [***], to the extent caused by the other Party, its employees and/or agents or, if [***]using Commercially Reasonable Efforts, damages in an amount equal to [***];

�

(ix)

actual and reasonable damages for personal injury, illness and/or death with respect to a Party�s employees or agents to the extent caused by the other Party�s failure to maintain adequate health and safety conditions at the Factory; and

�

(x)

actual and reasonable damages and liability incurred by a Party with respect to environmental conditions or issues (including actual and reasonable costs of remediation, if applicable), either (A)�to the extent caused by the other Party and/or (B)�to the extent such conditions or issues are the legal responsibility of the other Party.

�

(g)

Each Party shall use Commercially Reasonable Efforts to mitigate the damages incurred in connection with any breach by the other Party.

�

(h)

Subject to Sections 5.4(f) and 5.9 and subject to the limitations and exclusions set forth in this Section�12.1, all remedies provided in these General Terms and/or the Contract are cumulative and in addition to and not in lieu of any other remedies available to a Party under these General Terms and/or the Contract, at law, or in equity.

�

12.2

Force Majeure. �Force Majeure Event� means an event beyond the reasonable control of a Party that delays or prevents the Party from performing its obligations under these General Terms and/or the Contract, provided that (a)�the non-performing Party is without fault in causing or failing to prevent the event, and (b)�the event cannot be circumvented through the use of commercially reasonable alternative sources, workaround plans or other means. The affected Party will promptly notify the other Party of any Force Majeure Event and of its plans and efforts to implement a work-around, in which case the affected Party will be excused from further performance of the affected obligations as long as the Force Majeure Event continues. The affected Party will continue to use Commercially Reasonable Efforts to perform to the extent possible and will comply with any applicable and agreed disaster recovery obligations. The affected Party will notify the other Party promptly when the Force Majeure Event has abated. If a Force Majeure Event prevents performance for more than [***], then the unaffected Party may terminate these General Terms and the Contract(s) as of a date specified by such Party in a written notice of termination to the affected Party, in which case (i)�Tesla will pay Seller�s charges for Goods delivered in accordance with [***], but (ii)�Tesla will not be liable for any costs pertaining to [***] and (iii)�neither Party will be liable to the other Party for payment of [***], except as may be expressly permitted under Section�11.3(b). If a Force Majeure Event prevents performance by Seller and results in a backlog of unfulfilled orders for Goods, Seller shall, as directed by Tesla, [***] within the [***] period.

�

13.

Term and Termination.

�

13.1

Initial Term and Renewal. These General Terms will be effective as of the Effective Date and continue through the date that occurs [***] after Seller achieves Start of Production at the Factory (the �Term�). Beginning [***] after the Start of Production and at least [***] during the Term, the Parties will discuss in good faith the possibility of extending the Term. The �Start of Production� will be deemed to occur on the first day of the month following the month in which Seller delivers battery cells manufactured at the Factory [***].

�


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�

13.2

Termination, Generally. These General Terms and the Contract may only be terminated as provided in this Section�13 (Term and Termination). Termination by a Party will be without prejudice to any other rights and remedies available to a Party. Neither Party will be obliged to pay any termination charges or demobilization fees to the other Party in connection with any termination, except as may be expressly set forth in these General Terms and/or the applicable Contract.

�

13.3

Termination. Subject to Sections 2.4 (Tesla Responsibilities) of these General Terms, the Party who is not in Default may terminate these General Terms and/or the Contract as follows: (a)�if the other Party breaches a material obligation under these General Terms and/or the Contract and fails to cure the breach within [***] days after receipt of notice of such breach expressly stating the non-breaching Party�s intent to terminate (�Notice of Termination�) or, if the breach cannot reasonably be cured within such [***] period, [***] days after receipt of Notice of Termination; (b)�if the other Party becomes a debtor in a bankruptcy, insolvency, receivership, or similar proceeding commenced by a third party that is not dismissed within a reasonable time after commencement; or (c)�immediately upon Notice of Termination in the event of an incurable material breach, including (i)�a Party�s repudiation of these General Terms and/or the Contract, (ii)�in case of Section�6.4 (Debarment), or (iii)�if the other Party makes an assignment for the benefit of creditors in violation of these General Terms and/or the Contract or voluntarily institutes proceedings in bankruptcy or insolvency. Each of the foregoing types of breach shall be deemed to be a �Default.� The Parties may also terminate: (d)�as provided in Section�12.2 (Force Majeure); or (e)�[***] after such Change of Control Event. The Party that issues the Notice of Termination may approve a longer cure period in its sole discretion.

�

13.4	Obligations Upon Termination. Following any termination pursuant to Section�13.3 above and in addition to any actions or payments expressly required by these General Terms and/or the applicable Contract:

�

(a)

Seller shall:

�

(i)

immediately cease all work under the Contract, unless and to the extent that Tesla requests that Seller complete the manufacture of Goods using materials and components which were previously acquired by Seller within the applicable Lead Time to meet its obligations under the affected Contract(s) and which Seller cannot, using Commercially Reasonable Efforts, [***] in a manner that results in [***]with respect to such materials and components;

�

(ii)

transfer title and deliver to Tesla all finished Goods completed prior to the termination date, provided that Seller may in its sole but reasonable discretion change the payment terms for such Goods if Seller has terminated for Tesla�s Default;

�

(iii)

without limiting Seller�s right to damages for Tesla�s Default, [***];

�

(iv)

cooperate with Tesla in minimizing costs and losses related to the termination (including, without limitation, by returning the materials for a refund or credit or otherwise using or selling to any of Seller�s other customers);

�

(v)

upon termination of the Factory Lease, comply with the obligations described in the Factory Lease and in Section�11.3 above with respect to [***]; and

�

(vi)

in case of Tesla�s termination for Seller�s Default and if requested by Tesla, but subject to Seller�s actual capacity, labor constraints and supply chain constraints, issue a final Purchase Order for a quantity of Goods at volumes not in excess of [***] of purchases by Tesla over the [***] preceding termination and on the [***], and Seller shall not reject such Purchase Order.

�

(b)

Tesla will, after exercising any setoff rights permitted by Law, pay to Seller the following amounts, without duplication and in accordance with the then-current payment terms between Tesla and Seller:

�

(i)

The purchase price for all conforming Goods received by Tesla prior to the termination date or delivered following the termination date pursuant to this Section�13.4;

�


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�

(ii)

[***], unless Tesla has terminated for either (A)�Seller�s Default or (B)�a Change of Control Event with respect to Seller; and

�

(iii)

[***] paid by Seller for [***]at the Factory for which [***]; provided, however, that Tesla shall not have any obligation to [***]such amounts if Tesla terminates (A)�for Seller�s Default, (B)�as permitted under Section�12.2 (Force Majeure), or (C)�for a Change of Control Event with respect to Seller; and

�

(iv)

Any costs and/or expenses that Tesla is obligated to pay pursuant to Section�11.3 (Extension of Lease).

�

(c)

Notwithstanding any other provisions herein to the contrary but subject to Section�12 (Liability), in case of a Party�s termination due to Change of Control with respect to the other Party, the Party exercising such termination right shall be entitled to recover a termination charge equal to the following: (i)�in [***] of the Term, [***]; (ii)�in [***] of the Term, [***]; and (iii)�thereafter during the Term, [***].

�

14.

Insurance. During the Term of these General Terms, Seller shall obtain and maintain at its own cost and expense (and shall cause each subcontractor to maintain) policies for the types and amounts of insurance that are required under applicable Law.

�

15.

Dispute Resolution.

�

15.1

Governing Law. These General Terms and each Contract will be interpreted and construed in accordance with the substantive Laws of California and the United States generally applicable therein, without regard to any provisions of its choice of law rules that would result in a different outcome. The UN Convention on Contracts for the International Sale of Goods will not apply to the Contract.

�

15.2

Informal Dispute Resolution. In the event any disputes, differences or controversies arise between the Parties, out of or in relation to or in connection with the provisions of these General Terms and/or the Contract, the Parties shall thoroughly explore all possibilities for an amicable settlement.

�

15.3

Arbitration. Any dispute arising out of or relating to these General Terms and/or a Contract that is not resolved through negotiation shall be settled exclusively by final and binding arbitration conducted in accordance with the then-current Commercial Arbitration Rules of the Judicial Arbitration and Mediation Services/Endispute (�JAMS�). The existence, content and result of the arbitration shall be held in confidence by the Parties, their representatives, any other participants, and the arbitrator. The arbitration will be conducted by a single arbitrator selected by agreement of the Parties or, failing such agreement, appointed in accordance with the JAMS rules. The arbitrator shall be experienced in agreements for capital equipment. Any demand for arbitration and any counterclaim will specify in reasonable detail the facts and legal grounds forming the basis for the claimant�s request for relief and will include a statement of the total amount of damages claimed, if any, and any other remedy sought by the claimant. The arbitration will be conducted in the English language in San Francisco, California. Each Party will bear its own expenses in the arbitration and will share equally the costs of the arbitration; provided, however, that the arbitrator may, in their discretion, award reasonable costs and fees to the prevailing Party. The arbitrator will have full power and authority to determine issues of arbitrability and to interpret or construe the applicable provisions of the Contract and/or these General Terms and to fashion appropriate remedies for breaches of the Contract and/or these General Terms (including interim or permanent injunctive relief); provided that the arbitrator will not have any right or authority: (i)�in excess of the authority of a court having jurisdiction over the Parties and the dispute would have absent this arbitration agreement; (ii)�to award damages in excess of the types and limitation of damages found in the Contract and/or these General Terms; or (iii)�to modify the terms of either the Contract or these General Terms. The award of the arbitrator will be issued within thirty (30)�days of the completion of the hearing, shall be in writing, and shall state the reasoning on which the award is based. Judgment upon the award rendered in the arbitration may be entered in any court of competent jurisdiction. Each Party will have the right to apply at any time to a judicial authority for appropriate injunctive relief (or other interim or conservatory measures), and by doing so will not be deemed to have breached its agreement to arbitrate or to have

�


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�

impaired the powers reserved to the arbitrator. The Parties further consent to the jurisdiction of any state or federal court with subject matter jurisdiction located within a district that encompasses assets of a Party against whom a judgment (or award) has been rendered for the enforcement of the judgment (or award) against the assets of such Party.

�

15.4	Continued Performance. Each Party agrees to continue performing its obligations under these General Terms and each Contract while a dispute is being resolved unless and until such obligations are terminated by the termination or expiration thereof.

�

16.

Miscellaneous.

�

16.1

Notices. All formal notices, requests, demands, approvals and communications under these General Terms and/or the Contract (other than routine operational communications) (collectively, �Notices�) will be in writing and may be served either (a)�in person or (b)�by registered or certified mail with proof of delivery, addressed to the Party at the addresses set forth below. Notices given as described in the preceding sentence will be considered received on the day of actual delivery. A Party may change its address or designee for notification purposes by giving the other Party prior written notice of the new address or designee in the manner provided above. The Parties may mutually agree that certain types of routine approvals and notices of a non-legal nature may be given by electronic mail.

�


In the case of Tesla:	��	With a copy to:

Tesla Motors, Inc.	��	Tesla Motors, Inc.
3500 Deer Creek Road, Palo Alto, CA 94304	��	3500 Deer Creek Road, Palo Alto, CA 94304
Attn: Director, Battery Technology	��	Attn: Legal Department

In the case of Seller:	��	With a copy to:

SANYO Electric Co., Ltd.	��	Panasonic Corporation
Portable Rechargeable Battery Business Division	��	Automotive & Industrial Systems Company
222-1, Kaminaizen, Sumoto City, Hyogo	��	1006 Kadoma, Kadoma City, Osaka
656-8555, Japan	��	571-8506, Japan
Attn: Associate Director, Global Sales�& Marketing	��	Attn: Legal Center, Business Promotion Group

�

16.2

Audit and Inspection. Tesla and its authorized representatives shall have the right with reasonable prior written notice from time to time to access Seller�s leased areas approved by Seller (such approval will not be unreasonably withheld by Seller) and, subject to the NDA, verify Seller�s compliance with the terms of these General Terms and the Contract. Seller will maintain records as reasonably necessary to demonstrate Seller�s compliance with the terms of these General Terms, the Production Pricing Agreement, and the Contract, including showing that amounts charged to Tesla are true and correct. Such audit will be made at the agreed date and the normal business hour of Seller at the Factory. Tesla and its representatives may audit Seller�s records made within [***] prior to the audit date, to the extent needed to verify compliance with these General Terms, the Production Pricing Agreement, and the Contract, and Seller will make such records available to Tesla and its auditors for examination and copying upon their reasonable request; provided that Seller is not obliged to make available any technical or engineering confidential records, data and/or information owned or controlled by Seller without the prior written agreement between the Parties. Any audit will be conducted at Tesla�s expense. Notwithstanding the foregoing and unless approved otherwise by Seller, any audit of Seller�s compliance with [***] shall be conducted solely by an authorized third-party representative of Tesla which is bound not to disclose to Tesla the specific [***].

�

16.3

Entire Agreement. These General Terms and each Contract constitute the entire agreement between the Parties with respect to its subject matter, and supersedes all prior oral or written representations or agreements by the Parties with respect to the subject matter of these General Terms and the Contract. Except as authorized in Section�2.2, no subsequent terms, conditions, understandings, or agreements purporting to modify the terms of these General Terms or the Contract will be binding unless in writing and signed by Tesla and Seller.

�


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16.4	Assignment and Subcontracting.

�

(a)

Without prior written consent of the other Party, neither Party may assign these General Terms or any Contract or subcontract or delegate the performance of its duties thereunder, and any attempt to do so shall be void; provided, however, that (i)�each Party may, without requiring the other Party�s consent or meeting any other condition, add an Affiliate which operates in the Factory as a co-party to these General Terms and/or any Contract, and (ii)�Tesla may, upon the written notice to Seller, assign any or all of its rights, benefits or remedies under any Contract to an Affiliate which assumes all of Tesla�s obligations under the Contract, provided that Tesla remains responsible for (1)�payment if the Affiliate fails to pay in accordance with the Contract, (2)�performance of Tesla Responsibilities applicable to the Contract, if any, if the Affiliate fails to perform such Tesla Responsibilities and (3)�Tesla�s indemnification obligations provided in Section�7.2.

�

(b)

If Seller intends that all or part of the manufacture of Goods will be subcontracted to a third-party subcontractor, Seller will: (i)�be solely responsible for payments to the subcontractor; (ii)�include in its purchase order or any other contract with the subcontractor a waiver of subcontractor liens to the maximum extent permitted by applicable law; (iii)�before permitting any subcontractor to use Tesla Property and/or access the Facility, obtain Tesla�s prior written consent; (iv)�provide notice to Tesla at each Production Meeting of [***]; and (v)�[***] in connection with these General Terms and/or a Contract as reasonably requested by Tesla within a reasonable time after receipt of Tesla�s notice and following a good faith discussion. Tesla has no obligation with respect to Seller�s subcontractor other than payment to Seller of the agreed price of the conforming Goods delivered to Authorized Purchasers pursuant to their Purchase Order(s) accepted by Seller except as provided in [***].

�

(c)

Any subcontracting, assignment or delegation by Seller does not relieve Seller of any responsibility under the Contract, and Seller remains responsible to the same extent as if the subcontracted, assigned or delegated responsibilities were retained by Seller.

�

(d)

In the event of a Change of Control Event affecting a Party, the person or entity which acquires Control of the Party shall be subject to the terms and conditions of, and shall assume all of the acquired Party�s obligations under, these General Terms and the affected Contract(s).

�

(e)

These General Terms and all Contract(s) shall be binding upon the respective successors and permitted assigns of the Parties.

�

16.5

Relationship of Parties. The Parties are independent contractors under these General Terms and the Contract and no other relationship is intended, including, without limitation, a partnership, franchise, joint venture, agency, employer/employee, fiduciary, master/servant relationship, or other special relationship. Neither Party shall act in a manner that expresses or implies a relationship other than that of independent contractor, nor bind the other Party.

�

16.6	No Waiver. The failure of either Party to enforce on a particular occasion any right or remedy provided in these General Terms and/or the Contract or by law or in equity will not be deemed a waiver of that right or remedy on a subsequent occasion or a waiver of any other right or remedy.

�

16.7

Rules of Interpretation. Section references are to sections of the document in which the reference is contained and will be deemed to refer to and include all subsections of the referenced section. The section headings in these General Terms are for reference purposes only and may not be construed to modify or restrict any of the terms of these General Terms and/or the Contract. These General Terms and each Contract will be deemed to have been written by both Tesla and Seller. Unless the context requires otherwise, (a)��including� (and any of its derivative forms) means including but not limited to, (b)��may� means has the right, but not the obligation to do something and �may not� means does not have the right to do something, (c)�the words �will� and �shall� are shall be understood to apply to a mandatory obligation, not a permissive statement, and (d)�terms defined in the singular include the plural and vice versa. These General Terms and the Contract Documents are written in the English language, and the English text of these General Terms and of each Contract shall prevail over any translation hereof.

�


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16.8

Conflicts. In the event of a conflict between or among the documents comprising these General Terms and/or a Contract, the following order of precedence will apply (documents listed in descending order of priority): (a)�any written agreement signed by authorized representatives of the Parties expressly amending these General Terms and/or a Contract Document; (b)�the applicable Purchase Order accepted by Seller; (c)�the Production Plan; (d)�a Pricing Agreement signed by the Parties; (e)�any Product-specific exhibits or attachments to these General Terms; (f)�these General Terms and any exhibits, attachments, schedules and documents included or referenced in these General Terms that are not Product-specific attachments or schedules; and (g)�any other Contract Document. These General Terms shall supersede any standard terms and conditions that are automatically attached to purchase orders issued by Tesla.

�

16.9

Severability. If for any reason a court of competent jurisdiction finds any provision of these General Terms and/or the Contract to be unenforceable, that provision of these General Terms and/or the Contract will be enforced to the maximum extent permissible so as to implement the intent of the Parties, and the remainder of these General Terms and/or the Contract will continue in full force and effect.

�

16.10

Survival. Any provision of these General Terms and/or of a Contract that contemplates or governs performance or observance subsequent to termination or expiration thereof will survive the expiration or termination thereof for any reason, including without limitation Seller�s obligations, representations and warranties and Tesla�s rights under the Contract with respect to Goods delivered or ordered thereunder.

�

16.11

No Third Party Beneficiaries. These General Terms and each Contract are entered into solely between Tesla and Seller and, except for the Parties� indemnification obligations under Section�7 (Indemnification) and the Authorized Purchasers, will not be deemed to create any rights in any third parties or to create any obligations of either Tesla or Seller to any third parties.

�

16.12

Counterparts. These General Terms may be executed in counterparts, each of which shall be an original and together which shall constitute one and the same instrument.

�

16.13

Non-Solicitation. During the term of these General Terms, neither Party shall knowingly solicit for employment or induce to resign from the other Party any of the other Party�s then current employees, directors or officers who are directly involved in the performance of these General Terms and/or the Contract without the prior written consent of the other Party. The foregoing shall not apply to advertisements or general solicitations that do not specifically target the other Party�s employees.

�

16.14

Covenant of Good Faith. Except where an obligation is specifically identified as being in a party�s sole discretion, each Party, in its respective dealings with the other Party under or in connection with these General Terms and each Contract, shall act in good faith and with fair dealing.

�

16.15

Electronic Communication. Subject to Section�2.4(c), Seller will comply with the method of electronic communication reasonable specified by Tesla from time to time, including requirements for electronic funds transfer, purchase order transmission, electronic signature, and communication.

�

16.16

Environmentally Friendly Practices. In addition to complying with all environmental and safety requirements, to the maximum extent practicable, each Party will use environmentally conscious materials and practices in the development, manufacturing, packaging and delivery of all Goods and/or in connection with the Factory.

�

16.17

Defined Terms. Terms used in these General Terms with initial capitalization have the meanings specified where used or in this Section�16.17.

�

(a)

�Affiliate� means with respect to an entity, any other entity or person Controlling, Controlled by, or under common Control with, such entity.

�

(b)

�Anti-Bribery Laws� means the United States Foreign Corrupt Practices Act of 1977, the United Kingdom Bribery Act of 2010, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (in each case, as amended from time to time) and all other applicable national, regional, provincial, state, municipal or local laws and regulations that prohibit the bribery of, or the providing of unlawful gratuities, facilitation payments or other benefits to, any government official or any other person.

�


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CONFIDENTIAL	�	Confidential Treatment Requested by Tesla Motors, Inc.

�

(c)

�Authorized Purchaser� means Tesla or any Affiliate of Tesla that is authorized by Tesla to purchase Goods on behalf of Tesla and that Tesla notifies in writing to Seller.

�

(d)

[***].

�

(e)

[***].

�

(f)

�Change of Control Event� means a transaction or event involving a Party whereby (i)�any other entity, person or �group� (as such term is used in Section�13(d) of the Securities Exchange Act of 1934, as amended) has acquired Control of all or substantially all of the assets, of such Party (or any parent company of such Party), whether directly or indirectly, in a single transaction or series of related transactions, or (ii)�such Party (or any parent company of such Party) has consolidated with, or merged with or into, another entity, or sold, assigned, conveyed, transferred, leased or otherwise disposed of all or substantially all of its assets to another person(s) or entity(ies).

�

(g)

�Claim� means any demand, or any civil, criminal, administrative or investigative claim, action or proceeding (including arbitration) asserted, commenced or threatened against an entity or person by an unaffiliated third party. For the purposes of this definition, an employee of either Party is considered an unaffiliated third party.

�

(h)

�Commercially Reasonable Efforts� means taking all such steps and performing in such a manner as a well-managed company would undertake where it was acting in a determined, prudent and reasonable manner to achieve a particular desired result for its own benefit.

�

(i)

�Contract Documents� means the Purchase Order accepted by Seller, the applicable Pricing Agreement (if any), the provisions of these General Terms relevant to the obligations under the accepted Purchase Order (e.g., production and delivery of Goods), documents and attachments which are both referenced in any of the foregoing (including Specifications) relevant to the obligations under the accepted Purchase Order (e.g., production and delivery of Goods), and any other additional written agreements which are signed by authorized representatives of the Parties and pertain to the obligations under the accepted Purchase Order (e.g., production and delivery of Goods).

�

(j)

�Control� means possessing, directly or indirectly, the power to direct or cause the direction of the management, policies or operations of an entity, whether through ownership of voting securities, by contract or otherwise.

�

(k)

�Effective Date� has the meaning set forth in introduction.

�

(l)

�Goods� means all products specifically identified in a statement of work or product specific attachment or amendment to these General Terms, and all products that are not so identified, but which are made by or on behalf of Seller at the Factory and offered or sold by Seller to Tesla or any of its Authorized Purchasers. Goods shall include goods made by or on behalf of Seller at the Factory and sold by Seller to any Authorized Purchaser, directly or indirectly including through resellers, distributors, value-added distributors and subassembly manufacturers. �Goods� includes prototype and development parts, pre-production versions of Goods. To the extent that the Goods are Software, references to �sale� or words of similar meaning shall be deemed to refer to a �license� of such Goods consistent with the terms in the Contract.

�

(m)

�Intellectual Property Rights� means all intellectual and industrial property rights recognized in any jurisdiction, including copyrights, mask work rights, moral rights, trade secrets, patent rights, rights in inventions, trademarks, trade names, and service marks (including applications for, and registrations, extensions, renewals, and re-issuances of, the foregoing).

�

(n)

�Law(s)� means any statute, regulation, ordinance, rule, order, decree or governmental requirement enacted, promulgated or imposed by any governmental authority at any level (e.g., municipal, county,

�


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CONFIDENTIAL	�	Confidential Treatment Requested by Tesla Motors, Inc.

�

province, state or national). For the avoidance of doubt, the term �Laws� includes any and all applicable Anti-Bribery Laws and any and all applicable Laws with respect to: (i)�occupational safety and health; (ii)�protection of persons and property from death, injury or damage; (iii)�the environment and the use, handling, storage, labeling and disposal of toxic or hazardous materials; and/or (iv)�labor and employment.

�

(o)

�Lead Time� means the time expressly agreed upon in a written agreement signed by the Parties that an order should be placed so that the supplier of the good or service may deliver by the desired delivery date, or if not so agreed, the reasonable amount of time required by a typical supplier in the relevant industry, to manufacture the goods or complete the services that are the subject of the order.

�

(p)

�Module� means smallest replaceable unit in a Tesla battery pack. In the case of the Tesla Roadster, the Module consists of 621 battery cells connected in a series/parallel arrangement.

�

(q)

�Person� means an individual, corporation, partnership, limited partnership, joint venture, association, joint stock company, trust, trustee, estate, limited liability company, unincorporated organization, real estate investment trust, government or any agency or political subdivision thereof, or any other form of entity.

�

(r)

�Purchase Order� means a purchase order for Goods issued by Tesla or another Authorized Purchaser (e.g., a Production Order or a Discrete Order).

�

(s)

�Seller Personnel� means any personnel furnished by Seller or any of its Affiliates and working at the Factory in connection with the Contract, including employees and independent contractors of Seller, its Affiliates and subcontractors.

�

(t)

�Seller�s Property� has the meaning given in Section�9.1 of these General Terms.

�

(u)

�Specifications� means the most current version of all applicable specifications and requirements that are: (i)�provided by Tesla (including other documents or requirements specifically incorporated or referenced in these General Terms, Purchase Orders, bills of materials, statements of work, project schedules, drawings, and CAD data) and approved in writing by Seller; and/or (ii)�provided by Seller (including any samples, drawing, CAD data, spec sheets, or other descriptions or specifications or representations) and either (a)�approved of by Tesla in writing or (b)�relied upon by Tesla. Notwithstanding anything to the contrary in these General Terms, the Parties intend to describe all aspects of the design of the Goods in the applicable Specifications to the extent feasible.

�

(v)

�Tesla� means Tesla Motors, Inc. and/or an Affiliate(s) of Tesla.

�

(w)

�Tesla Motors Supplier Handbook� means the most current version of the written set of guidelines, standards and requirements provided by Tesla regarding development and production of Goods under these General Terms. The Tesla Motors Supplier Handbook may be provided by Tesla electronically or via a web-based portal.

�

(x)

�Tesla Product� means any product that is manufactured by or on behalf of Tesla (excluding Goods). Tesla Products may include vehicles, chargers, subassemblies, systems and components.

�

(y)

�Tesla-Supplied Items� means, collectively, the raw materials, components, supplies, and/or services to be provided by Tesla in connection with these General Terms (e.g. Utilities) and/or the Contract as a Tesla Responsibility.

�

(z)

�US Person� means a United States citizen, entity organized under the Laws of the United States or its territories or entity having its principal place of business within the United States or any of its territories.

�

(aa)

�Warranty Period� has the meaning given in Section�5.1(a).

�


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CONFIDENTIAL	�	Confidential Treatment Requested by Tesla Motors, Inc.

�

IN WITNESS WHEREOF, the Parties have executed these General Terms by persons duly authorized below:

�


Tesla Motors, Inc.			��	��	Panasonic Corporation

By:	�	/s/ JB Straubel	��	��	By:	��	/s/ Yoshio Ito
Printed: JB Straubel Title: Chief Technology Officer Date: October�1, 2014			��	��	Printed: Yoshio Ito Title: Senior Managing Director, Member of the Board President, Automotive & Industrial Systems Company Panasonic Corporation Date: September 30, 2014

�


Tesla-Panasonic General Terms and Conditions	�	Page 24 of 25
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CONFIDENTIAL	�	Confidential Treatment Requested by Tesla Motors, Inc.

�

Exhibit 1 � Quality Requirements

1. Quality Requirements.�All Goods sold to Tesla under the Contract shall be manufactured and provided in accordance with agreed Tesla�s quality control procedures and requirements, including, without limitation, all Tesla quality standards (collectively, the �Quality Requirements�). The Parties shall determine upon the mutual consultation whether the Goods meet the Quality Requirements. Seller shall, in accordance with the Quality Requirements, provide, maintain and enforce all measures necessary to secure the quality of Goods and the manufacturing processes thereof, including without limitation, quality control standards, inspection standards and specifications.

2. PPAP. All cells shall go through a formal Production Part Approval Process (�PPAP�) process prior to use in a Tesla product.�The PPAP process requires a review of product and process documents (FMEA, Control Plans, Inspection Standard, IEEE, etc.) and a process audit (as deemed necessary by Tesla Quality Personnel).�Seller shall inform Tesla of any process and product changes that occur after completion of the PPAP process.

3. Evidence of Seller�s Quality Assurance; Testing.�Upon Tesla�s request and within the scope that the Parties agree, Seller shall deliver to Tesla [***] as will validate compliance with all Quality Requirements.�If quality problems based upon the Quality Requirements arise from the Goods, Tesla may, upon prior notice and during normal business hours: [***].

4. Pre-delivery Inspection.�Seller shall be responsible for the quality control of the Goods it supplies to Tesla pursuant to the Contract, including, without limitation, adequate inspection and testing of Goods prior to delivery.

5. Tesla Testing.�If quality problems based upon the Quality Requirements arise from the Goods, upon receipt of a reasonable request by Tesla, Seller shall promptly conduct required engineering and quality control tests of Goods manufactured pursuant to the Contract, and shall provide Tesla with the results of those tests.

6. This Exhibit 1 does not limit the Parties� respective rights and obligations under the Contract.

�


Tesla-Panasonic General Terms and Conditions	�	Page 25 of 25
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Exhibit 10.3

Confidential Treatment Requested by Tesla Motors, Inc.

Production Pricing Agreement

This Production Pricing Agreement (�Pricing Agreement�) is entered into effective as of the date last signed below (�PA Effective Date�) by and between Tesla Motors, Inc., a Delaware corporation located at 3500 Deer Creek Road, Palo Alto, California, 94304 (�Tesla�) and Panasonic Corporation, a Japanese corporation located at 1006 Kadoma, Kadoma City, Osaka, 571-8506, Japan (�Seller�). Tesla and Seller are each referred to herein as a �Party� and collectively as the �Parties.� The Parties enter into this Pricing Agreement in connection with, and subject to, the General Terms and Conditions dated October�1, 2014 (the �General Terms�). Terms used herein with initial capitalization have the meanings specified where used or in the General Terms.

�

Production Planning.

�

This contract is for the supply of cylindrical lithium-ion battery cells made by or on behalf of Seller at the Factory (the �Goods�). The Parties shall meet and confer in good faith to finalize an agreed, written Specification for each type of Goods. The Parties intend that the initial Good will be a Li-Ion Cylindrical Battery Cell with an agreed watt-hour (Wh) capacity and size to be established based on good faith discussions.

�

As contemplated in Section�1 of the General Terms, Tesla will issue one or more Purchase Orders based on the agreed Production Plan, which will be set in accordance with Tesla�s forecast of its anticipated requirements and the periodic Production Meeting. Tesla intends to issue a Production Order for an agreed period of time after the Parties finalize the initial Production Plan. The binding quantities of Goods to be supplied by Seller and the applicable delivery dates will be specified in Tesla�s Purchase Orders accepted by Seller in accordance with Section�1.3 (Acceptance) of the General Terms. The Parties shall also discuss in good faith and agree on the Lead Time for each Good on an on-going basis at the Production Meeting [***], and any changes to the Lead Time will be reflected in writing.

�

The Parties intend for Seller to produce Goods at the Factory at an annual run rate that equates to thirty-five gigawatt-hours (35 GWh) of aggregate energy (the �Target Production Volume�) subject to Section�1.1(b) of the General Terms and Section�2.d below. Subject to the forecast and production planning process described in Section�1.1 (Production Planning) of the General Terms, Seller shall [***].

�

For each Good sold to a third party by Seller, [***].

�

Capital and Other Investments.

�

Production Lines. The Parties intend to undertake capital investments to build discrete production lines at the Factory for the manufacture of Goods (each such line is a �Production Line�). The Parties currently anticipate that Seller will operate [***] Production Lines when Seller�s production rate is at or near the Target Production Volume.

�

Seller Investments. Subject to Section�1.1(b) of the General Terms and Section�2.d below, Seller shall make all capital investments required for production of Goods for Tesla in accordance with the Production Plan (the cost for each such investment is �Seller Investment Cost�). Such capital investments shall be �Property,� as that term is defined in Section�9.1 of the General Terms. Seller shall use best efforts to [***]. Tesla will disclose the relevant market information (including the concept and strategy with respect to corresponding Tesla Products), production ramp plans and investment plans prior to each Seller Investment Cost pursuant to the NDA, if and to the extent reasonably related to such investment (as determined in Tesla�s sole but reasonable discretion). The Parties recognize that the current estimated Seller Investment Cost to achieve the Target Production Volume is [***].

�


Tesla-Panasonic Pricing Agreement	�	Page 1 of 8
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Confidential Treatment Requested by Tesla Motors, Inc.

�

The Seller Investment Costs will include all costs and expenses incurred by Seller for the equipment required to meet Seller�s obligations under the Production Plan, which will include (but is not limited to):

�

[***];

�

ii.

[***];

�

iii.

[***];

�

iv.

[***];

�

[***];

�

vi.

[***] in accordance with a mutually-agreed matrix set forth in Section�11.1(c) of the General Terms;

�

vii.

Other utilities as agreed by the Parties; and

�

viii.

Other equipment and systems as agreed in writing by the Parties.

�

Tesla Investments. Tesla may be financially responsible for certain capital investments at the Factory for some portions of the equipment required to meet Seller�s obligations under the Production Plan, if and to the extent agreed in writing by the Parties. Such capital investments shall be �Tesla Property� as that term is defined in Section�9.1 of the General Terms. Each such investment by Tesla is a �Tesla Capital Investment.� [***].

�

[***] Seller Investment Cost.

�

Tesla commits that Seller will [***] Seller Investment Cost [***] after [***] through the sale of Goods [***]; provided, however, that a Seller Investment Cost [***] by Tesla in the following circumstances: [***] Seller Investment Cost [***]. (The [***] is the [***]).

�

ii.

If and to the extent that Seller does not [***] Seller Investment Cost in the manner set forth in the applicable investment letter agreement [***] (as agreed by the Parties based on a good faith discussion) [***], Tesla shall either (A)�[***], or (B)�resolve the matter in another manner as agreed in writing by the Parties, upon the earlier of (i)�[***], or (ii)�the expiration or termination of the General Terms and unless expressly provided otherwise in the General Terms. If and to the extent, however, Seller does not [***] Seller Investment Cost in the manner set forth in the applicable investment letter agreement [***] (as agreed by the Parties based on a good faith discussion), Tesla will have no further obligation to [***] and [***].

�

iii.

For [***] production lines only, the Parties shall also evaluate in good faith progress towards [***] at a meeting that takes place [***]. If and to the extent Seller has not yet [***] Seller Investment Cost in the manner set forth in the applicable investment letter agreement [***] (as agreed by the Parties based on a good faith discussion) within [***], Tesla will promptly either (A)�[***] (B)�resolve the matter in another manner as agreed in writing by the Parties. If and to the extent, however, Seller has not yet [***] Seller Investment Cost in the manner set forth in the applicable investment letter agreement within [***] (as agreed by the Parties based on a good faith discussion), Tesla will have no further obligation to [***] and [***]. For example, if Seller has [***] of a Seller Investment Cost after [***] but the Parties had projected that Seller would [***] of such cost at that point in time:

�

If [***] is due to [***] or implement another solution agreed by the Parties [***]; or

�

If and to the extent [***] is due [***], Tesla will have no obligation to [***].

�

Pricing.

�

Unit Prices.

�

The Parties agree to set unit pricing for the Goods based on [***] (the price per Good is the �Unit Price�). The [***] Unit Prices for Goods manufactured on [***] are the �Quotation

�


Tesla-Panasonic Pricing Agreement	�	Page 2 of 8
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Confidential Treatment Requested by Tesla Motors, Inc.

�

Prices� set forth in Exhibit A. The Parties shall negotiate in good faith and use best efforts to [***]. Such discussions shall include the topics listed below. The Unit Price is subject to adjustment pursuant to Section�3(b) below. The Parties shall amend Exhibit A hereto to reflect agreed changes to the Unit Price.

��[***].

�

ii.

The Quotation Prices in Exhibit A are based on the following assumptions, and are subject to change if and to the extent that one or more assumptions change:

��[***].

�

iii.

As a general illustration, the Unit Price consists of the following items and adjustments to the Unit Price will be implemented with reference to the following:

[***]

��[***].

�

Unit Price Adjustments. The Unit Price is a firm, fixed price which is subject to adjustment only as follows:

�

The Parties shall meet and confer in good faith on an on-going basis, and at least [***], [***]. [***], the corresponding [***]the Unit Price will be adjusted by the corresponding amount.

�

ii.

[***].

�

iii.

[***].

�

iv.

[***].

�

[***].

�

vi.

[***].

�

vii.

If the aggregate orders for Goods by Authorized Purchasers in any rolling period of [***] are [***], the Parties shall immediately review and discuss the then-current Unit Prices.

�

Currency. Invoices and payments shall be reflected in United States dollars ($).

�

Responsibility for Certain Costs. Tesla shall pay for the costs for [***].

�

Miscellaneous.

�

[***].

�

[***].

�

Tesla may audit Seller�s compliance with [***], including [***], in accordance with Section�16.2 (Audit and Inspection) of the General Terms.

�

Seller and Tesla agree that the supply of the Goods shall be pursuant to the General Terms. This Pricing Agreement, together with such provisions of the General Terms, constitutes the entire agreement between the Parties with respect to its subject matter and supersedes all prior agreements and understandings, both oral and written, between the Parties with respect thereto. No subsequent terms, conditions, understandings, or agreements purporting to modify the terms of this Pricing Agreement will be binding unless in writing and signed by the Parties. This Pricing Agreement may be executed in counterparts, each of which when so executed and delivered will be deemed an original, and all of which taken together will constitute one and

�


Tesla-Panasonic Pricing Agreement	�	Page 3 of 8
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Confidential Treatment Requested by Tesla Motors, Inc.

�

the same instrument. This Pricing Agreement shall expire upon the later of (i)�expiration or termination of the General Terms unless otherwise specifically provided in the General Terms, or (ii)�the date that the Parties completes performance of their respective obligations under this Pricing Agreement.

IN WITNESS WHEREOF, the Parties have executed this Pricing Agreement by persons duly authorized below:

�


Panasonic Corporation			�	��	Tesla Motors, Inc.

Signed:	�	/s/ Yoshio Ito	�	��	Signed:	�	/s/ JB Straubel
Print�Name:	�	Yoshio Ito	�	��	Print�Name:	�	JB Straubel
Print�Title:	�	Senior Managing Director, Member of the Board President, Automotive�& Industrial Systems Company Panasonic Corporation	�	��	Print�Title: ��Chief Technology Officer � Date: October 1, 2014

Date: September�30, 2014			�	��		�

�


Tesla-Panasonic Pricing Agreement	�	Page 4 of 8
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Confidential Treatment Requested by Tesla Motors, Inc.

�

Exhibit A

Pricing

�

1.	Quotation Prices. The attached file titled �[*],� which is incorporated herein by reference, sets forth the current [*] price for Goods based on Seller�s quotation.

[***]

�


Tesla-Panasonic Pricing Agreement	�	Page 5 of 8
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Confidential Treatment Requested by Tesla Motors, Inc.

�

[***]

* Quotation Price is based on the [***] set forth in Exhibit B.

* Quotation Price shown are [***].

[***].

�


Tesla-Panasonic Pricing Agreement	�	Page 6 of 8
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Confidential Treatment Requested by Tesla Motors, Inc.

�

Exhibit B

[***]

�


Tesla-Panasonic Pricing Agreement	�	Page 7 of 8
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Confidential Treatment Requested by Tesla Motors, Inc.

�

Exhibit C

[***]

�


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Exhibit 10.4

�


	�	Confidential Treatment Requested by Tesla Motors, Inc.

�

October�1, 2014

�

To:	Mr.�JB Straubel

��	Chief Technology Officer

��	Tesla Motors, Inc.

��	3500 Deer Creek Road

��	Palo Alto, CA 94304

�

RE:

Investment letter agreement for Panasonic�s [***] Production Line [***] at Giga-Factory

Dear JB-san,

This letter agreement (�[***] Investment Letter Agreement�) is entered into by and between Tesla Motors, Inc., a Delaware corporation (�Tesla�), and Panasonic Corporation, a Japanese corporation (�Panasonic�), effective as of the date last signed below with respect to Panasonic�s investment in the [***] Production Line [***] (defined below), as contemplated in the General Terms and Conditions dated October�1, 2014, including Section�1.1(b) thereof (the �General Terms�), and the Production Pricing Agreement dated October�1, 2014 (�Pricing Agreement�) by and between the Parties. Tesla and Panasonic are each referred to herein as a �Party� and collectively as the �Parties.� This [***] Investment Letter Agreement is entered into in connection with, and subject to, the General Terms and the Pricing Agreement. Capitalized terms used in this [***] Investment Letter Agreement have the meanings given herein, in the General Terms and/or in the Pricing Agreement.

In consideration of the mutual premises and mutual covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Tesla and Panasonic hereby agree as follows.

�

Investment Commitment. Panasonic shall, at its cost and expense, supply all components (including but not limited to [***], but excluding [***] Tesla-Supplied Items), all engineering, manufacturing and other processes, all designs, and all research and development necessary to complete design, development, manufacture, assembly, installation of the Seller�s Property required for [***] for the manufacture of Goods which meet the requirements of the applicable Specifications (collectively, the �[***] Production Line [***]�) subject to (i)�the Parties� entering into the Factory Lease as contemplated in Section�11.1(a) of the General Terms by the Lease Target Date and (ii)�that the General Terms remain effective at the time of such investment by Panasonic. The [***] Production Line [***] is described in more detail in Exhibit A hereto. Panasonic will make its investments in

�


[***] Production Letter Agreement	�	Page 1 of 6
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	�	Confidential Treatment Requested by Tesla Motors, Inc.

�

the [***] Production Line [***] over [***], with installation at the Factory beginning on an agreed date after [***]; provided, however, that the schedule for such installation is subject to timely completion of the Tesla Responsibilities described in Sections 2.4(a), 11.1(a) and 11.1(b) of the General Terms. It is currently anticipated by the Parties that the [***] Production Line [***] shall be capable of achieving a monthly production capacity of [***] Goods (i.e., approximately [***]). Panasonic shall take title to all equipment, tooling, components and similar tangible items included in the [***] Production Line [***] at the Factory.

�

Investment Cost. The total amount of the Seller Investment Cost required for the [***] Production Line [***] is referred to as the �[***] Production [***]�. Panasonic represents that its [***] of the [***] Production [***] as of the date of this [***] Investment Letter Agreement, including all costs to connect the [***] Production Line [***] to the Utilities at the Factory (the �Utility Infrastructure Costs�), is [***]. Panasonic will use its [***] of the [***] Production [***]. Panasonic will notify Tesla promptly in writing of any and all changes to the [***] Production [***]. If the [***] Production [***] exceeds the foregoing [***] by more than [***], but only to the extent such increase is not due to a reasonable increase in the Utility Infrastructure Costs, Tesla shall have no liability for such [***] unless Tesla has given prior written consent to be liable for such [***] (which Tesla shall not unreasonably withhold, condition or delay following a good faith discussion with Panasonic).

�

[***]. For purposes of and subject to Section�2(e) ([***] Seller Investment Cost) of the Pricing Agreement, (a)�Seller will be deemed to [***] Production [***] through the sale of an agreed quantity of Goods, which will be reasonably agreed based on a good faith discussion by the Parties, over a period of [***] beginning on the [***] (as defined in the Pricing Agreement), and (b)�Seller will be deemed to [***] of the [***] Production [***] through the sale of an agreed quantity of Goods, which will be reasonably agreed based on a good faith discussion by the Parties, over the [***] of the [***] period. Further, the [***] Production [***] shall [***], and Panasonic will be deemed to [***], by an amount equal to [***]. It is currently anticipated that [***] for the [***] Production Line [***] will begin on or around [***], and the actual [***] therefor will be separately agreed in writing between the Parties in accordance with Section�2(e)(i) of the Pricing Agreement.

�

4.	Goods Pricing. The Unit Price of Goods shall be established in accordance with Pricing Agreement. The Parties agree that the supply of the Goods shall be pursuant to the General Terms.

�

5.	Target Purchase Quantity. The quarterly target quantity of Goods to be purchased by Tesla from Panasonic�s operating entity at the Factory (the �Target Purchase Quantity�) sets forth in Exhibit B, and the Parties will reference such quantities at the Production Meeting. If the first date that

�


[***] Production Letter Agreement	�	Page 2 of 6
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	�	Confidential Treatment Requested by Tesla Motors, Inc.

�

Panasonic�s operating entity at the Factory delivers to Tesla Goods with use of the [***] Production Line [***] is delayed from the schedule set forth in Exhibit B for any reason, [***]. Tesla will use Commercially Reasonable Efforts to purchase Goods in accordance with the Target Purchase Quantities, subject to Section�1.6 of the General Terms and Section�3(b)(vii) of the Pricing Agreement.

�

Miscellaneous. To the extent applicable to the subject matter of this [***] Investment Letter Agreement, the General Terms and Pricing Agreement are each incorporated herein and form an integral part hereof. This [***] Investment Letter Agreement, together with such provisions of the General Terms and Pricing Agreement, constitutes the entire agreement between the Parties with respect to its subject matter and supersedes all prior agreements and understandings, both oral and written, between the Parties with respect thereto. If a conflict between the provisions of this [***] Investment Letter Agreement and those of the General Terms and/or Pricing Agreement, the conflict shall be resolved pursuant to Section�16.8 (Conflicts) of the General Terms. No subsequent terms, conditions, understandings, or agreements purporting to modify the terms of this [***] Investment Letter Agreement will be binding unless in writing and signed by both Parties. This [***] Investment Letter Agreement may be executed in counterparts, each of which when so executed and delivered will be deemed an original, and all of which taken together will constitute one and the same instrument. This [***] Investment Letter Agreement shall expire upon [***] in accordance with the Pricing Agreement and the terms hereof.

Sincerely yours,

/s/ Shinji Sakamoto

Shinji Sakamoto

Executive Officer

Senior Vice President

Automotive�& Industrial Systems Company

Panasonic Corporation

�


[***] Production Letter Agreement	�	Page 3 of 6
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	�	Confidential Treatment Requested by Tesla Motors, Inc.

�

Agreed to by Tesla Motors, Inc.

By: /s/ JB Straubel

Name: JB Straubel

Title: Chief Technology Officer, Tesla Motors, Inc.

�


[***] Production Letter Agreement	�	Page 4 of 6
[***] Information has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions.


	�	Confidential Treatment Requested by Tesla Motors, Inc.

�

Exhibit A � [***] Production Line [***]

[***]

�


[***] Production Letter Agreement	�	Page 5 of 6
[***] Information has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions.


	�	Confidential Treatment Requested by Tesla Motors, Inc.

�

Exhibit B � Target Purchase Quantity

Unit: Million Cells

[***]

�


[***] Production Letter Agreement	�	Page 6 of 6
[***] Information has been omitted and filed separately with the Securities and Exchange Commission. Confidential Treatment has been requested with respect to the omitted portions.

EXHIBIT 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Elon Musk, certify that:

�

1.	I have reviewed this Quarterly Report on Form 10-Q of Tesla Motors, Inc.;

�

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

�

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

�

The registrant�s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

�

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

�

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

�

(c)

Evaluated the effectiveness of the registrant�s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

�

(d)

Disclosed in this report any change in the registrant�s internal control over financial reporting that occurred during the registrant�s most recent fiscal quarter (the registrant�s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant�s internal control over financial reporting; and

�

5.	The registrant�s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant�s auditors and the audit committee of the registrant�s Board of Directors (or persons performing the equivalent functions):

�

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant�s ability to record, process, summarize and report financial information; and

�

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant�s internal control over financial reporting.

�


Date: November�7, 2014	�	�	�	/s/ Elon Musk
	�	�	�	Elon Musk
	�	�	�	Chief Executive Officer
	�	�	�	(Principal Executive Officer)

EXHIBIT 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Deepak Ahuja, certify that:

�

1.	I have reviewed this Quarterly Report on Form 10-Q of Tesla Motors, Inc.;

�

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

�

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

�

(a)

�

(b)

�

(c)

�

(d)

�

5.	The registrant�s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant�s auditors and the audit committee of the registrant�s Board of Directors (or persons performing the equivalent functions):

�

(a)

�

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant�s internal control over financial reporting.

�


Date: November�7, 2014	�	�	�	/s/ Deepak Ahuja
	�	�	�	Deepak Ahuja
	�	�	�	Chief Financial Officer
	�	�	�	(Principal Financial Officer)

EXHIBIT 32.1

SECTION 1350 CERTIFICATIONS

I, Elon Musk, certify, pursuant to 18 U.S.C. Section�1350, that, to my knowledge, the Quarterly Report of Tesla Motors, Inc. on Form�10-Q for the quarterly period ended September�30, 2014, (i)�fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii)�that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Tesla Motors, Inc.

�


Date: November�7, 2014	�	�	�	/s/ Elon Musk
	�	�	�	Elon Musk
	�	�	�	Chief Executive Officer
	�	�	�	(Principal Executive Officer)

I, Deepak Ahuja, certify, pursuant to 18 U.S.C. Section�1350, that, to my knowledge, the Quarterly Report of Tesla Motors, Inc. on Form 10-Q for the quarterly period ended September�30, 2014, (i)�fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii)�that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Tesla Motors, Inc.

�


Date: November�7, 2014	�	�	�	/s/ Deepak Ahuja
	�	�	�	Deepak Ahuja
	�	�	�	Chief Financial Officer
	�	�	�	(Principal Financial Officer)

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