Tesla 2012 Annual Report Download - page 61

Table of Contents
of a carbon fiber panel in the vehicle causing a short, smoke and possible fire behind the right front headlamp of the vehicle. In the future, we
may at various times, voluntarily or involuntarily, initiate a recall if any of our vehicles, including our Model S, or 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, which could adversely affect our brand image in our
target markets and could adversely affect 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. We provide a three year or 36,000 miles New Vehicle Limited Warranty with every
Tesla Roadster, which we extended to four years or 50,000 miles for the purchasers of our 2008 Tesla Roadster. In addition, customers have the
opportunity to purchase an Extended Service Plan for the period after the end of the New Vehicle Limited Warranty to cover additional services
for an additional three years or 36,000 miles, whichever comes first. The New Vehicle Limited Warranty is similar to other vehicle
manufacturers’ warranty programs and is intended to cover all parts and labor to repair defects in material or workmanship in the body, chassis,
suspension, interior, electronic systems, battery pack, powertrain and brake system. We record and adjust warranty reserves based on changes in
estimated costs and actual warranty costs. However, because we only began delivering our first Tesla Roadster in early 2008, we have extremely
limited operating experience with our vehicles, and therefore little experience with warranty claims for these vehicles or with estimating
warranty reserves. Furthermore, reserves that we anticipate recording when we commence delivering Model S may be insufficient to cover any
future warranty claims.
Since we began initiating sales of our vehicles, we have continued to increase our warranty reserves based on our actual warranty claim
experience and we may be required to undertake further such increases in the future. As of December 31, 2011, we had warranty reserves of $6.3
million, and such reserve amount will increase in the future as Model S is sold. We could in the future become subject to a significant and
unexpected warranty expense. There can be no assurances that our currently existing or future warranty reserves will be sufficient to cover all
claims or that our limited experience with warranty claims will adequately address the needs of our customers to their satisfaction.
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 or sell 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 inquiring whether we infringe
their proprietary rights. Companies holding patents or other intellectual property rights relating to battery packs, electric motors or electronic
power management systems may bring suits alleging infringement of such rights or otherwise asserting their rights and seeking 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 that incorporate 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; or
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redesign our vehicles.