Tesla 2015 Annual Report Download - page 37

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.
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.
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.
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