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

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

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

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

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

As of ~~April 21,~~July 22, 2021, there were ~~963,330,448~~990,015,158 shares of the registrant’s common stock outstanding.

The discussions in this Quarterly Report on Form 10-Q contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements concerning any potential future impact of the coronavirus disease (“COVID-19”) pandemic on our business, supply chain constraints, our strategy, future operations, future financial position, future revenues, projected costs, profitability, expected cost reductions, capital adequacy, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “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 (the "SEC"). We do not assume any obligation to update any forward-looking statements.


	March 31,			December 31,			June 30,			December 31,
	2021			2020			2021			2020
Assets
Current assets
Cash and cash equivalents	$	17,141		$	19,384		$	16,229		$	19,384
Accounts receivable, net		1,890			1,886			2,129			1,886
Inventory		4,132			4,101			4,733			4,101
Prepaid expenses and other current assets		1,542			1,346			1,602			1,346
Total current assets		24,705			26,717			24,693			26,717
Operating lease vehicles, net		3,396			3,091			3,748			3,091
Solar energy systems, net		5,933			5,979			5,883			5,979
Property, plant and equipment, net		13,868			12,747			15,665			12,747
Operating lease right-of-use assets		1,647			1,558			1,734			1,558
Digital assets, net		1,331			—			1,311			0
Intangible assets, net		299			313			283			313
Goodwill		206			207			203			207
Other non-current assets		1,587			1,536			1,626			1,536
Total assets	$	52,972		$	52,148		$	55,146		$	52,148
Liabilities
Current liabilities
Accounts payable	$	6,648		$	6,051		$	7,558		$	6,051
Accrued liabilities and other		4,073			3,855			4,778			3,855
Deferred revenue		1,592			1,458			1,693			1,458
Customer deposits		745			752			812			752
Current portion of debt and finance leases		1,819			2,132			1,530			2,132
Total current liabilities		14,877			14,248			16,371			14,248
Debt and finance leases, net of current portion		9,053			9,556			7,871			9,556
Deferred revenue, net of current portion		1,294			1,284			1,318			1,284
Other long-term liabilities		3,283			3,330			3,336			3,330
Total liabilities		28,507			28,418			28,896			28,418
Commitments and contingencies (Note 12)
Redeemable noncontrolling interests in subsidiaries		601			604			605			604
Convertible senior notes (Note 10)		—			51			—			51
Equity
Stockholders' equity
Preferred stock; $0.001 par value; 100 shares authorized; 0 shares issued and outstanding		—			—
Common stock; $0.001 par value; 2,000 shares authorized; 963 and 960 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively		1			1
Preferred stock; $0.001 par value; 100 shares authorized; 0 shares issued and outstanding								—			—
Common stock; $0.001 par value; 2,000 shares authorized; 984 shares and 960 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively								1			1
Additional paid-in capital		27,623			27,260			28,205			27,260
Accumulated other comprehensive income		143			363			206			363
Accumulated deficit		(4,750	)		(5,399	)		(3,608	)		(5,399	)
Total stockholders' equity		23,017			22,225			24,804			22,225
Noncontrolling interests in subsidiaries		847			850			841			850
Total liabilities and equity	$	52,972		$	52,148		$	55,146		$	52,148

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


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020			2021			2020
Revenues
Automotive sales	$	8,705		$	4,893		$	9,874		$	4,911		$	18,579		$	9,804
Automotive leasing		297			239			332			268			629			507
Total automotive revenues		9,002			5,132			10,206			5,179			19,208			10,311
Energy generation and storage		494			293			801			370			1,295			663
Services and other		893			560			951			487			1,844			1,047
Total revenues		10,389			5,985			11,958			6,036			22,347			12,021
Cost of revenues
Automotive sales		6,457			3,699			7,119			3,714			13,576			7,413
Automotive leasing		160			122			188			148			348			270
Total automotive cost of revenues		6,617			3,821			7,307			3,862			13,924			7,683
Energy generation and storage		595			282			781			349			1,376			631
Services and other		962			648			986			558			1,948			1,206
Total cost of revenues		8,174			4,751			9,074			4,769			17,248			9,520
Gross profit		2,215			1,234			2,884			1,267			5,099			2,501
Operating expenses
Research and development		666			324			576			279			1,242			603
Selling, general and administrative		1,056			627			973			661			2,029			1,288
Restructuring and other		(101	)		—			23			—			(78	)		—
Total operating expenses		1,621			951			1,572			940			3,193			1,891
Income from operations		594			283			1,312			327			1,906			610
Interest income		10			10			11			8			21			18
Interest expense		(99	)		(169	)		(75	)		(170	)		(174	)		(339	)
Other income (expense), net		28			(54	)		45			(15	)		73			(69	)
Income before income taxes		533			70			1,293			150			1,826			220
Provision for income taxes		69			2			115			21			184			23
Net income		464			68			1,178			129			1,642			197
Net income attributable to noncontrolling interests and redeemable noncontrolling interests in subsidiaries		26			52			36			25			62			77
Net income attributable to common stockholders	$	438		$	16		$	1,142		$	104		$	1,580		$	120

Net income per share of common stock attributable to common stockholders (1)
Basic	$	0.46		$	0.02		$	1.18		$	0.11		$	1.64		$	0.13
Diluted	$	0.39		$	0.02		$	1.02		$	0.10		$	1.41		$	0.12
Weighted average shares used in computing net income per share of common stock (1)
Basic		961			915			971			928			966			921
Diluted		1,133			994			1,119			1,036			1,126			1,016

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


														Accumulated																									Accumulated
	Redeemable							Additional						Other			Total			Noncontrolling						Redeemable							Additional						Other			Total				Noncontrolling
	Noncontrolling			Common Stock				Paid-In			Accumulated			Comprehensive			Stockholders'			Interests in			Total			Noncontrolling			Common Stock				Paid-In			Accumulated			Comprehensive			Stockholders'				Interests in			Total
	Interests			Shares		Amount		Capital			Deficit			(Loss) Income			Equity			Subsidiaries			Equity
Balance as of December 31, 2020	$	604			960	$	1	$	27,260		$	(5,399	)	$	363		$	22,225		$	850		$	23,075
Adjustments for prior periods from adopting ASU 2020-06		—			—		—		(474	)		211			—			(263	)		—			(263	)
Six Months Ended June 30, 2020																										Interests			Shares (1)		Amount (1)		Capital (1)			Deficit			Loss			Equity				Subsidiaries			Equity
Balance as of December 31, 2019																										$	643			905	$	1	$	12,736		$	(6,083	)	$	(36	)	$	6,618			$	849		$	7,467
Adjustments for prior periods from adopting ASU 2016-13																											—			—		—		—			(37	)		—			(37	)			—			(37	)
Reclassification between equity and mezzanine equity for convertible senior notes																											—			—		—		(44	)		—			—			(44	)			—			(44	)
Exercises of conversion feature of convertible senior notes		—			0		0		11			—			—			11			—			11			—			1		0		65			—			—			65				—			65
Issuance of common stock for equity incentive awards		—			3		0		183			—			—			183			—			183			—			11		0		217			—			—			217				—			217
Issuance of common stock in Feb 2020 public offering, net of issuance costs of $28																											—			15		0		2,309			—			—			2,309				—			2,309
Stock-based compensation		—			—		—		643			—			—			643			—			643			—			—		—		611			—			—			611				—			611
Contributions from noncontrolling interests																											2			—		—		—			—			—			—				17			17
Distributions to noncontrolling interests		(12	)		—		—		—			—			—			—			(20	)		(20	)		(27	)		—		—		—			—			—			—				(77	)		(77	)
Net income		9			—		—		—			438			—			438			17			455
Other																											(2	)		—		—		—			—			—			—				—			—
Net (loss) income																											(3	)		—		—		—			120			—			120				80			200
Other comprehensive loss		—			—		—		—			—			(220	)		(220	)		—			(220	)		—			—		—		—			—			(4	)		(4	)			—			(4	)
Balance as of March 31, 2021	$	601			963	$	1	$	27,623		$	(4,750	)	$	143		$	23,017		$	847		$	23,864
Balance as of June 30, 2020																										$	613			932	$	1	$	15,894		$	(6,000	)	$	(40	)	$	9,855		��	$	869		$	10,724

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


	Three Months Ended March 31,						Six Months Ended June 30,
	2021			2020			2021			2020
Cash Flows from Operating Activities
Net income	$	464		$	68		$	1,642		$	197
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and impairment		621			553			1,302			1,120
Stock-based compensation		614			211			1,088			558
Inventory and purchase commitments write-downs		49			45			88			88
Foreign currency transaction net (gain) loss		(2	)		19			(1	)		38
Non-cash interest and other operating activities		8			111			60			216
Digital assets gain, net		(101	)		—			(78	)		0
Changes in operating assets and liabilities:
Accounts receivable		(24	)		(14	)		(283	)		(236	)
Inventory		(106	)		(981	)		(687	)		(535	)
Operating lease vehicles		(426	)		(197	)		(916	)		(330	)
Prepaid expenses and other current assets		(143	)		(154	)		(131	)		(301	)
Other non-current assets		(168	)		40			(289	)		(16	)
Accounts payable and accrued liabilities		672			(265	)		1,592			(372	)
Deferred revenue		162			53			279			(20	)
Customer deposits		(2	)		88			52			5
Other long-term liabilities		23			(17	)		47			112
Net cash provided by (used in) operating activities		1,641			(440	)
Net cash provided by operating activities								3,765			524
Cash Flows from Investing Activities
Purchases of property and equipment excluding finance leases, net of sales		(1,348	)		(455	)		(2,853	)		(1,001	)
Purchases of solar energy systems, net of sales		(12	)		(26	)		(22	)		(46	)
Purchases of digital assets		(1,500	)		—			(1,500	)		0
Proceeds from sales of digital assets		272			—			272			0
Receipt of government grants		6			1			6			1
Net cash used in investing activities		(2,582	)		(480	)		(4,097	)		(1,046	)
Cash Flows from Financing Activities
Proceeds from issuances of common stock in public offerings, net of issuance costs		—			2,309			0			2,309
Proceeds from issuances of convertible and other debt		2,983			2,802			4,862			4,946
Repayments of convertible and other debt		(4,038	)		(2,318	)		(7,408	)		(4,226	)
Collateralized lease repayments		(6	)		(97	)		(8	)		(168	)
Proceeds from exercises of stock options and other stock issuances		183			160			253			217
Principal payments on finance leases		(101	)		(100	)		(196	)		(154	)
Debt issuance costs		(5	)		—			(5	)		0
Proceeds from investments by noncontrolling interests in subsidiaries		—			19			2			19
Distributions paid to noncontrolling interests in subsidiaries		(32	)		(67	)		(65	)		(110	)
Payments for buy-outs of noncontrolling interests in subsidiaries								0			(2	)
Net cash (used in) provided by financing activities		(1,016	)		2,708			(2,565	)		2,831
Effect of exchange rate changes on cash and cash equivalents and restricted cash		(221	)		(24	)		(179	)		14
Net (decrease) increase in cash and cash equivalents and restricted cash		(2,178	)		1,764			(3,076	)		2,323
Cash and cash equivalents and restricted cash, beginning of period		19,901			6,783			19,901			6,783
Cash and cash equivalents and restricted cash, end of period	$	17,723		$	8,547		$	16,825		$	9,106
Supplemental Non-Cash Investing and Financing Activities
Acquisitions of property and equipment included in liabilities	$	1,061		$	415		$	1,768		$	668
Leased assets obtained in exchange for finance lease liabilities	$	64		$	32		$	177		$	54
Leased assets obtained in exchange for operating lease liabilities	$	179		$	60		$	341		$	187

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

Note 2 – Summary of Significant Accounting Policies

Unaudited Interim Financial Statements

The consolidated balance sheet as of ~~March 31,~~June 30, 2021, the consolidated statements of operations, the consolidated statements of comprehensive income, the consolidated statements of redeemable noncontrolling interests and equity for the three and six months ended June 30, 2021 and 2020 and the consolidated statements of cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020, as well as other information disclosed in the accompanying notes, are unaudited. The consolidated balance sheet as of December 31, 2020 was derived from the audited consolidated financial statements as of that date. The interim consolidated financial statements and the accompanying notes should be read in conjunction with the annual consolidated financial statements and the accompanying notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures in the accompanying notes.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets which could impact our estimates and assumptions. We have assessed the impact and are not aware of any specific events or circumstances that required an update to our estimates and assumptions or materially affected the carrying value of our assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

910

Revenue Recognition

Revenue by source

The following table disaggregates our revenue by major source (in millions):


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020		2021		2020
Automotive sales without resale value guarantee	$	8,013	$	4,367	$	9,332	$	4,423	$	17,345	$	8,790
Automotive sales with resale value guarantee		174		172		188		60		362		232
Automotive regulatory credits		518		354		354		428		872		782
Energy generation and storage sales		383		173		653		225		1,036		398
Services and other		893		560		951		487		1,844		1,047
Total revenues from sales and services		9,981		5,626		11,478		5,623		21,459		11,249
Automotive leasing		297		239		332		268		629		507
Energy generation and storage leasing		111		120		148		145		259		265
Total revenues	$	10,389	$	5,985	$	11,958	$	6,036	$	22,347	$	12,021

Automotive Segment

Automotive Sales Revenue

Automotive Sales with and without Resale Value Guarantee

We recognize revenue when control transfers upon delivery to customers in accordance with ASC 606 as a sale with a right of return when we do not believe the customer has a significant economic incentive to exercise the resale value guarantee provided to them at contract inception. The total sales return reserve on vehicles previously sold under our buyback options program was ~~$629~~$592 million and ~~$703~~$703 million as of ~~March 31,~~June 30, 2021 and December 31, 2020, respectively, of which ~~$206~~$215 million and ~~$202~~$202 million was short term, respectively.

Deferred revenue ~~activity~~is related to the access to our Supercharger network, internet connectivity, Full Self Driving (“FSD”) features and over-the-air software updates on automotive sales with and without resale value guarantee, which amounted to ~~$2.00~~$2.13 billion and ~~$1.93~~$1.93 billion as of ~~March 31,~~June 30, 2021 and December 31, 2020, respectively.

Deferred revenue is equivalent to the total transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, as of the balance sheet date. Revenue recognized from the deferred revenue balance as of December 31, 2020 and 2019 was ~~$79~~$157 million and ~~$57~~$149 million for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020, respectively. Of the total deferred revenue on automotive sales with and without resale value guarantees as of ~~March 31,~~June 30, 2021, we expect to recognize ~~$1.21~~$1.32 billion of revenue in the next 12 months. The remaining balance will be recognized over the performance period which is generally the expected ownership life of the vehicle or the eight-year life of the vehicle.

Automotive Regulatory Credits

We earn tradable credits in the operation of our automotive business under various regulations related to zero-emission vehicles, greenhouse gas, fuel economy and clean fuel. We sell these credits to other regulated entities who can use the credits to comply with emission standards and other regulatory requirements.

Payments for automotive regulatory credits are typically received at the point control transfers to the customer, or in accordance with payment terms customary to the business. We recognize revenue on the sale of automotive regulatory credits at the time control of the regulatory credits is transferred to the purchasing party as automotive sales revenue in the consolidated statements of operations. Deferred revenue related to sales of automotive regulatory credits was ~~$61~~$42 million and ~~$21~~$21 million as of ~~March 31,~~June 30, 2021 and December 31, 2020, respectively. We expect to recognize the majority of the deferred revenue as of ~~March 31,~~June 30, 2021 in the next 12 months. Revenue recognized from the deferred revenue balance as of December 31, 2020 and 2019 was immaterial and $140 million for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020, respectively.

1011

Automotive Leasing Revenue

Direct Sales-Type Leasing Program

For the three and six months ended ~~March 31,~~June 30, 2021, we recognized ~~$42~~$55 million and $97 million, respectively, of sales-type leasing revenue and ~~$26~~$36 million and $62 million, respectively, of sales-type leasing cost of revenue. There was ~~0sales-type~~no material sales-type leasing revenue or associated cost of revenue recognized in the three and six months ended ~~March 31,~~June 30, 2020 as we ~~had not launched~~introduced this ~~offering.~~offering in volume during the third quarter of 2020.

Net investment in sales-type leases, which is the sum of the present value of the future contractual lease payments, is presented on the consolidated balance sheet as a component of Prepaid expenses and other current assets for the current portion and as Other assets for the long-term portion. Lease receivables relating to sales-type leases are presented on the consolidated balance sheet as follows (in millions):


	March 31, 2021			December 31, 2020			June 30, 2021			December 31, 2020
Gross lease receivables	$	134		$	102		$	178		$	102
Unearned interest income		(14	)		(11	)		(18	)		(11	)
Net investment in sales-type leases	$	120		$	91		$	160		$	91

Reported as:
Prepaid expenses and other current assets	$	23		$	17		$	30		$	17
Other assets		97			74			130			74
Net investment in sales-type leases	$	120		$	91		$	160		$	91

Energy Generation and Storage Segment

Energy Generation and Storage Sales

We record as deferred revenue any non-refundable amounts that are collected from customers related to fees charged for prepayments and remote monitoring service and operations and maintenance service, which is recognized as revenue ratably over the respective customer contract term. As of ~~March 31,~~June 30, 2021 and December 31, 2020, deferred revenue related to such customer payments amounted to ~~$195~~$217 million and ~~$187~~$187 million, respectively. Revenue recognized from the deferred revenue balance as of December 31, 2020 and 2019 was ~~$33~~$66 million and ~~$21~~$28 million for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020, respectively. As of ~~March 31,~~June 30, 2021, total transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied for contracts with an original expected length of more than one year was ~~$107~~$149 million. Of this amount, we expect to recognize $6$8 million in the next 12 months and the remaining over a period up to 27 years.

Income Taxes

There are transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. As of ~~March 31,~~June 30, 2021 and December 31, 2020, the aggregate balances of our gross unrecognized tax benefits were ~~$387~~$396 million and ~~$380~~$380 million, respectively, of which ~~$356~~$357 million and ~~$353~~$353 million, respectively, would not give rise to changes in our effective tax rate since these tax benefits would increase a deferred tax asset that is currently fully offset by a valuation allowance.

The local government of Shanghai granted a beneficial corporate income tax rate of ~~15%~~15% to certain eligible enterprises, compared to the ~~25%~~25% statutory corporate income tax rate in China. Our Gigafactory Shanghai subsidiary was granted this beneficial income tax rate of ~~15%~~15% for 2019 through 2023.

We file income tax returns in the U.S., California and various state and foreign jurisdictions. We are currently under examination by the IRS for the years 2015 to 2018. Additional tax years within the period 2004 to 2014 and 2019 remain subject to examination for federal income tax purposes, and tax years 2004 to 2019 remain subject to examination for California income tax purposes. All net operating losses and tax credits generated to date are subject to adjustment for U.S. federal and California income tax purposes. Tax years 2008 to 2020 remain subject to examination in other U.S. state and foreign jurisdictions.

The potential outcome of the current examination could result in a change to unrecognized tax benefits within the next twelve months. However, we cannot reasonably estimate possible adjustments at this time.

1112

Net Income per Share of Common Stock Attributable to Common Stockholders

Basic net income per share of common stock attributable to common stockholders is calculated by dividing net income attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards, warrants and convertible senior notes using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income per share of common stock attributable to common stockholders when their effect is dilutive.

On January 1, 2021, we adopted ASU 2020-06 using the modified retrospective method. Following this adoption, we utilize the if-converted method for diluted net income per share calculation of our convertible debt instruments (see Recent Accounting Pronouncements section below for further details). During the three and six months ended ~~March 31,~~June 30, 2021, we increased net income attributable to common stockholders by $5$2 million and $6 million, respectively, to arrive at the numerator used to calculate diluted net income per share, which represents the interest expense recognized on the convertible debt instruments that were subject to this change in methodology.

Prior to the adoption, we applied the treasury stock method when calculating the potential dilutive effect, if any, of the following convertible senior notes which we intended to settle or have settled in cash the principal outstanding: our ~~1.25%~~1.25% Convertible Senior Notes due in 2021 (“2021 Notes”), ~~2.375%~~2.375% Convertible Senior Notes due in 2022 (“2022 Notes”), ~~2.00%~~2.00% Convertible Senior Notes due in 2024 (“2024 Notes”) and our subsidiary’s ~~5.50%~~5.50% Convertible Senior Notes due in 2022. Furthermore, in connection with the offerings of our convertible senior notes, we entered into convertible note hedges and warrants (see Note 10, Debt). However, our convertible note hedges are not included when calculating potentially dilutive shares since their effect is always anti-dilutive. ~~Warrants which have a~~The strike price ~~above~~on the warrants were below our average share price during the period and were ~~out of~~in the money and ~~were not~~ included in the tables below. Warrants ~~will be~~have been included in the weighted-average shares used in computing basic net income per share of common stock in the period(s) they are settled.

The following table presents the reconciliation of basic to diluted weighted average shares used in computing net income per share of common stock attributable to common stockholders, as adjusted to give effect to the ~~five-for-one~~5-for-one stock split effected in the form of a stock dividend in August 2020 (the “Stock Split”) (in millions):


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020		2021		2020
Weighted average shares used in computing net income per share of common stock, basic		961		915		971		928		966		921
Add:
Stock-based awards		97		46		93		53		95		50
Convertible senior notes (1)		21		30		10		39		16		35
Warrants		54		3		45		16		49		10
Weighted average shares used in computing net income per share of common stock, diluted		1,133		994		1,119		1,036		1,126		1,016

The following table presents the potentially dilutive shares that were excluded from the computation of diluted net income per share of common stock attributable to common stockholders, because their effect was anti-dilutive, as adjusted to give effect to the Stock Split (in millions):


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020		2021		2020
Stock-based awards		0		0		1		1		0		2
Convertible senior notes (1)		1		2		0		1		1		2

(1)

Under the modified retrospective method of adoption of ASU 2020-06, the dilutive impact of convertible senior notes was calculated using the if-converted method for the three and six months ended ~~March 31,~~June 30, 2021. Certain convertible senior notes were calculated using the treasury stock method for the three and six months ended ~~March 31,~~June 30, 2020. Refer to discussion above for further details.

The impact of adoption on our consolidated statements of operations for the three and six months ended ~~March 31,~~June 30, 2021 was primarily to decrease net interest expense by ~~$145~~$46 million and $191 million, respectively, and to decrease depreciation expense by an immaterial ~~amount.~~amounts. This had the effect of increasing our basic and diluted net income per share of common stock attributable to common stockholders by $0.05 and $0.04, respectively, for the three months ended ~~March 31,~~June 30, 2021 and by ~~$0.15~~$0.20 and ~~$0.13, respectively.~~$0.18, respectively, for the six months ended June 30, 2021. The change in methodology to determine the denominator used in the calculation of diluted net income per share of common stock attributable to common stockholders contributed less than ~~$0.01~~$0.01 of the increase by requiring the use of the if-converted method as discussed ~~above.~~above, for the three and six months ended June 30, 2021.

Note 4 – ~~Goodwill and~~ Intangible Assets

Goodwill decreased $1 million within the automotive segment from $207 million as of December 31, 2020 to $206 million as of March 31, 2021 due to foreign currency translation adjustments during the three months ended March 31, 2021. There were 0 accumulated impairment losses as of March 31, 2021 and December 31, 2020.

Information regarding our intangible assets including assets recognized from our acquisitions was as follows (in millions):


	March 31, 2021									December 31, 2020									June 30, 2021									December 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Other		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Other		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Other		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Other		Net Carrying Amount
Finite-lived intangible assets:
Developed technology	$	302	$	(122	)	$	3	$	183	$	302	$	(111	)	$	3	$	194	$	299	$	(131	)	$	4	$	172	$	302	$	(111	)	$	3	$	194
Trade names		3		(1	)		—		2		3		(1	)	—			2		2		(1	)		—		1		3		(1	)	—			2
Favorable contracts and leases, net		113		(34	)		—		79		113		(32	)	—			81		113		(36	)		—		77		113		(32	)	—			81
Other		38		(19	)		1		20		38		(18	)		1		21		36		(19	)		1		18		38		(18	)		1		21
Total finite-lived intangible assets		456		(176	)		4		284		456		(162	)		4		298		450		(187	)		5		268		456		(162	)		4		298
Indefinite-lived intangible assets:
Gigafactory Nevada water rights		15		—			—		15		15		—			—		15		15		—			—		15		15		—			—		15
Total intangible assets	$	471	$	(176	)	$	4	$	299	$	471	$	(162	)	$	4	$	313	$	465	$	(187	)	$	5	$	283	$	471	$	(162	)	$	4	$	313

Total future amortization expense for finite-lived intangible assets was estimated as follows (in millions):


Nine months ending December 31, 2021	$	37
Six months ending December 31, 2021			$	25
2022		50		50
2023		44		43
2024		29		28
2025		29		28
Thereafter		95		94
Total	$	284	$	268

Note 5 – Fair Value of Financial Instruments

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


	March 31, 2021								December 31, 2020								June 30, 2021								December 31, 2020
	Fair Value		Level I		Level II		Level III		Fair Value		Level I		Level II		Level III		Fair Value		Level I		Level II		Level III		Fair Value		Level I		Level II		Level III
Money market funds (cash and cash equivalents)	$	11,366	$	11,366	$	0	$	0	$	13,847	$	13,847	$	0	$	0	$	11,477	$	11,477	$	0	$	0	$	13,847	$	13,847	$	0	$	0
Interest rate swap liabilities		30		0		30		0		58		0		58		0		37		0		37		0		58		0		58		0
Total	$	11,396	$	11,366	$	30	$	0	$	13,905	$	13,847	$	58	$	0	$	11,514	$	11,477	$	37	$	0	$	13,905	$	13,847	$	58	$	0

All of our money market funds were classified within Level I of the fair value hierarchy because they were valued using quoted prices in active markets. Our interest rate swaps were classified within Level II of the fair value hierarchy because they were valued using alternative pricing sources or models that utilized market observable inputs, including current and forward interest rates.

Interest Rate Swaps

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

March 31, 2021

December 31, 2020

Aggregate Notional
Amount

Gross Asset at
Fair Value

Gross Liability at
Fair Value

Aggregate Notional
Amount

Gross Asset at
Fair Value

Gross Liability at
Fair Value

Interest rate swaps

$
398

$
0

$
30

$
554

$
0

$
58


	June 30, 2021						December 31, 2020
	Aggregate Notional Amount		Gross Asset at Fair Value		Gross Liability at Fair Value		Aggregate Notional Amount		Gross Asset at Fair Value		Gross Liability at Fair Value
Interest rate swaps	$	317	$	0	$	37	$	554	$	0	$	58

Our interest rate swaps activity was as follows (in millions):


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020		2021		2020
Gross losses	$	0	$	39	$	9	$	3	$	9	$	42
Gross gains	$	20	$	0	$	0	$	0	$	20	$	0

Disclosure of Fair Values

Our financial instruments that are not re-measured at fair value include accounts receivable, MyPower customer notes receivable, accounts payable, accrued liabilities, customer deposits and debt. The carrying values of these financial instruments other than our 2021 Notes, 2022 Notes, 2024 Notes, and our subsidiary’s ~~5.50%~~5.50% Convertible Senior Notes due in 2022 (collectively referred to as “Convertible Senior Notes” below), ~~5.30%~~5.30% Senior Notes due in 2025 (“2025 Notes”), ~~solar asset-backed notes~~Solar Asset-backed Notes and ~~solar loan-backed notes~~Solar Loan-backed Notes approximate their fair values.

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


	March 31, 2021				December 31, 2020				June 30, 2021				December 31, 2020
	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
Convertible Senior Notes	$	790	$	8,410	$	1,971	$	24,596	$	304	$	3,271	$	1,971	$	24,596
2025 Notes	$	1,786	$	1,868	$	1,785	$	1,877	$	1,787	$	1,861	$	1,785	$	1,877
Solar asset-backed notes	$	1,097	$	1,118	$	1,115	$	1,137
Solar loan-backed notes	$	128	$	135	$	146	$	152
Solar Asset-backed Notes									$	1,095	$	1,116	$	1,115	$	1,137
Solar Loan-backed Notes									$	128	$	136	$	146	$	152

Note 10 – Debt

The following is a summary of our debt and finance leases as of ~~March 31,~~June 30, 2021 (in millions):


					Unpaid		Unused										Unpaid		Unused
	Net Carrying Value				Principal		Committed		Contractual			Contractual	Net Carrying Value				Principal		Committed		Contractual			Contractual
	Current		Long-Term		Balance		Amount (1)		Interest Rates			Maturity Date	Current		Long-Term		Balance		Amount (1)		Interest Rates			Maturity Date
Recourse debt:
2022 Notes	$	317	$	—	$	319	$	—		2.375	%	March 2022	$	130	$	—	$	131	$	—		2.375	%	March 2022
2024 Notes		51		378		439		—		2.00	%	May 2024		7		166		174		—		2.00	%	May 2024
2025 Notes		—		1,786		1,800		—		5.30	%	August 2025		—		1,787		1,800		—		5.30	%	August 2025
Credit Agreement		—		1,898		1,898		266		3.3	%	July 2023		—		1,878		1,878		280		3.3	%	July 2023
Solar Bonds and other Loans		30		23		53		—		4.0-5.8	%	June 2021 - January 2031		2		7		9		—		4.0-5.8	%	October 2021-January 2031
Total recourse debt		398		4,085		4,509		266						139		3,838		3,992		280
Non-recourse debt:
Automotive Asset-backed Notes		936		1,636		2,582		—		0.2-7.9	%	August 2021-March 2025		869		1,455		2,333		—		0.2-7.9	%	August 2021-March 2025
Solar Asset-backed Notes		39		1,058		1,125		—		2.9%-7.7	%	September 2024-February 2048		41		1,054		1,122		—		2.9-7.7	%	September 2024-February 2048
China Loan Agreements		—		614		614		1,368		4.0	%	June 2021-December 2024
Cash Equity Debt		19		406		436		—		5.3%-5.8	%	July 2033-January 2035		20		402		434		—		5.3-5.8	%	July 2033-January 2035
Solar Loan-backed Notes		13		115		134		—		4.8%-7.5	%	September 2048-September 2049		13		115		134		—		4.8-7.5	%	September 2048-September 2049
Warehouse Agreements		—		—		—		1,100		Not applicable		September 2022		—		—		—		1,100		Not applicable		September 2022
Automotive Lease-backed Credit Facilities		10		24		34		148		0.8-5.9	%	September 2022-November 2022		—		—		—		173		Not applicable		September 2022
Solar Revolving Credit Facility and other Loans		—		81		81		23		2.7-5.1	%	June 2022-February 2033
Other Loans														—		14		14		23		5.1	%	February 2033
Total non-recourse debt		1,017		3,934		5,006		2,639						943		3,040		4,037		1,296
Total debt		1,415		8,019	$	9,515	$	2,905						1,082		6,878	$	8,029	$	1,576
Finance leases		404		1,034										448		993
Total debt and finance leases	$	1,819	$	9,053									$	1,530	$	7,871

1921

The following is a summary of our debt and finance leases as of December 31, 2020 (in millions):


					Unpaid			Unused
	Net Carrying Value				Principal			Committed		Contractual			Contractual
	Current		Long-Term		Balance			Amount (1)		Interest Rates			Maturity Date
Recourse debt:
2021 Notes	$	419	$	—	$	422		$	—		1.25	%	March 2021
2022 Notes		115		366		503			—		2.375	%	March 2022
2024 Notes		171		856		1,282			—		2.00	%	May 2024
2025 Notes		—		1,785		1,800			—		5.30	%	August 2025
Credit Agreement		—		1,895		1,895			278		3.3	%	July 2023
Solar Bonds and other Loans		4		49		55			—		3.6%-5.8	%	January 2021 - January 2031
Total recourse debt		709		4,951		5,957			278
Non-recourse debt:
Automotive Asset-backed Notes		777		921		1,705			—		0.6%-7.9	%	August 2021-August 2024
Solar Asset-backed Notes		39		1,076		1,141			—		3.0%-7.7	%	September 2024-February 2048
China Loan Agreements		—		616		616			1,372		4.0	%	June 2021-December 2024
Cash Equity Debt		18		408		439			—		5.3%-5.8	%	July 2033-January 2035
Solar Loan-backed Notes		13		133		152			—		4.8%-7.5	%	September 2048-September 2049
Warehouse Agreements		37		257		294			806		1.7%-1.8	%	September 2022
Solar Term Loan		151		—		151			—		3.7	%	January 2021
Automotive Lease-backed Credit Facility		14		19		33	��		153		1.9%-5.9	%	September 2022-November 2022
Solar Revolving Credit Facility and other Loans		—		81		81			23		2.7%-5.1	%	June 2022-February 2033
Total non-recourse debt		1,049		3,511		4,612			2,354
Total debt		1,758		8,462	$	10,569		$	2,632
Finance leases		374		1,094
Total debt and finance leases	$	2,132	$	9,556

(1)

There are no restrictions on draw-down or use for general corporate purposes with respect to any available committed funds under our credit facilities and financing funds, except certain specified conditions prior to draw-down, including pledging to our lenders sufficient amounts of qualified receivables, inventories, leased vehicles and our interests in those leases, solar energy systems and the associated customer contracts, our interests in financing funds or various other assets and as may be described below and in the notes to the consolidated financial statements included in our report on Form 10-K for the year ended December 31, 2020.

Recourse debt refers to debt that is recourse to our general assets. Non-recourse debt refers to debt that is recourse to only assets of our subsidiaries. The differences between the unpaid principal balances and the net carrying values are due to debt discounts or deferred financing costs. The debt discounts were updated as of January 1, 2021 for our convertible notes with the adoption of ASU 2020-06 as discussed in Note 2, Summary of Significant Accounting Policies. As of ~~March 31,~~June 30, 2021, we were in material compliance with all financial debt covenants, which include minimum liquidity and expense-coverage balances and ratios.

2021 Notes, 2022 Notes and 2024 Notes

During the first ~~quarter~~two quarters of 2021, the closing price of our common stock ~~exceeded 130%~~continued to exceed 130% of the applicable conversion price of each of our 2022 Notes and 2024 Notes on at least 20 of the last 30 consecutive trading days of the quarter; causing the 2022 Notes and 2024 Notes to be convertible by their holders during the second ~~quarter~~and third quarters of 2021. As we now expect to settle a portion of the 2024 Notes in the ~~second~~third quarter of 2021, we reclassified ~~$51~~$7 million of the carrying value of the 2024 Notes from debt and finance leases, net of current portion to current portion of debt and finance leases on our consolidated balance sheet as of ~~March 31,~~June 30, 2021. Should the closing price conditions continue to be met in a future quarter for any of these notes, such notes will be convertible at their holders’ option during the immediately following quarter.

On January 1, 2021, we adopted ASU 2020-06 using the modified retrospective method. As a result of this adoption, we have de-recognized the remaining debt discounts on the 2022 Notes and 2024 Notes and therefore no longer recognize any amortization of debt discounts as interest expense (see Note 2, Summary of Significant Accounting Policies). During the first ~~quarter~~two quarters of 2021, ~~$422~~$422 million, ~~$184~~$372 million and ~~$843 million~~$1.11 billion in aggregate principal amount of the 2021 Notes, 2022 Notes and 2024 Notes, respectively, were settled for ~~$422~~$422 million, ~~$184~~$372 million and ~~$843 million~~$1.11 billion in cash for their par amount, and the issuance of 5.3 million, ~~2.5~~5.1 million and ~~12.5~~16.4 million shares of our common stock for the conversion premium, respectively. The note hedges we entered into in connection with the issuance of the 2021 Notes, 2022 Notes and 2024 Notes were automatically settled with the respective conversions of the 2021 Notes, 2022 Notes and 2024 Notes, resulting in the receipt of 5.3 million, ~~2.5~~5.1 million and ~~12.5~~16.4 million shares of our common stock, respectively. In March 2021, the 2021 Notes were fully settled. Additionally, during the second quarter of 2021, we settled portions of the warrants entered into in connection with the issuance of the 2021 Notes and 2024 Notes, resulting in the issuance of 7.9 million and 9.2 million shares of our common stock, respectively.

202025 Notes

On July 16, 2021, we issued a notice of redemption to the holders of the 2025 Notes informing the holders that we will redeem the notes in full in August 2021 at a redemption price equal to 102.65% of outstanding principal amount, plus accrued and unpaid interest, if any.

Automotive Asset-backed Notes and Warehouse Agreements

In March 2021, we transferred beneficial interests related to certain leased vehicles into an SPE and issued ~~$1.08~~$1.08 billion in aggregate principal amount of Automotive Asset-backed Notes, with terms similar to our other Automotive Asset-backed Notes. The proceeds from the issuance, net of discounts and fees, were ~~$1.07~~$1.07 billion. In conjunction with this financing we repaid the remaining outstanding balance of our vehicle lease-backed loan and security agreement (the "2016 Warehouse Agreement"), for which committed funds remained available for future borrowings.

China Loan Agreements

In April 2021, we fully repaid the ~~$614~~$614 million in aggregate principal of our secured term loan facility in connection with the construction of Gigafactory Shanghai (the “Fixed Asset Facility”) and the facility was terminated. ~~After~~

In June 2021, our Working Capital Loan Contract entered in May 2020 (the “2020 China Working Capital Facility”) matured and the ~~termination, the $758 million of unused commitment under the Fixed Asset Facility included in the debt and finance lease table as of March 31, 2021 above~~facility was ~~no longer available.~~terminated.

Solar Term Loan

In January 2021, our Solar Term Loan matured and was repaid.

Automotive Lease-backed Credit Facilities

In June 2021, we fully repaid $32 million in aggregate principal of our Automotive Lease-backed Credit Facilities and terminated one of the facilities.

Solar Revolving Credit Facility and other Loans

In April 2021, we fully repaid the $67 million in aggregate principal of our Solar Revolving Credit Facility and the facility was terminated.

Interest Expense

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


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020		2021		2020
Contractual interest coupon	$	7	$	19	$	3	$	19	$	10	$	39
Amortization of debt issuance costs		2		2		1		2		3		4
Amortization of debt discounts (1)		—		44		—		44		—		88
Total	$	9	$	65	$	4	$	65	$	13	$	131

(1)

Under the modified retrospective method of adoption of ASU 2020-06, there was neither amortization of debt discounts, nor losses on extinguishment of debt recognized for the three and six months ended ~~March 31,~~June 30, 2021. Refer to discussion above for further details.

Note 11 – Equity Incentive Plans

2018 CEO Performance Award

In March 2018, our stockholders approved the Board of Directors’ grant of 101.3 million stock option awards, as adjusted to give effect to the Stock Split, to our CEO (the “2018 CEO Performance Award”). The 2018 CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational milestones (performance conditions) and market conditions, assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Each of the 12 vesting tranches of the 2018 CEO Performance Award will vest upon certification by the Board of Directors that both (i) the market capitalization milestone for such tranche, which begins at ~~$100.0~~$100.0 billion for the first tranche and increases by increments of ~~$50.0~~$50.0 billion thereafter (based on both a six calendar month trailing average and a 30 calendar day trailing average, counting only trading days), has been achieved, and (ii) any one of the following 8 operational milestones focused on total revenue or any one of the 8 operational milestones focused on Adjusted EBITDA have been achieved for the four consecutive fiscal quarters on an annualized basis and subsequently reported by us in our consolidated financial statements filed with our Forms 10-Q and/or 10-K. Adjusted EBITDA is defined as net income (loss) attributable to common stockholders before interest expense, provision (benefit) for income taxes, depreciation and amortization and stock-based compensation. Upon vesting and exercise, including the payment of the exercise price of ~~$70.01~~$70.01 per share, our CEO must hold shares that he acquires for five years post-exercise, other than a cashless exercise where shares are simultaneously sold to pay for the exercise price and any required tax withholding.

The achievement status of the operational milestones as of ~~March 31,~~June 30, 2021 is provided below. Although an operational milestone is deemed achieved in the last quarter of the relevant annualized period, it may be certified only after the financial statements supporting its achievement have been filed with our Forms 10-Q and/or 10-K.


Total Annualized Revenue	Total Annualized Revenue		Annualized Adjusted EBITDA			Total Annualized Revenue		Annualized Adjusted EBITDA
Milestone (in billions)	Milestone (in billions)	Achievement Status	Milestone (in billions)		Achievement Status	Milestone (in billions)	Achievement Status	Milestone (in billions)		Achievement Status
$	20.0	Achieved	$	1.5	Achieved	20.0	Achieved	$	1.5	Achieved
$	35.0	Achieved (1)	$	3.0	Achieved	35.0	Achieved	$	3.0	Achieved
$	55.0	Probable	$	4.5	Achieved	55.0	Probable	$	4.5	Achieved
$	75.0	-	$	6.0	Achieved (1)	75.0	-	$	6.0	Achieved
$	100.0	-	$	8.0	Probable	100.0	-	$	8.0	Probable
$	125.0	-	$	10.0	-	125.0	-	$	10.0	Probable
$	150.0	-	$	12.0	-	150.0	-	$	12.0	-
$	175.0	-	$	14.0	-	175.0	-	$	14.0	-

~~(1)~~

~~Achieved in the first quarter of 2021 and expected to be certified following the filing of this Quarterly Report on Form 10-Q.~~

Stock-based compensation under the 2018 CEO Performance Award represents a non-cash expense and is recorded as a Selling, general, and administrative operating expense in our consolidated statement of operations. In each quarter since the grant of the 2018 CEO Performance Award, we have recognized expense, generally on a pro-rated basis, for only the number of tranches (up to the maximum of 12 tranches) that corresponds to the number of operational milestones that have been achieved or have been determined probable of being achieved in the future, in accordance with the following principles.

On the grant date, a Monte Carlo simulation was used to determine for each tranche (i) a fixed amount of expense for such tranche and (ii) the future time when the market capitalization milestone for such tranche was expected to be achieved, or its “expected market capitalization milestone achievement time.” Separately, based on a subjective assessment of our future financial performance, each quarter we determine whether it is probable that we will achieve each operational milestone that has not previously been achieved or deemed probable of achievement and if so, the future time when we expect to achieve that operational milestone, or its “expected operational milestone achievement time.” When we first determine that an operational milestone has become probable of being achieved, we allocate the entire expense for the related tranche over the number of quarters between the grant date and the then-applicable “expected full achievement time.” The “expected full achievement time” at any given time is the later of (i) the expected operational milestone achievement time (if the related operational milestone has not yet been achieved) and (ii) the expected market capitalization milestone achievement time (if the related market capitalization milestone ~~has~~had not yet been achieved). We immediately recognize a catch-up expense for all accumulated expense for the quarters from the grant date through the quarter in which the operational milestone was first deemed probable of being achieved. Each quarter thereafter, we recognize the prorated portion of the then-remaining expense for the tranche based on the number of quarters between such quarter and the then-applicable expected full achievement time, except that upon the achievement of both a market capitalization milestone and operational milestone with respect to a tranche, all remaining expense for that tranche is immediately recognized.

As a result, we have experienced, and may experience in the future, significant catch-up expenses in quarters when one or more operational milestones are first determined to be probable of being achieved. Historically, the expected market capitalization achievement times were generally later than the related expected operational milestone achievement times. Therefore, when market capitalization milestones are achieved earlier than originally forecasted, for example due to periods of rapid stock price appreciation, this has resulted, and may result in the future, in higher catch-up expenses and the remaining expenses being recognized over shorter periods of time at a higher per-quarter rate. ~~During the first quarter~~As of June 30, 2021, all ~~remaining~~ market capitalization milestones ~~except for the milestone relating to $650.0 billion~~ were achieved.

During the first quarter of 2021, the operational milestone of annualized revenue of ~~$55.0~~$55.0 billion became probable of being achieved and consequently, we recognized a catch-up expense of ~~$116~~$116 million. During the second quarter of 2021, the operational milestone of annualized Adjusted EBITDA of $10.0 billion became probable of being achieved and consequently, we recognized a catch-up expense of $124 million.

As of ~~March 31,~~June 30, 2021, we had ~~$129~~$105 million of total unrecognized stock-based compensation expense for the operational milestones that were considered probable of achievement, which will be recognized over a weighted-average period of~~0.9~~ 0.7years. As of ~~March 31,~~June 30, 2021, we had unrecognized stock-based compensation expense of ~~$548~~$396 million for the operational milestones that were considered not probable of achievement. For the three and six months ended ~~March 31,~~June 30, 2021, ~~and 2020~~ we recorded stock-based compensation expense of ~~$299~~$176 million and ~~$66~~$475 million, respectively, related to the 2018 CEO Performance Award, ~~respectively.~~and $

22167

million and $233 million, respectively, for the same periods in 2020.

Summary Stock-Based Compensation Information

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


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020		2021		2020
Cost of revenues	$	103	$	33	$	108	$	52	$	211	$	85
Research and development		125		65		104		73		229		138
Selling, general and administrative		386		113		262		222		648		335
Total	$	614	$	211	$	474	$	347	$	1,088	$	558

Our income tax benefits recognized from stock-based compensation arrangements in each of the periods presented were immaterial due to cumulative losses and valuation allowances.

Note 12 – Commitments and Contingencies

Operating Lease Arrangement in Buffalo, New York

We have an operating lease through the Research Foundation for the State University of New York (the “SUNY Foundation”) with respect to Gigafactory New York. Under the lease and a related research and development agreement, we are continuing to further develop the facility.

Under this agreement, we are obligated to, among other things, meet employment targets as well as specified minimum numbers of personnel in the State of New York and in Buffalo, New York and spend or incur ~~$5.00~~$5.00 billion in combined capital, operational expenses, costs of goods sold and other costs in the State of New York during the 10-year period beginning April 30, 2018. On an annual basis during the initial lease term, as measured on each anniversary of such date, if we fail to meet these specified investment and job creation requirements, then we would be obligated to pay a ~~$41~~$41 million “program payment” to the SUNY Foundation for each year that we fail to meet these requirements. Furthermore, if the arrangement is terminated due to a material breach by us, then additional amounts may become payable by us.

As we temporarily suspended most of our manufacturing operations at Gigafactory New York pursuant to a New York State executive order issued in March 2020 as a result of the COVID-19 pandemic, we were granted a one-year deferral of our obligation to be compliant with our applicable targets under such agreement on April 30, 2020, which was memorialized in an amendment to our agreement with the SUNY Foundation in July 2020. In April 2021, we were granted an additional deferral through December 31, 2021, subject only to memorialization in writing by us and the SUNY Foundation, as our operations at Gigafactory New York have not yet fully ramped due to a number of factors related to the pandemic. Given that we would have met all targets originally required as of April 30, 2020 if they had been measured prior to the mandated reduction of operations in March 2020, and we are currently in excess of such targets relating to investments and personnel in the State of New York, we do not currently expect any issues meeting our applicable obligations following this expected deferral or in the years beyond. However, if our expectations as to the costs and timelines of our investment and operations at Buffalo or our production ramp of the Solar Roof prove incorrect, we may incur additional expenses or be required to make substantial payments to the SUNY Foundation.

Operating Lease Arrangement in Shanghai, China

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

Legal Proceedings

Litigation Relating to the SolarCity Acquisition

Between September 1, 2016 and October 5, 2016, 7 lawsuits were filed in the Delaware Court of Chancery by purported stockholders of Tesla challenging our acquisition of SolarCity Corporation (“SolarCity”). Following consolidation, the lawsuit names as defendants the members of Tesla’s board of directors as then constituted and alleges, among other things, that board members breached their fiduciary duties in connection with the acquisition. The complaint asserts both derivative claims and direct claims on behalf of a purported class and seeks, among other relief, unspecified monetary damages, attorneys’ fees and costs. On January 27, 2017, defendants filed a motion to dismiss the operative complaint. Rather than respond to the defendants’ motion, the plaintiffs filed an amended complaint. On March 17, 2017, defendants filed a motion to dismiss the amended complaint. On December 13, 2017, the Court heard oral argument on the motion. On March 28, 2018, the Court denied defendants’ motion to dismiss. Defendants filed a request for interlocutory appeal, and the Delaware Supreme Court denied that request without ruling on the merits but electing not to hear an appeal at this early stage of the case. Defendants filed their answer on May 18, 2018, and mediations were held on June 10, 2019. Plaintiffs and defendants filed respective motions for summary judgment on August 25, 2019, and further mediations were held on October 3, 2019. The Court held a hearing on the motions for summary judgment on November 4, 2019. On January 22, 2020, all of the director defendants except Elon Musk reached a settlement to resolve the lawsuit against them for an amount to be paid entirely under the applicable insurance policy. The settlement, which does not involve an admission of any wrongdoing by any party, was approved by the Court on August 17, 2020. Tesla received payment of approximately ~~$43~~$43 million on September 16, 2020, which has been recognized in our consolidated statement of operations as a reduction to Selling, general and administrative operating expenses for costs previously incurred related to the acquisition of SolarCity. On February 4, 2020, the Court issued a ruling that denied plaintiffs’ previously-filed motion for summary judgment and granted in part and denied in part defendants’ previously-filed motion for summary judgment. ~~Fact and expert discovery is complete, and the~~The case was set for trial in March 2020 until it was postponed by the Court due to safety precautions concerning COVID-19. The ~~current dates for the~~ trial ~~are~~was held from July 12 to July 23, 2021, ~~subject~~ to ~~change based on any further safety measures implemented~~be followed by ~~the Court.~~certain post-trial proceedings.

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

Securities Litigation Relating to Production of Model 3 Vehicles

On October 10, 2017, a purported stockholder class action was filed in the U.S. District Court for the Northern District of California against Tesla, two of its current officers and a former officer. The complaint alleges violations of federal securities laws and seeks unspecified compensatory damages and other relief on behalf of a purported class of purchasers of Tesla securities from May 4, 2016 to October 6, 2017. The lawsuit claims that Tesla supposedly made materially false and misleading statements regarding Tesla’s preparedness to produce Model 3 vehicles. Plaintiffs filed an amended complaint on March 23, 2018, and defendants filed a motion to dismiss on May 25, 2018. The court granted defendants’ motion to dismiss with leave to amend. Plaintiffs filed their amended complaint on September 28, 2018, and defendants filed a motion to dismiss the amended complaint on February 15, 2019. The hearing on the motion to dismiss was held on March 22, 2019, and on March 25, 2019, the Court ruled in favor of defendants and dismissed the complaint with prejudice. On April 8, 2019, plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit (“Ninth Circuit”) and on July 17, 2019 filed their opening brief. We filed our opposition on September 16, 2019, and plaintiffs filed their reply on October 8, 2019. A hearing on the appeal was held before a three-judge panel on April 30, 2020. On January 26, 2021, the panel affirmed the District Court’s dismissal of the complaint with prejudice. On March 5, 2021, the Ninth Circuit denied plaintiffs’ request for a rehearing before the full court, and a mandate issued on March 16, 2021.

On October 26, 2018, in a similar action, a purported stockholder class action was filed in the Superior Court of California in Santa Clara County against Tesla, Elon Musk and seven initial purchasers in an offering of debt securities by Tesla in August 2017. The complaint alleges misrepresentations made by Tesla regarding the number of Model 3 vehicles Tesla expected to produce by the end of 2017 in connection with such offering and seeks unspecified compensatory damages and other relief on behalf of a purported class of purchasers of Tesla securities in such offering. Tesla thereafter removed the case to federal court. On January 22, 2019, plaintiff abandoned its effort to proceed in state court, instead filing an amended complaint against Tesla, Elon Musk and seven initial purchasers in the debt offering before the same judge in the U.S. District Court for the Northern District of California who is hearing the above-referenced earlier-filed federal case. On February 5, 2019, the Court stayed this new case pending a ruling on the motion to dismiss the complaint in the earlier-filed federal case. After such earlier-filed federal case was dismissed, defendants filed a motion on July 2, 2019 to dismiss this case as well. The case was then stayed pending a ruling from the Ninth Circuit on the earlier-filed federal case, with an agreement that if defendants prevailed on the appeal, plaintiffs would dismiss the later-filed case. Following the Ninth Circuit’s affirmance discussed above, the plaintiffs dismissed the later-filed case with prejudice on April 15, 2021.

Litigation Relating to 2018 CEO Performance Award

On June 4, 2018, a purported Tesla stockholder filed a putative class and derivative action in the Delaware Court of Chancery against Elon Musk and the members of Tesla’s board of directors as then constituted, alleging corporate waste, unjust enrichment and that such board members breached their fiduciary duties by approving the stock-based compensation plan. The complaint seeks, among other things, monetary damages and rescission or reformation of the stock-based compensation plan. On August 31, 2018, defendants filed a motion to dismiss the complaint; plaintiff filed its opposition brief on November 1, 2018; and defendants filed a reply brief on December 13, 2018. The hearing on the motion to dismiss was held on May 9, 2019. On September 20, 2019, the Court granted the motion to dismiss as to the corporate waste claim but denied the motion as to the breach of fiduciary duty and unjust enrichment claims. Our answer was filed on December 3, 2019, and trial is set for April 2022. ~~Fact discovery is ongoing.~~

Litigation Related to Directors’ Compensation

On June 17, 2020, a purported Tesla stockholder filed a derivative action in the Delaware Court of Chancery, purportedly on behalf of Tesla, against certain of Tesla’s current and former directors regarding compensation awards granted to Tesla’s directors, other than Elon Musk, between 2017 and 2020. The suit asserts claims for breach of fiduciary duty and unjust enrichment and seeks declaratory and injunctive relief, unspecified damages and other relief. Defendants filed their answer on September 17, 2020. Trial is set for ~~September 2022, and fact discovery is ongoing.~~December 2022.

Litigation Relating to Potential Going Private Transaction

Between August 10, 2018 and September 6, 2018, ~~nine~~9 purported stockholder class actions were filed against Tesla and Elon Musk in connection with Mr. Musk’s August 7, 2018 Twitter post that he was considering taking Tesla private. All of the suits are now pending in the U.S. District Court for the Northern District of California. Although the complaints vary in certain respects, they each purport to assert claims for violations of federal securities laws related to Mr. Musk’s statement and seek unspecified compensatory damages and other relief on behalf of a purported class of purchasers of Tesla’s securities. Plaintiffs filed their consolidated complaint on January 16, 2019 and added as defendants the members of Tesla’s board of directors. The now-consolidated purported stockholder class action was stayed while the issue of selection of lead counsel was briefed and argued before the Ninth Circuit. The Ninth Circuit ruled regarding lead counsel. Defendants filed a motion to dismiss the complaint on November 22, 2019. The hearing on the motion was held on March 6, 2020. On April 15, 2020, the Court denied defendants’ motion to dismiss. The parties stipulated to certification of a class of stockholders, which the court granted on November 25, 2020. Trial is set for May 2022.

Between October 17, 2018 and March 8, ~~2021,7~~2021, 7 derivative lawsuits were filed in the Delaware Court of Chancery, purportedly on behalf of Tesla, against Mr. Musk and the members of Tesla’s board of directors, as constituted at relevant times, in relation to statements made and actions connected to a potential going private transaction, with certain of the lawsuits challenging additional Twitter posts by Mr. Musk, among other things. Five of those actions were consolidated, and all seven actions have been stayed pending resolution of the above-referenced consolidated purported stockholder class action. In addition to these cases, 2 derivative lawsuits were filed on October 25, 2018 and February 11, 2019 in the U.S. District Court for the District of Delaware, purportedly on behalf of Tesla, against Mr. Musk and the members of the Tesla board of directors as then constituted. Those cases have also been consolidated and stayed pending resolution of the above-referenced consolidated purported stockholder class action.

Unless otherwise stated, the individual defendants named in the stockholder proceedings described above and the Company with respect to the stockholder class action proceedings described above believe that the claims in such proceedings have no merit and intend to defend against them vigorously. We are unable to estimate the possible loss or range of loss, if any, associated with these claims.

Certain Investigations and Other Matters

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

In particular, the SEC had issued subpoenas to Tesla in connection with (a) Elon Musk’s prior statement that he was considering taking Tesla private and (b) certain projections that we made for Model 3 production rates during 2017 and other public statements relating to Model 3 production. The take-private investigation was resolved and closed with a settlement entered into with the SEC in September 2018 and as further clarified in April 2019 in an amendment. On December 4, 2019, the SEC (i) closed the investigation into the projections and other public statements regarding Model 3 production rates and (ii) issued a subpoena seeking information concerning certain financial data and contracts including Tesla’s regular financing arrangements. Separately, the DOJ had also asked us to voluntarily provide it with information about the above matters related to taking Tesla private and Model 3 production rates.

Aside from the settlement, as amended, with the SEC relating to Mr. Musk’s statement that he was considering taking Tesla private, there have not been any developments in these matters that we deem to be material, and to our knowledge no government agency in any ongoing investigation has concluded that any wrongdoing occurred. As is our normal practice, we have been cooperating and will continue to cooperate with government authorities. We cannot predict the outcome or impact of any ongoing matters. Should the government decide to pursue an enforcement action, there exists the possibility of a material adverse impact on our business, results of operation, prospects, cash flows and financial position.

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

Indemnification and Guaranteed Returns

We are contractually obligated to compensate certain fund investors for any losses that they may suffer in certain limited circumstances resulting from reductions in investment tax credits claimed under U.S. federal laws for the installation of solar power facilities and energy storage systems that are charged from a co-sited solar power facility (“ITC”s). Generally, such obligations would arise as a result of reductions to the value of the underlying solar energy systems as assessed by the U.S. Internal Revenue Service (the “IRS”) for purposes of claiming ITCs. For each balance sheet date, we assess and recognize, when applicable, a distribution payable for the potential exposure from this obligation based on all the information available at that time, including any audits undertaken by the IRS. We believe that any payments to the fund investors in excess of the amounts already recognized by us for this obligation are not probable or material based on the facts known at the filing date.

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

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

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

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

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

In 2021, we have produced ~~180,338~~386,759 vehicles and delivered ~~184,877~~386,181 vehicles through the ~~first~~second quarter. We are currently focused on increasing vehicle production and capacity, improving and developing ~~and~~ battery technologies, improving our FSD and Autopilot capabilities, increasing the affordability and efficiency of our vehicles and expanding our global ~~infrastructure and introducing our next vehicles.~~infrastructure.

In 2021, we have deployed ~~445~~1.72 GWh of energy storage products and 92177 megawatts of solar energy systems through the ~~first~~second quarter. We are currently focused on ramping production of energy storage products, improving our Solar Roof installation capability and efficiency and increasing market share of retrofit solar energy systems.

During the three and six months ended ~~March 31,~~June 30, 2021, we recognized total revenues of ~~$10.39~~$11.96 billion and $22.35 billion, respectively, representing ~~an increase~~increases of ~~$4.40~~$5.92 billion and $10.33 billion, respectively, over the ~~three months~~same periods ended ~~March 31,~~June 30, 2020. We continue to ramp production, build new manufacturing capacity and expand our operations to enable increased deliveries and deployments of our products and further revenue growth.

During the three and six months ended ~~March 31,~~June 30, 2021, our net income attributable to common stockholders was ~~$438 million,~~$1.14 billion and $1.58 billion, respectively, representing a favorable ~~change~~changes of ~~$422 million~~$1.04 billion and $1.46 billion, respectively, over the ~~three months~~same periods ended ~~March 31,~~June 30, 2020. We continue to focus on operational efficiencies, while we have seen an acceleration of non-cash stock-based compensation expense due to ~~a rapid increase~~continued increases in our market capitalization and updates to our business outlook.

We ended the ~~first~~second quarter of 2021 with ~~$17.14~~$16.23 billion in cash and cash equivalents, representing a decrease of ~~$2.24~~$3.16 billion from the end of 2020. Our cash flows provided by operating activities during the ~~three~~six month period ended ~~March 31,~~June 30, 2021 was ~~$1.64~~$3.77 billion, representing a favorable change of ~~$2.08~~$3.24 billion compared to our cash flows ~~used in~~provided by operating activities during the same period ended ~~March 31,~~June 30, 2020 of ~~$440~~$524 million, and capital expenditures amounted to ~~$1.35~~$2.85 billion during the ~~three~~six month period ended ~~March 31,~~June 30, 2021, compared to ~~$455 million~~$1.00 billion during the same period ended ~~March 31,~~June 30, 2020. Sustained growth has allowed our business to generally fund itself, but we will continue investing in a number of capital-intensive projects in upcoming periods.

Beginning in the first quarter of 2021, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. On the other hand, infection rates and regulations continue to fluctuate in various regions and there are ongoing global impacts resulting from the pandemic, including challenges and increases in costs for logistics and supply chains, such as increased port congestion, intermittent supplier delays and a shortfall of ~~microchip~~semiconductor supply. We have also previously been affected by temporary manufacturing closures, employment and compensation adjustments, and impediments to administrative activities supporting our product deliveries and deployments.

Ultimately, we cannot predict the duration of the COVID-19 pandemic. We will continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and we will have to accurately project demand and infrastructure requirements globally and deploy our production, workforce and other resources accordingly.

The following is a summary of the status of production of each of our announced vehicle models in production and under development, as of the date of this Quarterly Report on Form 10-Q:

~~We installed and tested the manufacturing equipment for our~~Our new ~~versions~~version of Model S ~~and Model X~~is in ~~the first quarter of 2021~~production, and we are ~~in the early stages of ramping production. We are~~ focused on commencing the updated Model X deliveries and ramping ~~these models and Model Y~~all of our production vehicles to ~~at least~~ their installed production capacities. ~~We have also worked~~Our current production continues to ~~increase localization at Gigafactory Shanghai~~be affected by ~~introducing drive unit~~the industry-wide semiconductor and other component shortages, requiring additional workaround manufacturing and ~~Model Y one-piece casting there.~~production design solutions to be implemented which may be difficult to sustain. The next phase of production growth will depend on the construction of Gigafactory Berlin and Gigafactory Texas, each of which is progressing as planned for production ~~and deliveries~~ beginning in late 2021, ~~and where we will also~~as well as our ability to add to our available sources of battery cell supply by manufacturing our own cells that we are developing to have high-volume output, lower capital and production costs and longer range. Consistent with our approach of innovating manufacturing techniques at our new factories, we expect as well to pioneer ~~there~~new methods related to the mass production of these cells and our unique structural battery pack concept. Our goals are to improve vehicle performance, decrease production costs and increase affordability.

However, these plans are subject to uncertainties inherent in establishing and ramping manufacturing operations, which may be exacerbated by the number of concurrent international projects, any industry-wide component constraints which may increase the number of manufacturing and production design workaround solutions required and any future impact from events outside of our control such as the COVID-19 ~~pandemic and any industry-wide component constraints.~~pandemic. Moreover, we must meet ambitious technological targets with our plans for battery cells as well as for iterative manufacturing and design improvements for our vehicles with each new factory.

Our cost reduction efforts and additional localized procurement and manufacturing are key to our vehicles’ affordability, and for example have allowed us to competitively price our vehicles in China. In addition to opening new factories in 2021, we will also continue to generate demand and brand awareness by improving our vehicles’ performance and functionality, including Autopilot, FSD and software features, and introducing anticipated future vehicles. Moreover, we expect to benefit from a recent spike in demand in the automotive industry generally, as well as ongoing electrification of the automotive sector and increasing environmental awareness.

However, we operate in a cyclical industry that is sensitive to trade, environmental and political uncertainty, all of which may also be compounded by any future global impact from the COVID-19 pandemic. Moreover, as additional competitors enter the marketplace and help bring the world closer to sustainable transportation, we will have to continue to execute well to maintain our momentum.

As our deliveries increase, we must work constantly to prevent our vehicle delivery capability from becoming a bottleneck on our total deliveries. Increasing the exports of vehicles manufactured at Gigafactory Shanghai has been effective in mitigating the strain on our deliveries in markets outside of the United States, and we expect to benefit further from situating additional factories closer to local markets. ~~In any case, as~~As we expand our manufacturing operations globally, we will have to continue to increase and staff our delivery, servicing and charging infrastructure accordingly, maintain our vehicle reliability and optimize our Supercharger locations to ensure ~~cost-effectiveness~~cost effectiveness and customer satisfaction. In particular, we remain focused on increasing the capability and efficiency of our servicing operations.

The long-term success of this business is dependent upon increasing margins through greater volumes. We continue to increase the production of our energy storage products to meet high levels of ~~demand.~~demand, but such production is also sensitive to global component constraints. For Megapack, energy storage deployments can vary meaningfully quarter to quarter depending on the timing of specific project milestones. For Powerwall, better availability and growing grid stability concerns drive higher customer interest, and we are emphasizing cross-selling with our residential solar energy products. We remain committed to ~~increasing~~growing our retrofit solar energy business by offering a low-cost and simplified online ordering experience. In addition, we continue to improve our installation capabilities for Solar Roof by on-boarding and training a large number of installers and reducing the installation time dramatically. As these product lines grow, we will have to maintain adequate battery cell supply for our energy storage products and hire additional personnel, particularly skilled electricians, to support the ramp of Solar Roof.

Our capital expenditures are typically difficult to project beyond the short term given the number and breadth of our core projects at any given time, and may further be impacted by uncertainties in future global market conditions. We are simultaneously ramping new products in the new Model S and Model X, Model Y and Solar Roof, constructing or ramping manufacturing facilities on three continents and piloting the development and manufacture of new battery cell technologies, and the pace of our capital spend may vary depending on overall priority among projects, the pace at which we meet milestones, production adjustments to and among our various products, increased capital efficiencies and the addition of new projects. Owing and subject to the foregoing as well as the pipeline of announced projects under development and all other continuing infrastructure growth, we currently expect our capital expenditures to be $4.50 to $6.00 billion in 2021 and each of the next two fiscal years. Given the breadth of our various planned projects in 2021, as we make progress on such projects we expect that our actual spend will be on the higher end of this range in 2021.

Our business has recently been consistently generating cash flow from operations in excess of our level of capital spend, and with better working capital management resulting in shorter days sales outstanding than days payable outstanding, our sales growth is also facilitating positive cash generation. On the other hand, we are likely to see heightened levels of capital expenditures during certain periods depending on the specific pace of our capital-intensive projects. Moreover, as our stock price has significantly increased, ~~recently,~~ we have seen higher levels of early conversions of “in-the-money” convertible senior notes, which obligates us to deliver cash and or shares pursuant to the terms of those notes. Overall, we expect our ability to be self-funding to continue as long as macroeconomic factors support current trends in our sales.

As long as we see expanding sales, and excluding the potential impact of non-cash stock compensation expense attributable to the 2018 CEO Performance Award and impairment charges on certain assets as explained below, we generally expect operating expenses relative to revenues to decrease as we ~~additionally~~continue to increase operational efficiency and process automation.

In March 2018, our stockholders approved a performance-based stock option award to our CEO (the “2018 CEO Performance Award”), consisting of 12 vesting tranches contingent on the achievement of specified market capitalization and operational milestones. We incur non-cash stock-based compensation expense for each tranche only after the related operational milestone initially becomes probable of being achieved based on a subjective assessment of our future financial performance, and if this happens following the grant date, we record at such time a cumulative catch-up expense that may be significant based on the length of time elapsed from the grant date. Moreover, the remaining expense for that tranche is ratably recorded over the period remaining until the later of (i) the expected achievement of the relevant operational milestone (if it has not yet been achieved) and (ii) the expected achievement of the related market capitalization milestone (if it ~~has~~had not yet been achieved). Upon the achievement of both milestones related to a tranche, all remaining associated expense is recognized immediately. Because the market capitalization milestone achievements were generally expected to occur later than the related expected operational milestone achievements, the achievement of the former earlier than expected may increase the magnitude of any catch-up expense and/or accelerate the rate at which the remaining expense is recognized. Since 2020, several operational milestones have become probable and/or have been achieved and all market capitalization milestones ~~except one~~ have been achieved, resulting in the recognition or acceleration of related expense earlier than anticipated and within a relatively short period of time. See Note 11, Equity Incentive Plans—2018 CEO Performance Award, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details regarding the stock-based compensation relating to the 2018 CEO Performance Award.

In the first quarter of 2021, we invested an aggregate $1.50 billion in bitcoin and ~~began accepting~~accepted bitcoin as a form of payment for sales of certain of our products in specified regions, subject to applicable ~~laws.~~laws, and suspended this practice in May 2021. We believe in the long-term potential of digital assets both as an investment and also as a liquid alternative to cash. As with any investment and consistent with how we manage fiat-based cash and cash-equivalent accounts, we may increase or decrease our holdings of digital assets at any time based on the needs of the business and our view of market and environmental conditions. Digital assets are considered indefinite-lived intangible assets under applicable accounting rules. Accordingly, any decrease in their fair values below our carrying values for such assets at any time subsequent to their acquisition will require us to recognize impairment charges, whereas we may make no upward revisions for any market price increases until a sale. ~~As we generally intend to hold these~~For any digital assets ~~long-term,~~held now or in the future, these charges may negatively impact our profitability in the periods in which such impairments occur even if the overall market values of these assets increase. For example, in the ~~first quarter of~~six month period ended June 30, 2021, we recorded approximately ~~$27~~$50 million of impairment losses resulting from changes to the carrying value of our bitcoin and gains of $128 million on certain sales of bitcoin by us.

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and 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 may be affected.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. The estimates used for, but not limited to, determining significant economic incentive for resale value guarantee arrangements, sales return reserves, the collectability of accounts receivable, inventory valuation, fair value of long-lived assets, goodwill, fair value of financial instruments, fair value and residual value of operating lease vehicles and solar energy systems subject to leases could be impacted. We have assessed the impact and are not aware of any specific events or circumstances that required an update to our estimates and assumptions or materially affected the carrying value of our assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 2020.

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

During 2020, we were also affected by temporary manufacturing closures, employment and compensation adjustments, and impediments to administrative activities supporting our product deliveries and deployments. Our temporary suspension at our factories resulted in idle capacity charges as we still incurred fixed costs such as depreciation, certain payroll related expenses and property taxes. As part of our response strategy to the business disruptions and uncertainty around macroeconomic conditions caused by the COVID-19 pandemic, we instituted cost reduction initiatives across our business globally to be commensurate to the scope of our operations while they were scaled back in the first half of 2020. Additionally, we suspended non-critical operating spend and opportunistically renegotiated supplier and vendor arrangements. As part of various governmental responses to the pandemic granted to companies globally, we received certain payroll related benefits which helped to reduce the impact of the COVID-19 pandemic on our financial results. Such payroll related benefits related to our direct headcount have been primarily netted against our disclosed idle capacity charges and they marginally reduced our operating expenses. The impact of the idle capacity charges incurred during the first half of 2020 were almost entirely offset by our cost savings initiatives and payroll related benefits.

Automotive sales revenue includes revenues related to cash deliveries of new Model S, Model X, Model 3 and Model Y vehicles, including access to our Supercharger network, internet connectivity, FSD features and over-the-air software updates, as well as sales of regulatory credits to other automotive manufacturers. Cash deliveries are vehicles that are not subject to lease accounting. Our revenue from regulatory credits fluctuates depending on when a contract is executed with a buyer and when the credits are delivered.

Automotive leasing revenue includes the amortization of revenue for vehicles under direct operating lease agreements as well as those sold with resale value guarantees accounted for as operating leases under lease accounting. We began offering direct leasing for Model Y vehicles in the third quarter of 2020. Additionally, automotive leasing revenue includes direct sales-type leasing programs where we recognize all revenue associated with the sales-type lease upon delivery to the customer, which we introduced in volume during the third quarter of 2020.

Services and other revenue consists of non-warranty after-sales vehicle services, sales of used vehicles, retail merchandise, sales by our acquired subsidiaries to third party customers and vehicle insurance revenue.

Automotive sales revenue increased ~~$3.81~~$4.96 billion, or ~~78%~~101%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31,~~June 30, 2020, primarily due to an increase of ~~96,464~~107,272 Model 3 and Model Y cash deliveries and an increase in the average selling price of Model 3 in the three months ended June 30, 2021 compared to the same period in the prior year. These increases were partially offset by a decrease from 7,532 fewer Model S and Model X cash deliveries in the three months ended June 30, 2021 compared to the prior period as we started delivering the new Model S as well as reductions in the average selling price of Model Y due to the regional sales mix compared to the prior period. There was also a decrease of $74 million from sales of regulatory credits to $354 million in the three months ended June 30, 2021.

Automotive sales revenue increased $8.78 billion, or 90%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, primarily due to an increase of 203,736 Model 3 and Model Y cash deliveries year over year from production ramping at both Gigafactory Shanghai and the Fremont Factory. There was also an increase of ~~$164~~$90 million from additional sales of regulatory credits to ~~$518~~$872 million in the ~~three~~six months ended ~~March 31,~~June 30, 2021. The increases in automotive sales revenue were partially offset by a decrease from ~~8,380~~15,912 fewer Model S and Model X cash deliveries ~~at a slightly lower combined average selling price~~ in the ~~three~~six months ended ~~March 31,~~June 30, 2021 compared to the prior period as we ~~phase out~~started delivering the ~~inventory of older models to get ready for the introduction of the updated versions. Additionally, there was a decrease~~new Model S as well as reductions in the ~~combined~~ average selling price of Model ~~3 and Model~~ Y ~~primarily~~ due to ~~a higher proportion of Standard Range variants in our~~the regional sales mix compared to the prior period.

Automotive leasing revenue increased ~~$58~~$64 million, or 24%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31, 2020,~~June 30, 2020. Automotive leasing revenue increased $122 million, or 24%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. These increases were primarily due to an increase in cumulative vehicles under our direct operating lease program and the introduction of direct sales-type leasing programs which we began offering in volume during the third quarter of 2020 where we recognize all revenue associated with the sales-type lease upon delivery to the customer. These increases were partially offset by the decreases in automotive leasing revenue associated with our resale value guarantee leasing programs accounted for as operating leases as those portfolios have declined.

Services and other revenue increased ~~$333~~$464 million, or ~~59%~~95%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31, 2020,~~June 30, 2020. Services and other revenue increased $797 million, or 76%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. These increases were primarily due to ~~increases~~an increase in used vehicle revenue driven by an increase in trade-ins, non-warranty maintenance services revenue as our fleet continues to grow and retail merchandise revenue.

Energy generation and storage revenue includes sales and leasing of solar energy generation and energy storage products, services related to such products and sales of solar energy systems incentives.

Energy generation and storage revenue increased by ~~$201~~$431 million, or ~~69%~~116%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31, 2020,~~June 30, 2020. Energy generation and storage revenue increased by $632 million, or 95%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. These increases were primarily due to increases in deployments of solar cash and loan jobs, ~~Powerwall~~Megapack and ~~Megapack,~~Powerwall, partially offset by reduced average selling prices on our solar cash and loan jobs as a result of our low cost solar strategy introduced mid-2020.

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

Cost of automotive leasing revenue includes the amortization of operating lease vehicles over the lease term, cost of goods sold associated with direct sales-type leases which were introduced in volume in the third quarter of 2020, as well as warranty expenses related to leased vehicles. Cost of automotive leasing revenue also includes vehicle connectivity costs and allocations of electricity and infrastructure costs related to our Supercharger network for vehicles under our leasing programs.

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

Cost of automotive sales revenue increased ~~$2.76~~$3.41 billion, or ~~75%~~92%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31,~~June 30, 2020, primarily due to an increase of ~~96,464~~107,272 Model 3 and Model Y cash deliveries ~~partially~~and higher outbound freight and duties in China as Model 3 vehicles manufactured in Gigafactory Shanghai were exported to other regions offset by a decrease in combined average Model 3 and Model Y costs per unit due to lower material, manufacturing, inbound freight and duty costs from localized procurement and manufacturing in ~~China, a higher sales mix of Standard Range trims and~~China. There was also reductions in Model Y average costs per unit as compared to the prior period due to temporary under-utilization of manufacturing capacity at lower production volumes during our production ramp in the first half of 2020, in addition to idle capacity charges of $189 million due to the temporary suspension of production at the Fremont Factory and Gigafactory Nevada during the three months ended June 30, 2020.Additionally, there was a decrease of ~~8,380~~7,532 Model S and Model X cash deliveries in the three months ended ~~March 31,~~June 30, 2021 compared to the prior ~~period.~~period as we started delivering the new Model S.

Cost of automotive sales revenue increased $6.16 billion, or 83%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, primarily due to an increase of 203,736 Model 3 and Model Y cash deliveries and higher outbound freight and duties in China as Model 3 vehicles manufactured in Gigafactory Shanghai were exported to other regions offset by a decrease in combined average Model 3 and Model Y costs per unit due to lower material, manufacturing, inbound freight and duty costs from localized procurement and manufacturing in China. There were also reductions in Model Y average costs per unit as compared to the prior period due to temporary under-utilization of manufacturing capacity at lower production volumes during our production ramp in the first half of 2020, in addition to idle capacity charges of $213 million due to the temporary suspension of production at the Fremont Factory and Gigafactory Nevada during the six months ended June 30, 2020.Additionally, there was a decrease of 15,912 Model S and Model X cash deliveries in the six months ended June 30, 2021 compared to the prior period as we started delivering the new Model S.

Cost of automotive leasing revenue increased ~~$38~~$40 million, or ~~31%~~27%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31, 2020,~~June 30, 2020. Cost of automotive leasing revenue increased $78 million, or 29%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. These increases were primarily due to an increase in cumulative vehicles under our direct operating lease program and the introduction of direct sales-type leasing programs which we began offering in volume during the third quarter of 2020 where we recognize all cost of revenue associated with the sales-type lease upon delivery to the customer. These increases were also partially offset by the decreases in cost of automotive lease revenue associated with our resale value guarantee leasing programs which are accounted for as operating leases as those portfolios have declined.

Cost of services and other revenue increased ~~$314~~$428 million, or ~~48%~~77%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31, 2020,~~June 30, 2020. Cost of services and other revenue increased $742 million, or 62%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. These increases were primarily due to increases in used vehicle cost of revenue driven by an increase in trade-ins, costs to support our increase in non-warranty maintenance services revenue and costs of retail merchandise as our sales have increased.

Gross margin for total automotive ~~remained relatively consistent at 26%~~increased from 25% to 28% in the three and six months ended ~~March 31,~~June 30, 2021 as compared to the three and six months ended ~~March 31,~~June 30, 2020. There were increases from improvements of Model Y3 and Model 3Y gross margins primarily from lower material, manufacturing, inbound freight and duty costs from localized procurement and manufacturing in China offset by higher outbound freight and duties in China as Model 3 vehicles manufactured in Gigafactory Shanghai were exported to other regions. There were also reductions in Model Y average costs per unit as compared to the prior period due to temporary under-utilization of manufacturing capacity at lower production volumes during our production ramp in the first half of ~~2020. Additionally, there was a positive impact from an increase~~2020, in addition to idle capacity charges of ~~$164~~$189 million and $213 million in cost of automotive sales revenue due to the temporary suspension of ~~regulatory credits.~~production at the Fremont Factory and Gigafactory Nevada during the three and six months ended June 30, 2020, respectively. These increases were partially offset by ~~a decrease~~reductions in the ~~combined~~ average selling price of Model ~~3 and Model~~ Y due to ~~a higher proportion of Standard Range variants in our~~the regional sales mix compared to the prior ~~period.~~period, in addition to impacts from sales of regulatory credits as discussed earlier.

Gross margin for total automotive & services and other segment increased from ~~21%~~22% to ~~23%~~26% in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31, 2020,~~June 30, 2020. Gross margin for total automotive & services and other segment increased from 22% to 25% in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. These increases were primarily due to the automotive gross margin impacts discussed above and an improvement in our services and other gross margin. Additionally, there was a lower proportion of services and other, which operated at a lower gross margin than our automotive business, within the segment in the three and six months ended ~~March 31,~~June 30, 2021 as compared to the prior period.

Cost of energy generation and storage revenue includes direct and indirect material and labor costs, warehouse rent, freight, warranty expense, other overhead costs and amortization of certain acquired intangible assets. Cost of energy generation and storage revenue also includes 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 agreements for solar energy system and PPAs where we are the lessor, the cost of revenue is primarily comprised of depreciation of the cost of leased solar energy systems, maintenance costs associated with those systems and amortization of any initial direct costs.

Cost of energy generation and storage revenue increased by ~~$313~~$432 million, or ~~111%~~124%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31, 2020,~~June 30, 2020. Cost of energy generation and storage revenue increased by $745 million, or 118%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. These increases were primarily due to increases in deployments of solar cash and loan jobs, Solar Roof, ~~Powerwall~~Megapack and ~~Megapack~~Powerwall and increased service maintenance costs on solar energy systems where we are the lessor, partially offset by reductions in average costs per unit of Solar Roof and solar cash and loan jobs ~~from improved overhead utilization~~ as deployments increased. Although our average costs per unit of Solar Roof improved compared to the prior period, they still remain significant and contribute disproportionately to our cost of energy generation and storage revenue.

Gross margin for energy generation and storage decreased from 4%6% to ~~-20%~~2% in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31, 2020~~June 30, 2020. Gross margin for energy generation and storage decreased from 5% to -6% in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. These decreases were primarily due to a higher proportion of Solar Roof in our overall energy business which operated at lower gross margins as a result of temporary manufacturing underutilization during product ramp, increased service maintenance costs on solar energy systems where we are the lessor and lower gross margins in our energy storage business as we are ramping Megapack.

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

R&D expenses increased ~~$342~~$297 million, or 106%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31,~~June 30, 2020. The increase was primarily due to ~~an $147~~a $135 million increase in employee and labor related expenses due to an increase in headcount and increased payroll taxes related to appreciation of our stock price, a ~~$122~~$76 million increase in R&D expensed materials, ~~and~~a $52 million increase in facilities, outside services, freight and depreciation expenses and a ~~$60~~$31 million increase in stock-based compensation expense. These increases were to support our expanding product roadmap such as the new versions of Model S and Model X and technologies including our proprietary battery cells.

R&D expenses as a percentage of revenue stayed consistent at 5% in the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. The is primarily due to the increase in total revenues from expanding sales.

R&D expenses increased $639 million, or 106%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. The increase was primarily due to a $282 million increase in employee and labor related expenses due to an increase in headcount and increased payroll taxes related to appreciation of our stock price, a $177 million increase in R&D expensed materials, a $91 million increase in stock-based compensation expense and an $88 million increase in facilities, outside services, freight and depreciation expense. These increases were to support our expanding product roadmap such as the new versions of Model S and Model X and technologies including our proprietary battery cells.

R&D expenses as a percentage of revenue increased from 5% to 6% in the ~~three~~six months ended ~~March 31,~~June 30, 2021 as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2020. The increase is primarily due to the increase in our R&D expenses as detailed above, partially offset by an increase in total revenues from expanding sales.

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

SG&A expenses increased ~~$429~~$312 million, or ~~68%~~47%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31,~~June 30, 2020. The increase is primarily due to an increase of ~~$273~~$186 million in employee and labor related expenses from increased headcount and increased payroll taxes related to appreciation of our stock price, an $86 million increase in office, information technology, facilities-related expenses, sales and marketing activities and other costs. There was also an increase of $40 million in stock-based compensation expense, of which ~~$233~~$9 million was attributable to the 2018 CEO Performance Award. ~~We recorded stock-based compensation expense~~See Note 11, Equity Incentive Plans, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

SG&A expenses as a percentage of ~~$299 million~~revenue decreased from 11% to 8% in the three months ended ~~March 31,~~June 30, 2021 ~~for~~as compared to the three months ended June 30, 2020. This was driven by the increase in total revenue from expanding sales, despite an increase in our SG&A expenses as detailed above.

SG&A expenses increased $741 million, or 58%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. The increase is primarily due to an increase of $313 million in stock-based compensation expense, of which $242 million was attributable to the 2018 CEO Performance ~~Award compared to $66 million in the prior period.~~Award. The increase in expense under the 2018 CEO Performance Award was primarily due to ~~the~~an increase in catch-up expense of ~~$116~~$160 million recognized in the ~~three~~six months ended ~~March 31,~~June 30, 2021, when the operational milestone of annualized revenue of $55.0 billion and Adjusted EBITDA of $10.0 billion became probable of being achieved as compared to the six months ended June 30, 2020. An additional $82 million was recognized in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, due to operational milestones being achieved earlier as well as the ~~acceleration of the expense related to the fifth and sixth tranches as their~~ market capitalization milestones ~~were~~being achieved earlier than originally forecasted ~~due to rapid appreciation of our stock price since 2020~~ (see Note 11, Equity Incentive Plans, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). Additionally, there was an increase of ~~$125~~$311 million in employee and labor related expenses from increased headcount and increased payroll taxes related to appreciation of our stock ~~price.~~price, a $117 million increase in office, information technology, facilities-related expenses, sales and marketing activities and other costs.

SG&A expenses as a percentage of revenue ~~remained relatively consistent at 10%~~decreased from 11% to 9% in the ~~three~~six months ended ~~March 31,~~June 30, 2021 as compared to the ~~three~~six months ended ~~March 31,~~June 30, 2020. ~~There~~This was ~~a favorable impact from~~driven by the increase in total revenue from expanding sales, ~~partially offset by~~despite an increase in our SG&A expenses as detailed above.

During the ~~three~~six months ended ~~March 31,~~June 30, 2021 we realized gains of $128 million through sales of ~~bitcoin~~bitcoin. Also, during the three and ~~also~~six months ended June 30, 2021, we recorded ~~$27~~$23 million and $50 million, respectively, of impairment ~~losses.~~losses on bitcoin. See Note 2, Summary of Significant Accounting Policies, and Note 3, Digital Assets, Net, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.

Interest expense decreased by ~~$70~~$95 million, or ~~41%~~56%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31, 2020,~~June 30, 2020. Interest expense decreased by $165 million, or 49%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. These decreases were primarily due to the adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, on January 1, 2021, whereby we have de-recognized the remaining debt discounts on the 2022 Notes and 2024 Notes and therefore no longer recognize any amortization of debt discounts as interest expense, as well as the continued reduction in our overall debt balance. See Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.

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

Other income (expense), net, changed favorably by ~~$82~~$60 million in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31,~~June 30, 2020, primarily due to favorable fluctuations in foreign currency exchange rates.

Other income (expense), net, changed favorably by $142 million in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, primarily due to favorable fluctuations in foreign currency exchange rates and a ~~$60~~$53 million favorable change in the mark-to-market remeasurement of our interest rate ~~swaps and favorable fluctuations in foreign currency exchange rates.~~swaps.

Our provision for income taxes is ~~$69~~$115 million with pre-tax income of ~~$533 million~~$1.29 billion, resulting in quarterly effective tax rate of 9% for the three months ended ~~March 31,~~June 30, 2021. The provision for income taxes increased by ~~$67~~$94 million, compared to $2$21 million provision for income taxes with pre-tax income of ~~$70~~$150 million, resulting in quarterly effective tax rate of 14% for the three months ended ~~March 31,~~June 30, 2020. The increase in income taxes was primarily due to the substantial ~~increases~~increase in ~~taxable profits~~pre-tax income, combined with changes in ~~our foreign jurisdictions year-over-year.~~forecasted annual tax rate with mix of jurisdictional earnings.

Our provision for income taxes is $184 million with pre-tax income of $1.83 billion, resulting in year-to-date effective tax rate ~~increased from 3% to 13% in~~of 10% for the ~~three~~six months ended ~~March 31, 2021 as~~June 30, 2021. The provision for income taxes increased by $161 million, compared to $23 million provision for income taxes with pre-tax income of $220 million, resulting year to date effective tax rate of 10% for the ~~three~~six months ended ~~March 31, 2020,~~June 30, 2020. The increase in income taxes was primarily due to the substantial increase in pre-tax income, combined with changes in ~~the three months ended March 31, 2021 as compared to a small pre-tax income for the three months ended March 31, 2020.~~forecasted annual tax rate with mix of jurisdictional earnings.

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

Net Income Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests

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

Net income attributable to noncontrolling interests and redeemable noncontrolling interests ~~decreased~~increased by ~~$26~~$11 million, or ~~50%~~44%, in the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31,~~June 30, 2020. The change was primarily due to lower activities from new financing fund ~~arrangements offset~~arrangements.

Net income attributable to noncontrolling interests and redeemable noncontrolling interests decreased by $15 million, or 19%, in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. The change was primarily due to a decrease in distributions to financing fund ~~investors.~~investors offset by lower activities from new financing fund arrangements.

We expect to continue to generate net positive operating cash flow as we have done in the last three fiscal years. The cash we generate from our core operations enables us to fund ongoing operations and production, our research and development projects for new products and technologies including our proprietary battery cells, additional manufacturing ramps at existing manufacturing facilities such as the Fremont Factory, Gigafactory Nevada, Gigafactory Shanghai and Gigafactory New York, the construction of Gigafactory Berlin and Gigafactory Texas, and the continued expansion of our retail and service locations, body shops, Mobile Service fleet, Supercharger network and energy product installation capabilities.

In addition, because a large portion of our future expenditures will be to fund our growth, we expect that if needed we will be able to adjust our capital and operating expenditures by operating segment. For example, if our near-term manufacturing operations decrease in scale or ramp more slowly than expected, including due to global economic or business conditions, we may choose to correspondingly slow the pace of our capital expenditures. Finally, we continually evaluate our cash needs and may decide it is best to raise additional capital or seek alternative financing sources to fund the rapid growth of our business, including through drawdowns on existing or new debt facilities or financing funds. Conversely, we may also from time to time determine that it is in our best interests to voluntarily repay certain indebtedness early.

Accordingly, we believe that our current sources of funds will provide us with adequate liquidity during the 12-month period following ~~March 31,~~June 30, 2021, including to pay down near-term debt obligations, as well as in the long-term.

See the sections below for more details regarding the material requirements for cash in our business and our sources of liquidity to meet such needs.

From time to time in the ordinary course of business, we enter into agreements with vendors for the purchase of components and raw materials to be used in the manufacture of our products. However, due to contractual terms, variability in the precise growth curves of our development and production ramps, and opportunities to renegotiate pricing, we generally do not have binding and enforceable purchase orders under such contracts beyond the short term, and the timing and magnitude of purchase orders beyond such period is difficult to accurately project.

As discussed in and subject to the considerations referenced in Part ~~II,~~I, Item 7,2, Management's Discussion and Analysis of Financial Condition and Results of Operations—Management Opportunities, Challenges and Risks—Cash Flow and Capital Expenditure Trends in this Quarterly Report on Form 10-Q, we currently expect our capital expenditures to support our projects globally to be $4.50 to $6.00 billion in 2021 and in each of the next two fiscal years. Given the breadth of our various planned projects in 2021, as we make progress on such projects we expect that our actual spend will be on the higher end of this range in 2021. In connection with our operations at Gigafactory ~~Buffalo,~~New York, we have an agreement to spend or incur $5.0 billion in combined capital, operational expenses, costs of goods sold and other costs in the State of New York through December 31, 2029 (pursuant to a deferral of our required timelines to meet such obligations that was granted in April 2021 subject only to memorialization in writing by us and the SUNY Foundation). We also have an operating lease arrangement with the local government of Shanghai pursuant to which we are required to spend RMB 14.08 billion in capital expenditures at Gigafactory Shanghai by the end of 2023. For details regarding these obligations, refer to Note 12, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

As of ~~March 31,~~June 30, 2021, we and our subsidiaries had outstanding ~~$9.52~~$8.03 billion in aggregate principal amount of indebtedness, of which ~~$1.43~~$1.09 billion is scheduled to become due in the succeeding 12 months. For details regarding our indebtedness, refer to Note 10,Debt, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Our sources to fund our material cash requirements are predominantly from our deliveries of vehicles, sales and installations of our energy storage products and solar energy systems, proceeds from debt facilities, proceeds from financing funds and proceeds from equity offerings.

As of ~~March 31,~~June 30, 2021, we had ~~$17.14~~$16.23 billion of cash and cash equivalents. Balances held in foreign currencies had a U.S. dollar equivalent of ~~$7.79~~$4.87 billion and consisted primarily of ~~euros,~~ Chinese yuan, euros and Canadian dollars. In addition, we had ~~$2.15~~$1.58 billion of unused committed amounts under our credit facilities and financing funds as of ~~March 31, 2021, net of amounts formerly available under the Fixed Asset Facility that was paid off and terminated in April~~June 30, 2021. Certain of such unused committed amounts are subject to satisfying specified conditions prior to draw-down (such as pledging to our lenders sufficient amounts of qualified receivables, inventories, leased vehicles and our interests in those leases, solar energy systems and the associated customer contracts, our interests in financing funds or various other assets; and contributing or selling qualified solar energy systems and the associated customer contracts or qualified leased vehicles and our interests in those leases into the financing funds). For details regarding our indebtedness and financing funds, refer to Note 10, Debt, and Note 13, Variable Interest Entity Arrangements to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In the first quarter of 2021, we invested an aggregate $1.50 billion in ~~bitcoin and began accepting~~bitcoin. In addition, during the three months ended March 31, 2021, we accepted bitcoin as a form of payment for sales of certain of our products in ~~certain~~specified regions, subject to applicable ~~laws. In~~laws, and suspended this practice in May 2021. We may in the ~~first quarter~~future restart the practice of ~~2021, we also sold an aggregate $272 million~~transacting in ~~bitcoin. Net of such sales, the~~digital assets for our products and services. The fair market value of our bitcoin holdings as of ~~March 31,~~June 30, 2021 was ~~$2.48~~$1.47 billion. ~~Based~~We believe in the long-term potential of digital assets both as an investment and also as a liquid alternative to cash. As with any investment and consistent with how we manage fiat-based cash and cash-equivalent accounts, we may increase or decrease our holdings of digital assets at any time based on ~~our trading activity to date, we believe bitcoin is highly liquid, although we generally intend to hold our bitcoin long-term regardless~~the needs of the ~~manner~~business and our view of ~~acquisition.~~market and environmental conditions. However, digital assets may be subject to volatile market prices, which may be unfavorable at the times when we may want or need to liquidate them.

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

Net cash ~~from operating activities changed favorably by $2.08 billion to net cash~~ provided by operating activities ~~of 1.64~~increased by $3.24 billion to $3.77 billion during the ~~three~~six months ended ~~March 31,~~June 30, 2021 from ~~net cash used in operating activities of $440~~$524 million during the ~~three~~six months ended ~~March 31,~~June 30, 2020. This increase was primarily due to ~~the decrease in net operating assets and liabilities of $1.44 billion and~~ the increase in net income excluding non-cash expenses and gains of ~~$747 million, partially offset by $101 million~~$1.88 billion and the overall decrease in net operating assets and liabilities of ~~net gain on digital assets.~~$1.36 billion. The decrease in our net operating assets and liabilities was mainly driven by an increase in accounts payable and accrued liabilities in the ~~three~~six months ended ~~March 31,~~June 30, 2021 as compared to a decrease in the ~~three~~six months ended ~~March 31,~~June 30, 2020 from ramp up in production at Gigafactory Shanghai and the Fremont ~~Factory and a smaller increase in inventory from buildup of finished goods from limited capacity to deliver or install our products at the end of the first quarter of 2020.~~Factory. The decrease in our net operating assets and liabilities was partially offset by a larger increase in operating lease vehicles as Model Y direct leasing was introduced in the third quarter of ~~2020 and an increase in other non-current assets in the three months ended March 31, 2021 as compared to a decrease in the same period in~~ 2020.

Cash flows from investing activities and their variability across each period related primarily to capital expenditures, which were ~~$1.35~~$2.85 billion for the ~~three~~six months ended ~~March 31,~~June 30, 2021, mainly for construction of Gigafactory Texas and Gigafactory Berlin and expansion of Gigafactory Shanghai and ~~$455 million~~$1.00 billion for the ~~three~~six months ended ~~March 31,~~June 30, 2020, mainly for Model Y production at the Fremont Factory and construction of Gigafactory Shanghai ~~construction.~~and Gigafactory Berlin. Additionally, net cash activities related to digital assets were $1.23 billion in the ~~three~~six months ended ~~March 31,~~June 30, 2021 from purchases of digital assets for $1.50 billion and proceeds from sales of digital assets of $272 million.

Net cash used in financing activities during the ~~three~~six months ended ~~March 31,~~June 30, 2021 was ~~$1.02~~$2.57 billion, which consisted primarily of ~~$1.45~~$1.95 billion of cash repayments upon conversions of our convertible senior notes, $614 million of repayments under our Fixed Asset Facility, $294 million of repayments under our 2016 Warehouse Agreement, $151 million repayment of Solar Term Loan upon maturity and ~~$101~~$196 million principal repayments of our finance leases. These cash outflows were partially offset by ~~$877~~$623 million of net borrowings from the Automotive Asset-backed Notes and ~~$183~~$253 million of proceeds from exercise of stock options and other stock issuances. See Note 10, Debt to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details regarding our debt obligations.

Net cash provided by financing activities during the ~~three~~six months ended ~~March 31,~~June 30, 2020 was ~~$2.71~~$2.83 billion, which consisted primarily of $2.31 billion from our February 2020 public offering of common stock, net of issuance costs, ~~$359~~$724 million of net borrowings under loan agreements entered into by certain Chinese subsidiaries (the "China Loan Agreements"), $514 million of net borrowings under our vehicle lease-backed loan and security agreements (the ~~"Warehouse Agreements"~~“Warehouse Agreements”), ~~$292 million of net borrowings under the senior secured asset-based revolving credit agreement (the “Credit Agreement”)~~ and ~~$160~~$217 million of proceeds from exercise of stock options and other stock issuances. These cash inflows were partially offset by ~~$129~~$254 million of payments of the ~~automotive asset-backed notes~~Automotive Asset-backed Notes, $177 million of payments under the senior secured asset-based revolving credit agreement (the “Credit Agreement”), collateralized lease repayments of $168 million, and ~~$100~~$154 million principal repayments of our finance leases.

We transact business globally in multiple currencies and hence have foreign currency risks related to our revenue, costs of revenue, operating expenses and localized subsidiary debt denominated in currencies other than the U.S. dollar (primarily the Chinese yuan, euro, Canadian dollar and ~~Swiss franc~~Australian dollar in relation to our current year operations). In general, we are a net receiver of currencies other than the U.S. dollar for our foreign subsidiaries. Accordingly, changes in exchange rates affect our revenue and other operating results as expressed in U.S. dollars as we do not typically hedge foreign currency risk.

We have also experienced, and will continue to experience, fluctuations in our net income (loss) as a result of gains (losses) on the settlement and the re-measurement of monetary assets and liabilities denominated in currencies that are not the local currency (primarily consisting of our intercompany and cash and cash equivalents balances). For the ~~three~~six months ended ~~March 31,~~June 30, 2021, we recognized a net foreign currency gain of $2$51 million in Other income (expense), net, with our largest re-measurement exposures from the U.S. dollar, Canadian dollar ~~euro~~ and ~~U.S. dollar~~Chinese yuan as our subsidiaries’ monetary assets and liabilities are denominated in various local currencies. For the ~~three~~six months ended ~~March 31,~~June 30, 2020, we recognized a net foreign currency loss of ~~$19~~$38 million in Other income (expense), net, with our largest re-measurement exposures from the U.S. dollar, ~~Australian dollar and~~ South Korean ~~won.~~won and Mexican peso.

We considered the historical trends in foreign currency exchange rates and determined that it is reasonably possible that adverse changes in foreign currency exchange rates of 10% for all currencies could be experienced in the near-term. These changes were applied to our total monetary assets and liabilities denominated in currencies other than our local currencies at the balance sheet date to compute the impact these changes would have had on our net income (loss) before income taxes. These changes would have resulted in a loss of ~~$64~~$128 million at ~~March 31,~~June 30, 2021 and $8 million at December 31, 2020 assuming no foreign currency hedging.

We are exposed to interest rate risk on our borrowings that bear interest at floating rates. Pursuant to our risk management policies, in certain cases, we utilize derivative instruments to manage some of this risk. We do not enter into derivative instruments for trading or speculative purposes. A hypothetical 10% change in interest rates on our floating rate debt would have increased or decreased our interest expense for the ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020 by $1 million and $1$3 million, respectively.

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

Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of ~~March 31,~~June 30, 2021, our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

There was no change in our internal control over financial reporting that occurred during the quarter ended ~~March 31,~~June 30, 2021, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

For a description of our material pending legal proceedings, please see Note 12, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In addition, each of the matters below is being disclosed pursuant to Item 103 of Regulation S-K because it relates to environmental regulations and aggregate civil penalties that we currently believe could potentially exceed $1 million. We believe that any proceeding that is material to our business or financial condition is likely to have potential penalties far in excess of such amount.

In May 2021, Tesla entered into a settlement agreement with The Bay Area Air Quality Management District ~~(“BAAQMD”) has issued~~with respect to past notices of violation ~~to us~~ relating to alleged air permitting and related compliance issues for the Fremont Factory, ~~but has not initiated formal proceedings. We have disputed~~ certain of ~~these allegations~~which we had disputed. Tesla agreed to pay $1 million consisting of a cash amount and ~~have asserted that there has been no related adverse community or~~the implementation of a supplemental environmental ~~impact. While we have~~project. The settlement agreement did not ~~yet resolved this matter, we remain in close communication with BAAQMD with respect to it. We do not currently expect~~contain any ~~material adverse impact on our business.~~admission of wrongdoing.

The German Umweltbundesamt has issued our subsidiary in Germany a notice and fine in the amount of 12 million euro alleging its non-compliance under applicable laws relating to market participation notifications and take-back obligations with respect to end-of-life battery products required thereunder. In response to Tesla’s objection, the German Umweltbundesamt issued Tesla a revised fine notice dated April 29, 2021 in which it reduced the original fine amount to 1.45 million euro. This is primarily relating to administrative requirements, but Tesla has continued to take back battery packs, and although we cannot predict the outcome of this matter, including the final amount of any penalties, we ~~have~~ filed ~~our~~a new objection in June 2021 and it is not expected to have a material adverse impact on our business.

In April 2021, we received a notice from the Environmental Protection Agency (the “EPA”) alleging that Tesla failed to provide records demonstrating compliance with certain requirements under the applicable National Emission Standards for Hazardous Air Pollutants under the Clean Air Act of 1963, as amended, relating to Surface Coating of Automobiles and Light-Duty Trucks regulations. Tesla has responded to all information requests from the EPA and refutes the allegations. While the outcome of this matter cannot be determined at this time, it is not currently expected to have a material adverse impact on our business.

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

We may be impacted by macroeconomic conditions resulting from the global COVID-19 pandemic.

Since the first quarter of 2020, there has been a worldwide impact from the COVID-19 pandemic. Government regulations and shifting social behaviors have limited or closed non-essential transportation, government functions, business activities and person-to-person interactions. In some cases, the relaxation of such trends has been followed by actual or contemplated returns to stringent restrictions on gatherings or commerce, including in parts of the U.S., and ~~a number~~the rest of ~~areas in Europe.~~the world.

During 2020, we temporarily suspended operations at each of our manufacturing facilities worldwide, and certain of our suppliers also shut down operations temporarily or ~~permanently.~~permanently, including during the recently re-imposed lockdowns in certain parts of the world. We instituted temporary employee furloughs and compensation reductions while our U.S. operations were scaled back. Temporary impediments to administrative activities supporting our operations also hampered our product deliveries and deployments.

Global trade conditions and consumer trends that originated during the pandemic continue to persist and may also have long-lasting adverse impact on us and our industries independently of the progress of the pandemic. For example, pandemic-related issues have exacerbated port congestion and intermittent supplier shutdowns and delays, resulting in additional expenses to expedite delivery of critical parts. Similarly, increased demand for personal electronics has created a shortfall of ~~microchips,~~semiconductors, which has caused challenges in our supply chain and production. Sustaining our production trajectory will require the ongoing readiness and solvency of our suppliers and vendors, a stable and motivated production workforce and government cooperation, including for travel and visa allowances. The contingencies inherent in the construction of, and ramp at, new facilities such as Gigafactory Shanghai, Gigafactory Berlin and Gigafactory Texas may be exacerbated by these challenges.

We cannot predict the duration or direction of current global trends or their sustained impact. Ultimately, we continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and we will have to accurately project demand and infrastructure requirements globally and deploy our production, workforce and other resources accordingly. If we experience unfavorable global market conditions, or if we cannot or do not maintain operations at a scope that is commensurate with such conditions or are later required to or choose to suspend such operations again, our business, prospects, financial condition and operating results may be harmed.

We may experience delays in launching and ramping the production of our products and features, or we may be unable to control our manufacturing costs.

We have previously experienced and may in the future experience launch and production ramp delays for new products and features. For example, we encountered unanticipated supplier issues that led to delays during the initial ramp of our first Model X and experienced challenges with a supplier and with ramping full automation for certain of our initial Model 3 manufacturing processes. In addition, we may introduce in the future new or unique manufacturing processes and design features for our products. There is no guarantee that we will be able to successfully and timely introduce and scale such processes or features.

In particular, our future business depends in large part on increasing the production of mass-market vehicles including Model 3 and Model Y, which we are planning to achieve through multiple factories worldwide. We have relatively limited experience to date in manufacturing Model 3 and Model Y at high volumes and even less experience building and ramping vehicle production lines across multiple factories in different geographies. In order to be successful, we will need to implement, maintain and ramp efficient and cost-effective manufacturing capabilities, processes and supply chains and achieve the design tolerances, high quality and output rates we have planned at our manufacturing facilities in California, Nevada, Texas, China and Germany. We will also need to hire, train and compensate skilled employees to operate these facilities. Bottlenecks and other unexpected challenges such as those we experienced in the past may arise during our production ramps, and we must address them promptly while continuing to improve manufacturing processes and reducing costs. If we are not successful in achieving these goals, we could face delays in establishing and/or sustaining our Model 3 and Model Y ramps or be unable to meet our related cost and profitability targets.

We may also experience similar future delays in launching and/or ramping production of our energy storage products and Solar Roof; new product versions or variants such as the recently updated Model S and Model X; new vehicles such as Tesla Semi, Cybertruck and the new Tesla Roadster; and future features and services such as new Autopilot or FSD features and the autonomous

Tesla ride-hailing network. Likewise, we may encounter delays with the design, construction and regulatory or other approvals necessary to build and bring online future manufacturing facilities and products.

Any delay or other complication in ramping the production of our current products or the development, manufacture, launch and production ramp of our future products, features and services, or in doing so cost-effectively and with high quality, may harm our brand, business, prospects, financial condition and operating results.

We may be unable to grow our global product sales, delivery and installation capabilities and our servicing and vehicle charging networks, or we may be unable to accurately project and effectively manage our growth.

Our success will depend on our ability to continue to expand our sales capabilities. We are targeting with Model 3 and Model Y a global mass demographic with a broad range of potential customers, in which we have relatively limited experience projecting demand and pricing our products. We currently produce numerous international variants at a limited number of factories, and if our specific demand expectations for these variants prove inaccurate, we may not be able to timely generate deliveries matched to the vehicles that we produce in the same timeframe or that are commensurate with the size of our operations in a given region. Likewise, as we develop and grow our energy products and services worldwide, our success will depend on our ability to correctly forecast demand in various markets.

Because we do not have independent dealer networks, we are responsible for delivering all of our vehicles to our customers. We may face difficulties with deliveries at increasing volumes, particularly in international markets requiring significant transit times. For example, we saw challenges in ramping our logistics channels in China and Europe to initially deliver Model 3 there in the first quarter of 2019. We have deployed a number of delivery models, such as deliveries to customers’ homes and workplaces and touchless deliveries, but there is no guarantee that such models will be scalable or be accepted globally. Likewise, as we ramp Solar Roof, we are working to substantially increase installation personnel and decrease installation times. If we are not successful in matching such capabilities with actual production, or if we experience unforeseen production delays or inaccurately forecast demand for the Solar Roof, our business, financial condition and operating results may be harmed.

Moreover, because of our unique expertise with our vehicles, we recommend that our vehicles be serviced by us or by certain authorized professionals. If we experience delays in adding such servicing capacity or servicing our vehicles efficiently, or experience unforeseen issues with the reliability of our vehicles, particularly higher-volume and relatively newer additions to our fleet such as Model 3 and Model Y, it could overburden our servicing capabilities and parts inventory. Similarly, the increasing number of Tesla vehicles also requires us to continue to rapidly increase the number of our Supercharger stations and connectors throughout the world.

There is no assurance that we will be able to ramp our business to meet our sales, delivery, installation, servicing and vehicle charging targets globally, that our projections on which such targets are based will prove accurate or that the pace of growth or coverage of our customer infrastructure network will meet customer expectations. These plans require significant cash investments and management resources and there is no guarantee that they will generate additional sales or installations of our products, or that we will be able to avoid cost overruns or be able to hire additional personnel to support them. As we expand, we will also need to ensure our compliance with regulatory requirements in various jurisdictions applicable to the sale, installation and servicing of our products, the sale or dispatch of electricity related to our energy products and the operation of Superchargers. If we fail to manage our growth effectively, it may harm our brand, business, prospects, financial condition and operating results.

Our future growth and success are dependent upon consumers’ demand for electric vehicles and specifically our vehicles in an automotive industry that is generally competitive, cyclical and volatile.

If the market for electric vehicles in general and Tesla vehicles in particular does not develop as we expect, develops more slowly than we expect, or if demand for our vehicles decreases in our markets or our vehicles compete with each other, our business, prospects, financial condition and operating results may be harmed.

We are still at an earlier stage and have limited resources and production relative to established competitors that offer internal combustion engine vehicles. In addition, electric vehicles still comprise a small percentage of overall vehicle sales. As a result, the market for our vehicles could be negatively affected by numerous factors, such as:

Finally, the target demographics for our vehicles, particularly Model 3 and Model Y, are highly competitive. Sales of vehicles in the automotive industry tend to be cyclical in many markets, which may expose us to further volatility.

Our suppliers may fail to deliver components according to schedules, prices, quality and volumes that are acceptable to us, or we may be unable to manage these components effectively.

Our products contain thousands of parts ~~that we purchase~~purchased globally from hundreds of suppliers, including single-source direct suppliers. This exposes us to multiple potential sources of component shortages, such as those that we experienced in 2012 and 2016 with our initial Model S and Model X ramps. Unexpected changes in business conditions, materials pricing, labor issues, wars, ~~governmental changes, tariffs,~~trade policies, natural disasters such as the March 2011 earthquakes in Japan, health epidemics such as the global COVID-19 pandemic, trade and shipping disruptions and other factors beyond our or our suppliers’ control could also affect these suppliers’ ability to deliver components to us or to remain solvent and operational. For example, a global shortage of ~~microchips~~semiconductors has been reported since early 2021 and has caused challenges in the manufacturing industry and impacted our supply chain and ~~production.~~production as well. We have used alternative parts and programmed software to mitigate the challenges caused by these shortages, but there is no guarantee we may be able to continually do so as we scale production to meet our growth targets. The unavailability of any component or supplier could result in production delays, idle manufacturing facilities, product design changes and loss of access to important technology and tools for producing and supporting our ~~products.~~products, as well as impact our capacity expansion. Moreover, significant increases in our production, such as for Model 3 and Model Y, or product design changes by us have required and may in the future require us to procure additional components in a short amount of time. Our suppliers may not be willing or able to sustainably meet our timelines or our cost, quality and volume needs, or to do so may cost us more, which may require us to replace them with other sources. Finally, we have limited vehicle manufacturing experience outside of the Fremont Factory and we may experience issues increasing the level of localized procurement at our Gigafactory Shanghai and at future factories such as Gigafactory Berlin and Gigafactory Texas. While we believe that we will be able to secure additional or alternate sources or develop our own replacements for most of our components, there is no assurance that we will be able to do so quickly or at all. Additionally, we may be unsuccessful in our continuous efforts to negotiate with existing suppliers to obtain cost reductions and avoid unfavorable changes to terms, source less expensive suppliers for certain parts and redesign certain parts to make them less expensive to produce. Any of these occurrences may harm our business, prospects, financial condition and operating results.

As the scale of our vehicle production increases, we will also need to accurately forecast, purchase, warehouse and transport components at high volumes to our manufacturing facilities and servicing locations internationally. If we are unable to accurately match the timing and quantities of component purchases to our actual needs or successfully implement automation, inventory management and other systems to accommodate the increased complexity in our supply chain and parts management, we may incur unexpected production disruption, storage, transportation and write-off costs, which may harm our business and operating results.

We may be unable to meet our projected construction timelines, costs and production ramps at new factories, or we may experience difficulties in generating and maintaining demand for products manufactured there.

Our ability to increase production of our vehicles on a sustained basis, make them affordable globally by accessing local supply chains and workforces and streamline delivery logistics is dependent on the construction and ramp of Gigafactory Shanghai, Gigafactory Berlin and Gigafactory Texas. The construction of and commencement and ramp of production at these factories are subject to a number of uncertainties inherent in all new manufacturing operations, including ongoing compliance with regulatory requirements, procurement and maintenance of construction, environmental and operational licenses and approvals for additional expansion, potential supply chain constraints, hiring, training and retention of qualified employees and the pace of bringing production equipment and processes online with the capability to manufacture high-quality units at scale. For example, we are currently constructing Gigafactory Berlin under conditional permits in anticipation of being granted final permits. Moreover, we will have to establish and ramp production of our proprietary battery cells and packs at our new factories, and we additionally intend to incorporate sequential design and manufacturing changes into vehicles manufactured at each new factory. We have limited experience to date with developing and implementing manufacturing innovations outside of the Fremont Factory, as we began production at Gigafactory Shanghai relatively recently. In particular, the majority of our design and engineering resources are currently located in California. In order to meet our expectations for our new factories, we must expand and manage localized design and engineering talent and resources. If we experience any issues or delays in meeting our projected timelines, costs, capital efficiency and production capacity for our new factories, expanding and managing teams to implement iterative design and production changes there, maintaining and complying with the terms of any debt financing that we obtain to fund them or generating and maintaining demand for the vehicles we manufacture there, our business, prospects, operating results and financial condition may be harmed.

We will need to maintain and significantly grow our access to battery cells, including through the development and manufacture of our own cells, and control our related costs.

We are dependent on the continued supply of lithium-ion battery cells for our vehicles and energy storage products, and we will require substantially more cells to grow our business according to our plans. Currently, we rely on suppliers such as Panasonic for these cells. However, we have to date fully qualified only a very limited number of such suppliers and have limited flexibility in changing suppliers. Any disruption in the supply of battery cells from our suppliers could limit production of our vehicles and energy

storage products. In the long term, we intend to supplement cells from our suppliers with cells manufactured by us, which we believe will be more efficient, manufacturable at greater volumes and cost-effective than currently available cells. However, our efforts to

develop and manufacture such battery cells have required and may require significant investments, and there can be no assurance that we will be able to achieve these targets in the timeframes that we have planned or at all. If we are unable to do so, we may have to curtail our planned vehicle and energy storage product production or procure additional cells from suppliers at potentially greater costs, either of which may harm our business and operating results.

In addition, the cost of battery cells, whether manufactured by our suppliers or by us, depends in part upon the prices and availability of raw materials such as lithium, nickel, cobalt and/or other metals. The prices for these materials fluctuate and their available supply may be unstable, depending on market conditions and global demand for these materials, including as a result of increased global production of electric vehicles and energy storage products. Any reduced availability of these materials may impact our access to cells and any increases in their prices may reduce our profitability if we cannot recoup the increased costs through increased vehicle prices. Moreover, any such attempts to increase product prices may harm our brand, prospects and operating results.

We face strong competition for our products and services from a growing list of established and new competitors.

The worldwide automotive market is highly competitive today and we expect it will become even more so in the future. For example, Model 3 and Model Y face competition from existing and future automobile manufacturers in the extremely competitive entry-level premium sedan and compact SUV markets. A significant and growing number of established and new automobile manufacturers, as well as other companies, have entered or are reported to have plans to enter the market for electric and other alternative fuel vehicles, including hybrid, plug-in hybrid and fully electric vehicles, as well as the market for self-driving technology and other vehicle applications and software platforms. In some cases, our competitors offer or will offer electric vehicles in important markets such as China and Europe, and/or have announced an intention to produce electric vehicles exclusively at some point in the future. Many of our competitors have significantly greater or better-established resources than we do to devote to the design, development, manufacturing, distribution, promotion, sale and support of their products. Increased competition could result in our lower vehicle unit sales, price reductions, revenue shortfalls, loss of customers and loss of market share, which may harm our business, financial condition and operating results.

We also face competition in our energy generation and storage business from other manufacturers, developers, installers and service providers of competing energy systems, as well as from large utilities. Decreases in the retail or wholesale prices of electricity from utilities or other renewable energy sources could make our products less attractive to customers and lead to an increased rate of residential customer defaults under our existing long-term leases and PPAs.

We may experience issues with lithium-ion cells or other components manufactured at Gigafactory Nevada, which may harm the production and profitability of our vehicle and energy storage products.

Our plan to grow the volume and profitability of our vehicles and energy storage products depends on significant lithium-ion battery cell production, including by our partner Panasonic at Gigafactory Nevada. Although Panasonic has a long track record of producing high-quality cells at significant volume at its factories in Japan, it has relatively limited experience with cell production at Gigafactory Nevada, which began in 2017. In addition, we produce several vehicle components, such as battery modules and packs incorporating the cells produced by Panasonic for Model 3 and Model Y and drive units (including to support Gigafactory Shanghai production), at Gigafactory Nevada, and we also manufacture energy storage products there. In the past, some of the manufacturing lines for certain product components took longer than anticipated to ramp to their full capacity, and additional bottlenecks may arise in the future as we continue to increase the production rate and introduce new lines. If we or Panasonic are unable to or otherwise do not maintain and grow our respective operations at Gigafactory Nevada production, or if we are unable to do so cost-effectively or hire and retain highly-skilled personnel there, our ability to manufacture our products profitably would be limited, which may harm our business and operating results.

Finally, the high volumes of lithium-ion cells and battery modules and packs manufactured at Gigafactory Nevada are stored and recycled at our various facilities. Any mishandling of battery cells may cause disruption to the operation of such 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. Any such disruptions or issues may harm our brand and business.

We face risks associated with maintaining and expanding our international operations, including unfavorable and uncertain regulatory, political, economic, tax and labor conditions.

We are subject to legal and regulatory requirements, political uncertainty and social, environmental and economic conditions in numerous jurisdictions, including markets in which we generate significant sales, over which we have little control and which are inherently unpredictable. Our operations in such jurisdictions, particularly as a company based in the U.S., create risks relating to conforming our products to regulatory and safety requirements and charging and other electric infrastructures; organizing local

operating entities; establishing, staffing and managing foreign business locations; attracting local customers; navigating foreign

government taxes, regulations and permit requirements; enforceability of our contractual rights; trade restrictions, customs regulations, tariffs and price or exchange controls; and preferences in foreign nations for domestically manufactured products. Such conditions may increase our costs, impact our ability to sell our products and require significant management attention, and may harm our business if we are unable to manage them effectively.

Our business may suffer if our products or features contain defects, fail to perform as expected or take longer than expected to become fully functional.

If our products contain design or manufacturing defects that cause them not to perform as expected or that require repair, or certain features of our vehicles such as new Autopilot or FSD features take longer than expected to become enabled, are legally restricted or become subject to onerous regulation, our ability to develop, market and sell our products and services may be harmed, and we may experience delivery delays, product recalls, product liability, breach of warranty and consumer protection claims and significant warranty and other expenses. For example, we are developing self-driving and driver assist technologies to rely on vision-based sensors, unlike alternative technologies in development that additionally require other redundant sensors. There is no guarantee that any incremental changes in the specific equipment we deploy in our vehicles over time will not result in initial functional disparities from prior iterations or will perform as expected in the timeframe we anticipate, or at all.

Our products are also highly dependent on software, which is inherently complex and may contain latent defects or errors or be subject to external attacks. Issues experienced by our customers have included those related to the Model S and Model X 17-inch display screen, the panoramic roof and the 12-volt battery in the Model S, the seats and doors in the Model X and the operation of solar panels installed by us. Although we attempt to remedy any issues we observe in our products as effectively and rapidly as possible, such efforts may not be timely, may hamper production or may not completely satisfy our customers. While we have performed extensive internal testing on our products and features, we currently have a limited frame of reference by which to evaluate their long-term quality, reliability, durability and performance characteristics. There can be no assurance that we will be able to detect and fix any defects in our products prior to their sale to or installation for customers.

The automobile industry generally experiences significant product liability claims, and as such we face the risk of such claims in the event our vehicles do not perform or are claimed to not have performed as expected. As is true for other automakers, our vehicles have been involved and we expect in the future will be involved in accidents resulting in death or personal injury, and such accidents where Autopilot or FSD features are engaged are the subject of significant public attention. We have experienced and we expect to continue to face claims arising from or related to misuse or claimed failures of such new technologies that we are pioneering. In addition, the battery packs that we produce make use of lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. While we have designed our battery packs to passively contain any single cell’s release of energy without spreading to neighboring cells, there can be no assurance that a field or testing failure of our vehicles or other battery packs that we produce will not occur, in particular due to a high-speed crash. Likewise, as our solar energy systems and energy storage products generate and store electricity, they have the potential to fail or cause injury to people or property. Any product liability claim may subject us to lawsuits and substantial monetary damages, product recalls or redesign efforts, and even a meritless claim may require us to defend it, all of which may generate negative publicity and be expensive and time-consuming. In most jurisdictions, we generally self-insure against the risk of product liability claims for vehicle exposure, meaning that any product liability claims will likely have to be paid from company funds and not by insurance.

We will need to maintain public credibility and confidence in our long-term business prospects in order to succeed.

In order to maintain and grow our business, we must maintain credibility and confidence among customers, suppliers, analysts, investors, ratings agencies and other parties in our long-term financial viability and business prospects. Maintaining such confidence may be challenging due to our limited operating history relative to established competitors; customer unfamiliarity with our products; any delays we may experience in scaling manufacturing, delivery and service operations to meet demand; competition and uncertainty regarding the future of electric vehicles or our other products and services; our quarterly production and sales performance compared with market expectations; and other factors including those over which we have no control. In particular, Tesla’s products, business, results of operations, statements and actions are well-publicized by a range of third parties. Such attention includes frequent criticism, which is often exaggerated or unfounded, such as speculation regarding the sufficiency or stability of our management team. Any such negative perceptions, whether caused by us or not, may harm our business and make it more difficult to raise additional funds if needed.

We may be unable to effectively grow, or manage the compliance, residual value, financing and credit risks related to, our various financing programs.

We offer financing arrangements for our vehicles in North America, Europe and Asia primarily through various financial institutions. We also currently offer vehicle financing arrangements directly through our local subsidiaries in certain markets.

Depending on the country, such arrangements are available for specified models and may include operating leases directly with us

under which we typically receive only a very small portion of the total vehicle purchase price at the time of lease, followed by a stream of payments over the term of the lease. We have also offered various arrangements for customers of our solar energy systems whereby they pay us a fixed payment to lease or finance the purchase of such systems or purchase electricity generated by them. If we do not successfully monitor and comply with applicable national, state and/or local financial regulations and consumer protection laws governing these transactions, we may become subject to enforcement actions or penalties.

The profitability of any directly-leased vehicles returned to us at the end of their leases depends on our ability to accurately project our vehicles’ residual values at the outset of the leases, and such values may fluctuate prior to the end of their terms depending on various factors such as supply and demand of our used vehicles, economic cycles and the pricing of new vehicles. We have made in the past and may make in the future certain adjustments to our prices from time to time in the ordinary course of business, which may impact the residual values of our vehicles and reduce the profitability of our vehicle leasing program. The funding and growth of this program also relies on our ability to secure adequate financing and/or business partners. If we are unable to adequately fund our leasing program through internal funds, partners or other financing sources, and compelling alternative financing programs are not available for our customers who may expect or need such options, we may be unable to grow our vehicle deliveries. Furthermore, if our vehicle leasing business grows substantially, our business may suffer if we cannot effectively manage the resulting greater levels of residual risk.

Similarly, we have provided resale value guarantees to vehicle customers and partners for certain financing programs, under which such counterparties may sell their vehicles back to us at certain points in time at pre-determined amounts. However, actual resale values are subject to fluctuations over the term of the financing arrangements, such as from the vehicle pricing changes discussed above. If the actual resale values of any vehicles resold or returned to us pursuant to these programs are materially lower than the pre-determined amounts we have offered, our financial condition and operating results may be harmed.

Finally, our vehicle and solar energy system financing programs and our energy storage sales programs also expose us to customer credit risk. In the event of a widespread economic downturn or other catastrophic event, our customers may be unable or unwilling to satisfy their payment obligations to us on a timely basis or at all. If a significant number of our customers default, we may incur substantial credit losses and/or impairment charges with respect to the underlying assets.

We must manage ongoing obligations under our agreement with the Research Foundation for the State University of New York relating to our Gigafactory New York.

We are party to an operating lease and a research and development agreement through the SUNY Foundation. These agreements provide for the construction and use of our Gigafactory New York, which we have primarily used for the development and production of our Solar Roof and other solar products and components, energy storage components and Supercharger components, and for other lessor-approved functions. Under this agreement, we are obligated to, among other things, meet employment targets as well as specified minimum numbers of personnel in the State of New York and in Buffalo, New York and spend or incur $5.00 billion in combined capital, operational expenses, costs of goods sold and other costs in the State of New York during a period that was initially 10 years beginning April 30, 2018. As we temporarily suspended most of our manufacturing operations at Gigafactory New York pursuant to a New York State executive order issued in March 2020 as a result of the COVID-19 pandemic, we were granted a one-year deferral of our obligation to be compliant with our applicable targets under such agreement on April 30, 2020, which was memorialized in an amendment to our agreement with the SUNY Foundation in July 2020. In April 2021, we were granted an additional deferral through December 31, 2021 subject only to memorialization in writing by us and the SUNY Foundation, as our operations at Gigafactory New York have not yet fully ramped due to a number of factors related to the pandemic. While we expect to have and grow significant operations at Gigafactory New York and the surrounding Buffalo area, any failure by us in any year over the course of the term of the agreement to meet all applicable future obligations may result in our obligation to pay a “program payment” of $41 million to the SUNY Foundation for such year, the termination of our lease at Gigafactory New York which may require us to pay additional penalties, and/or the need to adjust certain of our operations, in particular our production ramp of the Solar Roof or other components. Any of the foregoing events may harm our business, financial condition and operating results.

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

The loss of the services of any of our key employees or any significant portion of our workforce could disrupt our operations or delay the development, introduction and ramp of our products and services. In particular, we are highly dependent on the services of Elon Musk, Technoking of Tesla and our Chief Executive Officer. None of our key employees is bound by an employment agreement for any specific term and we may not be able to successfully attract and retain senior leadership necessary to grow our business. Our future success also depends upon our ability to attract, hire and retain a large number of engineering, manufacturing, marketing, sales and delivery, service, installation, technology and support personnel, especially to support our planned high-volume product sales, market and geographical expansion and technological innovations. Recruiting efforts, particularly for senior employees, may be time-consuming, which may delay the execution of our plans. If we are not successful in managing these risks, our business, financial condition and operating results may be harmed.

Employees may leave Tesla or choose other employers over Tesla due to various factors, such as a very competitive labor market for talented individuals with automotive or technology experience, or any negative publicity related to us. In regions where we have or will have operations, particularly significant engineering and manufacturing centers, there is strong competition for individuals with skillsets needed for our business, including specialized knowledge of electric vehicles, ~~software engineering, manufacturing~~ engineering and electrical and building construction expertise. Moreover, we may be impacted by perceptions relating to reductions in force that we have conducted in the past in order to optimize our organizational structure and reduce costs and the departure of certain senior personnel for various reasons. Likewise, as a result of our temporary suspension of various U.S. manufacturing operations in the first half of 2020, in April 2020 we temporarily furloughed certain hourly employees and reduced most salaried employees’ base salaries. We also compete with both mature and prosperous companies that have far greater financial resources than we do and start-ups and emerging companies that promise short-term growth opportunities.

Finally, our compensation philosophy for all of our personnel reflects our startup origins, with an emphasis on equity-based awards and benefits in order to closely align their incentives with the long-term interests of our stockholders. We periodically seek and obtain approval from our stockholders for future increases to the number of awards available under our equity incentive and employee stock purchase plans. If we are unable to obtain the requisite stockholder approvals for such future increases, we may have to expend additional cash to compensate our employees and our ability to retain and hire qualified personnel may be harmed.

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

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

We must manage risks relating to our information technology systems and the threat of intellectual property theft, data breaches and cyber-attacks.

We must continue to expand and improve our information technology systems as our operations grow, such as product data management, procurement, inventory management, production planning and execution, sales, service and logistics, dealer management, financial, tax and regulatory compliance systems. This includes the implementation of new internally developed systems and the deployment of such systems in the U.S. and abroad. We must also continue to maintain information technology measures designed to protect us against intellectual property theft, data breaches, sabotage and other external or internal cyber-attacks or misappropriation. However, the implementation, maintenance, segregation and improvement of these systems require significant management time, support and cost, and there are inherent risks associated with developing, improving and expanding our core systems as well as implementing new systems and updating current systems, including disruptions to the related areas of business operation. These risks may affect our ability to manage our data and inventory, procure parts or supplies or manufacture, sell, deliver and service products, adequately protect our intellectual property or achieve and maintain compliance with, or realize available benefits under, tax laws and other applicable regulations.

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

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

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

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

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

It is not uncommon for employees of certain trades at companies such as us to belong to a union, which can result in higher employee costs and increased risk of work stoppages. Moreover, regulations in some jurisdictions outside of the U.S. mandate employee participation in industrial collective bargaining agreements and work councils with certain consultation rights with respect to the relevant companies’ operations. Although we work diligently to provide the best possible work environment for our employees, they may still decide to join or seek recognition to form a labor union, or we may be required to become a union signatory. From time to time, labor unions have engaged in campaigns to organize certain of our operations, as part of which such unions have filed unfair labor practice charges against us with the National Labor Relations Board (the "NLRB"), and they may do so in the future. In September 2019, an administrative law judge issued a recommended decision for Tesla on certain issues and against us on certain others. In March 2021, the NLRB adopted a portion of the recommendation and overturned others. ~~We have filed a Notice of Appeal with~~Tesla appealed the decision to the United States Circuit Court for the Fifth ~~Circuit.~~Circuit, which is currently pending. Any unfavorable ultimate outcome for Tesla may have a negative impact on the perception of Tesla’s treatment of our employees. Furthermore, we are directly or indirectly dependent upon companies with unionized work forces, such as suppliers and trucking and freight companies. Any work stoppages or strikes organized by such unions could delay the manufacture and sale of our products and may harm our business and operating results.

We may choose to or be compelled to undertake product recalls or take other similar actions.

As a manufacturing company, we must manage the risk of product recalls with respect to our products. Recalls for our vehicles have resulted from, for example, industry-wide issues with airbags from a particular supplier, concerns of corrosion in Model S and Model X power steering assist motor bolts, certain suspension failures in Model S and Model X, ~~and~~ issues with Model S and Model X media control ~~units.~~units and improper torqueing of bolts to internal specifications on Model 3 and Model Y. In addition to recalls initiated by us for various causes, testing of or investigations into our products by government regulators or industry groups may compel us to initiate product recalls or may result in negative public perceptions about the safety of our products, even if we disagree with the defect determination or have data that shows the actual safety risk to be non-existent. In the future, we may voluntarily or involuntarily initiate recalls if any of our products are determined by us or a regulator to contain a safety defect or be noncompliant with applicable laws and regulations, such as U.S. federal motor vehicle safety standards. Such recalls, whether voluntary or involuntary or caused by systems or components engineered or manufactured by us or our suppliers, could result in significant expense, supply chain complications and service burdens, and may harm our brand, business, prospects, financial condition and operating results.

Our current and future warranty reserves may be insufficient to cover future warranty claims.

We provide a manufacturer’s warranty on all new and used Tesla vehicles we sell. We also provide certain warranties with respect to the energy generation and storage systems we sell, including on their installation and maintenance. For components not manufactured by us, we generally pass through to our customers the applicable manufacturers’ warranties, but may retain some warranty responsibilities for some or all of the life of such components. As part of our energy generation and storage system contracts, we may provide the customer with performance guarantees that guarantee that the underlying system will meet or exceed the minimum energy generation or other energy performance requirements specified in the contract. Under these performance guarantees, we generally bear the risk of electricity production or other performance shortfalls, even if they result from failures in components from third party manufacturers. These risks are exacerbated in the event such manufacturers cease operations or fail to honor their warranties.

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

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

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

There is no guarantee that we will have sufficient cash flow from our business to pay our indebtedness or that we will not incur additional indebtedness.

As of ~~March 31,~~June 30, 2021, we and our subsidiaries had outstanding ~~$9.52~~$8.03 billion in aggregate principal amount of indebtedness (see Note 10, Debt, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). Our consolidated indebtedness may increase our vulnerability to any generally adverse economic and industry conditions. We and our subsidiaries may,

subject to the limitations in the terms of our existing and future indebtedness, incur additional debt, secure existing or future debt or recapitalize our debt.

Holders of convertible senior notes issued by us or our subsidiary may convert such notes at their option prior to the scheduled maturities of the respective convertible senior notes under certain circumstances pursuant to the terms of such notes. Upon conversion of the applicable convertible senior notes, we will be obligated to deliver cash and/or shares pursuant to the terms of such notes. For example, as our stock price has significantly increased, ~~recently,~~ we have seen higher levels of early conversions of such “in-the-money” convertible senior notes. Moreover, holders of such convertible senior notes may have the right to require us to repurchase their notes upon the occurrence of a fundamental change pursuant to the terms of such notes.

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

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

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

Our business and our future plans for expansion are capital-intensive, and the specific timing of cash inflows and outflows may fluctuate substantially from period to period. We may need or want to raise additional funds through the issuance of equity, equity-related or debt securities or through obtaining credit from financial institutions to fund, together with our principal sources of liquidity, the costs of developing and manufacturing our current or future products, to pay any significant unplanned or accelerated expenses or for new significant strategic investments, or to refinance our significant consolidated indebtedness, even if not required to do so by the terms of such indebtedness. We cannot be certain that additional funds will be available to us on favorable terms when required, or at all. If we cannot raise additional funds when we need them, our financial condition, results of operations, business and prospects could be materially and adversely affected.

We may be negatively impacted by any early obsolescence of our manufacturing equipment.

We depreciate the cost of our manufacturing equipment over their expected useful lives. However, product cycles or manufacturing technology may change periodically, and we may decide to update our products or manufacturing processes more quickly than expected. Moreover, improvements in engineering and manufacturing expertise and efficiency may result in our ability to manufacture our products using less of our currently installed equipment. Alternatively, as we ramp and mature the production of our products to higher levels, we may discontinue the use of already installed equipment in favor of different or additional equipment. The useful life of any equipment that would be retired early as a result would be shortened, causing the depreciation on such equipment to be accelerated, and our results of operations may be harmed.

We hold and may acquire digital assets that may be subject to volatile market prices, impairment and unique risks of loss.

In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity, allowing us to invest a portion of such cash in certain alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds and other assets as specified in the future. Thereafter, we invested certain of such cash in bitcoin and also ~~began accepting~~accepted bitcoin as a form of payment for sales of certain of our products in specified regions, subject to applicable ~~laws.~~laws, and suspended this practice in May 2021. We ~~generally intend~~believe in the long-term potential of digital assets both as an investment and also as a liquid alternative to ~~hold~~cash. As with any investment and consistent with how we manage fiat-based cash and cash equivalent accounts, we may increase or decrease our ~~bitcoin positions long-term regardless~~holdings of digital assets at any time based on the needs of the ~~manner~~business and on our view of ~~acquisition.~~market and environmental conditions.

The prices of digital assets have been in the past and may continue to be highly volatile, including as a result of various associated risks and uncertainties. For example, the prevalence of such assets is a relatively recent trend, and their long-term adoption by investors, consumers and businesses is unpredictable. Moreover, their lack of a physical form, their reliance on technology for their creation, existence and transactional validation and their decentralization may subject their integrity to the threat of malicious attacks and technological obsolescence. Finally, the extent to which securities laws or other regulations apply or may apply in the future to such assets is unclear and may change in the future. If we hold digital assets and their values decrease relative to our purchase prices, our financial condition may be harmed.

Moreover, digital assets are currently considered indefinite-lived intangible assets under applicable accounting rules, meaning that any decrease in their fair values below our carrying values for such assets at any time subsequent to their acquisition will require us to recognize impairment charges, whereas we may make no upward revisions for any market price increases until a sale, which may adversely affect our operating results in any period in which such impairment occurs. Moreover, there is no guarantee that future changes in GAAP will not require us to change the way we account for digital assets held by us.

Finally, as intangible assets without centralized issuers or governing bodies, digital assets have been, and may in the future be, subject to security breaches, cyberattacks or other malicious activities, as well as human errors or computer malfunctions that may result in the loss or destruction of private keys needed to access such assets. While we intend to take all reasonable measures to secure any digital assets, if such threats are realized or the measures or controls we create or implement to secure our digital assets fail, it could result in a partial or total misappropriation or loss of our digital assets, and our financial condition and operating results may be harmed.

We transact business globally in multiple currencies and have foreign currency risks related to our revenue, costs of revenue, operating expenses and localized subsidiary debt denominated in currencies other than the U.S. dollar, currently primarily the Chinese yuan, euro, Canadian dollar and ~~Swiss franc.~~Australian dollar. To the extent we have significant revenues denominated in such foreign currencies, any strengthening of the U.S. dollar would tend to reduce our revenues as measured in U.S. dollars, as we have historically experienced. In addition, a portion of our costs and expenses have been, and we anticipate will continue to be, denominated in foreign currencies, including the Chinese yuan and Japanese yen. If we do not have fully offsetting revenues in these currencies and if the value of the U.S. dollar depreciates significantly against these currencies, our costs as measured in U.S. dollars as a percent of our revenues will correspondingly increase and our margins will suffer. Moreover, while we undertake limited hedging activities intended to offset the impact of currency translation exposure, it is impossible to predict or eliminate such impact. As a result, our operating results may be harmed.

We may need to defend ourselves against intellectual property infringement claims, which may be time-consuming and expensive.

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

Our operations could be adversely affected by events outside of our control, such as natural disasters, wars or health epidemics.

We may be impacted by natural disasters, wars, health epidemics, weather conditions or other events outside of our control. For example, our corporate headquarters, the Fremont Factory and Gigafactory Nevada are located in seismically active regions in Northern California and Nevada, and our Gigafactory Shanghai is located in a flood-prone area. Moreover, the area in which our Gigafactory Texas is being built experienced severe winter storms in the first quarter of 2021 that had a widespread impact on utilities and transportation. If major disasters such as earthquakes, floods or other events occur, or our information system or communications network breaks down or operates improperly, our headquarters and production facilities may be seriously damaged, or we may have to stop or delay production and shipment of our products. In addition, the global COVID-19 pandemic has impacted economic markets, manufacturing operations, supply chains, employment and consumer behavior in nearly every geographic region and industry across the world, and we have been, and may in the future be, adversely affected as a result. We may incur expenses or delays relating to such events outside of our control, which could have a material adverse impact on our business, operating results and financial condition.

Demand for our products and services may be impacted by the status of government and economic incentives supporting the development and adoption of such products.

Government and economic incentives that support the development and adoption of electric vehicles in the U.S. and abroad, including certain tax exemptions, tax credits and rebates, may be reduced, eliminated or exhausted from time to time. For example, a $7,500 federal tax credit that was available in the U.S. for the purchase of our vehicles was reduced in phases during and ultimately ended in 2019. We believe that this sequential phase-out likely pulled forward some vehicle demand into the periods preceding each reduction. Moreover, previously available incentives favoring electric vehicles in areas including Ontario, Canada, Germany, Hong Kong, Denmark and California have expired or were cancelled or temporarily unavailable, and in some cases were not eventually replaced or reinstituted, which may have negatively impacted sales. Any similar developments could have some negative impact on demand for our vehicles, and we and our customers may have to adjust to them.

In addition, certain governmental rebates, tax credits and other financial incentives that are currently available with respect to our solar and energy storage product businesses allow us to lower our costs and encourage customers to buy our products and investors to invest in our solar financing funds. However, these incentives may expire when the allocated funding is exhausted, reduced or terminated as renewable energy adoption rates increase, sometimes without warning. For example, the U.S. federal government currently offers certain tax credits for the installation of solar power facilities and energy storage systems that are charged from a co-sited solar power facility; however, these tax credits are currently scheduled to decline and/or expire in 2023 and beyond. Likewise, in jurisdictions where net metering is currently available, our customers receive bill credits from utilities for energy that their solar energy systems generate and export to the grid in excess of the electric load they use. The benefit available under net metering has been or has been proposed to be reduced, altered or eliminated in several jurisdictions, and has also been contested and may continue to be contested before the Federal Energy Regulatory Commission. Any reductions or terminations of such incentives may harm our business, prospects, financial condition and operating results by making our products less competitive for ~~potential~~ customers, increasing our cost of capital and adversely impacting our ability to attract investment partners and to form new financing funds for our solar and energy storage assets.

Finally, we and our fund investors claim these U.S. federal tax credits and certain state incentives in amounts based on independently appraised fair market values of our solar and energy storage systems. Nevertheless, the relevant governmental authorities have audited such values and in certain cases have determined that these values should be lower, and they may do so again in the future. Such determinations may result in adverse tax consequences and/or our obligation to make indemnification or other payments to our funds or fund investors.

We are subject to evolving laws and regulations that could impose substantial costs, legal prohibitions or unfavorable changes upon our operations or products.

As we grow our manufacturing operations in additional regions, we are or will be subject to complex environmental, manufacturing, health and safety laws and regulations at numerous jurisdictional levels in the U.S., China, Germany and other locations abroad, including laws relating to the use, handling, storage, recycling, disposal and/or human exposure to hazardous materials, product material inputs and post-consumer products and with respect to constructing, expanding and maintaining our facilities. The costs of compliance, including remediations of any discovered issues and any changes to our operations mandated by new or amended laws, may be significant, and any failures to comply could result in significant expenses, delays or fines. We are also subject to laws and regulations applicable to the supply, manufacture, import, sale and service of automobiles both domestically and abroad. For example, in countries outside of the U.S., we are required to meet standards relating to vehicle safety, fuel economy and emissions that are often materially different from requirements in the U.S., thus resulting in additional investment into the vehicles and systems to ensure regulatory compliance in those countries. This process may include official review and certification of our vehicles

by foreign regulatory agencies prior to market entry, as well as compliance with foreign reporting and recall management systems requirements.

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

Finally, as a manufacturer, installer and service provider with respect to solar generation and energy storage systems, and a supplier of electricity generated and stored by certain of the solar energy and energy storage systems we install for customers, we are impacted by federal, state and local regulations and policies concerning electricity pricing, the interconnection of electricity generation and storage equipment with the electrical grid and the sale of electricity generated by third party-owned systems. If regulations and policies that adversely impact the interconnection or use of our solar and energy storage systems are introduced, they could deter potential customers from purchasing our solar and energy storage products, threaten the economics of our existing contracts and cause us to cease solar and energy storage system sales and operations in the relevant jurisdictions, which may harm our business, financial condition and operating results.

Any failure by us to comply with a variety of U.S. and international privacy and consumer protection laws may harm us.

Any failure by us or our vendor or other business partners to comply with our public privacy notice or with federal, state or international privacy, data protection or security laws or regulations relating to the processing, collection, use, retention, security and transfer of personally identifiable information could result in regulatory or litigation-related actions against us, legal liability, fines, damages, ongoing audit requirements and other significant costs. Substantial expenses and operational changes may be required in connection with maintaining compliance with such laws, and even an unsuccessful challenge by customers or regulatory authorities of our activities could result in adverse publicity and could require a costly response from and defense by us. In addition, certain emerging privacy laws are still subject to a high degree of uncertainty as to their interpretation, application and impact, and may require extensive system and operational changes, be difficult to implement, increase our operating costs, adversely impact the cost or attractiveness of the products or services we offer, or result in adverse publicity and harm our reputation. For example, ~~in May 2018,~~ the General Data Protection Regulation ~~began to fully apply~~applies to the processing of personal information collected from individuals located in the European Union, and has created new compliance obligations and significantly increased fines for noncompliance. Similarly, ~~as of January 2020,~~ the California Consumer Privacy Act imposes certain legal obligations on our use and processing of personal information related to California residents. Finally, new privacy and cybersecurity laws are coming into effect in China. Notwithstanding our efforts to protect the security and integrity of our customers’ personal information, we may be required to expend significant resources to comply with data breach requirements if, for example, 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 may result in fines, penalties and damages and harm our brand, prospects and operating results.

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

We are cooperating with certain government investigations as discussed in Note 12, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. To our knowledge, no government agency in any such ongoing investigation has concluded that any wrongdoing occurred. However, we cannot predict the outcome or impact of any such ongoing matters, and there exists the possibility that we could be subject to liability, penalties and other restrictive sanctions and adverse consequences if the SEC, the U.S. Department of Justice or any other government agency were to pursue legal action in the future. Moreover, we expect to incur costs in responding to related requests for information and subpoenas, and if instituted, in defending against any governmental proceedings.

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

We may face regulatory challenges to or limitations on our ability to sell vehicles directly.

While we intend to continue to leverage our most effective sales strategies, including sales through our website, we may not be able to sell our vehicles through our own stores in certain states in the U.S. with laws that may be interpreted to impose limitations on this direct-to-consumer sales model. It has also been asserted that the laws in some states limit our ability to obtain dealer licenses from state motor vehicle regulators, and such assertions persist. In certain locations, decisions by regulators permitting us to sell vehicles have been and may be challenged by dealer associations and others as to whether such decisions comply with applicable state motor vehicle industry laws. We have prevailed in many of these lawsuits and such results have reinforced our continuing belief that state laws were not intended to apply to a manufacturer that does not have franchise dealers. In some states, there have also been regulatory and legislative efforts by dealer associations to propose laws that, if enacted, would prevent us from obtaining dealer licenses in their states given our current sales model. A few states have passed legislation that clarifies our ability to operate, but at the same time limits the number of dealer licenses we can obtain or stores that we can operate. The application of state laws applicable to our operations continues to be difficult to predict.

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

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 over the last 52 weeks an intra-day trading high of $900.40 per share and a low of ~~$89.28~~$200.75 per share, as adjusted to give effect to the Stock Split. The stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. In particular, a large proportion of our common stock has been historically and may in the future be traded by short sellers which may put pressure on the supply and demand for our common stock, further influencing volatility in its market price. Public perception and other factors outside of our control may additionally impact the stock price of companies like us that garner a disproportionate degree of public attention, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market or the market price of our shares, securities class action litigation has been filed against us. While we defend such actions vigorously, any judgment against us or any future stockholder litigation could result in substantial costs and a diversion of our management’s attention and resources.

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

We expect our period-to-period financial results to vary based on our operating costs, which we anticipate will fluctuate as the pace at which we continue to design, develop and manufacture new products and increase production capacity by expanding our current manufacturing facilities and adding future facilities, may not be consistent or linear between periods. Additionally, our revenues from period to period may fluctuate as we introduce existing products to new markets for the first time and as we develop and introduce new products. As a result of these factors, we believe that quarter-to-quarter comparisons of our financial results, especially in the short term, are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. Moreover, our financial results may not meet expectations of equity research analysts, ratings agencies or investors, who may be focused only on short-term quarterly financial results. If any of this occurs, the trading price of our stock could fall substantially, either suddenly or over time.

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

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

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

The conversion of some or all of the convertible senior notes issued by us or our subsidiaries would dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of any of such notes by their holders, and we may be

required to deliver a significant number of shares. Any sales in the public market of the common stock issuable upon such conversion could adversely affect their prevailing market prices. In addition, the existence of the convertible senior notes may encourage short selling by market participants because the conversion of such notes could be used to satisfy short positions, or the anticipated conversion of such notes into shares of our common stock could depress the price of our common stock.

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

If Elon Musk were forced to sell shares of our common stock that he has pledged to secure certain personal loan obligations, such sales could cause our stock price to decline.

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

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

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

~~None.~~In connection with the offering of 2.00% Convertible Senior Notes due 2024 in May 2019, we sold warrants to each of Société Générale, Wells Fargo Bank, National Association, Goldman, Sachs & Co. LLC and Credit Suisse Capital LLC (the “2019 Warrantholders”). On April 29, 2021, we agreed with the 2019 Warrantholders to partially terminate such warrants, and in connection with such partial termination, we issued an aggregate of 9,194,158 shares of our common stock to the 2019 Warrantholders. Such shares were issued pursuant to an exemption from registration provided by Rule 3(a)(9) of the Securities Act of 1933.

In connection with the offering of 1.25% Convertible Senior Notes due 2021 in March and April 2014, we sold warrants to each of Goldman, Sachs & Co., Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and Deutsche Bank Securities Inc. (the “2014 Warrantholders”). Between June 1, 2021 and June 30, 2021, we issued an aggregate of 7,854,065 shares of our common stock to the 2014 Warrantholders pursuant to their exercise of such warrants, which were net of the applicable exercise prices. Such shares were issued pursuant to an exemption from registration provided by Rule 3(a)(9) of the Securities Act of 1933.

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

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


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


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations	5
	Consolidated Statements of Comprehensive Income ~~(Loss)~~	6
	Consolidated Statements of Redeemable Noncontrolling Interests and Equity	7
	Consolidated Statements of Cash Flows	89
	Notes to Consolidated Financial Statements	910
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2931
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3943
Item 4.	Controls and Procedures	3943

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	4044
Item 1A.	Risk Factors	4145
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5458
Item 3.	Defaults Upon Senior Securities	5458
Item 4.	Mine Safety Disclosures	5458
Item 5.	Other Information	5458
Item 6.	Exhibits	5458

Signatures		5660


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020			2021			2020
Accrued warranty—beginning of period	$	1,468		$	1,089		$	1,534		$	1,130		$	1,468		$	1,089
Warranty costs incurred		(116	)		(81	)		(125	)		(62	)		(241	)		(143	)
Net changes in liability for pre-existing warranties, including expirations and foreign exchange impact		(1	)		3			7			9			6			12
Provision for warranty		183			119			275			120			458			239
Accrued warranty—end of period	$	1,534		$	1,130		$	1,691		$	1,197		$	1,691		$	1,197


	June 30,		December 31,
	2021		2020
Raw materials	$	2,067	$	1,508
Work in process		858		493
Finished goods (1)		1,318		1,666
Service parts		490		434
Total	$	4,733	$	4,101


	March 31,		December 31,
	2021		2020
Raw materials	$	1,836	$	1,508
Work in process		454		493
Finished goods (1)		1,341		1,666
Service parts		501		434
Total	$	4,132	$	4,101


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


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


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐


	Balances at December 31, 2020			Adjustments from Adoption of ASU 2020-06			Balances at January 1, 2021
Assets
Property, plant and equipment, net	$	12,747		$	(45	)	$	12,702
Liabilities
Current portion of debt and finance leases		2,132			50			2,182
Debt and finance leases, net of current portion		9,556			219			9,775
Mezzanine equity
Convertible senior notes		51			(51	)		0
Equity
Additional paid-in capital		27,260			(474	)		26,786
Accumulated deficit		(5,399	)		211			(5,188	)


Production Location	Vehicle Model(s)	Production Status
Fremont Factory	Model S / Model X	Active
	Model 3 / Model Y	Active
Gigafactory Shanghai	Model 3 / Model Y	Active
Gigafactory Berlin	Model Y	Constructing manufacturing facilities
Gigafactory Texas	Model Y	Constructing manufacturing facilities
	Cybertruck	In development
TBD	Tesla Semi	In development
	Tesla Roadster	In development


	Three Months Ended March 31,				Change					Three Months Ended June 30,				Change					Six Months Ended June 30,				Change
(Dollars in millions)	2021		2020		$		%			2021		2020		$		%			2021		2020		$		%
Automotive sales	$	8,705	$	4,893	$	3,812		78	%	$	9,874	$	4,911	$	4,963		101	%	$	18,579	$	9,804	$	8,775		90	%
Automotive leasing		297		239		58		24	%		332		268		64		24	%		629		507		122		24	%
Total automotive revenues		9,002		5,132		3,870		75	%		10,206		5,179		5,027		97	%		19,208		10,311		8,897		86	%
Services and other		893		560		333		59	%		951		487		464		95	%		1,844		1,047		797		76	%
Total automotive & services and other segment revenue		9,895		5,692		4,203		74	%		11,157		5,666		5,491		97	%		21,052		11,358		9,694		85	%
Energy generation and storage segment revenue		494		293		201		69	%		801		370		431		116	%		1,295		663		632		95	%
Total revenues	$	10,389	$	5,985	$	4,404		74	%	$	11,958	$	6,036	$	5,922		98	%	$	22,347	$	12,021	$	10,326		86	%


Exhibit		Incorporated by Reference				Filed
Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Herewith

10.1	Amendment No. 12 to the Second Amended and Restated Loan and Security Agreement, dated as of ~~March 15,~~June 8, 2021, by and among Tesla 2014 Warehouse SPV LLC, Tesla Finance LLC, the Lenders and Group Agents from time to time party thereto, Deutsche Bank Trust Company Americas, as Paying Agent, and Deutsche Bank AG, New York Branch, as Administrative Agent.	—	—	—	—	X

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

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

32.1*	Section 1350 Certifications	—	—	—	—

101.INS	Inline XBRL Instance Document	—	—	—	—	X

101.SCH	Inline XBRL Taxonomy Extension Schema Document	—	—	—	—	X

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.	—	—	—	—	X

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document	—	—	—	—	X

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document	—	—	—	—	X

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document	—	—	—	—	X

104	Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101)


		Tesla, Inc.

Date: ~~April~~July 27, 2021		/s/ Zachary J. Kirkhorn
		Zachary J. Kirkhorn
		Chief Financial Officer
		(Principal Financial Officer and Duly Authorized Officer)


	March 31,			December 31,			June 30,			December 31,
	2021			2020			2021			2020
Machinery, equipment, vehicles and office furniture	$	8,711		$	8,493		$	9,156		$	8,493
Tooling		1,916			1,811			2,038			1,811
Leasehold improvements		1,494			1,421			1,596			1,421
Land and buildings		3,681			3,662			3,725			3,662
Computer equipment, hardware and software		1,020			856			1,148			856
Construction in progress		2,435			1,621			3,826			1,621
		19,257			17,864			21,489			17,864
Less: Accumulated depreciation		(5,389	)		(5,117	)		(5,824	)		(5,117	)
Total	$	13,868		$	12,747		$	15,665		$	12,747