Tesla, Inc. (Form: 10-Q, Received: 07/29/2019 06:22:23)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2019


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

Commission File Number: 001-34756

Tesla, Inc.

(Exact name of registrant as specified in its charter)

Delaware

91-2197729

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3500 Deer Creek Road

Palo Alto, California

94304

(Address of principal executive offices)

(Zip Code)

(650) 681-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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

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:

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

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 July 22, 2019, there were 179,127,239 shares of the registrant’s common stock outstanding.

TESLA, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2019

INDEX

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	4
	Consolidated Balance Sheets	4
	Consolidated Statements of Operations	5
	Consolidated Statements of Comprehensive Loss	6
	Consolidated Statements of Redeemable Noncontrolling Interests and Equity	7
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	69
Item 6.	Exhibits	69

SIGNATURES		71

Forward-Looking Statements

The discussions in this Quarterly Report on Form 10-Q contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, 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. We do not assume any obligation to update any forward-looking statements.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Tesla, Inc.

Consolidated Balance Sheets

(in thousands, except for par values)

(unaudited)

	June 30,			December 31,
	2019			2018
Assets
Current assets
Cash and cash equivalents	$	4,954,740		$	3,685,618
Restricted cash		128,006			192,551
Accounts receivable, net		1,147,100			949,022
Inventory		3,382,358			3,113,446
Prepaid expenses and other current assets		569,748			365,671
Total current assets		10,181,952			8,306,308
Operating lease vehicles, net		2,069,540			2,089,758
Solar energy systems, net		6,200,704			6,271,396
Property, plant and equipment, net		10,082,458			11,330,077
Operating lease right-of-use assets		1,248,277			—
Intangible assets, net		327,358			282,492
Goodwill		153,475			68,159
MyPower customer notes receivable, net of current portion		400,308			421,548
Restricted cash, net of current portion		365,547			398,219
Other assets		842,978			571,657
Total assets	$	31,872,597		$	29,739,614
Liabilities
Current liabilities
Accounts payable	$	3,133,587		$	3,404,451
Accrued liabilities and other		2,622,943			2,094,253
Deferred revenue		883,293			630,292
Resale value guarantees		526,758			502,840
Customer deposits		631,107			792,601
Current portion of long-term debt and finance leases		1,791,085			2,567,699
Total current liabilities		9,588,773			9,992,136
Long-term debt and finance leases, net of current portion		11,234,401			9,403,672
Deferred revenue, net of current portion		1,182,042			990,873
Resale value guarantees, net of current portion		61,200			328,926
Other long-term liabilities		2,655,720			2,710,403
Total liabilities		24,722,136			23,426,010
Commitments and contingencies (Note 15)
Redeemable noncontrolling interests in subsidiaries		580,227			555,964
Equity
Stockholders' equity
Preferred stock; $0.001 par value; 100,000 shares authorized; no shares issued and outstanding		—			—
Common stock; $0.001 par value; 2,000,000 shares authorized; 179,118 and 172,603 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively		179			173
Additional paid-in capital		12,052,458			10,249,120
Accumulated other comprehensive loss		(5,605	)		(8,218	)
Accumulated deficit		(6,331,639	)		(5,317,832	)
Total stockholders' equity		5,715,393			4,923,243
Noncontrolling interests in subsidiaries		854,841			834,397
Total liabilities and equity	$	31,872,597		$	29,739,614

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

Tesla, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenues
Automotive sales	$	5,168,027		$	3,117,865		$	8,676,768		$	5,679,746
Automotive leasing		208,362			239,816			423,482			413,252
Total automotive revenues		5,376,389			3,357,681			9,100,250			6,092,998
Energy generation and storage		368,208			374,408			692,869			784,430
Services and other		605,079			270,142			1,098,021			533,554
Total revenues		6,349,676			4,002,231			10,891,140			7,410,982
Cost of revenues
Automotive sales		4,253,763			2,529,739			7,109,972			4,621,136
Automotive leasing		106,322			136,915			223,414			241,411
Total automotive cost of revenues		4,360,085			2,666,654			7,333,386			4,862,547
Energy generation and storage		325,523			330,273			642,410			705,636
Services and other		743,022			386,374			1,428,555			767,343
Total cost of revenues		5,428,630			3,383,301			9,404,351			6,335,526
Gross profit		921,046			618,930			1,486,789			1,075,456
Operating expenses
Research and development		323,898			386,129			664,072			753,225
Selling, general and administrative		647,261			750,759			1,351,190			1,437,163
Restructuring and other		117,345			103,434			160,816			103,434
Total operating expenses		1,088,504			1,240,322			2,176,078			2,293,822
Loss from operations		(167,458	)		(621,392	)		(689,289	)		(1,218,366	)
Interest income		10,362			5,064			19,124			10,278
Interest expense		(171,979	)		(163,582	)		(329,432	)		(313,128	)
Other (expense) income, net		(40,756	)		50,911			(15,006	)		13,195
Loss before income taxes		(369,831	)		(728,999	)		(1,014,603	)		(1,508,021	)
Provision for income taxes		19,431			13,707			42,304			19,312
Net loss		(389,262	)		(742,706	)		(1,056,907	)		(1,527,333	)
Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests in subsidiaries		19,072			(25,167	)		53,562			(100,243	)
Net loss attributable to common stockholders	$	(408,334	)	$	(717,539	)	$	(1,110,469	)	$	(1,427,090	)
Net loss per share of common stock attributable to common stockholders
Basic	$	(2.31	)	$	(4.22	)		(6.40	)	$	(8.42	)
Diluted	$	(2.31	)	$	(4.22	)		(6.40	)	$	(8.42	)
Weighted average shares used in computing net loss per share of common stock
Basic		176,654			169,997			174,831			169,574
Diluted		176,654			169,997			174,831			169,574

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

Tesla, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net loss	$	(389,262	)	$	(742,706	)	$	(1,056,907	)	$	(1,527,333	)
Other comprehensive income (loss):
Foreign currency translation adjustment		29,414			(64,376	)		2,613			(14,803	)
Comprehensive loss		(359,848	)		(807,082	)		(1,054,294	)		(1,542,136	)
Less: Comprehensive income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests in subsidiaries		19,072			(25,167	)		53,562			(100,243	)
Comprehensive loss attributable to common stockholders	$	(378,920	)	$	(781,915	)	$	(1,107,856	)	$	(1,441,893	)

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

Tesla, Inc.

Consolidated Statements of Redeemable Noncontrolling Interests and Equity

(in thousands, except per share data)

(unaudited)

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

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

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

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

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

Tesla, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2019			2018
Cash Flows from Operating Activities
Net loss	$	(1,056,907	)	$	(1,527,333	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and impairment		1,046,149			901,488
Stock-based compensation		418,241			338,983
Amortization of debt discounts and issuance costs		82,123			74,419
Inventory write-downs		115,672			46,098
Loss on disposals of fixed assets		47,931			118,850
Foreign currency transaction (gains) losses		(10,848	)		6,185
Non-cash interest and other operating activities		158,699			5,685
Operating cash flow related to repayment of discounted convertible notes		(188,107	)		—
Changes in operating assets and liabilities, net of effect of business combinations:
Accounts receivable		(168,312	)		(98,509	)
Inventory		(352,428	)		(1,055,556	)
Operating lease vehicles		(175,898	)		(186,208	)
Prepaid expenses and other current assets		(139,141	)		(95,194	)
Other non-current assets		42,165			(59,446	)
Accounts payable and accrued liabilities		49,898			909,720
Deferred revenue		476,556			107,497
Customer deposits		(160,376	)		42,920
Resale value guarantee		(76,332	)		(39,563	)
Other long-term liabilities		114,915			(18,076	)
Net cash provided by (used in) operating activities		224,000			(528,040	)
Cash Flows from Investing Activities
Purchases of property and equipment excluding finance leases, net of sales		(529,609	)		(1,265,475	)
Purchases of solar energy systems		(43,458	)		(140,375	)
Purchase of intangible assets		(5,333	)		—
Business combinations, net of cash acquired		31,012			(5,604	)
Net cash used in investing activities		(547,388	)		(1,411,454	)
Cash Flows from Financing Activities
Proceeds from issuances of common stock in public offerings		848,232			—
Proceeds from issuances of convertible and other debt		5,007,481			3,043,227
Repayments of convertible and other debt		(3,700,332	)		(2,268,716	)
Repayments of borrowings issued to related parties		—			(17,500	)
Collateralized lease repayments		(219,323	)		(200,518	)
Proceeds from exercises of stock options and other stock issuances		95,585			125,071
Principal payments on finance leases		(142,571	)		(48,182	)
Common stock and debt issuance costs		(30,376	)		(3,671	)
Purchase of convertible note hedges		(475,824	)		—
Proceeds from issuance of warrants		174,432			—
Proceeds from investments by noncontrolling interests in subsidiaries		88,866			253,037
Distributions paid to noncontrolling interests in subsidiaries		(148,759	)		(109,545	)
Payments for buy-outs of noncontrolling interests in subsidiaries		(7,589	)		(2,921	)
Net cash provided by financing activities		1,489,822			770,282
Effect of exchange rate changes on cash and cash equivalents and restricted cash		5,471			(12,509	)
Net increase (decrease) in cash and cash equivalents and restricted cash		1,171,905			(1,181,721	)
Cash and cash equivalents and restricted cash, beginning of period		4,276,388			3,964,959
Cash and cash equivalents and restricted cash, end of period	$	5,448,293		$	2,783,238
Supplemental Non-Cash Investing and Financing Activities
Equity issued in connection with business combination	$	207,222		$	—
Acquisitions of property and equipment included in liabilities	$	287,002		$	335,048
Estimated fair value of facilities under build-to-suit leases	$	—		$	61,709

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

Tesla, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 1 – Overview

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

Note 2 – Summary of Significant Accounting Policies

Unaudited Interim Financial Statements

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

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

Revenue Recognition

Automotive Sales Revenue

Automotive Sales with and without Resale Value Guarantee

Automotive sales revenue includes revenues related to deliveries of new vehicles, and specific other features and services that meet the definition of a performance obligation include access to our Supercharger network, internet connectivity, Autopilot and Full Self-Driving (“FSD”) features and over-the-air software updates. Deferred revenue related to the access to our Supercharger network, internet connectivity, Autopilot and FSD features and over-the-air software updates on automotive sales with and without resale value guarantee amounted to $1.19 billion and $882.8 million as of June 30, 2019 and December 31, 2018, respectively. Deferred revenue is equivalent to the total transaction price allocated to the performance obligations that are unsatisfied, or partially unsatisfied, as of the balance sheet date. Revenue recognized from the deferred revenue balance as of December 31, 2018 was $113.5 million for the six months ended June 30, 2019 . From the deferred revenue balance as of January 1, 2018, revenue recognized during the six months ended June 30, 2018 was $44.5 million. Of the total deferred revenue on automotive sales with and without resale value guarantees, we expect to recognize $567.0 million of revenue in the next 12 months. The remaining balance will be recognized over the various performance periods of the obligations, which is up to the eight-year life of the vehicle.

At the time of revenue recognition, we reduce the transaction price and record a sales return reserve against revenue for estimated variable consideration related to future product returns. Such estimates are based on historical experience. On a quarterly basis, we assess the estimated market values of vehicles under our buyback options program to determine whether there will be changes to future product returns. As we accumulate more data related to the buyback values of our vehicles or as market conditions change, there may be material changes to their estimated values. Due to price adjustments we made to our vehicle offerings during the six months ended June 30, 2019 , we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. As a result, along with the estimated variable consideration related to normal future product returns for vehicles sold under the buyback options program in the second quarter, we adjusted our sales return reserve on vehicles previously sold under our buyback options program resulting in a reduction of automotive sales revenues of $64.1 million and $564.6 million for the three and six months ended June 30, 2019, respectively. If customers elect to exercise the buyback option, we expect to be able to subsequently resell the returned vehicles, which resulted in a corresponding reduction in automotive cost of sales of $49.6 million and $458.4 million for the three and six months ended June 30, 2019, respectively. The net impact was $14.5 million and $106.2 million reduction in gross profit for the three and six months ended June 30, 2019, respectively.

Automotive Regulatory Credits

We recognize revenue on the sale of regulatory credits at the time control of the regulatory credits is transferred to the purchasing party as automotive revenue in the consolidated statements of operations. Deferred revenue related to sales of automotive regulatory credits was $140.0 million and $0 as of June 30, 2019 and December 31, 2018, respectively. We expect to recognize the deferred revenue as of June 30, 2019 over the next 1 to 3 years.

Automotive Leasing Revenue

Automotive leasing revenue includes revenue recognized under lease accounting guidance for our direct leasing programs as well as the two programs with resale value guarantees described below.

Direct Vehicle Leasing Program

We have outstanding leases under our direct vehicle leasing programs in the U.S., Canada and in certain countries in Europe. As of June 30, 2019, the direct vehicle leasing program is offered for new Model S, Model X vehicles in the U.S. and Canada and for new Model 3 vehicles in the U.S. Qualifying customers are permitted to lease a vehicle directly from Tesla for up to 48 months. At the end of the lease term, customers have the option of either returning the vehicle to us or purchasing it for a pre-determined residual value, for Model S and Model X leases. We account for these leasing transactions as operating leases. We record leasing revenues to automotive leasing revenue on a straight-line basis over the contractual term, and we record the depreciation of these vehicles to cost of automotive leasing revenue.

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

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

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

At the end of the lease term, we settle our liability in cash by either purchasing the vehicle from the leasing partner for the buyback option amount or paying a shortfall to the option amount the leasing partner may realize on the sale of the vehicle. Any remaining balances within deferred revenue and resale value guarantee will be settled to automotive leasing revenue. The end customers can extend the lease for a period of up to 6 months. In cases where the leasing partner retains ownership of the vehicle after the end of our option period, we expense the net value of the leased vehicle to cost of automotive leasing revenue. The maximum amount we could be required to pay under this program, should we decide to repurchase all vehicles, was $355.7 million and $479.8 million as of June 30, 2019 and December 31, 2018, respectively, including $297.2 million within a 12-month period from June 30, 2019. As of June 30, 2019 and December 31, 2018, we had $399.8 million and $558.3 million, respectively, of such borrowings recorded in resale value guarantees and $68.7 million and $92.5 million, respectively, recorded in deferred revenue liability. For the three and six months ended June 30, 2019, we recognized $49.8 million and $102.7 million, respectively, of leasing revenue related to this program, and $84.7 million and $167.2 million, respectively, for the same periods in 2018. The net carrying amount of operating lease vehicles under this program was $332.9 million and $468.5 million as of June 30, 2019 and December 31, 2018.

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

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

In cases where a customer retains ownership of a vehicle at the end of the guarantee period, the resale value guarantee liability and any remaining deferred revenue balances related to the vehicle are settled to automotive leasing revenue, and the net book value of the leased vehicle is expensed to cost of automotive leasing revenue. If a customer returns the vehicle to us during the guarantee period, we purchase the vehicle from the customer in an amount equal to the resale value guarantee and settle any remaining deferred balances to automotive leasing revenue, and we reclassify the net book value of the vehicle on the consolidated balance sheets to used vehicle inventory. As of June 30, 2019 and December 31, 2018, $187.5 million and $149.7 million, respectively, of the guarantees were exercisable by customers within the next 12 months. For the three and six months ended June 30, 2019, we recognized $37.3 million and $84.8 million, respectively, of leasing revenue related to this program, and $60.6 million and $76.7 million, respectively, for the same periods in 2018. The net carrying amount of operating lease vehicles under this program was $142.1 million and $211.5 million, respectively, as of June 30, 2019 and December 31, 2018.

Services and Other Revenue

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

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

Energy Generation and Storage Sales

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

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

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

Revenue by source

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019			2018
Automotive sales without resale value guarantee	$	4,918,301	$	2,698,239	$	8,601,682		$	4,880,753
Automotive sales with resale value guarantee (1)		138,507		365,616		(252,114	)		664,654
Automotive regulatory credits		111,219		54,010		327,200			134,339
Energy generation and storage sales (2)		225,765		234,602		437,865			532,497
Services and other		605,079		270,142		1,098,021			533,554
Total revenues from sales and services		5,998,871		3,622,609		10,212,654			6,745,797
Automotive leasing		208,362		239,816		423,482			413,252
Energy generation and storage leasing (2)		142,443		139,806		255,004			251,933
Total revenues	$	6,349,676	$	4,002,231	$	10,891,140		$	7,410,982

(1)

We made pricing adjustments to our vehicle offerings during the six months ended June 30, 2019, which resulted in a reduction of automotive sales with resale value guarantee revenues. Refer to Automotive Sales with and without Resale Value Guarantee section above for details. The amount presented represents gross automotive sales with resale value guarantee in the three and six months ended June 30, 2019 net of such pricing adjustments impact.

(2)

Following the adoption of ASU No. 2016-02, Leases, solar energy system sales and PPAs that commence after January 1, 2019, where we are the lessor and were previously accounted for as leases, will no longer meet the definition of a lease and will instead be accounted for in accordance with ASC 606 (refer to the Leases section below for details).

Leases

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

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

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

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

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

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

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

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

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

Income Taxes

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

On June 7, 2019, the Ninth Circuit Court of Appeals issued a new opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation. This opinion reversed the prior decision of the United States Tax Court. We do not expect this to have an impact on our consolidated financial statements.

Net Income (Loss) per Share of Common Stock Attributable to Common Stockholders

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

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Stock-based awards		12,820,081		9,925,584		11,829,378		9,815,543
Convertible senior notes		1,088,699		1,500,618		1,088,699		1,503,118
Warrants		—		270,027		—		286,010

Restricted Cash

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

	June 30,		December 31,		June 30,		December 31,
	2019		2018		2018		2017
Cash and cash equivalents	$	4,954,740	$	3,685,618	$	2,236,424	$	3,367,914
Restricted cash		128,006		192,551		146,822		155,323
Restricted cash, net of current portion		365,547		398,219		399,992		441,722
Total as presented in the consolidated statements of cash flows	$	5,448,293	$	4,276,388	$	2,783,238	$	3,964,959

Concentration of Risk

Credit Risk

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

Supply Risk

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

Operating Lease Vehicles

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

Warranties

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Accrued warranty—beginning of period	$	843,908		$	465,866		$	747,826		$	401,790
Warranty costs incurred		(61,237	)		(49,604	)		(115,426	)		(94,285	)
Net changes in liability for pre-existing warranties, including expirations and foreign exchange impact		5,598			(10,917	)		43,348			(10,416	)
Additional warranty accrued from adoption of the new revenue standard		—			—			—			37,139
Provision for warranty		153,223			118,664			265,744			189,781
Accrued warranty—end of period	$	941,492		$	524,009		$	941,492		$	524,009

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

Recent Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted

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

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

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

Recently adopted accounting pronouncements

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

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

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

Note 3 – Maxwell Acquisition

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

Fair Value of Purchase Consideration

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

Fair Value of Assets Acquired and Liabilities Assumed

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

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

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

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

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

Identifiable Intangible Assets Acquired

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

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

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

Note 4 – Goodwill and Intangible Assets

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

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

	June 30, 2019										December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Other			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Other			Net Carrying Amount
Finite-lived intangible assets:
Developed technology	$	254,526	$	(53,577	)	$	1,130		$	202,079	$	152,431	$	(40,705	)	$	1,205		$	112,931
Trade names		3,175		(710	)		160			2,625		45,275		(44,056	)		170			1,389
Favorable contracts and leases, net		112,817		(20,281	)		—			92,536		112,817		(16,409	)		—			96,408
Other		37,559		(13,463	)		689			24,785		35,559		(11,540	)		719			24,738
Total finite-lived intangible assets		408,077		(88,031	)		1,979			322,025		346,082		(112,710	)		2,094			235,466
Indefinite-lived intangible assets:
Gigafactory 1 water rights		5,333		—			—			5,333		—		—			—			—
In-process research and development (“IPR&D”)		60,290		—			(60,290	)		—		60,290		—			(13,264	)		47,026
Total indefinite-lived intangible assets		65,623		—			(60,290	)		5,333		60,290		—			(13,264	)		47,026
Total intangible assets	$	473,700	$	(88,031	)	$	(58,311	)	$	327,358	$	406,372	$	(112,710	)	$	(11,170	)	$	282,492

In April 2019, the Company determined to abandon further development efforts on the IPR&D and therefore impaired the remaining $47.0 million in the quarter ended June 30, 2019, in restructuring and other expenses.

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

Six months ending December 31, 2019	$	23,222
2020		44,550
2021		44,550
2022		44,550
2023		38,362
Thereafter		126,791
Total	$	322,025

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 thousands):

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

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

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 assets or other long-term liabilities, with any changes in their fair values recognized as other income (expense), net, in the consolidated statements of operations and with any cash flows recognized as investing activities in the consolidated statements of cash flows. Our interest rate swaps outstanding were as follows (in thousands):

June 30, 2019

December 31, 2018

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

862,853

1,517

28,356

800,293

12,159

1,089

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Gross gains	$	—	$	2,747	$	155	$	12,410
Gross losses	$	18,521	$	1,170	$	37,964	$	1,205

Disclosure of Fair Values

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

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

	June 30, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Convertible senior notes	$	4,150,996	$	4,727,156	$	3,660,316	$	4,346,642
Senior notes	$	1,780,345	$	1,584,000	$	1,778,756	$	1,575,000
Participation interest	$	19,802	$	19,285	$	18,946	$	18,431
Solar asset-backed notes	$	1,169,430	$	1,214,611	$	1,183,675	$	1,206,755
Solar loan-backed notes	$	189,956	$	202,891	$	203,052	$	211,788
Automotive asset-backed notes	$	945,614	$	952,042	$	1,172,160	$	1,179,910

Note 6 – Inventory

Our inventory consisted of the following (in thousands):

	June 30,		December 31,
	2019		2018
Raw materials	$	1,095,888	$	931,828
Work in process		334,641		296,991
Finished goods		1,600,214		1,581,763
Service parts		351,615		302,864
Total	$	3,382,358	$	3,113,446

Finished goods inventory included vehicles in transit to fulfill customer orders, new vehicles available for immediate sale at our retail and service center locations, used vehicles and energy storage products

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

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

Note 7 – Solar Energy Systems, Net

Solar energy systems, net, consisted of the following (in thousands):

	June 30,			December 31,
	2019			2018
Solar energy systems in service	$	6,587,439		$	6,430,729
Initial direct costs related to customer solar energy system lease acquisition costs		101,197			99,380
		6,688,636			6,530,109
Less: accumulated depreciation and amortization		(608,006	)		(495,518	)
		6,080,630			6,034,591
Solar energy systems under construction		49,777			67,773
Solar energy systems pending interconnection		70,297			169,032
Solar energy systems, net (1)	$	6,200,704		$	6,271,396

(1)	As of June 30, 2019 and December 31, 2018, solar energy systems, net, included $36.0 million of finance leased assets with accumulated depreciation and amortization of $4.7 million and $3.8 million, respectively.

Note 8 – Property, Plant and Equipment

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

	June 30,			December 31,
	2019			2018
Machinery, equipment, vehicles and office furniture	$	6,919,869		$	6,328,966
Tooling		1,463,543			1,397,514
Leasehold improvements		1,010,893			960,971
Land and buildings		2,839,746			4,047,006
Computer equipment, hardware and software		553,265			487,421
Construction in progress		543,452			807,297
		13,330,768			14,029,175
Less: Accumulated depreciation		(3,248,310	)		(2,699,098	)
Total	$	10,082,458		$	11,330,077

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

Construction in progress is primarily comprised of tooling and equipment related to the manufacturing of our vehicles and Gigafactory Shanghai construction. Completed assets are transferred to their respective asset classes, and depreciation begins when an asset is ready for its intended use. Interest on outstanding debt is capitalized during periods of significant capital asset construction and amortized over the useful lives of the related assets. During the three and six months ended June 30, 2019 , we capitalized $7.1 million and $14.6 million , respectively, of interest. During the three and six months ended June 30, 2018, we capitalized $15.7 million and $34.5 million, respectively, of interest.

Depreciation expense during the three and six months ended June 30, 2019 was $334.6 million and $634.0 million , respectively. Depreciation expense during the three and six months ended June 30, 2018 was $251.8 million and $497.0 million, respectively. Gross property and equipment under finance leases as of June 30, 2019 and December 31, 2018 was $1.96 billion and $1.52 billion, respectively. Accumulated depreciation on property and equipment under finance leases as of these dates was $339.3 million and $231.6 million, respectively.

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

Note 9 – Other Long-Term Liabilities

Other long-term liabilities consisted of the following (in thousands):

	June 30,		December 31,
	2019		2018
Accrued warranty reserve	$	653,095	$	547,125
Build-to-suit lease liability		—		1,662,017
Operating lease right-of-use liabilities		1,030,797		—
Deferred rent expense		—		59,252
Financing obligation		44,549		50,383
Sales return reserve		577,914		84,143
Other noncurrent liabilities		349,365		307,483
Total other long-term liabilities	$	2,655,720	$	2,710,403

As of December 31, 2018, the table above included $1.66 billion of gross non-current build-to-suit lease liabilities. As a result of the adoption of the new lease standard on January 1, 2019, we have de-recognized all build-to-suit lease liabilities and have reassessed these leases to be operating lease right-of-use liabilities as of June 30, 2019. Due to price adjustments we made to our vehicle offerings during the six months ended June 30, 2019, we increased our sales return reserve significantly on vehicles previously sold under our buyback options program. Refer to Note 2, Summary of Significant Accounting Policies, for details on these transactions.

Note 10 – Customer Deposits

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

Note 11 – Long-Term Debt Obligations

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

	Unpaid						Unused
	Principal		Net Carrying Value				Committed		Contractual			Contractual
	Balance		Current		Long-Term		Amount (1)		Interest Rates			Maturity Date
Recourse debt:
1.25% Convertible Senior Notes due in 2021 ("2021 Notes")		1,380,000		—		1,273,206		—		1.25	%	March 2021
2.375% Convertible Senior Notes due in 2022 ("2022 Notes")		977,500		—		886,513		—		2.375	%	March 2022
2.00% Convertible Senior Notes due in 2024 ("2024 Notes")		1,840,000		—		1,340,143		—		2.00	%	May 2024
5.30% Senior Notes due in 2025 ("2025 Notes")		1,800,000		—		1,780,345		—		5.30	%	August 2025
Credit Agreement		1,740,000		141,711		1,598,289		504,993	3.4% -5.5%			June 2020-July 2023
1.625% Convertible Senior Notes due in 2019		565,992		556,575		—		—		1.625	%	November 2019
Zero-Coupon Convertible Senior Notes due in 2020		103,000		—		94,559		—		0.0	%	December 2020
Vehicle, Solar Bonds and other Loans		144,668		14,712		126,948		1,000	1.8%-6.8%			September 2019-January 2031
Total recourse debt		8,551,160		712,998		7,100,003		505,993
Non-recourse debt:
Warehouse Agreements		321,650		45,452		276,198		778,350	3.8%-4.1%			September 2020
Canada Credit Facility		56,639		28,878		27,761		—	3.6%-5.9%			November 2022
Term Loan due in 2019		161,944		161,944		—		—		5.9	%	December 2019
Term Loan due in 2021		166,152		7,284		158,313		—		6.1	%	January 2021
Solar Revolving Credit Facility		41,908		—		41,908		—		6.0	%	June 2022
China Loan Agreement		27,478		27,478		—		482,122		3.9	%	March 2020
Cash equity debt		461,926		9,401		438,534		—	5.3%-5.8%			July 2033-January 2035
Solar asset-backed notes		1,198,962		33,640		1,135,790		—	4.0%-7.7%			September 2024-February 2048
Solar loan-backed notes		196,924		10,671		179,285		—	4.8%-7.5%			September 2048-September 2049
Automotive asset-backed notes		949,951		400,665		544,949		—	2.3%-7.9%			December 2019-June 2022
Solar Renewable Energy Credit and other Loans		24,995		21,417		3,106		27,201	4.4%-8.2%			September 2019-July 2021
Total non-recourse debt		3,608,529		746,830		2,805,844		1,287,673
Total debt	$	12,159,689	$	1,459,828	$	9,905,847	$	1,793,666

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

	Unpaid						Unused
	Principal		Net Carrying Value				Committed		Contractual			Contractual
	Balance		Current		Long-Term		Amount (1)		Interest Rates			Maturity Date
Recourse debt:
0.25% Convertible Senior Notes due in 2019 ("2019 Notes")		920,000		912,625		—		—		0.25	%	March 2019
2021 Notes		1,380,000		—		1,243,496		—		1.25	%	March 2021
2022 Notes		977,500		—		871,326		—		2.375	%	March 2022
2025 Notes		1,800,000		—		1,778,756		—		5.30	%	August 2025
Credit Agreement		1,540,000		—		1,540,000		230,999	1% plus LIBOR			June 2020
1.625% Convertible Senior Notes due in 2019		565,992		541,070		—		—		1.625	%	November 2019
Zero-Coupon Convertible Senior Notes due in 2020		103,000		—		91,799		—		0.0	%	December 2020
Vehicle, Solar Bonds and other Loans		100,928		1,322		100,190		—	1.8%-7.6%			January 2019-January 2031
Total recourse debt		7,387,420		1,455,017		5,625,567		230,999
Non-recourse debt:
Warehouse Agreements		92,000		13,604		78,396		1,008,000	3.9%-4.2%			September 2020
Canada Credit Facility		73,220		31,766		41,454		—	3.6%-5.9%			November 2022
Term Loan due in 2019		180,624		180,624		—		—		6.1	%	January 2019
Term Loan due in 2021		169,050		6,876		161,453		—		6.0	%	January 2021
Cash equity debt		466,837		10,911		441,472		—	5.3%-5.8%			July 2033-January 2035
Solar asset-backed notes		1,214,071		28,761		1,154,914		—	4.0%-7.7%			September 2024-February 2048
Solar loan-backed notes		210,249		9,888		193,164		—	4.8%-7.5%			September 2048-September 2049
Automotive asset-backed notes		1,177,937		467,926		704,234		—	2.3%-7.9%			December 2019-June 2022
Solar Renewable Energy Credit and other Loans		26,742		16,612		9,836		17,633	5.1%-7.9%			December 2019-July 2021
Total non-recourse debt		3,610,730		766,968		2,784,923		1,025,633
Total debt	$	10,998,150	$	2,221,985	$	8,410,490	$	1,256,632

(1)

Unused committed amounts under some of our credit facilities and financing funds 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). Upon draw-down of any unused committed amounts, there are no restrictions on use of available funds for general corporate purposes.

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

2019 Notes

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

2024 Notes, Bond Hedges and Warrant Transactions

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

Each $1,000 of principal of the 2024 Notes is initially convertible into 3.2276 shares of our common stock, which is equivalent to an initial conversion price of $309.83 per share, subject to adjustment upon the occurrence of specified events. Holders of the 2024 Notes may convert, at their option, on or after February 15, 2024. Further, holders of the 2024 Notes may convert, at their option, prior to February 15, 2024 only under the following circumstances: (1) during any calendar quarter commencing after September 30, 2019 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each trading day; (2) during the five-business day period after any five-consecutive trading day period in which the trading price per $1,000 principal amount of the 2024 Notes for each trading day of such period is less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day, or (3) if specified corporate events occur. Upon conversion, the 2024 Notes will be settled in cash, shares of our common stock or a combination thereof, at our election. If a fundamental change occurs prior to the maturity date, holders of the 2024 Notes may require us to repurchase all or a portion of their 2024 Notes for cash at a repurchase price equal to 100% of the principal amount plus any accrued and unpaid interest. In addition, if specific corporate events occur prior to the maturity date, we would increase the conversion rate for a holder who elects to convert its 2024 Notes in connection with such an event in certain circumstances. As of June 30, 2019, none of the conditions permitting the holders of the 2024 Notes to early convert had been met. Therefore, the 2024 Notes are classified as long-term.

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

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

Credit Agreement

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

China Loan Agreement

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

Solar Revolving Credit Facility

In June 2019, one of our subsidiaries entered into a loan agreement with a bank for a revolving credit facility of up to $50.0 million. The solar revolving credit facility bears interest at an annual rate of 2.50% plus: (i) for LIBOR loans, at our option, three-month LIBOR or daily LIBOR and (ii) for Base Rate loans, the highest of (a) the Federal Funds Rate plus 0.50%, (b) the Prime Rate, and (c) the three-month LIBOR plus 1.00%.The solar revolving credit facility is secured by certain assets of the subsidiary and was non-recourse to our other assets.

Term Loan due in 2019

In April 2019, we extended the maturity date of the Term Loan due in 2019 to June 2019. In June 2019, we further extended the maturity date of the Term Loan due in 2019 to December 2019.

Interest Incurred

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 2018 Notes, the 2019 Notes, the 2021 Notes, the 2022 Notes and the 2024 Notes (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Contractual interest coupon	$	15,533	$	10,588	$	25,892	$	21,136
Amortization of debt issuance costs		1,470		1,642		2,940		3,257
Amortization of debt discounts		33,467		30,525		61,541		60,384
Total	$	50,470	$	42,755	$	90,373	$	84,777

Note 12 – Leases

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

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

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

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

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

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

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

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

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

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

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

Total lease expense	$	208,067	$	390,130

(1)	Includes short-term leases and variable lease costs, which are immaterial.

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

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

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

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

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

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

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

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

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

	Operating		Finance
	Leases		Leases
2019	$	275,654	$	416,952
2020		256,931		503,545
2021		230,406		506,197
2022		182,911		23,828
2023		157,662		4,776
Thereafter		524,590		5,938
Total minimum lease payments	$	1,628,154		1,461,236
Less: Interest				122,340
Present value of lease obligations				1,338,896
Less: Current portion				345,714
Long-term portion of lease obligations			$	993,182

Non-cancellable Operating Lease Receivables

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

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

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

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

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

Note 13 – Common Stock

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

Note 14 – Equity Incentive Plans

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

As of June 30, 2019, 12,260,875 shares were reserved and available for issuance under the 2019 Plan.

2018 CEO Performance Award

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


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

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

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

•

Adjusted EBITDA of $3.0 billion

Stock-based compensation expense associated with the 2018 CEO Performance Award is recognized ratably over the longer of the expected achievement period for each pair of market capitalization or operational milestones, beginning at the point in time, which may or may not be the grant date, when the relevant operational milestone is considered probable of being met. In addition, if an operational milestone that was not considered probable at the grant date later becomes probable, we will record at such time cumulative catch-up expense for the service provided between the grant date and such time, which may be material depending on the length of such period. The market capitalization milestone period and the valuation of each tranche are determined using a Monte Carlo simulation and is used as the basis for determining the expected achievement period. The probability of meeting an operational milestone is based on a subjective assessment of our future financial projections. Even though no tranches of the 2018 CEO Performance Award vest unless a market capitalization and a matching operational milestone are both achieved, stock-based compensation expense is recognized only when an operational milestone is considered probable of achievement regardless of how much additional market capitalization must be achieved in order for a tranche to vest. At our current market capitalization, even the first tranche of the 2018 CEO Performance Award will not vest unless our market capitalization were to more than double from the current level and stay at that increased level for a sustained period of time. Additionally, stock-based compensation represents a non-cash expense and is recorded as a selling, general, and administrative operating expense in our consolidated statements of operations.

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

2014 Performance-Based Stock Option Awards

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

•

1/4th of each award vests upon completion of the first Model X production vehicle;

•

1/4th of each award vests upon achieving aggregate production of 100,000 vehicles in a trailing 12-month period;

•

1/4th of each award vests upon completion of the first Model 3 production vehicle; and

•

1/4th of each award vests upon achieving an annualized gross margin of greater than 30% for any three-year period.

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

•

Completion of the first Model X production vehicle;

•

Completion of the first Model 3 production vehicle; and

•

Aggregate production of 100,000 vehicles in a trailing 12-month period.

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

2012 CEO Performance Award

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

•

Successful completion of the Model X alpha prototype;

•

Successful completion of the Model X beta prototype;

•

Completion of the first Model X production vehicle;

•

Aggregate production of 100,000 vehicles;

•

Successful completion of the Model 3 alpha prototype;

•

Successful completion of the Model 3 beta prototype;

•

Completion of the first Model 3 production vehicle;

•

Aggregate production of 200,000 vehicles; and

•

Aggregate production of 300,000 vehicles.

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

Our CEO historically earned a base salary that reflected the applicable minimum wage requirements under California law, and he is subject to income taxes based on such base salary. However, he has never accepted his salary. Commencing in May 2019 at our CEO’s request, we eliminated altogether the earning and accrual of this base salary.

Summary Stock-Based Compensation Information

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cost of revenues	$	34,607	$	21,661	$	61,817	$	45,369
Research and development		71,474		65,937		143,956		127,044
Selling, general and administrative		102,948		105,869		209,654		162,693
Restructuring and other		834		3,877		2,814		3,877
Total	$	209,863	$	197,344	$	418,241	$	338,983

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

Note 15 – Commitments and Contingencies

Operating Lease Arrangement in Buffalo, New York

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

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

Legal Proceedings

Securities Litigation Relating to the SolarCity Acquisition

Between September 1, 2016 and October 5, 2016, seven lawsuits were filed in the Delaware Court of Chancery by purported stockholders of Tesla challenging our acquisition of SolarCity. Following consolidation, the lawsuit names as defendants the members of Tesla’s board of directors as then constituted and alleges, among other things, that board members breached their fiduciary duties in connection with the acquisition. The complaint asserts both derivative claims and direct claims on behalf of a purported class and seeks, among other relief, unspecified monetary damages, attorneys’ fees, and costs. On January 27, 2017, defendants filed a motion to dismiss the operative complaint. Rather than respond to the defendants’ motion, the plaintiffs filed an amended complaint. On March 17, 2017, defendants filed a motion to dismiss the amended complaint. On December 13, 2017, the Court heard oral argument on the motion. On March 28, 2018, the Court denied defendants’ motion to dismiss. Defendants filed a request for interlocutory appeal, but the Delaware Supreme Court denied that request 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. A mediation was held on June 10, 2019, following which the matter did not settle. The parties are proceeding with discovery, and the case is set for trial in March 2020.

These plaintiffs and others filed parallel actions in the U.S. District Court for the District of Delaware on or about 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.

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

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 the Company’s preparedness to produce Model 3 vehicles. Plaintiffs filed an amended complaint on March 23, 2018, and defendants filed a motion to dismiss on May 25, 2018. The court granted 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 and on July 17, 2019 filed their opening brief. We expect that our response will likely be due in September 2019. We continue to believe that the claims are without merit and intend to defend against this lawsuit vigorously. We are unable to estimate the possible loss or range of loss, if any, associated with this lawsuit.

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

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 Mr. Musk and the members of Tesla’s board of directors as then constituted, alleging 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 which we are awaiting a ruling. We believe the claims asserted in this lawsuit are without merit and intend to defend against them vigorously.

Securities Litigation Relating to Potential Going Private Transaction

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

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

On March 7, 2019, various stockholders filed a derivative suit in the Delaware Court of Chancery, purportedly on behalf of the Company, naming Elon Musk and Tesla’s board of directors, also related to Mr. Musk’s August 7, 2018 Twitter post that is the basis of the above-referenced consolidated purported stockholder class action as well as Mr. Musk’s February 19, 2019 Twitter post regarding Tesla’s vehicle production. The suit asserts claims for breach of fiduciary duty and seeks declaratory and injunctive relief, unspecified damages, and other relief. Plaintiffs moved for expedited proceedings in connection with the declaratory and injunctive relief. Briefs were filed on March 13, 2019 and the hearing held on March 18, 2019. Defendants prevailed, with the Court denying plaintiffs’ request for an expedited trial and granting defendants’ request to stay this action pending the outcome of the above-referenced consolidated purported stockholder class action.

Settlement with SEC related to Potential Going Private Transaction

On October 16, 2018, the U.S. District Court for the Southern District of New York entered a final judgment approving the terms of a settlement filed with the Court on September 29, 2018, in connection with the actions taken by the U.S. Securities and Exchange Commission (the “SEC”) relating to Elon Musk’s prior statement that he was considering taking Tesla private. Without admitting or denying any of the SEC’s allegations, and with no restriction on Mr. Musk’s ability to serve as an officer or director on the Board (other than as its Chair), among other things, we and Mr. Musk paid civil penalties of $20 million each and agreed that an independent director will serve as Chair of the Board for at least three years, and we appointed such an independent Chair of the Board and two additional independent directors to the Board, and further enhanced our disclosure controls and other corporate governance-related matters. On April 26, 2019, the settlement was amended to modify certain of the previously-agreed disclosure procedures to clarify the application of such procedures, which was subsequently approved by the Court. All other terms of the prior settlement were reaffirmed without modification.

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

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

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

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

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

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

Letters of Credit

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

Note 16 – Variable Interest Entity Arrangements

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

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

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

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

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

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

	June 30,		December 31,
	2019		2018
Assets
Current assets
Cash and cash equivalents	$	90,872	$	75,203
Restricted cash		62,446		130,927
Accounts receivable, net		42,865		18,702
Prepaid expenses and other current assets		8,850		10,262
Total current assets		205,033		235,094
Operating lease vehicles, net		470,571		155,439
Solar energy systems, net		5,078,928		5,116,728
Restricted cash, net of current portion		64,739		65,262
Other assets		71,177		55,554
Total assets	$	5,890,448	$	5,628,077
Liabilities
Current liabilities
Accounts payable	$	38	$	32
Accrued liabilities and other		91,040		132,774
Deferred revenue		34,535		21,345
Current portion of long-term debt and finance leases		625,179		662,988
Total current liabilities		750,792		817,139
Deferred revenue, net of current portion		204,407		177,451
Long-term debt and finance leases, net of current portion		1,259,682		1,237,707
Other long-term liabilities		28,018		26,400
Total liabilities	$	2,242,899	$	2,258,697

Note 17 – Related Party Transactions

Related party balances were comprised of the following (in thousands):

	June 30,		December 31,
	2019		2018
Solar Bonds issued to related parties	$	100	$	100
Convertible senior notes due to related parties	$	2,754	$	2,674

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

In May 2019, our CEO purchased from us 102,880 shares of our common stock in a public offering at the public offering price for an aggregate $25.0 million.

Note 18 – Segment Reporting and Information about Geographic Areas

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Automotive segment
Revenues	$	5,981,468	$	3,627,823	$	10,198,271	$	6,626,552
Gross profit	$	878,361	$	574,795	$	1,436,330	$	996,662
Energy generation and storage segment
Revenues	$	368,208	$	374,408	$	692,869	$	784,430
Gross profit	$	42,685	$	44,135	$	50,459	$	78,794

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
United States	$	3,480,000	$	2,246,637	$	5,809,569	$	4,115,828
China		689,735		527,230		1,469,148		1,035,933
Norway		380,373		224,421		796,433		386,741
Netherlands		248,102		206,550		361,453		353,076
Other		1,551,466		797,393		2,454,537		1,519,404
Total	$	6,349,676	$	4,002,231	$	10,891,140	$	7,410,982

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

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

	June 30,		December 31,
	2019		2018
United States	$	15,620,488	$	16,741,409
International		662,674		860,064
Total	$	16,283,162	$	17,601,473

Note 19 – Restructuring and Other

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

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

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

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

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

Overview

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

Automotive

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

Energy Generation and Storage

We are working on revamping the customer service experience for solar products through simplicity and accessibility by streamlining traditionally complex ordering, permitting, installation and back-end service processes, ultimately making our solar products even more compelling to consumers. In addition to retrofit solar energy systems, we offer our Solar Roof product that combines solar energy generation with attractive, integrated styling. Our energy storage products, which we manufacture at Gigafactory 1, consist of Powerwall, mostly for residential applications, and Powerpack, for commercial, industrial and utility-scale applications.

Management Opportunities, Challenges and Risks

Automotive—Demand and Sales

While the markets for alternative fuel vehicles and self-driving technology are increasingly competitive, we expect to generate incremental global demand for our vehicles by constantly innovating and making them accessible to larger and previously untapped consumer and commercial markets. An important factor in our success will be our Autopilot and FSD technologies that currently enable the driver-assistance features in our vehicles, and in which we are making significant strides through our proprietary and powerful FSD computer and remotely updateable artificial intelligence software. For our FSD customers, we are now rolling out our Navigate on Autopilot feature in additional markets and refining for general release the ability of our vehicles to be remotely summoned in parking lots and react to traffic lights and stop signs. Ultimately, while we are subject to regulatory constraints over which we have no control, our goal is a fully autonomously-driven future that improves safety and provides our customers with convenience and additional income through participation in an autonomous Tesla ride-hailing network, which we will also operate with our own vehicles.

We also believe that we have an advantage over our competitors in areas such as our battery and powertrain technology, including our leading motor efficiency, and our dedication to safety engineering, as most recently demonstrated by Model 3 achieving 5-star safety ratings from the National Highway Traffic Safety Administration and the European New Car Assessment Programme. In the second quarter of 2019, Model 3 remained the best-selling premium vehicle in the United States and gained ground on its established premium vehicle competition in Europe. Vehicles traded in to us by Model 3 customers continue to validate a wider addressable market for this vehicle than existing owners of premium vehicles, even as we prepare to enter new segments with Model Y and a pickup truck. In particular, we expect our planned production at Gigafactory Shanghai, which will facilitate our ability to offer Model 3 in China at competitive local pricing, will drive further demand and opportunity.

On the other hand, we may be impacted by trade policies, political uncertainty and economic cycles involving geographic regions where we have significant operations. Sales of vehicles in the automotive industry also tend to be cyclical in many markets, which may expose us to increased volatility. In addition, the federal tax credit for the purchase of a qualified electric vehicle in the U.S. was reduced again to $1,875 for each Tesla vehicle delivered in the third or fourth quarter of 2019, and will finally be reduced to $0 for each Tesla vehicle delivered thereafter. We believe that this sequential phase-out has likely pulled forward some vehicle demand into the periods preceding each reduction, and we may see similar pull-forwards through the remainder of 2019. In the long run, we do not expect a meaningful impact to our sales in the U.S., as we believe that each of our vehicle models offers a compelling proposition even without incentives.

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

Automotive—Deliveries and Customer Infrastructure

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

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

Automotive—Production

We also achieved a quarterly record for total vehicle production in the second quarter of 2019, and continue to grow Model 3 production at our Tesla Factory. Furthermore, we are making progress at our Gigafactory Shanghai, where we expect to begin production of certain trims of Model 3 for China by the end of 2019. The first phase of production at Gigafactory Shanghai will have a capacity of 150,000 Model 3 vehicles per year when ramped, and will allow us to access the efficiencies of local production, avoid certain local tariffs on U.S.-manufactured vehicles, and implement a simplified and cost-effective second generation manufacturing process for Model 3. Likewise, we have begun preparations for production of Model Y at the Tesla Factory, where we expect to leverage our past Model 3 production experience to build using manufacturing capacity that is less costly per unit of capacity than that of our original Model 3 line. However, the timeframe for Gigafactory Shanghai is subject to a number of uncertainties, including regulatory approval, supply chain constraints, and the pace of installing production equipment and bringing the factory online. Ultimately, achieving increased total vehicle production cost-effectively will require that we timely address any bottlenecks that may arise as we continue to ramp, establish and maintain sustained supplier capacity, and successfully utilize manufacturing processes at the maximum output rates that we have planned for them, not only for our existing manufacturing capabilities but also for Gigafactory Shanghai and the manufacturing buildout for Model Y.

Energy Generation and Storage Demand, Production and Deployment

We are optimizing ways to reduce customer acquisition costs of our energy generation products, by focusing on selling these products directly and efficiently. We have recently made the online buying experience for our energy products simpler and more accessible by standardizing the offerings for what has traditionally been a cumbersome customized process and offering highly competitive pricing, which should result in cost efficiencies and a larger market. While our retrofit solar system deployments decreased in the second quarter of 2019 from the previous quarter as we continue to implement and refine this strategy, we expect that deployments will stabilize and grow in the second half of the year.

We are also continuing with design iterations and testing on our Solar Roof product to improve our manufacturing capabilities, and we are continuing to expand installations, including to eight states in the United States during the second quarter of 2019.

We remain focused on growth for our energy storage products, and achieved a quarterly deployment record in the second quarter of 2019. After reestablishing certain production at Gigafactory 1 for our energy storage products in 2019, our manufacturing capacity for these products has increased significantly, allowing us to reduce backlog and shorten customer wait times. Moreover, we have seen further manufacturing efficiencies and improvements in our installation processes as we ramp. We also continue to see global opportunities for commercial and utility-scale projects, including to mitigate the costs of electricity and increase energy grid reliability.

Automotive Financing Options

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

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

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

Energy Generation and Storage Financing Options

We offer our customers the choice to either purchase and own solar energy systems or to purchase the energy that our solar energy systems produce through various contractual arrangements. These contractual arrangements include long-term leases and PPAs. In both structures, we install our solar energy systems at our customer’s premises and charge the customer a monthly fee, which alternatively may be prepaid at the customer’s option. In the lease structure, the monthly payment is fixed with a minimum production guarantee. In the PPA structure, we charge customers a fee per kilowatt-hour, or kWh, based on the amount of electricity the solar energy system actually produces. The leases and PPAs are typically for 20 years with a renewal option, and the specified monthly fees may be subject to annual escalations.

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

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

Gigafactory 1

We work together with our suppliers at Gigafactory 1 to integrate production of battery material, cells, modules, battery packs and drive units in one location for vehicles and energy storage products. We are also continuing to invest in Gigafactory 1 to achieve additional production output there. Panasonic has partnered with us on Gigafactory 1 with investments in the production equipment that it uses to manufacture and supply us with battery cells. Under our arrangement with Panasonic, we plan to purchase the full output from their production equipment at negotiated prices. As these terms convey a finance lease, as defined in ASC 842, Leases, we consider their production equipment to be leased assets when production commences. This results in us recording the value of their production equipment within property, plant and equipment, net, on the consolidated balance sheets with a corresponding liability recorded to long-term debt and finance leases. For all suppliers and partners for which we plan to purchase the full output from their production equipment located at Gigafactory 1, we will apply similar accounting. During the three and six months ended June 30, 2019, we recorded $231.2 million and $404.3 million on the consolidated balance sheet.

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

Gigafactory 2

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

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

Gigafactory Shanghai

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

Other Manufacturing

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

Trends in Cash Flow, Capital Expenditures and Operating Expenses

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

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

In March 2018, our stockholders approved the 2018 CEO Performance Award, with vesting contingent on achieving market capitalization and operational milestones. Consequently, we may incur significant additional non-cash stock-based compensation expense over the term of the award as each operational milestone becomes probable of being met. In particular, we will have to record a cumulative catch-up expense at the time each operational milestone becomes probable, which may be material depending on the length of time elapsed from the grant date. See Note 14, 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.

Critical Accounting Policies and Estimates

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 will be affected.

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

Results of Operations

Revenues

	Three Months Ended June 30,				Change						Six Months Ended June 30,				Change
(Dollars in thousands)	2019		2018		$			%			2019		2018		$			%
Automotive sales	$	5,168,027	$	3,117,865	$	2,050,162			66	%	$	8,676,768	$	5,679,746	$	2,997,022			53	%
Automotive leasing		208,362		239,816		(31,454	)		-13	%		423,482		413,252		10,230			2	%
Total automotive revenues		5,376,389		3,357,681		2,018,708			60	%		9,100,250		6,092,998		3,007,252			49	%
Services and other		605,079		270,142		334,937			124	%		1,098,021		533,554		564,467			106	%
Total automotive & services and other segment revenue		5,981,468		3,627,823		2,353,645			65	%		10,198,271		6,626,552		3,571,719			54	%
Energy generation and storage segment revenue		368,208		374,408		(6,200	)		-2	%		692,869		784,430		(91,561	)		-12	%
Total revenues	$	6,349,676	$	4,002,231	$	2,347,445			59	%	$	10,891,140	$	7,410,982	$	3,480,158			47	%

Automotive & Services and Other Segment

Automotive sales revenue includes revenues related to the sale of new Model S, Model X and Model 3 vehicles, including access to our Supercharger network, internet connectivity, Autopilot and FSD features and over-the-air software updates, as well as sales of regulatory credits to other automotive manufacturers. Our revenue from regulatory credits fluctuates by quarter depending on when a contract is executed with a buyer and when the credits are delivered. For example, our revenue from regulatory credit sales in the three months ended June 30, 2019 was $111.2 million while it was $216.0 million in the three months ended March 31, 2019.

Automotive leasing revenue includes the amortization of revenue for Model S, Model X and Model 3 vehicles under direct lease agreements as well as those sold with resale value guarantees accounted for as operating leases under lease accounting. We began offering leasing for Model 3 vehicles in the second quarter of 2019.

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

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

Automotive sales revenue increased $3.00 billion, or 53%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, primarily due to an increase of 97,609 Model 3 deliveries from our significant production ramp in the second half of 2018, delivered at average selling prices that remained relatively consistent year-over-year. Additionally, there was an increase of $192.9 million in sales of regulatory credits to $327.2 million in the six months ended June 30, 2019 compared to $134.3 million in the same period in the prior year. The above increases in revenue were offset by a decrease of 12,669 Model S and Model X deliveries at lower average selling prices due to price adjustments we made to our vehicle offerings in the first half of 2019. Additionally, due to these price adjustments, we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. As a result, along with the estimated variable consideration related to normal future product returns for vehicles sold under the buyback options program, we adjusted our sales return reserve on vehicles previously sold under our buyback options program resulting in a reduction of automotive sales revenues of $564.6 million. Refer to Note 2, Summary of Significant Accounting Policies, to the consolidated statements included elsewhere in the Quarterly Report on Form 10-Q.

Automotive leasing revenue decreased $31.5 million, or 13% , in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. The decrease was primarily due to a decrease in the number of vehicles under leasing programs where our counterparty has retained ownership of the vehicle during or at the end of the guarantee period when compared to the three months ended June 30, 2018 and a decrease in cumulative vehicles under our resale value guarantee financing programs which are accounted for as operating leases. When our counterparty retains ownership, any remaining balances within deferred revenue and resale value guarantee are settled to automotive leasing revenue. The decrease was partially offset by an increase in cumulative vehicles under our direct vehicle leasing program.

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

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

Energy Generation and Storage Segment

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

Energy generation and storage revenue decreased by $6.2 million, or 2%, in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. The decrease was primarily due to a decrease in deployments of cash and loan solar projects. The decrease was partially offset by increases in deployments of Powerpack and Powerwall.

Energy generation and storage revenue decreased by $91.6 million, or 12%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The decrease was primarily due to a decrease in revenue recognized for commercial projects, most predominantly $72.5 million for the South Australia battery project in the prior period, and a decrease in deployments of cash and loan solar projects. These decreases were partially offset by increases in deployments of Powerwall.

Cost of Revenues and Gross Margin

	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			$			%			2019			2018			$			%
Cost of revenues
Automotive sales	$	4,253,763		$	2,529,739		$	1,724,024			68	%	$	7,109,972		$	4,621,136		$	2,488,836			54	%
Automotive leasing		106,322			136,915			(30,593	)		-22	%		223,414			241,411			(17,997	)		-7	%
Total automotive cost of revenues		4,360,085			2,666,654			1,693,431			64	%		7,333,386			4,862,547			2,470,839			51	%
Services and other		743,022			386,374			356,648			92	%		1,428,555			767,343			661,212			86	%
Total automotive & services and other segment cost of revenues		5,103,107			3,053,028			2,050,079			67	%		8,761,941			5,629,890			3,132,051			56	%
Energy generation and storage segment		325,523			330,273			(4,750	)		-1	%		642,410			705,636			(63,226	)		-9	%
Total cost of revenues	$	5,428,630		$	3,383,301		$	2,045,329			60	%	$	9,404,351		$	6,335,526		$	3,068,825			48	%

Gross profit total automotive	$	1,016,304		$	691,027								$	1,766,864		$	1,230,451
Gross margin total automotive		19	%		21	%								19	%		20	%

Gross profit total automotive & services and other segment	$	878,361		$	574,795								$	1,436,330		$	996,662
Gross margin total automotive & services and other segment		15	%		16	%								14	%		15	%

Gross profit energy generation and storage segment	$	42,685		$	44,135								$	50,459		$	78,794
Gross margin energy generation and storage segment		12	%		12	%								7	%		10	%

Total gross profit	$	921,046		$	618,930								$	1,486,789		$	1,075,456
Total gross margin		15	%		15	%								14	%		15	%

Automotive & Services and Other Segment

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

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

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

Cost of automotive sales revenue increased $1.72 billion, or 68% , in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018, primarily due to an increase of 54,863 Model 3 deliveries from our significant production ramp in the second half of 2018. The increase was partially offset by significant reductions in Model 3 average costs per unit compared to the prior period primarily due to temporary under-utilization of manufacturing capacity at lower production volumes in the first half of 2018 and other cost efficiencies. Additionally, due to price adjustments we made to our vehicle offerings in the first half of 2019, we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. If customers elect to exercise the buyback options, we expect to be able to subsequently resell the returned vehicles, which resulted in a reduction of automotive cost of sales of $49.6 million for the three months ended June 30, 2019. Refer to Note 2, Summary of Significant Accounting Policies, to the consolidated statements included elsewhere in the Quarterly Report on Form 10-Q.

Cost of automotive sales revenue increased $2.49 billion, or 54%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, primarily due to an increase of 97,609 Model 3 deliveries from our significant production ramp in the second half of 2018. The increase was partially offset by significant reductions in Model 3 average costs per unit compared to the prior period primarily due to temporary under-utilization of manufacturing capacity at lower production volumes in the first half of 2018 and other cost efficiencies. Additionally, due to price adjustments we made to our vehicle offerings in the first half of 2019, we estimated that there is a greater likelihood that customers will exercise their buyback options that were provided prior to such adjustments. If customers elect to exercise the buyback options, we expect to be able to subsequently resell the returned vehicles, which resulted in a reduction of automotive cost of sales of $458.4 million for the six months ended June 30, 2019. Refer to Note 2, Summary of Significant Accounting Policies, to the consolidated statements included elsewhere in the Quarterly Report on Form 10-Q.

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

Cost of automotive leasing revenue decreased $18.0 million, or 7%, in the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The decrease was primarily due to a decrease in cumulative vehicles under our resale value guarantee financing programs which are accounted for as operating leases. The decrease was partially offset by an increase in cumulative vehicles under our direct vehicle leasing program and an increase in the number of vehicles under leasing programs where our counterparty has retained ownership of the vehicle during or at the end of the guarantee period when compared to the prior period. When our counterparty retains ownership, the net book value of the leased vehicle of the lease vehicle is expensed to cost of automotive leasing revenue.

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

Gross margin for total automotive decreased from 21% to 19% in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. The decrease was primarily related to lower Model S and Model X deliveries at lower margins due to lower average selling prices from price adjustments we made to our vehicle offerings in the three months ended June 30, 2019. Additionally, the price adjustments also resulted in a reduction in gross automotive sales profit of $14.5 million from the adjustment of our sales return reserve on vehicles previously sold under our buyback options program. The decrease was partially offset by improvement of Model 3 margins compared to the prior period as we achieved significant manufacturing efficiencies in the production of Model 3 in the second half of 2018 and first half of 2019.

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

Gross margin for total automotive & services and other segment decreased from 16% to 15% in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. Gross margin for total automotive & services and other segment decreased from 15% to 14% in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The decreases of gross margin in the three and six months ended June 30, 2019 compared to the same periods in the prior year were primarily due to the automotive gross margin impacts discussed above.

Energy Generation and Storage Segment

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

Cost of energy generation and storage revenue decreased by $4.8 million, or 1%, in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. The decrease was primarily due to a decrease in cost of revenue for cash and loan solar projects from lower deployments. The decrease was partially offset by increases in cost of revenue for Powerpack and Powerwall from increased deployments, and higher costs from temporary manufacturing under-utilization of our Solar Roof ramp.

Cost of energy generation and storage revenue decreased by $63.2 million, or 9%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 The decrease was primarily due to a decrease in cost of revenue for commercial energy storage projects, most predominantly $72.5 million for the South Australia battery project in the prior period, and a decrease in cost of revenue for cash and loan solar projects from lower deployments. These decreases were partially offset by increases in cost of revenue for Powerwall from increased deployments, and higher costs from temporary manufacturing under-utilization of our Solar Roof ramp.

Gross margin for energy generation and storage remained relatively consistent at 12% in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. Energy storage margins improved compared to the prior period as a result of higher average selling prices and certain favorable changes in cost. The increase was partially offset by lower margins in our cash and loan solar energy system business driven by higher fixed costs per project as a result of lower deployments in the three months ended June 30, 2019. Additionally, higher costs from temporary manufacturing under-utilization of our Solar Roof ramp have further offset an increase in margins.

Gross margin for energy generation and storage decreased from 10% to 7% in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The decrease was primarily due to lower margins in our cash and loan solar energy system business driven by higher fixed costs per project as a result of lower deployments in the six months ended June 30, 2019. Additionally, higher costs from temporary manufacturing under-utilization of our Solar Roof ramp have further contributed to a decrease in margins.

Research and Development Expense

	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			$			%			2019			2018			$			%
Research and development	$	323,898		$	386,129		$	(62,231	)		-16	%	$	664,072		$	753,225		$	(89,153	)		-12	%
As a percentage of revenues		5	%		10	%								6	%		10	%

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

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

R&D expenses decreased $62.2 million, or 16%, in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. The decrease was primarily due to a $32.2 million decrease in employee and labor related expenses from cost efficiency initiatives, a $20.2 million decrease in expensed materials and a $10.1 million decrease in professional and outside service expenses.

R&D expenses decreased $89.2 million, or 12%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The decrease was primarily due to a $52.6 million decrease in employee and labor related expenses from cost efficiency initiatives and a $24.7 million decrease in facilities, freight, and depreciation expenses.

Selling, General and Administrative Expense

	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			$			%			2019			2018			$			%
Selling, general and administrative	$	647,261		$	750,759		$	(103,498	)		-14	%	$	1,351,190		$	1,437,163		$	(85,973	)		-6	%
As a percentage of revenues		10	%		19	%								12	%		19	%

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

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

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

SG&A expenses decreased $86.0 million, or 6%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The decrease was primarily due to a $145.4 million decrease in employee and labor related expenses from decreased headcount, partially offset by a $47.0 million increase in stock-based compensation expense related to the 2018 CEO Performance Award and stock awards granted for new hires and refresher employee stock grants.

Restructuring and other

	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			$		%			2019			2018			$		%
Restructuring and other	$	117,345		$	103,434		$	13,911		13	%	$	160,816		$	103,434		$	57,382	55%
As a percentage of revenues		2	%		3	%							1	%		1	%

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

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

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

Interest Expense

	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			$			%			2019			2018			$			%
Interest expense	$	(171,979	)	$	(163,582	)	$	(8,397	)		5	%	$	(329,432	)	$	(313,128	)	$	(16,304	)		5	%
As a percentage of revenues		3	%		4	%								3	%		4	%

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

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

Other Income (Expense), Net

	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			$			%	2019			2018			$			%
Other income (expense), net	$	(40,756	)	$	50,911		$	(91,667	)	Not meaningful	$	(15,006	)	$	13,195		$	(28,201	)	Not meaningful
As a percentage of revenues		-1	%		1	%						0	%		0	%

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

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

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

Provision for Income Taxes

	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
(Dollars in thousands)	2019			2018			$		%			2019			2018			$		%
Provision for income taxes	$	19,431		$	13,707		$	5,724		42	%	$	42,304		$	19,312		$	22,992		119	%
Effective tax rate		-5	%		-2	%							-4	%		-1	%

Our provision for income taxes increased by $5.7 million, or 42%, in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018. Our provision for income taxes increased by $23.0 million, or 119%, in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The increases were primarily due to the increases in taxable profits in certain foreign jurisdictions year-over-year.

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

Three Months Ended June 30,

Change

Six Months Ended June 30,

Change

(Dollars in thousands)

2019

2018

2019

2018

Net income (loss) attributable to

noncontrolling interests and

redeemable noncontrolling

interests in subsidiaries

19,072

(25,167

)

44,239

-176%

53,562

(100,243

)

153,805

-153

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

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

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

Liquidity and Capital Resources

As of June 30, 2019, we had $4.95 billion of cash and cash equivalents. Balances held in foreign currencies had a U.S. dollar equivalent of $598.0 million and consisted primarily of Chinese yuan, Canadian dollar and euros. Our sources of cash 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.

Our sources of liquidity and cash flows enable us to fund ongoing operations, research and development projects for new products, development of our main projects including further capacity expansion and automation for our current Model 3 production, Gigafactory Shanghai, Model Y and Tesla Semi, and expansion of our Supercharger and vehicle service and repair networks. We currently expect total 2019 capital expenditures to be approximately $1.5 to $2.0 billion.

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

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

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

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

Summary of Cash Flows

	Six Months Ended June 30,
(Dollars in thousands)	2019			2018
Net cash provided by (used in) operating activities	$	224,000		$	(528,040	)
Net cash used in investing activities	$	(547,388	)	$	(1,411,454	)
Net cash provided by financing activities	$	1,489,822		$	770,282

Cash Flows from Operating Activities

Our cash flows from operating activities are significantly affected by our cash investments to support the growth of our business in areas such as 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, lease payments directly from customers, customer deposits, sales of regulatory credits and energy generation and storage products. These cash inflows are offset by our payments to suppliers for production materials and parts used in our manufacturing process, employee compensation, operating lease payments and interest payments on our financings.

Net cash from operating activities changed favorably by $752.0 million to net cash provided by operating activities of $224.0 million during the six months ended June 30, 2019 from net cash used in operating activities of $528.0 million during the six months ended June 30, 2018. This favorable change was primarily due to the increase in net income, excluding non-cash expenses and gains, of $836.6 million and the decrease in net operating assets and liabilities of $103.5 million. These favorable changes were partially offset by $188.1 million of the repayment of our 0.25% Convertible Senior Notes due in 2019 which was classified as an operating activity, as this represented an interest payment on the discounted convertible notes. The decrease in net operating assets and liabilities was mainly driven by a smaller increase in inventory, as a result of an increase in Model 3 deliveries, and an increase in deferred revenue as a result of increased Model 3 deliveries and receipt of regulatory credits which will be delivered at a future date. The increase in cash from certain operating activities was partially offset by a decrease in accounts payable and accrued liabilities.

Cash Flows from Investing Activities

Cash flows from investing activities and their variability across each period related primarily to capital expenditures, which were $573.1 million during the six months ended June 30, 2019 and $1.41 billion during the six months ended June 30, 2018. Capital expenditures during the six months ended June 30, 2019 were primarily comprised of $529.6 million in purchases of property and equipment, mainly for Model 3 production, and $43.5 million for the design, acquisition and installation of solar energy systems with customers.

Capital expenditures during the six months ended June 30, 2018 were $1.27 billion from purchases of property and equipment, mainly for Model 3 production, and $140.4 million for the design, acquisition and installation of solar energy systems with customers.

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

Cash Flows from Financing Activities

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

Cash flows from financing activities during the six months ended June 30, 2018 consisted primarily of $546.1 million from the issuance of automobile lease-backed notes and $489.0 million of net borrowings under the Credit Agreement. Additionally, there were net repayments of $172.8 million under the Warehouse Agreements and repayments of automobile lease-backed notes of $85.2 million.

Contractual Obligations

Contractual obligations did not materially change during the six months ended June 30, 2019 except for debt activity and lease activity, as discussed in more detail in Note 11, Long-Term Debt Obligations and Note 12, Leases.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

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

We 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 six months ended June 30, 2019, we recognized a net foreign currency gain of $10.8 million in other income (expense), net, with our largest re-measurement exposures from the U.S. dollar, Japanese yen and Chinese yuan as our subsidiaries are denominated in various local currencies. For the six months ended June 30, 2018, we recognized a net foreign currency loss of $6.2 million in other income (expense), net, with our largest re-measurement exposures from Japanese yen, Chinese yuan and Canadian dollar.

We considered the historical trends in foreign currency exchange rates and determined that it is reasonably possible that adverse changes in foreign currency exchange rates of 10% for all currencies could be experienced in the near-term. These 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 income (loss) before income taxes. These changes would have resulted in an adverse impact of $248.3 million at June 30, 2019 and $175.7 million at December 31, 2018.

Interest Rate Risk

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

During the second quarter of 2019, we amended our previous settlement with the SEC regarding Elon Musk’s social media posts on August 7, 2018 to clarify certain of the disclosure controls agreed in such settlement.

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a description of our material pending legal proceedings, please see Note 15, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In addition, the following matter is being disclosed pursuant to Item 103 of Regulation S-K because it relates to environmental regulations and aggregate civil penalties could potentially exceed $100,000. The Bay Area Air Quality Management District (the “BAAQMD”) has issued notices of violation to us relating to air permitting for the Tesla Factory, but has not alleged any adverse community or environmental impact, proposed any specific penalties, or initiated formal proceedings. We dispute certain of these allegations, and are working to resolve them with the BAAQMD. While we cannot predict the outcome of this matter, it is not expected to have a material adverse impact on our business.

ITEM 1A. RISK FACTORS

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

Risks Related to Our Business and Industry

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

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

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

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

Our future business depends in large part on our ability to execute on our plans to manufacture, market and sell the Model 3 vehicle, which we are offering at a lower price point and for which we achieved a stabilized production rate relatively recently and are producing at significantly higher volumes than the Model S or Model X vehicles. Moreover, we expect to commence production by the end of 2019 of certain trims of Model 3 for the local market in China in the initial phase of our Gigafactory Shanghai, and then progressively increase levels of localization through local sourcing and manufacturing. However, the timeframe for commencing Model 3 production at Gigafactory Shanghai is subject to a number of uncertainties, including regulatory approval, supply chain constraints, and the pace of installing production equipment and bringing the factory online.

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

Our production plan for Model 3 is based on many key assumptions, including:

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that we will be able to sustain and further expand our high-volume production of Model 3 at the Tesla Factory, including with the introduction of new variants, without exceeding our projected costs and on our projected timeline;

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that we will be able to continue to expand output at Gigafactory 1 in a timely manner to produce high volumes of quality lithium-ion cells to be integrated into battery modules and finished battery packs and drive unit components for Model 3, including in part to support production in China as the level of local sourcing and manufacturing there progressively increases, all at costs that allow us to sell Model 3 at our target gross margins;

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that we will be able to build and commence production at additional future facilities, such as at Gigafactory Shanghai, to support our international ramp for Model 3 in accordance with our projected timelines, costs and increased capital efficiency;

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that the equipment and processes which we have selected for Model 3 production will be able to accurately manufacture high volumes of the different variants of Model 3 within specified design tolerances, with high quality and at the maximum output rates that we have planned for them;

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that we will be able to maintain suppliers for the necessary components on terms and conditions that are acceptable to us and that we will be able to obtain high-quality components on a timely basis and in the necessary quantities to support high-volume production; and

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that we will be able to attract, recruit, hire, train and retain skilled employees to operate our planned high-volume production facilities to support Model 3, including at the Tesla Factory, Gigafactory 1 and Gigafactory Shanghai.

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

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

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

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

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

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

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

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

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perceptions about electric vehicle features, quality, safety, performance and cost;

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perceptions about the limited range over which electric vehicles may be driven on a single battery charge;

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competition, including from other types of alternative fuel vehicles, plug-in hybrid electric vehicles and high fuel-economy internal combustion engine vehicles;

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volatility in the cost of oil and gasoline;

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government regulations and economic incentives;

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access to charging facilities; and

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concerns about our future viability.

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

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

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

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

In particular, because we are producing Model 3 and expect to produce Model Y at significantly higher volumes than any of our other products to date, the negative impact of any delays or other constraints with respect to our suppliers for these vehicles could be substantially greater than any supply chain-related issues experienced with respect to our other products. We need our Model 3 suppliers, and will also need our Model Y suppliers, to sustainably ramp in accordance with our planned volumes and schedules for each vehicle. There is no assurance that these suppliers will ultimately be able to sustainably and timely meet our cost, quality and volume needs. For example, we may experience issues or delays increasing the level of localization in China through local sourcing and manufacturing at our Gigafactory Shanghai. Furthermore, as the scale of our vehicle production increases, we will need to accurately forecast, purchase, warehouse and transport to our manufacturing facilities components at much higher volumes. If we are unable to accurately match the timing and quantities of component purchases to our actual needs, including for our different model variants, or successfully implement automation, inventory management and other systems to accommodate the increased complexity in our supply chain, we may incur unexpected production disruption, storage, transportation and write-off costs, which could have a material adverse effect on our financial condition and operating results.

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

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

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

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

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

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

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

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

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

In particular, we plan to expand our manufacturing capabilities outside of the U.S., where we have limited experience operating a factory or managing related regulatory, financing and other challenges. For example, local manufacturing is critical to our expansion and sales in China, which is the largest market for electric vehicles in the world. Our vehicle sales in China have been negatively impacted by certain tariffs on automobiles manufactured in the U.S., such as our vehicles, and our costs for producing our vehicles in the U.S. have also been affected by import duties on certain components sourced from China. If we are not able to establish or experience delays in establishing manufacturing activities in China and other jurisdictions to minimize the impact of such unfavorable tariffs, duties or costs, or ramp our production capabilities at Gigafactory 1 or other facilities to support such vehicle manufacturing activities, our ability to compete in such jurisdictions, and our operating results, business and prospects, will be harmed.

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

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

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

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

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

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

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

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an increase in the cost, or decrease in the available supply, of materials used in the cells;

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disruption in the supply of cells due to quality issues or recalls by battery cell manufacturers or any issues that may arise with respect to cells manufactured at our own facilities; and

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fluctuations in the value of any foreign currencies in which battery cell and related raw material purchases are or may be denominated, such as the Japanese yen , against the U.S. dollar.

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

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

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

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

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

The solar and energy storage industries are highly competitive. We face competition from other manufacturers, developers and installers of solar and energy storage systems, as well as from large utilities. Decreases in the retail prices of electricity from utilities or other renewable energy sources could make our products less attractive to customers and lead to an increased rate of customer defaults under our existing long-term leases and PPAs. Moreover, solar product component and lithium-ion battery prices have declined and are continuing to decline, which may adversely impact our ability to cost-effectively manufacture such components ourselves.

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

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

Our plan to generate ongoing growth and demand, including by expanding and optimizing our vehicle service and charging operations and infrastructure, will require significant cash investments and management resources and may not meet

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

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

Our vehicles and energy storage products use lithium-ion battery cells that store large amounts of energy, and any incidents in which such energy is released unexpectedly could negatively impact our operations.

The battery packs that we produce make use of lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. While we have designed the battery pack to passively contain any single cell’s release of energy without spreading to neighboring cells, there can be no assurance that a field or testing failure of our vehicles or other battery packs that we produce will not occur, which could subject us to lawsuits, product recalls or redesign efforts, all of which would be time consuming and expensive. In addition, we store and recycle a significant number of lithium-ion cells at our facilities and are producing high volumes of cells and battery modules and packs at Gigafactory 1. Any mishandling of battery cells may cause disruption to the operation of our facilities. While we have implemented safety procedures related to the handling of the cells, there can be no assurance that a safety issue or fire related to the cells would not disrupt our operations. Such disruptions or issues could negatively affect our brand and harm our business, prospects, financial condition and operating results.

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

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

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

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

We and our customers currently benefit from certain government and economic incentives supporting the development and adoption of electric vehicles. In the U.S. and abroad, such incentives include, among other things, tax credits or rebates that encourage the purchase of electric vehicles. In Norway, for example, the purchase of electric vehicles is not currently subject to import taxes, the 25% value added tax, or the carbon dioxide and weight-based purchase taxes that apply to the purchase of gas-powered vehicles. Notably, the quantum of incentive programs promoting electric vehicles is a tiny fraction of the amount of subsidies that are provided to gas-powered vehicles through the oil and gas industries. Nevertheless, even the limited benefits from such programs could be reduced, eliminated or exhausted. For example, under current regulations, a $7,500 federal tax credit that was available in the U.S. for the purchase of our vehicles is being reduced in phases during, and will sunset at the end of, 2019. We believe that this sequential phase-out has likely pulled forward some vehicle demand into the periods preceding each reduction, and we may see similar pull-forwards through the remainder of 2019. Moreover, in July 2018, a previously available incentive for purchases of Model 3 in Ontario, Canada was cancelled and Tesla buyers in Germany lost access to electric vehicle incentives for a short period of time beginning late 2017. In April 2017 and January 2016, respectively, previously available incentives in Hong Kong and Denmark that favored the purchase of electric vehicles expired, negatively impacting sales. Effective March 2016, California implemented regulations phasing out a $2,500 cash rebate on qualified electric vehicles for high-income consumers. Such 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 on a particular date 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 a 30% ITC for the installation of solar power facilities and energy storage systems that are charged from a co-sited solar power facility. The ITC is currently scheduled to decline in phases, ultimately to 10% for commercial and utility systems and to 0% for customer-owned residential systems by January 2022. Likewise, in jurisdictions where net energy metering is currently available, our customers receive bill credits from utilities for energy that their solar energy systems generate and export to the grid in excess of the electric load they use. Several jurisdictions have reduced, altered or eliminated the benefit available under net energy metering, or have proposed to do so. Such reductions in or termination of governmental incentives could adversely impact our results by making our products less competitive for potential customers, increasing our cost of capital and adversely impacting our ability to attract investment partners and to form new financing funds for our solar and energy storage assets.

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

Any failure by us to comply with the terms of our agreement with the Research Foundation for the State University of New York relating to our Gigafactory 2, could result in negative consequences for our business.

We are party to an operating lease arrangement with the Research Foundation for the State University of New York (the “SUNY Foundation”). This agreement provides for the construction of Gigafactory 2 in Buffalo, New York, where we have housed the development and production of solar products and components. Under this agreement, we are obligated to, among other things, directly employ specified minimum numbers of Tesla personnel in the State of New York and spend or incur $5.0 billion in combined capital, operational expenses, costs of goods sold and other costs in the State of New York during the 10-year period following the substantial completion of all construction and related infrastructure, the arrival of manufacturing equipment, and the receipt of certain permits and other specified items at Gigafactory 2. While we expect significant operations at Gigafactory 2 and the surrounding Buffalo area to continue, including with our ramp and manufacture of Solar Roof, if we fail in any year over the course of the term of the agreement to meet these obligations, we would be obligated to pay a “program payment” of $41.2 million to the SUNY Foundation in such year. Any inability on our part to comply with the requirements of this agreement may result in the payment of significant amounts to the SUNY Foundation, the termination of our lease at Gigafactory 2, and/or the need to adjust certain of our operations, in particular our production ramp of Solar Roof. Any of the foregoing events could have a material adverse effect on our business, prospects, financial condition and operating results.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It is 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 (“NLRB”), and they may do so in the future. We cannot predict the timing or outcome of the NLRB’s decisions on such existing matters, which we dispute and continue to defend vigorously. Any unfavorable outcome for Tesla may have a negative impact on the perception of Tesla’s treatment of our employees.

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

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

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

Additionally, we offer in our vehicles 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 engaged. We are continuing to develop our FSD technology with the goal of achieving full self-driving capability in the future. There is a variety of international, federal and state regulations that may apply to self-driving vehicles, which include many existing vehicle standards that were not originally intended to apply to vehicles that may not have a driver. Such regulations continue to rapidly change, which increases the likelihood of a patchwork of complex or conflicting regulations, or may delay products or restrict self-driving features and availability, any of which could adversely affect our business.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We are cooperating with certain government investigations as discussed in Note 15, 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 ongoing investigation has concluded that any wrongdoing occurred. However, we cannot predict the outcome or impact of any ongoing matters, and there exists the possibility that we could be subject to liability, penalties and other restrictive sanctions and adverse consequences if the SEC, the DOJ, or any other government agency were to pursue legal action in the future. Moreover, we expect to incur costs in responding to related requests for information and subpoenas, and if instituted, in defending against any governmental proceedings.

For example, on October 16, 2018, the U.S. District Court for the Southern District of New York entered a final judgment approving the terms of a settlement filed with the Court on September 29, 2018, in connection with the actions taken by the SEC relating to 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 the Board, 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.

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

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

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

We transact business globally in multiple currencies and have foreign currency risks related to our revenue, costs of revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the euro, Japanese yen, Canadian dollar, Chinese yuan and Norwegian krone. To the extent we have significant revenues denominated in such foreign currencies, 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 Japanese yen. If we do not have fully offsetting revenues in these currencies and if the value of the U.S. dollar depreciates significantly against these currencies, our costs as measured in U.S. dollars as a percent of our revenues will correspondingly increase and our margins will suffer. Moreover, while we undertake limited hedging activities intended to offset the impact of currency translation exposure, it is impossible to predict or eliminate such impact. As a result, our operating results could be adversely affected.

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

We sell our vehicles directly to consumers using means that we believe will maximize our reach, currently including through our website and our own stores. While we intend to continue to leverage our most effective sales strategies, we may not be able to sell our vehicles through our own stores in each state in the U.S., as some states have laws that may be interpreted to impose limitations on this direct-to-consumer sales model. In some states, we have also opened galleries to educate and inform customers about our products, but such locations do not actually transact in the sale of vehicles. The application of these state laws to our operations continues to be difficult to predict. Laws in some states have limited our ability to obtain dealer licenses from state motor vehicle regulators and may continue to do so.

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

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

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

Others, including our competitors, may hold or obtain patents, copyrights, trademarks or other proprietary rights that could prevent, limit or interfere with our ability to make, use, develop, sell or market our products and services, which could make it more difficult for us to operate our business. From time to time, the holders of such intellectual property rights may assert their rights and urge us to take licenses, and/or may bring suits alleging infringement or misappropriation of such rights. 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 could significantly increase our operating expenses. In addition, if we are determined to have infringed upon a third party’s intellectual property rights, we may be required to cease making, selling or incorporating certain components or intellectual property into the goods and services we offer, to pay substantial damages and/or license royalties, to redesign our products and services, and/or to establish and maintain alternative branding for our products and services. In the event that we were required to take one or more such actions, our business, prospects, operating results and financial condition could be materially adversely affected. In addition, any litigation or claims, whether or not valid, could result in substantial costs, negative publicity and diversion of resources and management attention.

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

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

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

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

Risks Related to the Ownership of Our Common Stock

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

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

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

We may provide from time to time guidance regarding our expected financial and business performance, which may include projections regarding sales and production, as well as anticipated future revenues, gross margins, profitability and cash flows. Correctly identifying key factors affecting business conditions and predicting future events is inherently an uncertain process, and our guidance may not ultimately be accurate 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 is not accurate or varies from actual results due to our inability to meet our assumptions or the impact on our financial performance that could occur as a result of various risks and uncertainties, the market value of our common stock could decline significantly.

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

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

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

Elon Musk has pledged shares of our common stock to secure certain bank borrowings. If Mr. Musk were forced to sell these shares in order to satisfy his loan obligations, such sales could cause our stock price to decline.

Certain banking institutions have made extensions of credit to Elon Musk, our Chief Executive Officer, a portion of which was used to purchase shares of common stock in certain of our public offerings and private placements at the same prices offered to third party participants in such offerings and placements. We are not a party to these loans, which are partially secured by pledges of a portion of the Tesla common stock currently owned by Mr. Musk. If the price of our common stock were to decline substantially, 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 notes could impair a takeover attempt.

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

As announced on July 24, 2019, J.B. Straubel is departing from his position as our Chief Technical Officer. Mr. Straubel intends to continue to serve at Tesla in a senior advisor capacity.

ITEM 6. EXHIBITS

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

INDEX TO EXHIBITS

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

4.1	Fifth Supplemental Indenture, dated as of May 7, 2019, by and between Tesla, Inc. and U.S. Bank National Association, related to 2.00% Convertible Senior Notes due May 15, 2024.	8-K	001-34756	4.2	May 8, 2019

10.1†	Letter of Consent, dated as of June 14, 2019, by and among LML 2018 Warehouse SPV, LLC, Deutsche Bank AG, New York Branch, as Administrative Agent, and the Group Agents party thereto, in respect of the Loan and Security Agreement, dated as of August 17, 2017 and as amended from time to time, by and among LML Warehouse SPV, LLC, Tesla Finance LLC, and the Lenders, Group Agents and Administrative Agent from time to time party thereto.	—	—	—	—	X

10.2†	Grant Contract for State-Owned Construction Land Use Right, dated as of October 17, 2018, by and between Shanghai Planning and Land Resource Administration Bureau, as grantor, and Tesla (Shanghai) Co., Ltd., as grantee (English translation).	—	—	—	—	X

10.3†	Amended and Restated Factory Lease, executed as of March 26, 2019, by and between Tesla, Inc. and Panasonic Energy of North America, a division of Panasonic Corporation of North America, as tenant.	—	—	—	—	X

10.4*	Tesla, Inc. 2019 Equity Incentive Plan.	S-8	333-232079	4.2	June 12, 2019

10.5*	Form of Stock Option Award Agreement under 2019 Equity Incentive Plan.	S-8	333-232079	4.3	June 12, 2019

10.6*	Form of Restricted Stock Unit Award Agreement under 2019 Equity Incentive Plan.	S-8	333-232079	4.4	June 12, 2019

10.7*	Tesla, Inc. 2019 Employee Stock Purchase Plan.	S-8	333-232079	4.5	June 12, 2019

10.8	Form of Call Option Confirmation related to 2.00% Convertible Senior Notes Due May 15, 2024.	8-K	001-34756	10.1	May 3, 2019

10.9	Form of Warrant Confirmation related to 2.00% Convertible Senior Notes Due May 15, 2024.	8-K	001-34756	10.2	May 3, 2019

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	XBRL Instance Document	—	—	—	—	X

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

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

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

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

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

†	Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10).

*	Indicates a management contract or compensatory plan or arrangement.

**	Furnished herewith.

SIGNATURES

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

		Tesla, Inc.

Date: July 28, 2019		/s/ Zachary J. Kirkhorn
		Zachary J. Kirkhorn
		Chief Financial Officer
		(Principal Financial Officer and Duly Authorized Officer)

Certain identified information has been omitted from this document because it is not material and would be competitively harmful if publicly disclosed, and has been marked with “[***]” to indicate where omissions have been made.

Exhibit 10.1

Execution Draft

LML 2018 wAREHOUSE spv, LLC

3500 Deer Creek

Palo Alto, CA 94304

June 14, 2019

Lenders under the Loan Agreement

referred to below

Ladies and Gentlemen:

Reference is made to the Loan and Security Agreement, dated as of December 27, 2018 (as amended, restated or otherwise modified prior to the date hereof, the “Loan Agreement”; capitalized terms used but not defined herein have the meanings assigned thereto in the Loan Agreement), among LML 2018 Warehouse SPV, LLC (the “Borrower”), as borrower, Tesla Finance LLC, Deutsche Bank Trust Company Americas, as paying agent, Deutsche Bank AG, New York Branch, as administrative agent, the lenders parties thereto from time to time and the agents parties thereto from time to time.

1.Single Month Maturity Limit.

Due to strong demand at the end of fourth quarter 2018 which resulted in a high number of leases in December 2018, on the next date of deterimation, the aggregate Base Residual Value of all Warehouse SUBI Leases that are Eligible Leases scheduled to reach their Lease Maturity Date in any one (1) month will be greater than [***]. The Borrower anticipates that the Lease Maturity Dates of the portfolio will naturally rebalance with lease sales through July 31, 2019.

2.Consent.

The Borrowers hereby request that the Group Agents, on behalf of the Lenders of their Group, consent to modify the Single Month Maturity Limit to be [***] for dates of determination where the last day of the Settlement Period immediately preceding such dates or the related Cut-Off Date, as applicable (such applicable last day or Cut-Off Date, the “Measurement Date”), is on or before June 30, 2019.

For Measurement Dates after June 30, 2019, the Single Month Maturity Limit shall revert back to [***].

Please indicate your consent to the foregoing by countersigning this letter. The foregoing consent and agreement shall become effective (the date of such effectiveness, the “Consent Effective Date”) upon receipt by the Borrower of this letter countersigned by the Required Supermajority Group Agents.

3.Representations and Warranties.

The Borrower hereby confirms that each of the representations and warranties made by it in the Loan Agreement is true and correct in all material respects on and as of the date hereof (it being understood and agreed that (x) any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct in all material respects only as of such specified date and (y) any representation or warranty that is qualified by “materiality”, “Material Adverse Effect” or similar language shall be true and correct in all respects). The Borrower represents and warrants that, as of the date hereof, no Default or Event of Default has occurred and is continuing and no Default or Event of Default will result after giving effect to the occurrence of the Consent Effective Date.

4.Miscellaneous.

Except as expressly set forth herein, this letter shall not by implication or otherwise limit, impair, constitute a waiver of or otherwise affect the rights and remedies of any Lender or Agent under the Loan Agreement or any other Transaction Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Loan Agreement or any other Transaction Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to entitle any party to a consent to, or a waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Loan Agreement or any other Transaction Document in similar or different circumstances.

This letter agreement shall constitute a Transaction Document for purposes of the Loan Agreement and the Transaction Documents. This letter agreement and the rights and obligations of the parties hereto shall be governed by, and construed in accordance with, the laws of the State of New York.

This letter agreement may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. This letter agreement may be delivered by facsimile or other electronic transmission of the relevant signature pages hereof.

-2-

Very truly yours,

LML 2018 WAREHOUSE SPV, LLC

By:	/s/ Yaron Klein
	Name: Yaron Klein
	Title: Treasurer

[Signature Page- Letter]

Consented and agreed to as of
the date first above written:

Deutsche Bank AG, New York Branch,

as Administrative Agent, as Group Agent

By:		/s/ Kevin Fagan
		Name:Kevin Fagan
		Title:Vice President

By:		/s/ Katherine Bologna
		Name:Katherine Bologna
		Title:Managing Director

[Signature Page- Letter]

Consented and agreed to as of
the date first above written:

CITIBANK, N.A., as a Group Agent

By:		/s/ Brian Chin
		Name:Brian Chin
		Title:Vice President

[Signature Page- Letter]

Consented and agreed to as of
the date first above written:

ROYAL BANK OF CANADA, as a Group Agent

By:		/s/ Angela Nimoh-Etsiakoh
		Name:Angela Nimoh-Etsiakoh
		Title:Authorized Signatory

[Signature Page- Letter]

Consented and agreed to as of
the date first above written:

CREDIT SUISSE AG, NEW YORK BRANCH, as a Group Agent

By:	/s/ Patrick Duggan	/s/ Jeffrey Traola
	Name:Patrick Duggan	Name:Jeffrey Traola
	Title:Vice President	Title:Director

[Signature Page- Letter]

Consented and agreed to as of
the date first above written:

BARCLAYS BANK PLC, as a Group Agent

By:		/s/ John McCarthy
		Name:John McCarthy
		Title:Director

[Signature Page- Letter]

Exhibit 10.2

English Convenience Translation

-Original Agreement has been executed in Mandarin Chinese-

Grant Contract for State-owned Construction Land Use Right in Shanghai City

(Category of Industrial Land Use Project)

Shanghai Planning and Land Resource Administration Bureau

Special Notification

Grant Contract for State-owned Construction Land Use Right in Shanghai City

(Category of Industrial Land Use Project)

[***] Land Grant Contract [***] (Version 1.0)

Shanghai Planning and Land Resource Administration Bureau

Oct 17th, 2018

Contract Number: [***]

Grant Contract for State-owned Construction Land Use Right in Shanghai City

(Category of Industrial Land Use Project)

This contract is made and entered into by:

Grantor:	Shanghai Planning and Land Resource Administration Bureau
Address:	Beijing West Road No. 99
Post Code:	200003
Tel.:	63193188
Fax:	63193674

Grantee:	Tesla (Shanghai) Co., Ltd.
Contact Person:	[***]
Percentage of Capital Contribution:	100%
Registered Address:	D203A, Tonghui Rd. No. 168, Nanhui New Town, Pudong New Area
Mailing Address:	26/F HKRI Centre Two, 289 Shi Men Yi Road, Jing’an District, Shanghai
Post Code:	200040
Tel.:	[***]
Fax:	010-59057003
Bank:	[***]
Account	[***]

Chapter IGeneral Provisions

Article 1

According to the Property Law of the People’s Republic of China, the Contract Law of People’s Republic of China, the Land Administration Law of the People’s Republic of China, the Law of the People’s Republic of China on Urban Real Estate Administration, and other laws, relevant regulations and land supply policies, the Parties hereto agree to enter into this Contract under the principles of equality, voluntariness, good faith and in light of the valuable consideration.

Article 2

The ownership of the land, of which the land use right is granted, (the “Granted Land”) shall belong to the People’s Republic of China (“PRC”). The Grantor shall grant the state-owned construction land (category of industrial land use project) use right (the “Land Use Right”) according to the authorization by laws. All the underground resources and imbedded materials shall not fall within the scope of the granted state-owned construction land use right.

Article 3

The Grantee has the right to possess, utilize, benefit from and legally dispose of the state-owned construction land obtained according to the laws during the term of grant and shall be entitled to construct buildings, fixtures and facilities attached to them in their utilization of the land.

Chapter IIDelivery of the Granted Land and Payment of Grant Fees

Article 4

The registration number of the Granted Land hereunder is 201800465816460666. The total area of the land is eight hundred and sixty-four thousand eight hundred and eighty-five square meters (864,885.00 square meters), of which the area of the Granted Land is eight hundred and sixty-four thousand eight hundred and eighty-five square meters (864,885.00 square meters).

The Granted Land under this Contract is located at Lot Q01-05 of the Lingang Heavy Equipment Industrial Zone.

The horizontal boundaries of the Granted Land are East to the green belt of the control line of the East China Sea Second Bridge preserved for planning purpose; West to the green belt of South Feng Boundary River; South to the green belt of People’s Pond; North to the green belt of Laolitang River; the horizontal boundary map is attached hereto as Attachment1.

The vertical boundaries of the Granted Land are from __\__ meters above the land to __\__ meters below the land with __\__ meters’ height difference. The vertical boundary description is attached hereto as Attachment 2.

The spatial scope of the Granted Land is a closed area shaped by the horizontal plane constituted by the foregoing boundary marks extending to the vertical boundaries.

Article 5

The usage of the Granted Land under this Contract is for industrial land use.

Article 6

The Grantor shall deliver the Granted Land to the Grantee within 40 working days after the execution of this Contract, that is, December 12^th 2018. The Grantor shall keep the Granted Land as cleared land upon delivery.

Article 7

Prior to the execution of this Contract, the Grantor shall be responsible for the investigation and inspection work of the quality of the geological environment of land and underground water hereunder. The relevant inspection report shall be confirmed by the environmental protection authorities which shall issue written confirmation as the attachment of this Contract.

Article 8

The usage term of the state-owned construction land hereunder is industrial land: 50 years, to be calculated from the delivery date of the Granted Land stipulated in Article 6 of this Contract. If the original allocated (leased) state-owned construction land use right needs to be re-registered as being granted, the usage term shall be calculated from the execution date hereof.

Article 9

The grant fees of the state-owned construction land use right under this Contract (the “Grant Fees”) are RMB nine hundred and seventy-three million (RMB 973,000,000.00), i.e. RMB one thousand one hundred and twenty-five point zero one (RMB 1,125.01) per square meter.

Article 10

The deposit of the Granted Land of this Contract is 20.00% of the Grant Fees. The deposit constitutes part of the Grant Fees. The Grantee shall pay the deposit as guarantee of the performance of this Contract to the Local Treasury within 5 working days after the execution of this Contract.

Article 11

The Grantee shall pay to the Grantor the remaining Grant Fees according to the following Item (1) of this Article:

(1)

The Grant Fees of the state-owned construction land use right shall be paid in a lump sum within 30 working days after the execution of this Contract;

(2)

The Grant Fees of the state-owned construction land use right shall be paid in __\__ installments according to the following dates and amounts.

Article 12

If the Grantee agrees to pay the Grant Fees according to Item (2) of Article 11, the installments shall be paid in accordance with the following dates and amounts:

First InstallmentThe amount shall be __\__% of the Grant Fees, i.e. RMB__\__. The payment date shall be within __\__ working days after the execution of this Contract, i.e. before _____[date].

Second InstallmentThe amount shall be __\__% of the Grant Fees, i.e. RMB__\__. The payment date shall be within __\__ working days after the execution of this Contract, i.e. before _____[date].

If the Grant Fees are paid in several installments, the overall Grant Fees shall be paid within 90 working days after the execution of this Contract, in which the First Installment shall be paid within 10 working days after the execution of this Contract in the amount no less than 50% of the overall Grant Fees (including deposit). When paying the Second and other Installments, the Grantee shall pay the accrued interests of outstanding fees to the Grantor according to the loan interest rate announced by the People’s Bank of China at the date of payment of the First Installment.

Article 13

To ensure the timely commencement of construction, completion of instruction and production by the Grantee, the Grantee shall pay 20% of the Grant Fees as deposit for timely performance (or in the form of a Letter of Guarantee) to the Shanghai Lingang Area Development Administration within 5 working days after the execution of this Contract.

The deposit for timely performance is composed of three parts, the deposit for timely commencement of construction accounts for 60% of the total deposit and timely completion of construction accounts for 20%, and timely commencement of production accounts for 20%.

If the Grantee is confirmed to have commenced the construction on time, the Shanghai Lingang Area Development Administration shall return the deposit for timely commencement of construction and its bank loan interests in full within 10 working days after the confirmation of commencement of construction, i.e. before June 22^nd 2019.

If the Grantee is confirmed to have completed the construction on time, the Shanghai Lingang Area Development Administration shall return the deposit for timely completion of construction and its bank loan interests in full within 10 working days after the confirmation of completion of construction, i.e. before June 22^nd 2021.

If the Grantee is confirmed to have begun production on time, the Shanghai Lingang Area Development Administration shall return the deposit for timely production and its bank loan interests in full within 10 working days after the confirmation of production, i.e. before December 22^nd 2021.

Article 14

Upon the full payment of the Grant Fees in accordance with this Contract, the Grantee shall apply for the registration of grant of the state-owned construction land use right with this Contract, the proof of payment of Grant Fees and other relevant materials.

Chapter IIIDevelopment, Construction and Utilization of the Granted Land

Article 15

Any new building, fixture and facilities attached to them to be constructed by the Grantee within the Granted Land shall be subject to the planning requirements

for granted land (see Attachment 3) provided by the municipal (county) planning administration authorities, among which:

In space above the ground, the nature of main buildings is industrial buildings; the nature of the auxiliary buildings is __\__; the rate of capacity of buildings above the ground is industrial land: less than 2.0; the area of buildings above the ground is 1,729,770.00 square meters with the limit of height being 30 meters ; the density of buildings above the ground is subject to the verified planning scheme; the rate of green lands is 20%.

In the underground space, the planned nature of the underground construction land is __\__; the maximum horizontally-projected area of the underground buildings (fixtures) is __\__; the range of depth is __\__; the total area of underground land is __\__; the total area of underground construction is __\__,among which the area for business use is __\__ square meters, for office use is __\__ square meters, for parking use is __\__ square meters, for industrial use is __\__ square meters, for storage use is __\__ square meters. If the underground space needs to be commercially developed during the construction stage while it is not agreed in this Contract, the Grantee shall sign a supplementary grant contract with the Grantor and pay the supplementary grant fees before getting the planning license of construction projects.

Other land use requirement(s): _____\______ .

Article 16

The Grantee shall utilize the Granted Land in compliance with the land use purpose and the rate of capacity stipulated under this Contract and shall not make any changes. The category of industrial projects under this Contract shall not be changed without approval.

Article 17

The Grantee agrees that, according to the planning requirements set out by the planning authorities, the area for the purpose of enterprise’s internal administrative work and residential service facilities within the Granted Land shall be no more than 7.00 % of the total area of the Granted Land, i.e. no more than 60,541.95 square meters, and the gross floor area shall be no more than 121,083.90 square meters. The Grantee agrees not to construct complete residential houses, building for experts, hotels, motels, training centers or other non-production facilities within the Granted Land; the Grantee shall not construct any buildings similar to villas on industrial land with the floor area per building being 150-500 square meters and that are not connected with any other buildings or are only connected with another building of the same type.

Article 18

The Grantee agrees to commence the construction project on the Granted Land within 6 months after delivery (i.e before June 12^th 2019), complete the construction within 30 months after delivery (i.e. before June 12^th 2021) and begin production within 36 months after delivery (i.e before December 12^th 2021). Special projects will be regulated by special clauses.

If the Grantee fails to commence the construction as scheduled, the Grantee shall apply to the Grantor for extension of commencement 30 days in advance. If the extension is approved by the Grantor, the completion date of the project may be extended accordingly, but the extension of commencement shall not exceed 3 months.

If the Grantee fails to complete the construction as scheduled, the Grantee shall apply to the Grantor for the delay of completion 30 days in advance. Upon the Grantor’s approval, the extension shall not exceed 3 months.

Article 19

The Grantee agrees that the total investment of fixed assets on the Granted Land shall be no less than the approved or filed amount of RMB fourteen billion seventy-five million and nine hundred and thirty thousand (RMB 14,075.93 million), with investment per square meter no less than RMB sixteen thousand two hundred and sixty-six (RMB 16,266.00). The total investment of fixed assets for the construction project on the Granted Land includes the construction of buildings, fixtures and facilities attached to them, investment of equipment, Grant Fees and etc.

Article 20

The Grantee agrees that within 5 years after the land delivery (i.e. before December 12^th 2023, the incomes of the construction project on the Granted Land for sales reaching target production will be no less than RMB seventy-five billion (RMB 75,000 million) per year and the total taxes for reaching target production will be no less than RMB two billion and two hundred and thirty million (RMB 2230 million) per year, with annual taxes per square meter no less than RMB two thousand and five hundred (RMB 2,500).

Article 21

During the construction by the Grantee on the Granted Land under this Contract, the facilities of water and gas use and treatment of sewage, as well as the main lines outside of the Granted Land and the connection facilities of transformer stations shall be subject to relevant regulations.

The Grantee agrees that the government is entitled to construct underground railways, tunnels, comprehensive trenches, underground roads, civil defense projects, underground pipes or pipelines that may enter, pass or go through the Granted Land for public utilities. In any case that the function of the Granted Land is affected thereby, the government or the public utility construction entity shall provide the Grantee with reasonable indemnifications.

Article 22

The Grantor shall not take back the Land Use Right lawfully obtained and utilized by the Grantee in accordance with this Contract before the expiration of the Land Use Term hereunder; unless otherwise agreed in this Contract. However, under special circumstances, if the Land Use Right needs to be taken back in advance for public interest, the Grantor shall apply for approval through legal procedures and shall provide the Grantee with indemnifications based on the residual value of the buildings, fixtures and facilities attached to them within the Granted Land and grant fees of the Land Use Right for the remaining land use term.

Article 23

Upon completion of the construction project on the Granted Land, the Grantee shall make an application to the land administration authorities executing this Contract for inspection and verification of the land use situation with respect to the construction project under this Contract and the performance of this Contract. A certificate for the acceptance of completion shall be issued by the land administration authorities if project is inspected and verified as qualified for acceptance. Among which:

If the measured floor area for calculation of plot ratio exceeds the total amount agreed under this Contract, but within the scope of difference permitted by the planning approval, the completion shall be inspected and verified after the supplementary payment of grant fees for the exceeding area at the price of the Grant Fees agreed under this Contract.

If the measured gross floor area exceeds the scope of difference permitted by the planning approval, the completion shall be inspected and verified after the lawful dispose of the exceeding area in accordance with the procedures of investigation and punishment against illegal construction. The supplementary payment of grant fees for the illegal area shall be made at the higher price between the price agreed in this Contract and the market price appraised at the time of supplementary payment for the entire exceeding area (including that within the scope of difference permitted by the planning approval) and decided collectively by the Grantor.

Article 24

The Grantee shall collect and submit the reconnaissance report of geotechnical engineering, perform the obligation of preventing geological disasters, and protect the land subsidence monitoring and prevention facilities and shallow geothermal energy monitoring facilities distributed within the Granted Land.

Article 25

The Grantee shall collect and organize the profiles of the completion of construction project on the Granted Land and submit them to the administration department of urban construction profiles of municipal or district (county) level in accordance with relevant regulations.

Chapter IVTransfer, Lease and Mortgage of the Land Use Right

Article 26

The Land Use Right under this Contract shall not be transferred in its entirety or partly.

The buildings within the Granted Land shall not be transferred per building, per floor or per room.

The changes of the structure of land user’s capital contribution and of shareholding structure of the Target Company shall be subject to prior consent of the Grantor.

Article 27

The overall transfer of the land and buildings under this Contract shall be subject to provisions of the following Item (2) of this Article:

(1)

The application of transfer shall be made to the Grantor and the transfer shall be conducted upon consent of the Grantor and in accordance with relevant laws and regulations;

(2)

The Grantor or the park management authorities shall have the priority purchase right.

The overall transfer of land and buildings shall be conducted in the municipal unified market of land transactions.

Article 28

The Land Use Right under this Contract shall be mortgaged in its entirety when any mortgage is established thereon. The principle claims guaranteed by the mortgage shall be limited to the bank loan for the development and construction of the Granted Land and shall not exceed the overall Grant Fees agreed in this Contract.

The circumstances where the buildings under construction or the newly-constructed buildings as well as land are mortgaged shall be regulated by the Measures of Real Estate Mortgage in the Shanghai Municipality.

Article 29

The realization of the mortgage on the Granted Land shall be subject to provisions of the following Item (2) of this Article:

(1)

The qualification of the collateral purchaser shall be comprehensively identified by the planning and land resource administration authorities, the industrial administration authorities and the park management authorities, and shall comply with the requirements of industrial orientation and park planning；

(2)

The Grantor or the park management authorities shall have priority purchase rights over the Land Use Right.

Chapter VExpiration of Land Use Term

Article 30

Unless the Granted Land needs to be taken back for public interest, when the term of land use hereof (“Land Use Term”) expires and the Grantee needs to continue to use the Granted Land, the Grantee shall submit an application of extension to the Grantor no later than 1 year prior to the expiration of Land Use Term.

Prior to the application of extension, the Grantee shall submit an application to the Shanghai Lingang Area Development Administration for comprehensive assessment. If the Shanghai Lingang Area Development Administration confirms that the relevant standards have been satisfied, the Grantor shall approve the application of extension.

If the Grantor agrees to extend the Land Use Term, the Grantee shall complete procedures of land use including those with respect to grant or lease pursuant

to the laws, re-sign the contract of grant, lease or other land use contracts and pay the land use fees such as the grant fees and rents.

Article 31

Upon expiration of the Land Use Term, if the application for extension is not approved due to failure to satisfy relevant standards after the comprehensive assessment or due to public interest, this Contract shall be terminated and the Grantor is entitled to take back the land use right without consideration. The Grantee shall complete the deregistration process of the Land Use Right in accordance with relevant regulations and return the Certificate of State-owned Land Use Right.

The Grantor and the Grantee agree to dispose of the buildings, fixtures and facilities attached to them within the Granted Land according to section (1) below:

(1)

The Grantor shall take back the buildings, fixtures and auxiliary facilities on the land area and provide the Grantee with corresponding compensation according to the residual value of the buildings, fixtures and auxiliary facilities when they are taken back.

(2)

The Grantor shall take back the buildings, fixtures and auxiliary facilities without consideration.

(3)

The Grantee shall remove or demolish the buildings, fixtures and auxiliary facilities, and restore the land to level ground.

Article 32

Upon expiration of the Land Use Term, if no application of extension has been made, this Contract shall be terminated. The Grantor shall take back the Land Use Right without consideration. The Grantee shall complete the deregistration process of the Land Use Right pursuant to relevant regulations and return the Certificate of State-owned Land Use Right.

The Grantor shall take back the buildings, fixtures and facilities attached to them within the Granted Land without consideration. The land user shall maintain the normal utility functions of the buildings, fixtures and facilities attached to them above the ground without any intended damage. If the buildings, fixtures and facilities attached to them above the ground lose any of their normal utility functions, the Grantor may require the land user to move or demolish such buildings, fixtures and facilities attached to them above the ground and to clear the land.

Chapter VIForce Majeure

Article 33

Either Party to this Contract who is unable to fully or partially perform this Contract due to Force Majeure may be exempted from liability but shall, as conditions permit, adopt all necessary remedial measures to mitigate the losses caused by Force Majeure. Any Force Majeure occurs during the period of delayed performance by one Party shall not exempt such Party from liability.

Article 34

The Party encountering with Force Majeure shall notify the other Party in writing by letters, telegraphs or fax within 7 days and provide the other Party with the

report and proof of its failure of or delay in performance of all or part of this Contract within 15 days after occurrence of Force Majeure.

Chapter VIILiability for Breach of Contract

Article 35

The Grantee shall pay the land Premium as scheduled according to this Contract. If the Grantee fails to pay the Premium on time, it shall pay 1.00‰ of the due amount as liquidated damages on a daily basis starting from the date of delay. If the Grantee delays the payment for more than 60 days, and still fails to pay the Premium after demanding notice by the Grantor, the Grantor is entitled to terminate this Contract. In such case, the Grantee shall have no right to request for refund of the deposit and meanwhile the Grantor may claim against the Grantee for losses.

Article 36

The Grantee shall pay the deposit for timely performance (or submit in the form of letter of guarantee) as scheduled in this Contract. If the Grantee fails to timely pay the deposit for timely performance in full amount and delays the payment for more than 60 days, and still fails to pay the deposit for timely performance after demanding notice by the Grantor, the Grantor is entitled to terminate this Contract. In such case, the Grantee shall have no right to request for refund of the deposit and meanwhile the Grantor may claim against the Grantee for losses.

Article 37

If the Grantee terminates the investment and construction of the project under this Contract due to its own reasons and submits to the Grantor to terminate this Contract and to take back the land no less than 30 days prior to the agreed commencement of construction date, such case shall be handled under the following provisions upon Grantor’s approval: the Grantor shall refund the Premium in full amount except for the deposit to the Grantee, take back the land use right, and refund the deposit for timely performance and relevant bank interests in full amount to the Grantee.

Article 38

The Grantee agrees to be subject to the time management of commencement of project construction under this Contract and perform according to section (1) of this Article:

(1)

If the Grantee fails to commence the construction pursuant to the date agreed under this Contract or any extended commencement of instruction date approved by the Grantor, the Grantee shall pay 50% of the deposit for timely commencement of instruction as liquidated damages; if the Grantee delays the commencement for more than 6 months, it shall pay the total deposit for timely commencement of instruction as liquidated damages. If the delay is more than one year, the Grantor is entitled to terminate this Contract and take back the land use right. In such case, the Grantor shall refund the Premium for the remaining term of land use deducting the deposit agreed under this Contract, and refund the deposits for timely completion of instruction and timely commencement of production and their relevant bank interests in full amount to the Grantee.

(2)

If the Grantee fails to commence the construction pursuant to the date agreed under this Contract or any extended commencement of instruction date approved by the Grantor, the Grantee shall pay \ ‰ of the total land Premium as liquidated damages for each day of delay and the Grantor is entitled to require the Grantee to continue to perform under this Contract. If the Grantee delays the commencement of instruction for more than one year, the Grantor is entitled to terminate this Contract, take back the land use right. In such case, the Grantor shall refund the land Premium for the remaining term of land use deducting the deposit agreed under this Contract to the Grantee.

Article 39

The Grantee agrees to be subject to the time management of completion of project construction under this Contract and perform according to section (1) of this Article:

(1)

If the Grantee fails to complete the construction pursuant to the date agreed under this Contract or any extended completion of instruction date approved by the Grantor, the Grantee shall pay 50% of the deposit for timely completion of construction as liquidated damages; if the Grantee delays the completion for more than 6 months, it shall pay the total deposit for timely completion of construction as liquidated damages. If the delay is more than one year, the Grantor is entitled to terminate this Contract and take back the land use right. In such case, the Grantor shall refund the Premium for the remaining term of land use deducting the deposit agreed under this Contract and refund the deposit for timely commencement of production and relevant bank interests in full amount to the Grantee.

(2)

If the Grantee fails to complete the construction pursuant to the date agreed under this Contract or any extended completion of instruction date approved by the Grantor, the Grantee shall pay \ ‰ of the total land Premium as liquidated damages for each day of delay. If the Grantee delays the completion of instruction for more than one year, the Grantor is entitled to terminate this Contract, take back the land use right. In such case, the Grantor shall refund the land Premium for the remaining term of land use deducting the deposit agreed under this Contract to the Grantee.

If the Grantee delays the completion of the project construction for more than one year, leading to the termination of this Contract by the Grantor, the Grantor and Grantee agree to dispose of the buildings, fixtures and auxiliary facilities within the scope of the land under this Contract according to section (1) below:

(1)

(2)

The Grantor shall take back the buildings, fixtures and auxiliary facilities without consideration.

(3)

The Grantee shall remove or demolish the buildings, fixtures and auxiliary facilities, and restore the land to level ground.

Article 40

If the Grantee fails to commence production as agreed under this Contract, the Grantee shall pay the total deposit for timely commencement of production as liquidated damages. The Shanghai Lingang Area Development and Construction Management Committee and the Grantee shall stipulate a new commencement of production date, and the extension shall be no longer than 6 months after the previously agreed commencement of production date, that is before June 22^nd 2022. If the Shanghai Lingang Area Development and Construction Management Committee determines that the Grantee fails to commence production pursuant to the extended commencement of production date, the Grantor is entitled to terminate this Contract, take back the land use right. In such case, the Grantor shall refund the land Premium for the remaining term of land use deducting the deposit agreed under this Contract.

If the Grantee fails to commence production pursuant to the extended commencement of production date, leading to the termination of this Contract by the Grantor, the Grantor and Grantee agree to dispose of the buildings, fixtures and auxiliary facilities within the scope of the land under this Contract according to section (1) below:

(1)

(2)

The Grantor shall take back the buildings, fixtures and auxiliary facilities without consideration.

(3)

The Grantee shall remove or demolish the buildings, fixtures and auxiliary facilities, and restore the land to level ground.

Article 41

After the commencement of production of the project under this Contract, upon confirmation of the Shanghai Lingang Area Development and Construction Management Committee, if the total investment of fixed assets and the investment fails to reach the standards agreed under this Contract, the Grantee shall continue to perform under this Contract as well as pay the liquidated damages equal to the same proportion of the Premium as the proportion of the actual shortfall amount of investment in the total agreed investment amount or the investment intensity.

Article 42

Within one month after the date of reaching target production under this Contract, the Shanghai Lingang Area Development and Construction Management Committee shall determine on the reaching of target production by the project.

If the total tax revenue of the project fails to reach but is no less than 80% of the standard agreed under this Contract, the Grantee shall pay 20% of the actual shortfall amount of the tax revenue as liquidated damages. The Grantee shall be deemed as having fulfilled this article upon payment of liquidated damages.

Article 43

If the Grantee submits to the Grantor to take back the land use right after reaching target product due to the Grantee’s own reasons, such case shall be handled under the following provisions upon the Grantor’s approval: the Grantor

shall terminate this Contract, take back the land use right and refund the land Premium for the remaining term of land use to the Grantee. The Grantor and the Grantee agree to administer with the buildings, fixtures and auxiliary facilities within the scope of the land under this Contract according to section (1) of this Article:

(1)

(2)

The Grantor shall take back the buildings, fixtures and auxiliary facilities without consideration.

(3)

The Grantee shall remove or demolish the buildings, fixtures and auxiliary facilities, and restore the land to level ground.

Article 44

If any of the plot ratio, building density or other indicators hereunder is lower than the agreed minimum standards of this Contract, the Grantor may require the Grantee to continue to perform under this Contract as well as pay the liquidated damages, equal to the same proportion of the Premium as the difference between the actual amount and the agreed minimum standards. If any of the plot ratio, building density or other indicators of the land hereunder exceeds the agreed maximum standards of this Contract, the Grantor has the right to take back the exceeding area and may require the Grantee to pay liquidated damages equals to the same proportion of the Premium of the exceeding portion in comparison to the agreed maximum standards.

Article 45

If the ratio of land for the enterprise’s internal administrative offices and the residential services facilities, or the floor area of the enterprise’s internal administrative offices and the residential services facilities, exceeds the standards agreed under this Contract, the Grantee shall pay 5.00 ‰ of the total land Premium to the Grantor as liquidated damages, and demolish relevant construction facilities at its own cost.

Article 46

If the Grantee pays the Premium on schedule pursuant to this Contract, the Grantor must timely deliver the granted land to the Grantee according to this Contract. If the Grantor fails to deliver the land on time and delays the Grantee’s procession of the land, the Grantor shall pay 1.00 ‰ of the Premium paid by the Grantee as the liquidated damages to the Grantee for each day of delay. In such case, the land use term shall start to calculate from the actual delivery date. If the Grantor delays the delivery of the land for more than 60 days, and still fails to deliver the land after demanding notice by the Grantee, the Grantee is entitled to terminate this Contract. In such case, the Grantor shall refund twice the amount of the deposit under this Contract and the remaining amount of any paid Premium to the Grantee. The Grantee may also claim against the Grantor for losses.

Article 47

If the Grantor fails to deliver the land or reach the land conditions as agreed under this Contract or unilaterally changes the usage conditions of the land, the Grantee is entitled to require the Grantor to perform the obligations according to

the agreed conditions under this Contract and compensate the Grantee’s direct losses caused by the Grantor’s delay in performance. The land use term shall be start to calculate from the date of fulfillment of the agreed land conditions under this Contract.

Article 48

If any of the following circumstances occur during the use of the land under this Contract by the Grantee, the Grantor is entitled to terminate this Contract, take back the land use right. In such case, the Grantor shall refund the land Premium for the remaining term of land use to the Grantee:

(1)

In violation of Article 42 of this Contract, the total tax revenue of the project fails to reach 80% of the standard agreed under this Contract within 1 month after the agreed date of reaching target production, as determined by the Shanghai Lingang Area Development and Construction Management Committee.

(2)

The Shanghai Lingang Area Development and Construction Management Committee determines that the industry product within the granted land fails to meet relevant standards upon a comprehensive assessment for every five years from the third year after the agreed date of reaching target production;

(3)

The Grantee transfers or mortgages the land or changes the investment ratio structure of the land user or the project company’s shareholding structure in violation of PRC laws, regulations and Chapter IV of this Contract.

If the Grantee breaches this article, leading to the termination of this Contract by the Grantor, the Grantor and Grantee agree to administer with the buildings, fixtures and auxiliary facilities within the scope of the land under this Contract according to section (1) below:

(1)

(2)

The Grantor shall take back the buildings, fixtures and auxiliary facilities without consideration.

(3)

The Grantee shall remove or demolish the buildings, fixtures and auxiliary facilities, and restore the land to level ground.

Article 49

If the Grantee hereunder violates the articles of this Contract and changes the usage of the land without approval, and if the violation is severe and the Grantee fails to correct such violation within required time, the Grantor is entitled to terminate this Contract and take back the land use right without consideration. The Grantor and Grantee agree to administer with the buildings, fixtures and auxiliary facilities within the scope of the land under this Contract according to section (1) of this Article:

(1)

(2)

The Grantor shall take back the buildings, fixtures and auxiliary facilities without consideration.

(3)

The Grantee shall remove or demolish the buildings, fixtures and auxiliary facilities, and restore the land to level ground.

Article 50

Upon confirmation of the Environmental Protection Administration, if the use of land under this Contract causes serious environmental pollution, the Grantor is entitled to terminate this Contract, take back the land use right and require the Grantee to pay all the costs for recovering the geological environment of the soil and underground water. The Grantor and Grantee agree to administer with the buildings, fixtures and auxiliary facilities within the scope of the land under this Contract according to section (1) of this Article:

(1)

(2)

The Grantor shall take back the buildings, fixtures and auxiliary facilities without consideration.

(3)

The Grantee shall remove or demolish the buildings, fixtures and auxiliary facilities, and restore the land to level ground.

Chapter VIIIApplicable Law and Disputes Resolution

Article 51

The formation, validity, interpretation, performance and dispute resolution of this Contract shall be governed by PRC laws and Shanghai municipal regulations and rules. Disputes arising out of the performance of this Contract shall be resolved through negotiation between Party A and Party B; if the dispute cannot be resolved through negotiation, it shall be resolved in accordance with section (2) of this Article:

(1)

Applying for arbitration to \ ;

(2)

Filing a lawsuit to the People’s Court of PRC; or

(3)

Other methods (as specifically agreed in Special agreements)

Article 52

Special agreements:

If the Grantee violates relevant provisions of the granting documents during the granting activities of the land under this Contract and the Grantor decides to cancel the qualification obtained by the Grantee, the Grantor is entitled to terminate this Contract, take back the land use right and in such case, the Grantor shall refund the land Premium for the remaining term of land use deducting the deposit as agreed under this Contract. If the Grantee violates relevant provisions of the granting documents during the granting activities of the land under this Contract and the Grantor terminates this Contract, the Grantor and the Grantee agree that the Grantor shall take back the buildings, fixtures and auxiliary facilities on the land area and provide the Grantee with corresponding compensation according to the residual value of the buildings, fixtures and auxiliary facilities when they are taken back.

This section shall prevail over Article 17 of this Contract: the Grantee agrees that according to the land use planning conditions set out by the planning authorities, the area for the enterprise’s internal administrative offices and the residential service facilities within the Granted Land under this Contract shall not exceed 7% of the total Granted Land, i.e. no more than 60541.95 square meters, and the floor area shall not exceed 7% of the total floor area of the Granted Land, i.e. no more than 121083.90 square meters. The Grantee agrees not to construct sets of residential buildings, buildings for experts, hotels, motels, training center, or other non-production facilities within the Granted Land; the Grantee shall not construct any single building with floor area of 150-500 square meters, which is not connected with any other buildings or only connected with other building(s) by one side wall, similar to a villa, on industrial land.

The floor area for plot ratio calculation of this land shall be no more than 1729770.00 square meters.

Chapter IXMiscellaneous

Article 53

The proposal for granting the land use right under this Contract has been approved by the People’s Government of Shanghai. This Contract shall take into effect as of the execution date by both Parties.

Article 54

The Parties to this Contract guarantee the authenticity of the names, addresses, phone numbers, faxes, account opening banks, agents and other contents filled in under this Contract. If either party fails to give written notice to the other party of any change of the aforesaid information within 15 days after such change, it shall assume the liability arising therefrom.

Article 55

This Contract and the attachments include 18 pages in total and the Chinese version shall prevail.

Article 56

Amounts, prices, areas and other items in this Contract are written in Arabic numbers and Chinese characters simultaneously and in case of inconsistency, the Chinese characters shall prevail.

Article 57

Issues not included in this Contract may be negotiated by the Parties and any further agreement achieved therefrom may be attached to this Contract as attachments, with equal legal effect as this Contract.

Article 58

This Contract shall be executed in four originals with the same effect and each of the Grantor and the Grantee shall hold two originals.

Grantor (seal): [***]

Grantee (seal): [***]

Legal Representative (Proxy): [***]

(Signature):

[***](Signature): [***]

Attachment I:

The Plane Boundary Map of the Granted Land

The Outcome Form of Boundary Point Coordinates

Table 11-1

Point No.	Distance (M)	Vertical Coordinate(X)	Horizontal Coordinate(Y)	Radius	Boundary Mark Material	Boundary Point Type	Notes
1	115.52	-39411.718	28773.497			Analytic	Construction Land
2		-39299.611	28801.37			Analytic	Construction Land
	12.72
3		-39287.363	28804.808			Analytic	Construction Land
	34.45			450.0
4		-39293.053	28838.779			Analytic	Construction Land
	264.91
5		-39445.191	29055.644			Analytic	Construction Land
	159.34
6		-39484.819	29209.973			Analytic	Construction Land
	600.68			13920.0
7		-40085.299	29196.222			Analytic	Construction Land
	42.92
8		-40128.18	29194.314			Analytic	Construction Land
	35.74
9		-40163.89	29192.725			Analytic	Construction Land
	40.85
10		-40204.701	29190.909			Analytic	Construction Land
	353.72
11		-40558.072	29175.183			Analytic	Construction Land
	202.34			-8080.0
12		-40760.304	29168.72			Analytic	Construction Land
	4.89
13		-40762.261	29164.235			Analytic	Construction Land
	57.98
14		-40788.639	29112.6			Analytic	Construction Land
	88.98
15		-40831.449	29034.597			Analytic	Construction Land
	57.13
16		-40860.622	28985.475			Analytic	Construction Land
	46.72			90.0
17		-40873.227	28941.031			Analytic	Construction Land
	72.15
18		-40874.379	28868.891			Analytic	Construction Land
	16.0
19		-40874.379	28852.886			Analytic	Construction Land
	24.26
20		-40874.258	28828.628			Analytic	Construction Land
	207.64
21		-40873.524	28620.994			Analytic	Construction Land
	21.23
22		-40871.78	28599.839			Analytic	Construction Land

Calculator: Sun LiInspector: Yao Qing

Attachment II:

The Vertical Boundary Description of the Granted Land

The Outcome Form of Boundary Point Coordinates

Table 11-2

Point No.	Distance (M)	Vertical Coordinate(X)	Horizontal Coordinate(Y)	Radius	Boundary Mark Material	Boundary Point Type	Notes
23	38.57	-40867.459	28574.705			Analytic	Construction Land
24		-40866.654	28537.68			Analytic	Construction Land
	89.36
25		-40836.373	28450.653			Analytic	Construction Land
	47.57			30.0
26		-40799.917	28428.348			Analytic	Construction Land
	394.36
27		-40417.208	28523.501			Analytic	Construction Land
	19.85
28		-40397.944	28528.291			Analytic	Construction Land
	28.0
29		-40370.771	28535.047			Analytic	Construction Land
	342.7
30		-40038.197	28617.735			Analytic	Construction Land
	19.88
31		-40018.901	28622.532			Analytic	Construction Land
	35.0
32		-39984.934	28630.978			Analytic	Construction Land
	330.98
33		-39663.738	28710.837			Analytic	Construction Land
	19.87
34		-39644.453	28715.632			Analytic	Construction Land
	8.95
35		-39635.767	28717.791			Analytic	Construction Land
	16.7
36		-39634	28734.4			Analytic	Construction Land
	3.35
37		-39489.08	28737.728			Analytic	Construction Land
	147.92
38		-39489.08	28765.65			Analytic	Construction Land
	77.76
1		-39411.718	28733.497			Analytic	Construction Land

Calculator: Sun LiInspector: Yao Qing

The Outline Map of Land Scope

Shanghai State-owned Construction Land Use Right (Industrial Land Industry Project)

Consulting Form for Bid, Auction and Listing of the Granted Land

(Planning Part)

Consulting Unit: Approval Office of Shanghai Lingang Area Development Administration

No.: Hu Lin Gang Zhao Pai Gua Zheng (2018) No. 8

Plot name	Plot Q01-05, Unit 04PD-0303, Lingang Heavy Equipment Industrial Zone
Boundaries of the Plot (East to)	the reserved control line for the East China Sea Bridge II under planning	Boundaries of the Plot (South to)	People’s Pond (Renmintang)
Boundaries of the Plot (West to)	Pudong Border River	Boundaries of the Plot (North to)	Lianggang Ave. (Laolitang)
Gross Area	About 864,885 sq.m	Granted Area	About 864,885 sq.m
Attachment	□Survey Report regarding Housing and Land Ownership
Consulting Unit Contact person	Shanliang Shen	Contact No.	68283261
Consulting Items
Plot location*	Q01 block street, Phase II, Heavy Equipment Industrial Zone, Nicheng town, Nanhui New Town, Pudong New Area
Elevation system	Shanghai Wusong	Plotting scale	[not filled]
Vertical height limit	Up bound: [not filled] Low bound: [not filled]	Elevation difference	[not filled]
Above-ground Part
Plot usage*	Category II of Industry	Ratio of each land usage to total land use	[not filled]
Plot ratio*	Upper limit: 2.0 Lower limit: 1.2 (alternatively, doubling the floor area of a building over 8 meters in height )

Greening rate*	Upper limit: subject to approval by administrative departments of greening Lower limit: 10%	Intensive greening rate*	Upper limit: -[not filled] Lower limit: -[not filled]
Property of main building*	Industrial factory	Property of ancillary building*	Ancillary structure
Above-ground built-up area*	Subject to approved design proposal	Gross built-up area*	Subject to approved design proposal
Building height limit*	30 meters	Building breadth limit*	-[not filled]
Floor height*	In compliance with architecture functional requirements and professional design regulations	Building interval and daylight requirements	For non-residential buildings, Shanghai Urban Planning Management Technology Regulation shall implement, and the buildings shall also comply with related fire regulations.
Building density*	Upper: [not filled] Lower: [not filled]	Enter & exit setting*	Shanghai Urban Planning Management Technology Regulation shall implement and the setting shall be subject to the opinions of traffic police.
Above-ground parking lots*	In compliance with the Shanghai Construction Transportation Design and Parking Lot (Space) Setting Standard and requirements of related administrative departments.	Ground standard altitude*	The suggested standard is equal to the Wusong standard altitude plus 4.2 meters.

Required distance to the redline in city planning*	For non-residential buildings, Shanghai Urban Planning Management Technology Regulation shall implement.	Required distance to the boundary line*	For non-residential buildings, Shanghai Urban Planning Management Technology Regulation shall implement.
Required distance to the blue line in city planning	-[not filled]	Required distance to the green line in city planning	No less than 10 meters from the Renmin Pond green line, and Shanghai Urban Planning Management Technology Regulation shall implement in any other aspects regarding such distance. The building should also stay away from the controlled land area of river channel in planning.
Building volume	-[not filled]
Building color and material*	-[not filled]
Architecture style*	-[not filled]
Landscape*	-[not filled]
Region Style*	-[not filled]
Other supporting municipal facilities*	-[not filled]
Other supporting public facilities*	-[not filled]
Vertical design requirements*	-[not filled]
Is there any existing conservational building in compliance with current planning in the area*		□ Yes (attach form)	√ No

Commercial Land
Lower limit sets of Apartment*		-[not filled]
Industrial Land
Rate of Administration office & social amenity (≤7%)*		7
Under-ground part
Property of underground construction land planning	-[not filled]	Maximum ground area occupied by horizontal projection of underground building (structure)	-[not filled]
Start-stop depth	-[not filled]	Gross underground land use area	-[not filled]
Gross underground build-up area	- [not filled] sq.m, among which Commercial area: - [not filled] sq.m Office area: - [not filled] sq.m Parking lot area: - [not filled] sq.m Industrial area: - [not filled] sq.m Storage area: -[not filled] sq.m
Underground parking lots*	-[not filled]	Basement connection requirements*	-[not filled]

Other planning management requirements	(1)The greening control area which is 10 meters from the Renmin Pond green line in the base area should be guaranteed for preservation and greening. Any fence wall should be see-through and green-through, the foundation of such fence wall should be inside the boundaries of the base area. (2)Construction projects such as those applying glass walls should be in compliance with relevant requirements under Shanghai Constructional Glass Wall Administration Regulation, and the form of the glass walls should be identified and marked in the constructional design plan submitted for approval. (3)Any administrative requirements involving environmental protection, health, fire safety, traffic police, traffic and transportation, sanitation, water management, greening, “smart water city”, civil defense and safe production should be subject to opinions of relevant departments before taking actions.
Initial comments*	√ agree □ disagree
Remarks	Plan to review and approve application in the absence of a proposal
Consulting Unit*	Approval Office of Shanghai Lingang Area Development Administration (stamp)
Consulting Unit contact person*	Xiaoyan Hong	Contact No.*	68283890

Attachment III:

Planning Conditions of the Granted Land Approved by the Planning Administration Department

Attachment IV:

Content to be included in the Remarks of Real Estate Title Certificate

The Grantor ‘s approval is required when the Grantee transfers the land;

The real estate property can only be mortgaged as a whole, any partition mortgage is not allowed;

Ratio of investment contribution: Tesla (Shanghai) Co., Ltd, 100%.

Equity structure:

Actual controller:

To change any of the above remarks, the Grantor’s written consent is required.

Shanghai Lingang Area Development Administration Document

Hu Lin Di Guan Wei Jing [2018] No. 71

Confirmation Letter of Shanghai Lingang Area Development Administration on the Transfer of Unit 04PD-0303 Plot Q01-05 with Industrial Project in Lingang Heavy Equipment Industrial Zone

Shanghai Planning and Land Resources Administration Bureau:

According to the Memorandum of Cooperation between the Shanghai Municipal People's Government and Tesla (Shanghai) Co., Ltd. signed on July 10, 2018 and the Investment Agreement, it is hereby confirmed that Tesla (Shanghai) Co., Ltd. will participate in the transfer of the Unit 04PD-0303 Plot Q01-05 with industry project in Lingang Heavy Equipment Industrial Zone. The name of the construction project is: Tesla Shanghai Gigafactory Project (Phase I). The confirmation letter is valid for one year.

Shanghai Lingang Area Development Administration

August 7, 2018

[Stamp of Shanghai Lingang Area Development Administration]

Cc: Tesla (Shanghai) Co., Ltd.

By Office of Shanghai Lingang Area Development Administration, printed and issued on August 7, 2018 (4 copies were printed in total)

Basic Information Form of the Project

Project #	LG003-18
Basics of the plot	*Plot name	Plot Q01-05, Unit 04PD-0303, Lingang Heavy Equipment Industrial Zone
	*Boundaries of the Plot	North to Lianggang Ave. (Laolitang), south to People’s Pond (Renmintang), west to Pudong-Fengxian Border River, east to the reserved control line for the East China Sea Bridge II under planning.
	*Affiliation to industrial neighborhood	Lingang Industrial Zone	*Land area	864,885 sq.m
	*Plot ratio	Less than 2.0, subject to the approved proposal
	*Building density	0.3 – 0.7
	*Above-ground building area	350,000 – 550,000 sq.m

Project facts [Stamp of the Economic and Trade Office of the Shanghai Lingang Area Development Administration]	*Project name	Tesla Shanghai Gigafactory Project (Phase I)
	*Minimum total investment in fixed assets	RMB 14,000,000,000	*Minimum investment intensity	10,850,000 yuan/mu (one mu equals to 666.666 sq.m)
	*Sales revenue upon reaching target production	RMB 75,000,000,000/year	*Total tax revenue upon reaching target production	RMB 2,230,000,000/year
	*Tax output intensity upon reaching target production	RMB 2,500 /year per sq.m	Minimum land output rate	RMB 57,800,000/mu
	Minimum sales output rate	RMB 57,800,000/year per mu	Minimum tax output rate	RMB 1,700,000/year per mu
	Maximum output water consumption	Approximately 1.0 cubic meter/RMB 10,000, subject to the final proposal	Maximum output energy consumption	Approximately 0.01 ton std. coal / RMB 10,000, subject to the final proposal.
	Minimum employment	0.08 persons / RMB one million of output value
	*Commencement of construction time	6 months after delivery of land	*Completion of construction time	30 months after delivery of land
	*Commencement of production time	36 months after delivery of land	*Reaching target production time	5 years after delivery of land
	*Type of approved industry (in sub-categories)	3612 NEV manufacture	Environmental protection requirement	Compliant with environmental protection requirement
	Lifecycle of the industry (suggested time limit for transfer)	50 years
Profile of the interested land user	*Business name	Tesla (Shanghai) Co., Ltd.
	*Contact person	ZHU Xiaotong
	Company add.	D203A, 168 Tonghui Rd, Xincheng Town, Nanhui, Pudong 201306
	*Tel.	010-59057399	Fax	010-59057003
	Business nature	LLC (Wholly Owned HK/MO/TW Enterprise)	Registered capital	RMB 4,670,000,000

Business range

Engaged in the production, sales, maintenance and other after-sales services and technical development, technical services, technical consultation and technology transfer in the field of electric vehicles and parts, batteries, energy storage equipment and photovoltaic products; wholesale and commission agency (except auction) of products similar to the above-mentioned, import and export business, after-sales service, and provision of related supporting services; EV demonstration and product promotion; warehousing; training,

consulting, research and development and technical services related to the above-mentioned business; enterprise management consulting, business information consultation, provision of internal financial advice for the corporation group.

Industry involved

3612 EV manufacturing

[Page break]

Regulatory requirements	This form is incorporated in the whole process of land supervision as an annexure to the Grant Contract for State-owned Construction Land Use Right. In case the building plot ratio and other indicators differ from this form after completion of the project, it will be handled as a breach of contract under the Grant Contract for State-owned Construction Land Use Right.
Good Faith Commitment	The company solemnly promises that the information filled in this form is true and valid, and agrees to use this form as an annexure to the “Grant Contract for State-owned Construction Land Use Right” and that the annexure has the same legal effect as the Grant Contract for State-owned Construction Land Use Right. We will strictly implement the above indicators during the project construction process. Any violation of this form and the indicators therein will be handled as a breach of contract under the Grant Contract for State-owned Construction Land Use Right.
Interested land user	Tesla (Shanghai) Co., Ltd.
Filled-in Date

[Stamp of Tesla (Shanghai) Co., Ltd.]

Notes:

1. This form is only applicable to the transfer of industrial land with industrial projects identified by district/county-level administration;

2. The project number consists of the initials of the district or county name (Chinese characters) + serial number (three digits) + the number of year: for example, Baoshan would look like BS001-12;

3. Every item with an asterisk “*” is required to be filled out;

4. The “Basic Information Form of the Project” shall be included in the Grant Contract for State-owned Construction Land Use Right.

Adjustment Instruction of Grant Contract for State-owned Construction Land Use Right

The number included in the brackets in the first page of this Contract is the version number of contract, which should be 1.0 when the contract is signed for the first time, and 2.0 when any supplemental contract is signed, and by parity of reasoning for any further amendment of the contract.

Exhibit 10.3

Amended and Restated Factory Lease

This Amended and Restated Factory Lease (“Amended Lease” or “Lease”) is entered into effective as of January 1, 2017 (the “Amendment Effective Date”) by and between Tesla, Inc., a Delaware corporation located at 3500 Deer Creek Road, Palo Alto, California 94304 (“Tesla”), on the one hand, and Panasonic Energy of North America, a division of Panasonic Corporation of North America (“Tenant”), on the other hand, with reference to the General Terms and Conditions dated October 1, 2014 (as amended, the “General Terms”) and the Gigafactory Battery Cell Pricing Agreement dated January 1, 2014 (as amended, “Pricing Agreement”), each by and between Tesla, Panasonic Corporation (“Panasonic”) and Tenant. Upon signature by all Parties, this Amended Lease shall supersede and replace in entirety the Factory Lease dated December 1, 2015 by and between the Parties (the “2015 Lease”) as of the Amendment Effective Date; provided, however, that any provisions related to termination of the 2015 Lease shall not apply in connection with such termination. For avoidance of doubt, claims arising under the 2015 Lease shall continue to be governed by, and subject to, the 2015 Lease. Terms used herein with initial capitalization have the meanings given where used, or in Section 13.19 hereof, in the General Terms, or in the Pricing Agreement.

Basic Information


Factory:	The manufacturing facility owned by Tesla in Storey County, Nevada, as depicted in Appendix A-1, located at Electric Ave, Sparks, NV 89434.
Land:	The real property on which the Factory is located, as described in Appendix A-1.
Premises:	The portion of the Factory leased to Tenant hereunder, as more specifically set forth in Appendix A-2.
Commencement Date:	January 1, 2017 [***].
Production Date:	The date that Tenant begins to produce Goods in the Premises for the Purpose.
Expiration Date:	As set forth in Section 11.1 below.
[***]:	[***]
Purpose:	The manufacture, supply, and support of lithium-ion battery cells.

The Parties have executed this Amended Lease by persons duly authorized below:

Tesla, Inc.		Panasonic Energy of North America, a division of Panasonic Corporation of North America
By:	/s/ Yoshihiko Yamada	By:	/s/ Allan Swan
Printed:	Yoshihiko Yamada	Printed:	Allan Swan
Title:	VP, Gigafactory	Title:	President
Date:	3/25/2019	Date:	3/26/2019

Factory Lease

Page 2 of 21

Whereas, Tesla, Panasonic and Tenant have entered into the General Terms, the Pricing Agreement, and certain other agreements with respect to the Purpose (collectively, the “Commercial Agreements”), which Commercial Agreements contemplate that Panasonic and/or its Affiliates, including without limitation Tenant, will perform the Purpose; and

Whereas, Tesla has purchased the Land, is currently operating and constructing a manufacturing facility on the Land, and intends to provide to Tenant sufficient space and utilities at such facility for the Purpose;

Now, therefore, the Parties agree as follows:

1.	Lease Rights and Obligations.

1.1	Grant of Lease.

(a)

Tesla leases to Tenant, and Tenant takes from Tesla, the Premises, to have and to hold for the Lease Term, subject to any superior liens or encumbrances and subject to the terms of this Lease and reserving and excepting to Tesla the roof and provided that this Lease confers no rights either with regard to the subsurface of the Land below the ground level of the building or with regard to airspace above the roof of the Factory. Tenant’s rights under this Lease include an exclusive right to use the Premises and a non-exclusive right to use all parking and other areas and all easements and rights benefiting the Premises. Tenant and its employees and business invitees shall be entitled to the non-exclusive use of the Common Areas during the Lease Term, in common with Tesla and with other persons authorized by Tesla from time to time to use the Common Areas. Tesla shall tender possession of the Premises to Tenant in its “as-is” condition as of the Commencement Date, without limiting any mutually-agreed punch lists with respect to the Premises, and, as a Tesla Responsibility, cause the Premises, the portions of the Factory pertinent to the Premises (including, without limitation, the Common Areas) and the corresponding exterior portions of the Factory (including the parking areas and the driveways, alleys, landscape and grounds surrounding such portions of the Factory) to be in compliance with all applicable Laws as of the Production Date and during the Lease Term (except to the extent of Tenant’s obligations with respect to the Premises).

(b)

The Parties shall discuss in good faith the general configuration of the Premises [***] within the Factory as required for Tenant to accomplish the Purpose. Prior to [***]: (i) Tenant may access the Premises for (A) planning, measurement, construction and installation of improvements, fixtures, and customizations to the Premises including Factory Systems (collectively, the “Tenant Improvements”) which are approved in writing by Tesla from time to time and required for Tenant to accomplish the Purpose, such approval to not unreasonably be withheld, delayed or conditioned, and (B) delivery, installation, and preparation of inventory and equipment as required for Tenant to accomplish the Purpose; and (ii) (A) Tesla will provide reasonable, temporary restroom facilities for Tenant’s agents, contractors and employees; and (B) Tesla will provide without charge reasonable space for temporary parking facilities for Tenant’s contractors and/or subcontractors for planning, measurement, construction and installation of Tenant Improvements and/or Tenant’s Property to the Premises, on the Land and/or within the Factory. Tenant may, subject to Tesla’s reasonable safety instructions and policies, also access the Premises at no cost and expense to Tenant prior to [***] ( from time to time upon Tesla’s prior consent (which shall not be unreasonably withheld, delayed or conditioned) for the purpose of planning, measurement and other necessary preparation for Tenant Improvements and/or other Tenant’s Property. Tenant shall complete and maintain all Tenant Improvements in a professional and workmanlike manner with reasonable quality materials. On or after [***], Tenant may access the Premises for manufacturing and support activities related to the Purpose.

(c)

Tenant acknowledges that this Lease and all rights granted hereunder are subject to any and all restrictions generally applicable to the Factory and/or the Land, including the CCR Rules.

(d)

Notwithstanding anything to the contrary, Tesla shall not, during the Lease Term, lease the Premises to Tesla’s Affiliates or any other third party without Tenant’s prior written consent.

(e)

During the Lease Term, Tenant shall: (i) maintain a valid business license in the State of Nevada and all Permits required by the county, city, and/or town in which the Factory is located; and (ii) maintain the Premises as its primary place of business for the Purpose.

Factory Lease

Page 3 of 21

1.2Use. During the Lease Term, Tenant shall: (a) use and occupy the Premises solely for the Purpose and for no other purpose whatsoever, unless otherwise agreed in writing by Tesla; (b) not use the Premises in any manner that is disreputable, creates extraordinary fire or other hazards (with reference to the Purpose), or that is beyond the scope of what is necessary for the Purpose and that results in an increase in the cost of insurance on the Factory; and (c) subject to Section 9.2, cause the Premises to comply with all applicable Laws (for avoidance of doubt, this obligation does not extend to areas of the Land or Factory outside the Premises, except to the extent such areas are or become under Tenant’s control). Tenant will have access to the Premises 24 hours per day, 7 days per week. The Parties shall discuss in good faith and sign a mutually-agreed matrix to describe each Party’s responsibility during the Lease Term for certain operational activities and/or maintenance in or around the Premises and/or Factory (hereinafter referred to as the “Responsibilities Matrix”).

1.3	Utilities.

(a)

Factory Utilities. Subject to Tenant providing to Tesla a reasonably complete mutually agreed upon [***]according to Appendix B, Tesla shall, as a Tesla Responsibility, design, procure, install, configure, maintain in good working order, and furnish the utilities and services to the Premises identified in Appendix B as a Tesla Responsibility (including installation, hook-up, delivery, and repair) (collectively, the “Factory Utilities”). Tesla may monitor Tenant’s use of the Factory Utilities, and Tenant shall [***] pursuant to [***] of the General Terms, which is hereby incorporated by reference into, and forms an integral part of, this Lease provided that such provision shall be deemed amended and modified mutatis mutandi solely for purposes of applicability to this Lease. The Parties shall discuss Tenant’s use of the Factory Utilities in good faith as requested by Tesla, and the Parties shall discuss in good faith any requests by Tenant that Tesla assume responsibility for additional utilities and services to the Premises.

(b)

Tenant Utilities. Tenant shall, at its expense, install, configure, maintain, and/or procure the utilities and services to be solely used by Tenant and required for Tenant to accomplish the Purpose as reasonably determined by Tenant and as identified in Appendix B as a Tenant Responsibility (collectively, “Tenant Utilities”). As of the date of this Agreement, the Tenant Utilities shall be the utilities and services set forth in Appendix B as the Tenant Utilities. Tesla will use Commercially Reasonable Efforts not to interfere with Tenant’s use of Tenant Utilities. Tesla shall not be responsible for providing any Tenant Utilities to Tenant. Tesla shall not be liable to Tenant for any interruption or failure of service of any Tenant Utilities to the Premises from any cause whatsoever, except to the extent of Tesla’s gross negligence, willful misconduct, or failure to fulfill its commercially reasonable maintenance obligations for the Tenant Utilities Tesla has undertaken to maintain as identified in Appendix B, nor shall such interruption or failure constitute a constructive eviction or [***] or affect the obligations of Tenant under this Lease or the General Terms in any other way whatsoever. If Tesla and/or any of its other tenants at the Factory desire to use any portion of the Tenant Utilities, the Parties shall discuss in good faith the terms and conditions of the use, including but not limited to Tenant’s charges for such use.

1.4	Maintenance and Repairs.

(a)

Tesla Responsibilities. During the Lease Term and as a Tesla Responsibility at no cost and expense to Tenant, Tesla will maintain, repair and, as necessary, replace: (i) the structure of the Factory (including the structural elements of the roof, the roof membrane, the slab, the foundation, structural elements of the Factory (e.g. column, beam), and exterior walls of the Factory); and (ii) all portions of the Premises and/or Factory not required to be maintained by Tenant under this Lease including the exterior portions of the Premises (e.g. the parking areas and the driveways, alleys, landscape and grounds surrounding the Factory), the Common Areas, those items that are identified as a Tesla Responsibility in the annexed Appendix B, and as otherwise agreed in writing by the Parties. The Tesla Responsibilities include, without limitation, items identified in Appendix B as a Tesla Responsibility, utility lines serving the Premises inside the Premises; floor coverings; lighting; wiring; all locks and closing devices; plate glass, all window sash, casement or frames, window cases, window frames, security grilles or similar enclosures; doors and door frames; (which may include fire alarms, sprinkler systems for fire, fire proof doors; general air conditioning systems); and all items of repair, maintenance and improvement or reconstruction as may at any time or from time to time be required with respect to the Premises by any governmental agency having jurisdiction. [***]. Tesla will use Commercially Reasonable Efforts to (i) respond to Tenant’s request for maintenance and repairs based on Tenant’s expressed priorities; (ii) keep Tenant informed of progress and completion of Tenant’s requested maintenance and repairs; and (ii) coordinate with Tenant so as to not interfere with Tenant’s use of the Premises during any such maintenance and repairs.

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(b)

Tenant Responsibilities. During the Lease Term and at its cost and expense, Tenant shall repair, replace, and maintain the Premises and every part thereof in good and tenantable condition, subject to reasonable wear and tear, including Tenant Improvements which shall include Tenant equipment in the Premises, and all of Tenant’s signs; provided, however, that (i) the foregoing excludes the structural aspects of exterior walls, roof, structural portions of the Premises and structural floor, and (ii) Tesla shall conduct maintenance and repairs as contemplated in Section 1.4(a) above. Tenant shall complete all maintenance and repair for which it is responsible in a professional and workmanlike manner, with reasonable quality materials and in compliance with applicable Laws and insurance requirements. Tenant shall deposit all trash in a covered trash container. Tenant waives the benefits of any current or future Law giving Tenant any rights or remedies as a result of the physical condition of the Premises and any and all rights to make repairs at Tesla’s expense or to terminate this Lease, except as expressly provided herein. Tenant Improvements must be designed and stamped by a licensed Nevada engineer or architect to the extent required by any governmental agency having jurisdiction and submitted to Tesla for review and approval prior to commencement of construction. Tenant Improvements must also comply in full with all applicable Laws.

1.5Signs. Tenant may, at its cost, place its standard signs within the Premises, subject to applicable Laws and Tesla Policies. At the end of the Lease Term, Tenant will remove its signs and spot repair, paint, and/or replace the Factory walls or surfaces to which its signs are attached. Tenant shall not place any other signs on or in the Factory (other than the Premises) or any other portion of the Land without Tesla’s express, prior written consent.

1.6Quiet Enjoyment. For so long as Tenant is not in default under this Lease beyond any applicable cure period, Tenant will have, subject to the terms of this Lease, peaceful and quiet enjoyment of the Premises.

1.7Tenant Personnel. Section 11.2 (Seller Personnel) of the General Terms is hereby incorporated by reference into, and forms an integral part of, this Lease, provided that such provision shall be deemed amended and modified mutatis mutandi solely for purposes of applicability to this Lease and such provision shall be deemed to include, for purposes of this Lease, any and all visitors, employees, directors, officers, agents, servants, contractors, subcontractors and/or subtenants of Tenant or any Tenant Affiliate (collectively “Tenant Personnel”) when they are at the Factory, and assignees, and/or successors of Tenant; provided, however, that: (a) Tenant shall not be obligated to comply with Section 11.2(a)(i) (legal right to work) for visitors who do not perform any work when they visit at the Factory; and (b) Tenant shall not be obligated to comply with Section 11.2(b) (background checks) of the General Terms for visitors who do not perform any work when they visit at the Factory or for any employees, directors, or officers of a Tenant Affiliate. Tenant shall require all Tenant Personnel who enter the Factory to agree in writing to maintain confidentiality of Tesla’s Confidential Information under terms no less protective than the terms of the NDA.

1.8Insurance.

(a)

General. The Parties each agree that insurance policies obtained pursuant to this Section shall: (i) be held with one or more insurance companies rated A or better and having a financial size category of VII or larger (both as determined by A.M. Best & Company), and licensed to do business in Storey County, Nevada; (ii) be primary and not contributory with any liability coverage held by the other Party or any Affiliate of the other Party; (iii) provide for severability of interests; and (iv) to the extent possible, provide for a waiver of subrogation. Each Party shall provide the other with certificates of insurance and copies of insurance policies upon request by the other Party. Each Party will use Commercially Reasonable Efforts to give the other Party at least [***] days’ prior written notice of any restrictive change, non-renewal or cancellation of any policy obtained pursuant to this Section. Each Party will be responsible for all deductibles and retentions with regard to their respective insurance policies.

(b)

Landlord Insurance. During the Lease Term, Landlord shall obtain and maintain at its cost the following types and amounts of insurance coverage. Landlord may insure the Premises through a blanket policy and, if Landlord does so, Landlord will allocate a reasonable portion of the premium to the Premises based on the insurer’s cost calculations. Further, subject to applicable Laws, Landlord may self-insure any of the foregoing insurance requirements.

(i)

[***]for Property Insurance insuring the Factory and improvements to the Factory (including the Premises, but excluding Tenant’s Property and Tenant Improvements) at full replacement cost;

(ii)

Commercial General Liability in an amount of $2.5 million per occurrence covering the Common Areas of the Factory (but expressly excluding the Premises); and

(iii)

Worker’s Compensation & Employers’ Liability in an amount equal to the greater of $1 million per person and accident or the amount(s) required by applicable Laws of the State of Nevada.

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(c)

Tenant Insurance. During the Lease Term, Tenant (i) shall obtain and maintain at its cost the types and amounts of insurance that are required by applicable Law or reasonably required by Landlord’s insurance provider(s), and (ii) may obtain and maintain, in its sole discretion and at its sole cost and expense, the following types and amounts of insurance coverage.

(i)

“special form” Property Insurance covering Tenant’s Property and Tenant Improvements, at full replacement cost;

(ii)

Commercial General Liability in an amount of [***] covering the Premises, [***];

(iii)

Worker’s Compensation & Employers’ Liability with respect to Tenant Personnel in an amount equal to [***] or the amount(s) [***]; and

(iv)

Automobile Liability covering hired, owned and non-owned vehicles using standard ISO Business Auto policy or similar form, in an amount of [***].

2.Tesla Responsibilities

2.1Section 2.4 (Tesla Responsibilities) of the General Terms is incorporated by reference into, and forms an integral part of, this Lease, provided that such provision shall be deemed amended and modified mutatis mutandi solely for purposes of applicability to this Lease.

2.2As a Tesla Responsibility, Tesla shall: (a) maintain the Land; (b) construct the Factory; and (c) procure items for the Premises and/or the Purpose as may be agreed in writing by the Parties.

[***]

3.1

[***]

(a)

[***]

(b)

[***]

(c)

[***]

3.2

[***]

(a)

[***]

(b)

[***]

(c)

[***]

3.3

[***]

3.4

[***]

(a)

[***]

(b)

[***]

(c)

[***]

(d)

[***]

4.Representations and Warranties.

4.1General. Each Party represents and warrants that it (and its Affiliates to the extent applicable): (a) will perform all of its obligations under this Lease in a professional and workmanlike manner, consistent with industry standards and in accordance with all of the terms of this Lease; and (b) has the right and ability to enter into, perform the obligations under and agree to the covenants contained in this Lease. Tenant further represents that: (c) each obligation of any Tenant entity under this Lease is binding on all Tenant entities which are Parties to this Lease as if each such Tenant entity had agreed to the obligation. Tesla further represents that: (d) each obligation of any Tesla entity under this Lease is binding on all Tesla entities which are Parties to this Lease as if each such Tesla entity had agreed to the obligation.

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4.2Compliance with Laws and Tesla Policies.

(a)

Tenant will, at its cost and expense, obtain all necessary regulatory approvals, licenses, and permits (collectively, “Permits”) applicable to its business and comply with all Laws and Factory Requirements applicable to its business or the performance of its obligations under this Lease, the General Terms, and/or the Contract Documents, as such Laws and/or Factory Requirements may be revised from time to time; provided, however, that the Parties shall consult in good faith and reasonably cooperate to obtain the Permits required for Tenant’s business operations at the Premises. The foregoing includes all Laws pertaining to any of the following: (i) occupational safety and health; (ii) protection of persons and property from death, injury or damage; (iii) the environment, including all applicable Environmental Requirements; (iv) the use, handling, storage, labeling and disposal of toxic or Hazardous Materials; (v) labor and employment, including equal employment opportunity; (vi) tax; (vii) workmen’s compensation and unemployment insurance, (viii) money laundering, anti-terrorism, trade embargos, and economic sanctions; (ix) anti-bribery and anti-corruption; and (x) to the extent relevant to Tenant’s obligations, Laws with respect to data privacy, data protection, and consumer privacy. Tenant will, if reasonably requested by Tesla, submit to Tesla evidence of such compliance. Each Party will also provide the other Party with all information reasonably required in order for the other Party to comply with Laws applicable to it.

(b)

Tesla will, at its cost and expense, comply with all Laws applicable to the performance of its obligations under this Lease, as such Laws may be revised from time to time, in any of the following areas: (i) occupational safety and health; (ii) protection of persons and property from death, injury or damage; (iii) the environment, including all applicable Environmental Requirements; and (iv) the use, handling, storage, labeling and disposal of toxic or Hazardous Materials.

(c)

To the extent not prohibited by Law, each Party will promptly notify the other Party in writing of any investigation or inquiry by a governmental authority into whether such Party (or any of its Personnel) is charged with failing to comply with any Laws that may or will impact its performance under this Lease.

(d)

Tenant will comply with any Tesla policies, standards, rules, and procedures (collectively, “Tesla Policies”) applicable to performance of Tenant’s obligations under this Lease and/or to the Factory which are disclosed to Tenant in writing and approved by Tenant, as such Tesla Policies may be revised from time to time subject to Tenant’s approval, and Tenant shall not unreasonably withhold, condition, or delay its approval for any such Tesla Policy or any changes thereto. Without limiting the foregoing, Tenant shall also cause Tenant Personnel to sign Tesla’s Visitor Safety and Non-Disclosure Agreement when entering the Factory.

4.3Debarment. Section 6.4 (Debarment) of the General Terms is incorporated by reference into, and forms an integral part of, this Lease, provided that such provision shall be deemed amended and modified mutatis mutandi solely for purposes of applicability to this Lease.

4.4Disclaimer. The warranties set forth herein are exclusive and are in lieu of all other warranties with respect to this Lease, The Premises, the Factory, and/or the Land, whether arising from a course of dealing, course of performance or trade usage, or whether oral, written, express, implied or statutory, all of which are hereby waived by Tesla and Tenant.

5.Indemnification.

5.1Indemnification by Tenant. Notwithstanding Section 12.1(d) of the General Terms, to the extent permitted by Law but subject to Section 5.3 (Procedure; Limitations), Tenant agrees to indemnify, defend and hold harmless Tesla, its Affiliates, and their respective directors, officers, employers and agents (collectively, “Tesla Indemnitees”) from and against any and all costs, fees, penalties, expenses, third-party damages, reasonable attorneys' fees and all other liabilities to any third party whatsoever (“Losses”), arising out of any Claim against any Tesla Indemnitee which arises from or relates to any actual or alleged: (a) personal injury (including death) or property damage to the extent caused by the negligence or willful misconduct of Tenant, any Tenant Personnel, or any of Tenant’s visitors, licensees, employees, directors, officers, agents, servants, contractors and/or subcontractors in connection with this Lease; (b) breach of a Tenant obligation under this Lease with respect to, or violation of, one or more Environmental Requirements for which Tenant is responsible under this Lease; (c) challenge (for example, through a lien or similar impairment) to Tesla's right, title and interest in the Premises, Factory, Land, Goods, or Tesla Property, or right to possession of any of the foregoing, in each case brought by any third party supplier to Tenant or any Tenant Personnel, including toolmakers, subcontractors, and lending institutions; or (d) Claims as contemplated in Section 13.4 (Brokers).

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5.2Indemnification by Tesla. Notwithstanding the provisions of Section 12.1(d) of the General Terms, to the extent permitted by Law but subject to Section 5.3 (Procedure; Limitations), Tesla agrees to indemnify, defend and hold harmless Tenant, its Affiliates, and their respective directors, officers, employers and agents (collectively, “Tenant Indemnitees”) from and against any and all Losses arising out of any Claim against any Tenant Indemnitee which arises from or relates to any actual or alleged: (a) personal injury (including death) or property damage to the extent caused by the negligence or willful misconduct of Tesla or any of Tesla’s visitors, licensees, employees, directors, officers, agents, servants, contractors and/or subcontractors in connection with this Lease; (b) breach of a Tesla obligation under this Lease with respect to, or violation of, one or more Environmental Requirements for which Tesla is responsible under this Lease; (c) challenge to Tenant’s sole right, title and interest in materials, work-in-process, Goods or Tenant’s Property, or right to possession of any of the foregoing, in each case brought by any third party supplier to Tesla or agent to Tesla, including toolmakers, subcontractors, and lending institutions; or (d) Claims as contemplated in Section 13.4 (Brokers).

5.3Procedure; Limitations. Sections 7.3 (Procedure) and 7.4 (Limitations) of the General Terms are incorporated by reference into, and form an integral part of, this Lease, provided that such provisions shall be deemed amended and modified mutatis mutandi solely for purposes of applicability to this Lease.

6.Casualty. If all or substantially all of the Factory or the Premises are damaged, or a part of the Factory is damaged so that the operation of Tenant at the Premises is adversely affected by a fire or other casualty (a “Casualty Event”), Tesla will notify Tenant promptly in writing of the occurrence of the Casualty Event, and will use Commercially Reasonable Efforts to give the notice within [***] days, which notice shall include an estimate as to the amount of time to restore the Premises (such notice is the “Casualty Notice”). In case of the occurrence of a Casualty Event, the Parties shall discuss in good faith regarding the restoration of the Factory or the Premises, and Tesla shall use Commercially Reasonable Efforts to restore them as soon as practicable but in any event within [***]; provided, however, that, if Tesla reasonably determines after such good-faith discussion with Tenant that it cannot restore the Premises or such damaged portion of the Factory within a period of [***], then the Casualty Event will be deemed to be a Force Majeure Event and either Party may terminate this Lease upon written notice, provided that such Party was not grossly negligent in causing or failing to prevent the Casualty Event. If neither Party exercises the foregoing termination right, or less than all or substantial all of the Premises are damaged by a Casualty Event, then Tesla will, as a Tesla Responsibility, use Commercially Reasonable Efforts to restore the Premises and/or such damaged portion of the Factory in a commercially reasonable period of time if and to the extent that Tesla deems it is commercially reasonable and feasible to do so. [***] while Tesla restores the Premises and/or such damaged portion of the Factory adversely affecting Tenant’s operation (and for any additional period reasonably required for Tenant’s restoration of any improvements or equipment installed by Tenant and time reasonably required for Tenant to be fully operational at the Premises) in the proportion which the area of the Premises, if any, affected by the casualty or related restoration work bears to the total area of the Premises.

7.Condemnation. Tesla will promptly notify Tenant of any threatened Taking known to Tesla and will allow Tenant to participate in any negotiations with public authorities. If all or substantially all of the Premises is taken for any public or quasi-public use under governmental law, ordinance, or regulation, or by right of eminent domain, or by private purchase in lieu of any condemnation (collectively, a “Taking” or “Taken”), or if any part of the Premises, the Factory, or the Land is Taken and the partial Taking would prevent or materially interfere with Tenant’s access to or use of the Premises, then Tenant may, at its option, terminate this Lease by giving written notice to Tesla. Such termination will be effective as of the effective date of the Taking and will be deemed to be a termination due to a Force Majeure Event by either Party under the General Terms and this Lease. If part of the Premises is Taken and Tenant does not terminate the Lease, (a) Tesla will, as a Tesla Responsibility, restore the Premises within a commercially reasonable period of time, and (b) [***]. If any Taking occurs, then Tesla will be entitled to the entire award for the Premises but Tesla shall have no right to any award for the value of Tenant’s Property, Tenant Improvements, and/or Tenant’s moving costs. Tenant may separately pursue a claim against the condemning authority in connection with a Taking for the value of Tenant’s property, moving costs, loss of business, and other claims it may have.

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8.Subordination, Estoppel Certificates and Liens.

8.1Mortgages. At Tesla’s written request, Tenant will subordinate this Lease and Tenant’s interest and rights under this Lease to any existing or future deed of trust, security deed, mortgage, security assignments and any other similar encumbrances (each, a “Mortgage”), provided that the holder of the Mortgage has executed, acknowledged and delivered to Tenant a commercially reasonable Subordination, Attornment and Non-Disturbance Agreement that provides that: (a) Tenant’s possession of the Premises and other rights under the Lease will not be disturbed in any proceeding to foreclose the Mortgage or in any other action instituted in connection with such Mortgage, (b) Tenant will not be named as a defendant in any foreclosure action or proceeding which may be instituted by the holder of such Mortgage, and (c) if the holder of the Mortgage or any other person acquires title to the Premises through foreclosure or otherwise, the Lease will continue in full force and effect as a direct lease between Tenant and the new owner, and the new owner will assume and perform Tesla’s obligations under this Lease. The holder of any Mortgage may, at any time, subordinate its Mortgage to this Lease, without Tenant’s consent, by giving written notice to Tenant.

8.2Estoppel Certificates. Tenant shall, within [***] days of Tesla’s request, execute and deliver to Tesla estoppel certificates(s) to: (a) certify that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect and the date to which [***], if any; (b) acknowledge that there are not, to Tenant’s knowledge, any uncured defaults on the part of Tesla hereunder, or stating the nature of defaults if such exist; and (c) evidence the status of this Lease. If Tenant fails to timely respond to a request for an estoppel certificate, Tesla may deliver an additional request accompanied by a second copy of the same estoppel certificate. If Tenant does not respond within [***] Business Days after such second request, Tenant will be deemed to have agreed to all matters set forth in good faith in the estoppel certificate, except to the extent that Tesla has actual knowledge to the contrary.

8.3Mechanic’s Liens. Tenant will not allow any person working on behalf of either Tenant or any Tenant Personnel to place any lien or similar impairment on the Land, Factory, or Premises.

9.Environmental Requirements.

9.1Responsibilities Matrix. Unless expressly provided otherwise in the Responsibilities Matrix, Tenant shall install, operate, and maintain the Tenant Utilities in full compliance with all applicable Environmental Requirements and Tesla shall have such responsibility with respect to the Factory Utilities.

9.2Tesla Obligations. Tesla shall, as a Tesla Responsibility and during the Lease Term: (a) cause the Land and Factory to comply with all Environmental Requirements, except (i) to the extent of Tenant’s obligations under Section 9.3, or (ii) to the extent that non-compliance with an Environmental Requirement is or was caused by Tenant, any Tenant Personnel, or any of Tenant’s visitors, licensees, employees, directors, officers, agents, servants, contractors and/or subcontractors; (b) be responsible for (i) coordination and arrangements with Tenant and all other entities located at the Land and permitted by Tesla, if any, for compliance with all Environmental Requirements with respect to the entire site, and (ii) any and all filings and permits with respect to the entire site as required under any Environmental Requirements, and Tesla will discuss in good faith such filings as related to Tenant’s operations in the Premises.

9.3Tenant Obligations.

(a)

Tenant shall not transport, store, use, generate, manufacture, or release any Hazardous Materials in or about the Premises, Land, or Factory, nor shall Tenant permit any Tenant Personnel to do any of the foregoing, except if and to the extent such activity is: (i) related to the Purpose; (ii) in compliance with all Environmental Requirements (including Section 9.5 of this Lease as applicable); and (iii) notified in advance in writing by Tenant (except in the case of ordinary office and cleaning supplies containing [***] in normal and customary amounts). Further, except as expressly provided otherwise in this Lease or the Responsibilities Matrix, Tenant shall cause the Premises (as distinct from the Factory and Land) to comply with all Environmental Requirements during the Lease Term, including as applicable by conducting remediation, cleanup and repairs as required by applicable Law and/or any Environmental Requirements; provided, however, that Tesla shall conduct such remediation, cleanup and repairs at its expense if and to the extent that the non-compliance with one or more Environmental Requirements was caused by Tesla or any of Tesla’s visitors, licensees, employees, directors, officers, agents, servants, contractors and/or subcontractors. Further, Tenant shall conduct remediation, cleanup and repairs with respect to the Land and Factory if and to the extent that the non-compliance with one or more Environmental Requirements was caused by Tenant, any Tenant Personnel, or any of Tenant’s visitors, licensees, employees, directors, officers, agents, servants, contractors and/or subcontractors.

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(b)

Tenant shall provide all information that is reasonably requested by Tesla in connection with, and required for, Tesla’s performance of its obligations under Section 9.2 above, and access to the Premises and Tenant’s records as required to confirm and evaluate the accuracy and thoroughness of such information. Tenant shall not contest any findings or remediation (proposed or required) identified in a filing by Tesla in connection with any Environmental Requirements applicable to the site. Tesla will use Commercially Reasonable Efforts to discuss in good-faith with Tenant any such findings or remediation, but only to the extent that (i) the finding(s) and/or remediation pertain to the Premises, and (ii) such discussion will not, in Tesla’s sole but reasonable determination, result in a breach of confidentiality or waiver of applicable privilege.

9.4Pre-Existing Issues. Notwithstanding anything to the contrary herein or in the General Terms, Tenant shall not be liable for any non-compliance with any Environmental Requirements or any other environmental issue which existed in the Land, Factory and/or Premises before the Commencement Date and was not caused by Tenant.

9.5

[***]

(a)

[***]

(b)

[***]

(i)

[***]

(ii)

[***]

(c)

[***]

(d)

[***]

(f)

[***]

(g)

[***]

10.Liability.

10.1Limitations of Liability and Exclusions. Section 12.1 (Limitations of Liability and Exclusions) of the General Terms is incorporated by reference into, and forms an integral part of, this Lease, provided that such provision shall be deemed amended and modified mutatis mutandi solely for purposes of applicability to this Lease. The foregoing provision governs each Party’s liability pursuant to this Lease; provided, however, that the following shall also be deemed to be direct damages for purposes of this Lease:

(a)

actual and reasonable damages and liability incurred by a Party with respect to environmental conditions or issues (including actual and reasonable costs of remediation, if applicable), either (a) to the extent caused by the other Party and/or (b) to the extent such conditions or issues are the legal responsibility of the other Party; the foregoing includes, without limitation, any and all losses, fines, penalties, liabilities, damages (including punitive damages), remedial costs and expenses (including investigation, remediation, removal, repair, corrective action, and/or cleanup expenses), and costs (including actual and reasonable attorneys’ fees, consultant fees and/or expert witness fees) suffered or incurred by a Party arising from any of the following to the extent caused by acts or omissions of the other Party or any employee or agent thereof: (i) the presence of any Hazardous Materials in, under, on or from the Premises, Factory, and/or Land (e.g. in connection with any spills or the transfer of chemicals from a tanker to storage for use in production activities at the Factory); or (ii) failure to comply with any applicable Environmental Requirement;

(b)

if Tesla terminates for Tenant’s Lease Default, the [***];

(c)

if Tesla terminates for Tenant’s Lease Default, the actual and reasonable costs and expenses to Tesla of soliciting new tenants during [***], including any costs and expenses for re-fixturing, alterations and other costs in connection with the Premises for any reasonable or necessary alterations to bring the Premises back to the condition as of the Commencement Date subject to reasonable wear and tear;

10.2Force Majeure. Section 12.2 (Force Majeure) of the General Terms is incorporated by reference into, and forms an integral part of, this Lease, provided that such provision shall be deemed amended and modified mutatis mutandi solely for purposes of applicability to this Lease.

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11.Term and Termination.

11.1Term. The term of this Lease (the “Lease Term” or “Amended Lease Term”) will begin on the Amendment Effective Date and end on the effective date of termination or expiration of the General Terms and each Contract entered into by the Parties thereunder (the “Expiration Date”).

11.2Termination, Generally. This Lease may only be terminated as provided in this Section 11 (Term and Termination). Termination by a Party will be without prejudice to any other rights and remedies available to a Party. Neither Party will be obliged to pay any termination charges or demobilization fees to the other Party in connection with any termination of this Lease, except as may be expressly set forth in this Lease.

11.3Termination.

(a)

Subject to Sections 2.1 (Tesla Responsibilities) above, the Party who is not in Lease Default may terminate this Lease as follows: (i) if the other Party breaches a material obligation under the Lease and fails to cure the breach within [***] days after receipt of notice of such breach expressly stating the non-breaching Party’s intent to terminate (“Notice of Termination”) or, if the breach cannot reasonably be cured within such [***]-day period, [***] days after receipt of Notice of Termination provided the Party in Lease Default commences and diligently pursues a cure within the [***]-day period; (ii) if the other Party becomes a debtor in a bankruptcy, insolvency, receivership, or similar proceeding commenced by a third party that is not dismissed within a reasonable time after commencement; or (iii) immediately upon Notice of Termination in the event of an incurable material breach, including (A) a Party’s repudiation of this Lease, (B) in case of Section 4.3 (Debarment), or (C) if the other Party makes an assignment for the benefit of creditors in violation of this Lease or voluntarily institutes proceedings in bankruptcy or insolvency. Each of the foregoing types of breach shall be deemed to be a “Lease Default.” The Party that issues the Notice of Termination may approve a longer cure period with respect to any Lease Default in its sole discretion. For purposes of this subsection, each of the following will be deemed to be a material breach of this Lease: (x) Tenant’s abandonment of the Premises; (y) [***]; and (z) either Party’s assignment, encumbrance or subletting in violation of the provisions hereof.

(b)

The Parties may also terminate this Lease: (i) as provided in Section 10.2 (Force Majeure); (ii) as provided in Section 6 (Casualty); (iii) as provided in Section 7 (Condemnation); or (iv) for convenience (i.e. without cause) upon prior written notice to the other Party if such other Party experiences a Change of Control Event, but only if both: (A) the Change of Control Event will, or is reasonably likely to, materially and adversely affect the terminating Party’s interests pertinent to the General Terms and the Contract(s), and (B) the terminating Party terminates within [***] after such Change of Control Event.

(c)

Tenant may terminate this Lease pursuant to Section 11.1 of the General Terms.

(d)

Subject to Section 11.3 (Extension of Lease) of the General Terms, this Lease shall also automatically terminate without any further action by the Parties upon expiration or termination of the General Terms and all Contracts by and between the Parties under the General Terms.

11.4Obligations Upon Termination or Expiration.

(a)

Immediately upon the date of expiration or termination of the Lease and in addition to any actions or payments expressly required hereunder but subject to Section 11.3 (Extension of Lease) of the General Terms, Tenant shall vacate and deliver to Tesla possession of the Premises (i) free and clear of all liens, charges, or encumbrances thereon resulting from any act or omission on Tenant’s part, (ii) free and clear of all violations of applicable Laws excluding any violation for which Tenant is not responsible, including any violation of the Environmental Requirements which existed prior to the Commencement Date, (iii) broom clean, in good condition, normal wear and tear excepted, free of all toxic or Hazardous Materials and waste materials of any nature brought onto the Premises or caused by Tenant or for which Tenant is otherwise responsible, but excluding any of them for which Tenant is not responsible, and (iv) having removed all Tenant Improvements so that the Premises are in substantially the same condition as they are in at Commencement Date and/or Production Date or when installed, if later, normal wear and tear excepted.

(b)

Prior to such delivery but subject to Section 11.3 (Extension of Lease) of the General Terms, Tenant shall remove all Tenant’s Property and Tenant Improvements that Tenant has the right to remove or is obligated to remove under this Lease and shall repair all damage caused by and perform all restoration made necessary by the removal of any Tenant Improvements or Tenant’s Property normal wear and tear excepted. If and to the extent that Tenant does not comply with the foregoing when it surrenders the Premises, (i) Tesla may elect to retain or dispose of Tenant Improvements and dispose of Tenant’s Property in any manner, and (ii) Tenant shall reimburse Tesla upon demand for Tesla’s costs for storing, removing, and disposing of any Tenant Improvements or Tenant’s Property .

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11.5	Holding Over.

(a)

If Tenant remains in possession of the Premises after the effective date of termination or after expiration of the Lease Term (and provided that the Preparation Period has expired), unless otherwise provided in Section 11.3 (Extension of Lease) of the General Terms (the “Holding Over”), such possession by Tenant shall be deemed to be a month-to-month tenancy which is subject to termination by either Party by providing [***] days’ prior written notice to the other Party. All provisions of this Lease, except those pertaining to Lease Term and option to extend, shall apply to such month-to-month tenancy, unless otherwise provided in Section 11.3 (Extension of Lease) of the General Terms; provided that [***] in case of expiration or termination of this Lease or the General Terms for any reason other than as set forth in subparagraph (i) above.

(b)

If the Holding Over continues more than [***] days, then Tenant will be liable to Tesla for the rental revenue lost by Tesla as a result of the holdover (other than as a result of a termination of any executed lease for any portion of the Premises) and for any amounts Tesla is required to pay to any new tenant (whether in the form of rent abatement, monetary damages, or otherwise) as a result of the holdover. If Tenant wishes to extend its occupation of the Premises after the effective date of expiration or termination of this Lease, Tenant may request an extension in writing and Tesla will discuss such extension with Tenant in good faith but Tesla shall have no obligation to grant an extension.

(c)

If the Holding Over continues more than [***] days, then upon [***] day prior written notice to Tenant: (A) Tesla shall have an unconditional right of entry to the Premises and may use such reasonable force as it may deem necessary for the purpose of gaining admittance to and retaking possession of the Premises without any liability in trespass; (B) Tesla may expel and remove Tenant, those claiming under Tenant, and their effects, as allowed by Law, without any liability in trespass; (C) if Tesla removes any Tenant’s Property from the Premises, Tesla may either store such property in a public warehouse or at a place selected by Tesla in the State of Nevada at Tenant’s expense or scrap or recycle such property in its sole discretion and use the resulting funds (if any) towards any indebtedness of Tenant to Tesla, in each case without any liability to Tenant other than to provide any remaining balance of proceeds from scrap or recycling to Tenant; (D) Tesla may remove any and all Tenant Improvements in the Premises at Tenant’s expense; and (E) Tenant hereby releases Tesla from all actions, proceedings, claims, and demands whatsoever for and in respect of Tesla’s exercise of any of the foregoing rights except in case that such action, proceeding, claim and/or demand are raised based on Tesla’s intentional torts, willful misconduct or gross negligence.

12.Dispute Resolution.

12.1Governing Law. This Lease will be interpreted and construed in accordance with the following substantive Laws and the Laws of the United States generally applicable therein, without regard to any provisions of choice of law rules that would result in a different outcome: (a) the Laws of California with respect to contract matters; and (b) the Laws of Nevada with respect to leasehold matters. The UN Convention on Contracts for the International Sale of Goods will not apply to this Lease.

12.2Dispute Resolution. In the event any disputes, differences or controversies arise between the Parties, out of or in relation to or in connection with the provisions of this Lease, the Parties shall thoroughly explore all possibilities for an amicable settlement. Section 15.3 (Arbitration) of the General Terms is incorporated by reference into, and forms an integral part of, this Lease, provided that such provision shall be deemed amended and modified mutatis mutandi solely for purposes of applicability to this Lease. Each Party agrees to continue performing its obligations under this Lease while a dispute is being resolved unless and until such obligations are terminated by the termination or expiration thereof.

13.Miscellaneous.

13.1Assignment and Subcontracting.

(a)

Without prior written consent of the other Party, neither Party may assign this Lease and Tenant may not sublet its rights hereunder, and any attempt to do so shall be void; provided, however, that: (i) each Party may, by a written notice but without requiring the other Party’s consent or meeting any other condition, add an Affiliate which operates in the Factory as a co-party to this Lease; and (ii) Tesla may, with Tenant’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed, assign any or all of its rights, benefits or remedies to an Affiliate which assumes all of Tesla’s obligations hereunder.

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(b)

Tenant may not subcontract any of its obligations under this Lease without Tesla’s prior written consent (such consent will not be unreasonably withheld, conditioned, or delayed by Tesla), and any attempt to do so shall be void. If Tenant subcontracts any of its obligations under this Lease to a third party, Tenant will: (i) be solely responsible for payments to the subcontractor; (ii) include in its purchase order or any other contract with the subcontractor a waiver of subcontractor liens on the Premises and Factory to the maximum extent permitted by applicable Law; (iii) before permitting any subcontractor to use Tesla Property and/or access the Factory, obtain Tesla’s prior written consent, which shall not be unreasonably withheld, conditioned, or delayed by Tesla; and (iv) replace any subcontractor used by Tenant in connection with this Lease as reasonably requested by Tesla within a reasonable time after receipt of notice from Tesla and following a good faith discussion. Tesla has no obligation with respect to any subcontractor of Tenant. Any subcontracting, assignment or delegation by Tenant does not relieve Tenant of any responsibility under this Lease, and Tenant remains responsible to the same extent as if the subcontracted, assigned or delegated responsibilities were retained by Tenant. [***] shall not be deemed to be a waiver by Tesla of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee, subtenant or any other successor of Tenant under this Lease, in the performance of any of the terms hereof, Tesla may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. If and to the extent that Tesla unreasonably withholds, conditions or delays its consent to any proposed subcontractor, Tesla will be deemed to have failed to perform a Tesla Responsibility and Section 2.4(b) of the General Terms will apply.

(c)

In the event of a Change of Control Event affecting a Party, the person or entity which acquires Control of the Party shall be subject to the terms and conditions of, and shall assume all of the acquired Party’s obligations under, this Lease.

(d)

If Tesla sells, transfers, assigns or otherwise disposes of any portion of the Land and Factory covered by this Lease and/or the Factory Utilities to a Tesla Affiliate or a third party, any such sale, transfer, assignment or disposal shall be subject to any and all of Tenant’s rights under this Lease. Tesla shall first notify in writing to and discuss with Tenant in good faith if Tesla intends to sell, transfer, assign or otherwise dispose of any portion of the Land and Factory covered by this Lease and/or the Factory Utilities to any third party.

(e)

This Lease shall be binding upon the respective successors and permitted assigns of the Parties.

13.2Audit and Inspection.

(a)

Tenant will permit Tesla and its agents and representatives to enter the Premises if reasonably required and with reasonable prior notice and in compliance with Tenant’s reasonable security and occupational safety procedures for any of the following:

(i)

an emergency at any time;

(ii)

a law enforcement or government inspection at any time;

(iii)

employee health & safety (EHS);

(iv)

security;

(v)

audit (e.g., PPAP);

(vi)

evaluation of compliance with Environmental Requirements and/or for purposes of any Tesla filings or obligations under one or more Environmental Requirements;

(vii)

as separately approved in writing by Tenant following a good faith discussion with Tesla; and/or

(viii)

maintenance or repair of Tesla Property used by or for Tenant in the Premises.

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(b)

Tesla and its authorized representatives shall have the right, from time to time with reasonable prior written notice and subject to the NDA and compliance with Tenant’s reasonable security and occupational safety procedures, to access the Premises as approved by Tenant (such approval will not be unreasonably withheld, conditioned, or delayed by Tenant) for any of the following purposes: (i) to determine whether the Premises are in good condition and whether Tenant is complying with its obligations under this Lease; (ii) to do any necessary or appropriate maintenance and to make any restoration to the Premises or the Factory and other improvements in which the Premises are located that Tesla has under the Lease the right or obligation to perform; (iii) to serve, post, or keep posted any notices required or allowed under the provisions of this Lease; and/or (iv) to shore the foundations, footings, and walls of the Factory and to erect scaffolding and protective barricades around and about the Factory or Premises (but without preventing entry to the Premises), and to do any other act or thing necessary for the safety or preservation of the Premises or the building and the other improvements in which the Premises are located if any excavation or other construction is undertaken or is about to be undertaken on any adjacent property or nearby street.

(c)

Tenant will maintain records as required to demonstrate its compliance with the terms of this Lease. Tesla and its representatives may audit Tenant’s records for the three-year period prior to the audit date using reasonable efforts not to interrupt Tenant’s operations in the Premises, to the extent needed to verify compliance with this Lease, and Tenant will make such records available to Tesla and its auditors for examination and copying upon their reasonable request; provided that Tenant is not obliged to make available any technical or engineering records, data and/or information which is confidential or proprietary to Tenant and which is owned or controlled by Tenant without the prior written agreement between the Parties. Each Party shall bear its own expenses in connection with any such audit. Tesla shall not be liable in any manner for any inconvenience, disturbance, loss of business, nuisance, or other damage arising out of Tesla’s entry on the Premises, nor shall any such entry constitute a constructive eviction or in any way affect Tenant’s obligations under this Lease or [***].

13.3Authority. Each Party represents to the other that it has the full right and authority to bind itself without the consent or approval of any other person or entity and that it has full power, capacity, authority and legal right to execute and deliver this Lease and to perform all of its obligations hereunder.

13.4Brokers. Each Party represents and warrants that it has dealt with no broker, agent or other person in connection with this Lease, and agrees to indemnify and hold the other Party harmless from and against any claims by any broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with such Party with regard to this Lease.

13.5Confidentiality. The then-current Non-Disclosure Agreement executed by the Parties (“NDA”) sets forth the Parties’ respective confidentiality obligations hereunder. The NDA is hereby incorporated by reference in this Lease, and the terms and conditions of the NDA will continue in force during the Lease Term and thereafter during the Confidentiality Period (as defined in the NDA).

13.6Counterparts. This Lease may be executed in counterparts, each of which shall be an original and together which shall constitute one and the same instrument.

13.7Covenant of Good Faith. Each Party, in its respective dealings with the other Party under or in connection with this Lease, shall act in good faith and with fair dealing.

13.8Environmentally Friendly Practices. In addition to complying with all Environmental Requirements, to the maximum extent practicable, each Party will use environmentally conscious materials and practices in connection with this Lease.

13.9Entire Agreement. This Lease (including its accompanying addenda and exhibits, the recitals and Basic Information at the beginning hereof, and together with applicable provisions in the General Terms, the Pricing Agreement, and any documents incorporated or referenced in either of the foregoing) constitutes the entire agreement between the Parties with respect to its subject matter, and supersedes all prior oral or written representations or agreements by the Parties with respect thereto. No subsequent terms, conditions, understandings, or agreements purporting to modify the terms of this Lease will be binding unless in writing and signed by a Director-level or higher for Tesla and an authorized employee of Tenant.

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13.10Memorandum of Lease. If requested by Tenant and during the Lease Term, Tesla will execute a memorandum of lease with respect to this Lease. Tenant shall be responsible for recording such memorandum of lease at its expense if Tenant elects to do so.

13.11No Third Party Beneficiaries. This Lease is entered into solely between Tesla and Tenant and, except for the Parties’ indemnification obligations hereunder, will not be deemed to create any rights in any third parties or to create any obligations of either Tesla or Tenant to any third parties.

13.12No Waiver. The failure of either Party to enforce on a particular occasion any right or remedy provided in this Lease or by law or in equity will not be deemed a waiver of that right or remedy on a subsequent occasion or a waiver of any other right or remedy.

13.13Notices. Section 16.1 (Notices) of the General Terms is hereby incorporated by reference into, and forms an integral part of, this Lease provided that such provision shall be deemed amended and modified mutatis mutandi solely for purposes of applicability to this Lease. Copies of all notices to Tenant shall also be sent to Panasonic Corporation of North America, Two Riverfront Plaza, Newark, NJ 07102, Attn: General Counsel.

13.14Relationship of Parties. The Parties are independent contractors under this Lease and no other relationship is intended, including a partnership, franchise, joint venture, agency, employer/employee, fiduciary, master/servant relationship, tenancy-in-common, joint tenancy, financing, or other special relationship, express or implied. Neither Party shall act in a manner that expresses or implies a relationship other than that of independent contractor, nor bind the other Party. Tesla and Tenant will treat this Lease (including its accompanying addenda and exhibits) as a lease in their separate books and records and in any reports to any third party.

13.15Rules of Interpretation. Section 16.7 (Rules of Interpretation) of the General Terms is hereby incorporated by reference into, and forms an integral part of, this Lease provided that such provision shall be deemed amended and modified mutatis mutandi solely for purposes of applicability to this Lease.

13.16Severability. If for any reason a court of competent jurisdiction finds any provision of this Lease to be unenforceable, that provision of this Lease will be enforced to the maximum extent permissible so as to implement the intent of the Parties, and the remainder of this Lease will continue in full force and effect.

13.17Survival. Any provision of this Lease that contemplates or governs performance or observance subsequent to termination or expiration will survive the expiration or termination hereof for any reason.

13.18Time. Time is of the essence as to the performance of each Party’s obligations under this Lease.

13.19Defined Terms.

(a)

“Business Day” means any day that is not a Saturday, Sunday, or federal holiday.

(b)

“CCR Rules” means all policies, procedures, rules and regulations applicable to the Factory and/or the Land (collectively, the “CCR Rules”).

(c)

"Common Areas" shall mean all areas of the Factory intended or designated by Tesla from time to time as for the common use or benefit of the tenants of the Factory and their employees, agents, and other invitees, including all parking areas, pedestrian walkways, driveways and access roads, entrances and exits, and landscaped areas.

(d)

“Environmental Requirements” means all applicable present and future Laws regulating or relating to human health, safety, or environmental conditions on, under, or about the Premises, Factory, Land, or the environment, including but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA); the Resource Conservation and Recovery Act; and all state and local counterparts.

(e)

“Factory Requirements” means, collectively, all CCR Rules and insurance requirements applicable to the Factory and/or the Land.

(f)

“Factory Systems” means, collectively, HVAC systems, fire suppression systems, lighting systems, electrical systems, plumbing systems, or other mechanical and building systems.

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(g)

“Hazardous Materials” means and includes any substance, material, waste, pollutant, or contaminant listed or defined as hazardous or toxic under any Environmental Requirements.

(h)

“Law(s)” means any statute, regulation, ordinance, rule, order, decree or governmental requirement enacted, promulgated or imposed by any governmental authority at any level (e.g., municipal, county, province, state or national). For the avoidance of doubt, the term “Laws” includes any and all applicable Anti-Bribery Laws and Anti-Money Laundering Laws.

(i)

[***]

(j)

“Party” refers to either Tesla or Tenant and “Parties” refers collectively to Tesla and Tenant.

(k)

“Tenant’s Property” has the same meaning as the term Seller’s Property, as defined in Section 9.1 of the General Terms.

(l)

“Taxes” means, for purposes of this Lease, all real estate taxes, assessments and governmental charges. Taxes do not include any estate taxes or inheritance taxes, transfer, gift or franchise taxes, or gross receipts taxes of Tesla, any “roll back” or similar taxes attributable to periods before the Commencement Date, or any federal, state or local income taxes, any tax in lieu of net income tax, any penalties or interest other than those attributable to Tenant’s failure to comply timely with its obligations under this Lease, nor any special assessments incurred as a result of the initial construction or subsequent enlargement of the Premises.

(m)

“Tesla Property” has the meaning set forth in Section 9.1 of the General Terms.

(n)

“Tesla Responsibility” (including its derivations) has the meaning set forth in Section 2.4 (Tesla Responsibilities) of the General Terms.

(o)

“Tesla-Supplied Items” means, collectively, the raw materials, components, supplies, and/or services to be provided by Tesla hereunder as a Tesla Responsibility.

Exhibits

Appendix A-1: Legal Description of Land

Appendix A-2: Site Plan for Premises

Appendix B: Factory Utilities, Tenant Utilities, and Certain Factory Systems and Tenant Improvements

Appendix C: Utility Rates

Appendix D: [***]

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Appendix A-1: Legal Description of Land

[***]

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Appendix A-2: Site Plan for Premises

[***]

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Appendix B: Factory Utilities, Tenant Utilities, and Certain Factory Systems and Tenant Improvements

[***]

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Appendix C: Utility Rates

[***]

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Appendix D: [***]

Per Section [***] of this Lease, Tenant is required to comply with all Environmental Requirements relevant to the battery cell production materials supplied to Tenant for use in production of battery cells at Gigafactory 1.

[***]

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Exhibit 31.1

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

I, Elon Musk, certify that:

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

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

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

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

(a)

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

(b)

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

(c)

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

(d)

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

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

(a)

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

(b)

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

Date: July 28, 2019				/s/ Elon Musk
				Elon Musk
				Chief Executive Officer
				(Principal Executive Officer)

Exhibit 31.2

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

I, Zachary J. Kirkhorn, certify that:

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

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

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

(a)

(b)

(c)

(d)

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

(a)

(b)

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

Date: July 28, 2019				/s/ Zachary J. Kirkhorn
				Zachary J. Kirkhorn
				Chief Financial Officer
				(Principal Financial Officer)

Exhibit 32.1

SECTION 1350 CERTIFICATIONS

I, Elon Musk, certify, pursuant to 18 U.S.C. Section 1350, that, to my knowledge, the Quarterly Report of Tesla, Inc. on Form 10-Q for the quarterly period ended June 30, 2019, (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Tesla, Inc.

Date: July 28, 2019				/s/ Elon Musk
				Elon Musk
				Chief Executive Officer
				(Principal Executive Officer)

I, Zachary J. Kirkhorn, certify, pursuant to 18 U.S.C. Section 1350, that, to my knowledge, the Quarterly Report of Tesla, Inc. on Form 10-Q for the quarterly period ended June 30, 2019, (i) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) that the information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Tesla, Inc.

Date: July 28, 2019				/s/ Zachary J. Kirkhorn
				Zachary J. Kirkhorn
				Chief Financial Officer
				(Principal Financial Officer)