Item 1. FINANCIAL STATEMENTS

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Item 1. FINANCIAL STATEMENTS

Tesla, Inc.

C****onsolidated Balance Sheets

(in millions, except per share data)

(unaudited)

June 30,December 31,
20222021
Assets
Current assets
Cash and cash equivalents$18,324$17,576
Short-term marketable securities591131
Accounts receivable, net2,0811,913
Inventory8,1085,757
Prepaid expenses and other current assets2,1181,723
Total current assets31,22227,100
Operating lease vehicles, net4,7824,511
Solar energy systems, net5,6245,765
Property, plant and equipment, net21,09318,884
Operating lease right-of-use assets2,1852,016
Digital assets, net2181,260
Intangible assets, net241257
Goodwill196200
Other non-current assets2,9522,138
Total assets$68,513$62,131
Liabilities
Current liabilities
Accounts payable$11,212$10,025
Accrued liabilities and other6,0375,719
Deferred revenue1,8581,447
Customer deposits1,182925
Current portion of debt and finance leases1,5321,589
Total current liabilities21,82119,705
Debt and finance leases, net of current portion2,8985,245
Deferred revenue, net of current portion2,2102,052
Other long-term liabilities3,9263,546
Total liabilities30,85530,548
Commitments and contingencies (Note 12)
Redeemable noncontrolling interests in subsidiaries421568
Equity
Stockholders’ equity
Preferred stock; $0.001 par value; 100 shares authorized;no shares issued and outstanding——
Common stock; $0.001 par value; 2,000 shares authorized;1,041 and 1,033 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively11
Additional paid-in capital30,94429,803
Accumulated other comprehensive (loss) income(477)54
Retained earnings5,908331
Total stockholders’ equity36,37630,189
Noncontrolling interests in subsidiaries861826
Total liabilities and equity$68,513$62,131

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

Tesla, Inc.

C****onsolidated Statements of Operations

(in millions, except per share data)

(unaudited)

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Revenues
Automotive sales$13,670$9,520$29,184$17,707
Automotive regulatory credits3443541,023872
Automotive leasing5883321,256629
Total automotive revenues14,60210,20631,46319,208
Energy generation and storage8668011,4821,295
Services and other1,4669512,7451,844
Total revenues16,93411,95835,69022,347
Cost of revenues
Automotive sales10,1537,11921,06713,576
Automotive leasing368188776348
Total automotive cost of revenues10,5217,30721,84313,924
Energy generation and storage7697811,4571,376
Services and other1,4109862,6961,948
Total cost of revenues12,7009,07425,99617,248
Gross profit4,2342,8849,6945,099
Operating expenses
Research and development6675761,5321,242
Selling, general and administrative9619731,9532,029
Restructuring and other14223142(78)
Total operating expenses1,7701,5723,6273,193
Income from operations2,4641,3126,0671,906
Interest income26115421
Interest expense(44)(75)(105)(174)
Other income, net28458473
Income before income taxes2,4741,2936,1001,826
Provision for income taxes205115551184
Net income2,2691,1785,5491,642
Net income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests in subsidiaries1036(28)62
Net income attributable to common stockholders$2,259$1,142$5,577$1,580
Net income per share of common stock attributable to common stockholders
Basic$2.18$1.18$5.38$1.64
Diluted$1.95$1.02$4.82$1.41
Weighted average shares used in computing net income per share of common stock
Basic1,0379711,036966
Diluted1,1551,1191,1561,126

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

Tesla, Inc.

C****onsolidated Statements of Comprehensive Income

(in millions)

(unaudited)

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Net income$2,269$1,178$5,549$1,642
Other comprehensive (loss) income:
Foreign currency translation adjustment(421)63(517)(157)
Unrealized net loss on marketable securities(6)—(14)—
Comprehensive income1,8421,2415,0181,485
Less: Comprehensive income (loss) attributable to noncontrolling interests and redeemable noncontrolling interests in subsidiaries1036(28)62
Comprehensive income attributable to common stockholders$1,832$1,205$5,046$1,423

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

Tesla, Inc.

Consolidated Statements of Redeemable Noncontrolling Interests and Equity

(in millions, except per share data)

(unaudited)

Accumulated
RedeemableAdditionalOtherTotalNoncontrolling
NoncontrollingCommon StockPaid-InComprehensiveRetainedStockholders’Interests inTotal
Three Months Ended June 30, 2022InterestsSharesAmountCapitalLossEarningsEquitySubsidiariesEquity
Balance as of March 31, 2022$4591,036$1$30,485$(50)$3,649$34,085$862$34,947
Exercises of conversion feature of convertible senior notes—000—————
Settlements of warrants—300——0—0
Issuance of common stock for equity incentive awards—2043——43—43
Stock-based compensation———419——419—419
Distributions to noncontrolling interests(13)——————(26)(26)
Buy-out of noncontrolling interests(10)——(3)——(3)—(3)
Net (loss) income(15)————2,2592,259252,284
Other comprehensive loss————(427)—(427)—(427)
Balance as of June 30, 2022$4211,041$1$30,944$(477)$5,908$36,376$861$37,237
Accumulated
RedeemableAdditionalOtherTotalNoncontrolling
NoncontrollingCommon StockPaid-InComprehensiveRetainedStockholders’Interests inTotal
Six Months Ended June 30, 2022InterestsSharesAmountCapitalIncome (Loss)EarningsEquitySubsidiariesEquity
Balance as of December 31, 2021$5681,033$1$29,803$54$331$30,189$826$31,015
Exercises of conversion feature of convertible senior notes—000—————
Settlements of warrants—300—————
Issuance of common stock for equity incentive awards—50245——245—245
Stock-based compensation———904——904—904
Distributions to noncontrolling interests(25)——————(48)(48)
Buy-out of noncontrolling interests(11)——(8)——(8)—(8)
Net (loss) income(111)————5,5775,577835,660
Other comprehensive loss————(531)—(531)—(531)
Balance as of June 30, 2022$4211,041$1$30,944$(477)$5,908$36,376$861$37,237
Accumulated
RedeemableAdditionalOtherTotalNoncontrolling
NoncontrollingCommon StockPaid-InComprehensiveAccumulatedStockholders’Interests inTotal
Three Months Ended June 30, 2021InterestsSharesAmountCapitalIncomeDeficitEquitySubsidiariesEquity
Balance as of March 31, 2021$601963$1$27,623$143$(4,750)$23,017$847$23,864
Exercises of conversion feature of convertible senior notes—10(6)——(6)—(6)
Settlements of warrants—170———0—0
Issuance of common stock for equity incentive awards—3069——69—69
Stock-based compensation———519——519—519
Contributions from noncontrolling interests2————————
Distributions to noncontrolling interests(14)——————(26)(26)
Net income16————1,1421,142201,162
Other comprehensive income————63—63—63
Balance as of June 30, 2021$605984$1$28,205$206$(3,608)$24,804$841$25,645
Accumulated
RedeemableAdditionalOtherTotalNoncontrolling
NoncontrollingCommon StockPaid-InComprehensiveAccumulatedStockholders’Interests inTotal
Six Months Ended June 30, 2021InterestsSharesAmountCapitalIncome (Loss)DeficitEquitySubsidiariesEquity
Balance as of December 31, 2020$604960$1$27,260$363$(5,399)$22,225$850$23,075
Adjustments for prior periods from adopting ASU 2020-06———(474)—211(263)—(263)
Exercises of conversion feature of convertible senior notes—105——5—5
Settlements of warrants—170———0—0
Issuance of common stock for equity incentive awards—60252——252—252
Stock-based compensation———1,162——1,162—1,162
Contributions from noncontrolling interests2————————
Distributions to noncontrolling interests(26)——————(46)(46)
Net income25————1,5801,580371,617
Other comprehensive loss————(157)—(157)—(157)
Balance as of June 30, 2021$605984$1$28,205$206$(3,608)$24,804$841$25,645

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

Tesla, Inc.

C****onsolidated Statements of Cash Flows

(in millions)

(unaudited)

Six Months Ended June 30,
20222021
Cash Flows from Operating Activities
Net income$5,549$1,642
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and impairment1,8021,302
Stock-based compensation7791,088
Inventory and purchase commitments write-downs5888
Foreign currency transaction net unrealized gain(52)(1)
Non-cash interest and other operating activities5260
Digital assets loss (gain), net106(78)
Changes in operating assets and liabilities:
Accounts receivable(233)(283)
Inventory(2,192)(687)
Operating lease vehicles(795)(916)
Prepaid expenses and other current assets(533)(131)
Other non-current assets(1,042)(289)
Accounts payable and accrued liabilities1,4061,592
Deferred revenue648279
Customer deposits29252
Other long-term liabilities50147
Net cash provided by operating activities6,3463,765
Cash Flows from Investing Activities
Purchases of property and equipment excluding finance leases, net of sales(3,497)(2,853)
Purchases of solar energy systems, net of sales(5)(22)
Purchases of digital assets(1,500)
Proceeds from sales of digital assets936272
Purchase of intangible assets(9)—
Purchases of marketable securities(476)—
Receipt of government grants—6
Net cash used in investing activities(3,051)(4,097)
Cash Flows from Financing Activities
Proceeds from issuances of convertible and other debt—4,862
Repayments of convertible and other debt(2,219)(7,408)
Collateralized lease repayments—(8)
Proceeds from exercises of stock options and other stock issuances245253
Principal payments on finance leases(251)(196)
Debt issuance costs—(5)
Proceeds from investments by noncontrolling interests in subsidiaries—2
Distributions paid to noncontrolling interests in subsidiaries(76)(65)
Payments for buy-outs of noncontrolling interests in subsidiaries(19)—
Net cash used in financing activities(2,320)(2,565)
Effect of exchange rate changes on cash and cash equivalents and restricted cash(232)(179)
Net increase (decrease) in cash and cash equivalents and restricted cash743(3,076)
Cash and cash equivalents and restricted cash, beginning of period18,14419,901
Cash and cash equivalents and restricted cash, end of period$18,887$16,825
Supplemental Non-Cash Investing and Financing Activities
Acquisitions of property and equipment included in liabilities$1,636$1,768
Leased assets obtained in exchange for finance lease liabilities$36$177
Leased assets obtained in exchange for operating lease liabilities$445$341

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

Tesla, Inc.

N****otes 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 our company, manages resource allocations and measures performance among two operating and reportable segments: (i) automotive and (ii) energy generation and storage.

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

In addition, we have experienced and are experiencing varying levels of inflation resulting in part from various supply chain disruptions, increased shipping and transportation costs, increased raw material and labor costs and other disruptions caused by the COVID‐19 pandemic and general global economic conditions. The inflationary impact on our cost structure has contributed to adjustments in our product pricing, despite a continued focus on reducing our manufacturing costs where possible.

Note 2 – Summary of Significant Accounting Policies

Unaudited Interim Financial Statements

The consolidated balance sheet as of June 30, 2022, the consolidated statements of operations, the consolidated statements of comprehensive income, the consolidated statements of redeemable noncontrolling interests and equity for the three and six months ended June 30, 2022 and 2021 and the consolidated statements of cash flows for the six months ended June 30, 2022 and 2021, as well as other information disclosed in the accompanying notes, are unaudited. The consolidated balance sheet as of December 31, 2021 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, 2021.

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

Use of Estimates

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

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

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation in the consolidated financial statements and the accompanying notes.

Revenue Recognition

Revenue by source

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

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Automotive sales without resale value guarantee$13,518$9,332$28,843$17,345
Automotive sales with resale value guarantee152188341362
Automotive regulatory credits3443541,023872
Energy generation and storage sales7176531,2201,036
Services and other1,4669512,7451,844
Total revenues from sales and services16,19711,47834,17221,459
Automotive leasing5883321,256629
Energy generation and storage leasing149148262259
Total revenues$16,934$11,958$35,690$22,347

Automotive Segment

Automotive Sales Revenue

Automotive Sales with and without Resale Value Guarantee

We recognize revenue when control transfers upon delivery to customers in accordance with ASC 606, Revenue from Contracts with Customers, as a sale with a right of return when we do not believe the customer has a significant economic incentive to exercise the resale value guarantee provided to them at contract inception. The total sales return reserve on vehicles sold with resale value guarantees was $130 million and $223 million as of June 30, 2022 and December 31, 2021, respectively, of which $56 million and $91 million was short-term, respectively.

Deferred revenue is related to the access to our Full Self Driving (“FSD”) features, internet connectivity, Supercharger network and over-the-air software updates on automotive sales with and without resale value guarantee, which amounted to $2.66 billion and $2.38 billion as of June 30, 2022 and December 31, 2021, 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, 2021 and 2020 was $121 million and $157 million for the six months ended June 30, 2022 and 2021, respectively. Of the total deferred revenue on automotive sales with and without resale value guarantees as of June 30, 2022, we expect to recognize $1.02 billion of revenue in the next 12 months. The remaining balance will be recognized at the time of transfer of control of the product or over the performance period, which is generally the expected ownership life of the vehicle.

We have been providing loans for financing our automotive deliveries during the six months ended June 30, 2022. We have recorded net financing receivables of $320 million which are presented on the consolidated balance sheets as a component of Accounts receivable, net, for the current portion and as Other non-current assets for the long-term portion, as of June 30, 2022.

Automotive Regulatory Credits

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

Payments for automotive regulatory credits are typically received at the point control transfers to the customer, or in accordance with payment terms customary to the business. We recognize revenue on the sale of automotive regulatory credits, which have negligible incremental costs associated with them, at the time control of the regulatory credits is transferred to the purchasing party. Deferred revenue related to sales of automotive regulatory credits was immaterial as of June 30, 2022 and December 31, 2021. Revenue recognized from the deferred revenue balance as of December 31, 2021 and 2020 was immaterial for the six months ended June 30, 2022 and 2021. During the six months ended June 30, 2022, we had also recognized $288 million in revenue due to changes in regulation which entitled us to additional consideration for credits sold previously.

Automotive Leasing Revenue

Direct Sales-Type Leasing Program

For the three and six months ended June 30, 2022, we recognized $133 million and $398 million, respectively, of sales-type leasing revenue and $82 million and $246 million, respectively, of sales-type leasing cost of revenue. For the three and six months ended June 30, 2021, we recognized $55 million and $97 million, respectively, of sales-typing leasing revenue and $36 million and $62 million, respectively, of sales-type leasing cost of revenue.

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

June 30, 2022December 31, 2021
Gross lease receivables$682$427
Unearned interest income(79)(50)
Allowance for expected credit losses(3)(1)
Net investment in sales-type leases$600$376
Reported as:
Prepaid expenses and other current assets$129$73
Other non-current assets471303
Net investment in sales-type leases$600$376

Energy Generation and Storage Segment

Energy Generation and Storage Sales

We record as deferred revenue any non-refundable amounts that are collected from customers related to fees charged for prepayments and remote monitoring service and operations and maintenance service, which is recognized as revenue ratably over the respective customer contract term. As of June 30, 2022 and December 31, 2021, deferred revenue related to such customer payments amounted to $678 million and $399 million, respectively. Revenue recognized from the deferred revenue balance as of December 31, 2021 and 2020 was $79 million and $66 million for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, 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 $211 million. Of this amount, we expect to recognize $12 million in the next 12 months and the remaining over a period up to 26 years.

We have been providing loans for financing our energy generation products during the six months ended June 30, 2022. We have recorded net financing receivables of $238 million which are presented on the consolidated balance sheets as a component of Accounts receivable, net, for the current portion and as Other non-current assets for the long-term portion, as of June 30, 2022.

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, 2022 and December 31, 2021, the aggregate balances of our gross unrecognized tax benefits were $601 million and $531 million, respectively, of which $482 million and $473 million, respectively, would not give rise to changes in our effective tax rate since these tax benefits would increase a deferred tax asset that is currently fully offset by a valuation allowance.

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

We file income tax returns in the U.S. and various state and foreign jurisdictions. We are currently under examination by the IRS for the years 2015 to 2018. Additional tax years within the periods 2004 to 2014 and 2019 to 2021 remain subject to examination for federal income tax purposes. All net operating losses and tax credits generated to date are subject to adjustment for U.S. federal and state income tax purposes. Our returns for 2004 and subsequent tax years remain subject to examination in U.S. state and foreign jurisdictions.

Given the uncertainty in timing and outcome of our tax examinations, an estimate of the range of the reasonably possible change in gross unrecognized tax benefits within twelve months cannot be made at this time.

Net Income per Share of Common Stock Attributable to Common Stockholders

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

Furthermore, in connection with the offerings of our convertible senior notes, we entered into convertible note hedges and warrants (see Note 10, Debt). However, our convertible note hedges are not included when calculating potentially dilutive shares since their effect is always anti-dilutive. The strike price on the warrants were below our average share price during the period and were included in the tables below. Warrants are included in the weighted-average shares used in computing basic net income per share of common stock in the period(s) they are settled.

The following table presents the reconciliation of net income attributable to common stockholders to net income used in computing basic and diluted net income per share of common stock (in millions):

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Net income attributable to common stockholders$2,259$1,142$5,577$1,580
Less: Buy-out of noncontrolling interest3—8—
Net income used in computing basic net income per share of common stock2,2561,1425,5691,580
Less: Dilutive convertible debt0(2)1(6)
Net income used in computing diluted net income per share of common stock$2,256$1,144$5,568$1,586

The following table presents the reconciliation of basic to diluted weighted average shares used in computing net income per share of common stock attributable to common stockholders (in millions):

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Weighted average shares used in computing net income per share of common stock, basic1,0379711,036966
Add:
Stock-based awards1019310395
Convertible senior notes110116
Warrants16451649
Weighted average shares used in computing net income per share of common stock, diluted1,1551,1191,1561,126

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

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Stock-based awards1110
Convertible senior notes—0—1

Restricted Cash

We maintain certain cash balances restricted as to withdrawal or use. Our restricted cash is comprised primarily of cash held to service certain payments under various secured debt facilities. In addition, restricted cash includes cash held as collateral for certain permits as well as sales to lease partners with a resale value guarantee, letters of credit, real estate leases, insurance policies and certain operating leases. We record restricted cash as other assets in the consolidated balance sheets and determine current or non-current classification based on the expected duration of the restriction.

Our total cash and cash equivalents and restricted cash, as presented in the consolidated statements of cash flows, was as follows (in millions):

June 30,December 31,June 30,December 31,
2022202120212020
Cash and cash equivalents$18,324$17,576$16,229$19,384
Restricted cash included in prepaid expenses and other current assets294345326238
Restricted cash included in other non-current assets269223270279
Total as presented in the consolidated statements of cash flows$18,887$18,144$16,825$19,901

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable primarily include amounts related to receivables from financial institutions and leasing companies offering various financing products to our customers, sales of energy generation and storage products, sales of regulatory credits to other automotive manufacturers, government rebates already passed through to customers and maintenance services on vehicles owned by leasing companies. We provide an allowance against accounts receivable for the amount we expect to be uncollectible. We write-off accounts receivable against the allowance when they are deemed uncollectible.

Depending on the day of the week on which the end of a fiscal quarter falls, our accounts receivable balance may fluctuate as we are waiting for certain customer payments to clear through our banking institutions and receipts of payments from our financing partners, which can take up to approximately two weeks based on the contractual payment terms with such partners. Our accounts receivable balances associated with our sales of regulatory credits, which are typically transferred to other manufacturers during the last few days of the quarter, is dependent on contractual payment terms. Additionally, government rebates can take up to a year or more to be collected depending on the customary processing timelines of the specific jurisdictions issuing them. These various factors may have a significant impact on our accounts receivable balance from period to period. As of June 30, 2022 and December 31, 2021, we had $759 million and $627 million, respectively, of long-term government rebates receivable in Other non-current assets on our consolidated balance sheets.

MyPower Customer Notes Receivable

As of June 30, 2022 and December 31, 2021, the total outstanding balance of MyPower customer notes receivable, net of allowance for expected credit losses, was $287 million and $299 million, respectively, of which $8 million and $11 million were due in the next 12 months as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022 and December 31, 2021, the allowance for expected credit losses was $41 million.

Concentration of Risk

Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, marketable securities, restricted cash, accounts receivable and other finance receivables. Our cash balances are primarily on deposit at high credit quality financial institutions or invested in money market funds. These deposits are typically in excess of insured limits. As of June 30, 2022 and December 31, 2021, no entity represented 10% or more of our total receivables balance.

Supply Risk

We are dependent on our suppliers, including 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

The gross cost of operating lease vehicles as of June 30, 2022 and December 31, 2021 was $5.73 billion and $5.28 billion, respectively. Operating lease vehicles on the consolidated balance sheets are presented net of accumulated depreciation of $955 million and $773 million as of June 30, 2022 and December 31, 2021, respectively.

Warranties

We provide a manufacturer’s warranty on all new and used vehicles and a warranty on the installation and components of the energy generation and storage systems we sell for periods typically between 10 to 25 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 if 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 operating lease accounting and our solar energy systems under lease contracts or Power Purchase Agreements (“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. Due to the magnitude of our automotive business, accrued warranty balance is primarily related to our automotive segment. Accrued warranty activity consisted of the following (in millions):

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Accrued warranty—beginning of period$2,287$1,534$2,101$1,468
Warranty costs incurred(187)(125)(338)(241)
Net changes in liability for pre-existing warranties, including expirations and foreign exchange impact147176
Provision for warranty319275653458
Accrued warranty—end of period$2,433$1,691$2,433$1,691

Recent Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted

In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of the ASU should be applied prospectively. Early adoption is also permitted, including adoption in an interim period. If early adopted, the amendments are applied retrospectively to all business combinations for which the acquisition date occurred during the fiscal year of adoption. This ASU is currently not expected to have a material impact on our consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which we adopted on January 1, 2020. This ASU also enhances the disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the ASU amends the guidance on vintage disclosures to require entities to disclose current period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC 326-20. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of the ASU would be applied prospectively. Early adoption is also permitted, including adoption in an interim period. This ASU is currently not expected to have a material impact on our consolidated financial statements.

Recently adopted accounting pronouncements

In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832). This ASU requires business entities to disclose information about government assistance they receive if the transactions were accounted for by analogy to either a grant or a contribution accounting model. The disclosure requirements include the nature of the transaction and the related accounting policy used, the line items on the balance sheets and statements of operations that are affected and the amounts applicable to each financial statement line item and the significant terms and conditions of the transactions. The ASU is effective for annual periods beginning after December 15, 2021. The disclosure requirements can be applied either retrospectively or prospectively to all transactions in the scope of the amendments that are reflected in the financial statements at the date of initial application and new transactions that are entered into after the date of initial application. We adopted the ASU prospectively on January 1, 2022. The additional annual disclosures required are not expected to have a material impact on our consolidated financial statements.

Note 3 – Digital Assets, Net

During the six months ended June 30, 2022 and 2021, we purchased and/or received an immaterial amount and $1.50 billion, respectively, of digital assets. As of June 30, 2022, we have converted approximately 75% of our purchases into fiat currency. During the three and six months ended June 30, 2022, we recorded impairment loss of $170 million as well as realized gains of $64 million in connection with converting our holdings of digital assets into fiat currency. During the six months ended June 30, 2021, we realized gains of $128 million in connection with converting our holdings of digital assets into fiat currency. During the three and six months ended June 30, 2021, we recorded $23 million and $50 million, respectively, of impairment losses on such digital assets. The gains are presented net of impairment losses in Restructuring and other in the consolidated statements of operations. As of June 30, 2022 and December 31, 2021, the carrying value of our digital assets held was $218 million and $1.26 billion, which reflects cumulative impairments of $169 million and $101 million, each period, respectively. The fair market value of such digital assets held as of June 30, 2022 was $222 million.

Note 4 – Intangible Assets

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

June 30, 2022December 31, 2021
Gross Carrying AmountAccumulated AmortizationOtherNet Carrying AmountGross Carrying AmountAccumulated AmortizationOtherNet Carrying Amount
Finite-lived intangible assets:
Developed technology$299$(168)$2$133$299$(150)$3$152
Trade names2(2)——2(1)—1
Favorable contracts and leases, net113(44)—69113(40)—73
Other36(22)11536(21)116
Total finite-lived intangible assets450(236)3217450(212)4242
Indefinite-lived intangible assets:
Gigafactory Nevada water rights15——1515——15
Other9——9————
Total infinite-lived intangible assets24——2415——15
Total intangible assets$474$(236)$3$241$465$(212)$4$257

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

Six months ending December 31, 2022$25
202343
202428
202528
202627
Thereafter66
Total$217

Note 5 – Fair Value of Financial Instruments

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

June 30, 2022December 31, 2021
Fair ValueLevel ILevel IILevel IIIFair ValueLevel ILevel IILevel III
Money market funds$8,032$8,032$—$—$9,548$9,548$—$—
U.S. government securities211—211—————
Corporate debt securities580—580—131—131—
Interest rate swap liabilities————31—31—
Total$8,823$8,032$791$—$9,710$9,548$162$—

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 U.S. government securities and marketable securities are classified within Level II of the fair value hierarchy and the market approach was used to determine fair value of these investments. 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.

Our cash, cash equivalents and marketable securities classified by security type as of June 30, 2022 and December 31, 2021 consisted of the following (in millions):

June 30, 2022
Adjusted CostGross Unrealized GainsGross Unrealized LossesFair ValueCash and Cash EquivalentsShort-Term Marketable Securities
Cash$10,092$—$—$10,092$10,092$—
Money market funds8,032——8,0328,032—
U.S. government securities212—(1)21120011
Corporate debt securities5941(15)580—580
Total cash, cash equivalents and short-term marketable securities$18,930$1$(16)$18,915$18,324$591
December 31, 2021
Adjusted CostGross Unrealized GainsGross Unrealized LossesFair ValueCash and Cash EquivalentsShort-Term Marketable Securities
Cash$8,028$—$—$8,028$8,028$—
Money market funds9,548——9,5489,548—
Corporate debt securities132—(1)131—131
Total cash, cash equivalents and short-term marketable securities$17,708$—$(1)$17,707$17,576$131

We record gross realized gains, losses and credit losses as a component of Other income, net in the consolidated statements of operations. For the three and six months ended June 30, 2022, we did not recognize any material gross realized gains, losses or credit losses. The ending allowance balances for credit losses were immaterial as of June 30, 2022 and December 31, 2021. We have determined that the gross unrealized losses on our marketable securities as of June 30, 2022 and December 31, 2021 were temporary in nature.

The following table summarizes the fair value of our marketable securities by stated contractual maturities as of June 30, 2022 (in millions):

Due in 1 year or less$59
Due in 1 year through 5 years428
Due in 5 years through 10 years104
Total$591

Interest Rate Swaps

We had previously entered 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 did not designate our interest rate swaps as hedging instruments. Accordingly, our interest rate swaps were recorded at fair value on the consolidated balance sheets within Other non-current assets or Other long-term liabilities, with any changes in their fair values recognized as Other income, net, in the consolidated statements of operations and with any cash flows recognized as operating activities in the consolidated statements of cash flows. Our interest rate swaps outstanding were as follows (in millions):

June 30, 2022December 31, 2021
Aggregate Notional AmountGross Asset at Fair ValueGross Liability at Fair ValueAggregate Notional AmountGross Asset at Fair ValueGross Liability at Fair Value
Interest rate swaps$—$—$—$312$—$31

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

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Gross losses$—$9$—$9
Gross gains$—$—$10$20

Disclosure of Fair Values

Our financial instruments that are not re-measured at fair value include accounts receivable, MyPower customer notes receivable, accounts payable, accrued liabilities, customer deposits and debt. The carrying values of these financial instruments approximate their fair values, other than our 2.375% Convertible Senior Notes due in 2022 (“2022 Notes”), 2.00% Convertible Senior Notes due in 2024 (“2024 Notes”) (collectively referred to as “Convertible Senior Notes” below), and Solar Asset and Loan-backed Notes.

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

June 30, 2022December 31, 2021
Carrying ValueFair ValueCarrying ValueFair Value
Convertible Senior Notes (1)$46$498$119$2,016
Solar Asset and Loan-backed Notes$450$425$827$834

(1)

The 2022 Notes were fully settled in the first quarter of 2022.

Note 6 – Inventory

Our inventory consisted of the following (in millions):

June 30,December 31,
20222021
Raw materials$4,949$2,816
Work in process1,3701,089
Finished goods (1)1,1851,277
Service parts604575
Total$8,108$5,757

(1)

Finished goods inventory includes vehicles in transit to fulfill customer orders, new vehicles available for sale, used vehicles, energy storage products and Solar Roof products available for sale.

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, 2022, we recorded write-downs of $23 million and $49 million, respectively, in Cost of revenues in the consolidated statements of operations. During the three and six months ended June 30, 2021, we recorded write-downs of $33 million and $56 million, respectively, in Cost of revenues in the consolidated statements of operations.

Note 7 – Property, Plant and Equipment, Net

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

June 30,December 31,
20222021
Machinery, equipment, vehicles and office furniture$11,749$9,953
Tooling2,4172,188
Leasehold improvements2,0181,826
Land and buildings6,4064,675
Computer equipment, hardware and software1,7461,414
Construction in progress4,5445,559
28,88025,615
Less: Accumulated depreciation(7,787)(6,731)
Total$21,093$18,884

Construction in progress is primarily comprised of construction of Gigafactory Berlin-Brandenburg and Gigafactory Texas, expansion of Gigafactory Shanghai and equipment and tooling related to the manufacturing of our products. 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, 2022, we capitalized interest of an immaterial amount. During the three and six months ended June 30, 2021, we capitalized $23 million and $38 million, respectively, of interest.

Depreciation expense during the three and six months ended June 30, 2022 was $578 million and $1.13 billion, respectively. Depreciation expense during the three and six months ended June 30, 2021 was $461 million and $885 million, respectively. Gross property, plant and equipment under finance leases as of June 30, 2022 and December 31, 2021 was $2.77 billion and $2.75 billion, respectively, with accumulated depreciation of $1.44 billion and $1.21 billion, respectively.

Panasonic has partnered with us on Gigafactory Nevada 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 the terms of the arrangement convey a finance lease under ASC 842, Leases, we account for their production equipment as leased assets when production commences. We account for each lease and any non-lease components associated with that lease as a single lease component for all asset classes, except production equipment classes embedded in supply agreements. 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 debt and finance leases. Depreciation on Panasonic production equipment is computed using the units-of-production method whereby capitalized costs are amortized over the total estimated productive life of the respective assets. As of June 30, 2022 and December 31, 2021, we had cumulatively capitalized gross costs of $2.01 billion and $1.98 billion, respectively, on the consolidated balance sheets in relation to the production equipment under our Panasonic arrangement.

Note 8 – Accrued Liabilities and Other

Our accrued liabilities and other current liabilities consisted of the following (in millions):

June 30,December 31,
20222021
Accrued purchases (1)$2,130$2,045
Taxes payable (2)1,0451,122
Payroll and related costs1,077906
Accrued warranty reserve, current portion778703
Sales return reserve, current portion257265
Operating lease liabilities, current portion413368
Other current liabilities337310
Total$6,037$5,719

(1)

Accrued purchases primarily reflects receipts of goods and services for which we had not yet been invoiced. As we are invoiced for these goods and services, this balance will reduce and accounts payable will increase.

(2)

Taxes payable includes value added tax, sales tax, property tax, use tax and income tax payables.

Note 9 – Other Long-Term Liabilities

Our other long-term liabilities consisted of the following (in millions):

June 30,December 31,
20222021
Operating lease liabilities$1,822$1,671
Accrued warranty reserve1,6551,398
Sales return reserve74133
Deferred tax liability2224
Other non-current liabilities353320
Total other long-term liabilities$3,926$3,546

Note 10 – Debt

The following is a summary of our debt and finance leases as of June 30, 2022 (in millions):

UnpaidUnused
Net Carrying ValuePrincipalCommittedContractualContractual
CurrentLong-TermBalanceAmount (1)Interest RatesMaturity Date
Recourse debt:
2024 Notes$1$45$46$—2.00%May 2024
Credit Agreement———2,265Not applicableJuly 2023
Solar Bonds077—4.70-5.75%March 2025-January 2031
Total recourse debt152532,265
Non-recourse debt:
Automotive Asset-backed Notes1,0211,2162,244—0.36-5.48%October 2022-September 2025
Solar Asset and Loan-backed Notes12438459—4.12-7.74%December 2026-February 2048
Cash Equity Debt23376411—5.25-5.81%July 2033-January 2035
Automotive Lease-backed Credit Facilities———152Not applicableSeptember 2023
Other Loans—1313215.10%February 2033
Total non-recourse debt1,0562,0433,127173
Total debt1,0572,095$3,180$2,438
Finance leases475803
Total debt and finance leases$1,532$2,898

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

UnpaidUnused
Net Carrying ValuePrincipalCommittedContractualContractual
CurrentLong-TermBalanceAmount (1)Interest RatesMaturity Date
Recourse debt:
2022 Notes$29$—$29$—2.375%March 2022
2024 Notes18991—2.00%May 2024
Credit Agreement—1,2501,2509203.25%July 2023
Solar Bonds077—4.00-5.75%January 2022 - January 2031
Total recourse debt301,3461,377920
Non-recourse debt:
Automotive Asset-backed Notes1,0071,7062,723—0.12%-5.48%September 2022-September 2025
Solar Asset and Loan-backed Notes27800844—2.87%-7.74%September 2024-September 2049
Cash Equity Debt24388422—5.25-5.81%July 2033-January 2035
Automotive Lease-backed Credit Facilities———167Not applicableSeptember 2023
Other Loans—1414215.10%February 2033
Total non-recourse debt1,0582,9084,003188
Total debt1,0884,254$5,380$1,108
Finance leases501991
Total debt and finance leases$1,589$5,245

(1)

There are no restrictions on draw-down or use for general corporate purposes with respect to any available committed funds under our credit facilities, except certain specified conditions prior to draw-down, including pledging to our lenders sufficient amounts of qualified receivables, inventories, leased vehicles and our interests in those leases or various other assets and as may be described below and in the notes to the consolidated financial statements included in our report on Form 10-K for the year ended December 31, 2021.

Recourse debt refers to debt that is recourse to our general assets. Non-recourse debt refers to debt that is recourse to only assets of our subsidiaries. The differences between the unpaid principal balances and the net carrying values are due to debt discounts or deferred financing costs. As of June 30, 2022, we were in material compliance with all financial debt covenants.

2022 Notes and 2024 Notes

During the first two quarters of 2022, the closing price of our common stock continued to exceed 130% of the applicable conversion price of our 2024 Notes on at least 20 of the last 30 consecutive trading days of the quarter, causing the 2024 Notes to be convertible by their holders during the second and third quarters of 2022. Should the closing price conditions continue to be met in a future quarter for the 2024 Notes, the 2024 Notes will be convertible at their holders’ option during the immediately following quarter.

During the first two quarters of 2022, $29 million and $45 million in aggregate principal amount of the 2022 Notes and 2024 Notes, respectively, were converted and settled in cash for their par amount, and the issuance of 0.4 million and 0.7 million shares of our common stock for the applicable conversion premium, respectively. The note hedges we entered into in connection with the issuance of the 2022 Notes and 2024 Notes were automatically settled with the respective conversions of the 2022 Notes and 2024 Notes, resulting in the receipt of 0.4 million and 0.7 million shares of our common stock, respectively. In March 2022, the 2022 Notes were fully settled.

Solar Asset and Loan-backed Notes

During the first two quarters of 2022, we early repaid $380 million in aggregate principal of the Solar Asset and Loan-backed Notes and recorded an extinguishment of debt charge of $11 million related to the early repayments in Interest expense in the consolidated statement of operations.

Interest Expense

The following table presents the interest expense related to the contractual interest coupon and the amortization of debt issuance costs, which include the 1.25% Convertible Senior Notes due in 2021 (fully settled in March 2021), the 2022 Notes (fully settled in March 2022) and the 2024 Notes (in millions):

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Contractual interest coupon$0$3$1$10
Amortization of debt issuance costs0113
Total$0$4$2$13

Note 11 – Equity Incentive Plans

2018 CEO Performance Award

In March 2018, our stockholders approved the Board of Directors’ grant of 101.3 million stock option awards, as adjusted to give effect to the five-for-one stock split effected in the form of a stock dividend in August 2020 (“Stock Split”), to our CEO (the “2018 CEO Performance Award”). The 2018 CEO Performance Award consists of 12 vesting tranches with a vesting schedule based entirely on the attainment of both operational milestones (performance conditions) and market conditions, assuming continued employment either as the CEO or as both Executive Chairman and Chief Product Officer and service through each vesting date. Each of the 12 vesting tranches of the 2018 CEO Performance Award will vest upon certification by the Board of Directors that both (i) the market capitalization milestone for such tranche, which begins at $100.0 billion for the first tranche and increases by increments of $50.0 billion thereafter (based on both a six calendar month trailing average and a 30 calendar day trailing average, counting only trading days), has been achieved, and (ii) any one of the following eight operational milestones focused on total revenue or any one of the eight operational milestones focused on Adjusted EBITDA have been achieved for the four consecutive fiscal quarters on an annualized basis and subsequently reported by us in our consolidated financial statements filed with our Forms 10-Q and/or 10-K. Adjusted EBITDA is defined as net income (loss) attributable to common stockholders before interest expense, provision (benefit) for income taxes, depreciation and amortization and stock-based compensation. Upon vesting and exercise, including the payment of the exercise price of $70.01 per share, our CEO must hold shares that he acquires for five years post-exercise, other than a cashless exercise where shares are simultaneously sold to pay for the exercise price and any required tax withholding.

The achievement status of the operational milestones as of June 30, 2022 is provided below. Although an operational milestone is deemed achieved in the last quarter of the relevant annualized period, it may be certified only after the financial statements supporting its achievement have been filed with our Forms 10-Q and/or 10-K.

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

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

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

As a result, we have experienced significant catch-up expenses in quarters when one or more operational milestones were first determined to be probable of achievement. Historically, the expected market capitalization achievement times were generally later than the related expected operational milestone achievement times. Therefore, when market capitalization milestones were achieved earlier than originally forecasted due to periods of rapid stock price appreciation, we had higher catch-up expenses and the remaining expenses were being recognized over shorter periods of time at a higher per-quarter rate. All market capitalization milestones were achieved as of the second quarter of 2021.

During the first quarter of 2022, three operational milestones were achieved and consequently, we recognized an aggregate catch-up expense of $11 million.

As of June 30, 2022, we had $9 million of total unrecognized stock-based compensation expense remaining, which will be recognized over a weighted-average period of 0.3 years. For the three and six months ended June 30, 2022, we recorded stock-based compensation expense of $8 million and $57 million, respectively, related to the 2018 CEO Performance Award, and $176 million and $475 million, respectively, for the same periods in 2021.

Other Performance-Based Grants

2021 Performance-Based Stock Option & Restricted Stock Unit (“RSU”) Awards

During the fourth quarter of 2021, the Compensation Committee of our Board of Directors granted to certain employees RSUs and stock options to purchase an aggregate 0.7 million shares of our common stock to create incentives for continued long-term success and to closely align compensation with our stockholders’ interests in the achievement of certain performance milestones by our company.

We begin recording stock-based compensation expense when the performance milestones become probable of achievement. Following achievement, vesting occurs over a two-year period with continued employment. During the first quarter of 2022, the performance milestones related to this grant became probable of achievement and consequently, we recognized an aggregate catch-up expense of $30 million. As of June 30, 2022, we had unrecognized stock-based compensation expense of $283 million, which will be recognized over a weighted-average period of 3 years. For the three and six months ended June 30, 2022, we recorded $34 million and $103 million, respectively, of stock-based compensation expense related to this grant, net of forfeitures.

Summary Stock-Based Compensation Information

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

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Cost of revenues$143$108$274$211
Research and development122104265229
Selling, general and administrative96262240648
Total$361$474$779$1,088

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

Note 12 – Commitments and Contingencies

Operating Lease Arrangement in Buffalo, New York

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

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

As we temporarily suspended most of our manufacturing operations at Gigafactory New York pursuant to a New York State executive order issued in March 2020 as a result of the COVID-19 pandemic, we were granted a deferral of our obligation to be compliant with our applicable targets through December 31, 2021 in an amendment memorialized in August 2021. The amendment also extended our overall agreement to spend or incur $5.00 billion in combined capital, operational expenses, costs of goods sold and other costs in the State of New York through December 31, 2029. On February 1, 2022, we reported to the State of New York that we had met and exceeded our annual requirements for jobs and investment in Buffalo and New York State. As of June 30, 2022, we are currently in excess of such targets relating to investments and personnel in the State of New York and Buffalo and do not currently expect any issues meeting our applicable obligations following this expected deferral or in the years beyond. However, if our expectations as to the costs and timelines of our investment and operations at Buffalo or our production ramp of the Solar Roof prove incorrect, we may incur additional expenses or be required to make substantial payments to the SUNY Foundation.

Operating Lease Arrangement in Shanghai, China

We have an operating lease arrangement for an initial term of 50 years with the local government of Shanghai for land use rights where we are constructing Gigafactory Shanghai. Under the terms of the arrangement, we are required to spend RMB 14.08 billion in capital expenditures by the end of 2023 and to generate RMB 2.23 billion of annual tax revenues starting at the end of 2023. If we are unwilling or unable to meet such target or obtain periodic project approvals, in accordance with the Chinese government’s standard terms for such arrangements, we would be required to revert the site to the local government and receive compensation for the remaining value of the land lease, buildings and fixtures. We expect to meet the capital expenditure and tax revenue requirements based on our current level of spend and sales.

Legal Proceedings

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 Corporation (“SolarCity”). Following consolidation, the lawsuit names as defendants the members of Tesla’s board of directors as then constituted and alleges, among other things, that board members breached their fiduciary duties in connection with the acquisition. The complaint asserts both derivative claims and direct claims on behalf of a purported class and seeks, among other relief, unspecified monetary damages, attorneys’ fees and costs. On January 22, 2020, all of the director defendants except Elon Musk reached a settlement to resolve the lawsuit against them for an amount to be paid entirely under the applicable insurance policy. The settlement, which does not involve an admission of any wrongdoing by any party, was approved by the Court on August 17, 2020. Tesla received payment of approximately $43 million on September 16, 2020, which has been recognized in our consolidated statements of operations as a reduction to Selling, general and administrative operating expenses for costs previously incurred related to the acquisition of SolarCity. On February 4, 2020, the Court issued a ruling that denied plaintiffs’ previously-filed motion for summary judgment and granted in part and denied in part defendants’ previously-filed motion for summary judgment. The case was set for trial in March 2020 until it was postponed by the Court due to safety precautions concerning COVID-19. The trial was held from July 12 to July 23, 2021 and on August 16, 2021. On October 22, 2021, the Court approved the parties’ joint stipulation that (a) the class is decertified and the action shall continue exclusively as a derivative action under Court of Chancery Rule 23.1 and (b) the direct claims against Elon Musk are dismissed with prejudice. Following post-trial briefing, post-trial argument was held on January 18, 2022.

On April 27, 2022, the Court entered judgment in favor of Mr. Musk on all counts.  On May 26, 2022, the plaintiff filed a notice of appeal. The parties are in the process of submitting briefing before the Supreme Court of Delaware.

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.

Litigation Relating to 2018 CEO Performance Award

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

On January 25, 2021, the Court conditionally certified certain claims and a class of Tesla stockholders as a class action. On September 30, 2021, plaintiff filed a motion for leave to file a verified amended derivative complaint. On October 1, 2021, defendants Kimbal Musk and Steve Jurvetson moved for summary judgment as to the claims against them. Following the motion, plaintiff agreed to voluntarily dismiss the claims against Kimbal Musk and Steve Jurvetson. Plaintiff also moved for summary judgment on October 1, 2021. On October 27, 2021, the Court approved the parties’ joint stipulation that, among other things, (a) all claims against Kimbal Musk and Steve Jurvetson in the Complaint are dismissed with prejudice; (b) the class is decertified and the action shall continue exclusively as a derivative action under Court of Chancery Rule 23.1; and (c) the direct claims against the remaining defendants are dismissed with prejudice. On November 18, 2021, the remaining defendants (a) moved for partial summary judgment, (b) opposed plaintiff’s summary judgment motion and (c) opposed the plaintiff’s motion to amend his complaint. In January 2022, the case was assigned to a different judge. On February 24, 2022, the court (i) granted plaintiff’s motion to amend his complaint, and (ii) canceled oral argument on the summary judgment motions, stating that the court is “skeptical that this litigation can be resolved based on the undisputed facts” and the “case is going to trial,” but that the “parties may reassert their arguments made in support of summary judgment in their pre-trial and post-trial briefs.” Trial is currently set for October 24-31, 2022.

Litigation Related to Directors’ Compensation

On June 17, 2020, a purported Tesla stockholder filed a derivative action in the Delaware Court of Chancery, purportedly on behalf of Tesla, against certain of Tesla’s current and former directors regarding compensation awards granted to Tesla’s directors, other than Elon Musk, between 2017 and 2020. The suit asserts claims for breach of fiduciary duty and unjust enrichment and seeks declaratory and injunctive relief, unspecified damages and other relief. Defendants filed their answer on September 17, 2020. Trial is set for September 11, 2023.

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 Mr. Musk’s August 7, 2018 Twitter post that he was considering taking Tesla private. All of the suits are now pending in the U.S. District Court for the Northern District of California. Although the complaints vary in certain respects, they each purport to assert claims for violations of federal securities laws related to Mr. Musk’s statement and seek unspecified compensatory damages and other relief on behalf of a purported class of purchasers of Tesla’s securities. Plaintiffs filed their consolidated complaint on January 16, 2019 and added as defendants the members of Tesla’s board of directors. The now-consolidated purported stockholder class action was stayed while the issue of selection of lead counsel was briefed and argued before the Ninth Circuit. The Ninth Circuit ruled regarding lead counsel. Defendants filed a motion to dismiss the complaint on November 22, 2019. The hearing on the motion was held on March 6, 2020. On April 15, 2020, the Court denied defendants’ motion to dismiss. The parties stipulated to certification of a class of stockholders, which the court granted on November 25, 2020. On January 11, 2022, plaintiff filed a motion for partial summary judgment. On April 1, 2022, the Court granted in part plaintiffs’ motion for partial summary judgment. The Company disagrees with the ruling and accordingly, on April 22, 2022, asked the Court for reconsideration or, in the alternative, certification to file an interlocutory appeal. On June 16, 2022, in response to Tesla’s motions, the Court denied certification to appeal and declined to reconsider its opinion but clarified its summary judgment ruling to make clear that it had not ruled that any misstatements it identified met the required materiality element under the securities statute. The issue of materiality and reliance will both be questions for the jury to decide at trial, which is set for January 17, 2023.

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

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

On November 15, 2021, JPMorgan Chase Bank (“JP Morgan”) filed a lawsuit against Tesla in the Southern District of New York alleging breach of a stock warrant agreement that was entered into as part of a convertible notes offering in 2014. In 2018, JP Morgan informed Tesla that it had adjusted the strike price based upon Mr. Musk’s August 7, 2018 Twitter post that he was considering taking Tesla private. Tesla disputed JP Morgan’s adjustment as a violation of the parties’ agreement. In 2021, Tesla delivered shares to JP Morgan per the agreement, which they duly accepted. JP Morgan now alleges that it is owed approximately $162 million as the value of additional shares that it claims should have been delivered as a result of the adjustment to the strike price in 2018. On January 24, 2022, Tesla filed multiple counterclaims as part of its answer to the underlying lawsuit, asserting among other points that JP Morgan should have terminated the stock warrant agreement in 2018 rather than make an adjustment to the strike price that it should have known would lead to a commercially unreasonable result. Tesla believes that the adjustments made by JP Morgan were neither proper nor commercially reasonable, as required under the stock warrant agreements. JP Morgan filed a motion for judgment on the pleadings, which Tesla opposed, and that motion is currently pending before the Court.

Litigation and Investigations Relating to Alleged Discrimination and Harassment

On October 4, 2021, in a case captioned Diaz v. Tesla, a jury in the Northern District of California returned a verdict of $136.9 million against Tesla on claims by a former contingent worker that he was subjected to race discrimination while assigned to work at Tesla’s Fremont Factory from 2015-2016. On November 16, 2021, Tesla filed a post-trial motion for relief that included a request for a new trial or reduction of the jury’s damages. The Court held a hearing on Tesla’s motion on January 19, 2022. On April 13, 2022, the Court granted Tesla’s motion in part, reducing the total damages to $15 million and conditionally denied the motion for a new trial subject to the plaintiff’s acceptance of the reduced award. On June 21, 2022, the plaintiff rejected the reduced award and, as a result, on June 27, 2022, the Court ordered a new trial to commence on March 27, 2023. Tesla continues to believe that the facts and law do not justify the damages awarded and is assessing its next steps.

On February 9, 2022, shortly after the Diaz jury verdict, the California Department of Fair Employment and Housing (“DFEH”) filed a civil complaint against Tesla (and filed an amended complaint on March 11, 2022) in Alameda County, California Superior Court, alleging systemic race discrimination, hostile work environment and pay equity claims, among others. DFEH’s amended complaint seeks monetary damages and injunctive relief. On April 18, 2022, Tesla filed a: (1) motion to stay the case, (2) motion to strike and (3) demurrer seeking dismissal of the lawsuit or, in the alternative, certain claims. On June 8, 2022, the Court denied Tesla’s motion to stay the case. A hearing on the motion to strike and the demurrer seeking dismissal of the lawsuit is scheduled for August 24, 2022.

Additionally, on June 1, 2022 the EEOC issued a cause finding against Tesla that closely parallels the DFEH’s allegations. Tesla will begin the mandatory pre-filing conciliation process with the EEOC.

On June 16, 2022, two Tesla stockholders filed separate derivative actions in the U.S. District Court for the Western District of Texas, purportedly on behalf of Tesla, against certain of Tesla’s current and former directors. Both suits assert claims for breach of fiduciary duty, unjust enrichment, and violation of the federal securities laws in connection with alleged race and gender discrimination and sexual harassment. Among other things, plaintiffs seek declaratory and injunctive relief, unspecified damages payable to Tesla, and attorneys’ fees. We anticipate that the directors will move to dismiss both actions because neither shareholder made a demand upon the Tesla’s board of directors prior to filing suit.

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, including subpoenas, formal and informal requests and other investigations and inquiries.

For example, the SEC had issued subpoenas to Tesla in connection with Elon Musk’s prior statement that he was considering taking Tesla private. The take-private investigation was resolved and closed with a settlement entered into with the SEC in September 2018 and as further clarified in April 2019 in an amendment. On November 16, 2021, and June 13, 2022, the SEC issued subpoenas to us seeking information on our governance processes around compliance with the SEC settlement, as amended.

Separately, the DOJ previously asked us to voluntarily provide it with information about the above matter related to taking Tesla private and Model 3 production rates. We have not received any further requests from DOJ on these matters since we last provided information in May 2019. There have not been any additional 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.

Indemnifications

We are contractually obligated to compensate certain fund investors for any losses that they may suffer in certain limited circumstances resulting from reductions in investment tax credits claimed under U.S. federal laws for the installation of solar power facilities and energy storage systems that are charged from a co-sited solar power facility. 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.

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.

Note 13 – 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 and the associated customer contracts to be sold or contributed to these VIEs, redeploying solar energy systems 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 millions):

June 30,December 31,
20222021
Assets
Current assets
Cash and cash equivalents$65$79
Accounts receivable, net4522
Prepaid expenses and other current assets301152
Total current assets411253
Solar energy systems, net3,9244,108
Other non-current assets388265
Total assets$4,723$4,626
Liabilities
Current liabilities
Accrued liabilities and other$66$74
Deferred revenue1010
Current portion of debt and finance leases1,0451,031
Total current liabilities1,1211,115
Deferred revenue, net of current portion143153
Debt and finance leases, net of current portion1,5922,093
Other long-term liabilities1111
Total liabilities$2,867$3,372

Note 14 – 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, retail merchandise, sales by our acquired subsidiaries to third party customers and vehicle insurance revenue. The energy generation and storage segment includes the design, manufacture, installation, sales and leasing of solar energy generation and energy storage products and related services and sales of solar energy systems incentives. Our CODM does not evaluate operating segments using asset or liability information. The following table presents revenues and gross profit by reportable segment (in millions):

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Automotive segment
Revenues$16,068$11,157$34,208$21,052
Gross profit$4,137$2,864$9,669$5,180
Energy generation and storage segment
Revenues$866$801$1,482$1,295
Gross profit$97$20$25$(81)

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

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
United States$9,614$5,205$18,348$9,629
China3,7872,8598,4375,902
Other3,5333,8948,9056,816
Total$16,934$11,958$35,690$22,347

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

June 30,December 31,
20222021
United States$20,278$19,026
Germany3,1862,606
China2,5612,415
Other International692602
Total$26,717$24,649

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