Description
Tesla Motors Inc. CEO, 10% Owner Musk Elon bought 35,398 shares on 10-03-2012 at $ 28.25
BUSINESS OVERVIEW
We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components. We own our sales and service network and have operationally structured our business in a manner that we believe will enable us to rapidly develop and launch advanced electric vehicles and technologies. We believe our vehicles, electric vehicle engineering expertise, and operational structure differentiates us from incumbent automobile manufacturers.
We are the first company to commercially produce a federally-compliant electric vehicle, the Tesla Roadster, which achieves a market-leading range on a single charge combined with attractive design, driving performance and zero tailpipe emissions. Our Tesla Roadster offers impressive acceleration and performance without producing any tailpipe emissions. The Tesla Roadster’s proprietary electric vehicle powertrain system is the foundation of our business and, with design enhancements, will also form the basis for our Model S sedan, our Model X crossover, as well as future vehicles.
Model S is in an advanced stage of development and is currently scheduled to commence customer deliveries by July 2012. We expect that Model S will be manufactured with an adaptable platform architecture upon which other future vehicles, including our Model X crossover, will be based. We revealed a prototype of the Model X crossover in February 2012. We plan to start Model X production in late 2013 and ramp up to significant customer deliveries in early 2014. This unique vehicle has been designed to fill the niche between the roominess of a minivan and the style of an SUV, while having high performance features such as a dual motor all-wheel drive system.
In addition to developing our own vehicles, we provide services for the development of electric powertrain components and sell electric powertrain components to other automotive manufacturers. We have provided development services and powertrain components to Daimler AG (Daimler) for its Smart fortwo and A-Class electric vehicles. We recently announced the receipt of an initial purchase order for the development of a full powertrain system for an additional Mercedes Benz vehicle from Daimler. We also have almost completed a development services program to produce a full electric powertrain system for Toyota Motor Corporation (Toyota) for use in its RAV4 EV. We anticipate beginning to ship these systems to Toyota during the first half of 2012 under our supply and services agreement.
The commercial production of a highway capable, fully electric vehicle that meets consumers’ range and performance expectations requires substantial design, engineering, and integration work on almost every system of our vehicles. Our roots in Silicon Valley have enabled us to recruit engineers with strong skills in electrical engineering, power electronics and software engineering. We have complemented this talent base with automotive engineers with substantial expertise in vehicle engineering and manufacturing. Our ability to combine expertise in electric powertrain and vehicle engineering provides a broad capability in electric vehicle design and systems integration. We believe these capabilities, coupled with our focus solely on electric vehicle technology as well as our strong inhouse engineering and manufacturing capacity, will enable us to sustain the electric vehicle industry leadership we created through the production of the Tesla Roadster.
We sell and service our Tesla Roadster though our company-owned sales and service network in the North America, Europe and Asia. Our intent is to offer a compelling customer experience while gathering rapid customer feedback and achieving operating efficiencies, better control over the costs of inventory, warranty service, pricing, and the development of the Tesla brand. Our Tesla stores do not carry large vehicle inventories and, as a result, do not require corresponding large floor spaces. We believe the benefits we receive from distribution ownership, combined with our product design based on modularity and common platforms, will enable us to improve the speed of product development and improve the capital efficiency of our business. We believe that this approach provides us with a competitive advantage as compared to incumbent automobile manufacturers.
Our first vehicle, the Tesla Roadster, can accelerate from zero to 60 miles per hour in 3.9 seconds and has a maximum speed of approximately 120 miles per hour. The Roadster Sport version can accelerate from zero to 60 miles per hour in 3.7 seconds. The Tesla Roadster has a range of 245 miles on a single charge, as determined using the United States Environmental Protection Agency’s (EPA’s), combined two-cycle city/highway test. The Tesla Roadster has a range that is almost double that of any other commercially released electric vehicle and reportedly set a new world distance record of 313 miles on a single charge for a production electric car in a rally across Australia as part of the 2009 Global Green Challenge. As of December 31, 2011, we had delivered approximately 2,150 Tesla Roadsters to customers in over 31 countries, almost all of which were sold in North America and Europe. We concluded the production run of the Tesla Roadster in January 2012. We are selling our remaining Tesla Roadsters primarily in Europe and Asia during 2012 until our inventory is depleted. To date, our customers have driven the Tesla Roadster for an estimated aggregate of almost 20 million miles.
We announced our second electric vehicle, Model S, with the public exhibition of a drivable early prototype in March 2009. In October 2011 we invited over three thousand customers and other stakeholders to see and ride in the beta prototypes of Model S at our manufacturing facility in Fremont, California, the Tesla Factory. We have completed the construction of several drivable Model S alpha and beta prototypes, which are currently undergoing detailed testing. We currently plan to begin customer deliveries of Model S by July 2012.
Model S is a four door, five-passenger premium sedan that offers exceptional performance, functionality and attractive styling. As a fully electric vehicle, Model S will produce zero tailpipe emissions while accelerating from zero to 60 miles per hour in a targeted time of as low as 4.4 seconds in its performance version. The base Model S will have an effective base price of $49,900 in the United States with the 40 kilowatt-hour (kWh) battery pack option, assuming and after giving effect to the continuation of a United States federal tax credit of $7,500 for the purchase of alternative fuel vehicles. Even without the tax credit, we believe the base list price will be competitive from a pricing perspective with other premium vehicles. We believe that Model S will demonstrate our ability to produce increasingly affordable electric vehicles that offer long-range capabilities and uncompromised performance, energy efficiency, convenience and design.
We plan to offer Model S with a variety of battery pack options—40 kWh, 60 kWh and 85 kWh—which we estimate will offer a range on a single charge of 160 miles, 230 miles, and 300 miles, respectively, while traveling at a steady speed of 55 miles per hour. The EPA’s new fuel economy requirements will require us to label Model S utilizing new and different energy efficiency testing methodologies. These methodologies differ from the one we have used to estimate the range of the vehicles at a steady speed of 55 miles per hour and could reduce the range reported on the required labeling of our vehicles by up to 30% as compared to our current estimates.
We are designing Model S for a significantly broader customer base than the Tesla Roadster. Accordingly, we currently intend to target an annual production rate of approximately 20,000 cars per year beginning in 2013 from our Tesla Factory. We currently plan to commence deliveries by July 2012 and to deliver approximately 5,000 Model S sedans in 2012. As of December 31, 2011, we had received over 8,000 customer reservations with a minimum refundable payment of $5,000.
We have nearly completed the Tesla Factory, our integrated electric vehicle manufacturing facility in Fremont, California for the manufacture of Model S and its components. In October 2010, we completed the purchase of this facility from New United Motor Manufacturing, Inc. (NUMMI). We intend to use the facility for the production of our Model S vehicle, Model X crossover, and to build our future electric vehicles. We have entered into a loan agreement with the United States Federal Financing Bank and United States Department of Energy (DOE Loan Facility), to arrange loans for up to $465.0 million, $363.9 million of which is intended for the continued development of Model S and the build out of the Tesla Factory.
The electric powertrain we developed for the Tesla Roadster has provided the foundational technology for our Model S, our Model X crossover and our future vehicles, and for electric powertrain components and systems that we are selling to Daimler and its affiliates and that we intend to sell to Toyota. Our electric powertrain consists of the following components: our modular battery pack, our power electronics, gearbox, our motor and control and integration software which enables the components to operate as a system. We sell certain of these components to Daimler and intend to sell these systems to Toyota, and have secured $101.2 million of an aggregate $465.0 million from our DOE Loan Facility to fund the infrastructure for these powertrain activities. We believe that our efforts in our powertrain development will enable us to advance our technology and rapidly and cost effectively develop vehicles.
Our battery pack and electric powertrain system has enabled us to deliver market-leading range capability on our vehicles at what we believe is a compelling battery cost per kilowatt-hour. The battery pack of the Tesla Roadster uses commercially available lithium-ion battery cells and contains 53 kilowatt-hours of usable energy, almost double the energy of any other commercially available electric vehicle battery pack, thereby significantly increasing its range capability. Designing an electric powertrain and a vehicle to exploit its energy efficiency has required extensive safety testing and innovation in battery packs, motors, powertrain systems and vehicle engineering. Our proprietary technology includes cooling systems, safety systems, charge balancing systems, battery engineering for vibration and environmental durability, customized motor design and the software and electronics management systems necessary to manage battery and vehicle performance under demanding real-life driving conditions. These technology innovations have resulted in an extensive intellectual property portfolio—as of December 31, 2011, we had 59 issued patents and more than 230 pending patent applications with the United States Patent and Trademark Office and internationally in a broad range of areas.
We are designing our vehicles to enable the cost effective development of our future vehicles. For example, we are designing a common platform architecture for Model S, which compactly positions the battery pack, motor and other elements of our powertrain within the frame of the vehicle. We believe this architecture will form the basis of several future vehicles, including our planned Model X crossover, and enable us to efficiently and cost effectively launch these new vehicle models in the future.
Our Vehicles and Products
We currently design, manufacture and sell fully electric vehicles and electric powertrain components.
The Tesla Roadster
Our first vehicle, the Tesla Roadster, is the first high-performance electric sports car. The two-seat, convertible Tesla Roadster has a combination of range, style, performance and energy efficiency that we believe is unmatched in the market today. It can accelerate from zero to 60 miles per hour in 3.9 seconds and has a maximum speed of approximately 120 miles per hour. The Tesla Roadster also has a range of 245 miles on a single charge, as determined using the United States EPA’s, combined two-cycle city/highway test. This range is almost double that of any other commercially released electric vehicle.
As of December 31, 2011, we had delivered approximately 2,150 Tesla Roadsters to customers in over 31 countries, almost all of which were sold to customers in North America and Europe. The Tesla Roadster complies with, or is exempt from, all applicable vehicle safety standards in the United States, the European Union as well as select other countries. To date, our customers have driven the Tesla Roadster for an estimated aggregate of almost 20 million miles. We concluded the production run of the Tesla Roadster in January 2012. We are selling our remaining Tesla Roadsters primarily in Europe and Asia during 2012 until our inventory is depleted.
The cumulative capital expenditures and research and development costs for the Tesla Roadster from our inception to the date we delivered our first Tesla Roadster was approximately $125 million.
We have continued to rapidly develop the Tesla Roadster since its introduction. In June 2009, nine months after its commercial introduction, we launched the Tesla Roadster 2, as well as a high-performance variant, the Tesla Roadster Sport. We delivered our first right-hand drive model of the Tesla Roadster in January 2010 and have since delivered right-hand drive Roadsters into key markets such as the United Kingdom, Japan, Hong Kong, and Australia. In July 2010, we released the Roadster 2.5, an upgraded version of Roadster 2.
Model S
Our second vehicle, Model S, is currently expected to begin customer deliveries by July of 2012 and we currently plan to deliver approximately 5,000 Model S sedans in 2012. We are leveraging technologies within the electric powertrain of the Tesla Roadster to create a four-door, five-adult-passenger sedan that produces zero tailpipe emissions while accelerating from zero to 60 miles per hour in a targeted time of as low as 4.4 seconds in its performance version. Model S acceleration from zero to 60 miles per hour is targeted at 6.5 seconds, 5.9 seconds and 5.6 seconds for the 40 kWh, 60 kWh and 85 kWh battery pack options, respectively. We have designed Model S to include a third row with two rear-facing child seats, subject to applicable safety regulations and requirements, allowing us to offer a seven passenger sedan. The drivable early prototype of Model S was exhibited to the public in March 2009 and as of December 31, 2011, we had received over 8,000 customer reservations with a minimum refundable payment of $5,000.
We plan to offer Model S with a variety of battery pack options—40 kWh, 60 kWh and 85 kWh—which we estimate will offer a range on a single charge of 160 miles, 230 miles, and 300 miles, respectively, while traveling at a steady speed of 55 miles per hour. We expect that these options will allow customers to purchase an electric vehicle that best matches their personal driving needs. The EPA’s new fuel economy requirements will require us to label Model S utilizing new and different energy efficiency testing methodologies. These methodologies differ from the one we have used to estimate the range of the vehicles at a steady speed of 55 miles per hour and could reduce the range reported on the required labeling of our vehicles by up to 30% as compared to our current estimates.
To complement its range capabilities, we also are offering Model S with a package of recharging options. We are offering the capability to fast charge Model S vehicles equipped with either the 60 kWh or 85 kWh battery packs at one of Tesla’s SuperCharger facilities, which we plan to start installing at selected locations in the United States in 2012. We anticipate that the fast charge capability will allow Model S owners to replenish 50% of the battery pack in about 30 minutes. This feature would offer these drivers a rapid and convenient way to recharge their vehicles. In addition, we are designing Model S to incorporate a modular battery pack in the floor of the vehicle, enabling it to be rapidly swapped out at a specialized commercial battery exchange facility that we anticipate may be available in the future.
We are designing Model S to offer a compelling combination of functionality, convenience and styling without compromising performance and energy efficiency. With the battery pack in the floor of the vehicle and the motor and gearbox in line with the rear axle, we have designed Model S to provide best in class storage space of 36.8 cubic feet, including storage under both the tailgate and the hood. By way of comparison, this storage space exceeds the approximately 14 cubic feet of storage available in the 2009 BMW 5 Series sedan and the approximately 21 cubic feet of storage available in the 2009 Lincoln Town Car. We are also planning to equip Model S with premium luxury features, including a 17 inch touch screen driver interface, advanced wireless connectivity, such as 3G connectivity, and driver customization of the infotainment and climate control systems of the vehicle. We are designing Model S with the intent to achieve a five star safety rating. We believe the intended combination of performance, styling, convenience and energy efficiency of Model S will help position it as a compelling alternative to other vehicles in the luxury and performance segments.
We have announced that the 45 kWh, 60 kWh and 85 kWh battery pack options of Model S will have an effective base price of $49,900, $59,900, and $69,900, respectively, in the United States, assuming and after giving effect to the continuation of a United States federal tax credit of $7,500 for the purchase of alternative fuel vehicles. Even without the tax credit, we believe the base list price will be competitive with other premium vehicles. We have also announced a performance version of Model S. Equipped with the 85 kWh battery pack and a high performance drive inverter, we anticipate that the Model S performance version will accelerate from zero to 60 miles per hour in 4.4 seconds. The effective base price of the Model S performance version is $84,900.
We anticipate that the initial units of Model S will be introduced with a Signature Series which will have an 85 kWh battery pack and include certain colors and interior options, some of which may not be available in the general production of Model S. We also offer the Signature Series with a performance version. The effective base price of the Signature Series is $87,900 and the effective base price of the Signature Series performance version is $97,900.
We are designing Model S to provide a lower cost of ownership as compared to other vehicles in its class. We consider the purchase price, cost of fuel and the cost of maintenance over a six year ownership period in this calculation. We assume comparable residual values, warranties, insurance costs and promotions and assume that currently available consumer incentives are still available at the time of a Model S purchase. In addition to the competitive pricing of Model S relative to other premium vehicles, we estimate that customers of electric vehicles will enjoy lower fuel costs. For example, assuming an average of 12,000 miles driven per year, an average electricity cost of 11.0 cents per kilowatt-hour and an average gasoline price of $3.38 per gallon over the full ownership of the vehicle which were the average electricity cost and gasoline price in the United States, respectively, for January 2012, and based on our estimate of the energy efficiency of Model S, we estimate that our Model S could have approximately $1,900 per year less in fuel costs than a comparable premium internal combustion engine sedan. Furthermore, we expect Model S will have lower maintenance costs than comparable premium internal combustion engine sedans due to fewer moving parts and the absence of certain components, including oil, oil filters, spark plugs and engine valves.
CEO BACKGROUND
Elon Musk has served as our Chief Executive Officer since October 2008 and as Chairman of our board of directors since April 2004. Mr. Musk has also served as Chief Executive Officer, Chief Technology Officer and Chairman of Space Exploration Technologies Corporation (“SpaceX”), a company which is developing and launching advanced rockets for satellite and eventually human transportation, since May 2002, and as Chairman of SolarCity, a solar installation company, since July 2006. Prior to joining SpaceX, Mr. Musk co-founded PayPal, an electronic payment system, which was acquired by eBay in October 2002, and Zip2 Corporation, a provider of Internet enterprise software and services, which was acquired by Compaq in March 1999. Mr. Musk holds a B.A. in physics from the University of Pennsylvania and a B.S. in business from the Wharton School of the University of Pennsylvania.
We believe that Mr. Musk possesses specific attributes that qualify him to serve as a member of our Board of Directors, including the perspective and experience he brings as our Chief Executive Officer, one of our founders and our largest stockholder, which brings historic knowledge, operational expertise and continuity to our Board of Directors.
H.E. Ahmed Saif Al Darmaki has been a member of our Board of Directors since September 2009. Mr. Al Darmaki currently serves as the Vice Chairman of the Board of Directors of the Abu Dhabi National Energy Company PJSC (TAQA), which is a publicly listed global energy sector company on the Abu Dhabi Securities Exchange. From September 1999 to December 2010, Mr. Al Darmaki served as Planning & Development Director of Abu Dhabi Water and Electricity Authority, which manages the generation, transmission and distribution of water and electricity in the Emirate of Abu Dhabi. Mr. Al Darmaki holds a B.S. in business administration and finance from United Arab Emirates University and an M.B.A. from the Zayed University.
Mr. Al Darmaki tendered his resignation from the Board of Directors, effective as of the date of the 2012 Annual Meeting.
Brad W. Buss has been a member of our Board of Directors since November 2009. Since August 2005, Mr. Buss has been Executive Vice President of Finance and Administration and Chief Financial Officer of Cypress Semiconductor Corporation (NASDAQ: CY), a semiconductor design and manufacturing company. Prior to joining Cypress, Mr. Buss served as Vice President of Finance at Altera Corp., a semiconductor design and manufacturing company, from March 2000 to March 2001 and from October 2001 to August 2005. From March 2001 to October 2001, Mr. Buss served as the Chief Financial Officer of Zaffire, Inc., a developer and manufacturer of optical networking equipment. Mr. Buss also serves as a director of CaféPress.com. Mr. Buss holds a B.S. in economics from McMaster University and an honors business administration degree, majoring in finance and accounting, from the University of Windsor.
We believe that Mr. Buss possesses specific attributes that qualify him to serve as a member of our Board of Directors and to serve as chair of our audit committee, including his executive experience and his financial and accounting expertise with both public and private companies.
Ira Ehrenpreis has been a member of our Board of Directors since May 2007. Mr. Ehrenpreis has been with Technology Partners, a venture capital firm, since 1996. He is presently a managing member of the firm and leads Technology Partners’ Cleantech practice. In the venture capital community, he serves on the Board of the National Venture Capital Association and the Western Association of Venture Capitalists and is the Co-Chairman of the VCNetwork, an organization comprising more than 1,000 venture capitalists. In the cleantech sector, he has served on several industry boards, including the American Council on Renewable Energy and the Cleantech Venture Network (Past Chairman of Advisory Board), and has been the Chairman of the Clean-Tech Investor Summit in 2005, 2006, 2007, 2008, 2009, 2010 and 2011. Mr. Ehrenpreis holds a B.A. from the University of California, Los Angeles and a J.D. and M.B.A. from Stanford University.
We believe that Mr. Ehrenpreis possesses specific attributes that qualify him to serve as a member of our Board of Directors and serve as chair of our nominating and corporate governance committee and chair of our compensation committee, including his experience in the cleantech and venture capital industries.
Antonio J. Gracias has been a member of our Board of Directors since May 2007 and has served as our Lead Independent Director since September 2010. Since 2003, Mr. Gracias has been Chief Executive Officer of Valor Management Corp., a private equity firm. Mr. Gracias is a director of SpaceX and SolarCity Corporation. Mr. Gracias holds a joint B.S. and M.S. degree in international finance and economics from the Georgetown University School of Foreign Service and a J.D. from the University of Chicago Law School.
We believe that Mr. Gracias possesses specific attributes that qualify him to serve as a member of our Board of Directors, including his management experience with a nationally recognized private equity firm and his operations management and supply chain optimization expertise.
Stephen T. Jurvetson has been a member of our Board of Directors since June 2009. Since 1995, Mr. Jurvetson has been a Managing Director of Draper Fisher Jurvetson, a venture capital firm. Mr. Jurvetson is a director of NeoPhotonics Corporation, Synthetic Genomics Inc. and SpaceX, among others. Mr. Jurvetson holds B.S. and M.S. degrees in electrical engineering from Stanford University and an M.B.A. from the Stanford Business School.
We believe that Mr. Jurvetson possesses specific attributes that qualify him to serve as a member of our Board of Directors, including his experience in the venture capital industry and his years of business and leadership experience.
Herbert Kohler has been a member of our Board of Directors since May 2009. Since 1976, Dr. Kohler has served in various positions at Daimler AG (“Daimler”), an automobile manufacturer, most recently as Vice President of Group Research & Advanced Engineering e-drive & Future Mobility and Chief Environmental Officer since April 2009. In August 2006, Dr. Kohler was appointed head of Daimler’s Group Research & Advanced Engineering Vehicle and Powertrain. From October 2000 to August 2006, Dr. Kohler served as vice president for Daimler’s Body and Powertrain Research. Dr. Kohler holds a Diploma and Ph.D. in engineering from Stuttgart University.
We believe that Dr. Kohler possesses specific attributes that qualify him to serve as a member of our Board of Directors, including his management experience with a multinational automobile manufacturer, his experience in advanced vehicle technologies and his general strategic and operational experience in the automobile industry.
Kimbal Musk has been a member of our Board of Directors since April 2004. Mr. Musk has been the owner of The Kitchen Restaurant Group, a USA Today Top Ten restaurant, since January 2004 and its Chief Executive Officer since April 2004. In November 2010, Mr. Musk became the Executive Director of The Kitchen Community, a non-profit organization that creates learning gardens in schools across the United States. Since February 2012, Mr. Musk has been a director of the Los Angeles Fund for Public Education, a philanthropic organization dedicated to driving positive change in the Los Angeles Unified School District. In November 1995, Mr. Musk co-founded Zip2 Corporation, a provider of enterprise software and services, which was acquired by Compaq in March 1999. Mr. Musk holds a B.Comm. in business from Queen’s University and is a graduate of The French Culinary Institute in New York City.
We believe that Mr. Musk possesses specific attributes that qualify him to serve as a member of our Board of Directors, including his business experience in retail and consumer markets, his lengthy experience on our Board of Directors, and his experience with technology companies.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview and 2011 Highlights
We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components. We own our sales and service network, and market and sell our vehicles directly to consumers via the phone and internet, in-person at our corporate events and through our network of Tesla stores. We were incorporated in Delaware in July 2003, opened our first store in Los Angeles, California in May 2008, and introduced our first vehicle, the Tesla Roadster, in early 2008. We are targeting our second vehicle, the Model S sedan, for a significantly broader customer base than the Tesla Roadster and plan to manufacture Model S in higher volumes than those for the Tesla Roadster. First customer deliveries of Model S are planned by July 2012. We have also recently revealed an early prototype of the Model X crossover, a vehicle based on the Model S platform. This unique vehicle has been designed to fill the niche between the roominess of a minivan and the style of an SUV, while having high performance features such as a dual motor all-wheel drive system.
During the year ended December 31, 2011, we recognized total revenues of $204.2 million, an increase of 75% over total revenues of $116.7 million for the year ended December 31, 2010. Automotive sales revenue of $148.6 million increased 53% from the year ended December 31, 2010, driven by strong customer demand for the Tesla Roadster globally and significantly higher powertrain component sales. We completed 2011 with cumulative deliveries worldwide from inception of approximately 2,150 Roadsters and concluded the production run of the Tesla Roadster in January 2012. We expect to sell our remaining Tesla Roadsters primarily in Europe and Asia during 2012 until our inventory is depleted.
Development services revenue increased to $55.7 million for the year ended December 31, 2011 from $19.7 million for the year ended December 31, 2010, due primarily to our development activities for the Toyota Motor Corporation (Toyota) RAV4 EV program for a full electric powertrain system. We completed planned milestones and deliveries of samples to Toyota during the year, and we currently expect to complete our remaining development services milestones and sample deliveries during the first quarter of 2012.
We made significant progress on the Model S program this year and we remain on schedule to commence customer deliveries by July 2012. During the year, we moved from building alpha to beta prototypes and performed detailed testing of systems integration, performance and safety. Our significant efforts in development and testing, both of which are ongoing, has allowed us to further refine the overall design of Model S and its constituent parts as well as the production and assembly processes to manufacture the vehicle. In October 2011, we finalized a long term supply contract with Panasonic Corporation for battery cells to be used in our products, which gives us increased visibility into our variable costs.
Research and development expenses included expenses related to Model S alpha and beta prototype build, development of the Tesla Factory, significant engineering, design and testing work being undertaken to support Model S development, design and engineering activities related to Model X, and other research and development activities. Research and development expenses for the year ended December 31, 2011 were $209.0 million, compared to $93.0 million for the year ended December 31, 2010.
In addition to Model S engineering, we also experienced significant activity at the Tesla Factory, where we intend to produce our Model S, Model X and future vehicles. Significant construction has taken place and detailed manufacturing readiness plans are being executed. Almost all of our Model S vehicle manufacturing equipment has been installed at the Tesla Factory. As part of our testing and qualifying activities of our manufacturing equipment, we are now assembling beta prototype vehicles at the Tesla Factory and expect to start building release candidate vehicles in the first quarter of 2012. During this process, we are continuing to fine-tune our production processes and incorporate a higher percentage of production-intent components into the cars. Once we complete these activities, the Tesla Factory will be fully commissioned for production and ready for its intended use. As a result of investments being made in the Tesla Factory and related supplier tooling for Model S, capital expenditures increased to $197.9 million for the year ended December 31, 2011, compared to $105.4 million for the year ended December 31, 2010. Our capital expenditures in 2010 were comprised primarily of payments we had made towards the purchase of the Tesla Factory from New United Motor Manufacturing, Inc. (NUMMI).
With the opening of our Santana Row store in 2011, we launched what we believe to be a new and unique retail experience designed to engage and inform potential customers about electric vehicles in general, learn about Tesla’s innovations and configure their cars through hands-on interactive screens. During the year, we further expanded our company-owned retail network with the opening of several more stores in the United States utilizing the new store concept embodied by our Santana Row Tesla store. Some of these new stores will replace existing stores which we plan to continue using as service locations. As a result of our activities to support the sales of the Tesla Roadster, the opening and operation of new stores, higher store-related and marketing activities, as well as the growth of our business in general, we incurred higher selling, general and administrative expenses of $104.1 million for the year ended December 31, 2011 when compared to expenses of $84.6 million for the year ended December 31, 2010.
In June 2011, we completed a follow-on offering of common stock in which a total of 6,095,000 shares of our common stock were sold, and received cash proceeds of $172.7 million, net of underwriting discounts. Concurrent with this offering, we also sold 1,416,000 shares of common stock to Elon Musk, our Chief Executive Officer and 637,475 shares of common stock to Blackstar Investco LLC, an affiliate of Daimler and received total cash proceeds of $59.1 million in these private placements. No underwriting discounts or commissions were paid in connection with these private placements.
Along with the proceeds from our public offerings and private placements, our continued draw-downs under the Department of Energy Loan Facility (DOE Loan Facility) and other sources of cash including cash from the sales of the Tesla Roadster, development services to Toyota, sales of powertrain components to Daimler, and cash received from refundable reservation payments for our Model S, provided the liquidity to fund our Model S, Model X and powertrain development activities, as well as our capital investments in manufacturing infrastructure. During the year ended December 31, 2011, we received $204.4 million in draw-downs under the DOE Loan Facility bringing our total long-term debt under the facility to $276.3 million. As we continue to progress on our Model S and powertrain activities, we expect to continue making draw-downs under the DOE Loan Facility.
As of December 31, 2011, we had $492.7 million in principal sources of liquidity available from our cash and cash equivalents, short-term marketable securities, cash held in our dedicated DOE account and the remaining amounts available under the DOE Loan Facility. This includes our cash and cash equivalents in the amount of $255.3 million which includes investments in money market funds, short-term marketable securities of $25.1 million, cash of $23.5 million deposited in a dedicated DOE account in accordance with the requirements of our DOE Loan Facility, and $188.8 million available under the DOE Loan Facility. We expect that these principal sources of liquidity together with our current projections of cash flow from operating activities will provide us adequate liquidity until we reach profitability in 2013.
Management Opportunities, Challenges and Risks
Our principal focus has continued to be on the disciplined development of Model S so that we can commence deliveries by July 2012. We have also been focused on the continued sales of the Tesla Roadster and powertrain components, development services activities with our strategic partners, advanced engineering work on the planned Model X and pursuing new electric powertrain opportunities with automobile manufacturers.
In January 2012, we concluded the production run of our current generation Tesla Roadster. Through December 31, 2011, we had delivered approximately 2,150 Roadsters to customers. We plan to sell our remaining Tesla Roadsters during 2012 primarily in Europe and Asia until our inventory is depleted.
Powertrain component sales in 2011 were driven primarily by our deliveries to supply Daimler AG (Daimler) with battery packs and chargers for the Daimler Smart fortwo and A-Class EV programs. We completed both of these production programs as of December 31, 2011. In July 2011, we entered into a supply and services agreement with Toyota for the production of an electric powertrain system, including a battery pack, charging system, inverter, motor, gearbox and associated software, which will be integrated into the Toyota RAV4 EV. Additionally, we will provide Toyota with certain services related to the supply of these components. Pursuant to the agreement, Toyota will pay us approximately $100 million from 2012 through 2014 based on our delivery of these components for the Toyota RAV4 EV. Due to the wind down of the Daimler Smart fortwo and A-Class EV production programs at the end of 2011, we expect powertrain component sales to be limited until the planned start of production of the Toyota RAV4 EV powertrain system in the first half of 2012.
As we have a limited number of the Tesla Roadsters left for sale and as we expect powertrain component sales to decline until the start of production for the Toyota RAV4 EV program, we anticipate our automotive sales will decline, potentially significantly, just prior to the planned launch of our Model S. The launch of our Model S could be delayed for a number of reasons and any such delays may be significant and would extend the period in which we would generate limited revenues from sales of our electric vehicles and electric powertrain systems.
We completed all of our planned milestones and deliveries of samples to Toyota during 2011, and we currently expect to complete our remaining development services milestones and sample deliveries during the first quarter of 2012. As such, we expect that the remaining development services revenue under the Toyota RAV4 EV program will also be recognized in the first quarter. Since the revenue related to development services milestones are recognized when achieved while milestone costs must be expensed as incurred, our development services gross margin will reflect this favorability when we recognize our final Toyota RAV4 EV milestones in 2012. In November 2011, we received a letter of intent from Daimler for a full electric powertrain program for a vehicle in the Mercedes line and recently, we received a purchase order to begin the development work. However, we have not yet finalized with Daimler the terms for this program and may never do so. Due to timing differences that may arise between the recognition of future milestone revenue and the underlying costs of development services, the gross margin from our development services activities may vary from period to period as we have seen under our previous development services agreements including that for the Toyota RAV4 EV program.
The build of Model S beta prototypes continues to progress and we will begin building release candidate vehicles in the first quarter of 2012. We continue to work closely with suppliers to design, develop and test components that will meet our anticipated production design specifications and schedule. Ensuring that our design, engineering, operations and manufacturing engineering teams, and our suppliers, execute on all significant activities will be critical to a timely launch of first customer deliveries of our Model S by July 2012. Our continuing negotiations with suppliers and the adequate maturation of our manufacturing capabilities will influence our ability to achieve the cost per unit that we are currently projecting. Our plan to commence deliveries of Model S by July 2012 is also dependent upon the timely availability of funds from the DOE Loan Facility, upon our finalizing the related design, engineering, component procurement, testing, build out and manufacturing plans in a timely manner and upon our ability to execute these plans within the current timeline.
In February 2012, we revealed an early prototype of the Model X crossover as the first vehicle we intend to develop by leveraging the Model S platform. This unique vehicle has been designed to fill the niche between the roominess of a minivan and the style of an SUV, while having high performance features such as a dual motor all-wheel drive system. We currently plan to start production of Model X in the fourth quarter of 2013 with significant deliveries in 2014. Our ability to develop and introduce the Model X in this timeframe is based on our expectations of leveraging the Model S platform. Additionally, if there is a lower level of commonality between Model S and Model X than anticipated, our future development and tooling costs may exceed expectations.
Our operating expenses in 2011 have been significant as we continued to execute on the Model S program and are systematically and strategically expanding our sales and service infrastructure globally to support the launch of Model S. As we continue to make significant investments in research and development and our infrastructure to launch Model S as well as incur costs for the development of Model X, we expect to continue generating a net loss until we reach planned volume sales of Model S in 2013. As pre-production expenses and development and prototyping costs cannot be capitalized, we expect our operating expenses to continue increasing due to our ongoing activities to prepare the Tesla Factory for production, refine Model S through our engineering and testing on beta prototype and release candidate vehicles, and continue the advanced engineering work on Model X. Once we start recognizing revenue from the sales of Model S, our Model S production costs, including direct parts, material and labor costs, manufacturing overhead and amortized tooling, and logistics, will begin to be reflected in cost of automotive sales.
Capital spending for the Model S program will continue into 2012 as we complete our commissioning activities of the Tesla Factory and as we make final payments for tooling and manufacturing equipment required for production. Depreciation of our capital expenditures related to the manufacturing of Model S will begin with the start of Model S production. We anticipate that most of the capital expenditures on Model S will continue to be funded by the DOE Loan Facility until the launch of Model S. We also anticipate our aggregate capital expenditures for 2012 to be comparable to that in 2011, primarily focused on vehicle development and manufacturing activities for Model S and Model X.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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. We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
Automotive Sales
We recognize automotive sales revenue from sales of the Tesla Roadster, including vehicle options, accessories and destination charges, vehicle service and sales of zero emission vehicle, or ZEV credits. We also recognize automotive sales revenue from the sales of electric vehicle powertrain components, such as battery packs and battery chargers, to other manufacturers. We recognize revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and there are no uncertainties regarding customer acceptance; (iii) fees are fixed or determinable; and (iv) collection is reasonably assured.
Automotive sales consist primarily of revenue earned from the sale of vehicles. Sales or other amounts collected in advance of meeting all of the revenue recognition criteria are not recognized in the consolidated statements of operations and are instead recorded as deferred revenue on our consolidated balance sheets. Prior to February 2010, we did not provide direct financing for the purchase of the Tesla Roadster although a third-party lender has provided financing arrangements to our customers in the United States. Under these arrangements we have been paid in full by the customer at the time of purchase. Starting in February 2010, we began offering a leasing program to qualified customers in the United States.
Automotive sales also consist of revenue earned from the sales of vehicle options, accessories and destination charges. While these sales may take place separately from a vehicle sale, they are often part of one vehicle sale agreement resulting in multiple element arrangements. Contract interpretation is sometimes required to determine the appropriate accounting for recognition of our revenue, including whether the deliverables specified in the multiple element arrangement should be treated as separate units of accounting, and, if so, how the price should be allocated among the elements, when to recognize revenue for each element, and the period over which revenue should be recognized. We are also required to evaluate whether a delivered item has value on a stand-alone basis prior to delivery of the remaining items by determining whether we have made separate sales of such items or whether the undelivered items are essential to the functionality of the delivered items. Further, we assess whether we know the fair value of the undelivered items, determined by reference to stand-alone sales of such items.
To date, we have been able to establish the fair value for each of the deliverables within the multiple element arrangements because we sell each of the vehicles, vehicle accessories and options separately, outside of any multiple element arrangements. As each of these items has stand alone value to the customer, revenue from sales of vehicle accessories and options are recognized when those specific items are delivered to the customer. Increased complexity to our sales agreements or changes in our judgments and estimates regarding application of these revenue recognition guidelines could result in a change in the timing or amount of revenue recognized in future periods.
Effective January 1, 2011, we adopted amended accounting standards issued by the Financial Accounting Standards Board (FASB) for multiple deliverable revenue arrangements on a prospective basis for applicable transactions originating or materially modified after January 1, 2011. The new standard changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. For fiscal 2011 and future periods, when a sales arrangement contains multiple elements, we allocate revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available. To date, we have been able to establish the fair value for each of the deliverables within the multiple element arrangements because we sell each of the vehicles, vehicles accessories and options separately, outside of any multiple element arrangements. Therefore, there were no material differences between total revenue reported and pro forma total revenues that would have been reported during the year ended December 31, 2011, if the transactions entered into or materially modified after January 1, 2011 were subject to previous accounting guidance.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview and Quarter Highlights
We design, develop, manufacture and sell high-performance fully electric vehicles and advanced electric vehicle powertrain components. We own our sales and service network, and market and sell our vehicles directly to consumers via the phone and internet, in-person at our corporate events and through our network of Tesla stores. We were incorporated in Delaware in July 2003, opened our first store in Los Angeles, California in May 2008, and introduced our first vehicle, the Tesla Roadster, in early 2008. We are targeting our second vehicle, the Model S sedan, for a significantly broader customer base than the Tesla Roadster and plan to manufacture Model S in higher volumes than those for the Tesla Roadster. We commenced deliveries of Model S in June 2012. In February 2012, we revealed an early prototype of the Model X crossover, a vehicle based on the Model S platform.
During the three months ended June 30, 2012, we recognized total revenues of $26.7 million, a decrease of 54% from total revenues of $58.2 million for the three months ended June 30, 2011. Automotive sales revenue of $22.1 million decreased 43% from the three months ended June 30, 2011, primarily reflecting the completion of the Daimler AG (Daimler) Smart fortwo and A-Class EV production programs at the end of 2011 under which we supplied Daimler with battery packs and chargers. Sales of the Tesla Roadster decreased as we concluded sales of the Tesla Roadster in North America during the first quarter of 2012. Our remaining Roadsters are available for sale only in Europe and Asia. We will continue selling our remaining Tesla Roadsters in 2012 until inventory is depleted. We concluded the production run of our current generation Tesla Roadster in January 2012.
Development services revenue decreased to $4.6 million for the three months ended June 30, 2012 from $19.1 million for the three months ended June 30, 2011, as we completed our final development services milestones and sample deliveries for the Toyota Motor Corporation (Toyota) RAV4 EV program during the first quarter of 2012 and began supplying Toyota with production powertrain systems for the RAV4 EV. Revenue related to the supply of these production powertrain systems is recorded in automotive sales. Development services revenue recognized during the second quarter of 2012 related primarily to the Mercedes-Benz development program with Daimler.
In June 2012, we commenced deliveries of Model S to customers in the United States. Our timely launch of Model S represented an important milestone, transitioning us from significant activities in Model S development and our preparation for vehicle manufacturing at the Tesla Factory, to preparation for volume production in the coming months. Research and development expenses for the three months ended June 30, 2012 were $74.9 million, compared to $52.5 million for the three months ended June 30, 2011. The higher research and development expenses reflected our continuing efforts in Model S pre-production activities, including manufacturing preparedness, process validation, prototype builds and extensive testing at both the vehicle and component levels.
As a result of investments we continued to make in the Tesla Factory and supplier tooling for Model S production, capital expenditures increased to $61.3 million for the three months ended June 30, 2012, compared to $54.3 million for the three months ended June 30, 2011.
We incurred higher selling, general and administrative expenses of $36.1 million for the three months ended June 30, 2012 when compared to expenses of $24.7 million for the three months ended June 30, 2011. The increased expenses were driven by our continued activities to support the growth of our business including the expansion of our Tesla store network and our Model S service and delivery infrastructure.
Our Model S development activities, as well as our capital investments in manufacturing infrastructure, continued to be supported by draw-downs under our Department of Energy Loan Facility (DOE Loan Facility) and other sources of cash including cash from the sales of the Tesla Roadster and Model S, cash received from refundable reservation payments for our Model S and Model X, and cash from the provision of development services and sales of powertrain components and systems. During the three months ended June 30, 2012, we received $71.3 million in draw-downs under the DOE Loan Facility bringing our total long-term debt under the facility to $431.8 million. With the completion of Model S development and pre-production activities, we expect to draw-down all remaining funds under the DOE Loan Facility in the next few months.
As of June 30, 2012, we had $265.8 million in principal sources of liquidity from our cash and cash equivalents, current restricted cash and the remaining amounts available under the DOE Loan Facility. This primarily includes our cash and cash equivalents in the amount of $210.6 million which includes investments in money market funds, cash of $15.3 million deposited in dedicated DOE accounts in accordance with the requirements of our DOE Loan Facility and which will be used for repayment of all principal and interest that will come due on December 15, 2012, and $33.3 million available under the DOE Loan Facility. We currently expect to reach free cash flow (defined as cash flow from operations less capital expenditures) break even in the fourth quarter of 2012 based on present assumptions including our goal to deliver 5,000 Model S vehicles to customers in 2012. While we are confident in our ability to achieve our intended business plans with our current cash levels, we are evaluating alternatives to opportunistically pursue liquidity options to strengthen our balance sheet, accelerate our pace of product development and increase shareholder value.
Management Opportunities, Challenges and Risks
Our principal focus for the first half of 2012 was on completing the development of Model S, establishing our manufacturing capabilities at the Tesla Factory, and preparing for the Model S launch. While we successfully commenced deliveries of Model S to customers in the United States in June 2012, our attention during the remainder of 2012 remains on the continued refinement of our manufacturing and supply chain processes to enable quality production as we methodically transition to volume production at the Tesla Factory. In addition, we are focused on achieving manufacturing efficiencies and the implementation of planned cost reductions in order to achieve our gross margin target of 25% in 2013. Based on our current projections, we expect to reach profitability in 2013.
During the second quarter, we completed all regulatory tests, including crash safety assessments, required for the sale of Model S in the United States. Development and testing continue as we homologate Model S for the rest of the world, with initial focus on Canada and Europe. We will continue delivering Model S with the 85 kilowatt-hour (kWh) battery pack option to our Signature series and general production customers and expect to deliver Model S with the 60 kWh and 40 kWh battery pack options thereafter.
In addition to our efforts on Model S, we have also been focused on the continued sales of the Tesla Roadster and powertrain components and systems, development services activities with our strategic partners, advanced engineering work on the planned Model X and pursuing new electric powertrain opportunities with automobile manufacturers.
In January 2012, we concluded the production run of our current generation Tesla Roadster at 2,500 vehicles. Through June 30, 2012, we had delivered over 2,350 Roadsters to customers and we plan to sell our remaining Tesla Roadsters during 2012 primarily in Europe and Asia until our inventory is depleted.
We completed our production deliveries to supply Daimler with battery packs and chargers for the Daimler Smart fortwo and A-Class EV programs as of December 31, 2011. Although we have continued to deliver a small number of battery packs to Daimler to meet their service requirements, we expect further powertrain component sales under these programs to Daimler to be limited.
During the first quarter of 2012, we began shipping powertrain systems to Toyota under a supply and services agreement for the Toyota RAV4 EV. Pursuant to the agreement, Toyota will pay us approximately $100 million from 2012 through 2014 based on our delivery of the powertrain systems for the Toyota RAV4 EV. Powertrain systems sales to Toyota are expected to ramp up during the second half of 2012.
As we had a limited number of Tesla Roadsters left for sale, a limited number of powertrain components to deliver to Daimler and had not yet delivered a significant number of systems for the Toyota RAV4 EV program, automotive sales declined during the first half of 2012. With the launch of Model S in June 2012, we expect automotive sales to increase significantly during the second half of 2012 as compared to the second half of 2011. However, volume production and scale deliveries of our Model S could be delayed for a number of reasons. Any such delays may be significant and would extend the period in which we would generate limited revenues from sales of our electric vehicles and electric powertrain systems.
In the first half of 2012, we received two purchase orders from Daimler to begin work on the development of a full electric powertrain for a Mercedes-Benz vehicle and in May 2012, we executed an agreement with Daimler. Pursuant to the agreement, we will provide development services and deliver prototype samples. As we have experienced under our previous development services agreements due to timing differences that may arise between the recognition of milestone revenues and the underlying costs of development services, the gross margin from our development services activities may vary from period to period.
In February 2012, we revealed an early prototype of the Model X crossover as the first vehicle we intend to develop by leveraging the Model S platform. We currently plan to start deliveries of Model X in 2014. Our ability to develop and introduce the Model X in this timeframe is based partially on our expectations of leveraging the Model S platform. If there is a lower level of commonality between Model S and Model X than anticipated, our future development and tooling costs may exceed expectations.
We have already incurred significant operating expenses in 2012 as we continued to make significant investments in the development of Model S, our manufacturing capabilities and our sales and service infrastructure. We expect operating expenses for the remainder of 2012 will continue to be significant as we incur costs for additional development on Model S including for homologation in Canada, Europe and other markets, launch of the 60 kWh and 40 kWh battery pack options, and the development of the right-hand drive version, the development of Model X and the systematic and strategic expansion of our sales and service infrastructure globally. As we transition to volume production of Model S, Model S related manufacturing costs, including direct parts, material and labor costs, manufacturing overhead and amortized tooling, and logistics, will be fully reflected in cost of automotive sales during the second half of 2012. As such, Model S related research and development expenses will decline in the third quarter while cost of automotive sales is expected to increase. Selling, general and administrative expenses should continue to rise moderately on a quarterly basis as we continue to increase our vehicle selling and servicing capabilities.
Since starting production in June 2012, we have manufactured approximately 40 Model S vehicles as of July 25, 2012. During the third quarter of 2012, we expect to deliver approximately 500 Model S vehicles to customers. Given the limited number of vehicles we expect to deliver, we expect our automotive sales gross margin for the third quarter of 2012 to be slightly negative, as our cost of automotive sales will reflect the full burden of operating our Tesla Factory, including depreciation for our manufacturing facility and equipment. During the fourth quarter of 2012, we expect to deliver approximately 4,500 Model S vehicles and expect our automotive sales gross margin to improve significantly as we reach higher volume and achieve manufacturing cost efficiencies and planned cost reductions. Accurately forecasting our manufacturing costs is difficult until we reach a certain level of volume production. Moreover, until we reach planned volume sales of Model S in 2013, we expect to continue generating a net loss as a result of our anticipated high level of operating expenses.
We have continued to incur capital expenditures for the Model S program and will continue to do so in 2012 as we make final payments for tooling and manufacturing equipment required for production at full capacity. We currently anticipate that our aggregate capital expenditures for 2012 to be about $210 million, primarily focused on vehicle development and manufacturing activities for Model S and Model X and the addition of new Tesla stores, mainly in North East of the United States, and service infrastructure throughout the United States.
See Part II — Item 1A — “Risk Factors” for a further discussion of risks associated with our business, including additional risks related to the Model S and Model X.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed 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, please refer to the “Critical Accounting Policies and Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission (SEC). In addition, please refer to Note 2, “Summary of Significant Accounting Policies,” of our condensed consolidated financial statements in Item 1, Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Development Services
Development services represent arrangements where we develop electric vehicle powertrain components and systems for other automobile manufacturers, including the design and development of battery packs, drive units and chargers to meet customer’s specifications.
Development services revenue during the three and six months ended June 30, 2012 was $4.6 million and $15.5 million, a decrease from $19.1 million and $34.5 million during the three and six months ended June 30, 2011, respectively.
In July 2010, we entered into an agreement with Toyota to initiate development of an electric powertrain for the Toyota RAV4. Under this Phase 0 development agreement, prototypes were made by us by combining the Toyota RAV4 model with a Tesla electric powertrain. In October 2010, we also entered into a Phase 1 contract services agreement with Toyota for the development of a validated powertrain system, including a battery, power electronics module, motor, gearbox and associated software, which would be integrated into an electric vehicle version of the Toyota RAV4.
During the three and six months ended June 30, 2011, we completed various milestones and delivered several samples under the Phase 1 agreement and delivered all remaining prototype vehicles under the Phase 0 agreement. Development services revenue under these arrangements with Toyota for the three and six months ended June 30, 2011 was $19.1 million and $34.5 million, respectively. Through June 30, 2011, we had delivered all development services under the Phase 0 contract services agreement.
During the three months ended March 31, 2012, we completed our remaining milestones and delivered samples under the Phase 1 agreement and recognized $10.7 million in development services revenue.
In the first half of 2012, we received two purchase orders from Daimler to begin work on the development of a full electric powertrain program for a Daimler Mercedes-Benz vehicle and in May 2012, we executed an agreement with Daimler which covers the significant terms for this development program. Pursuant to the agreement, we will provide development services and deliver prototype samples. During the three months ended June 30, 2012, we recognized $4.3 million in development services revenue in connection with this development program.
We intend to grow our development services revenue over time by establishing additional commercial arrangements with other automobile manufacturers and by pursuing new development opportunities with existing strategic partners. Additionally, we expect our development services revenue may fluctuate in future periods based on the timing of our delivery of milestones and samples, as well as the timing of meeting revenue recognition criteria.
CONF CALL
Michael Lew - Needham & Co. LLC
Thanks and good afternoon. On the last call, you mentioned that you were thinking about a mainstream offering for Gen 3 instead of an updated Roadster. Do you have any update on your thought process there, like what types of market times you are looking for?
Elon R. Musk - Chairman, Product Architect and CEO
I mean, it’s very aspirational at this point, because our intention is focused on the Model S and on our key powertrain partners, Toyota and Daimler. So, I mean, late 2015 would be the earliest.
Michael Lew - Needham & Co. LLC
Okay.
Elon R. Musk - Chairman, Product Architect and CEO
2016 is probably most likely, but something like that.
Michael Lew - Needham & Co. LLC
Got it. Okay. And also on the RAV4 electric, are you providing multiple versions of a battery pack as [true as it stayed] a 100-mile range and you’ve highlighted in the shareholders letter that you are providing a range of 170 miles.
Elon R. Musk - Chairman, Product Architect and CEO
I think there was unfortunately the way that the information was communicated was a little confusing because there is actually only this one battery pack. And the range is actually, if you were comparing today to what the Leaf 100-mile range is, which is the city driving that compares to the 170-mile number for the RAV4 or sort of 165 miles to 170 miles. If you look at the Leaf, say five cycle test that range is in around the 70-mile to 75-mile number I believe, grant maybe 71-mile or something, 73-mile, very difficult. Okay, I think it remains positive at 73-mile. So when comparing to the five cycle range, the RAV4 range is around 105 miles. So in any given range scenario, the RAV4 is about 60% more range than a Leaf.
Michael Lew - Needham & Co. LLC
Okay.
Elon R. Musk - Chairman, Product Architect and CEO
I think we still got confused with comparing the Leafs city range to RAV4’s five cycle range, but which is not apples-to-apples obviously.
Michael Lew - Needham & Co. LLC
Okay. Yeah. I was trying to reconcile the 100-mile from Toyota and your 170-mile. That’s a little bit confused. That’s a big 70-mile delta [unless] Toyota talked about 100 miles strictly highway driving, but still that’s a nice 70-mile increment on the city side.
Elon R. Musk - Chairman, Product Architect and CEO
Sorry. Could you repeat the question?
Michael Lew - Needham & Co. LLC
Toyota had stated 100 miles and you are at 170 miles for the RAV4 and there is 70-mile delta there, and I guess, or maybe Toyota was mentioning highway driving versus, I’d say, city driving.
Elon R. Musk - Chairman, Product Architect and CEO
Toyota is referring to there is what’s called the five cycle.
Michael Lew - Needham & Co. LLC
Okay.
Elon R. Musk - Chairman, Product Architect and CEO
It’s extremely arduous range and it’s at least 100 miles. Actually, depending on configuration it’s actually at least 105 miles and it maybe as high as 120 miles.
Michael Lew - Needham & Co. LLC
All right.
Elon R. Musk - Chairman, Product Architect and CEO
And if you were to compare that to the Leaf, you would compare it to the Leafs five cycle range which is 73-mile.
Michael Lew - Needham & Co. LLC
Right. Okay. I get that.
Elon R. Musk - Chairman, Product Architect and CEO
Yeah.
Michael Lew - Needham & Co. LLC
Okay. And then, one more.
Elon R. Musk - Chairman, Product Architect and CEO
What happened in the media was people were looking at the Leafs city range of 100-mile and comparing that to the RAV4’s five cycle range and those are not comparable numbers. That’s where you want us, make more sense to compare it to the sort of 100-mile, almost 170-mile range for the RAV4.
Michael Lew - Needham & Co. LLC
Okay. I agree. And also one last question. Earlier you mentioned a high conversion rate for the model S sign ups to reservation. Have you seen any signs of, let’s say, cannibalization for model X, since those that are on the wait list for the S may just choose to switch over if they get early on the [lane] the model X a little bit earlier?
Elon R. Musk - Chairman, Product Architect and CEO
Well, the model X deliveries will be really, I mean, if you put out a deposit for model X you’re going to get the car in almost two years, maybe 22 months, that kind of thing. So it’s really, you’re do getting a car in Q2 of 2014, if you put down a deposit for the model X, whereas you get a car in Q2 of next year if you put down a deposit for the model X. So there’s about a year advantage there, and then we’ll see how deposits track, but I think it will remain true that you will be able to get a model S a lot sooner than a Model X for quite some time.
Michael Lew - Needham & Co. LLC
Okay. I misunderstood. I thought they would be rolling out late in 2013, but thank you.
Elon R. Musk - Chairman, Product Architect and CEO
I mean, very tiny numbers that’s possible, but, I mean if you put down a deposit now you’re really going to get your car in about 22 months-ish. I mean, that’s overly precise. Figure it at approximately two years.
Michael Lew - Needham & Co. LLC
Okay. I appreciate it.
Jeffrey K. Evanson - Vice President-Investor Relations
Hey, Patrick, we probably only have time for one more question.
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Fund Letters
