Tesla 2011 Annual Report Download - page 94

Table of Contents
engineering support and testing, direct parts, material and labor costs, manufacturing overhead, including amortized tooling costs, shipping and
logistic costs and other development expenses that we incur in the performance of our services under development agreements. During the
quarter ended March 31, 2010, Daimler engaged us to assist with the development and production of a battery pack and charger for a pilot fleet
of its A-Class electric vehicles to be introduced in Europe during 2011. As of March 31, 2010, a development agreement had yet to be finalized
and as such, the related development services costs of $0.5 million that we incurred during the quarter ended March 31, 2010 were expensed in
research and development. In May 2010, we finalized the agreement and began recording the costs related to this program in cost of revenues.
Gross profit for the year ended December 31, 2010 was $30.7 million, an increase from $9.5 million for the year ended December 31,
2009. The increase was driven primarily by the gross profit contributed by our development services revenues which we began to recognize in
2010; an expanded offering of vehicle options to our customers; the continued launch of the Tesla Roadster internationally, where in certain
markets, we have experienced higher selling prices; and cost improvements associated with the model changeover from the Tesla Roadster to the
Tesla Roadster 2 during the second half of 2009. Gross profit for the year ended December 31, 2010 was also favorably impacted by the fact that
certain of the A-Class development services revenue that we recognized during the year ended December 31, 2010 did not have any
corresponding cost of revenues, since these costs were recorded in research and development expenses prior to us finalizing the development
agreement in May 2010.
Cost of revenues of $102.4 million for the year ended December 31, 2009 increased from $15.9 million for the year ended December 31,
2008. The significant increase in cost of revenues was due to the increase in Tesla Roadster sales from which we began to recognize revenue
during the fourth quarter of 2008; higher warranty expense; and the model changeover from the Tesla Roadster to the Tesla Roadster 2 as well as
significant part changes implemented to improve the design and reduce per unit costs, for which we recorded charges to cost of revenues in the
amount of $1.4 million for excess and obsolete inventory during the year ended December 31, 2009.
Gross loss for the year ended December 31, 2008 was $1.1 million due to the lower average selling prices for our initial vehicles, the high
materials and manufacturing costs associated with our first generation Tesla Roadster and limited economies of scale from low vehicle
production volumes. Gross profit for the year ended December 31, 2009 of $9.5 million benefited from higher per unit revenue and reduced
manufacturing cost from increased volume and component re-design.
We expect our development services revenue may fluctuate in future periods based on the timing of cash receipts as compared to the
timing of meeting revenue recognition criteria. This may cause our gross profit and gross margin to be similarly impacted.
Research and Development Expenses
Research and development expenses consist primarily of personnel costs for our teams in engineering and research, supply chain, quality,
manufacturing engineering and manufacturing test organizations, prototyping expense, contract and professional services and amortized
equipment expense. Also included in research and development expenses are development services costs that we incur, if any, prior to the
finalization of agreements with our development services customers as reaching a final agreement and revenue recognition is not assured.
Development services costs incurred after the finalization of an agreement are recorded in cost of revenues.
Research and development expenses for the year ended December 31, 2010 were $93.0 million, an increase from $19.3 million for the year
ended December 31, 2009. Research and development expenses during the year ended December 31, 2009 included $23.2 million in Daimler
Smart fortwo development compensation which was recorded as an offset to research and development expenses. The $73.7 million increase in
research and
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