You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and our audited financial statements for the year endedDecember 31, 2020 and the related notes incorporated by referenced in our Current Report on Form 8-K, filed withSEC onJune 17, 2021 (the "Super 8-K"). This discussion contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from the results described in or implied by the forward-looking statements. You should carefully read the section entitled "Risk Factors" to gain an understanding of the important factors that could cause actual results to differ materially from these forward-looking statements. Overview We are a leading developer and producer of commercial electric vehicle technology with an integrated business model focused on providing end-to-end solutions that enable commercial vehicle electrification. While our business has historically been centered on the development and sale of electric transit buses, the increased significance of revenue from Proterra Powered has caused us to consider reorganizing into two business units with three business lines, each of which addresses a critical component of the commercial vehicle electrification value proposition in a complementary and self-reinforcing manner: •Proterra Powered and Energy is our business unit that is responsible for providing our technology solutions to commercial vehicle manufacturers and owners of commercial fleets, and is comprised of two business lines. •Proterra Powered designs, develops, manufactures, sells, and integrates proprietary battery systems and electrification solutions into vehicles for global commercial vehicle original equipment manufacturer ("OEM") customers serving the Class 3 to Class 8 vehicle segments, including delivery trucks, school buses, coach buses, construction and mining equipment, and other applications. •Proterra Energy provides turnkey fleet-scale, high-power charging solutions and software services, ranging from fleet and energy management software-as-a-service, to fleet planning, hardware, infrastructure, installation, utility engagement, and charging optimization. These solutions are designed to optimize energy use and costs, and to provide vehicle-to-grid functionality. •Proterra Transit is our business unit that designs, develops, manufactures, and sells electric transit buses as an OEM for North American public transit agencies, airports, universities, and other commercial transit fleets. Proterra Transit offers an ideal venue to showcase and validate our electric vehicle technology platform through rigorous daily use by a large group of sophisticated customers focused on meeting the wide-ranging needs of the communities they serve. The first application of Proterra Powered's commercial vehicle electrification technology was through Proterra Transit's heavy-duty transit bus, which we designed from the ground up for the North American market. Proterra Powered has partnered with several OEMs in the school bus, step-van, motor coach and double-decker transit bus, shuttle bus, international transit bus, construction and mining and last-mile delivery vehicle markets. ThroughSeptember 30, 2021 , Proterra Powered has delivered battery systems and electrification solutions for 264 vehicles to our OEM partner customers. In addition, Proterra Energy has established itself as a leading commercial vehicle charging solution provider by helping fleet operators fulfill the high-power charging needs of commercial electric vehicles and optimize their energy usage, while meeting their logistical constraints and continuous service requirements. As ofSeptember 30, 2021 , we had installed approximately 59 MW of charging infrastructure across more than 680 charge points throughoutNorth America . ThroughSeptember 30, 2021 , we have generated the majority of our revenue from Proterra Transit's sales of electric transit buses, complemented by additional revenue from Proterra Powered's sales of battery systems and Proterra Energy's sales and installation of charging systems, as well as from the sale of spare parts and other services provided to customers. As fleet electrification continues to expand beyond buses to trucks and other commercial vehicles, we expect Proterra Powered and Proterra Energy to grow into a significantly larger portion of our overall business and generate a greater portion of 39 -------------------------------------------------------------------------------- revenue. ThroughSeptember 30, 2021 , our chief operating decision maker, the Chief Executive Officer, reviewed financial information presented at the entity level for ongoing operations and for internal planning and forecasting purposes, and we had a single reportable segment. Proterra Powered's strategy is to leverage Proterra Transit's success in the electric transit bus market to showcase the performance of our technology and demonstrate a strong track record of range and reliability in order to provide our battery systems and electrification solutions to other commercial vehicle segments. We believe our success in the transit bus market using our battery systems and electrification solutions to power heavy-duty vehicles with faster acceleration than a diesel-powered bus up steep hills, all while maintaining a rigorous regular schedule of operation with little tolerance for error, helps demonstrate the broad applicability of our technology to other commercial vehicle segments with similar requirements. We sell our electric powertrains using a business development team as well as a channel sales team for certain end markets. These teams work closely with our engineering team to develop optimal electrification solutions for our customers, depending on their vehicle requirements. Enhanced by Proterra Powered's high performance battery systems and electrification solutions and our purpose-built transit bus vehicle designed to optimize power, weight, and efficiency, Proterra Transit has delivered more than 50% of all the electric transit buses inNorth America between 2012 and 2019. Our sales efforts are focused on the 400 largest public transit agencies, which range in size from approximately 50 buses to thousands of buses in their fleets. These agencies operate more than 85% of the more than 70,000 transit buses on the road inNorth America , according to the FTA's National Transit Database, as well as airports, universities, hospitals, and corporate shuttles. As ofSeptember 30, 2021 , there are, in aggregate, more than 25,000 buses in operation at fleets that are mandated to convert to 100% zero-emission by 2040, including fleets in the state ofCalifornia and the cities ofNew York City ,Chicago , andSeattle , among others. The fleet size of our primary public transit agency customer targets ranges between approximately 100 to more than 4,000 buses, and their electrification plans typically involve a phased approach. Our strategy is to maintain the No. 1 market share of the North American electric transit bus market as electric penetration continues to rise by both acquiring new customers and expanding our share of existing customers as transit agencies' average order rates increase to meet their zero emission targets. We believe we have a competitive advantage in winning new bus sales due to our extensive track record, with more than 700 vehicles on the road which have accumulated more than 20 million real-world service miles spanning a wide spectrum of climates, conditions, altitudes and terrains. We believe that repeat orders of increasing scale represent a considerable growth opportunity for our electric transit buses. After initial purchase, our customers often expand their electric vehicle programs and place additional orders for electric buses and charging systems. Repeat orders lower our customer acquisition costs and increase visibility into our sales pipeline. Many of our existing customers have announced long-term goals to transition to fleets completely comprised of electric vehicles. We have a long sales and production cycle given our customers' structured procurement processes and vehicle customization requirements, and believe that our proven ability to deliver commercial-quality battery systems, electrification and charging solutions, and electric transit buses gives us a distinct first mover advantage in end markets that are electrifying rapidly. For Proterra Powered, new vehicle development programs for commercial vehicle OEMs typically last between one and three years. As a result, volume production and revenue generation tend to trail initial contract signatures by a few years. For Proterra Transit, public transit agencies typically conduct a request for proposal process before awards are made and purchase orders are issued. Proposals are evaluated on various criteria, including but not limited to technical requirements, reliability, reputation of the manufacturer, and price. This initial sales process from first engagement to award typically ranges from 6 to 18 months. Once a proposal has been awarded, a pre-production process is completed where customer specific options are mutually agreed upon. A final purchase order follows the pre-production process. Procurement of parts and production typically follow the purchase order. Once a bus is fully manufactured, the customer performs a final inspection before accepting delivery, allowing us to recognize revenue. The length of time between a customer award and vehicle acceptance typically varies between 12 and 24 months, depending on product availability and production capacity. We have significant manufacturing capacity already in place and at scale with approximately 350,000 square feet of manufacturing space across three facilities in two states. InCity of Industry, California , we operate a battery production facility as well as a bus manufacturing facility. We also operate a battery production facility inBurlingame, California . Our largest bus manufacturing facility is located inGreenville, South Carolina . Battery manufacturing capacity at ourCity of Industry facility, once fully staffed on a three shift structure, is 675 megawatt-hours ("MWh"), sufficient to supply batteries for both our total bus manufacturing capacity of 680 transit buses across our two bus assembly facilities inGreenville, SC andCity of Industry, CA , as well as more than 350 MWh of Proterra Powered batteries for third-party customers, equivalent to 1,500 school buses and/or delivery vehicles per year. We have specifically developed our battery modules using a design for manufacturability (DFM) approach that enables high-volume automated production of the module using a modular 40 -------------------------------------------------------------------------------- manufacturing line that can be rapidly built with low capital expenditures. Enabled by the simplicity of design and integrated architecture of our battery modules, we manufacture our battery packs in two widths and heights, various lengths ranging from 3-feet to 9-feet, and four different voltages. In the nine months endingSeptember 30, 2020 our battery production was 84.0 MWh and in the nine months endedSeptember 2021 our production was 145.1 MWh, a 73% increase year over year. As we increase our production volumes, we believe that we will be able to leverage our historical investments in capacity to reduce our labor and overhead costs as a percentage of total revenue. We currently have sufficient capacity to fulfill our current backlog and anticipated near-term growth. For the nine months endedSeptember 30, 2021 and 2020, our total revenue was$174.4 million and$142.8 million , respectively. We had a gross profit of$4.8 million and$6.4 million for the nine months endedSeptember 30, 2021 and 2020, representing a gross margin of 3% and 5%, respectively. We have also invested significant resources in research and development, operations, and sales and marketing to grow our business and as a result, generated losses from operations of$86.8 million and$66.9 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Key metrics and select financial data Deliveries We delivered 154 and 122 vehicles in the nine months endedSeptember 30, 2021 and 2020, respectively. We delivered battery systems for 134 and 74 vehicles in the nine months endedSeptember 30, 2021 and 2020, respectively. Deliveries is an indicator of our ability to convert awarded orders into revenue and demonstrates the scaling of our operations. Vehicles delivered represents the number of buses that have been accepted by our Proterra Transit customers during a period. Customers will accept a bus when they determine the bus meets their service requirements. Battery systems delivered represents the battery systems sold to OEMs that have met revenue recognition criteria during a period and is measured based on the number of underlying vehicles in which they are to be used. In addition to batteries, battery systems could include drivetrains and high voltage systems and controls, depending upon the customer contract. Growth rates between deliveries and total revenue are not perfectly correlated because our total revenue is affected by other variables, such as the mix of products sold during the period or other services provided in addition to the hardware delivered. Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure that we use to evaluate our ongoing operations and for internal planning and forecasting purposes, because, among other reasons, it eliminates the effect of financing, non-recurring items, capital expenditures, and non-cash expenses such as stock-based compensation and loss (gain) on valuation of derivative and warrant liabilities. We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Three Months Ended September 30, December 31, September 30, (in thousands) 2021 June 30, 2021 March 31, 2021 2020 2020 June 30, 2020 March 31, 2020 Adjusted EBITDA Reconciliation: Net income (loss)$ 36,321 $ (189,027) $ (52,162) $ (32,623) $ (46,860) $ (22,699) $ (24,825) Add (deduct): Interest expense, net 6,362 29,129 8,797 8,849 5,198 727 639 Provision for income taxes - - - 22 - - - Depreciation and amortization expense 3,938 3,978 3,759 4,043 3,696 4,091 3,706 Stock-based compensation expense 3,178 5,090 2,997 2,731 2,680 2,446 2,425 (Gain) loss on valuation of derivative and warrant liabilities (73,197) 129,789 16,321 (6,072) 19,061 - - Asset impairment charge - - - 121 - - - Adjusted EBITDA$ (23,398) $ (21,041) $ (20,288) $ (22,929) $ (16,225) $ (15,435) $ (18,055) Business Combination 41
-------------------------------------------------------------------------------- OnJune 14, 2021 , we consummated the transactions contemplated by the Agreement and Plan of Merger, dated as ofJanuary 11, 2021 (the "Merger Agreement"), by and amongArcLight Clean Transition Corp. ("ArcLight" and, after the Domestication as described below, "Proterra"), aCayman Islands exempted company,Phoenix Merger Sub, Inc. , aDelaware corporation and a wholly owned subsidiary of ArcLight ("Phoenix Merger Sub"), andProterra Inc , aDelaware corporation ("Legacy Proterra"). As contemplated by the Merger Agreement, onJune 11, 2021 , ArcLight filed a notice of deregistration with theCayman Islands Registrar of Companies, together with the necessary accompanying documents, and filed a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of theState of Delaware , under which ArcLight was domesticated and continues as aDelaware corporation (the "Domestication"). Further, onJune 14, 2021 , as contemplated by the Merger Agreement, Proterra consummated the merger contemplated by the Merger Agreement, whereby Phoenix Merger Sub merged with and into Legacy Proterra, the separate corporate existence of Phoenix Merger Sub ceasing and Legacy Proterra being the surviving corporation and a wholly owned subsidiary of Proterra (the "Merger" and, together with the Domestication and the other transactions contemplated by the Merger Agreement, the "Business Combination"). In addition, pursuant to subscription agreements entered into in connection with the Merger Agreement, certain investors purchased an aggregate of 41,500,000 shares of Proterra common stock (the "PIPE Investors ") concurrently with the closing of the Business Combination (the "Closing") for an aggregate purchase price of$415,000,000 (the "PIPE Financing"). We received$649.3 million in net cash proceeds upon Closing to fund our growth initiatives, including research and development and our next-generation battery program. Key factors affecting our performance COVID-19 Pandemic: The outbreak of the novel coronavirus COVID-19, which was declared a pandemic by theWorld Health Organization onMarch 11, 2020 , has led to adverse impacts on theU.S. and global economies and created uncertainty regarding potential impacts to our supply chain, operations, and customer demand. Our manufacturing operations, and our transit agency customers, have been designated as an "Essential Business" under applicable public health orders. We made adjustments to our business operations and have continued to operate with limited interruptions sinceMarch 2020 with no material adverse impact to our operations, financial position, or liquidity throughSeptember 30, 2021 . Most recently, during the third quarter of 2021, our vehicle deliveries were impacted by constraints and inefficiencies in production driven by shortages in parts, particularly resin for connectors, resulting from global supply chain disruptions stemming from the pandemic. Although we achieved revenue growth during the three and nine months endedSeptember 30, 2021 compared to 2020, these disruptions decreased our revenue and increased our overhead, and our results for the fourth quarter of 2021 may continue to be impacted by supply chain issues. More generally, the COVID-19 pandemic is currently expected to continue to have an impact on our results of operations, financial position, and liquidity. If the outbreak, and related shutdowns, logistics delays, part shortages, production inefficiencies or extended customer order and acceptance processes, are prolonged or worsen, including as a result of variant strains of the virus, it could lead to more significant delays in production, the signing of new customer contracts, and customer acceptances of near-term deliveries. Ability to sell additional powertrains, vehicles, chargers and other products to new and existing customers Our results will be impacted by our ability to sell our battery systems, electrification solutions including charging and energy management software, and electric transit buses, to new and existing customers. We have had initial success with Proterra Powered establishing strategic partnerships and with Proterra Transit selling electric transit buses and chargers to more than 150 customers. Our growth opportunity is dependent on commercial vehicle manufacturers electrifying their product offerings and increasing production as well as transit agencies electrifying more of their fleets, both of which we believe will increase with continued improvement in battery performance and costs over time. Our ability to sell additional products to existing customers is a key part of our success, as follow-on purchases indicate customer satisfaction and decrease the likelihood of competitive substitution. In order to sell additional products to new and existing customers, we will need to continue to invest significant resources in our products and services. If we fail to make the right investment decisions in our technology and electrification solutions, including our battery systems and electrification and charging solutions, if customers do not adopt our technology or our products and services, or if our competitors are able to develop technology or products and services that are superior to ours, our business, prospects, financial condition, and operating results could be adversely affected. 42 -------------------------------------------------------------------------------- Ability to improve profit margins and scale our business We intend to continue investing in initiatives to improve our operating leverage and significantly ramp production. We believe continued reduction in costs and an increase in production volumes will enable commercial vehicle manufacturers to electrify faster. Purchased materials represent the largest component of cost of goods sold in all products and we continue to explore ways to reduce these costs through improved design for cost, strategic sourcing, long-term contracts, and in some cases vertical integration. We launched two new manufacturing facilities in 2017 and a new battery manufacturing facility in 2020. We believe that an increase in volume and additional experience will allow us to leverage those investments and reduce our labor and overhead costs, as well as our freight costs, as a percentage of total revenue. By reducing material costs, increasing facility utilization rates and improving overall economies of scale, we can reduce prices while maintaining or growing gross margins of our products to improve customers' total cost of ownership and help accelerate commercial electric vehicle adoption. Our ability to achieve our cost-saving and production-efficiency objectives could be negatively impacted by a variety of factors including, among other things, lower-than-expected facility utilization rates, manufacturing and production cost overruns, increased purchased material costs, and unexpected supply-chain quality issues or interruptions. If we are unable to achieve our goals, we may not be able to reduce price enough to accelerate commercial vehicle electrification and our cost of goods sold and operating costs could be greater than anticipated, which would negatively impact gross margin and profitability. Continued emissions regulation and environmental stewardship Our business benefits from international, federal, state, and local government interest in regulating air pollution and greenhouse gas emissions that contribute to global climate change. InJuly 2020 , 15 states, includingCalifornia andNew York , pledged to work jointly towards a unified goal of zero emissions for 100% of new sales of medium- and heavy-duty commercial vehicles by 2050. InAugust 2019 , theEuropean Union passed Regulation 2019/1242, mandating a reduction in emissions from new trucks by 2025 and 2030. In addition, a growing number of cities and transit agencies have pledged to convert their entire transit bus fleets to zero-emission vehicles by a specific target date, and many have already begun to purchase electric vehicles in order to meet this goal. For example, onDecember 14, 2018 , theCalifornia Air Resources Board adopted a state-wide mandate, the Innovative Clean Transit Rule, mandating transit agencies to commit to purchasing zero-emission buses starting in 2029.The Infrastructure Investment and Jobs Act passed by theU.S House of Representatives onNovember 5 , 2021would provide additional funding for electric vehicles and electric vehicle charging infrastructure through the creation of new programs and grants and the expansion of existing programs, including over$4.0 billion to replace existing buses with zero emission buses and at least$2.5 billion to replace existing school buses with zero emission school buses. The move away from diesel- and natural gas-powered commercial vehicles is a significant step forward to accelerate the use of advanced technologies in medium- and heavy-duty vehicles to meet air quality and public health, thereby boosting near-term deployment of battery-electric commercial vehicles. As legacy internal combustion engine technology becomes more heavily regulated and costly across the globe, commercial vehicle manufacturers are investing in electrification. While this investment may increase competition, we believe that it will also increase customer demand, and help build the necessary supply chain and adjacent industry investments to support powertrain electrification. However, the uncertainty related to the passage of new legislation could impact the timing and number of vehicle orders, and any reduction in governmental interest in emissions regulation could negatively impact our business prospects or operating results. Government programs accelerating adoption of zero-emission vehicles Federal and state funding has accelerated the adoption of electric vehicles in our target markets. For instance, ourU.S. transit customers have partially funded electric bus purchases through competitive grant programs, including the Low or No Emission Vehicle Program authorized by the federal Fixing America's Surface Transportation Act in 2015, and other state-specific funding. In each of the last two years, we have acquired, on average, 12 new customerswho partnered with us to apply for competitive grants through the Low or No Emission Vehicle Program. Inthe United States , states are also allocating portions of settlement funds from the approximately$15 billion Volkswagen Emissions Settlement Program to investments in zero-emission transit buses and school buses. We expect that the continued availability of government funding for our customers to help fund purchases of our electric transit buses and battery systems will remain an important factor in our company's growth prospects. 43 -------------------------------------------------------------------------------- Components of results of operations Revenue We derive revenue primarily from the sale of vehicles, the sale of battery packs and powertrain systems, the sale and installation of charging systems and related equipment, as well as the sale of spare parts and other services provided to customers. Product revenue. Product revenue consists of revenue earned from the sale of vehicles, sale of battery packs and powertrain systems as well as sales and installation of charging systems. We generally recognize product revenue from contracts with customers for the sales of our vehicles once we deliver a vehicle to a customer. A vehicle is considered delivered once a customer has accepted it. Acceptance generally occurs once the customer has completed its inspection of the vehicle and determined it to be operating as defined in the applicable contract. Revenue from the sale of battery packs and powertrain systems is typically recognized upon shipping. Revenue from sales and installation of charging systems is typically recognized upon acceptance by the customer. Under certain contract arrangements, revenue related to the charging systems is recognized over the installation period using an input measure based on costs incurred to date relative to total estimated costs to completion. Product revenue also includes revenue from leasing vehicles and charging systems under operating leases. Revenue from operating lease arrangements is recognized ratably over the life of those contracts. The amount of product revenue we recognize in a given period depends on the number of vehicles accepted in a given period and on the type of financing used by the customer. Parts and other service revenue. Parts and other service revenue includes sales of spare parts, revenue earned from the development of electric vehicle powertrain components, the design and development of battery and drive systems for other vehicle manufacturers, and sales of extended warranties. The amount of parts and service revenue tends to grow with the number of vehicles delivered. However, variability can exist as customers have different methodologies for sourcing spare parts for their fleets. Revenue related to the design, development and integration of battery and drive systems is typically recognized upon shipping or delivery of services and prototypes, depending on the terms in customer contracts. For a description of our revenue recognition policies, see the section titled "- Critical Accounting Policies and Estimates." Cost of goods sold Product cost of goods sold. Product cost of goods sold consists primarily of direct material and labor costs, manufacturing overhead, other personnel-related expenses, which include salaries, bonuses, benefits, and stock-based compensation expense, reserves for estimated warranty costs, freight expense, and depreciation expense. Product cost of goods sold also includes charges to write-down the carrying value of inventory when it exceeds its estimated net realizable value, including on-hand inventory that is either obsolete or in excess of forecasted demand. We expect our product cost of goods sold to increase in absolute dollars in future periods as we sell more vehicles and charging systems. As we grow into our current capacity and execute on cost-reduction initiatives, we expect our product cost of goods sold as a percentage of revenue to decrease over time. Parts and other service cost of goods sold. Parts and other service cost of goods sold consists primarily of material costs and the cost of services provided, including field service costs and costs related to our development team. We record costs of development services incurred in periods prior to the finalization of an agreement as research and development expense. Once a development agreement is finalized, we record these costs in parts and other service cost of goods sold. We expect our parts and other service cost of goods sold to increase in absolute dollars in future periods as more customers put additional vehicles into service and sign new development agreements. Because purchased materials comprise more than 50% of cost of goods sold, lowering our bill of materials cost is our most critical cost reduction initiative. Bill of materials cost reduction is a cross-functional effort involving engineering, supply chain, manufacturing, and finance. These cost-reduction efforts have yielded improvements in bill of materials costs since 2018, and we have identified additional opportunities to address cost reduction in the near and medium term. 44 -------------------------------------------------------------------------------- Gross profit and margin Gross profit is total revenue less total cost of goods sold. Gross margin is gross profit expressed as a percentage of total revenue. Our gross profit (loss) and margin may fluctuate from period-to-period. Such fluctuations have been and will continue to be affected by a variety of factors, including the timing of vehicle acceptance, mix of products sold, manufacturing costs, financing options, and warranty costs. We expect our gross margin to improve over time as we continue to scale our operations and execute on cost reduction initiatives. Operating expenses Research and development. Research and development expense consists primarily of personnel-related expenses, consulting and contractor expenses, validation and testing expense, prototype parts and materials, depreciation expense, and allocated overhead costs. ThroughSeptember 30, 2021 , we have expensed certain software development costs related to our fleet and energy management platform as incurred because technological feasibility has not been fully achieved. We intend to continue to make significant investments in developing new products and enhancing existing products. Research and development expense will be variable relative to the number of products that are in development, validation or testing. However, we expect it to decline as a percentage of total revenue over time. Selling, general and administrative. Selling, general and administrative expenses consist primarily of personnel-related expenses for our sales, marketing, supply chain, finance, legal, human resources, and administrative personnel, as well as the costs of customer service, information technology, professional services, insurance, travel, allocated overhead, and other marketing, communications and administrative expenses. We will continue to actively promote our products. We also expect to invest in our corporate organization and incur additional expenses associated with transitioning to, and operating as, a public company, including increased legal and accounting costs, investor relations costs, higher insurance premiums, and compliance costs. As a result, we expect that selling, general and administrative expenses will increase in absolute dollars in future periods but decline as a percentage of total revenue over time. Interest expense, net Interest expense, net consists primarily of interest expense associated with our debt facilities and amortization of debt discount and issuance costs. Interest income consists primarily of interest income earned on our cash and cash equivalents and short-term investments balances. (Gain) loss on valuation of derivative and warrant liabilities (Gain) loss on valuation of derivative and warrant liabilities relates to the changes in the fair value of derivative and warrant liabilities, which are subject to remeasurement at each balance sheet date. Other expense, net Other expense, net primarily relates to currency fluctuations that generate foreign exchange gains or losses on invoices denominated in currencies other than theU.S. dollar, sublease income, amortization of short-term investment premium/discount and other non-operational financial gains or losses. 45 --------------------------------------------------------------------------------
Results of operations The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. Percentages presented in the following tables may not sum due to rounding.
Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Product revenue$ 59,907 $ 46,142 $ 167,401 $ 137,253 Parts and other service revenue 2,034 1,395 7,048 5,543 Total revenue 61,941 47,537 174,449 142,796 Product cost of goods sold 57,034 43,949 162,513 130,505 Parts and other service cost of goods sold 2,244 1,679 7,089 5,862 Total cost of goods sold (1) 59,278 45,628 169,602 136,367 Gross profit (loss) 2,663 1,909 4,847 6,429 Research and development (1) 11,296 9,229 31,311 26,133 Selling, general and administrative (1) 21,123 15,240 60,327 47,165 Total operating expenses 32,419 24,469 91,638 73,298 Loss from operations (29,756) (22,560) (86,791) (66,869) Interest expense, net 6,362 5,198 44,288 6,564 (Gain) loss on valuation of derivative and warrant liabilities (73,197) 19,061 72,913 19,061 Other expense, net 758 41 876 1,890 Income (loss) before income taxes 36,321 (46,860) (204,868) (94,384) Provision for income taxes - - - - Net income (loss)$ 36,321 $ (46,860) $ (204,868) $ (94,384) __________________
(1)Includes stock-based compensation as follows:
Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Cost of goods sold$ 319 $ 235 $ 865 $ 688 Research and development 567 461 1,625 1,183 Selling, general and administrative 2,292 1,984 8,775 5,680
Total stock-based compensation expense
46 --------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Product revenue 97 % 97 % 96 % 96 % Parts and other service revenue 3 3 4 4 Total revenue 100 100 100 100 Product cost of goods sold 92 92 93 91 Parts and other service cost of goods sold 4 4 4 4 Total cost of goods sold (1) 96 96 97 95 Gross profit 4 4 3 5 Research and development (1) 18 19 18 18 Selling, general and administrative (1) 34 32 35 33 Total operating expenses 52 51 53 51 Loss from operations (48) (47) (50) (46) Interest expense, net 10 11 25 5 (Gain) loss on valuation of derivative and warrant liabilities (118) 40 42 13 Other (income) expense, net 1 - 1 1 Income (Loss) before income taxes 59 (98) (118) (65) Provision for income taxes - - - - Net income (loss) 59 % (98) % (118) % (65) % __________________
(1)Includes stock-based compensation expense as follows:
Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Cost of goods sold 1 % - % - % - % Research and development 1 1 1 1 Selling, general and administrative 4 4 5 4 Total stock-based compensation expense 5 % 6 % 6 % 5 % Comparison of the Three and Nine Months EndedSeptember 30, 2021 and 2020 Revenue Three Months Ended September 30, $ % Nine Months Ended September 30, $ % (dollars in thousands) 2021 2020 Change Change 2021 2020 Change Change Product revenue$ 59,907 $ 46,142 $ 13,765 30 %$ 167,401 $ 137,253 $ 30,148 22 % Parts and other service revenue 2,034 1,395 639 46 7,048 5,543 1,505 27 Total revenue$ 61,941 $ 47,537 $ 14,404 30 %$ 174,449 $ 142,796 $ 31,653 22 % Total revenue increased by$14.4 million in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The increase was primarily due to a$18.8 million increase from sale of buses. We delivered 52 buses in the three months endedSeptember 30, 2021 as compared to 33 buses delivered in the three months endedSeptember 30, 2020 . The three months endedSeptember 30, 2020 were impacted by COVID-19 as we slowed production to mitigate for any potential supply risks or impacts to our employees. We delivered battery systems for 78 and 32 vehicles in the three months endedSeptember 30, 2021 and 2020, respectively. As a result, revenue for these systems increased by$4.7 million in the three months endedSeptember 30, 2021 . Revenue from charging systems and installation decreased by$10.5 million in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . This year over year decrease in revenue from charging systems and installations was due to higher revenue in the three months endedSeptember 20, 2020 resulting from certain large infrastructure projects completed in that quarter and lower revenue in the three months endedSeptember 30, 2021 resulting from supplier constraints and delays in equipment delivery. 47 -------------------------------------------------------------------------------- Total revenue increased by$31.7 million in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase was primarily due to$26.9 million increase from sale of buses and a$7.9 million increase from battery systems but was offset by a$3.5 million decrease in revenue from charging systems and installation. We delivered 154 buses in the nine months endedSeptember 30, 2021 as compared to 122 buses delivered in the nine months endedSeptember 30, 2020 . We delivered battery systems for 134 and 74 vehicles in the nine months endedSeptember 30, 2021 and 2020, respectively. Revenue from charging systems and installation declined in the nine months endedSeptember 30, 2021 mainly due to a supplier constraint which led to delays in equipment delivery as well as timing of certain large projects that were completed in the third quarter of 2020. Cost of goods sold and gross profit Three Months Ended September 30, $ % Nine Months Ended September 30, $ % (dollars in thousands) 2021 2020 Change Change 2021 2020 Change Change Product cost of goods sold$ 57,034 $ 43,949 $ 13,085 30 %$ 162,513 $ 130,505 $ 32,008 25 % Parts and other service cost of goods sold 2,244 1,679 565 34 7,089 5,862 1,227 21 Total cost of goods sold 59,278 45,628 13,650 30 169,602 136,367 33,235 24 Gross profit$ 2,663 $ 1,909 $ 754 39 %$ 4,847 $ 6,429 $ (1,582) (25) % Cost of goods sold increased by$13.7 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The$13.1 million increase in product cost of goods sold in the three months endedSeptember 30, 2021 was primarily driven by the increase in vehicles delivered and lower productivity levels in the production process as part shortages led to inefficiency. The$0.6 million increase in parts and other service cost of goods sold was the result of the increased cost of the service department. Cost of goods sold increased by$33.2 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The$32.0 million increase in product cost of goods sold in the nine months endedSeptember 30, 2021 was primarily driven by the increase in vehicles delivered and an increase in product warranty expense. The$1.2 million increase in parts and other service cost of goods sold was the result of the increased volume and product mix of prototype revenue and increased cost of the service department. Gross profit increased by$0.8 million to$2.7 million in the three months endedSeptember 30, 2021 compared to$1.9 million in the three months endedSeptember 30, 2020 . Gross profit decreased by$1.6 million in the nine months endedSeptember 30, 2021 compared the nine months endedSeptember 30, 2020 . Gross profit was negatively impacted by unabsorbed labor and manufacturing overhead costs caused by COVID-19 related supply chain interruption and delays in production for all the periods presented. Operating expenses Research and development Three Months Ended September Nine Months Ended September 30, $ % 30, $ % (dollars in thousands) 2021 2020 Change Change 2021 2020 Change Change Research and development$ 11,296 $ 9,229 $ 2,067 22 %$ 31,311 $ 26,133 $ 5,178 20 % Research and development expense increased by$2.1 million for the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 . The$2.1 million increase was primarily due to an increase in personnel related expenses and stock-based compensation of$2.0 million to support increased product development efforts. Research and development expense increased by$5.2 million for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . The$5.2 million increase was primarily due to an increase in personnel related expenses and stock-based compensation of$4.4 million to support the increased product development efforts, and an increase in IT expense of$0.6 million . 48 --------------------------------------------------------------------------------
Selling, general and administrative
Three Months Ended September Nine Months Ended September 30, $ % 30, $ % (dollars in thousands) 2021 2020 Change Change 2021 2020 Change Change Selling, general and administrative$ 21,123 $ 15,240 $ 5,883 39 %$ 60,327 $ 47,165 $ 13,162 28 % Selling, general and administrative expense increased by$5.9 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . The$5.9 million increase was primarily due to an increase in personnel related expenses and stock-based compensation of$2.4 million , an increase in insurance expense of$1.4 million , an increase in professional fees of$0.8 million , an increase in IT expense of$0.5 million due to increased cybersecurity measures, more users and incremental data usage costs, and an increase in travel expense of$0.5 million , as COVID-19 restrictions have relaxed. Selling, general and administrative expense increased by$13.2 million for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . The$13.2 million increase was primarily due to an increase in personnel related expenses and stock-based compensation of$6.9 million , an increase in legal fees and potential settlement expenses of$3.1 million , an increase in insurance expense of$2.1 million , and an increase in IT expense of$1.5 million due to increased cybersecurity measures, more users and incremental data usage costs. Interest expense, net Three Months Ended September Nine Months Ended September 30, $ % 30, $ % (dollars in thousands) 2021 2020 Change Change 2021 2020 Change Change Interest income$ (749) $ (56) $ (693) 1238 %$ (458) $ (177) $ (281) 159 % Interest expense 7,111 5,254 1,857 35 44,746 6,741 38,005 564 Interest expense, net$ 6,362 $ 5,198 $ 1,164 22 %$ 44,288 $ 6,564 $ 37,724 575 % Interest expense, net increased by$1.2 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 due to higher average debt levels in the quarter driving higher interest expense, offset by higher interest income on higher cash and investment balances. Interest expense, net increased by$37.7 million for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . The increase was primarily due to the write-off of$21.0 million of unamortized debt issuance costs associated with the secured convertible promissory notes (the "Convertible Notes") with an original aggregate principal of$46.5 million that were converted upon the Closing of the Merger, and additional interest expense resulting from the original aggregate principal of$200.0 million of Convertible Notes issued inAugust 2020 . These amounts were offset by increased interest income earned on investments from cash equivalents and short-term investments. For more information regarding the Convertible Notes, see "-Liquidity and capital resources" below. (Gain) loss on valuation of derivative and warrant liabilities Three Months Ended September Nine Months Ended September 30, $ % 30, $ % (dollars in thousands) 2021 2020 Change Change 2021 2020 Change Change (Gain) loss on valuation of derivative and warrant liabilities$ (73,197) $ 19,061 $ (92,258) NM$ 72,913 $ 19,061 $ 53,852 NM The$73.2 million gain in the three months endedSeptember 30, 2021 was attributable to the$31.7 million and$41.5 million change in fair value when revaluing the liabilities arising from the private placement warrants and public warrants, respectively. The$72.9 million loss in the nine months endedSeptember 30, 2021 was related to losses on revaluation of the derivative and warrant liabilities arising from the Convertible Notes of$111.7 million and$47.3 million , respectively, offset by the$37.8 million and$48.3 million gains recognized on revaluation of the liabilities arising from the private placement warrants and public warrants, respectively. 49 -------------------------------------------------------------------------------- The$19.1 million loss in the three and nine months endedSeptember 30, 2020 was mainly related to the fair value change of derivative liabilities arising from the Convertible Notes. Other expense, net Three Months Ended September Nine Months Ended September 30, $ % 30, $ % (dollars in thousands) 2021 2020 Change Change 2021 2020 Change Change Other expense, net$ 758 $ 41 $ 717 1749 %$ 876 $ 1,890 $ (1,014) (54) % Other expense, net includes currency fluctuations that generate foreign exchange gains or losses on invoices denominated in currencies other than theU.S. dollar, sublease income and other non-operational financial losses. In the three months endedSeptember 30, 2021 , other expense increased by$0.7 million compared to the three months endedSeptember 30, 2020 , mainly due to amortization of short-term investment premiums. In the nine months endedSeptember 30, 2021 , we recognized other expense of$0.9 million , compared to$1.9 million for the nine months endedSeptember 30, 2020 . The higher expense in the nine months endedSeptember 30, 2020 was mainly due to foreign exchange rate fluctuations in the first quarter of 2020, and other non-operational financial gains or losses. Provision for income taxes We are subject to income taxes inthe United States and certain states, but due to our net operating loss position and full valuation allowance, we have not recognized any material provision or benefit throughSeptember 30, 2021 . Liquidity and capital resources As ofSeptember 30, 2021 , we had cash and cash equivalents and short-term investments of$727.5 million . Our primary requirements for liquidity and capital are investment in new products and technologies, the improvement and expansion of new and existing manufacturing facilities, working capital, debt service, and general corporate needs. Prior to the Business Combination, these cash requirements have been met through the net proceeds we received through private sales of equity securities, borrowings under our credit facilities, and payments received from customers. We believe that our sources of existing cash and cash equivalents and short-term investments, funds raised in connection with the Business Combination and the PIPE Financing, funds available under our Senior Credit Facility described in more detail below, and payments from customers will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months. However, if we are unable to generate sufficient cash flows from operations in the future, or fund availability under our Senior Credit Facility is not sufficient, we may have to obtain additional equity or debt financing. The issuance and sale of additional equity would result in further dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could result in significant financial and operating covenants that would restrict our operations. We cannot assure you that we will be able to obtain refinancing or additional financing on favorable terms or at all. With the funds raised in connection with the Business Combination and the PIPE Financing, we expect no additional capital will be needed to execute our business plan over the next 12 months. We will continue to invest in increasing and optimizing production and expanding the portfolio of products and services. These investments will be approached with a view to improving profitability in the long-term. Senior Credit Facility InMay 2019 , we entered into a Loan, Guaranty and Security Agreement (the "Senior Credit Facility"), which is a senior secured asset-based lending facility with borrowing capacity up to$75.0 million . The Senior Credit Facility is available on a revolving basis through the earlier ofMay 2024 or 91 days prior to the stated maturity of any subordinated debt in aggregate amount of$7.5 million or more. The maximum availability under the Senior Credit Facility is based on certain specified percentages of eligible accounts receivable and inventory, subject to certain reserves, to be determined in accordance with the Senior Credit Facility. The commitment under the Senior Credit Facility includes a$15.0 million letter of credit sub-line. Subject to certain conditions, the commitment may be increased by$50.0 million upon approval by the lender, and at our option, the commitment can be reduced to$25.0 million or terminated upon at least 15 days written notice. 50 -------------------------------------------------------------------------------- The Senior Credit Facility is secured by a security interest on substantially all our assets except for intellectual property and other restricted property. Borrowings under the Senior Credit Facility bear interest at per annum rates equal to, at our option, either (i) the base rate plus an applicable margin for base rate loan, or (ii) the London Interbank Offered Rate, or LIBOR, plus an applicable margin for LIBOR loan. The base rate is calculated as the greater of (a) the Lender prime rate, (b) the federal funds rate plus 0.5%, and (c) one-month LIBOR plus 1.0%. The applicable margin is calculated based on a pricing grid linked to quarterly average excess availability (as a percentage of borrowing capacity). For base rate loans, the applicable margin ranges from 0.0% to 1.5%, and for LIBOR Loans, it ranges from 1.5% to 3.0%. The unused line fee is 0.375% per annum of the actual daily amount of the unutilized revolver commitment and will be reduced to 0.25% under certain conditions. The Senior Credit Facility contains certain customary non-financial covenants. In addition, the Senior Credit Facility requires us to maintain a Fixed Charge Coverage Ratio of at least 1.00:1.00 during such times as a covenant trigger event shall exist. As ofSeptember 30, 2021 , we do not have an outstanding balance under this credit facility although we are utilizing the facility's borrowing capacity for letters of credit. Small Business Administration Loan InMay 2020 , we receivedSmall Business Administration ("SBA") loan proceeds of$10.0 million from Town Center Bank pursuant to the Paycheck Protection Program (the "PPP loan") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The PPP loan was in the form of a note that matures onMay 6, 2022 . As ofSeptember 30, 2021 , the interest rate is 1.0% per annum and interest is payable monthly commencing inOctober 2021 . All or a portion of the loan may be forgiven by the SBA upon application with supporting documentation of expenditures in accordance with SBA requirements, which include employees being kept on the payroll for eight weeks after the date of the loan and the proceeds being used for payroll, rent, mortgage interest, or utilities. Secured Convertible Promissory Notes InAugust 2020 , we entered into a Note Purchase Agreement for Secured Convertible Promissory Notes. The Convertible Notes had an original aggregate principal amount of$200.0 million as of the issuance date, with a cash interest of 5.0% per annum payable at each quarter end and a paid-in-kind interest of 4.5% per annum payable by increasing the principal balance at each quarter end. The Convertible Notes will mature inAugust 2025 , and the Company may not make prepayment unless approved by the required holders of the Convertible Notes. At the closing of the Merger, certain Convertible Notes holders with original aggregate principal amount of$46.5 million elected to convert their Convertible Notes at the Closing of the Merger resulting in the issuance of 7.4 million shares of common stock. At any time after the expiration of the lock-up period following the Closing of the Merger, the remaining outstanding Convertible Notes will automatically be converted into common stock if the volume-weighted average price of the common stock over a period of 20 consecutive trading days exceeds 150% of the conversion price. Based on the determined conversion price, the automatic conversion of the Convertible Notes will be triggered based on a VWAP of$9.86 per share. Each of the Convertible Notes shall rank equally without preference or priority of any kind over one another, but senior in all rights, privileges and preferences to all other shares of our capital stock and all other securities that are convertible into or exercisable for our capital stock directly or indirectly. Prior to the maturity date or conversion of the entire balance of the Convertible Notes, in the event of a liquidation or sale of the Company, we shall pay to the holders of Convertible Notes the greater of (i) 150% of the principal balance of the Convertible Notes or (ii) the consideration that the holders would have received had the holders elected to convert the Convertible Notes into preferred stock immediately prior to such liquidation event. The Convertible Notes do not entitle the holders to any voting rights or other rights as a stockholder of the Company, unless and until the Convertible Notes are actually converted into shares of our capital stock in accordance with their terms. 51 -------------------------------------------------------------------------------- The Note Purchase Agreement contains certain customary non-financial covenants. In addition, the Note Purchase Agreement requires us to maintain liquidity at quarter end of not less than the greater of (i)$75.0 million and (ii) four times of cash burn for the three-month period then ended. In connection with the issuance of the Convertible Notes, we issued to the purchasers of the Convertible Notes warrants to purchase 4.6 million shares of our stock at an exercise price of$0.02 per share. These warrants are freestanding financial instruments and, prior to the Closing, were classified as liability due to the possibility that they could become exercisable into Legacy Proterra convertible preferred stock. The warrant liability was remeasured on a recurring basis at each reporting period date, with the change in fair value reported in the statement of operations. Upon any exercise of the warrants to common stock within 5 years from issuance date, the carrying amount of the warrant liability was reclassified to stockholders' equity. Upon the consummation of the Merger, the stock issuable upon exercise of the warrants is Proterra common stock, with no possibility to convert to Legacy Proterra convertible preferred stock. As a result, the carrying amount of the warrant liability was reclassified to stockholders' equity. The loss from change in fair value of the warrant liability was$47.3 million for the nine months endedSeptember 30, 2021 . An aggregate of$69.3 million in warrant liability was reclassified to additional paid-in capital upon exercise and consummation of the Merger. As ofSeptember 30, 2021 , 3.4 million warrants were outstanding. Prior to the Closing, the embedded features of the Convertible Notes were composed of conversion options that had the economic characteristics of a contingent early redemption feature settled in shares of our stock rather than cash, because the total number of shares of our stock delivered to settle these embedded features would predominantly have a fixed value. These conversion options were bifurcated and accounted for separately from the host debt instrument. The derivative liability of$68.5 million was initially measured at fair value on its issuance date and recorded as a debt discount and was amortized during the term of the Convertible Notes to interest expense using effective interest method. The derivative liability was remeasured on a recurring basis at each reporting period date, with the change in fair value reported in the statement of operations. The loss from the change in fair value of the derivative liability was$111.7 million for the nine months endedSeptember 30, 2021 . Upon the consummation of the Merger, the embedded conversion features associated with the Convertible Notes were no longer qualify for derivative accounting since the conversion price became fixed. The$182.6 million carrying amount of the embedded derivative, fair value as of the date of the Closing, was reclassified to stockholders' equity in accordance with Topic 815, Derivatives and Hedging. As ofSeptember 30, 2021 , the outstanding balance of the Convertible Notes was$161.5 million including PIK interest of$8.0 million . Performance bonds and Letters of Credit Public transit agencies may require their suppliers to obtain performance bonds from surety companies or letters of credit to protect against non-performance. These performance guarantees are normally valid from contract effective date to completion of the contract, which is generally upon customer acceptance of the vehicle. Surety companies limit the maximum coverage they will provide based on financial performance and do not provide committed bonding facilities. Currently, we are required to cash collateralize a portion of the total performance bond amount. The collateral provided is shown as restricted cash on the balance sheet. As ofSeptember 30, 2021 , we had$12.6 million of restricted cash related to performance bonds. We believe that we currently have sufficient capacity to meet the performance guarantee needs of our business through our arrangements with our primary surety provider. We have a long-term supply agreement with a supplier,who requested that we provide a letter of credit as guarantee of payment. As ofSeptember 30, 2021 , we had a$10.0 million standby letter of credit outstanding with this supplier. 52 -------------------------------------------------------------------------------- Cash flows The following table summarizes our cash flows: Nine Months Ended September 30, (in thousands) 2021 2020 Cash flows (used in) provided by: Operating activities$ (72,251) $ (59,592) Investing activities (391,865) (44,741) Financing activities 633,521 202,720
Net increase in cash and cash equivalents, and restricted cash
Operating activities Net cash used in operating activities in the nine months endedSeptember 30, 2021 was$72.3 million compared to$59.6 million in the nine months endedSeptember 30, 2020 . The increase of cash used in operating activities in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was mainly due to higher net losses and increases in working capital due to growth of our business. The increase in net loss of$110.5 million between the comparison periods included$53.9 million of non-cash loss on change in the fair value of derivative and warrant liabilities. Non-cash interest expense and debt discount and issuance costs amortization increased by$34.3 million and stock-based compensation expense increased by$3.7 million in the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . In the nine months endedSeptember 30, 2021 , cash provided by operating activities included$22.0 million and$0.9 million related to accounts payable and accrued liabilities and other non-current liabilities, respectively, but was more than offset by cash used in inventory, accounts receivable, and prepaid expenses and other current assets of$9.6 million ,$8.2 million , and$5.2 million respectively. In the nine months endedSeptember 30, 2020 , cash provided by operating activities included$5.3 million and$4.2 million related to deferred revenue and other non-current liabilities, respectively, and was more than offset by cash used in inventory, accounts payable and accrued liabilities, accounts receivable, and prepaid expenses and other current assets of$4.9 million ,$4.1 million ,$2.6 million and$2.6 million , respectively. Investing activities Net cash used in investment activities was$391.9 million in the nine months endedSeptember 30, 2021 compared to$44.7 million in the nine months endedSeptember 30, 2020 . The$347.1 million increase was primarily driven by a net increase of$354.0 million related to the purchase of short-term investments net of maturity and sales offset by lower capital expenditures. The increased investment in short-term investments was driven by our investment of the net proceeds from the Business Combination. Capital expenditures decreased by$6.9 million due to higher spending in the nine months endedSeptember 30, 2020 related to the expansion of battery production in ourCity of Industry facility. Financing activities Net cash provided by financing activities was$633.5 million for the nine months endedSeptember 30, 2021 as compared to$202.7 million for the nine months endedSeptember 30, 2020 . The net cash provided by financing activities for the nine months endedSeptember 30, 2021 primarily resulted from net proceeds of$644.8 million from the Business Combination and the PIPE Financing and$5.5 million from the exercise of stock options and warrants, which was partially offset by a Senior Credit Facility repayment of$17.1 million . In the nine months endedSeptember 30, 2020 , we received proceeds from borrowings of$200.0 million through the issuance of the Convertible Notes,$14.3 million under the Senior Credit Facility, and$10.0 million from the PPP loan, offset by a$12.8 million repayment under the Senior Credit Facility and a$10.0 million repayment of a prior credit facility with Hercules Capital, Inc. 53 -------------------------------------------------------------------------------- Contractual obligations The following table summarizes our non-cancelable contractual obligations as ofSeptember 30, 2021 (in thousands): Payments Due By Period Less Than More Than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years Leases(1)$ 10,661 $ 3,960 $ 4,966 $ 1,735 $ - Debt principal(2) 171,494 10,000 - 161,494 - Purchase obligations(3) 623,716 208,151 415,565 - - Total$ 805,871 $ 222,111 $ 420,531 $ 163,229 $ - __________________ (1)Represents minimum operating lease payments under operating leases for office facilities and equipment, excluding potential lease renewals. (2)Including PIK interest added to principal balance throughSeptember 30, 2021 . (3)Represents purchase orders or contracts for the purchase of certain goods and services and purchase commitments. InAugust 2020 , we entered into a Note Purchase Agreement for the Convertible Notes, which had an original aggregate principal amount of$200.0 million as of the issuance date (and an original aggregate principal amount of$153.5 million as ofSeptember 30, 2021 ) and will mature inAugust 2025 . We may not prepay the Convertible Notes unless approved by the required holders of the Convertible Notes. The balances may be mandatorily converted into common stock if certain criteria met, pursuant to the terms specified in the Note Purchase Agreement. See Note 6 to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for details of conversion features. Off-balance sheet arrangements We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt, or operating our business. With the exception of letters of credit primarily used to support performance bond obligations, we do not have any off-balance sheet arrangements or relationships with entities that are not disclosed in our consolidated financial statements that have, or are reasonably likely to have, a material current or future effect on our financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources. In addition, we do not engage in trading activities involving non-exchange traded contracts. Critical accounting policies and estimates Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of financial statements in conformity withU.S. GAAP requires us to make estimates, assumptions, and judgments that affect amounts of assets and liabilities reported in the financial statements, the disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the applicable periods. We base our estimates, assumptions, and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments would change the estimates used in the preparation of our financial statements, which, in turn, could change the results from those reported. We evaluate our estimates, assumptions, and judgments on an ongoing basis. There have been no material changes to our critical accounting policies and estimates from the information provided in "Proterra's Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical accounting policies and estimates", which is incorporated by reference in the Super 8-K, except for the new accounting policies adopted during the three months endedJune 30, 2021 related to public warrants and private placement warrants. See Note 1 of the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for details. Recent accounting pronouncements not yet adopted See Note 2 of the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for recently issued accounting pronouncements not yet adopted. Item 3. Quantitative and Qualitative Disclosure About Market Risk 54 -------------------------------------------------------------------------------- We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate and foreign currency risks as follows: Interest rate risk As ofSeptember 30, 2021 , we had cash and cash equivalents and short-term investments of$727.5 million . Our cash and cash equivalents and short-term investments are held primarily inU.S. treasury and corporate debt securities and money market funds. We believe that we do not have any material exposure to changes in fair value as a result of changes in interest rates due to the short-term nature of these instruments. We have not been exposed to material risks on investment income due to changes in interest rates given the low levels of interest being earned. We are exposed to interest rate risk related to our indebtedness under the Senior Credit Facility that bears interest at floating rates based on the prime rate plus a specified margin. As ofSeptember 30, 2021 , we had no principal outstanding under the Senior Credit Facility. Foreign exchange risk We are exposed to foreign currency exchange rate risk, primarily related to certain raw material purchases denominated in Euros and certain accounts receivables from one customer denominated in Canadian dollars. Payments denominated in foreign currencies represented less than 5% of our total payments during the nine months endedSeptember 30, 2021 . Revenue from the customer with accounts receivable denominated in Canadian dollars was not material in the nine months endedSeptember 30, 2021 . The customer with accounts receivable denominated in Canadian dollars accounted for approximately 10% of our total revenue in the nine months endedSeptember 30, 2020 . The exchange rate fluctuations accounted for$0.1 million of other expense in the nine months endedSeptember 30, 2021 , and$0.9 million of other expense in the nine months endedSeptember 30, 2020 . The higher expense in 2020 was mainly due to foreign exchange rate fluctuations in the first quarter of 2020 as global markets reacted to the COVID-19 pandemic. As a result, we believe that we currently do not have any material exposure to changes in foreign currency exchange rates. Item 4. Controls and Procedures Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission (the "SEC"). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. As ofSeptember 30, 2021 , as required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective. Changes in Internal Control over Financial Reporting During the fiscal quarter endedSeptember 30, 2021 , we continue to be engaged in the process of design and implementation of our internal control over financial reporting in a manner commensurate with the scale of our operations subsequent to the Business Combination, including the enhancement of our internal and external technical accounting resources. 55
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