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 ended December 31, 2020 and the
related notes incorporated by referenced in our Current Report on Form 8-K,
filed with SEC on June 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. Through September 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 of September 30, 2021, we had installed approximately 59 MW of
charging infrastructure across more than 680 charge points throughout North
America.
Through September 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. Through September 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 in North 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 in North America, according to the FTA's National Transit Database, as
well as airports, universities, hospitals, and corporate shuttles. As of
September 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 of California and the cities of New York City, Chicago, and
Seattle, 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. In City of Industry, California, we operate a battery production
facility as well as a bus manufacturing facility. We also operate a battery
production facility in Burlingame, California. Our largest bus manufacturing
facility is located in Greenville, South Carolina. Battery manufacturing
capacity at our City 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 in Greenville, SC and City 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 ending September 30, 2020 our battery production was 84.0 MWh and in the
nine months ended September 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 ended September 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 ended September 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 ended September 30, 2021
and 2020, respectively.
Key metrics and select financial data
Deliveries
We delivered 154 and 122 vehicles in the nine months ended September 30, 2021
and 2020, respectively. We delivered battery systems for 134 and 74 vehicles in
the nine months ended September 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

--------------------------------------------------------------------------------

On June 14, 2021, we consummated the transactions contemplated by the Agreement
and Plan of Merger, dated as of January 11, 2021 (the "Merger Agreement"), by
and among ArcLight Clean Transition Corp. ("ArcLight" and, after the
Domestication as described below, "Proterra"), a Cayman Islands exempted
company, Phoenix Merger Sub, Inc., a Delaware corporation and a wholly owned
subsidiary of ArcLight ("Phoenix Merger Sub"), and Proterra Inc, a Delaware
corporation ("Legacy Proterra"). As contemplated by the Merger Agreement, on
June 11, 2021, ArcLight filed a notice of deregistration with the Cayman 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 the State of Delaware, under which
ArcLight was domesticated and continues as a Delaware corporation (the
"Domestication"). Further, on June 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
the World Health Organization on March 11, 2020, has led to adverse impacts on
the U.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 since March 2020 with no material adverse impact to our
operations, financial position, or liquidity through September 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 ended September 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. In July 2020, 15 states, including
California and New 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. In August 2019, the European 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, on December 14, 2018, the California 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 the U.S House of
Representatives on November 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, our U.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 customers who partnered
with us to apply for competitive grants through the Low or No Emission Vehicle
Program. In the 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. Through September 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 the U.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 $ 3,178 $ 2,680 $ 11,265 $ 7,551


                                       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 Ended September 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 ended September 30,
2021 compared to the three months ended September 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 ended September 30, 2021 as compared to 33 buses
delivered in the three months ended September 30, 2020. The three months ended
September 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 ended September 30, 2021 and
2020, respectively. As a result, revenue for these systems increased by $4.7
million in the three months ended September 30, 2021. Revenue from charging
systems and installation decreased by $10.5 million in the three months ended
September 30, 2021 compared to the three months ended September 30, 2020. This
year over year decrease in revenue from charging systems and installations was
due to higher revenue in the three months ended September 20, 2020 resulting
from certain large infrastructure projects completed in that quarter and lower
revenue in the three months ended September 30, 2021 resulting from supplier
constraints and delays in equipment delivery.
                                       47
--------------------------------------------------------------------------------

Total revenue increased by $31.7 million in the nine months ended September 30,
2021 compared to the nine months ended September 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 ended September 30, 2021 as compared to 122 buses delivered in the
nine months ended September 30, 2020. We delivered battery systems for 134 and
74 vehicles in the nine months ended September 30, 2021 and 2020, respectively.
Revenue from charging systems and installation declined in the nine months ended
September 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 ended
September 30, 2021 compared to the three months ended September 30, 2020. The
$13.1 million increase in product cost of goods sold in the three months ended
September 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 ended
September 30, 2021 compared to the nine months ended September 30, 2020. The
$32.0 million increase in product cost of goods sold in the nine months ended
September 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 ended
September 30, 2021 compared to $1.9 million in the three months ended September
30, 2020. Gross profit decreased by $1.6 million in the nine months ended
September 30, 2021 compared the nine months ended September 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
ended September 30, 2021 as compared to the three months ended September 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
ended September 30, 2021 as compared to the nine months ended September 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 ended September 30, 2021 compared to the three months ended
September 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 ended September 30, 2021 as compared to the nine months ended
September 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 ended
September 30, 2021 compared to the three months ended September 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 ended
September 30, 2021 as compared to the nine months ended September 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 in August 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 ended September 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 ended September 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 ended September 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 the U.S.
dollar, sublease income and other non-operational financial losses. In the three
months ended September 30, 2021, other expense increased by $0.7 million
compared to the three months ended September 30, 2020, mainly due to
amortization of short-term investment premiums. In the nine months ended
September 30, 2021, we recognized other expense of $0.9 million, compared to
$1.9 million for the nine months ended September 30, 2020. The higher expense in
the nine months ended September 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 in the 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 through September 30, 2021.
Liquidity and capital resources
As of September 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
In May 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 of May 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 of September 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
In May 2020, we received Small 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 on May 6,
2022. As of September 30, 2021, the interest rate is 1.0% per annum and interest
is payable monthly commencing in October 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
In August 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 in August 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 ended
September 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 of September 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 ended
September 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 of September 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 of September 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 of September 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 $ 169,405 $ 98,387




Operating activities
Net cash used in operating activities in the nine months ended September 30,
2021 was $72.3 million compared to $59.6 million in the nine months ended
September 30, 2020. The increase of cash used in operating activities in the
nine months ended September 30, 2021 compared to the nine months ended September
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 ended September 30, 2021 as compared to the nine months ended
September 30, 2020. In the nine months ended September 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 ended September 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
ended September 30, 2021 compared to $44.7 million in the nine months ended
September 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 ended September 30, 2020
related to the expansion of battery production in our City of Industry facility.
Financing activities
Net cash provided by financing activities was $633.5 million for the nine months
ended September 30, 2021 as compared to $202.7 million for the nine months ended
September 30, 2020. The net cash provided by financing activities for the nine
months ended September 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 ended
September 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 of
September 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 through September 30, 2021.
(3)Represents purchase orders or contracts for the purchase of certain goods and
services and purchase commitments.
In August 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 of September 30, 2021) and will mature in August 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 with U.S. GAAP.
The preparation of financial statements in conformity with U.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 ended June 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 of September 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 in U.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 of September 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 ended September 30, 2021. Revenue from the customer with
accounts receivable denominated in Canadian dollars was not material in the nine
months ended September 30, 2021. The customer with accounts receivable
denominated in Canadian dollars accounted for approximately 10% of our total
revenue in the nine months ended September 30, 2020. The exchange rate
fluctuations accounted for $0.1 million of other expense in the nine months
ended September 30, 2021, and $0.9 million of other expense in the nine months
ended September 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 the Securities 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 of September 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 ended September 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

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses