PROTERRA INC. 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, 2021 and the related notes incorporated by referenced in our Annual Report (the "Annual Report") on Form 10-K, filed withSEC onMarch 14, 2022 . This discussion contains forward-looking statements and involves numerous risks and uncertainties. As a result of many factors, including those factors set forth in Part II, Item 1A entitled "Risk Factors," our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read Part II, Item 1A entitled "Risk Factors" to gain an understanding of the important factors that could cause actual results to differ materially from our 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.
Our business is organized into two business units comprised of three business lines, with each business line addressing a critical component of the commercial vehicle electrification. •Proterra Powered & Energy is our business unit that provides 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, and coach buses, as well as 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 vehicles 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 commercial vehicle electrification technology was through Proterra Transit's heavy-duty electric transit bus, which we designed from the ground up for the North American market. Our industry experience, the performance of our transit buses, and compelling total cost of ownership has helped make us a leader in theU.S. electric transit bus market. With over 850 electric transit buses on the road, our electric transit buses have delivered more than 25 million cumulative service miles spanning a wide spectrum of climates, conditions, altitudes and terrains. From this experience, we have been able to continue to iterate and improve our technology. Our decade of experience supplying battery electric heavy duty transit buses provided us the opportunity to validate our products' performance, fuel efficiency and maintenance costs with a demanding customer base and helped broaden our appeal as a supplier to OEMs in other commercial vehicle segments and geographies. Proterra Powered has partnered with more than a dozen OEMs spanning from Class 3 to Class 8 trucks, several types of buses, and multiple off-highway categories. ThroughMarch 31, 2022 , Proterra Powered has delivered battery systems and electrification solutions for more than 650 vehicles to our OEM partner customers. 38
-------------------------------------------------------------------------------- In addition, Proterra Energy has established our Company 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 our customers' space constraints and continuous service requirements. As ofMarch 31, 2022 , we had delivered more than 60 MW of charging infrastructure acrossNorth America . ThroughMarch 31, 2022 , 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 & Energy to grow into a significantly larger portion of our overall business and generate a greater portion of revenue. ThroughMarch 31, 2022 , 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 been a leader in the North American electric transit market since 2012. 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. We also focus our sales efforts on airports, universities, and corporate shuttle operators. As ofMarch 31, 2022 , 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 850 vehicles on the road which have accumulated more than 25 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 39 -------------------------------------------------------------------------------- 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 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. InNovember 2021 , we entered into a lease arrangement for a new plant with approximately 327,000 square feet atGreer, South Carolina to expand our battery system manufacturing capacity and to multiple gigawatt-hours 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 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 three months endedMarch 31, 2021 our battery production was 42 MWh and in the three months endedMarch 31, 2022 our production was 82 MWh, a 95% 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 three months endedMarch 31, 2022 and 2021, our total revenue was$58.6 million and$54.0 million , respectively. We generated a gross loss of$(3.0) million and gross profit of$0.9 million for the three months endedMarch 31, 2022 and 2021, representing a gross margin of (5)% and 2%, 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$43.2 million and$27.3 million for the three months endedMarch 31, 2022 and 2021, respectively.
Key metrics and select financial data
Deliveries
We delivered 40 and 48 vehicles in the three months endedMarch 31, 2022 and 2021, respectively. We delivered battery systems for 287 and 26 vehicles in the three months endedMarch 31, 2022 and 2021, 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 met revenue recognition criteria during a period. 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,
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non-recurring items, capital expenditures, and non-cash expenses such as
stock-based compensation and (gain) loss 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 March
31,
(in thousands) 2022 2021
Adjusted EBITDA Reconciliation:
Net loss $ (50,078) $ (52,162)
Add (deduct):
Interest expense, net 6,879 8,797
Provision for income taxes - -
Depreciation and amortization expense 3,381 3,759
Stock-based compensation expense 4,642 2,997
Loss on valuation of derivative and warrant liabilities - 16,321
Adjusted EBITDA $ (35,176) $ (20,288)
Business Combination
On June 14, 2021 , we consummated the transactions contemplated by the Merger
Agreement, by and among ArcLight, Phoenix Merger Sub, and Legacy Proterra. As
contemplated by the Merger Agreement, on June 11, 2021 , ArcLight consummated the
Domestication. Further, on June 14, 2021 , as contemplated by the Merger
Agreement, we consummated the Merger.
In addition, pursuant to subscription agreements entered into in connection with
the Merger Agreement, the PIPE Investors purchased an aggregate of 41,500,000
shares of Proterra common stock concurrently with the Closing for an aggregate
purchase price of $415,000,000 .
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.
In
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 were designated as an "Essential Business" under applicable public health orders. We have 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 throughMarch 31, 2022 . Our vehicle and equipment deliveries were impacted during the three months endedMarch 31, 2022 by ongoing constraints and inefficiencies in production driven by shortages in component parts, particularly resin for connectors, resulting from global supply chain disruptions stemming from the pandemic. Although we achieved revenue growth during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , these disruptions decreased our revenue and increased our overhead, led to increased costs to secure components critical to our production needs and negatively impacted our margins. Our results for the remaining quarters of 2022 may continue to be impacted by supply chain issues. More generally, the COVID-19 pandemic, raw material and component price inflation, and increased freight and logistics costs are currently expected to continue to have an impact on our results of operations, financial position, and liquidity. If the outbreak, and related shutdowns, shipment 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 41
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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 130 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.
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, and delays in our ability to hire, train, and retain employees needed to scale production to meet demand. 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 enacted onNovember 15, 2021 will 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 42 -------------------------------------------------------------------------------- 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. 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.
Components of results of operations
Revenue
We derive revenue primarily from the sale of vehicles, the sale of battery and
powertrain systems, the sale and installation of charging systems, 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 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 met revenue recognition
criteria. Revenue from the sale of battery and powertrain systems is typically
recognized upon shipping. Revenue from sales and installation of charging
systems is typically recognized at a point of time once met revenue recognition
criteria. 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 lease term. The amount of product revenue we recognize in a
given period depends on the number of vehicles accepted and 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.
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 in the longer term.
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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.
Gross profit (loss) and margin
Gross profit (loss) is total revenue less total cost of goods sold. Gross margin is gross profit (loss) 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 in the longer term.
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. ThroughMarch 31, 2022 , 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.
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--------------------------------------------------------------------------------Other expense (income), net
Other expense (income), net primarily relates to sublease income and 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. 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
March 31,
(in thousands) 2022 2021
Product revenue $ 54,171 $ 51,422
Parts and other service revenue 4,410 2,584
Total revenue 58,581 54,006
Product cost of goods sold 57,226 50,531
Parts and other service cost of goods sold 4,358 2,604
Total cost of goods sold (1) 61,584 53,135
Gross profit (loss) (3,003) 871
Research and development (1) 11,802 9,700
Selling, general and administrative (1) 28,387 18,460
Total operating expenses 40,189 28,160
Loss from operations (43,192) (27,289)
Interest expense, net 6,879 8,797
Loss on valuation of derivative and warrant liabilities - 16,321
Other expense (income), net 7 (245)
Loss before income taxes (50,078) (52,162)
Provision for income taxes - -
Net loss $ (50,078) $ (52,162)
__________________(1)Includes stock-based compensation as follows:
Three Months Ended March 31,
(in thousands) 2022 2021
Cost of goods sold $ 516 $ 276
Research and development 993 513
Selling, general and administrative 3,133 2,208
Total stock-based compensation expense $ 4,642 $ 2,997
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Three Months Ended March 31,
2022 2021
Product revenue 92 % 95 %
Parts and other service revenue 8 5
Total revenue 100 100
Product cost of goods sold 98 94
Parts and other service cost of goods sold 7 5
Total cost of goods sold (1) 105 99
Gross profit (loss) (5) 1
Research and development (1) 20 18
Selling, general and administrative (1) 48 34
Total operating expenses 68 52
Loss from operations (73) (51)
Interest expense, net 12 16
Loss on valuation of derivative and warrant liabilities - 30
Other expense (income), net - -
Loss before income taxes (85) (97)
Provision for income taxes - -
Net loss (85) % (97) %
__________________(1)Includes stock-based compensation expense as follows:
Three Months Ended March 31,
2022 2021
Cost of goods sold 1 % 1 %
Research and development 2 1
Selling, general and administrative 5 4
Total stock-based compensation expense 8 % 6 %
Comparison of the Three Months Ended
Revenue
Three Months Ended
March 31, $ %
(dollars in thousands) 2022 2021 Change Change
Product revenue $ 54,171 $ 51,422 $ 2,749 5 %
Parts and other service revenue 4,410 2,584 1,826 71
Total revenue $ 58,581 $ 54,006 $ 4,575 8 %
Total revenue increased by $4.6 million in the three months ended March 31, 2022
compared to the three months ended March 31, 2021 . The increase of total revenue
was primarily due to an increase of delivered battery systems. We delivered
battery systems for 287 vehicles in the three months ended March 31, 2022 , as
compared to 26 vehicles in three months ended March 31, 2021 . The increase of
total revenue was partially offset by a decrease in delivery of vehicles,
charging systems and installations. We delivered 40 buses in the three months
ended March 31, 2022 as compared to 48 buses accepted in the three months ended
March 31, 2021 . This year over year decrease in revenue from transit vehicle,
charging systems and installations was due to production delays, which were
mainly caused by parts shortages resulting from supplier production challenges
and global supply chain interruptions due to the ongoing COVID-19 pandemic.
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--------------------------------------------------------------------------------Cost of goods sold and gross profit
Three Months Ended
March 31, $ %
(dollars in thousands) 2022 2021 Change Change
Product cost of goods sold $ 57,226 $ 50,531 $ 6,695 13 %
Parts and other service cost of goods sold 4,358 2,604 1,754 67
Total cost of goods sold 61,584 53,135 8,449 16
Gross profit (loss) $ (3,003) $ 871 $ (3,874) NM
Cost of goods sold increased by $8.4 million for the three months ended March
31, 2022 compared to the three months ended March 31, 2021 . The $6.7 million
increase in product cost of goods sold in the three months ended March 31, 2022
was primarily driven by lower productivity levels in the production process as
parts shortages led to inefficiency. The $1.8 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 decreased by $3.9 million to a gross loss of $3.0 million in the
three months ended March 31, 2022 from a gross profit of $0.9 million in the
three months ended March 31, 2021 . Gross profit was negatively impacted
primarily due to unabsorbed labor and manufacturing overhead costs caused by the
ongoing COVID-19 pandemic and related supply chain interruptions and delays in
production.
Operating expenses
Research and development
Three Months Ended March 31, $ %
(dollars in thousands) 2022 2021 Change Change
Research and development $
11,802
Research and development expense increased by$2.1 million for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . The$2.1 million increase was primarily due to an increase in personnel related expenses and stock-based compensation of$1.9 million to support increased product development efforts.
Selling, general and administrative
Three Months Ended
March 31, $ %
(dollars in thousands) 2022 2021 Change Change
Selling, general and administrative $ 28,387 $ 18,460 $ 9,927 54 %
Selling, general and administrative expense increased by $9.9 million for the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 . The $9.9 million increase was primarily due to an increase in personnel
related expenses and stock-based compensation of $6.7 million , an increase in
insurance expense of $1.5 million , an increase in facility related expenses of
$0.8 million due to a new battery facility lease entered into in November 2021 ,
and an increase in IT expense of $0.8 million due to increased cybersecurity
measures, more users and incremental data usage costs.
Interest expense, net
Three Months Ended March 31, $ %
(dollars in thousands) 2022 2021 Change Change
Interest income $ (310) $ (32) $ (278) 869 %
Interest expense 7,189 8,829 (1,640) (19)
Interest expense, net $ 6,879 $ 8,797 $ (1,918) (22) %
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-------------------------------------------------------------------------------- Interest expense, net decreased by$1.9 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 due to lower average debt levels in the quarter driving lower interest expense, offset by higher interest income on higher cash equivalents and short-term investment balances. The decrease was primarily due to 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 inJune 2021 , and the$17.1 million repayment of Senior Credit Facility borrowing inJune 2021 .
Loss on valuation of derivative and warrant liabilities
Three Months Ended March
31, $ %
(dollars in thousands) 2022 2021 Change Change
Loss on valuation of derivative and warrant
liabilities $ - $ 16,321 $ (16,321) NM
The
Other expense (income), net
Three Months Ended March 31, $ %
(dollars in thousands) 2022 2021 Change Change
Other expense (income), net Other expense (income), 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.
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 throughMarch 31, 2022 .
Liquidity and capital resources
As ofMarch 31, 2022 , we had cash and cash equivalents and short-term investments of$598.7 million . Our primary requirements for liquidity and capital are investment in new products and technologies, the improvement and expansion of existing manufacturing facilities, working capital, debt service, and general corporate needs. Historically, 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 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 our existing funds, 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. 48 --------------------------------------------------------------------------------
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.
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 ofMarch 31, 2022 , there was no balance for borrowings outstanding under the Senior Credit Facility, although we utilized$14.5 million of the facility's sub-line for letters of credit.
Small Business Administration Loan
InMay 2020 , the Company 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 (CARES) Act". The PPP loan was in the form of a note with an original maturity inMay 2022 , and was extended toMay 2025 based on SBA's interim final rule. As ofMarch 31, 2022 , the interest rate was 1.0% per annum and interest was payable monthly commencing inOctober 2021 . All or a portion of the loan was eligible for forgiveness by the SBA upon application with supporting documentation of expenditures in accordance with SBA requirements, which included 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. InJanuary 2022 , the SBA denied our PPP loan forgiveness application on the grounds that the Company was subject to a size standard that applied to businesses under NAICS Code 488999 (all other support services for transportation). We filed an appeal on the grounds that the NAICS Code that applies to our business is 336120 (heavy duty truck and bus manufacturing). InMay 2022 , the SBA approved our PPP loan forgiveness application and the PPP loan of$10.0 million was forgiven in full. The amount forgiven will be recognized in the consolidated statements of operations as a gain on extinguishment of debt.
Secured Convertible Promissory Notes
InAugust 2020 , we issued the Convertible Notes. The Convertible Notes had an 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. 49 -------------------------------------------------------------------------------- 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 common 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. The Note Purchase Agreement governing the Convertible Notes 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 for shares of common stock, the carrying amount of the warrant liability was reclassified to stockholders' equity. Upon the consummation of the Merger, the warrants became exercisable for 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 year endedDecember 31, 2021 . An aggregate of$69.3 million in warrant liability was reclassified to additional paid-in capital upon exercise and consummation of the Merger. In the fourth quarter of 2021, all remaining outstanding warrants were exercised for shares of common stock. 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 year endedDecember 31, 2021 . Upon the consummation of the Merger, the embedded conversion features associated with the Convertible Notes no longer qualified 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. At the closing of the Merger, certain Convertible Note holders with an original aggregate principal amount of$46.5 million elected to convert their Convertible Notes at the Closing of the Business Combination, resulting in the issuance of 7.4 million shares of common stock. An aggregate of$48.8 million principal and interest was reclassified to stockholders' equity, and$21.0 million of remaining related debt issuance costs were expensed to interest expense.
As of
The remaining Convertible Notes including accrued interest will be automatically converted to common stock at$6.5712 per share pursuant to the mandatory conversion provisions, if and when the VWAP of our common stock exceeds$9.86 over 20 consecutive days subsequent toJanuary 13, 2022 . 50 --------------------------------------------------------------------------------
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 ofMarch 31, 2022 , 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.
Cash flows
The following table summarizes our cash flows:
Three Months Ended March 31,
(in thousands) 2022 2021
Cash flows (used in) provided by:
Operating activities $ (52,148) $ (15,749)
Investing activities (71,652) (63,755)
Financing activities 1,125 1,903
Net decrease in cash and cash equivalents, and restricted cash $
(122,675)
Operating activities
Net cash used in operating activities in the three months endedMarch 31, 2022 was$52.1 million compared to$15.7 million in the three months endedMarch 31, 2021 . The increase of cash used in operating activities in the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 was mainly due to increases in working capital due to growth of our business. The decrease in net loss of$2.1 million between the comparison periods included decrease of$16.3 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$0.9 million and stock-based compensation expense increased by$1.6 million in the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . In the three months endedMarch 31, 2022 , cash used in operating activities includes$13.8 million ,$3.5 million and$1.7 million related to inventory, accounts payable and accrued liabilities, and deferred revenue, respectively, which was partially offset by cash provided by operating activities related to accounts receivable of$3.3 million . In the three months endedMarch 31, 2021 , cash provided by operating activities included$10.1 million and$1.3 million related to accounts payable and accrued liabilities and other non-current liabilities, respectively, which was partially offset by cash used in operating activities related to prepaid expense and other current assets and deferred revenue of$3.5 million and$1.5 million , respectively.
Investing activities
Net cash used in investment activities was$71.7 million in the three months endedMarch 31, 2022 compared to$63.8 million in the three months endedMarch 31, 2021 . The$7.9 million increase was primarily driven by increased capital expenditures due to higher spending in three months endedMarch 31, 2022 related to the new plant atGreer, South Carolina .
Financing activities
Net cash provided by financing activities was
51
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pending amendment. In the three months ended
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 guarantee payments under a product supply agreement, a lease arrangement, or 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. Contractual obligations The purchase commitments including purchase orders or contracts for the purchase of certain goods and services was$2.2 billion as ofMarch 31, 2022 , of which 14% was expected to be due in the next 12 months, 30% in 1-3 years, and the remainder in more than 3 years through 2028. The Convertible Notes had an outstanding principal amount including PIK interest of$165.1 million as ofMarch 31, 2022 , which will mature inAugust 2025 . The outstanding balances will be automatically converted into common stock at$6.5712 per share pursuant to the mandatory conversion provisions, if and when the VWAP of our common stock exceeds$9.86 over 20 consecutive days subsequent toJanuary 13, 2022 .
Critical accounting policies and estimates
Our condensed 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 significant changes in our critical accounting policies and estimates during the three months endedMarch 31, 2022 , as compared to the critical accounting policies and estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Recent accounting pronouncements
See Note 2 to the condensed consolidated financial statements for information regarding recent accounting pronouncements that are of significance or potential significance to us.
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