Filed pursuant to Rule 424(b)(3)
Registration No. 333-264346
PROSPECTUS SUPPLEMENT NO. 4
(to Prospectus dated June 9, 2023)
Proterra Inc
125,389,111 Shares of Common Stock
26,317,092 Shares of Common Stock Underlying Warrants and Convertible Notes
This prospectus supplement supplements the prospectus dated June 9, 2023, which forms a part of our registration statement on Form S-1 (File No. 333-264346) as supplemented by Prospectus Supplement No. 1, dated June 28, 2023 and as further supplemented by Prospectus Supplement No. 2, dated August 8, 2023 and Prospectus Supplement No. 3, dated August 9, 2023 (the “Prospectus”). This prospectus supplement is being filed to update and supplement the information in the Prospectus with the information contained in our quarterly report on Form 10-Q for the quarter ended September 30, 2023, filed with the Securities and Exchange Commission on November 6, 2023 (the “Quarterly Report”). Accordingly, we have attached the Quarterly Report to this prospectus supplement.
The Prospectus and this prospectus supplement relate to the offer and sale from time to time by the selling securityholders named in the Prospectus (the “Selling Securityholders”) of up to 125,389,111 shares of common stock, par value $0.0001 per share (“common stock”), consisting of (i) up to 16,334,868 shares of common stock issued in a private placement of 41,500,000 shares of common stock pursuant to subscription agreements entered into on January 11, 2021; (ii) up to 1,904,692 shares of common stock held by ArcLight CTC Holdings, L.P.; and (iii) up to 107,149,551 shares of common stock issued or issuable to certain former stockholders and other security holders of Legacy Proterra (the “Legacy Proterra Holders”) in connection with or as a result of the consummation of the Business Combination (as defined in the Prospectus), consisting of (a) up to 56,766,043 shares of common stock; (b) up to 26,316,200 shares of common stock (the “Note Shares”) issuable upon the conversion of outstanding convertible promissory notes (the “Convertible Notes”); (c) up to 892 shares of common stock issuable upon the exercise of certain warrants (the “Legacy Proterra warrants”); (d) 11,171,287 shares of common stock issued or issuable upon the exercise of certain equity awards; and (e) up to 12,895,129 shares of common stock (“Earnout Shares”), comprising both Earnout Shares that were issued to certain Legacy Proterra Holders in July 2021 and Earnout Shares that certain Legacy Proterra Holders have the contingent right to receive upon the achievement of certain stock price-based vesting conditions.
In addition, the Prospectus and this prospectus supplement relate to the offer and sale of (i) up to 892 shares of common stock issuable by us upon exercise of the Legacy Proterra warrants that were previously registered, and (ii) up to 26,316,200 Note Shares issuable by us upon conversion of the Convertible Notes, certain of which were previously registered. The number of shares issuable upon conversion of Convertible Notes is calculated assuming that the Convertible Notes convert pursuant to their mandatory conversion terms on December 31, 2022 pursuant to the terms of the Convertible Notes in effect as of that date and does not reflect the terms of the amended Convertible Notes Facility (as defined in the Prospectus). The actual number of shares issued upon conversion will depend on the actual date of conversion and will be pursuant to the terms of the amended Convertible Notes Facility (as defined in the Prospectus).
Our common stock trades on the over-the-counter market under the symbol “PTRAQ.” On November 2, 2023, the last reported sale price of our common stock was $0.0682 per share. Quotes of stock trading prices on any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
This prospectus supplement updates and supplements the information in the Prospectus and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus, including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectus and if there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement.
Investing in our common stock involves risks. See the section entitled “Risk Factors” beginning on page 7 of the Prospectus to read about factors you should consider before buying our common stock.
The registration statement to which the Prospectus and this prospectus supplement relates registers the resale of a substantial number of shares of our common stock by the Selling Securityholders. Sales in the public market of a large number of shares, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus supplement is November 6, 2023
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
Commission file number 001-39546
Proterra Inc
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | 90-2099565 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| |
1815 Rollins Road Burlingame, California | 94010 | |
(Address of Principal Executive Offices) | (Zip Code) | |
(864) 438-0000
Registrant's telephone number, including area code
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| | | | |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | |
| Large accelerated filer | x | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | o |
| | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The registrant had outstanding 228.2 million shares of common stock as of November 2, 2023.
TABLE OF CONTENTS
Explanatory Note – Certain Defined Terms
Unless otherwise stated in this Quarterly Report on Form 10-Q (the “Quarterly Report”) or the context otherwise requires, references to:
•“ArcLight” means ArcLight Clean Transition Corp., a Cayman Islands exempted company, prior to the consummation of the Domestication;
•“Business Combination” means the Domestication, the Merger and the other transactions contemplated by the Merger Agreement, collectively, including the PIPE Financing;
•“Closing” means the closing of the Business Combination;
•“Closing Date” means June 14, 2021;
•“common stock” means the common stock, par value $0.0001 per share, of Proterra;
•“Convertible Notes” means the Secured Convertible Promissory Notes that Legacy Proterra issued in August 2020, as amended and restated on March 31, 2023;
•"Cowen Parties” means the Second Lien Agent, CSI I Prodigy Holdco LP, CSI Prodigy Co-Investment LP, and CSI PRTA Co-Investment L.P.;
•“Domestication” means the domestication of ArcLight as a corporation incorporated in the State of Delaware;
•“initial public offering” means ArcLight’s initial public offering that was consummated on September 25, 2020;
•“Legacy Proterra” means Proterra Inc (now known as Proterra Operating Company, Inc.), a Delaware corporation, prior to the consummation of the Business Combination;
•“Merger” means the merger of Phoenix Merger Sub with and into Legacy Proterra pursuant to the Merger Agreement, with Legacy Proterra as the surviving company in the Merger and, after giving effect to such Merger, Legacy Proterra becoming a wholly-owned subsidiary of Proterra;
•“Merger Agreement” means that certain Merger Agreement, dated as of January 11, 2021 (as may be amended, supplemented or otherwise modified from time to time), by and among ArcLight, Phoenix Merger Sub and Legacy Proterra;
•“Note Purchase Agreement” means the Note Purchase Agreement, dated as of August 4, 2020, by and among Legacy Proterra, the investors from time to time party thereto, the guarantors from time to time party thereto and CSI GP I LLC, as collateral agent, as amended on August 31, 2020 and further amended on March 31, 2023;
•“Phoenix Merger Sub” refers to Phoenix Merger Sub, Inc.;
•“PIPE Financing” means the transactions contemplated by the Subscription Agreements, pursuant to which the PIPE Investors collectively subscribed for 41,500,000 shares of common stock for an aggregate purchase price of $415,000,000 in connection with the Closing;
•“PIPE Investors” means the investors who participated in the PIPE Financing and entered into the Subscription Agreements;
•“Proterra” means ArcLight upon and after Closing;
•“Proterra OpCo” means Proterra Operating Company, Inc. (formerly known as Proterra Inc prior to the consummation of the Business Combination);
•"Second Lien Agent” means CSI GP I LLC, as collateral agent under the Note Purchase Agreement;
•“Senior Credit Facility” means the Loan, Guaranty and Security Agreement dated as of May 8, 2019, by and among Legacy Proterra, the lenders from time to time party thereto and Bank of America, N.A., as administrative agent, as amended on August 4, 2020, June 16, 2021, and April 3, 2023; and
•“Subscription Agreements” means the subscription agreements, entered into by ArcLight and each of the PIPE Investors in connection with the PIPE Financing.
In addition, unless otherwise indicated or the context otherwise requires, references in this Quarterly Report to the “Company,” “we,” “us,” “our” and other similar terms refer to Legacy Proterra prior to the Business Combination and to Proterra and its consolidated subsidiaries after giving effect to the Business Combination.
Forward-Looking Statements
This Quarterly Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This Quarterly Report contains forward-looking statements regarding, among other things, our plans, strategies and prospects, both business and financial. These statements are based on the beliefs and assumptions of our management. We also may provide forward-looking statements in oral statements or other written materials released to the public. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words “believes”, “estimates”, “expects”, “projects”, “forecasts”, “objectives”, “goals”, “aims”, “continue”, “predict”, “would”, “could’, “may”, “will”, “should”, “seeks”, “plans”, “scheduled”, “anticipates” or “intends” or similar expressions. Forward-looking statements contained in this Quarterly Report may include, for example, and without limitation, statements about:
•Bankruptcy Court rulings in the Chapter 11 Cases and the outcome of the Company’s Chapter 11 Cases in the Bankruptcy Court, including our ability to successfully market and sell all, substantially all or some of our assets and to develop, negotiate, confirm and consummate a Chapter 11 plan;
•whether the period over which we anticipate our existing cash and cash equivalents will be sufficient to fund our Chapter 11 Cases, operating expenses and capital expenditure requirements;
•the length of time that we will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of Chapter 11;
•the effects of the Chapter 11 Cases, including increased legal and other professional costs and the diversion of management’s attention and consumption of resources as a result of the Chapter 11 Cases;
•our ability to meet our financial obligations during the Chapter 11 process;
•risks relating to the trading price and volatility of the Company’s common stock as a result of the Chapter 11 Cases and the effects of the delisting of the Company’s common stock from the Nasdaq Global Select Market;
•possible proceedings that may be brought by third parties in connection with the Chapter 11 process or any potential asset sale and risks associated with third-party motions in Chapter 11;
•the result of our post-petition marketing process is unknown, and there may be insufficient proceeds, if any, to make distributions to equity holders;
•the timing or amount of distributions, if any, to our stakeholders;
•employee attrition and our ability to retain senior management and other key personnel due to the distractions and uncertainties of the Chapter 11 Cases;
•our ability to maintain relationships with suppliers, customers, employees and other third parties as a result of the Chapter 11 Cases;
•our financial and business performance, including business metrics;
•our ability to continue as a going concern;
•availability of additional capital to support our ability to maintain adequate operational and financial resources and generate sufficient cash flows;
•changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans;
•regulations that we are subject to, the impact of unfavorable changes to such regulations, or our ability to comply with such regulations;
•expectations regarding corporate, state, federal and international mandates/commitments to clean energy;
•our success in retaining or recruiting, or changes required in, our officers, key employees or directors, and our ability to attract and retain key personnel;
•forecasts regarding long-term end-customer adoption rates and demand for our products in markets that are new and rapidly evolving and our ability to meet demand for our products;
•our ability to compete successfully against current and future competitors in light of intense and increasing competition in the commercial vehicle electrification market, including battery systems for transit buses and other commercial vehicle uses;
•our ability to improve operational efficiency, streamline supply chain and distribution logistics, reduce organizational complexity and reduce facility costs;
•the availability of government economic incentives and government funding for commercial vehicle electrification, including public transit upon which our transit business is significantly dependent, and other commercial uses for our battery systems;
•willingness of corporate and other public transportation providers and other commercial vehicle end users to adopt and fund the purchase of electric vehicles for mass transit and other commercial uses;
•availability of a limited number of suppliers for our products and services and their desire and/or ability to satisfy our supply demands, and our dependence on our business suppliers, particularly as we build out new facilities;
•material losses and costs from product warranty claims, recalls, or remediation of electric transit buses or our battery systems for real or perceived deficiencies or from customer satisfaction campaigns;
•increases in costs, disruption of supply, or shortage of materials, particularly lithium-ion cells and wiring harnesses, and drivetrain components;
•our dependence on a small number of customers that fluctuate from year to year, and ability to add new customers or expand sales to our existing customers;
•rapid evolution of our industry and technology, and related unforeseen changes, including developments in alternative technologies and powertrains or improvements in the internal combustion engine that could adversely affect the demand for our electric transit buses;
•development, maintenance and growth of strategic relationships in the Proterra Powered or Proterra Energy business, identification of new strategic relationship opportunities, or formation strategic relationships;
•accident or safety incidents involving our buses, battery systems, electric drivetrains, high-voltage systems or charging solutions;
•product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims;
•changes to U.S. trade policies, including new tariffs or the renegotiation or termination of existing trade agreements or treaties;
•various environmental and safety laws and regulations that could impose substantial costs upon us and negatively impact our ability to operate our manufacturing facilities; outages and disruptions of our services if we fail to maintain adequate security and supporting infrastructure as we scale our information technology systems;
•ability to protect our intellectual property and defend intellectual property rights claims made by third parties;
•developments and projections relating to our competitors and industry;
•the potential for our business development efforts to maximize the potential value of our portfolio and our related plans and strategy;
•our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
•our ability to develop and maintain effective internal controls and procedures and remediate the material weaknesses we have identified in our internal controls;
•our expectations with respect to tax treatment, including with respect to tax incentives and credits;
•cyber-attacks and security vulnerabilities; and
•the continuing impacts of the macroeconomic conditions, such as rising inflation and interest rates, uncertain credit and global financial markets, including recent and potential bank failures, and supply chain disruptions, and geopolitical events, such as the conflict between Russia and Ukraine and related sanctions, on the foregoing.
These forward-looking statements are based on information available as of the date of this Quarterly Report, and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Important factors could cause actual results to differ materially from those indicated or implied by forward-looking statements such as those contained in documents we have filed with the U.S. Securities and Exchange Commission (the “SEC”) and financial reporting to the Bankruptcy Court. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or similar transactions.
As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. For a discussion of the risks involved in our business and investing in our common stock, see Part II, Item 1A. titled “Risk Factors.”
Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results may vary in material respects from those expressed or implied by these forward-looking statements. You should not place undue reliance on these forward-looking statements.
Summary of Risk Factors
The below summary of risk factors provides an overview of many of the risks we are exposed to in the normal course of our business activities. As a result, the following summary of risks does not contain all of the information that may be important to you, and you should read the summary of risks together with the more detailed discussion of risks set forth in Part II, Item 1A under the heading “Risk Factors,” and elsewhere in this Quarterly Report. Additional risks, beyond those summarized below or discussed elsewhere in this Quarterly Report, may apply to our activities or operations as currently conducted or as we may conduct them in the future or in the markets in which we operate or may in the future operate. Consistent with the foregoing, we are exposed to a variety of risks, including, without limitation, risks associated with the following:
•We are subject to the risks and uncertainties associated with Chapter 11 proceedings, including restrictions on our use of cash collateral, and operating as Debtors in the Chapter 11 Cases for a long period of time may harm our business.
•We may not be able to obtain confirmation of a Chapter 11 plan of reorganization or complete any Bankruptcy Court-approved sales of our Company or assets, or we may not be able to realize adequate consideration for such sales.
•We may be subject to claims that will not be discharged in the Chapter 11 proceedings, which could have a material adverse effect on our financial conditions and results of operations.
•We have, and may continue, to experience increased levels of employee attrition as a result of the Chapter 11 proceedings.
•Our post-bankruptcy capital structure has yet to be determined, and any changes to our capital structure may have a material adverse effect on existing debt and security holders, including holders of our common stock.
•The Chapter 11 proceedings has caused and may continue to cause our common stock to decrease in value materially or may render our common stock worthless. Trading in shares of our common stock during the pendency of the Chapter 11 proceedings is highly speculative and investors could lose all or part of their investments.
•There is substantial doubt about our ability to continue as a going concern for a period of 12 months from the date of this Quarterly Report on Form 10-Q.
•If our estimates or judgments relating to our critical accounting policies prove to be incorrect or financial reporting standards or interpretations change, our operating results could be adversely affected.
•We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future.
•We have a history of net losses and negative cash flows from operations, have experienced rapid growth and may not achieve or sustain positive gross margin or profitability in the future.
•Our operating results have fluctuated and may continue to fluctuate from quarter to quarter, which makes our future results difficult to predict.
•Because many of the markets in which we compete are new and rapidly evolving, including as a result of consolidation of industry players, it is difficult to forecast long-term end-customer adoption rates and demand for our products, and our ability to meet demand for our products.
•Our business is significantly dependent on government funding and economic incentives for public transit and commercial electric vehicles, and the unavailability, reduction, or elimination of government economic
incentives would have an adverse effect on our business, prospects, financial condition, and operating results.
•Our business is dependent on the continued adoption of electrification in the commercial vehicle market and the continued development of infrastructure to support increased electrification by governments, utilities and end users.
•We face intense and increasing competition in the transit bus market and may not be able to compete successfully against current and future competitors, which could adversely affect our business, revenue growth, and market share.
•We have been and may continue to be impacted by macroeconomic conditions such as the rising inflation and interest rates, uncertain credit and global financial markets, including the recent and potential bank failures, and supply chain disruption and geopolitical events, such as the conflict between Russia and Ukraine and related sanctions.
•The growth of our business is dependent upon the willingness of corporate and other public transportation providers to adopt and fund the purchase of electric vehicles.
•Our dependence on a limited number of suppliers for certain product inputs introduces significant risk that could have adverse effects on our financial condition and operating results.
•We have a long sales, production, and technology development cycle for new public transit customers, which may create fluctuations in whether and when revenue is recognized and may have an adverse effect on our business.
•We could incur material losses and costs from product warranty claims, recalls, or remediation of electric transit buses for real or perceived deficiencies or from customer satisfaction campaigns.
•Our revenue has in the past depended, and will likely continue to depend, on a small number of customers that fluctuate from year to year, and failure to add new customers or expand sales to our existing customers could have an adverse effect on our operating results for a particular period.
•Our business is subject to substantial regulations and compliance programs, which are evolving, and unfavorable changes or failure by us to comply with these regulations and compliance programs could have an adverse effect on our business.
•Our business could be adversely affected from an accident or safety incident involving our battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses or defaults in the materials or workmanship of our composite bus bodies or other components.
Part I. Financial Information
Item 1. Financial Statements
PROTERRA INC
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (Unaudited) | | * |
| Assets: | | | |
| Cash and cash equivalents | $ | 112,814 | | | $ | 73,695 | |
| Accounts receivable, net | 80,854 | | | 130,337 | |
| Short-term investments | 17,899 | | | 224,359 | |
| Inventory | 263,610 | | | 169,567 | |
| Prepaid expenses and other current assets | 33,532 | | | 50,893 | |
| Deferred cost of goods sold | 4,706 | | | 4,304 | |
| Restricted cash, current | 25,546 | | | 12,565 | |
| Total current assets | 538,961 | | | 665,720 | |
| Property, plant, and equipment, net | 108,409 | | | 107,552 | |
Operating lease right-of-use assets | 15,326 | | | 20,274 | |
| | | |
| Long-term inventory prepayment | 10,000 | | | 10,000 | |
| Other assets | 38,729 | | | 36,913 | |
| Total assets | $ | 711,425 | | | $ | 840,459 | |
| Liabilities and Stockholders’ Equity: | | | |
| Accounts payable | $ | 7,379 | | | $ | 57,822 | |
| Accrued liabilities | 30,328 | | | 33,551 | |
| Deferred revenue, current | 768 | | | 30,017 | |
| Operating lease liabilities, current | — | | | 6,876 | |
| Debt, current | 178,992 | | | 122,692 | |
| | | |
| Total current liabilities | 217,467 | | | 250,958 | |
| | | |
| Deferred revenue, non-current | 5 | | | 37,381 | |
| Operating lease liabilities, non-current | — | | | 18,098 | |
| Other long-term liabilities | 4,999 | | | 17,164 | |
| Total liabilities not subject to compromise | 222,471 | | | 323,601 | |
| Liabilities subject to compromise | 213,745 | | | — | |
| Total liabilities | 436,216 | | | 323,601 | |
Commitments and contingencies (Note 7) | | | |
| Stockholders’ equity: | | | |
Common stock, $0.0001 par value; 1,000,000 shares authorized and 228,167 shares issued and outstanding as of September 30, 2023 (unaudited); 500,000 shares authorized and 226,265 shares issued and outstanding as of December 31, 2022 | 22 | | | 22 | |
Preferred stock, $0.0001 par value; 10,000 shares authorized and zero shares issued and outstanding as of September 30, 2023 (unaudited); 10,000 shares authorized, zero shares issued and outstanding as of December 31, 2022 | — | | | — | |
Additional paid-in capital | 1,641,123 | | | 1,613,556 | |
Accumulated deficit | (1,365,930) | | | (1,096,175) | |
| Accumulated other comprehensive loss | (6) | | | (545) | |
Total stockholders’ equity | 275,209 | | | 516,858 | |
Total liabilities and stockholders’ equity | $ | 711,425 | | | $ | 840,459 | |
*: Derived from audited Consolidated Financial Statements.
See accompanying notes to unaudited condensed consolidated financial statements.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Product revenue | $ | 79,957 | | | $ | 89,769 | | | $ | 227,056 | | | $ | 214,196 | |
| Parts and other service revenue | 6,191 | | | 6,454 | | | 24,335 | | | 15,172 | |
| Total revenue | 86,148 | | | 96,223 | | | 251,391 | | | 229,368 | |
| Product cost of goods sold | 92,950 | | | 91,408 | | | 264,391 | | | 217,743 | |
| Parts and other service cost of goods sold | 4,628 | | | 6,091 | | | 17,375 | | | 15,349 | |
| Total cost of goods sold | 97,578 | | | 97,499 | | | 281,766 | | | 233,092 | |
Gross loss | (11,430) | | | (1,276) | | | (30,375) | | | (3,724) | |
| Research and development | 10,992 | | | 18,165 | | | 44,438 | | | 44,871 | |
| Selling, general and administrative | 37,419 | | | 38,554 | | | 108,867 | | | 98,646 | |
| Total operating expenses | 48,411 | | | 56,719 | | | 153,305 | | | 143,517 | |
| Loss from operations | (59,841) | | | (57,995) | | | (183,680) | | | (147,241) | |
| Interest expense, net | 152 | | | 7,361 | | | 11,344 | | | 21,191 | |
| (Gain) loss on debt extinguishment | — | | | — | | | 177,939 | | | (10,201) | |
Gain on revaluation of derivative liability | (81,300) | | | — | | | (114,878) | | | — | |
Asset impairment charge | 1,600 | | | — | | | 1,600 | | | — | |
| Other expense (income), net | (1,900) | | | (295) | | | (6,321) | | | (1,271) | |
| Reorganization items, net | 16,391 | | | — | | | 16,391 | | | — | |
Income (loss) before income taxes | 5,216 | | | (65,061) | | | (269,755) | | | (156,960) | |
| Provision for income taxes | — | | | — | | | — | | | — | |
Net income (loss) | $ | 5,216 | | | $ | (65,061) | | | $ | (269,755) | | | $ | (156,960) | |
Net income (loss) per share of common stock: | | | | | | | |
| Basic | $ | 0.02 | | | $ | (0.29) | | | $ | (1.19) | | | $ | (0.70) | |
| Diluted | $ | 0.02 | | | $ | (0.45) | | | $ | (1.19) | | | $ | (0.79) | |
| Weighted average shares used in per share computation: | | | | | | | |
| Basic | 227,869 | | | 225,291 | | | 227,192 | | | 223,782 | |
| Diluted | 227,869 | | | 250,704 | | | 227,192 | | | 248,637 | |
See accompanying notes to unaudited condensed consolidated financial statements.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net income (loss) | $ | 5,216 | | | $ | (65,061) | | | $ | (269,755) | | | $ | (156,960) | |
| Other comprehensive income (loss), net of taxes: | | | | | | | |
| Available-for-sales securities: | | | | | | | |
| Unrealized gain (loss) on available-for-sale securities | 25 | | | 625 | | | 539 | | | (1,481) | |
| Other comprehensive income (loss), net of taxes | 25 | | | 625 | | | 539 | | | (1,481) | |
Total comprehensive income (loss), net of taxes | $ | 5,241 | | | $ | (64,436) | | | $ | (269,216) | | | $ | (158,441) | |
See accompanying notes to unaudited condensed consolidated financial statements.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
| Nine Months Ended September 30, 2023 | | | | | | Shares | | Amount | | | | |
| Balance, December 31, 2022 | | | | | | 226,265 | | | $ | 22 | | | $ | 1,613,556 | | | $ | (1,096,175) | | | $ | (545) | | | $ | 516,858 | |
| Issuance of stock upon exercise of options and RSU release | | | | | | 588 | | | — | | | 113 | | | — | | | — | | | 113 | |
| | | | | | | | | | | | | | | | |
| Stock-based compensation | | | | | | — | | | — | | | 4,314 | | | — | | | — | | | 4,314 | |
| Debt extinguishment fair value adjustment | | | | | | — | | | — | | | (7,200) | | | — | | | — | | | (7,200) | |
| Net loss | | | | | | — | | | — | | | — | | | (243,977) | | | — | | | (243,977) | |
| Other comprehensive income, net of taxes | | | | | | — | | | — | | | — | | | — | | | 608 | | | 608 | |
| Balance, March 31, 2023 | | | | | | 226,853 | | | 22 | | | 1,610,783 | | | (1,340,152) | | | 63 | | | 270,716 | |
| Issuance of stock upon RSU release | | | | | | 331 | | | — | | | — | | | — | | | — | | | — | |
| Stock issuance for employee stock purchase plan | | | | | | 586 | | | — | | | 662 | | | — | | | — | | | 662 | |
| Reclassification of liability upon charter amendment | | | | | | — | | | — | | | 20,800 | | | — | | | — | | | 20,800 | |
| Stock-based compensation | | | | | | — | | | — | | | 4,405 | | | — | | | — | | | 4,405 | |
| Net loss | | | | | | — | | | — | | | — | | | (30,994) | | | — | | | (30,994) | |
| Other comprehensive loss, net of taxes | | | | | | — | | | — | | | — | | | — | | | (94) | | | (94) | |
| Balance, June 30, 2023 | | | | | | 227,770 | | | 22 | | | 1,636,650 | | | (1,371,146) | | | (31) | | | 265,495 | |
Issuance of stock upon RSU release, net of payment of tax withholding obligations | | | | | | 397 | | | — | | | (9) | | | — | | | — | | | (9) | |
| Stock-based compensation | | | | | | — | | | — | | | 4,482 | | | — | | | — | | | 4,482 | |
Net income | | | | | | — | | | — | | | — | | | 5,216 | | | — | | | 5,216 | |
Other comprehensive income, net of taxes | | | | | | — | | | — | | | — | | | — | | | 25 | | | 25 | |
| Balance, September 30, 2023 | | | | | | 228,167 | | | $ | 22 | | | $ | 1,641,123 | | | $ | (1,365,930) | | | $ | (6) | | | $ | 275,209 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total |
| Nine Months Ended September 30, 2022 | | | | | | Shares | | Amount | | | | |
| Balance, December 31, 2021 | | | | | | 221,960 | | | $ | 22 | | | $ | 1,578,943 | | | $ | (858,225) | | | $ | (588) | | | $ | 720,152 | |
| Issuance of stock upon exercise of options and RSU release | | | | | | 743 | | | — | | | 1,833 | | | — | | | — | | | 1,833 | |
| Stock issuance for employee stock purchase plan | | | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation | | | | | | — | | | — | | | 4,642 | | | — | | | — | | | 4,642 | |
| Net loss | | | | | | — | | | — | | | — | | | (50,078) | | | — | | | (50,078) | |
| Other comprehensive loss, net of taxes | | | | | | — | | | — | | | — | | | — | | | (1,641) | | | (1,641) | |
| Balance, March 31, 2022 | | | | | | 222,703 | | | 22 | | | 1,585,418 | | | (908,303) | | | (2,229) | | | 674,908 | |
| Issuance of stock upon exercise of options and RSU release | | | | | | 1,951 | | | — | | | 6,011 | | | — | | | — | | | 6,011 | |
| Stock issuance for employee stock purchase plan | | | | | | 325 | | | — | | | 1,502 | | | — | | | — | | | 1,502 | |
| Stock-based compensation | | | | | | — | | | — | | | 6,315 | | | — | | | — | | | 6,315 | |
| Net loss | | | | | | — | | | — | | | — | | | (41,821) | | | — | | | (41,821) | |
| Other comprehensive loss, net of taxes | | | | | | — | | | — | | | — | | | — | | | (465) | | | (465) | |
| Balance, June 30, 2022 | | | | | | 224,979 | | | 22 | | | 1,599,246 | | | (950,124) | | | (2,694) | | | 646,450 | |
| Issuance of stock upon exercise of options and RSU release | | | | | | 553 | | | — | | | 1,125 | | | — | | | — | | | 1,125 | |
| Stock-based compensation | | | | | | — | | | — | | | 5,356 | | | — | | | — | | | 5,356 | |
| Net loss | | | | | | — | | | — | | | — | | | (65,061) | | | — | | | (65,061) | |
Other comprehensive income, net of taxes | | | | | | — | | | — | | | — | | | — | | | 625 | | | 625 | |
| Balance, September 30, 2022 | | | | | | 225,532 | | | $ | 22 | | | $ | 1,605,727 | | | $ | (1,015,185) | | | $ | (2,069) | | | $ | 588,495 | |
See accompanying notes to unaudited condensed consolidated financial statements.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
| Cash flows from operating activities: | | | |
| Net loss | $ | (269,755) | | | $ | (156,960) | |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
| Depreciation and amortization | 15,045 | | | 9,583 | |
Asset impairment charge | 1,600 | | | — | |
| Stock-based compensation | 13,201 | | | 16,313 | |
| Amortization of debt discount and issuance costs | (922) | | | 10,497 | |
| Accretion of debt PIK interest | 8,015 | | | 5,559 | |
| (Gain) loss on debt extinguishment | 177,939 | | | (10,007) | |
Gain on revaluation of derivative liability | (114,878) | | | — | |
Non-cash reorganization items | (1,139) | | | — | |
| Others | (3,959) | | | (688) | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | 48,579 | | | (20,717) | |
| Inventory | (94,043) | | | (49,762) | |
| Prepaid expenses and other current assets | 17,360 | | | (13,508) | |
| Deferred cost of goods sold | (401) | | | (1,761) | |
| Operating lease right-of-use assets and liabilities | (537) | | | 412 | |
| Other assets | (3,522) | | | (13,042) | |
| Accounts payable and accrued liabilities | 41,880 | | | 19,922 | |
| Deferred revenue, current and non-current | 16,420 | | | 5,100 | |
| Other non-current liabilities | 9,859 | | | 1,473 | |
| Net cash used in operating activities | (139,258) | | | (197,586) | |
| Cash flows from investing activities: | | | |
| Purchase of investments | (164,468) | | | (395,596) | |
| Proceeds from maturities of investments | 375,832 | | | 512,000 | |
| Purchase of property and equipment | (16,486) | | | (41,833) | |
Net cash provided by investing activities | 194,878 | | | 74,571 | |
| Cash flows from financing activities: | | | |
| | | |
| | | |
| | | |
| Repayment of government grants | — | | | (700) | |
| Proceeds from exercise of stock options | 113 | | | 8,969 | |
| Proceeds from employee stock purchase plan | 662 | | | 1,502 | |
| Other financing activities | (4,295) | | | 2,815 | |
| Net cash provided by (used in) financing activities | (3,520) | | | 12,586 | |
Net increase (decrease) in cash and cash equivalents, and restricted cash | 52,100 | | | (110,429) | |
| Cash and cash equivalents, and restricted cash at the beginning of period | 86,260 | | | 182,604 | |
| Cash and cash equivalents, and restricted cash at the end of period | $ | 138,360 | | | $ | 72,175 | |
| Supplemental disclosures of cash flow information: | | | |
| Cash paid for interest | $ | 4,400 | | | $ | 6,289 | |
| Cash paid for income taxes | — | | | — | |
| Non-cash investing and financing activity: | | | |
| Accrued capital expenditures in accounts payable and accrued liabilities | $ | 3,299 | | | $ | 4,798 | |
| Non-cash transfer of assets to inventory | — | | | 515 | |
| Reclassification of derivative liability upon charter amendment | $ | 20,800 | | | $ | — | |
See accompanying notes to unaudited condensed consolidated financial statements.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Description of Business
Proterra Inc (“Proterra” or the “Company") is a leading developer and producer of zero-emission electric vehicle and EV technology solutions for commercial application. Proterra designs, develops, manufactures, and sells electric transit buses as an original equipment manufacturer for North American public transit agencies, airports, universities, and other commercial transit fleets. It also designs, develops, manufactures, sells, and integrates proprietary battery systems and electrification solutions for global commercial vehicle manufacturers. Additionally, Proterra provides fleet-scale, high-power charging solutions for its customers. Proterra is headquartered in Burlingame, California. The Company has consolidated bus production to Greenville, South Carolina and battery production to Greer, South Carolina as of September 30, 2023.
Proterra Operating Company, Inc. (“Proterra OpCo” and formerly known as Proterra Inc prior to the consummation of the Business Combination (“Legacy Proterra”)) was originally formed in June 2004 as a Colorado limited liability company and converted to a Delaware corporation in February 2010. On June 14, 2021, Legacy Proterra consummated the transactions contemplated by the Merger Agreement (the “Merger Agreement”), dated as of January 11, 2021, by and among ArcLight Clean Transition Corp. (“ArcLight”), (and, after the domestication of ArcLight as a corporation incorporated in the State of Delaware, (the “Domestication”), Proterra), Phoenix Merger Sub, Inc. (the “Phoenix Merger Sub”), and Legacy Proterra, whereby Phoenix Merger Sub merged with and into Legacy Proterra, and Legacy Proterra being the surviving corporation and a wholly owned subsidiary of Proterra. Legacy Proterra changed its name to “Proterra Operating Company, Inc.” and continues as a Delaware corporation and wholly-owned subsidiary of Proterra (the “Merger”). Unless otherwise specified or unless the context otherwise requires, references in these notes to the “Company,” “we,” “us,” or “our” refer to Legacy Proterra prior to the Domestication, the Merger and other transactions contemplated by the Merger Agreement (the “Business Combination”) and to Proterra following the Business Combination.
Voluntary Filing under Chapter 11
As previously disclosed, on August 7, 2023 (the “Petition Date”), Proterra Inc and its direct subsidiary, Proterra Operating Company, Inc. (collectively, the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 (“Chapter 11) of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (such court, the “Bankruptcy Court” and such cases, the “Chapter 11 Cases”). The Chapter 11 Cases are jointly administered under the caption In re Proterra Inc, Case No. 23-11120 (BLS) (Bankr. D. Del. 2023). The Debtors continue to operate their business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. To ensure their ability to continue operating in the ordinary course of business, the Debtors sought from the Bankruptcy Court, various forms of “first-day” relief”, including, among other things, authority to use cash collateral, pay employee wages and benefits, pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date and continue customer programs. On August 10, 2023, the motions filed by the Debtors seeking this “first-day” relief were approved by the Bankruptcy Court and, to the extent such relief was granted on an interim basis, the Debtors have subsequently obtained orders granting such relief on a final basis. For detailed discussion about the Chapter 11 Cases, refer to Note 2, Chapter 11 Filing and Other Related Matters.
NASDAQ Delisting
On August 8, 2023, the Company received written notice from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, Nasdaq had determined to delist the Company’s common stock from the Nasdaq Global Select Market. The Company did not appeal this determination. On August 17, 2023, Nasdaq suspended the trading of the Company’s common stock at the opening of business. On September 9, 2023, Nasdaq applied to the U.S. Securities and Exchange Commission (the “SEC”) pursuant to Form 25 to remove the common stock of the Company from listing and registration on the Nasdaq Global Select Market at the opening of business September 20, 2023. As a result of the suspension and
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
delisting, the Company’s common stock began trading exclusively on the over-the-counter market (“OTC market”) on August 17, 2023 under the symbol PTRAQ. We will remain subject to SEC reporting obligations.
Application of ASC 852
Beginning on the Petition Date, the Company applied Financial Accounting Standards Board Codification Topic 852, Reorganizations (“ASC 852”) in preparing the consolidated financial statements. ASC 852 requires the financial statements, for the periods subsequent to the Petition Date and up to and including the period of emergence from Chapter 11, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain charges incurred during the bankruptcy proceedings, such as legal and other professional fees incurred directly as a result of the bankruptcy proceeding are recorded as Reorganization items, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss. In addition, prepetition obligations that may be impacted by the Chapter 11 process have been classified on the Consolidated Balance Sheet as of September 30, 2023 as liabilities subject to compromise. These liabilities are reported at the amounts the Company anticipates will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. See Note 2, Chapter 11 Filing and Other Related Matters, for more information.
Basis of Presentation
The unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the rules and regulations of the SEC.
Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2022 and the related notes incorporated by reference in the Company’s Annual Report (the “Annual Report”) on Form 10-K, filed with SEC on March 17, 2023 and amended on May 1, 2023, which provides a more complete discussion of the Company’s accounting policies and certain other information. The information as of December 31, 2022 was derived from the Company’s audited financial statements. The condensed consolidated financial statements were prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for a fair presentation of the Company’s financial position as of September 30, 2023 and the results of operations and cash flows for the nine months ended September 30, 2023 and 2022. The results of operations for the nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.
Liquidity and Going Concern
Under ASC Subtopic 205-40, Presentation of Financial Statements—Going Concern (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to meet our future obligations as they become due within one year of the financial statements being issued in this Quarterly Report on Form 10-Q. These financial statements have been prepared by management in accordance with U.S. GAAP and this basis assumes that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. These financial statements do not include any adjustments that may result from the outcome of this uncertainty.
The Company has incurred net losses and negative cash flows from operations since inception. As of September 30, 2023, the Company has an accumulated deficit of $1.4 billion, and cash and cash equivalents and short-term investments of $130.7 million. The Company has funded operations primarily through a combination of equity and debt financing.
Beginning on the Petition Date, the Company’s ability to continue as a going concern is contingent upon, among other things, its ability to, subject to the Bankruptcy Court’s approval, implement a Chapter 11 plan, emerge from the Chapter 11 Cases and generate sufficient liquidity to meet its contractual obligations and
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
operating needs. As a result of risks and uncertainties, the delisting of our common stock and the effects of potential disruption resulting from the Chapter 11 Cases making it more difficult to maintain business, financing and operational relationships, together with the Company’s recurring losses from operations and accumulated deficit, substantial doubt exists regarding our ability to continue as a going concern for the next 12 months. See Note 2, Chapter 11 Filing and Other Related Matters for additional details on the Chapter 11 Cases.
The Company expects to continue to operate in the normal course for the duration of the Chapter 11 Cases. The Bankruptcy Court has approved a bidding process that may result in the sale of all or substantially all of its assets during the Chapter 11 Cases.
Use of Estimates
In preparing the condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP and pursuant to the rules and regulations of the SEC, the Company must make estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ materially from these estimates.
Significant Accounting Policies
There have been no changes to the Company’s significant accounting policies described in the Annual Report, except for the accounting policies related to the Secured Convertible Promissory Notes that Legacy Proterra issued in August 2020 (as amended and restated, the “Convertible Notes”) and derivative liability described in Note 5, Debt, adopted during the three months ended March 31, 2023, and application of ASC 852 during the three months ended September 30, 2023, that have had a material impact on the Company’s condensed consolidated financial statements and related notes. See Note 2, Chapter 11 Filing and Other Related Matters, for more information on application of ASC 852.
Segments
The Company operates in the United States and has sales to the European Union, Canada, United Kingdom, Australia, Japan and Türkiye. Revenue disaggregated by geography, based on the addresses of the Company’s customers, consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| United States | $ | 68,480 | | | $ | 82,040 | | | $ | 201,585 | | | $ | 195,680 | |
| Rest of World | 17,668 | | | 14,183 | | | 49,806 | | | 33,688 | |
| $ | 86,148 | | | $ | 96,223 | | | $ | 251,391 | | | $ | 229,368 | |
The Company’s chief operating decision maker is its Chief Executive Officer (CEO) who reviews financial information presented on a consolidated basis for purposes of making decision on allocating resources and assessing financial performance. Accordingly, the Company has determined that it has a single reportable segment.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company determines the allowance for credit losses based on historical write-off experience, an analysis of the aging of outstanding receivables, customer payment patterns and expectations of changes in macroeconomic conditions that may affect the collectability of outstanding receivables. The allowance for credit losses was not material as of September 30, 2023 and December 31, 2022.
Credit Risk and Concentration
The Company’s financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, short-term investments, and accounts receivable. Cash and
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
cash equivalents and short-term investments are maintained primarily at one financial institution as of September 30, 2023 and December 31, 2022, and deposits exceed federally insured limits. Risks associated with cash and cash equivalents, and short-term investments are mitigated by banking with creditworthy financial institutions. The Company has not experienced any losses on its deposits of cash and cash equivalents or its short-term investments.
Cash equivalents and short-term investments consist of short-term money market funds, corporate debt securities, and debt securities issued by the U.S. Treasury, which are deposited with reputable financial institutions. The Company’s cash management and investment policy limits investment instruments to securities with short-term credit ratings at the timing of purchase of P-2 and A-2 or better from Moody’s Investors Service and Standard & Poor’s Financial Services, LLC, respectively, with the objective to preserve capital and to maintain liquidity until the funds can be used in business operations.
Accounts receivable are typically unsecured and are generally derived from revenue earned from transit agencies, universities and airports in North America and global commercial vehicle manufacturers in North America, the European Union, the United Kingdom, Australia, Japan and Türkiye. The Company periodically evaluates the collectability of its accounts receivable and provides an allowance for potential credit losses as necessary.
Given the large order value for customers and the relatively low number of customers, revenue and accounts receivable have typically been concentrated with a limited number of customers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | Accounts Receivable |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | September 30, | | December 31, |
| 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
| Number of customers accounted for 10% or more | 3 | | 2 | | 1 | | 2 | | 3 | | 2 |
Total % of customers accounted for 10% or more | 62% | | 40% | | 24% | | 27% | | 52% | | 48% |
Single source suppliers provide the Company with a number of components that are required for manufacturing of its current products. Although there may be multiple suppliers available, many of the components that the Company’s manufacturing process requires are purchased from one single source. If these single source suppliers fail to meet the Company’s requirements on a timely basis at competitive prices or are unable to provide components for any reason, the Company could suffer manufacturing delays, a possible loss of revenue, or incur higher cost of sales, any of which could adversely impact the Company’s operating results. As part of the Chapter 11 proceedings, the Company rejected the existing contract with TPI Composites, Inc., the single source supplier for bus bodies, and the Company may be unable to negotiate another agreement on better terms. As of September 30, 2023, the Company has sufficient bus bodies in inventory to meet its near term production plan.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of property, plant, and equipment and right-of-use assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value.
In addition to the recoverability assessment, the Company periodically reviews the remaining estimated useful lives of property, plant, and equipment. If the estimated useful life assumption for any asset is reduced, the remaining net book value is depreciated over the revised estimated useful life.
The Company reviews long-lived assets for impairment at the lowest level for which separate cash flows can be identified. On October 17, 2023, Volta Trucks, a Proterra Powered customer, announced that it will file for administration in the United Kingdom and insolvency proceedings in other relevant jurisdictions. The Company
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
recorded a $1.6 million impairment charge in the three months and nine months ended September 30, 2023 to the long-term investments recorded in other assets in the condensed consolidated balance sheets. See Note 12, Subsequent events, for details. No impairment charge was recognized in the three and nine months ended September 30, 2022.
Deferred Revenue
Deferred revenue consists of billings or payments received in advance of revenue recognition that are recognized as revenue once the revenue recognition criteria are met. In some instances, progress billings are issued upon meeting certain milestones stated in the contracts. Accordingly, the deferred revenue balance does not represent the total contract value of non-cancelable arrangements. Invoices are typically due within 30 to 40 days. The current portion of deferred revenue represents the amount that is expected to be recognized as revenue within one year from the balance sheet date.
The changes in deferred revenue inclusive of the balance recorded in the liabilities subject to compromise, consisted of the following (in thousands):
| | | | | |
Deferred revenue as of December 31, 2022 | $ | 67,398 | |
Revenue recognized from beginning balance during the nine months ended September 30, 2023 | (17,336) | |
Deferred revenue added during the nine months ended September 30, 2023 | 33,756 | |
Deferred revenue as of September 30, 2023 | $ | 83,818 | |
Liabilities Subject to Compromise
Since filing the Chapter 11 petitions, the Company has operated as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. The liabilities subject to compromise balance is reflective of expected allowed claim amounts in accordance with ASC 852 and are subject to change materially based on the proceedings and continued consideration of claims that may be modified, allowed, or disallowed. Refer to Note 2, Chapter 11 Filing and Other Related Matters, for details.
Revenue Recognition
The Company derives revenue primarily from the sale of vehicles and charging systems, the installation of charging systems, the sale of battery systems and powertrain components to other vehicle manufacturers, as well as the sale of spare parts and other services provided to customers. Product revenue consists of revenue earned from vehicles and charging systems, battery systems and powertrain components, installation of charging systems, and revenue from leased vehicles, charging systems, and batteries under operating leases. Parts and other service revenue includes revenue earned from spare parts, the design and development of battery systems and powertrain systems for other vehicle manufacturers, and extended warranties.
The Company recognizes revenue when or as it satisfies a performance obligation by transferring control of a product or service to a customer. Revenue from product sales is recognized when control of the underlying performance obligations is transferred to the customer. Revenue from sales of vehicles is typically recognized upon delivery when the Company can objectively demonstrate that the criteria specified in the contractual acceptance provisions are achieved prior to delivery. In cases, where the Company cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior delivery, revenue is recognized upon acceptance by the customer. Revenue from sales of charging systems is recognized at a point in time, generally upon delivery or commissioning when control of the underlying performance obligations are transferred to the customer. Under certain contract arrangements, the control of the performance obligations related to the charging systems is transferred over time, and the associated revenue is recognized over the installation period using an input measure based on costs incurred to date relative to total estimated costs to completion. Spare parts revenue is recognized upon shipment. Extended warranty revenue is recognized over the life of the extended warranty using the time elapsed method. Development service contracts typically include the delivery of prototype products to customers. The performance obligation associated with the development of prototype products as well as battery systems and powertrain components to other vehicle manufacturers, is satisfied at a point in time, typically upon shipping.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue derived from performance obligations satisfied over time from charging systems and installation was $0.9 million and $3.7 million for the three months ended September 30, 2023 and 2022, respectively, and $3.7 million and $5.8 million for the nine months ended September 30, 2023 and 2022, respectively. Leasing revenue and extended warranty revenue recognized over time was immaterial for the three and nine months ended September 30, 2023 and 2022, respectively.
As of September 30, 2023 and December 31, 2022, the contract assets balance was $3.2 million and $26.1 million, respectively, and these balances are recorded in the prepaid expenses and other current assets on the consolidated balance sheets. The contract assets are expected to be billed within the next twelve months.
As of September 30, 2023, the amount of remaining performance obligations that have not been recognized as revenue was $417.4 million. As the Company is in the process of a Bankruptcy Court-approved bidding process that may result in the sale of all or substantially all of its assets during the Chapter 11 Cases, the timing of satisfaction of these performance obligations is not estimable as of September 30, 2023. This amount excludes the value of remaining performance obligations for contracts with an original expected length of one year or less.
Our business has the following commercial offerings each addressing a critical component of commercial vehicle electrification.
•Proterra Transit designs, develops, manufactures, and sells electric transit buses as an original equipment manufacturer (“OEM”) for North American public transit agencies, airports, universities, and other commercial transit fleets.
•Proterra Powered & Energy includes Proterra Powered, which designs, develops, manufactures, sells, and integrates proprietary battery systems and electrification solutions into vehicles for global commercial vehicle OEMs, and Proterra Energy, which offers 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.
Revenue of these commercial offerings are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Proterra Transit | | $ | 25,770 | | | $ | 56,363 | | | $ | 91,745 | | | $ | 142,563 | |
| Proterra Powered & Energy | | 60,378 | | | 39,860 | | | 159,646 | | | 86,805 | |
| Total | | $ | 86,148 | | | $ | 96,223 | | | $ | 251,391 | | | $ | 229,368 | |
Product Warranties
Warranty expense is recorded as a component of cost of goods sold. Activity of the accrued warranty inclusive of the balances in the liabilities subject to compromise, consisted of the following (in thousands):
| | | | | |
| Nine Months Ended September 30, 2023 |
| Warranty reserve- beginning of period | $ | 25,513 | |
| Warranty costs incurred | (2,991) | |
| Net changes in liability for pre-existing warranties, including expirations | (3,000) | |
| Provision for warranty | 13,501 | |
| Warranty reserve- end of period | $ | 33,023 | |
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Adopted Accounting Guidance and Accounting Pronouncements Not Yet Effective
There have been no recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance during the nine months ended September 30, 2023 that are of significance or potential significance to the Company.
2. Chapter 11 Filing and Other Related Matters
The Chapter 11 Cases
Events Leading to Chapter 11
As previously disclosed, the Company has incurred net losses and negative cash flows from operations since inception and has funded operations primarily through a combination of equity and debt financing. The Company’s (i) existing Convertible Notes include a requirement that the Company maintain minimum liquidity and (ii) existing loan facilities include a requirement that the Company deliver financial reports without a going concern qualification, which have been waived or modified as the Company pursued various strategies designed to improve liquidity and cash generated from operations, such as expense reduction and cash savings initiatives that included streamlining facilities, initiating working capital initiatives, and efforts to reduce overall selling, general and administrative expenses, including a workforce reduction announced in January 2023, that included the closure of the City of Industry facility by December 31, 2023 to improve operational efficiency, and the cessation of battery production in the Burlingame facility in June 2023 to consolidate all battery production in our Powered 1 battery factory in the second half of 2023. Additionally, the Company explored potential options for raising additional funds through the issuance of equity, equity-linked, and/or debt securities, debt financings or other capital sources and/or strategic transactions. However, as discussed in the Declaration of Gareth T. Joyce in Support of Chapter 11 Petitions and First Day Pleadings [Docket No. 16] (the “First Day Declaration”) filed by the Debtors’ in the Chapter 11 Cases, these prepetition capital raising efforts were unsuccessful.
Voluntary Filing for Chapter 11 Protections
As previously disclosed, on the Petition Date, the Debtors filed the Bankruptcy Petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases are jointly administered under the caption In re Proterra Inc, Case No. 23-11120 (BLS) (Bankr. D. Del. 2023). The Debtors continue to operate their business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. To ensure their ability to continue operating in the ordinary course of business, the Debtors sought, from the Bankruptcy Court, various forms of “first-day” relief, including, among other things, authority to use cash collateral, pay employee wages and benefits, pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date and continue customer programs. On August 10, 2023, the motions filed by the Debtors seeking this “first-day” relief were approved by the Bankruptcy Court and, to the extent such relief was granted on an interim basis, the Debtors have subsequently obtained orders granting such relief on a final basis.
As previously disclosed by the Company, the filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the Senior Credit Facility and the Convertible Notes. As a result of the bankruptcy filing, the outstanding principal and interest thereunder became immediately due and payable. Any efforts to enforce such payment obligations under the debt instruments set forth above are automatically stayed under the Bankruptcy Code. However, the Convertible Notes continue to accrue PIK and cash interest under the cash collateral order. See Note 5, Debt for details.
Debtors-In-Possession
The Debtors are currently operating as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. In general, as debtors-in-possession under the Bankruptcy Code, the Debtors are authorized to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. The Debtors have obtained relief from the Bankruptcy Court authorizing the Debtors to conduct their business activities in the ordinary course,
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
including, among other things and subject to the terms and conditions of such orders, authorizing the Debtors to, among other things: (i) pay employees’ wages and related obligations; (ii) pay pre-petition claims of certain lien claimants and critical vendors; (iii) continue to operate their cash management system in a manner substantially similar to pre-petition practice (iv) continue to maintain and administer certain existing customer programs; (v) pay taxes in the ordinary course; (vi) maintain their insurance program and surety bond program in the ordinary course; (vii) pay utility providers for post-petition services in the ordinary course; and (viii) to use cash collateral. In addition, the Bankruptcy Court has entered an order limiting trading of the Company’s equity securities to protect the Company’s net operating losses.
Marketing Process
In addition to the aforementioned first-day motions, the Debtors received Bankruptcy Court approval of certain procedures related to a marketing and bidding process for one or more potential sales or reorganization of all or certain assets of the Debtors, including the assets of Debtors’ Proterra Transit, Proterra Powered, and Proterra Energy business lines.
Prepetition Key Employee Retention Plan
As previously disclosed by the Company, on August 3, 2023, the compensation committee of the board of directors of the Company (the “Compensation Committee”) granted retention awards (each, a “Retention Award”) to certain of the Company’s employees. The Retention Awards, memorialized in an award letter (“Retention Award Letter”), are subject to clawback if the participant is terminated for cause or voluntarily resigns before the earlier of either the six-month anniversary or one-year anniversary of the date of grant, as applicable, or any potential transaction involving the Company (including through a merger, recapitalization or sale of substantially all of the assets of the Company) or any sale, disposition or winding down of any business unit, business division or asset of the Company that the participant provides substantially all of his or her services to.
As previously disclosed, the Company granted Retention Awards to named executive officers Julian Soell and Chris Bailey. Messrs. Soell and Bailey each received a Retention Award of approximately $0.5 million, which was paid on August 4, 2023, subject to certain clawback provisions. Under the terms of Messrs. Soell’s and Bailey’s Retention Award Letters, if the executive is terminated by the Company for “cause” (as defined in the Retention Award Letter) or by the executive without “good reason” (as defined in the executive’s employment or severance agreement) prior to the earlier of (i) August 4, 2024 and (ii) a “corporate transaction” (as defined in the Retention Award Letter), the executive will be required to repay the Company the after-tax amount of the Retention Award within 90 days following his termination date. Such repayment obligation does not apply in the event of a termination due to a death or disability, or due to a leave of absence because of a disability.
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the Debtors’ filing of the Bankruptcy Petitions resulted in most judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims being subject to the automatic stay under the Bankruptcy Code.
Executory Contracts
Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assume and assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors in this document, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease of the Debtors, is qualified by any rights the Debtors have under the Bankruptcy Code.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Potential Claims
The Debtors have filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing. Certain holders of pre-petition claims against the Debtors are required to file proofs of claim by the deadlines set forth in the Order Establishing Bar Dates for Filing Proofs of Claim and Approving the Form and Manner of Notice Thereof [Docket No. 187].
The Debtors will receive proofs of claim, that will be reconciled to amounts recorded in the Debtors’ accounting records. Differences in amounts recorded and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court, where appropriate. The Debtors may ask the Bankruptcy Court to disallow claims that the Debtors believe are duplicative, have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons. In addition, as a result of this process, the Debtors may identify additional liabilities that will need to be recorded or reclassified to liabilities subject to compromise. In light of the substantial number of claims expected to be filed, the claims administration process may take considerable time to complete and may continue through and following the Chapter 11 proceedings.
Reorganization items, net and Liabilities Subject to Compromise
The amounts currently classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of secured status of certain claims, the values of any collateral securing such claims, or other events. Any resulting changes in classification will be reflected in subsequent financial statements. If there is uncertainty about whether a secured claim is undersecured, or will be impaired under any Chapter 11 plan, the entire amount of the claim is included with prepetition claims in liabilities subject to compromise.
As a result of the filing of the Chapter 11 Cases on August 7, 2023, the classification of pre-petition indebtedness is generally subject to compromise pursuant to a Chapter 11 plan. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ business and assets. Among other things, the Bankruptcy Court authorized the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes and critical vendors. The Debtors are paying and intend to pay undisputed post-petition liabilities in the ordinary course of business. In addition, the Debtors may reject certain pre-petition executory contracts and unexpired leases with respect to their operations with the approval of the Bankruptcy Court. Any damages resulting from the rejection of executory contracts and unexpired leases are treated as general unsecured claims.
Reorganization items, net incurred as a result of the Chapter 11 Cases presented separately in the accompanying Consolidated Statements of Operations were as follows (in thousands):
| | | | | | | | | | | |
| Three Months Ended September 30, 2023 | | Nine Months Ended September 30, 2023 |
Professional fees and other bankruptcy related costs | $ | 17,530 | | | $ | 17,530 | |
Write-off of liabilities subject to compromise | (1,139) | | | (1,139) | |
Reorganization items, net | $ | 16,391 | | | $ | 16,391 | |
As of September 30, 2023, no cash payment was made for the legal and professional fees related to the reorganization.
The accompanying Condensed Consolidated Balance Sheets as of September 30, 2023 include amounts classified as Liabilities subject to compromise. The amount reflects the expected allowed amount of the pre-
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
petition claims that are not fully secured and that have at least a possibility of not being repaid at the full claim amount.
Liabilities subject to compromise consisted of the following (in thousands):
| | | | | |
| September 30, 2023 |
| Accounts payable | $ | 73,947 | |
Accrued liabilities | 14,885 | |
Deferred revenue | 83,045 | |
Operating lease liabilities | 19,490 | |
Other liabilities | 22,378 | |
| Liabilities subject to compromise | $ | 213,745 | |
The Company will continue to evaluate the amount and classification of its pre-petition liabilities. Any additional liabilities that are subject to compromise will be recognized accordingly and the aggregate amount of liabilities subject to compromise may change and such adjustments may be material.
3. Fair Value of Financial Instruments
The Company measures certain financial assets and liabilities at fair value. Fair value is determined based on the exit price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy:
Level 1 – Quoted prices in active markets for identical assets or liabilities;
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Financial assets and liabilities measured at fair value on a recurring basis using the above input categories were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Pricing Category | | Fair Value at |
| | September 30, 2023 | | December 31, 2022 |
| Assets: | | | | | |
| Cash equivalents and marketable securities: | | | | | |
| Money market funds | Level 1 | | $ | 9 | | | $ | 14,941 | |
| | | | | |
| Short-term investments: | | | | | |
| U.S. Treasury securities | Level 1 | | 17,899 | | | 224,359 | |
| | | | | |
| Total | | | $ | 17,908 | | | $ | 239,300 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
The Company’s short-term investments were comprised of U.S. Treasury securities, and classified as available-for-sale at the time of purchase because it is intended that these investments are available for current operations. Investments are reported at fair value and are subject to periodic impairment review. Unrealized gains and losses related to changes in the fair value of these securities are recognized in accumulated other comprehensive loss. The ultimate value realized on these securities is subject to market price volatility until they are sold. Realized gains or losses from short-term investments are recorded in other expense (income), net.
As of September 30, 2023 and December 31, 2022, the Company has $25.0 million and $26.6 million, respectively, of long-term investments recorded in other assets in the condensed consolidated balance sheets, comprised of minority ownership of equity investments in privately held entities. The long-term investment
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
balances include $25.0 million strategic equity investment made in the third quarter of 2022 in an entity that the Company expects to produce lithium iron phosphate (LFP) battery cells in the United States in the coming years which is expected to provide the Company with development opportunities for battery packs with another cell chemistry to address additional segments of the commercial vehicle market. These investments do not have a readily determinable fair value and are accounted for under a measurement alternative at cost, less impairment, adjusted for observable price changes. No impairment charges or observable price changes were recognized in the nine months ended September 30, 2022. The Company recorded a $1.6 million impairment charge to write off its entire investment in Volta Trucks entity in the nine months ended September 30, 2023 as a result of its filing for insolvency proceedings. See Note 12, Subsequent events, for details. There are no unrealized gains or losses associated with the long-term investment as of September 30, 2023.
The following is a summary of cash equivalents and marketable securities as of September 30, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost | | Unrealized Loss | | Estimated Fair Value |
| Cash equivalents: | | | | | | |
| Money market funds | | $ | 9 | | | $ | — | | | $ | 9 | |
| | | | | | |
| Short-term investments: | | | | | | |
| U.S. Treasury securities | | 17,905 | | | (6) | | | 17,899 | |
| | | | | | |
| Total | | $ | 17,914 | | | $ | (6) | | | $ | 17,908 | |
As of September 30, 2023, the contractual maturities of the short-term investments were less than one year.
The following is a summary of cash equivalents and marketable securities as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost | | Unrealized Loss | | Estimated Fair Value |
| Cash equivalents: | | | | | | |
| Money market funds | | $ | 14,941 | | | $ | — | | | $ | 14,941 | |
| | | | | | |
| Short-term investments: | | | | | | |
| U.S. Treasury securities | | 224,904 | | | (545) | | | 224,359 | |
| | | | | | |
| Total | | $ | 239,845 | | | $ | (545) | | | $ | 239,300 | |
As of December 31, 2022, the contractual maturities of the short-term investments were less than one year.
The fair value of derivative liability under the Convertible Notes was measured as the difference between the estimated value of the Convertible Notes with and without the embedded features. See Note 5, Debt, for additional information on the Convertible Notes. A summary of the changes of the derivative liability is as follows (in thousands):
| | | | | |
| Derivative liability |
| Fair value at issuance as of March 31, 2023 | $ | 135,678 | |
| Change in fair value | (114,878) | |
| Reclassification of liability upon charter amendment | (20,800) | |
Fair value as of September 30, 2023 | $ | — | |
The change in fair value of derivative liability is recorded in the statements of operations. On June 23, 2023, the Company received stockholder approval to increase the number of authorized shares and subsequently filed a
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
certificate of amendment with the State of Delaware. Upon amending the certificate of incorporation, certain embedded conversion features associated with the Convertible Notes no longer qualify for derivative accounting because the Company has sufficient number of authorized shares to issue upon conversion of the Convertible Notes. The carrying amount of the derivative liability of $20.8 million associated with those conversion features, which is the fair value as of June 23, 2023, was reclassified to stockholders’ equity in accordance with Topic 815, Derivatives and Hedging. The fair value change in derivative liability was caused by changes of stock price and certain underlying assumptions related to the likelihood of conversion.
The voluntary petition filing of Chapter 11 on August 7, 2023 is considered an event of default under the Convertible Notes, triggering the maturity date of the Convertible Notes. As the embedded conversion features associated with the Convertible Notes expired on maturity date, the change of fair value of $81.3 million was recorded to the gain on revaluation of derivative liability on the condensed consolidated statement of operations during the three months ended September 30, 2023.
4. Balance Sheet Components
Cash and cash equivalents consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Cash | $ | 112,805 | | | $ | 58,754 | |
Cash equivalents | 9 | | | 14,941 | |
Total cash and cash equivalents | $ | 112,814 | | | $ | 73,695 | |
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheets to the total of such amounts shown on the statements of cash flows. The restricted cash is primarily collateral for performance bonds issued to certain customers. The collateral is provided in the form of a cash deposit to either support the bond directly or to collateralize a letter of credit that supports the performance bonds.
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Cash and cash equivalents | $ | 112,814 | | | $ | 73,695 | |
Restricted cash, current portion | 25,546 | | | 12,565 | |
| | | |
| | | |
Total cash and cash equivalents, and restricted cash | $ | 138,360 | | | $ | 86,260 | |
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Raw materials | $ | 204,463 | | | $ | 127,199 | |
Work in progress | 39,736 | | | 21,153 | |
Finished goods | 10,201 | | | 13,518 | |
Service parts | 9,210 | | | 7,697 | |
Total inventories | $ | 263,610 | | | $ | 169,567 | |
Increases in Raw materials as of September 30, 2023 is primarily related to the timing of receipts of lithium-ion cells for our battery packs and increase of work in progress and finished goods mainly due to timing of bus deliveries. For the three and nine months ended September 30, 2023, $7.8 million and $14.5 million of expenses were recorded related to the write down of inventories for excess or obsolete inventories, scrap from the battery manufacturing facility (Powered 1) ramp up production and consolidation of Powered facilities, and lower of cost or market adjustment. The reserve expenses were immaterial for each of the three and nine months ended September 30, 2022.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Property, plant, and equipment, net, consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Computer hardware | $ | 6,116 | | | $ | 5,465 | |
Computer software | 17,111 | | | 11,012 | |
Internally used vehicles and charging systems | 11,778 | | | 15,177 | |
Leased vehicles and batteries | 5,142 | | | 5,142 | |
Leasehold improvements | 30,951 | | | 10,716 | |
Machinery and equipment | 80,795 | | | 28,942 | |
Office furniture and equipment | 3,397 | | | 2,523 | |
Tooling | 19,885 | | | 22,430 | |
Finance lease right-of-use assets | 878 | | | 179 | |
Construction in progress | 5,217 | | | 72,505 | |
| 181,270 | | | 174,091 | |
Less: Accumulated depreciation and amortization | (72,861) | | | (66,539) | |
Total | $ | 108,409 | | | $ | 107,552 | |
Construction in progress was comprised of various assets that are not available for their intended use as of the balance sheet date. The construction in progress balance as of December 31, 2022 mainly related to the equipment and facility build out at Powered 1 in Greer, South Carolina.
For the three and nine months ended September 30, 2023, depreciation and amortization expense were $5.5 million and $15.0 million, respectively. For the three and nine months ended September 30, 2022, depreciation and amortization expense were $2.9 million and $9.6 million, respectively.
Accrued liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Accrued payroll and related expenses | $ | 4,819 | | | $ | 8,647 | |
Accrued legal and professional fees | 17,649 | | | 1,586 | |
Accrued sales and use tax | 168 | | | 1,784 | |
Warranty reserve | — | | | 8,406 | |
| Accrued supplier liability | — | | | 7,699 | |
| Insurance related | — | | | 4,445 | |
Other accrued expenses | 7,692 | | | 984 | |
Total | $ | 30,328 | | | $ | 33,551 | |
Other long-term liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Warranty reserve | $ | 3,420 | | | $ | 17,107 | |
Other long-term liabilities | 1,579 | | | 57 | |
| Total | $ | 4,999 | | | $ | 17,164 | |
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Debt
Debt, net of debt discount and issuance costs, consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Senior Credit Facility | $ | — | | | $ | — | |
| | | |
Convertible Notes | 178,992 | | | 122,692 | |
Total debt | $ | 178,992 | | | $ | 122,692 | |
Less debt, current | 178,992 | | | 122,692 | |
Debt, non-current | $ | — | | | $ | — | |
Senior Credit Facility
In May 2019, the Company entered into the Senior Credit Facility with borrowing capacity up to $75.0 million. The commitment under the Senior Credit Facility is available to the Company on a revolving basis through the earlier of May 9, 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 percentage of eligible accounts receivable and inventory, subject to certain reserves, to be determined in accordance with the Senior Credit Facility. The Senior Credit Facility includes a $25.0 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 the Company’s 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 in substantially all of the Company’s assets except certain excluded assets.
Borrowings under the Senior Credit Facility bore interest at per annum rates equal to, at the Company’s option, either (i) the base rate plus an applicable margin for base rate loans, or (ii) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin for LIBOR loans. 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 Senior Credit Facility contains certain customary non-financial covenants. In addition, the Senior Credit Facility requires the Company to maintain a fixed charge coverage ratio of at least 1.00:1.00 during such times as a covenant trigger event shall exist.
On April 3, 2023, the Company entered into the Third Amendment to the Senior Credit Facility to replace the references of LIBOR in the loan document with Term SOFR, a rate based on the secured overnight financing rate as administered by the Federal Reserve Bank of New York.
The voluntary petition filing on August 7, 2023 is considered an event of default under the Senior Credit Facility, and resulted in termination of the revolver commitment. The defeasance of the Senior Credit Facility resulted in the write-off of remaining unamortized debt issuance cost of $0.1 million to interest expense.
There was no outstanding balance for borrowings under the Senior Credit Facility as of September 30, 2023 and December 31, 2022. The Company elected to cash collateralize its outstanding letters of credit obligations in accordance with certain terms under the Senior Credit Facility, which was recorded in the restricted cash, current on the condensed consolidated balance sheet. During the three months ended September 30, 2023, $10 million of letter of credit was drawn. As of September 30, 2023, there was an aggregate of $11.9 million in letters of credit outstanding.
Convertible Notes
In August 2020, Legacy Proterra issued $200.0 million aggregate principal amount of Convertible Notes with an initial maturity date on August 4, 2025. The Convertible Notes had a cash interest of 5.0% per annum payable
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
at each quarter end and a paid-in-kind (“PIK”) interest of 4.5% per annum payable by increasing the principal balance at each quarter end.
Each of the Convertible Notes rank equally without preference or priority of any kind over one another, but senior in all rights, privileges and preferences to all shares of the Company’s capital stock and all other securities of the Company that are convertible into or exercisable for the Company’s capital stock directly or indirectly. The Convertible Notes are secured by substantially all of the assets of Legacy Proterra, including its intellectual property.
Prior to the maturity date, in the event of a liquidation or sale of the Company, the Company was required to 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 the Company’s capital stock in accordance with their terms.
The Note Purchase Agreement contains certain customary non-financial covenants. In addition, the Note Purchase Agreement requires the Company to maintain liquidity at quarter end (“Minimum Liquidity Covenant”) 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. See below for details regarding modifications to the Minimum Liquidity Covenant.
In connection with the issuance of the Convertible Notes, the Company issued warrants to the holders of Convertible Notes to purchase 4.6 million shares of Company capital stock at an exercise price of $0.02 per share. The warrants were freestanding financial instruments and, prior to the closing of the Business Combination (the “Closing”), were classified as a liability due to the possibility that they could become exercisable into Legacy Proterra convertible preferred stock. 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 warrant liability of $29.0 million was initially measured at fair value on its issuance date and recorded as a debt discount and amortized during the term of the Convertible Notes to interest expense using the effective-interest method. 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, the carrying amount of the warrant liability was reclassified to stockholders’ equity. In the fourth quarter of 2021, all remaining outstanding warrants were exercised.
Prior to the Closing, the embedded features of the Convertible Notes were comprised of conversion options that had the economic characteristics of a contingent early redemption feature settled in a variable number of shares of Company stock. 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 the issuance date of the Convertible Notes and recorded as debt discount and was amortized during the term of the Convertible Notes to interest expense using the 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. 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 carrying amount of the embedded derivative, the fair value as of June 14, 2021 (the “Closing Date”), was reclassified to stockholders’ equity in accordance with Topic 815, Derivatives and Hedging.
Issuance costs of $5.1 million were also recorded as debt discount and are amortized during the term of the Convertible Notes to interest expense using the effective interest method.
On June 14, 2021, certain Convertible Note holders with an original aggregate principal amount of $46.5 million elected to convert their Convertible Notes at the Closing. An aggregate of $48.8 million principal and
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
interest was reclassified to additional paid-in capital, and $21.0 million of remaining related debt issuance costs were expensed to interest expense.
The outstanding 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 volume-weighted average price (“VWAP”) of the common stock exceeds $9.86 over 20 consecutive days subsequent to January 13, 2022.
The Company was not in compliance with the Minimum Liquidity Covenant as of December 31, 2022. The Company received a waiver of the Minimum Liquidity Covenant in February 2023 which provided for retroactive effect, so that no such event of default occurred in the year ended December 31, 2022.
The Company’s inability to deliver audited financial statements certified by the Company’s independent registered public accounting firm without qualification (or similar notation) as to going concern with respect to the financial statements for the year ended December 31, 2022 would have been an event of default under both the Senior Credit Facility and the Convertible Notes. On March 14, 2023, the Company obtained a limited advance waiver from the holders of the Convertible Notes with respect to the covenant that requires an unqualified statement regarding the Company being able to continue as a going concern until March 31, 2023. On March 31, 2023, the Company received a waiver for the Senior Credit Facility to consent to the delivery of the 2022 Financials with a going concern qualification and waived the cross default of the corresponding covenant under the Convertible Notes in connection with the 2022 Financials.
As a result, the Company was in compliance with the covenants contained in the Senior Credit Facility and Convertible Facility as of March 31, 2023.
Amendment to the Notes Purchase Agreement and Convertible Notes
On March 31, 2023, the Company entered into an amendment to the Notes Purchase Agreement and Convertible Notes, which includes amendments to the interest rate, maturity date, mandatory and optional conversion rights, limitations on the issuance of shares of the Company’s common stock upon conversion and the Company’s obligation to seek stockholder approvals as described below, minimum liquidity requirements and certain other covenants described in further detail below (together, the “Convertible Notes Amendments”).
The Convertible Notes Amendments provide for (i) a waiver of the Minimum Liquidity Covenant through May 31, 2024, requiring instead a minimum Liquidity (as defined in the Convertible Notes Amendments) of $125.0 million as of the last day of each quarter from March 31, 2023 through and including May 31, 2024, and (ii) a waiver of the requirement that the Company’s financial statements be certified by the Company’s auditor without qualification (or similar notation) as to going concern for the Company’s consolidated financial statements for fiscal years 2022 and 2023. After May 31, 2024, the Convertible Notes require the Company to maintain Liquidity at each quarter end of not less than the greater of (i) $75.0 million and (ii) four times of Cash Burn (as defined in the Convertible Notes Amendments) for the three-month period then ended. In addition, the Convertible Notes contain an additional holding company covenant limiting the Company’s ability to engage in business, operations and activities other than as set forth in the Convertible Notes.
The Convertible Notes Amendments extended the maturity date of the Convertible Notes to August 4, 2028, except with respect to $3.5 million original principal amount, which have since also been extended as described below. The annual interest rate was increased to 12.0% per annum, consisting of 5.0% in cash and 7.0% PIK interest with the PIK default rate proportionally increased to 9.0%. The increased PIK interest on the Convertible Notes is to be accrued from March 17, 2023.
In addition, the Convertible Notes Amendments amended the mandatory conversion provision in the existing Convertible Notes to provide for mandatory conversion only on or after March 31, 2024, if the daily VWAP of the Company’s common stock equals or exceeds (a) $15.00 after March 31, 2024 to but not including March 31, 2025, or (b) $12.00 after March 31, 2025, in each case, over a period of 20 consecutive trading days and providing that if the mandatory conversion trigger is met, to convert at a conversion price equal to (i) $4.00 until 1/3 of the aggregate balance of such Convertible Note (including all PIK interest and cash interest accrued but not paid) is converted, (ii) thereafter, $5.00 until 1/3 of the aggregate balance of the such Convertible Note is
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
converted, and (iii) thereafter, $6.00. The conversion prices will be equitably adjusted to reflect any stock dividends, stock splits, reverse stock splits, recapitalizations or other similar events.
In addition, following the Convertible Notes Amendments, holders of the Convertible Notes have an additional option, at any time on or after March 31, 2024 until maturity of the Convertible Notes, to convert at a conversion price equal to (i) $4.00 until 1/3 of the aggregate balance of the such Convertible Note is converted, (ii) thereafter, $5.00 until 1/3 of the aggregate balance of the such Convertible Note is converted, and (iii) thereafter, $6.00, which conversion right shall be exercisable in whole or in part from time to time; provided, however, that if the Company consummates a Qualified Financing (as defined below), the holder, at its option, at any time or from time to time on or after March 31, 2024, may convert its Convertible Notes at a conversion price equal to 75% of the lowest per share cash purchase price of the common stock or preferred stock sold by Proterra in any Qualified Financing, subject to a $1.016 floor conversion price. “Qualified Financing” means, as of any date of determination, a bona fide equity financing, if any, on or after March 31, 2023, in which the Company or Proterra OpCo sells equity or equity-linked securities in a capital-raising transaction (which may include a public offering of the Company’s equity securities).
Subject to certain exceptions, the Convertible Notes also restrict the Company’s ability to, among other things: dispose of or sell the Company’s assets; make material changes in the Company’s business or management, or accounting and reporting practices; acquire, consolidate, or merge with other entities; incur additional indebtedness; create liens on the Company’s assets; pay dividends; make investments; enter transactions with affiliates; and pre-pay other indebtedness.
The Convertible Notes also contain customary events of default, including, among others, the failure to make any payment of principal (or any other payment) when due under the Convertible Notes within five business days of the applicable due date, the breach of the Minimum Liquidity Covenant or any of the negative covenants, and the commencement of an insolvency proceeding. A default under the Company’s Convertible Notes would result in a cross-default under the Senior Credit Facility.
The Convertible Notes provide that no “person” or “group” (within the meaning of Section 13(d) of the Exchange Act) will be entitled to receive any of the Company’s common stock otherwise deliverable upon conversion of the Convertible Notes to the extent that such receipt would cause such person or group to become, directly or indirectly, a “beneficial owner” as defined in Rule 13d-3 under the Exchange Act of more than 40% of the Company’s common stock outstanding at such time (the “Beneficial Ownership Limitation”), and no conversion of the Convertible Notes shall take place to the extent (but only to the extent) that such receipt (or conversion) would cause any Note holder or its affiliates to beneficially own shares of the Company’s common stock in excess of the Beneficial Ownership Limitation.
The Convertible Notes also provide for certain limitations on the conversion rights of the holders of the Convertible Notes, including caps on the number of shares of common stock deliverable upon conversion subject to obtaining stockholder approval, as described below. The Company has agreed to use its best efforts to obtain stockholder approval of (i) the issuance of more than 19.99% of the Company’s outstanding common stock in accordance with Nasdaq listing standards (the “Nasdaq Proposal”) and (ii) an amendment to the Company’s certificate of incorporation to increase the number of authorized shares of common stock.
Prior to the receipt of stockholder approval of the Nasdaq Proposal, the maximum number of shares of common stock that may be issued upon conversions of the Convertible Notes will be 45,257,360 shares. If stockholder approval of the Nasdaq Proposal is obtained, until and unless the Company receives stockholder approval of an amendment to the Company’s certificate of incorporation to increase the number of authorized shares of the Company’s common stock, the maximum number of shares of common stock that may be issued upon conversions of the Convertible Notes will be 177,782,000 shares. If the Company receives both stockholder approvals, the number of shares of the Company’s common stock that may be issued upon conversion of the Convertible Notes will be limited by the number of authorized and available shares, subject to the Beneficial Ownership Limitation described above.
The Company was obligated to use best efforts to seek the above stockholder approvals as promptly as practicable and no later than the Company’s 2023 annual meeting of stockholders; provided that if such
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
stockholder approvals are not received at the Company’s 2023 annual meeting of stockholders, the Company is obligated to call a special meeting of stockholders every 6 months until such stockholder approvals are received.
For any additional shares exceeding the 45,257,360 or 177,782,000 share limits set forth above, the Convertible Notes holders had the right to elect either (x) to rescind the conversion with respect to (and only with respect to) the portion of the balance of the Convertible Notes that relates to the number of shares of the Company’s common stock exceeding the applicable limitations (the “Excess Shares”), or (y) for the Company to pay to such Convertible Note holder an amount equal to the product of (A) the number of Excess Shares, multiplied by (B) the simple average of the daily VWAP of the common stock for the 20 consecutive trading days ending on and including the trading day immediately preceding the applicable conversion date.
Immediately prior to the Convertible Notes Amendments, the Convertible Notes, net of debt discount and issuance costs, consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Principal | $ | 153,500 | | | $ | 153,500 | |
PIK interest | 19,196 | | | 17,301 | |
Total principal | 172,696 | | | 170,801 | |
Less debt discount and issuance costs | (44,275) | | | (48,109) | |
Total Convertible Notes | $ | 128,421 | | | $ | 122,692 | |
In accordance with ASC Topic No. 470-50, Debt – Modifications and Extinguishments, the Convertible Notes Amendments were determined to be an extinguishment of the existing debt and an issuance of new debt upon the effectiveness of the Convertible Notes Amendments on March 31, 2023. The new debt is initially recorded at its fair value of $313.4 million, and a loss on debt extinguishment is calculated as the difference between the fair value of the new debt, the net carrying amount of the old debt, and other adjustments required under US GAAP. The Company recorded a loss on debt extinguishment of $177.9 million in the condensed consolidated statements of operations and the $7.2 million fair value of the mandatory conversion feature under the Convertible Notes immediately prior to the Convertible Notes Amendments were recorded to offset stockholders’ equity in accordance with Topic 815, Derivatives and Hedging. The embedded features in the Convertible Notes include conversion options that had the economic characteristics of a contingent early redemption feature settled in a variable number of shares of the Company’s common stock. These conversion features were bifurcated and accounted for as a derivative liability separately from the host debt instrument. As of March 31, 2023, the fair value of derivative liability of $135.7 million was recorded as debt discount on the condensed consolidated balance sheets, which will be amortized during the term of the Convertible Notes to interest expense using the effective-interest method. The derivative liability will be remeasured on a recurring basis at each reporting period date, with the change in fair value reported in the statement of operations. The Convertible Notes Amendments were a non-cash transaction and had no impact to the financing activities in the statements of cash flows for the three and six months ended June 30, 2023.
Upon effectiveness of the Convertible Notes Amendments, the Convertible Notes, inclusive of debt premium, consisted of the following (in thousands):
| | | | | | | |
| March 31, 2023 | | |
Principal | $ | 153,500 | | | |
PIK interest | 19,371 | | | |
Total principal | 172,871 | | | |
Plus debt premium | 4,864 | | | |
Total Convertible Notes | $ | 177,735 | | | |
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On May 19, 2023, $3.5 million original principal amount of Convertible Notes was amended to extend the maturity date to August 4, 2028.
On June 23, 2023, the stockholders of the Company approved and the Company filed in Delaware an amendment to the Company’s Certificate of Incorporation to increase the total number of authorized shares of common stock from 500,000,000 shares to 1,000,000,000 shares. The stockholders also approved the Nasdaq Proposal.
Upon receiving the stockholder approval, certain embedded conversion features associated with the Convertible Notes no longer qualify for derivative accounting. The carrying amount of the derivative liability of $20.8 million associated with those conversion features, which is the fair value as of June 23,2023, was reclassified to stockholders’ equity in accordance with Topic 815, Derivatives and Hedging. The remaining derivative liabilities are continually remeasured on a recurring basis at each reporting period date, with the change in fair value reported in the statement of operations. See Note 3, Fair Value of Financial Instruments, for details of valuation methodology and impact of change of fair value of derivative liability.
The Bankruptcy Petitions are considered an event of default under the Convertible Notes, triggering the maturity date of the Convertible Notes. The principal and accrued unpaid interest became due and payable immediately. The Convertible Notes are fully secured and therefore not subject to compromise, and accordingly it is continually accounted under Topic 470, debt. As the embedded conversion features associated with the Convertible Notes expired on maturity date, the change of fair value of $81.3 million was recorded to other income on the consolidated statement of operation. The unamortized debt premium of approximately $4.7 million was written off to interest expense.
Pursuant to the final cash collateral order, post-petition interest on pre-petition debt continues to accrue at the non-default rate until the earlier of (i) April 1, 2024 and (ii) the notice period following an event of default, unless an extension is approved by the Bankruptcy Court, and paid when such payment would have been due under the Notes Purchase Agreement.
As of September 30, 2023, the Convertible Notes consisted of the following (in thousands):
| | | | | | | |
| September 30, 2023 | | |
Principal | $ | 153,500 | | | |
PIK interest | 25,492 | | | |
Total principal | $ | 178,992 | | | |
| | | |
| | | |
The amortization expense of debt discount (premium) and issuance costs were $(4.7) million and $(1.0) million for the three and nine months ended September 30, 2023, respectively. The amortization expense of debt discount and issuance costs were $3.6 million and $10.4 million for the three and nine months ended September 30, 2022, respectively.
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(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Leases
As a Lessor
The net investment in leases were as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Net investment in leases, current | $ | 1,078 | | | $ | 985 | |
| Net investment in leases, non-current | 9,771 | | | 9,304 | |
| Total net investment in leases | $ | 10,849 | | | $ | 10,289 | |
Interest income from accretion of net investment in lease was not material in the nine months ended September 30, 2023 or 2022.
Future minimum payments receivable from operating and sales-type leases as of September 30, 2023 for each of the next five years were as follows:
| | | | | | | | | | | |
| Operating leases | | Sales-type leases |
| Remainder of 2023 | $ | 70 | | | $ | 229 | |
| 2024 | — | | | 1,010 | |
| 2025 | — | | | 1,762 | |
| 2026 | — | | | 1,808 | |
| 2027 | — | | | 1,808 | |
Thereafter | — | | | 4,896 | |
Total minimum lease payments | $ | 70 | | | $ | 11,513 | |
As a Lessee
The Company leases its office and manufacturing related facilities in Burlingame and City of Industry, California, Greenville and Greer, South Carolina, and Rochester Hills, Michigan under operating lease agreements with various expiration dates from 2023 through 2033.
The Company had no material finance leases as of September 30, 2023.
Maturities of operating lease liabilities as of September 30, 2023 were as follows (in thousands):
| | | | | |
| Remainder of 2023 | $ | 1,725 | |
| 2024 | 4,204 | |
| 2025 | 3,487 | |
| 2026 | 2,615 | |
| 2027 | 2,238 | |
Thereafter | 9,858 | |
| Total undiscounted lease payment | 24,127 | |
| Less: imputed interest | (4,637) | |
| Total operating lease liabilities | $ | 19,490 | |
Operating lease expense was $2.0 million and $6.0 million for the three and nine months ended September 30, 2023, respectively. Operating lease expense was $1.9 million and $5.4 million for the three and nine months ended September 30, 2022, respectively.
Short-term and variable lease expenses for the nine months ended September 30, 2023 and 2022 were not material.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental cash flow information related to leases were as follows (in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows for operating leases | $ | (6,295) | | | $ | (4,822) | |
| Lease liabilities arising from obtaining right-of-use assets: | | | |
| Operating lease | $ | — | | | $ | 4,178 | |
| Finance lease | $ | 699 | | | $ | — | |
Operating lease right-of-use assets and liabilities consisted of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Operating leases | | | |
Operating lease right-of-use assets | $ | 15,326 | | | $ | 20,274 | |
Operating lease liabilities, current | — | | | 6,876 | |
Operating lease liabilities, non-current | — | | | 18,098 | |
Total operating lease liabilities | $ | — | | | $ | 24,974 | |
The operating lease right-of-use liabilities, which is included in the liabilities subject to compromise, was $19.5 million.
The weighted average remaining lease term and discount rate of operating leases were 6.7 years and 6.1%, respectively, as of September 30, 2023. The weighted average remaining lease term and discount rate of operating leases were 6.4 years and 6.2%, respectively, as of December 31, 2022.
As of September 30, 2023, the Company had no significant additional operating leases and finance leases that have not yet commenced.
7. Commitments and Contingencies
Purchase Commitments
As of September 30, 2023, the Company had outstanding inventory and other purchase commitments of $1.9 billion, excluding inestimable variable components. Most of the commitments relate to the expected purchase of 2170 battery cells to be manufactured at a yet to be built LG Energy Solution battery cell plant in the United States, pursuant to a long-term supply agreement. The terms of the agreement require the Company to make certain prepayments that vary in size based on milestones relating to the construction of the US facility. As of September 30, 2023, the Company has made a $10.0 million prepayment, which was recorded as the long-term inventory prepayment on the consolidated balance sheets. See Note 12, Subsequent events, for details related to the announcement of LG Energy Solution related to this US facility.
Letters of Credit
As of September 30, 2023, the Company had cash collateralized letters of credit outstanding totaling $12.0 million, which will expire over various dates in 2023 and 2024.
Legal Proceedings
The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. From time to time in the normal course of business, various claims and litigation have been asserted or commenced. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to
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(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
significant liability or damages. Any claims or litigation could have an adverse effect on the Company’s business, financial position, operating results, or cash flows in or following the period that claims or litigation are resolved.
As of September 30, 2023 and December 31, 2022, other than the Chapter 11 Cases, the Company was not a party to any legal proceedings that would have a material adverse effect on its business.
8. Stockholders’ Equity
On June 23, 2023, the stockholders of the Company approved and the Company filed in Delaware an amendment to the Company’s Certificate of Incorporation to increase the total number of authorized shares of common stock from 500,000,000 shares to 1,000,000,000 shares. As of September 30, 2023, the Company is authorized to issue 1,010,000,000 shares of capital stock, with a par value of $0.0001 per share. The authorized shares consist of 1,000,000,000 shares of common stock and 10,000,000 shares of preferred stock. As of September 30, 2023, 228,167,279 shares of common stock were issued and outstanding, and no shares of preferred stock were issued and outstanding. The holders of each share of common stock are entitled to one vote per share.
As of September 30, 2023, the Company had reserved shares of common stock for issuance as follows (in thousands): | | | | | |
2010 Equity Incentive Plan | 10,317 | |
2021 Equity Incentive Plan | 34,537 | |
2021 Employee Stock Purchase Plan | 4,877 | |
Warrants | 1 | |
Earnout Stock | 18,009 | |
| Convertible notes | 247,835 | |
Total | 315,576 | |
9. Equity Plans and Stock-based Compensation
2010 Equity Incentive Plan
In 2010, Legacy Proterra adopted the 2010 Equity Incentive Plan (the “2010 Plan”), which provided for the grant of stock options, stock appreciation rights, restricted stock, and restricted stock units. Upon Closing, the then outstanding options under the 2010 Plan were converted into options exercisable to purchase an aggregate of 22,532,619 shares of common stock. Following the Closing, such options continue to be subject to the terms of the 2010 Plan and applicable award agreements; however, no further awards can be granted under the 2010 Plan. As of September 30, 2023, options to purchase 10,316,698 shares of common stock remained outstanding under the 2010 Plan.
2021 Equity Incentive Plan
The 2021 Plan was adopted by the ArcLight Board prior to the Closing, approved by ArcLight’s shareholders on June 11, 2021, and became effective upon the Closing Date. The Equity Incentive Plan allows the Company to grant awards of stock options, restricted stock awards, stock appreciation rights, restricted stock units (“RSUs”), performance awards, and stock bonus awards to officers, employees, directors and consultants.
The Company initially reserved 10,000,000 shares of common stock, plus 387,531 reserved shares not issued under the 2010 Plan on the effective date of the 2021 Plan. The number of shares reserved for issuance under the 2021 Plan increases automatically on January 1 of each of 2022 through 2031 by the number of shares equal to the lesser of 4% of the total number of outstanding shares of all classes of common stock as of the immediately preceding December 31, or a number as may be determined by the Board. In the first quarter of 2022 and 2023, the shares of common stock reserved for issuance were increased by 8,878,388 and 9,050,606, respectively, pursuant to the 2021 Plan.
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(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The exercise price of stock options granted must be at least equal to the fair market value of common stock on the date of grant. Incentive stock options granted to an individual who holds, directly or by attribution, more than ten percent of the total combined voting power of all classes of capital stock must have an exercise price of at least 110% of the fair market value of common stock on the date of grant. Subject to certain adjustments, no more than 30,000,000 shares may be issued pursuant to the exercise of incentive stock options granted under the 2021 Plan.
The maximum term of options granted is ten years from the date of grant, except that the maximum permitted term of incentive stock options granted to an individual who holds, directly or by attribution, more than ten percent of the total combined voting power of all classes of capital stock is five years from the date of grant.
Stock option and RSU awards generally vest annually over a four-year period.
In connection with the Company’s bankruptcy filing on August 7, 2023, the Company is not authorized to grant any additional awards under the Equity Incentive Plan.
2021 Employee Stock Purchase Plan
Proterra’s 2021 Employee Stock Purchase Plan (the “ESPP”), including the authorization of the initial share reserve thereunder, was adopted by the ArcLight Board prior to the Closing, approved by ArcLight’s shareholders on June 11, 2021, and became effective upon the Closing Date.
An aggregate of 1,630,000 shares of common stock were reserved and available for sale under the ESPP. The aggregate number of shares reserved for sale under the ESPP increases automatically on January 1 of each of 2022 through 2031 by a number of shares equal to the lesser of 1% of the total number of outstanding shares of common stock as of the immediately preceding December 31 or a number of shares as may be determined by the Board or the compensation committee. The aggregate number of shares issued over the term of the ESPP, subject to certain adjustments, may not exceed 16,300,000 shares. In the first quarter of 2022 and 2023, the shares of common stock reserved for issuance were increased by 2,219,597 and 2,262,651, respectively, pursuant to the ESPP.
The ESPP allows eligible employees to purchase shares of common stock at a discount through payroll deductions of up to 15% of their eligible compensation, at not less than 85% of the fair market value, as defined in the ESPP, subject to any plan limitations. A participant may purchase a maximum of 2,500 shares during each 6-month offering period and $25,000 in any one calendar year. The offering periods generally start on the first trading day on or after November 15th and May 15th of each year.
The first offering period started in the fourth quarter of 2021. The Company calculated the fair value of the employees’ purchase rights related to the ESPP using the Black-Scholes model.
In August 2023, in connection with the Company’s bankruptcy filing, all outstanding offering periods under the ESPP program were discontinued, and the Company recorded the remaining unrecognized stock-based compensation expense in the three months ended September 30, 2023. The stock-based compensation expense were approximately $0.8 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively. In the nine months ended September 30, 2023 and 2022, the Company issued 586,008 and 325,106 shares of common stock under the ESPP with a purchase price of $1.13 and $4.62 per share, respectively.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company’s stock option activity and related information was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options Outstanding |
| Number of Stock Options Outstanding | | Weighted- Average Exercise Price | | Weighted-Average Remaining Contractual Life
(Years) | | Aggregate Intrinsic Value
(in thousands) |
Balance as of December 31, 2022 (1) | 14,256,697 | | | $ | 4.32 | | | 5.5 | | $ | 9,469 | |
Granted | 3,035,164 | | | 1.41 | | | | | |
Exercised | (57,036) | | | 1.98 | | | | | |
Cancelled/forfeited/expired (2) | (3,250,706) | | | 5.06 | | | | | |
Balance as of September 30, 2023 | 13,984,119 | | | $ | 3.53 | | | 5.2 | | $ | — | |
Exercisable as of September 30, 2023 | 9,844,575 | | | $ | 3.80 | | | 3.5 | | $ | — | |
__________________
(1)Excluding Equity Awards of 2,677,500 shares and Milestone Options of 669,375 shares. See below for further details.
(2)Excluding 2,677,500 shares cancelled under the Equity Awards with weighted average exercise price of $19.61 per share, and 669,375 shares cancelled under the Milestone Options with exercise price of $5.33 per share.
In March 2020, in conjunction with Mr. Allen’s appointment as the then President and Chief Executive Officer, the board of directors of Legacy Proterra approved a grant to Mr. Allen of stock option awards with respect to 4,685,624 shares, comprised of (1) 1,338,749 shares of a time-based award with an exercise price of $5.33 per share vesting quarterly over four years, (2) 2,677,500 shares of a time-based award consisting of four tranches with an exercise price of $11.21, $16.81, $22.41 and $28.02 per share, respectively, and vesting quarterly over four years (“Equity Awards”), and (3) 669,375 shares of milestone-based award with an exercise price of $5.33 per share vesting entirely and becoming exercisable on the first trading day following the expiration of the lockup period of the Company’s initial public offering or the consummation of a change in control of the Company or upon the consummation of a merger involving a special purpose acquisition company (“Milestone Options”). The stock-based compensation expense for Milestone Options was recognized at the time the performance milestone became probable of achievement, which was at the time of Closing. Upon Closing, the 669,375 shares underlying the Milestone Options fully vested, and $2.1 million stock-based compensation expense was recognized in June 2021. As of June 30, 2023, Mr. Allen retired from the board, and his unvested shares were canceled.
Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money stock options. The total intrinsic value of stock options exercised was $0.1 million for the nine months ended September 30, 2023. The total estimated grant date fair value of stock options vested was $5.0 million for the nine months ended September 30, 2023. As of September 30, 2023, the total unrecognized stock-based compensation expense related to outstanding stock options was $6.9 million, which is expected to be recognized over a weighted-average period of 3.0 years.
The fair value of stock options granted is estimated on the date of grant using the following assumptions:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Expected term (in years) | 6.3 | | 6.3 |
Risk-free interest rate | 3.7 | % | | 2.0 | % |
Expected volatility | 67.2 | % | | 55.1 | % |
Expected dividend rate | — | | — |
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Units
A summary of the Company's RSU activity and related information is as follows:
| | | | | | | | | | | | | | | | |
| | Number of RSUs | | Weighted Average Grant Date Fair Value | | |
Balance as of December 31, 2022 | | 5,733,227 | | | $ | 7.07 | | | |
| Granted | | 5,154,438 | | | 1.60 | | | |
| Released | | (1,402,679) | | | 6.77 | | | |
| Forfeited | | (2,079,799) | | | 5.29 | | | |
Balance as of September 30, 2023 | | 7,405,187 | | | $ | 3.82 | | | |
The compensation expense related to the service-based RSU awards is determined using the fair market value of the Company’s common stock on the date of the grant. As of September 30, 2023, the total unrecognized stock-based compensation expense related to outstanding RSUs was $24.0 million, which is expected to be recognized over a weighted-average period of 3.0 years.
Stock-based Compensation Expense
Stock-based compensation expense included in operating results was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Cost of goods sold | | $ | 209 | | | $ | 456 | | | $ | 786 | | | $ | 1,350 | |
Research and development | | 1,250 | | | 1,409 | | | 3,707 | | | 3,690 | |
Selling, general and administrative | | 3,023 | | | 3,491 | | | 8,708 | | | 11,273 | |
Total stock-based compensation expense | | $ | 4,482 | | | $ | 5,356 | | | $ | 13,201 | | | $ | 16,313 | |
10. Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture as they are not deemed to be issued for accounting purposes. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including stock options, RSUs and warrants, to the extent they are dilutive.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The computation of basic and diluted net loss per share of common stock attributable to common stockholders was as follows (in thousands, except for per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Numerator: | | | | | | | |
Net income (loss) | $ | 5,216 | | | $ | (65,061) | | | $ | (269,755) | | | $ | (156,960) | |
| Effect of dilutive securities: | | | | | | | |
Interest expense to be recognized upon conversion of Convertible Notes (1) | — | | | (47,891) | | | — | | | (40,154) | |
| Numerator for diluted EPS - Net loss after the effect of dilutive securities | $ | 5,216 | | | $ | (112,952) | | | $ | (269,755) | | | $ | (197,114) | |
| Denominator: | | | | | | | |
Weighted-average shares used in computing net loss per share of common stock, basic | 227,869 | | | 225,291 | | | 227,192 | | | 223,782 | |
Convertible Notes (1) | — | | | 25,413 | | | — | | | 24,855 | |
| Diluted weighted average shares | 227,869 | | | 250,704 | | | 227,192 | | | 248,637 | |
Net income (loss) per share of common stock: | | | | | | | |
Basic | $ | 0.02 | | | $ | (0.29) | | | $ | (1.19) | | | $ | (0.70) | |
| Diluted | $ | 0.02 | | | $ | (0.45) | | | $ | (1.19) | | | $ | (0.79) | |
__________________
(1)Adjustment is under the “if-converted” method. Adjustments for the three months ended September 30, 2022 include write-off of $59.0 million unamortized debt discount of the Convertible Notes as of June 30, 2022, offset by the $7.4 million interest expense recorded in net loss of three months ended September 30, 2022. Adjustments for the nine months ended September 30, 2022 include write-off of $62.3 million unamortized debt discount of the Convertible Notes as of December 31, 2021, offset by the $14.5 million interest expense recorded in net loss of nine months ended September 30, 2022.
The Company applies the treasury stock method when calculating the diluted net income (loss) per share of common stock and “if-converted” method for Convertible Notes when applicable.
Prior to the Convertible Notes Amendments, the outstanding Convertible Notes including accrued interest would have been automatically converted to common stock at $6.5712 per share pursuant to the mandatory conversion provisions, if and when the VWAP exceeded $9.86 over 20 consecutive days subsequent to January 13, 2022. Following the Convertible Notes Amendments, the conditions for the convertible features under the Convertible Notes were not satisfied. See Note 5, Debt, for additional information on the conversion provisions of the Convertible Notes. The voluntary petition filing on August 7, 2023 is considered an event of default under the Convertible Notes, triggering the maturity date of the Convertible Notes. The conversion features under the Convertible Notes expired on the maturity date.
No adjustment is required to the weighted-average shares used in computing the diluted net income (loss) per share for the three and nine months ended September 30, 2023. The potentially dilutive securities were as follows (in thousands):
| | | | | | | | | | | |
| | | |
| September 30, 2023 | | | | | | |
| Stock options and RSUs to purchase common stock | 21,389 | | | | | | | |
| | | | | | | |
| | | | | | | |
| Warrants to purchase common stock | 1 | | | | | | | |
| | | | | | | |
| Total | 21,390 | | | | | | | |
11. 401(k) Plan
The Company sponsors a 401(k) defined contribution plan covering all eligible employees and provides a matching contribution for the first 4% of their salaries. The matching contribution costs incurred were $0.9 million and $2.9 million in the three and nine months ended September 30, 2023, respectively. The matching contribution costs incurred were $0.9 million and $2.4 million in the three and nine months ended September 30, 2022, respectively.
PROTERRA INC
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Subsequent Events
Key Employee Incentive Plan
On October 10, 2023, the Bankruptcy Court approved a Key Employee Incentive Plan (the “KEIP”), which had previously been approved by the Compensation Committee, subject to Bankruptcy Court approval. The KEIP was developed with the assistance of advisors to provide incentive-based cash compensation to its participants based on creating business value and executing one or more of any potential transaction involving the Company (including through a merger, recapitalization or sale of substantially all of the assets of the Company) or any sale, disposition or winding down of any business unit, business division or asset of the Company (each, a “Transaction”).
Each participant of the KEIP (the “KEIP Participants”) will be eligible to receive a KEIP award that represents the potential to earn one or more cash payments (each, a “KEIP Payment”), which will be in lieu of any existing incentive and retention opportunities, including the Company’s short-term cash bonus, equity incentive and retention programs. Generally, KEIP Payments must be earned pursuant to the terms provided under the KEIP in order to be payable to KEIP Participants. The timing of KEIP Payments are subject to the terms provided under the KEIP.
KEIP Participants may earn an aggregate amount of approximately $1.4 million upon approval by the Bankruptcy Court of a Transaction which, along or in combination with a series of prior Transactions, meet a certain numerical threshold. KEIP Participants may earn an additional KEIP Payment equal to 3% of the excess value above such certain numerical threshold associated with such Transaction. If the series of Transactions do not meet the relevant threshold amounts, there will be no payouts under the KEIP. The KEIP is subject to further conditions regarding continued employment of the KEIP participants and other conditions.
Post-Petition Key Employee Retention Plan
On October 5, 2023, the Bankruptcy Court approved a Key Employee Retention Plan (the “KERP”), which had previously been approved by the Compensation Committee, subject to Bankruptcy Court approval. The KERP provides for grants of retention awards that are subject to clawback if the KERP participant is terminated for cause or voluntarily resigns before the earlier of either the six-month anniversary or one-year anniversary of the date of grant as applicable, or a Transaction involving the Company or the business unit or division for which the KERP participant provides substantially all of his or her services to. Payments pursuant to the KERP will not exceed, in the aggregate, approximately $1.5 million.
Volta Truck Bankruptcy
On October 17, 2023, Volta Trucks, a Proterra Powered customer, announced that it will file for administration in the United Kingdom and insolvency proceedings in other relevant jurisdictions. The Company recorded a $1.6 million impairment charge in the three months ended September 30, 2023 to write off its long-term investments in this entity. As the Company has sufficient deferred revenue from prepayments outstanding, no credit losses over its accounts receivables outstanding as of September 30, 2023 are expected.
LG US Facility Plan Modification
On October 25, 2023, LG Energy Solution issued a press release announcing that it modified its plan for a yet to be built battery cell manufacturing plant in the United States to only produce 46-series battery cells instead of the original plan to produce both 46-series and 2170 battery cells. According to the press release, the expected date for start of production remains unchanged, scheduled for late 2025. The Company is currently in discussions with LG Energy Solution concerning the existing long-term supply agreement which contains minimum volume commitments and certain milestone-based prepayments related to the construction of the US facility as disclosed in Note 7, Commitments and Contingencies. The Company continues to recognize the $10.0 million prepayment as a long-term inventory prepayment on the condensed consolidated balance sheets as of September 30, 2023.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and our audited financial statements for the year ended December 31, 2022 and the related notes incorporated by reference in our Annual Report. 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 titled “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 titled “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
Overview
Proterra’s mission is to build innovative electric vehicle and battery technologies to power a better, more sustainable world.
Commercial and industrial fleets are expected to adopt electric vehicles at increasingly higher rates over the next two decades, driven by factors including emissions targets and regulations, and lower operating costs. More than 200,000 new electric buses, medium-duty trucks, and heavy-duty trucks are expected to be sold in the industry by 2030 and approximately 650,000 by 2040 in our core markets of North America and Europe. Assuming average battery capacity per vehicle of 225 kWh for medium-duty trucks, 300 kWh for buses and 750 kWh for heavy-duty trucks, we estimate this could translate into demand for heavy-duty commercial and industrial-scale batteries of approximately 90 GWh by 2030 and approximately 300 GWh by 2040 in such markets. Our business strategy is to capitalize on this opportunity through our industry-leading commercial electrification solutions. Additionally, to improve battery production efficiency, the Company consolidated the battery production from Burlingame and City of Industry, California to Powered 1 battery factory at the end of the third quarter of 2023. These changes are part of an overall operational efficiency effort by the Company to address the challenges we have faced related to improving our margins and increasing our cash flows. This is an ongoing process and our efforts to date have not yet fully addressed these challenges partially due to the slower than expected ramp of our Powered 1 battery factory.
In the first quarter of 2023, we announced workforce restructuring plans designed to improve operational efficiency with the reduction of our workforce by up to twenty five percent, or the elimination of approximately 300 jobs, and the planned closure of our City of Industry manufacturing facility by December 31, 2023.
We have the following commercial offerings each addressing a critical component of commercial vehicle electrification.
•Proterra Powered & Energy. Proterra Powered products are our proprietary battery systems and electrification solutions 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 products and services offer 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. We design, develop, manufacture, and sell 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.
Our industry experience, the performance of our transit buses, and compelling total cost of ownership has helped make us a leader in the U.S. electric transit bus market. With over 1,100 electric transit buses delivered since inception, our electric transit buses currently have delivered more than 50 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 has provided the opportunity to validate our products’ performance, operational efficiency and maintenance costs with a demanding customer base. Proterra Powered is able to leverage Proterra Transit’s expertise and showcase its strong record of range and reliability on North America’s most difficult public transit routes to attract other commercial vehicle segments. We believe our success powering heavy-duty transit vehicles with optimal performance and operation compared to a diesel-powered bus, will continue to demonstrate the strength and breadth of our technology to other commercial vehicle applications. We sell our battery systems and electrification solutions 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 cutting-edge electrification solutions tailored to our customers’ vehicle requirements.
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. Through September 30, 2023, Proterra Powered has delivered battery systems and electrification solutions for more than 2,850 vehicles to our OEM partner customers.
In addition, Proterra Energy has established us 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 of September 30, 2023, we had installed more than 120 MW of charging infrastructure across North America.
Historically, 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 & Proterra Energy to grow into a significantly larger portion of our overall business and generate a greater portion of revenue. In the second quarter of 2023, Proterra Powered generated a majority of our total revenue for the first time. Through September 30, 2023, our chief operating decision maker, the Chief Executive Officer, evaluates Proterra’s results on a consolidated basis for purposes of making decisions on allocating resources and assessing financial performance, resulting in a single reportable segment.
Enhanced by Proterra PoweredTM 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 in North America, according to the Federal Transit Administration’s (“FTA”) National Transit Database. We also focus our sales effort on airports, universities, hospitals, and corporate shuttle operators. As of September 30, 2023, there are, in aggregate, more than 25,000 buses in operation at fleets that are mandated to convert to 100% zero-emission by 2040 in North America, 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 goal is to maintain our leadership in market share of the North American electric bus and commercial vehicle 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 1,100 vehicles delivered and more than 50 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 consolidated our bus production to our largest bus manufacturing facility located in Greenville, South Carolina in the second quarter of 2023. We constructed our Powered 1 battery factory which has approximately 327,000 square feet at Greer, South Carolina. To improve production efficiency, we have consolidated our battery production to Powered 1 battery factory at the end of the third quarter of 2023. Our planned total battery system manufacturing capacity is 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 can manufacture our battery packs in two widths and three heights, various lengths ranging from 3-feet to 9-feet, and four different voltages. In the nine months ended September 30, 2023 and 2022, our battery production was 474.7 MWh and 255.0 MWh, respectively, a 86% increase year over year. As we work to increase our production volumes, complete construction of our Powered 1 battery factory, and improve manufacturing efficiency across our production assets as we scale, 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. With the addition of our Powered 1 factory, we believe we will have sufficient capacity to fulfill our current backlog and anticipated near-term growth but further investment in capacity will be required as demand for electric vehicles continues to grow globally.
For the nine months ended September 30, 2023 and 2022, our total revenue was $251.4 million and $229.4 million, respectively. We generated a gross loss of $30.4 million and $3.7 million for the nine months ended September 30, 2023 and 2022, representing a gross margin of (12.1)% and (1.6)%, respectively. We 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 $183.7 million and $147.2 million for the nine months ended September 30, 2023 and 2022, respectively. The restructuring we announced in the first quarter of 2023 started in the later part of the first quarter, and therefore its impact was not significant to the operating results of the first quarter. In the second quarter of 2023, the costs reduction contributed to the offset of other incremental expenses incurred to grow our business and operate as a public company. In the third quarter of 2023, the Company filed the Bankruptcy Petitions, and is currently operating as a debtor-in-possession.
We intend to continue to make investments in developing new products and enhancing existing products. In 2022, we made a strategic equity investment in a privately held entity that we expect to produce lithium iron phosphate (LFP) battery cells in the United States in the coming years to provide us with development opportunities for battery packs with another cell chemistry to address additional segments of the commercial vehicle market. We are also increasing and/or optimizing our production capacity, and also expect to make investments in our sales and marketing organizations as well as those expenses associated with operating as a public company. As a result, we expect that the cost of goods sold and operating expenses will increase with total revenue in absolute dollars in future periods but decline as a percentage of total revenue over time.
Recent Developments
Voluntary Reorganization under Chapter 11
As previously disclosed, on August 7, 2023 (the “Petition Date”), Proterra Inc and its direct subsidiary, Proterra Operating Company, Inc (collectively, the “Debtors”), filed voluntary petitions (the “Bankruptcy Petitions”) for
reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (such court, the “Bankruptcy Court” and such cases, the “Chapter 11 Cases”). The Chapter 11 Cases are jointly administered under the caption In re Proterra Inc, Case No. 23-11120 (BLS) (Bankr. D. Del. 2023). The Debtors continue to operate their business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. To ensure their ability to continue operating in the ordinary course of business, the Debtors sought from the Bankruptcy Court various forms of “first-day” relief”, including, among other things, authority to use cash collateral, pay employee wages and benefits, pay vendors and suppliers in the ordinary course for all goods and services provided after the Petition Date and continue customer programs. On August 10, 2023, the motions filed by the Debtors seeking this “first-day” relief were approved by the Bankruptcy Court and, to the extent such relief was granted on an interim basis, the Debtors have subsequently obtained orders granting such relief on a final basis. For detailed discussion about the Chapter 11 Cases, refer to Note 2, Chapter 11 Filing and Other Related Matters to our unaudited condensed consolidated financial statements.
As previously disclosed by the Company, the filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the Senior Credit Facility and the Convertible Notes as a result of the bankruptcy filing, the outstanding principal and interest thereunder became immediately due and payable. Any efforts to enforce such payment obligations under the debt instruments set forth above are automatically stayed under the Bankruptcy Code. However, the Convertible Notes continue to accrue PIK and cash interest under the final cash collateral order. See Note 5, Debt, to our unaudited condensed consolidated financial statements for details.
NASDAQ Delisting Proceedings
As previously disclosed, on August 8, 2023, the Company received written notice from the Listing Qualifications Department of Nasdaq notifying the Company that, as a result of the Chapter 11 Cases and in accordance with Nasdaq Listing Rules 5101, 5110(b) and IM-5101-1, Nasdaq had determined to delist the Company’s common stock from the Nasdaq Global Select Market. The Company did not intend appeal this determination. On August 17, 2023, Nasdaq suspended the trading of the Company’s common stock at the opening of business. On September 9, 2023, Nasdaq applied to the SEC pursuant to Form 25 to remove the common stock of the Company from listing and registration on the Nasdaq Global Select Market at the opening of business September 20, 2023. As a result of the suspension and delisting, the Company’s common stock began trading exclusively on the OTC market on August 17, 2023 under the symbol PTRAQ.
Volta Truck Insolvency Proceedings
On October 17, 2023, Volta Trucks, a Proterra Powered customer, announced that it will file for administration in the United Kingdom and insolvency proceedings in other relevant jurisdictions. The Company recorded a $1.6 million impairment charge in the three months ended September 30, 2023 to write off its long-term investments in this entity. As the Company has sufficient deferred revenue from prepayments outstanding, no credit losses over its accounts receivables outstanding as of September 30, 2023 are expected.
Process for Sale of All or Substantially All of Our Assets
At the outset of our Chapter 11 Cases, we commenced a bidding process that may result in the sale of all or substantially all of our assets pursuant to section 363 of the Bankruptcy Code. The Bankruptcy Court approved the bidding procedures on September 7, 2023. The bidding procedures provide for substantial flexibility with respect to the structure of any transaction. The Company may select one or more stalking horse bidders and pursue Bankruptcy Court-approved bid protections if the Company believes, it the exercise of its business judgment, that doing so will maximize value. The bidding procedures permit potential bidders to submit bids with respect to not only sale transactions but also other types of transactions involving the Company and its assets, including, without limitation, proposals for the raising of debt or equity financing in connection with a chapter 11 plan of reorganization. The bidding procedures also provide for various deadlines by which qualified bids must be submitted and the timing of the auctions and ultimate sale of some or all of the Company’s assets. Bids for Proterra Transit are on a more expedited schedule (the “Track A Schedule” and “Track A Bid Deadline”) than bids for all of the Company’s assets and for Proterra Powered assets (the “Track B Schedule” and “Track B Bid
Deadline”). Pursuant the Notice of Revised Dates Relating to Bidding Procedures Deadlines For (I) Proterra Energy; and (II) Proterra Transit [Docket No. 368], which is subject to further change, the Track A Bid Deadline was October 26, 2023 at 4:00 p.m. (ET) with an auction, if necessary, scheduled for November 13, 2023 at 10:00 a.m. (ET). The Track B Bid Deadline is November 6, 2023 at 4:00 p.m. (ET) with an auction, if necessary, scheduled for November 9, 2023 at 10:00 a.m. (ET). Pursuant to the provisions in the bidding procedures order, these dates were delayed from those originally proposed, and could be further delayed pursuant to the terms of the bidding procedures order and in consultation with the Consultation Parties (as defined therein). A hearing to approve the Track A sale and Track B sale is currently scheduled for November 28, 2023 at 10:00 a.m. (ET).
Key metrics and select financial data
Deliveries
We delivered 85 and 162 (152 new and 10 pre-owned) vehicles in the nine months ended September 30, 2023 and 2022, respectively. We delivered battery systems for 1,235 and 927 vehicles in the nine months ended September 30, 2023 and 2022, respectively.
Deliveries is an indicator of our ability to convert awarded orders into revenue and demonstrates the scaling of our operations. We expect volume of deliveries to vary every quarter and not be linear as product configurations vary in complexity and timing for completion is not standard. 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 delivered during the period or other services provided in addition to the hardware delivered.
Key factors affecting our performance
Supply Chain Disruption, Material Costs and Economic Impacts
Ongoing macroeconomics conditions have 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. The recent increase in inflation, interest rate and energy costs and continued disruption in global markets (in part stemming from the conflict in Ukraine) have further impacted supply chain stability and material costs. Our vehicle and charging system deliveries were impacted by ongoing constraints and inefficiencies in production driven in part by shortages in component parts resulting from global supply chain disruptions stemming from the pandemic and supplier instability during the first six months of 2023. After the Chapter 11 petition filing, there have been supply chain disruptions which caused shortages of parts. Although we achieved revenue growth during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, these disruptions decreased our production which negatively impacted our revenue and increased our overhead, led to increased costs to secure components critical to our production needs and negatively impacted our margins. We expect that our results for the remaining 2023 across all of our product lines will continue to be impacted by these supply chain issues, including parts shortages.
More generally, raw material and component price inflation, and increased freight and logistics costs in addition to parts shortages are currently expected to continue to have an impact on our results of operations, financial position, and liquidity. If supply chain disruptions, shipment delays, part shortages, production inefficiencies, extended customer order and acceptance processes, are prolonged or worsen, or if supplier credit terms are unfavorable as a result of our current financial condition or supplier to impose more onerous terms on us, such as requiring cash payments prior to parts delivery, 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 transit agencies, universities and airports. 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), as well as our ability to increase manufacturing capacity and secure supply of key components, including battery cells, to meet expected demand, and our reputation in the market. 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, and our manufacturing capacity and supply chain, and demonstrate our reliability as a partner both in terms of our financial condition and product quality and customer service. If we fail to make the right investment decisions in our technology and electrification solutions, including our battery systems and electrification and charging solutions, and our manufacturing facilities and supply chain initiatives, if customers do not adopt our technology or our products and services or we cannot timely deliver products to customers due to supply chain disruptions or otherwise, or if our competitors are able to develop and deliver 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 completed construction of our battery production facility in Greer including the first production line which went in service in January 2023. We consolidated our bus manufacturing in our Greenville facility in the second quarter of 2023, and consolidated all battery production to Greer facility at the end of the third quarter of 2023. We expect the consolidation of bus production in Greenville to continue to drive greater labor and overhead efficiencies while maintaining the equivalent volume of output. 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. We expect our product cost of goods sold to increase in absolute dollars in future periods as the volume of products we sell increases. As we grow into our current capacity, execute on cost-reduction initiatives, and improve production efficiency, we expect our product cost of goods sold as a percentage of revenue to decrease in the longer term. We anticipate that by increasing facility utilization rates and improving overall economies of scale, we can positively impact gross margins of our products, bring value to our customers and help accelerate commercial electric vehicle adoption. Our ability to achieve cost-saving and production-efficiency objectives can be negatively impacted by a variety of factors including, among other things, labor cost inflation, lower-than-expected facility utilization rates, rising real estate costs, 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.
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 (“CARB”) adopted a state-wide mandate, the Innovative Clean Transit Rule, mandating transit agencies to commit to purchasing zero-
emission buses starting in 2029. In 2023, CARB passed the Advanced Clean Fleet Rule, which requires public and private medium-duty fleets in California to convert to zero-emission vehicles by 2045, with some sectors as early as 2035. 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 goals, 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, appropriation of government funding, and implementation of regulations 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. The Infrastructure Investment and Jobs Act enacted on November 15, 2021 authorizes 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. In August 2022, the Inflation Reduction Act (the “IRA”) added additional funding and tax credit programs for both passenger car and commercial vehicles, many of which will become available to recipients in 2023. 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 availability of this now unprecedented level of government funding for our customers, suppliers, and competitors to help fund purchases of commercial electric vehicles and battery systems will remain an important factor in our company’s growth prospects.
As a result of the IRA, the Internal Revenue Code Section 45X introduces “Advanced Manufacturing Production Credit” (“AMPC”) in effective January 1, 2023. The AMPC is based on the quantity of eligible components produced and sold by a taxpayer to an unrelated person in the taxable year. The AMPC is available for the production of battery cells and battery modules in the United States based on the capacity in kilowatt hours of the battery cell or module. The credit in the case of a battery cell is based on the capacity of the cell, $35 per kWh, and in the case of a module is based on the capacity of the module, $10 per kWh (or, in the case of a battery module that does not use battery cells, $45 per kWh). The credit is available from 2023 to 2032 subject to phase down beginning in 2030. The credit is eligible for direct payment for a five-year period from Treasury and the right to the credit can be sold for cash to third parties (in both cases subject to certain limitations). Based on the direct pay mechanism, it allows taxpayers to elect to treat the credit as a direct payment of tax, which allows them to receive a cash payment if the taxpayer does not incur any income tax liability. Accordingly, these tax credits are government grants in nature. As such, we follow our accounting policy related to government grants and record it as a reduction of product cost of goods sold when we are reasonably assured that the conditions required for such tax credits are met and such benefit will be received. We expect that we will qualify for the $10 per kWh credit, however, we cannot assure that the IRS will ultimately determine that we qualify.
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. A vehicle is considered delivered once met revenue recognition criteria. Revenue from sales of vehicles and charging systems is typically recognized upon delivery when we can objectively demonstrate that the criteria specified in the contractual acceptance
provisions are achieved prior to delivery. In cases, where we cannot objectively demonstrate that the criteria specified in the contractual acceptance provisions have been achieved prior to delivery, revenue is 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. Revenue from the sale of battery and powertrain systems is typically recognized upon shipping. 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 products delivered 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 the volume of products we sell increases. As we grow into our current capacity, execute on cost-reduction initiatives, and improve production efficiency, we expect our product cost of goods sold as a percentage of revenue to decrease in the longer term.
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.
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 has and may in the future 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 delivery, 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. Software development costs related to our fleet and energy management platform are expensed as incurred if the capitalization criteria are not met. 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 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 debt extinguishment
Loss on debt extinguishment relates to the amendment made to the Notes Purchase Agreement and Convertible Notes on March 31, 2023. See Note 5, Debt, for additional information of the Convertible Notes. Gain on debt extinguishment relates to the forgiveness of the PPP loan.
(Gain) loss on revaluation of derivative liability
(Gain) loss on valuation of derivative liability relates to the changes in the fair value of derivative liability, which were subject to remeasurement at each balance sheet date.
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 the U.S. dollar, amortization of short-term investment premium/discount and other non-operational financial gains or losses.
Reorganization items, net
Reorganization items, net represent expenses (including professional fees), realized gains and losses, and provisions for losses that can be directly associated with the bankruptcy proceeding.
Critical accounting policies and estimates
Our unaudited condensed 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 significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2023, 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 ended December 31, 2022, except for the accounting policies related to the Convertible Notes and derivative liability adopted during the three months ended March 31, 2023, and application of ASC 852 (as described and defined below) during the three months ended September 30, 2023. See Note 1
and Note 5 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for details.
Application of ASC 852
Beginning on the Petition Date, the Company applied Financial Accounting Standards Board Codification Topic 852, Reorganizations (“ASC 852”) in preparing the consolidated financial statements. ASC 852 requires the financial statements, for the periods subsequent to the Petition Date and up to and including the period of emergence from Chapter 11 proceedings, to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain charges incurred during the bankruptcy proceedings, such as the write-off of unamortized debt issuance costs and premium on debt subject to compromise, legal and professional fees incurred directly as a result of the bankruptcy proceeding are recorded as Reorganization items, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss. In addition, prepetition obligations that may be impacted by the Chapter 11 process have been classified on the Consolidated Balance Sheet as of September 30, 2023 as liabilities subject to compromise. These liabilities are reported at the amounts the Company anticipates will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.
Recent accounting pronouncements
See Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding recent accounting pronouncements that are of significance or potential significance to us.
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) | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | |
Product revenue | | $ | 79,957 | | | $ | 89,769 | | | $ | 227,056 | | | $ | 214,196 | |
Parts and other service revenue | | 6,191 | | | 6,454 | | | 24,335 | | | 15,172 | |
Total revenue | | 86,148 | | | 96,223 | | | 251,391 | | | 229,368 | |
Product cost of goods sold | | 92,950 | | | 91,408 | | | 264,391 | | | 217,743 | |
Parts and other service cost of goods sold | | 4,628 | | | 6,091 | | | 17,375 | | | 15,349 | |
Total cost of goods sold (1) | | 97,578 | | | 97,499 | | | 281,766 | | | 233,092 | |
Gross profit (loss) | | (11,430) | | | (1,276) | | | (30,375) | | | (3,724) | |
Research and development (1) | | 10,992 | | | 18,165 | | | 44,438 | | | 44,871 | |
Selling, general and administrative (1) | | 37,419 | | | 38,554 | | | 108,867 | | | 98,646 | |
Total operating expenses | | 48,411 | | | 56,719 | | | 153,305 | | | 143,517 | |
Loss from operations | | (59,841) | | | (57,995) | | | (183,680) | | | (147,241) | |
Interest expense, net | | 152 | | | 7,361 | | | 11,344 | | | 21,191 | |
| (Gain) loss on debt extinguishment | | — | | | — | | | 177,939 | | | (10,201) | |
Gain on revaluation of derivative liability | | (81,300) | | | — | | | (114,878) | | | — | |
Asset impairment charge | | 1,600 | | | — | | | 1,600 | | | — | |
Other expense (income), net | | (1,900) | | | (295) | | | (6,321) | | | (1,271) | |
Reorganization items | | 16,391 | | | — | | | 16,391 | | | — | |
Income (loss) before income taxes | | 5,216 | | | (65,061) | | | (269,755) | | | (156,960) | |
Provision for income taxes | | — | | | — | | | — | | | — | |
Net income (loss) | | $ | 5,216 | | | $ | (65,061) | | | $ | (269,755) | | | $ | (156,960) | |
__________________
(1)Includes stock-based compensation as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | |
Cost of goods sold | | $ | 209 | | | $ | 456 | | | $ | 786 | | | $ | 1,350 | |
Research and development | | 1,250 | | | 1,409 | | | 3,707 | | | 3,690 | |
Selling, general and administrative | | 3,023 | | | 3,491 | | | 8,708 | | | 11,273 | |
Total stock-based compensation expense | | $ | 4,482 | | | $ | 5,356 | | | $ | 13,201 | | | $ | 16,313 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | |
Product revenue | | 93 | % | | 93 | % | | 90 | % | | 93 | % |
Parts and other service revenue | | 7 | | | 7 | | | 10 | | | 7 | |
Total revenue | | 100 | | | 100 | | | 100 | | | 100 | |
Product cost of goods sold | | 108 | | | 95 | | | 105 | | | 95 | |
Parts and other service cost of goods sold | | 5 | | | 6 | | | 7 | | | 6 | |
Total cost of goods sold (1) | | 113 | | | 101 | | | 112 | | | 101 | |
Gross loss | | (13) | | | (1) | | | (12) | | | (1) | |
Research and development (1) | | 13 | | | 19 | | | 18 | | | 20 | |
Selling, general and administrative (1) | | 43 | | | 40 | | | 43 | | | 43 | |
Total operating expenses | | 56 | | | 59 | | | 61 | | | 63 | |
Loss from operations | | (69) | | | (60) | | | (73) | | | (64) | |
Interest expense, net | | — | | | 8 | | | 5 | | | 9 | |
| (Gain) loss on debt extinguishment | | — | | | — | | | 71 | | | (4) | |
Gain on revaluation of derivative liability | | (94) | | | — | | | (46) | | | — | |
Asset impairment charge | | 2 | | | — | | | 1 | | | — | |
Other expense (income), net | | (2) | | | — | | | (3) | | | (1) | |
Reorganization items | | 19 | | | — | | | 7 | | | — | |
Income (loss) before income taxes | | 6 | | | (68) | | | (108) | | | (68) | |
Provision for income taxes | | — | | | — | | | — | | | — | |
Net income (loss) | | 6 | % | | (68) | % | | (108) | % | | (68) | % |
__________________
(1)Includes stock-based compensation expense as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | |
Cost of goods sold | | — | % | | — | % | | — | % | | — | % |
Research and development | | 1 | | | 2 | | | 2 | | | 2 | |
Selling, general and administrative | | 4 | | | 4 | | | 3 | | | 5 | |
Total stock-based compensation expense | | 5 | % | | 6 | % | | 5 | % | | 7 | % |
Comparison of the Three and Nine Months Ended September 30, 2023 and 2022
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | $ | | % | | Nine Months Ended September 30, | | $ | | % |
| (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | 2023 | | 2022 | | Change | | Change |
| | | | | | | | | | | | | | |
Product revenue | | $ | 79,957 | | | $ | 89,769 | | | $ | (9,812) | | | (11) | % | | $ | 227,056 | | | $ | 214,196 | | | $ | 12,860 | | | 6 | % |
Parts and other service revenue | | 6,191 | | | 6,454 | | | (263) | | | (4) | | | 24,335 | | | 15,172 | | | 9,163 | | | 60 | |
Total revenue | | $ | 86,148 | | | $ | 96,223 | | | $ | (10,075) | | | (10) | | | $ | 251,391 | | | $ | 229,368 | | | $ | 22,023 | | | 10 | |
| Proterra Transit new buses delivered | | 23 | | | 52 | | | (29) | | | (56) | | | 85 | | | 152 | | | (67) | | | (44) | |
| Proterra Powered battery systems delivered | | 530 | | | 348 | | | 182 | | | 52 | | | 1,235 | | | 927 | | | 308 | | | 33 | |
| MW charging infrastructure installed | | 8.7 | | | 22.5 | | | (13.8) | | | (61) | % | | 26.5 | | | 28.8 | | | (2.3) | | | (8) | % |
Total revenue decreased by $10.1 million in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease of total revenue was primarily due to lower than planned production caused by bankruptcy-related supply chain parts shortages. This decrease was partially offset by an increase of battery systems delivered.
Total revenue increased by $22.0 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase of total revenue was primarily due to an increase of battery systems delivered, which was partially offset by fewer bus deliveries.
Cost of goods sold and gross profit (loss)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | $ | | % | | Nine Months Ended September 30, | | $ | | % |
| (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | 2023 | | 2022 | | Change | | Change |
| | | | | | | | | | | | | | |
Product cost of goods sold | | $ | 92,950 | | | $ | 91,408 | | | $ | 1,542 | | | 2 | % | | $ | 264,391 | | | $ | 217,743 | | | $ | 46,648 | | | 21 | % |
Parts and other service cost of goods sold | | 4,628 | | | 6,091 | | | (1,463) | | | (24) | | | 17,375 | | | 15,349 | | | 2,026 | | | 13 | |
Total cost of goods sold | | 97,578 | | | 97,499 | | | 79 | | | — | | | 281,766 | | | 233,092 | | | 48,674 | | | 21 | |
Gross loss | | $ | (11,430) | | | $ | (1,276) | | | $ | (10,154) | | | 796 | % | | $ | (30,375) | | | $ | (3,724) | | | $ | (26,651) | | | 716 | % |
Cost of goods sold increased slightly for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in costs were mainly driven by unabsorbed labor and manufacturing overhead costs from lower than planned production, which was caused by supply chain parts shortages as a result of the Chapter 11 Cases and production efficiency of Powered 1 not reached yet, and higher material input costs. The increase in costs was also due to a $7.8 million inventory write down related to excess or obsolete inventories and scrap costs as part of the consolidation of manufacturing facilities and the ramp up Powered 1 factory production, which started in the first quarter of 2023. These costs were partially offset by manufacturing credits earned as part of the IRA in 2023.
Cost of goods sold increased by $48.7 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in costs were mainly driven by the unabsorbed labor and manufacturing overhead costs from lower than planned production, which was caused by supply chain parts shortages as a result of the Chapter 11 Cases and production efficiency of Powered 1 not reached yet, increased volume for battery systems and higher material input costs. In addition, delays in production resulting mainly from parts shortages and supplier instability along with the ramp up Powered 1 factory production, which started in the first quarter of 2023, negatively impacted our ability to absorb increased labor and manufacturing overhead costs in the first quarter of 2023. The increase was also due to the $14.5 million inventory write down, and increased personnel expense, depreciation and facility expenses associated with Powered 1 factory, which started
production in the first quarter of 2023. These costs were partially offset by manufacturing credits earned as part of the IRA in 2023.
Gross loss increased by $10.2 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Gross loss increased by $26.7 million to $30.4 million in the nine months ended September 30, 2023 from $3.7 million in the nine months ended September 30, 2022. Gross profit was negatively impacted primarily due to unabsorbed labor and manufacturing overhead costs from lower than planned production caused by supply chain parts shortages as a result of the Chapter 11 Cases, a high mix of deliveries of products with pre-inflation pricing that were produced at costs that reflected increased cost of goods sold due to volume and higher material input costs, the inventory write down, and increased personnel related costs, depreciation and facility expenses associated with Powered 1 factory, which started production in the first quarter of 2023. For the nine months ended September 30, 2023, the gross profit was also negatively impacted by the unabsorbed labor and manufacturing overhead costs caused by delays in production and supply chain interruptions, along with the ramp up Powered 1 factory production in the first quarter of 2023.
Gross profit for the nine months ended September 30, 2022 was negatively impacted primarily due to unabsorbed labor and manufacturing overhead costs caused by the COVID-19 pandemic and related supply chain interruptions and delays in production.
Operating expenses
Research and development
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | $ | | % | | Nine Months Ended September 30, | | $ | | % |
| (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | 2023 | | 2022 | | Change | | Change |
| | | | | | | | | | | | | | |
Research and development | | $ | 10,992 | | | $ | 18,165 | | | $ | (7,173) | | | (39) | % | | $ | 44,438 | | | $ | 44,871 | | | $ | (433) | | | (1) | % |
Research and development expense decreased by $7.2 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to a decrease in prototype parts and tooling expense of $2.4 million, a decrease in personnel related expense and stock-based compensation of $2.3 million, and a decrease of professional and consulting fees of $2.1 million.
Research and development expense decreased by $0.4 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to an decrease in professional and consulting fees of $1.1 million and a decrease in prototype parts and tooling expenses of $0.7 million, which is partially offset by an increase in personnel related expenses of $1.3 million.
Selling, general and administrative
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | $ | | % | | Nine Months Ended September 30, | | $ | | % |
| (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | 2023 | | 2022 | | Change | | Change |
| | | | | | | | | | | | | | |
Selling, general and administrative | | $ | 37,419 | | | $ | 38,554 | | | $ | (1,135) | | | (3) | % | | $ | 108,867 | | | $ | 98,646 | | | $ | 10,221 | | | 10 | % |
Selling, general and administrative expense decreased by $1.1 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The $1.1 million decrease was primarily due to a decrease in personnel related expense and stock-based compensation of $1.9 million and a decrease in facilities expense of $1.0 million, which was partially offset by an increase in professional and consulting fees of $1.8 million.
Selling, general and administrative expense increased by $10.2 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The $10.2 million increase was primarily due to an increase in professional and consulting fees of $9.3 million and an increase in personnel related expenses and stock-based compensation of $2.2 million.
Interest expense, net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | $ | | % | | Nine Months Ended September 30, | | $ | | % |
| (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | 2023 | | 2022 | | Change | | Change |
| | | | | | | | | | | | | | |
Interest income | | $ | (512) | | | $ | (458) | | | $ | (54) | | | 12 | % | | $ | (2,362) | | | $ | (1,112) | | | $ | (1,250) | | | 112 | % |
Interest expense | | 664 | | | 7,819 | | | (7,155) | | | (92) | | | 13,706 | | | 22,303 | | | (8,597) | | | (39) | |
Interest expense, net | | $ | 152 | | | $ | 7,361 | | | $ | (7,209) | | | (98) | % | | $ | 11,344 | | | $ | 21,191 | | | $ | (9,847) | | | (46) | % |
Interest expense, net decreased by $7.2 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Interest expense, net decreased by $9.8 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease was primarily due to the decrease of amortization expense of debt discount/premium associated with the Convertible Notes, which were amended on March 31, 2023.
(Gain) loss on debt extinguishment
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | $ | | % | | Nine Months Ended September 30, | | $ | | % |
| (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | 2023 | | 2022 | | Change | | Change |
| | | | | | | | | | | | | | |
| (Gain) loss on debt extinguishment | | $ | — | | | $ | — | | | $ | — | | | NM | | $ | 177,939 | | | $ | (10,201) | | | $ | 188,140 | | | NM |
On March 31, 2023, we entered into amendments to the Notes Purchase Agreement and Convertible Notes as described in Note 5 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. The Convertible Notes Amendments were considered as an extinguishment of the existing debt under the Convertible Notes outstanding as of March 31, 2023, and the issuance of new debt upon the effectiveness of the Convertible Notes Amendments on March 31, 2023, which resulted in a $177.9 million loss on debt extinguishment.
The $10.2 million gain on debt extinguishment in the nine months ended September 30, 2022 was related to the $10.0 million PPP loan forgiveness approved by the SBA in May 2022. The previously paid and accrued interest of $0.2 million was also forgiven.
Gain on revaluation of derivative liability
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | $ | | % | | Nine Months Ended September 30, | | $ | | % |
| (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | 2023 | | 2022 | | Change | | Change |
| | | | | | | | | | | | | | |
Gain on revaluation of derivative liability | | $ | (81,300) | | | $ | — | | | $ | (81,300) | | | NM | | $ | (114,878) | | | $ | — | | | $ | (114,878) | | | NM |
The $81.3 million gain in the three months ended September 30, 2023 was related to the non-cash fair value change in derivative liability arising from the filing of the Bankruptcy Petitions on August 7, 2023, which is considered an event of default under the Convertible Notes, triggering the maturity date of the Convertible Notes, and the embedded conversion features associated with the Convertible Notes expired on maturity date.
The $114.9 million in nine months ended September 30, 2023 was related to the non-cash fair value change in derivative liability arising from the Amended Convertible Notes caused by the filing of the Bankruptcy Petitions
in the third quarter of 2023 and changes of stock price and certain underlying assumptions related to the likelihood of conversion in the second quarter of 2023.
Asset impairment charge
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | $ | | % | | Nine Months Ended September 30, | | $ | | % |
| (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | 2023 | | 2022 | | Change | | Change |
| | | | | | | | | | | | | | |
Asset impairment charge | | $ | 1,600 | | | $ | — | | | $ | 1,600 | | | NM | | $ | 1,600 | | | $ | — | | | $ | 1,600 | | | NM |
The $1.6 million impairment charge is to write off a long-term investment recorded in other assets in the condensed consolidated balance sheets, which was comprised of a minority equity investment in a privately held entity.
Other expense (income), net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | $ | | % | | Nine Months Ended September 30, | | $ | | % |
| (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | 2023 | | 2022 | | Change | | Change |
| | | | | | | | | | | | | | |
Other expense (income), net | | $ | (1,900) | | | $ | (295) | | | $ | (1,605) | | | 544 | % | | $ | (6,321) | | | $ | (1,271) | | | $ | (5,050) | | | 397 | % |
The other income in the three and nine months ended September 30, 2023 was mainly the gains from amortization of short-term investment premium/discount and sublease income.
Reorganization items, net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | $ | | % | | Nine Months Ended September 30, | | $ | | % |
| (dollars in thousands) | | 2023 | | 2022 | | Change | | Change | | 2023 | | 2022 | | Change | | Change |
| | | | | | | | | | | | | | |
Reorganization items, net | | $ | 16,391 | | | $ | — | | | $ | 16,391 | | | NM | | $ | 16,391 | | | $ | — | | | $ | 16,391 | | | NM |
The reorganization items, net in the three and nine months ended September 30, 2023 was mainly the professional fees and other bankruptcy related costs arising from the filing of the Bankruptcy Petitions on August 7, 2023 partially offset by gains from write-off of liabilities subject to compromise as a result of the Chapter 11 Cases.
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, 2023.
Liquidity and capital resources
As of September 30, 2023, we had cash and cash equivalents and short-term investments of $130.7 million. Our primary requirements for liquidity and capital are investment in new products and technologies, the completion and improvement of our current manufacturing and future capacity expansion, working capital, servicing our indebtedness, complying with the requirements of the terms governing the Senior Credit Facility and Convertible Notes, and general corporate needs. Historically, these cash requirements have been met through the net proceeds we received through private sales of equity securities, the Business Combination, the PIPE Financing, the Convertible Notes, borrowings under our credit facilities, and payments received from customers. Following our Chapter 11 Cases’ filing, our principal source of funds has been and is expected to continue to be cash on hand.
Beginning on the Petition Date, the Company’s ability to continue as a going concern is contingent upon, among other things, its ability to, subject to the Bankruptcy Court’s approval, implement a Chapter 11 plan, emerge from the Chapter 11 proceedings and generate sufficient liquidity to meet its contractual obligations and operating needs. There can be no assurance that we will be successful in executing a transaction or consummating a Chapter 11 plan with respect to the Chapter 11 Cases. As a result of risks and uncertainties, the delisting of our common stock and the effects of potential disruption resulting from the Chapter 11 Cases making it more difficult to maintain business, financing and operational relationships, together with the Company’s recurring losses from operations and accumulated deficit, substantial doubt exists regarding our ability to continue as a going concern for the next 12 months. See Note 2, Chapter 11 Filing and Other Related Matters for additional details on the Chapter 11 Cases.
Senior Credit Facility
As previously disclosed, in May 2019, we entered into 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 secured by a security interest on substantially all our assets except for intellectual property and certain other excluded assets.
The filing of the Chapter 11 Cases is considered an event of default under the Senior Credit Facility, and resulted in termination of the revolver commitment. The Company elected to cash collateralize its outstanding letters of credit obligations in accordance to certain terms under the Senior Credit Facility, which was recorded in the restricted cash, current on the condensed consolidated balance sheet. During the three months ended September 30, 2023, $10 million of letter of credit was drawn.
There was no outstanding balance for borrowings under the Senior Credit Facility as of September 30, 2023. There was an aggregate of $11.9 million in letters of credit outstanding, which is fully cash collateralized as of September 30, 2023.
Convertible Notes
On March 31, 2023, the Company entered into an amendment to the Notes Purchase Agreements and the Convertible Notes, which includes amendments to the interest rate, maturity date, mandatory and optional conversion rights, limitations on the issuance of shares of our common stock upon conversion and the Company’s obligation to seek stockholder approval, minimum liquidity requirements and certain other covenants (the “Convertible Notes Amendments”). See Note 5 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for additional details of the Convertible Notes prior to and after the Convertible Notes Amendments.
The filing of the Chapter 11 Cases is considered an event of default under the Convertible Notes and resulted in the Convertible Notes maturing on such day. The principal and accrued unpaid interest are due and payable immediately.
Pursuant to the final cash collateral order, post-petition interest on pre-petition debt continues to accrue at the non-default rate until the earlier of (i) April 1, 2024 and (ii) the notice period following an event of default, unless an extension is approved by the Bankruptcy Court and paid when such payment would have been due under the Notes Purchase Agreement.
As of September 30, 2023, the outstanding balance of the Convertible Notes was $179.0 million inclusive of PIK interest of $25.5 million.
Performance bonds
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. Historically, we have primarily provided cash collateral. Our surety provider may
accept letters of credit. The collateral provided is a mix of restricted cash on the balance sheet and letters of credit. As of September 30, 2023, we had $25.5 million of restricted cash and $6.7 million of letters of credit related to performance bonds. Subject to the Chapter 11 Cases, we believe we 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:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (in thousands) | | 2023 | | 2022 |
| | |
| Cash flows (used in) provided by: | | | | |
Operating activities | | $ | (139,258) | | | $ | (197,586) | |
Investing activities | | 194,878 | | | 74,571 | |
Financing activities | | (3,520) | | | 12,586 | |
Net increase (decrease) in cash and cash equivalents, and restricted cash | | $ | 52,100 | | | $ | (110,429) | |
Operating activities
Net cash used in operating activities in the nine months ended September 30, 2023 was $139.3 million compared to $197.6 million net cash used in operating activities in the nine months ended September 30, 2022. The change of cash used in operating activities in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was mainly due to changes of working capital balance offset by higher net loss than comparative period. The increase in net loss of $112.8 million between the comparison periods and $114.9 million non-cash gain on revaluation of derivative liability in 2023 is primarily offset by the increase of non-cash loss on debt extinguishment of $187.9 million and $5.5 million of depreciation and amortization expense. In the nine months ended September 30, 2023, cash provided by operating activities includes $48.6 million, $41.9 million, $16.4 million and $17.4 million related to account receivable, accounts payable and accrued liabilities, deferred revenue and prepaid expenses and other current assets, respectively, and partially offset by cash used in operating activities related to inventory of $94.0 million. In the nine months ended September 30, 2022, cash used in operating activities included $49.8 million, $20.7 million and $13.0 million related to inventory, accounts receivable and other assets, respectively, which was partially offset by cash provided by operating activities related to deferred revenue and accounts payable and accrued liabilities of $5.1 million and $19.9 million, respectively.
Investing activities
Net cash provided by investing activities was $194.9 million in the nine months ended September 30, 2023 compared to $74.6 million net cash used by investing activities in the nine months ended September 30, 2022. The $194.9 million net cash provided by investing activities for the nine months ended September 30, 2023 resulted from $211.4 million net cash provided by maturity of marketable securities and offset by $16.5 million capital expenditures mainly related to the Powered 1 factory. The $74.6 million net cash used in investing activities for the nine months ended September 30, 2022 resulted from $116.4 million net purchase of short-term investments and $41.8 million capital expenditures mainly related to the Powered 1 factory.
Financing activities
Net cash used in financing activities was $3.5 million for the nine months ended September 30, 2023 as compared to $12.6 million net cash provided by financing activities for the nine months ended September 30, 2022. The net cash used in financing activities for the nine months ended September 30, 2023 primarily resulted from the payment of insurance related financing liability. The net cash provided by financing activities for the nine months ended September 30, 2022 primarily resulted from net proceeds of $9.0 million from the exercise of stock options.
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, 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, excluding inestimable variable components, was $1.9 billion as of September 30, 2023, of which 25% was expected to be due in the next 12 months, 40% in 1-3 years, and the remainder in more than 3 years through 2028. Most of the commitments relate to the expected purchase of 2170 battery cells manufactured at a yet to be built LG Energy Solution battery cell plant in the United States, pursuant to a long-term supply agreement.
On October 25, 2023, LG Energy Solution issued a press release announcing that it modified its plan for the yet to be built battery cell manufacturing plant in the United States to only produce 46-series battery cells instead of the original plan to produce both 46-series and 2170 battery cells. According to the press release, the expected date for start of production remains unchanged, scheduled for late 2025. The Company is currently in discussions with LG Energy Solution concerning the existing long-term supply agreement which contains minimum volume commitments and certain milestone-based prepayments related to the construction of the US facility. See the risk factor under “Risk Factor—If LG Energy Solution does not satisfy its contractual obligations to us with respect to producing certain EV cells in the United States, we may incur significant additional, unplanned design, development and manufacturing costs of EV cells for our products and may experience potential revenue losses” for further information.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
There have been no material changes in our market risk exposures for the nine months ended September 30, 2023, as compared to those discussed in our Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision of and with the participation of our principal executive officer and principal financial officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2022. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2023 because the material weaknesses in internal control over financial reporting, described below and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with SEC on March 17, 2023 and amended on May 1, 2023, remained as of September 30, 2023.
We did not have a sufficient number of trained resources with assigned responsibility and accountability for the design, operation and documentation of internal control over financial reporting. As a result:
a. We did not have an effective risk assessment process that defined clear financial reporting objectives and evaluated risks at a sufficient level of detail to identify all relevant risks of material misstatement across the entity.
b. We did not have an effective information and communication process that identified and assessed the source of and controls necessary to ensure the reliability of information used in financial reporting and that communicates relevant information about roles and responsibilities for internal control over financial reporting.
c. We did not have effective monitoring activities to assess the operation of internal control over financial reporting including the continued appropriateness of control design and level of documentation maintained to support control effectiveness.
As a consequence, we did not effectively design, implement, or operate process-level control activities for substantially all of our financial reporting processes.
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will be able to prevent all errors and detect all fraud due to inherent limitations of internal controls. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. These inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the financial reporting process safeguards to reduce, though not eliminate, the risk of errors or fraud.
After giving full consideration to the material weaknesses and the additional procedures that we performed, management has concluded that the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles (“US GAAP”).
Remediation Plan and Status
Our management, with the oversight of the audit committee of our board of directors, is in the process of designing and implementing a remediation plan and have taken and continue to take steps that we believe will help address the underlying causes of the material weakness, which includes the following steps:
(1) Hiring, training, and retaining individuals with the appropriate skills and experience related to technical accounting, internal control over financial reporting, and the design and implementation of information technology solutions;
(2) Enhancing risk assessment and prioritizing remediation activities that most significantly reduce the risk that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis;
(3) Implementing and monitoring our phased approach to remediation of control activities;
(4) Enhancing information and communication processes through information technology solutions designed to ensure that information needed for financial reporting is accurate, complete, relevant and reliable, and communicated in a timely manner; and
(5) Reporting regularly to the audit committee of the board of directors on the progress and results of our remediation plan, including the identification, status, and resolution of internal control deficiencies.
The elements of our remediation plan can only be accomplished over time and are subject to continued review, implementation and testing by management, as well as oversight by the audit committee of our board of directors, to determine that it is achieving its objectives. While we have implemented a variety of steps to remediate these weaknesses, the material weaknesses will not be considered remediated until such time as management designs and implements effective controls that operate for a sufficient period of time and concludes, through testing, that these controls are effective. Examples of actions that have been implemented as part of the ongoing remediation plan include but are not limited to the hiring of a temporary accounting advisor and full time Chief Accounting Officer in the second quarter of 2023. The Company has also contracted the services of a global consulting firm that is experienced in SOX and Committee of Sponsoring Organizations (COSO) compliance to
assist with the ongoing remediation efforts. We will continue to monitor the effectiveness of our remediation plan and will refine the remediation plan as appropriate. However, the bankruptcy related resource constraints have negatively impacted our schedule in carrying out the remediation plan.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s most recently completed quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting, other than the remediation steps described above.
Part II. Other Information
Item 1. Legal Proceedings
From time to time we may be involved in various disputes and litigation matters that arise in the ordinary course of business. We are currently not a party to any material legal proceedings other than the Chapter 11 Cases and the legal proceedings described below. The information contained in Note 2 Chapter 11 Filing and Other Related Matters is incorporated herein by reference. As a result of the Chapter 11 Cases, substantially all proceedings pending against the Debtors have been stayed.
Securities Class Action Lawsuits
Two securities class actions, Villanueva v. Proterra Inc., Case No. 3:23-cv-3519 and Tirado v. Proterra Inc., Case No. 5:23-cv-04528, were filed in the U.S. District Court for the Northern District of California on July 14, 2023 and September 1, 2023, respectively, against the Company and certain of its current and former directors and officers. Plaintiffs in both actions allege that Defendants made misleading statements about the Company’s financial condition and liquidity. They seek damages based in part on the drop in Proterra’s stock price after it disclosed, on March 15, 2023, that it violated a minimum liquidity clause in its Convertible Notes and that its independent registered public accounting firm’s audit report indicated that it would need to qualify its audit report with a "going concern" clause, and after it disclosed, on August 7, 2023, its Chapter 11 bankruptcy filing. On October 23, 2023, the U.S. District Court for the Northern District of California granted the Villanueva plaintiffs’ motion to consolidate the two class actions. The Company and the individual defendants deny all allegations of wrongdoing in the complaints and intend to vigorously defend the matter. Since the cases are at an early stage, the Company is unable to predict the ultimate outcome of the lawsuits and cannot reasonably estimate the potential loss or range of loss the Company may incur.
Item 1A. Risk Factors
Investing in our securities involves risks. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly Report, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements included elsewhere in this Quarterly Report, before deciding whether to purchase any of our securities. Our business, results of operations, financial condition, and prospects could also be harmed by risks and uncertainties that are not presently known to us or that we currently believe are not material. If any of these risks actually occur, our business, results of operations, financial condition, and prospects could be materially and adversely affected. Unless otherwise indicated, references in these risk factors to our business being harmed will include harm to our business, reputation, brand, financial condition, results of operations, and prospects. In such event, the market price of our securities could decline, and you could lose all or part of your investment.
Risks Associated with Chapter 11 Proceedings
We are subject to the risks and uncertainties associated with Chapter 11 proceedings.
For the duration of our Chapter 11 proceedings, our operations and our ability to develop and execute our business plan, as well as our continuation as a going concern, are subject to the risks and uncertainties associated with bankruptcy. These risks include the following:
•our ability to successfully conduct a sale, execute a transaction, develop, confirm and consummate a Chapter 11 plan or alternative restructuring transaction, or otherwise realize any value with respect to our assets;
•our ability to obtain and/or maintain court approval with respect to motions filed in Chapter 11 proceedings from time to time;
•our ability to operate within the restrictions and the liquidity limitations of any orders, including orders related to cash collateral, entered by the Bankruptcy Court in connection with the Chapter 11 Cases;
•our ability to obtain sufficient financing, including the use of cash collateral, to allow us to emerge from bankruptcy and execute our business plan of reorganization post-emergence;
•our ability to maintain our relationships with our suppliers, vendors, customers, employees and other third parties;
•our suppliers’ and vendors’ likely unwillingness or ability to fulfill any obligations they may have under supply terms or agreements for ongoing support, including their warranty obligations to us, as a result of the Chapter 11 Cases or other disputes, that could cause us to incur costs or liabilities, damage our reputation with our customers or potential acquirers of our assets;
•our ability to maintain contracts that are critical to our operations;
•our ability to execute on our business plan;
•our ability to attract, motivate and retain key employees;
•our ability to attract and retain sufficient number of trained resources to carry out our remediation plan on schedule;
•the imposition of restrictions or obligations on the Company by regulators related to the bankruptcy and emergence from Chapter 11;
•the ability of third parties to seek and obtain court approval to terminate contracts and other agreements with us;
•the ability of third parties to seek and obtain court approval to terminate or shorten the exclusivity period for us to propose and confirm a Chapter 11 plan, to appoint a Chapter 11 trustee, or to convert the Chapter 11 proceedings to a Chapter 7 proceeding;
•the substantial costs associated with Chapter 11 Cases, particularly if delays in the Chapter 11 Cases increase costs;
•the ability of third parties to assert claims against the Company, which may be substantial;
•the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 proceedings that may be inconsistent with our plans; and
•uncertainties and continuing risks associated with our ability to achieve our stated goals and continue as a going concern.
Delays in our Chapter 11 Cases increase the risks of us being unable to reorganize our business and emerge from bankruptcy and increase our costs associated with the bankruptcy process
These risks and uncertainties could affect our business and operations in various ways. For example, negative events associated with our Chapter 11 proceedings could adversely affect our relationships with our suppliers, vendors, customers, employees, and other third parties, which in turn could adversely affect our operations and financial condition. Also, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, including a sale of all or part of our business, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. Because of the risks and uncertainties associated with our Chapter 11 proceedings, we cannot accurately predict or quantify the ultimate impact of events that will occur during our Chapter 11 proceedings that may be inconsistent with our plans or that may have on ultimate recovery for stakeholders, including creditors and stockholders.
Operating under Bankruptcy Court protection for a long period of time may harm our business.
Our future results are dependent upon the successful confirmation and implementation of a plan of reorganization. A long period of operations under Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the Chapter 11 proceedings continue, our senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing on our business operations. A prolonged period of operating under Bankruptcy Court protection also may make it more difficult to retain management and other key personnel necessary to the success and growth of our business.
Additionally, so long as the Chapter 11 proceedings continue, we will be required to incur significant costs for professional fees and other expenses associated with the administration of the Chapter 11 proceedings, including potentially costs of litigation arising thereunder.
While the Debtors have made efforts to minimize the length of the Chapter 11 Cases, it is impossible to predict with certainty the amount of time that the Debtors may spend in bankruptcy.
The Chapter 11 Cases limit the flexibility of our management team in running our business.
While we operate our business as debtors-in-possession under supervision by the Bankruptcy Court, we are required to obtain the approval of the Bankruptcy Court and, in some cases, certain lenders and the creditors’ committee prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, negotiation with a creditors’ committee and other parties-in-interest and one or more hearings. The creditors’ committee and other parties-in interest may be heard at any Bankruptcy Court hearing and may raise objections with respect to these motions. This process may delay major transactions and limit our ability to respond quickly to opportunities and events in the marketplace. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe are beneficial to us.
We may not be able to obtain confirmation of a Chapter 11 plan of reorganization or complete any Bankruptcy Court-approved sales of our Company or assets, or we may not be able to realize adequate consideration for such sales.
To emerge successfully from Bankruptcy Court protection as a viable entity, we must meet certain statutory requirements with respect to adequacy of disclosure with respect to the plan of reorganization, solicit and obtain the requisite acceptances of such a plan and fulfill other statutory conditions for confirmation of such a plan, which have not occurred to date. The confirmation process is subject to numerous potential, unanticipated delays, including that the Debtors may not receive the requisite acceptances of constituencies in the Chapter 11 proceedings to confirm a Chapter 11 plan. Even if the requisite acceptances of a plan are received, the Bankruptcy Court may not confirm such a plan if other statutory requirements are not met. If a Chapter 11 plan of reorganization is not confirmed by the Bankruptcy Court, it is unclear whether we would be able to reorganize our business and what, if anything, holders of claims against us would ultimately receive with respect to their claims.
There can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 proceedings or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 proceedings. Even if a Chapter 11 plan is confirmed and implemented, our operating results may be adversely affected by the possible reluctance of prospective lenders, suppliers and other counterparties to do business with a company that recently emerged from bankruptcy proceedings. If we are unable to successfully reorganize, we may not be able to continue our operations.
In connection with the Chapter 11 Cases, we may attempt to sell all or certain of our assets pursuant to a sale under section 363 of the Bankruptcy Code or otherwise reorganize the Company pursuant to a Chapter 11 plan of reorganization. There can be no assurance that we will be successful in completing any such transactions because there may not be buyers willing to enter into any such transactions, we may not receive sufficient consideration for such assets, or there may be objections from our stakeholders. If we are unable to complete these transactions, it may be necessary to seek additional funding sources or possibly convert to a Chapter 7 liquidation process. If these transactions are completed, they may not generate the anticipated or desired outcomes.
Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.
We face uncertainty regarding the adequacy of our liquidity and capital resources. In addition to the cash requirements necessary to fund ongoing operations, and our persistent net losses and negative cash flows from operations, we have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 proceedings and expect that we will continue to incur significant professional fees and costs throughout our Chapter 11 proceedings. We cannot assure investors that cash on hand and cash flow from operations will be sufficient to continue to fund our operations and allow us to satisfy our obligations related to the Chapter 11 proceedings until we are able to emerge from the Chapter 11 proceedings.
Our liquidity, including our ability to meet our ongoing operational obligations, is dependent upon, among other things: (i) our ability to comply with the terms and conditions of the final cash collateral order, (ii) our ability to maintain adequate cash on hand, (iii) our ability to generate cash flow from operations, (iv) our ability to successfully conduct a sale, execute a transaction, or develop, confirm and consummate a Chapter 11 plan or other alternative restructuring transaction, and (v) the cost, duration and outcome of the Chapter 11 proceedings.
As a result of the Chapter 11 proceedings, our financial results may be volatile and may not reflect historical trends.
During the Chapter 11 proceedings, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our condensed consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the bankruptcy filing.
In particular, the amount and composition of our assets and liabilities could be significantly different as a result of the Chapter 11 Cases, and the description of our operations, assets, liabilities, contingencies, liquidity and capital resources included in our periodic reports or in any filing we make with the Bankruptcy Court may not accurately reflect such matters during the pendency of or following the Chapter 11 Cases or the value of our assets in an organized sale process in light of the uncertainty of the estimates and assumptions used in the applicable reporting principles, and such values may be higher or lower as a result. The periodic financial information reported to the Bankruptcy Court is not presented in accordance with GAAP and may differ materially from information that has been or may in the future be provided as of quarter end in our periodic reports and may reflect estimates based on assumptions that may change significantly during the course of the Chapter 11 Cases or due to other contingencies, and, as applicable, is subject to all of the disclaimers presented therewith.
In addition, if we emerge from Chapter 11, the amounts reported in subsequent condensed consolidated financial statements may materially change relative to historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to a plan of reorganization. We also may be required to adopt fresh start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our consolidated balance sheets. Our financial results after the application of fresh start accounting also may be different from historical trends.
We may be subject to claims that will not be discharged in the Chapter 11 proceedings, which could have a material adverse effect on our financial conditions and results of operations.
The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all claims that arose prior to the Petition Date, or after such date but before confirmation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the terms of the plan of reorganization. We are not currently aware of any material claims against the Debtors that would not ultimately be discharged by a Chapter 11 plan of reorganization of the Debtors; however any claims not ultimately discharged through a Chapter 11 plan of reorganization could be asserted against the reorganized Debtors and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.
We may be subject to a Liquidation Premium Claim as a result of the Chapter 11 proceedings.
The terms of the Convertible Notes provide that prior to the maturity date, in the event of a liquidation or sale of the Company, the Company would be required to pay to the holders of Convertible Notes, in lieu of paying the principal amount of the 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 “Liquidation Premium”). As set forth in the final cash collateral order in the Chapter 11 proceedings, the Cowen Parties, who hold approximately 98% of the outstanding aggregate principal amount of the Convertible Notes, have reserved the right to assert a claim for the Liquidation Premium (“Liquidation Premium Claim”). The Cowen Parties are required to file a master proof of claim in the Chapter 11 proceedings, which may include the Liquidation Premium Claim, by no later than November 15, 2023. While we believe that no Liquidation Premium has been triggered or could be triggered in the future by the commencement and prosecution of the Chapter 11 proceedings, there is a risk that the Cowen Parties assert a Liquidation Premium Claim and that the adjudication of any such claim may be unfavorable to the Company, resulting in increased claims against the Company in the amount of the Liquidation Premium.
We have experienced, and may continue to experience, increased levels of employee attrition as a result of the Chapter 11 proceedings.
As a result of the Chapter 11 proceedings, we have and may experience increased levels of employee attrition, and our employees likely will face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Increased levels of employee attrition may cause us to rely on fewer employees, increase the number of key employees as a share of the total personnel we employ, and in some cases these employees may be less experienced which puts at greater risk our ability to execute our plans and strategies. To conserve our cash, most of the departed employees are not being replaced.
Senior management may leave the Debtors during the pendency of the Chapter 11 proceedings if not adequately compensated.
The Bankruptcy Code limits a debtor’s ability to pay bonus compensation to insiders absent court approval. While we have obtained Bankruptcy Court approval of an incentive program for certain members of senior management, certain modifications to this program or incentive programs for other insiders would require court approval. If we are unable to obtain court approval of any insider incentive bonus program, certain members of our senior management team may be undercompensated compared to both our market peers and their compensation prior to the Chapter 11 proceedings. There can be no assurance that members of management will continue to work for the Company under such circumstances. Should the Company lose all or part of the senior management team during the pendency of the Chapter 11 proceedings, we may experience substantial disruption and value destruction as a result.
Our post-bankruptcy capital structure is yet to be determined, and any changes to our capital structure may have a material adverse effect on existing debt and security holders, including holders of our common stock.
Our post-bankruptcy capital structure has yet to be determined and may be set pursuant to a plan that requires Bankruptcy Court approval. The reorganization of our capital structure may include exchanges of new debt or equity securities for our existing debt, equity securities, and claims against us. Such new debt may be issued at different interest rates, payment schedules and maturities than our existing debt securities. Existing equity securities are subject to a high risk of being cancelled. The success of a reorganization through any such exchanges or modifications will depend on approval by the Bankruptcy Court and the willingness of existing debt and security holders to agree to the exchange or modification, subject to the provisions of the Bankruptcy Code, and there can be no guarantee of success. If such exchanges or modifications are successful, holders of our debt or of claims against us may find their holdings no longer have any value or are materially reduced in value, or they may be converted to equity and be diluted or may be modified or replaced by debt with a principal amount that is less than the outstanding principal amount, longer maturities and reduced interest rates. Holders of our common stock may also find that their holdings no longer have any value and face highly uncertain or no recoveries under a plan. There can be no assurance that any new debt or equity securities will maintain their value at the time of
issuance. If existing debt or equity holders are adversely affected by a reorganization, it may adversely affect our ability to issue new debt or equity in the future. Although we cannot predict how the claims and interests of stakeholders in the Chapter 11 Cases, including holders of common stock, will ultimately be resolved, we expect that common stockholders will not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured indebtedness, are paid in full. Consequently, there is a significant risk that the holders of our common stock would receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.
Any Chapter 11 plan that we may implement will likely be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, or adverse market conditions persist or worsen, our plan may be unsuccessful in its execution.
Any Chapter 11 plan that we may implement will affect both our capital structure and the ownership, structure and operation of our remaining business and will likely reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to (i) our ability to substantially change our capital structure; and (ii) the overall strength and stability of general economic conditions, both in the U.S. and in global markets. The failure of any of these factors could materially adversely affect the successful reorganization of our business.
In addition, any plan of reorganization will likely rely upon financial projections, including with respect to revenues, adjusted EBITDA, capital expenditures, debt service and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. In our case, the forecasts will be even more speculative than normal, because they may involve fundamental changes in the nature of our capital structure. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our business or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful implementation of any plan of reorganization.
The amount of claims allowed could significantly exceed our estimates.
Although the Bankruptcy Court has established November 13, 2023 as the bar date for all creditors that are not government entities and February 3, 2024, for all creditors that are government entities to file their proof of claim or interest, there can be no assurance regarding the amount of claims allowed to participate in distributions under a Chapter 11 plan or that such claims will not be significantly greater than may be anticipated which, could in turn result in the value of distributions to stakeholders being delayed, reduced, or eliminated entirely. Inevitably, some assumptions will not materialize, and unanticipated events and circumstances may affect the ultimate results and total amount of claims against us.
In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code, in which case our common stock would likely be worthless.
There can be no assurance as to whether we will successfully reorganize and emerge from the Chapter 11 proceedings or, if we do successfully reorganize, as to when we would emerge from the Chapter 11 proceedings. If the Bankruptcy Court finds that it would be in the best interest of creditors and/or the Debtors, the Bankruptcy Court may convert our Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Debtors’ assets for distribution in accordance with the priorities established by the Bankruptcy Code. The Debtors believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to the Debtors’ creditors than those provided for in a Chapter 11 plan because of, among other things, (i) the likelihood that the assets would have to be sold or otherwise disposed of in a disorderly fashion over a short period of time rather than reorganizing or selling such assets in a controlled manner, (ii) additional administrative expenses and delays resulting from the appointment of a Chapter 7 trustee, and/or (iii) additional expenses and claims, some of which would be entitled to priority, that
would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
The Chapter 11 proceedings may cause our common stock to decrease in value materially or may render our common stock worthless.
We have a substantial amount of indebtedness that is senior to the Company’s existing shares of common stock in our capital structure. Recoveries in the Chapter 11 Cases for holders of common stock, if any, will depend upon the performance of our business, the value of our assets and other factors. Although we cannot predict how our common stock will be treated under any Chapter 11 plan at this time, the common stockholders may not receive a material, or any, recovery unless the holders of more senior claims and interests, such as secured indebtedness, are paid in full. Consequently, there is a significant risk that the holders of our common stock will receive little or no recovery under the Chapter 11 Cases and that our common stock will decrease in value materially or become worthless. Trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in bankruptcy proceedings.
Trading in shares of our common stock during the pendency of the Chapter 11 proceedings is highly speculative and an investor could lose all or part of their investment.
The price of our common stock has been volatile following the commencement of the Chapter 11 Cases and has and may continue to decrease in value. Accordingly, any trading in our common stock during the pendency of our Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of our common stock. External factors have caused and may continue to cause the market price and demand for our common stock to fluctuate substantially. Accordingly, we cannot assure investors of the liquidity of an active trading market, the ability to sell shares of our common stock when desired, or the prices that an investor may obtain for the shares of our common stock.
In the past, following periods of extreme volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. This and other securities litigation against us could result in substantial costs and a diversion of our management’s attention and resources.
Our common stock has been delisted from trading on the Nasdaq Global Select Market, which may negatively impact the trading price of our common stock and our stockholders and there may be risks involved with trading in an over-the-counter market.
Our common stock has been delisted from the Nasdaq Global Select Market. As a result of the delisting, our common stock began trading exclusively on the OTC market on August 17, 2023 under the symbol PTRAQ. We can provide no assurance that our common stock will continue to trade on this market, whether broker-dealers will continue to provide public quotes of our common stock on this market, whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock will continue on this market in the future, which could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell our common stock. Furthermore, because of the limited market and generally low volume of trading in our common stock, the price of our common stock is likely to be volatile and more likely to be affected by broad market fluctuations, general market conditions, changes in the markets’ perception of our securities, and announcements made by us or third parties with interests in the Chapter 11 Cases.
We may be adversely affected by potential litigation, including litigation arising out of the Chapter 11 Cases.
In the future, we may become parties to litigation. In general, litigation can be expensive and time consuming to bring or defend against. Such litigation could result in settlements or damages that could significantly affect our financial results. It is also possible that certain parties will commence litigation with respect to the treatment of their claims under a Chapter 11 plan. It is not possible to predict the potential litigation that we may become party
to nor the final resolution of such litigation. The impact of any such litigation on our business and financial stability, however, could be material.
Additional Risks Related to Our Financial Condition
There is substantial doubt about our ability to continue as a going concern for a period of twelve months from the date of this Quarterly Report on Form 10-Q.
Beginning on the Petition Date, the Company’s ability to continue as a going concern is contingent upon, among other things, its ability to, subject to the Bankruptcy Court’s approval, implement a Chapter 11 plan, emerge from the Chapter 11 Cases and generate sufficient liquidity to meet its contractual obligations and operating needs. As a result, the Company faces risks and uncertainties related to, among other things, (i) the Company’s ability to obtain requisite support for a Chapter 11 plan from various stakeholders, and (ii) the potentially disruptive effects of the Chapter 11 proceedings on our business making it potentially more difficult to maintain business, financing and operational relationships. The outcome of the Chapter 11 Cases is subject to a high degree of uncertainty and is dependent upon factors that are outside of our control, including rulings by the Bankruptcy Court and the actions of the Company’s creditors. There can be no assurance that we will be successful in executing a transaction, or consummating a Chapter 11 plan with respect to the Chapter 11 Cases. As a result of risks and uncertainties related to the aforementioned conditions, the delisting of our common stock, and the effects of potential disruption resulting from the Chapter 11 Cases making it more difficult to maintain business, financing and operational relationships, together with our recurring losses from operations and accumulated deficit, substantial doubt exists regarding our ability to continue as a going concern for the next 12 months. See Note 2, Chapter 11 Filing and Other Related Matters for additional details on the Chapter 11 Cases.
The filing of the Chapter 11 Cases constituted an event of default that accelerated substantially all of our obligations under all of our pre-petition debt instruments.
As of September 30, 2023, we had cash and cash equivalents and short-term investments of $130.7 million.
See the risk factors under “Risks Associated with Chapter 11 Proceedings” for further information.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect or financial reporting standards or interpretations change, our operating results could be adversely affected.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity as of the date of the financial statements, and the amount of revenue and expenses, during the periods presented, that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our financial statements include those related to determination of revenue recognition, stock-based compensation, inventory, and warranties. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of industry or financial analysts and investors, resulting in a decline in the trading price of our common stock.
Additionally, we regularly monitor our compliance with applicable financial reporting standards and review new pronouncements and drafts thereof that are relevant to us. As a result of new standards, changes to existing standards, and changes in interpretation, we might be required to change our accounting policies, alter our operational policies, or implement new or enhance existing systems so that they reflect new or amended financial reporting standards, or we may be required to restate our published financial statements. Changes to existing standards or changes in their interpretation may have an adverse effect on our reputation, business, financial position, and profit, or cause an adverse deviation from our revenue and operating profit target, which may negatively impact our financial results.
We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future. If we fail to remediate these material weaknesses or
otherwise fail to establish and maintain effective control over financial reporting, it may adversely affect our ability to accurately and timely report our financial results in the future, and may adversely affect investor confidence, our reputation, our ability to raise additional capital, and our business operations and financial condition.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management, with the participation of the principal executive officer and principal financial officer, under the oversight of our board of directors, evaluated the effectiveness of our internal control over financial reporting as of September 30, 2023, using the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our internal control over financial reporting was not effective as of September 30, 2023, because of the material weaknesses in internal control over financial reporting, described below and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with SEC on March 17, 2023 and amended on May 1, 2023, remained as of September 30, 2023.
We did not have a sufficient number of trained resources with assigned responsibility and accountability for the design, operation and documentation of internal control over financial reporting.
As a result:
•We did not have an effective risk assessment process that defined clear financial reporting objectives and evaluated risks at a sufficient level of detail to identify all relevant risks of material misstatement across the entity.
•We did not have an effective information and communication process that identified and assessed the source of and controls necessary to ensure the reliability of information used in financial reporting and that communicates relevant information about roles and responsibilities for internal control over financial reporting.
•We did not have effective monitoring activities to assess the operation of internal control over financial reporting, including the continued appropriateness of control design and level of documentation maintained to support control effectiveness.
As a consequence, we did not effectively design, implement, or operate process-level control activities for substantially all of our financial reporting processes.
Our management, with the oversight of the audit committee of our board of directors, is in the process of designing and implementing a remediation plan and is taking steps to remediate the material weaknesses. The material weaknesses will not be considered remediated until such time as management designs and implements effective controls that operate for a sufficient period of time and concludes, through testing, that these controls are effective. Furthermore, we cannot ensure that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate in a timely manner or at all the control deficiencies that led to our material weakness in our internal controls over financial reporting or that they will prevent or avoid potential future material weaknesses due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future these controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements. Furthermore, the bankruptcy related resource constraints have negatively impacted our schedule in carrying out the remediation plan.
We will need to continue to dedicate internal resources, engage outside consultants and maintain a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to remediate the material weakness and any future control deficiencies or material weaknesses, and improve control processes as appropriate, validate through testing that controls are functioning as documented and maintain a continuous reporting and improvement process for internal control over financial reporting. If we are not able to correct material weaknesses or deficiencies in internal controls in a timely manner or otherwise comply with the requirements of Section 404 in a timely manner, our ability to record, process, summarize and report financial
information accurately and within applicable time periods may be adversely affected and we could be subject to sanctions or investigations by the SEC or other regulatory authorities as well as shareholder litigation which would require additional financial and management resources and could adversely affect the market price of our common stock. Furthermore, if we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
Any failure to remediate the material weaknesses or otherwise develop or maintain effective controls or any difficulties encountered in their implementation or improvement could limit our ability to prevent or detect a misstatement of our accounts or disclosures that could result in material misstatements of our annual or interim financial statements. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports. For example, in connection with the identification of the material weakness described above, we were unable to file our Annual Report on Form 10-K by the deadline prescribed by the SEC and, as a result, we are currently not eligible to utilize a Form S-3 registration statement. Additionally, investors may lose confidence in our financial reporting and our stock price may decline as a result. In addition, perceptions of the Company among customers, suppliers, lenders, investors, securities analysts and others could also be adversely affected.
Risks Related to Our Business and Industry
Our limited history of selling battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses, and related technologies makes it difficult to evaluate our business and prospects and may increase the risks associated with your investment.
Although we were incorporated in 2004, we only began delivering electric vehicles in 2010, and through September 30, 2023 had delivered over 1,100 electric transit buses. In the nine months ended September 30, 2023 and 2022, we recognized $251.4 million and $229.4 million, respectively, in total revenue. In 2022, 2021 and 2020, we recognized $309.4 million, $242.9 million, and $196.9 million in total revenue, respectively. Since 2010, our product line has changed significantly, and our most recent transit bus model has only been in operation since 2020. Further, we started developing our battery technology in 2015 and did not begin battery pack production in any significant volume until 2017. We also have limited experience deploying our electric powertrain technology in vehicles other than electric transit buses. In 2018, we announced our software platform for connected vehicle intelligence, which we now refer to as our Valence (formerly called APEX) fleet and energy management software-as-a-service platform, which has only had beta customers until recently; we just relaunched the platform as Valence in 2022. Our energy services, which includes fleet planning, charging infrastructure and related energy management services, only began generating limited revenue in 2019. We began providing integrated charging solutions in 2019 and have only begun sourcing our new charging hardware from a new partner in 2020, with our first deliveries occurring in 2021.
As a result, we have a limited operating history upon which to evaluate our business and future prospects, which subjects us to a number of risks and uncertainties, including our ability to plan for and predict future growth. Our limited operating experience is particularly concentrated in our Proterra Transit line of business, and that limited experience may not prove to be relevant to Proterra Powered and Proterra Energy. As a result, the operating history of Proterra Transit may not prove to be predictive of the success of Proterra Powered and Proterra Energy.
Moreover, because of the limited deployment of our products and services to date, defects or other problems with our products or industry-wide setbacks that impact the commercial electric vehicle market or the electric vehicle market as a whole may disproportionately impact our ability to attract additional customers or sell to existing customers, and harm our brand and reputation relative to larger, more established vehicle manufacturers that have a longer operating history and investments in more than one technology. We have encountered and expect to continue to encounter risks and difficulties experienced by growing companies in rapidly developing and changing industries, including challenges related to achieving market acceptance of our existing and future products and services, competing against companies with greater financial and technical resources, competing against entrenched incumbent competitors that have long-standing relationships with our prospective customers in the commercial vehicle market, including the public transit market and other transportation markets, recruiting and retaining qualified employees, and making use of our limited resources. We cannot ensure that we will be
successful in addressing these and other challenges that we may face in the future, and our business may be adversely affected if we do not manage these risks appropriately. As a result, we may not attain sufficient revenue to achieve or maintain positive cash flow from operations or profitability in any given period, or at all.
We have a history of net losses, have experienced rapid growth, and may not achieve or sustain positive gross margin or profitability in the future.
We incurred net losses of $269.8 million in the nine months ended September 30, 2023, $238.0 million, $250.0 million, and $127.0 million in 2022, 2021, and 2020, respectively, and we expect to incur net losses for the foreseeable future. As of September 30, 2023, we had an accumulated deficit of $1.4 billion. On January 13, 2023, we approved a plan designed to improve operational efficiency, including reducing our workforce by approximately 25% and closing our City of Industry facility. We consolidated bus production to our Greenville facility, and are in the process of consolidating all battery production to Powered 1 battery factory in the second half of 2023. In transitioning manufacturing facilities, we may experience delays and disruptions in our manufacturing and production activities. We also expect to continue to hire new employees, particularly for our manufacturing facilities in South Carolina. Managing our growth has and will place significant demands on our management as well as on our administrative, operational, legal and financial resources. To manage our growth effectively, we must continue to improve and expand our infrastructure, including our information technology, financial, legal, compliance and administrative systems and controls. We must also continue to effectively and efficiently manage our employees, operations, finances, research and development, and capital investments.
All of these efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently, or at all, to offset these higher expenses. While our revenue has grown in recent periods, our operating expenses have also increased significantly. If our revenue declines or fails to grow at a rate faster than increases in our operating expenses, or we are unable to increase gross margin, whether through reducing the cost of production or increasing sales, we would not be able to achieve and maintain profitability in future periods. As a result, we may continue to generate losses. We cannot ensure that we will achieve profitability in the future or that, if we do become profitable, that we will be able to sustain profitability.
Our operating results have fluctuated and may fluctuate from quarter to quarter, which makes our future results difficult to predict.
Our quarterly operating results have fluctuated in the past and may fluctuate in the future. Our revenue recognition depends on the timing of delivery and customer acceptance. Large order sizes may result in a significant number of orders being accepted or rejected at one time, which could disproportionately impact revenue recognition in a given quarter. Revenue for battery systems and electrification and charging solutions is less dependent than electric transit buses and charging systems on customer acceptance but can be unpredictable based on our customers’ ability to cancel within lead times. Additionally, we have a limited operating history, which makes it difficult to forecast our future results and subjects us to several risks and uncertainties, including our ability to plan for and anticipate future growth. As a result, our past quarterly operating results may not be reliable indicators of future performance, particularly in our rapidly evolving market.
Our operating results in any given quarter can be influenced by numerous factors, many of which are unpredictable or are outside of our control, including:
•our ability to maintain and grow our customer base and to sell additional products to our existing customers;
•our ability to build a reputation as a manufacturer of quality battery systems, electrification and charging solutions, fleet and energy management software and electric transit buses and to build trust and long-term relationships with customers;
•the effects of ongoing macroeconomic conditions, particularly with respect to funding for state and federal transit programs and reduced operating revenue from reduced passenger levels, and the effect on our suppliers and customers;
•the amount of funding appropriated annually for state and federal transit programs and the amount and timing of government funding programs for electric commercial vehicles;
•our ability to deliver our products as planned to meet our revenue goals and avoid liquidated damages within certain contracts, which may depend on factors such as supply shortages of components and component quality issues, customer configuration, manufacturing, or shipping delays, our ability to manage logistics, and to accurately forecast inventory and labor requirements;
•the mix of order size and variations in profit margins for each contract, which may affect our overall gross margin in any particular period;
•fluctuations in the cost and availability of raw materials, including as a result of tariffs and other trade restrictions;
•cancellations or modifications of awards or orders by our customers;
•our ability to design and produce safe, reliable, and quality products on an ongoing basis;
•the cost of materials used in our products;
•levels of warranty claims or estimated costs of warranty claims and vehicle or equipment recalls;
•our ability to distinguish ourselves from competitors in our industry by developing and offering competitive products, effectively partner with manufacturers in adjacent markets and respond to competitive developments, including the introduction of new battery systems, electrification and charging solutions, fleet and energy management software or electric transit buses and pricing changes by our competitors;
•the adoption of electric vehicles over other fuel solutions such as diesel-hybrid, hybrid, or compressed natural gas vehicles or battery electric fuel cell vehicles;
•the success and timing of our strategic relationships to enter adjacent markets;
•pricing pressure as a result of competition or otherwise;
•our ability to implement cost reduction measures;
•buying patterns of customers, and the procurement schedules of our current and prospective customers in the commercial vehicle markets, including the public transit and school bus markets;
•current and evolving industry standards and government regulations that impact our business at the federal, state, and local level, particularly in the areas of product safety and rules of origin such as Buy America, Buy American, and provincial Canadian Content regulations, and competitive bidding regulations at the federal, state and local level for electric transit buses;
•the timing of testing by, and the ability of our buses to pass, the FTA’s federal bus testing program;
•delays or disruptions in our supply, manufacturing, or distribution chain, including insolvency, credit, or other difficulties confronting our key suppliers;
•our ability to effectively manage the length and complexity of our sales cycles;
•the mix of financing alternatives that we offer and our customers choose to utilize;
•our ability to continuously improve our product without obsoleting inventory or production tooling;
•litigation, adverse judgments, settlements, or other litigation-related costs;
•timing of stock-based compensation expense; and
•general economic and political conditions and government regulations in the United States and Canada and the countries where we may expand in the future, macroeconomic such as the COVID-19 pandemic, rising inflation and interest rates, uncertain credit and global financial markets, recent and potential future disruptions in access to bank deposits or lending commitments due to bank failures, supply chain disruption and geopolitical conditions, including the conflict between Russia and Ukraine and related sanctions.
The impact of one or more of the foregoing and other factors may cause our operating results to vary significantly. As such, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance. If we fail to meet or exceed the expectations of investors or securities analysts, then the trading price of our common stock could fall substantially, and we could face costly lawsuits, including securities class action suits.
Our business is dependent on the continued adoption of electrification in the commercial vehicle market and the continued development of infrastructure to support increased electrification by governments, utilities and end users.
The commercial vehicle market, including the transit market, remains largely based on the use of traditional fuel sources and significant infrastructure has been built to support those products. The electric vehicle market remains a small portion of this market and the infrastructure to support our products is still being developed, some of which we can provide to our customers. In order for our products to be attractive to more customers, the development of infrastructure, such as charging stations, increased electrification and utilities to support electric transportation must continue to be developed by governments, utilities and end users, making our products easier to use in more places. A failure for this infrastructure to continue to grow could have a material adverse effect on our business and result of operations.
Further increases in costs, disruption of supply, or shortage of materials, particularly lithium-ion cells, wiring harnesses, and drivetrain components could continue to harm our business.
We may experience, and have continued to experience, increases in the cost of, or a sustained interruption in the supply of or shortage of materials necessary for, the production, maintenance and service of our transit buses, battery systems, electrification and charging solutions, fleet and energy management systems, and related technologies. For example, our vehicle and equipment deliveries were impacted by constraints and inefficiencies in production driven by shortages in component parts, particularly resin for connectors, wiring harnesses, and certain drivetrain components, resulting in part from global supply chain disruptions. In the past, these delays have caused temporary shutdowns of our production lines, and have caused delays in production and incremental shipping costs for air freight. Further, if suppliers impose unfavorable credit terms or impose more onerous terms on us, such as requiring cash payments prior to parts delivery, as a result of our current financial condition, this could restrict our ability to secure parts and limit our production. Any such increases in cost, including due to inflation, supply interruption, materials shortages, or an increase in freight and logistics costs, our unfavorable credit terms with suppliers could adversely impact our business, prospects, financial condition and operating results.
Our suppliers also use various materials, including aluminum, carbon fiber, lithium, cobalt, nickel, copper and neodymium. The prices and supply of these materials have and may fluctuate, depending on market conditions, geopolitical risks, fluctuations in currency exchange rates, and global supply and demand for these materials. Our contracts do not all have mechanisms in place that allow us to raise prices to the end customer due to inflation or other material cost increases. If we are not able to raise our prices to our end customers, inflationary pressures and other material cost increases could, in turn, negatively impact our operating results.
Moreover, we are subject to risks and uncertainties associated with changing economic, political, and other conditions in foreign countries. Unavailability or delay of imports from our suppliers have caused and may in the future cause interruptions in our supply chain and increase our costs of procurement. Consequently, we may experience increased competition for materials, which could further increase the cost to us of sourcing materials
and negatively impact our ability to source parts from our current suppliers and from identifying and working with new suppliers.
Our business is dependent on reliable availability of lithium-ion cells for our battery packs. While we believe other sources of lithium-ion cells will be available for our battery packs, to date, we have only used one supplier for lithium-ion cells for the battery packs used in commercial applications for our Proterra Transit and Proterra Powered customers. As we increase battery pack production, there is no guarantee that our current cell supplier will be able to supply the volume that we will require to meet growing demand. Battery cell demand continues to increase across vehicle segments including passenger car, and new incentives and tax credits under the IRA, which became law in August 2022, may further accelerate demand and competition for cell supply. Any disruption in the supply of battery cells could disrupt production of our battery systems and electric transit buses until we are able to find a different supplier that can meet our specifications and production demands. Such disruption could have an adverse effect on our business, prospects, financial condition and operating results.
We expect raw material prices to be volatile for the foreseeable future due to inflation and continued global supply chain issues. While we believe our exposure to increased costs is no greater than the industry as a whole, our business and results of operations may be adversely affected if our efforts to mitigate their effects are unsuccessful. Substantial increases in the prices for our materials or prices charged to us, particularly those charged by lithium-ion cell suppliers or charger hardware providers, have and would increase our operating costs and have and could reduce our margins if we cannot recoup the increased costs through increased sale prices on our battery systems, vehicles or charging systems. Furthermore, fluctuations in fuel costs, or other economic conditions, may cause us to experience significant increases in freight charges and material costs. Additionally, because the negotiated price of an existing battery system, vehicle or charging system is established at the outset, we, rather than our customers, bear the economic risk of increases in the cost of materials. Moreover, any attempts to increase battery system, vehicle or charging system prices in response to increased material costs could increase the difficulty of selling our electric transit buses or battery systems at attractive prices to new and existing customers and lead to cancellations of customer orders. If we are unable to effectively manage our supply chain and respond to disruptions to our supply chain in a cost-efficient manner, we may fail to achieve the financial results we expect or that financial analysts and investors expect, and our business, prospects, financial condition and operating results may be adversely affected.
Our recent workforce reductions and consolidation of facilities may not be as successful as anticipated and may not improve overall efficiency.
On January 20, 2023, we implemented a reduction-in-force and announced the planned closure of our City of Industry facility by December 31, 2023. In February 2023, we implemented a rigorous headcount approval process, scrutinizing and only approving roles in the most critical areas of need. While we believe these actions will improve operational efficiency and expect to realize cost reductions, we may not be able to realize the full benefits within the anticipated time frame, or at all. We may also incur other charges, costs, future cash expenditures or impairments not currently contemplated due to events that may occur as a result of, or in connection with the reduction in workforce and facility closure. Further, we may experience unintended consequences and costs, such as the loss of institutional knowledge and expertise, attrition beyond our intended reductions-in-force, a reduction in morale among our remaining employees, and the risk that we may not achieve the anticipated benefits, all of which may have an adverse effect on our results of operations or financial condition.
While we have implemented, and intend to continue to implement, cost-reduction strategies in order to meet our goals, if we do not achieve expected savings or if operating costs increase as a result of investments in strategic initiatives, our total operating costs would be greater than anticipated. We may also incur substantial costs or cost overruns in utilizing and increasing our production capability, particularly if we build new battery production lines, and if we vertically integrate subsystem production into our manufacturing facilities. In addition, if we do not manage cost-reduction efforts properly, such efforts may affect the quality of our products and our ability to generate future revenue. Moreover, significant portions of our operating expenses are fixed costs that will neither increase nor decrease proportionately with revenue. In addition, we incur significant costs related to procuring the materials required to manufacture our battery systems, electrification and charging solutions, fleet and energy management systems and electric transit buses, as well as assembling electric transit buses and systems, and compensating our personnel. If we are not able to implement further cost-reduction efforts or reduce
our fixed costs sufficiently in response to a decline in revenue, our business, prospects, financial condition, and operating results may be adversely affected.
Because many of the markets in which we compete are new and rapidly evolving, including possible consolidation of industry players, it is difficult to forecast long-term end-customer adoption rates and demand for our products, and our ability to meet demand for our products.
We are pursuing opportunities in markets that are undergoing rapid changes, including technological and regulatory changes, and it is difficult to predict the timing and size of the opportunities. There may be ongoing consolidation of industry players which could impact market demand for our products and competition for electrification solutions. Commercial vehicle battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses, and related technologies, represent complex products and services. Because these automotive systems depend on technology from many companies, commercialization of commercial vehicle electrification products could be delayed or impaired due to unavailability of technology or integration challenges inherent in the use of multiple vendors in commercial vehicle production. Although we currently have contracts with several commercial customers, these companies may not be able to implement our technology immediately, or at all. Some of our commercial customers are emerging companies that may not be able to commercialize their products on the production timelines they contemplated when entering into a contract with us, or at all. In 2022, we renegotiated production volumes and minimum order penalties for some customers, and any future inability of customers to meet contract commitments could adversely affect our business and financial results.
In addition, regulatory, safety or reliability requirements, many of which are outside of our control, could also cause delays or otherwise impair commercial adoption of these new technologies, which will adversely affect our growth. Our future financial performance will depend on our ability to make timely investments in the correct market opportunities. If one or more of these markets experience a shift in customer or prospective customer demand, our products may not compete as effectively, if at all. It is also possible that we may not be able to meet demand, and lose customer or prospective customer confidence as a result and lose business to competitors. In the evolving nature of the markets in which we operate, it is difficult to predict customer demand or adoption rates for our products or the future growth of the markets in which we operate. If demand does not develop or if we cannot accurately forecast customer demand, the size of our markets, or our future financial results, our business, prospects, financial condition, and operating results could be adversely affected.
If our battery systems, electrification and charging solutions, electric transit buses, fleet and energy management software, or other products have product defects and if our customer service is not effective in addressing customer concerns, our ability to develop, market and sell our products and services could be harmed.
Our battery systems, electrification and charging solutions, fleet and energy management software and electric transit buses have in the past contained, and may in the future contain, product defects. Due to the limited deployment of our battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses, and related technologies, there may be latent problems with our products that have not yet been discovered.
We have in the past found defects in our battery systems, electric transit buses, and charging systems. We may in the future find additional design and manufacturing defects that cause our products to require repair or not perform as expected. While we perform our own and in some cases third-party testing on the products we manufacture, we currently have a limited amount of customer operating experience with our battery systems, drivetrains, high-voltage systems, electric transit buses, software systems, and charging solutions by which to evaluate detailed long-term quality, reliability, durability, and performance characteristics of these products and solutions. There can be no assurance that we will be able to detect and fix any defects in our products prior to their sale to or operation by customers. Our efforts to remedy any issues may not be timely, may hamper production, or may not be satisfactory to our customers. Further, our business has grown rapidly in recent periods, and we may not be able to scale our service organization or partner with an existing service network quickly enough to satisfactorily provide timely customer service and address product defects, customer complaints, and warranty issues, which could result in customer dissatisfaction and negatively impact further sales.
Any product defects, delays, or legal restrictions on our products, or other failure of our products to perform as expected could harm our reputation, negatively impact our ability to market and sell our products, and result in delivery delays, product recalls, product liability claims, customer contract terminations, adverse regulatory actions, and significant warranty and other expenses, and could have an adverse effect on our business, prospects, financial condition, and operating results.
Our battery packs use of lithium-ion cells, which have been observed to catch fire, and our charging solutions operate at high voltages which may cause concerns regarding the use of battery systems, electrification and charging solutions and fleet and energy management software in public transit and other commercial vehicles.
The battery packs that we produce make use of lithium-ion cells. On rare occasions, it is possible for lithium-ion cells to rapidly release contained energy by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells. Highly publicized incidents of laptop computers and cell phones containing lithium-ion batteries bursting into flames have focused consumer attention on the safety of these cells. Fires have also been reported in electric cars and transit buses using lithium-ion batteries, including one of our transit buses. These events have raised questions about the suitability of using lithium-ion cells for commercial vehicle applications.
Despite the safety features that we design into our battery packs, there has been, and could be a failure of the battery packs in our buses or battery packs that we may produce for third parties. In November 2022, we experienced the first known fire on a Proterra transit bus that involved our proprietary battery system. There were no injuries and no known property damage, other than to exterior parts of the bus near the thermal event and the involved battery pack. After investigation we issued a recall for a limited number of battery packs. Incidents such as the November 2022 event could subject us to lawsuits, product recalls, cancelled contracts, lost customers, and potentially slow market adoption of our electric transit buses by transit authorities and our technologies by other customers. Also, negative public perceptions regarding the suitability of lithium-ion cells for commercial vehicle applications or any future incident involving lithium-ion cells, such as a vehicle or other fires, particularly public transit vehicle incidents, even if unrelated to our products, could have an adverse effect on our business, prospects, financial condition, and operating results.
In addition to thermal risk related to battery packs, related accessories and ancillary products could also be subject to similar safety concerns and risks as a result of the high voltage they carry and transmit. Our charging solutions also operate at high voltages and charging equipment must be properly maintained. In the past, our legacy single blade chargers have experienced charger fires which caused damage to the chargers and the bus. In particular, we experienced four such thermal incidents related to our legacy overhead single blade chargers over 2019 and 2020, including one incident in which a charger was completely destroyed. While none of these events resulted in personal injury or significant property damage to the bus or other property, it is possible that other such or related incidents could occur in the future, or that such thermal discharge could result in personal injury or property damage.
We also store a significant number of lithium-ion cells and design, test, and produce battery modules and packs at our manufacturing facilities and other locations. While we have implemented safety procedures for handling cells, we may experience a safety issue or fire related to the cells. Once we ship our customers battery systems, those systems are out of immediate control. Any mishandling of battery systems or equipment failures in our operations or in our customers operations may cause accidents that could potentially harm our employees or third parties or result in disruptions to our business or our customers’ business. While we have implemented safety procedures and require our customers to implement safety procedures, we or our customers could experience a safety issue or fire which could disrupt operations or cause injuries and could have an adverse effect on our business, prospects, financial condition, and operating results.
Our most recent business expansion with Proterra Powered and Proterra Energy may not be as successful as anticipated, may not attract the customers and business partners we expect, and the assumptions underlying the growth prospects of these businesses may not prove to be accurate.
We have recently introduced and, in the future may introduce, new services and products that our customers and prospective customers may not utilize to the extent we anticipate or at all. For example, Proterra Powered
and Proterra Energy products and services are designed to simplify the complexities of electric vehicle energy delivery and the deployment of large electric vehicle fleets for our customers. Through these businesses, we offer to design, build, finance, operate, and maintain the energy ecosystem that we believe to be required to power commercial electric vehicles. We have made, and will continue to be required to make, significant investments to scale these businesses, but we cannot be certain that such investments will be successful or meet the needs of our customers. Moreover, even if our customers use these services, we may encounter new challenges related to the delivery of energy solutions and competition from companies that may be better positioned to provide energy management services. If we invest in services or products that are not adopted by our customers or fail to invest in new services and products that meet the needs of our customers, our business, prospects, financial condition, and operating results could be adversely affected. In addition, we have limited history operating these businesses and providing the products and services they offer. There can be no assurances that these products and services will be accepted by our customers, or that we will effectively be able to market and sell them to existing customers, especially our transit customers who comprise the vast majority of our current revenues. Further, the limited experience we have acquired operating Proterra Transit may not prove to be applicable to Proterra Powered and Proterra Energy.
We expect Proterra Powered and Proterra Energy product lines to account for a growing percentage of our revenue in the future, and it is possible that certain assumptions underlying the launch of these businesses are subsequently determined to be inaccurate, such as assumptions regarding the growing adoption of electrification by commercial vehicle manufacturers and their customers in general; the attractiveness of our products and services to OEMs that would use our battery systems, electric drivetrains, high-voltage systems, vehicle controls, telemetry gateways, charging solutions, software and telematics platforms and related technologies in their electric transit buses or elsewhere; government and regulatory initiatives and directives impacting the adoption of electrification technologies for commercial vehicle applications; and the overall reliance by enterprises on commercial vehicles and the demand for medium- and heavy-duty trucks in the future.
We face intense and increasing competition in the transit bus market and may not be able to compete successfully against current and future competitors, which could adversely affect our business, revenue growth, and market share.
The transit bus industry is relationship driven and dominated by incumbent companies that have served their respective markets longer than we have. In the transit bus industry, our main sources of competition are incumbent transit vehicle integrators that have served our market with legacy diesel, diesel-hybrid and compressed natural gas products for many years, such as NFI Group Inc., Gillig Corporation, and Nova Bus Company; BYD Company Ltd., a Chinese company that offers an array of vehicles and other products, including electric transit vehicles; and new entrants and companies in adjacent markets, including other vehicle manufacturers that have entered or are reported to have plans to enter the transit bus market.
In the transit bus industry, electric bus procurements still represent a minority of annual transit bus purchases. As the number of electric bus OEMs increases, we may not be able to maintain our leading market position in North America. We also may not be successful in competing against incumbent competitors that have longer histories of serving the transit bus market and established track records of service, or with much larger, well-funded companies that choose to invest in the electric transit bus market. As more established bus companies develop their electric vehicle or competing zero-emission solutions, their long history in the transit sector could prove to be a competitive advantage which may have a negative impact on our ability to compete with them. Moreover, our competitors that also manufacture diesel-hybrid and compressed natural gas vehicles may have an advantage with their existing and prospective customers that are interested in exploring diesel alternatives without committing to electric vehicles or to pursue a gradual electrification strategy with the same manufacturer. Additionally, these competitors have more experience with the procurement process of public transit authorities, including bid protests. Competitors, potential customers, or regulators may also make claims that our electric transit buses or competitive bid activity are not in compliance with laws, regulatory requirements, or industry standards, which may impact our ability to sell our electric transit buses and to compete successfully for current and future customers. Actions by competitors may have consequences for future business or effects that we have not anticipated on other future opportunities.
We face intense and increasing competition in the commercial vehicle electrification market and may not be able to compete successfully against current and future competitors, which could adversely affect our business, revenue growth, and market share.
The electric powertrain, electric commercial vehicle and charging solutions industries are highly competitive. We may not be successful in competing against companies in the battery systems, electric powertrain, charging solutions and related industries who may have more resources than we do or who are able to produce products and deliver services that are perceived by the market to be superior to ours. Global battery makers in particular may be able to leverage their superior scale and access to capital to sell their products more effectively to potential customers and may be further incentivized to compete with us in the North American market to take advantage of new incentives and tax credits for commercial vehicle electrification in the IRA, which became law in August 2022. We may also face competitive pressure from incumbent vehicle producers that decide to enter the battery system or electric powertrain business, or vertically integrate their supply chain, and that are able to leverage their superior resources and capital to produce products that perform or are priced competitively when compared to our own.
In the battery system and electric powertrain industry, our main sources of competition include large Chinese battery suppliers such as CATL; incumbent tier one automotive suppliers that are developing electric powertrain alternatives to internal combustion engines, such as Cummins, Allison Transmission, BorgWarner and Dana; and commercial vehicle manufacturers that are developing or may develop their own internal electric powertrain solutions for their vehicles including large automotive companies, such as Daimler Truck Group and Volvo Group. In the future, incumbents and new companies offering competing zero emission solutions such as fuel cell electric vehicles may also become significant competitors.
In the charging solutions industry, our main sources of competition are incumbent charging solutions providers that develop charging solutions for commercial vehicles such as Siemens, ABB, Heliox, ChargePoint and Rhombus; and software companies that offer charging management solutions and can partner with hardware providers to provide complete solutions to end customers.
These competitors may have greater financial, technical, manufacturing, marketing, sales, and other resources than we do, and may have more experience and ability to devote greater resources to designing, developing, testing, manufacturing, distributing, deploying, promoting, selling or supporting battery systems, electrification and charging solutions, fleet and energy management software, and related technologies. Similarly, our principal competitors that also design, test, manufacture and deploy battery systems, electrification and charging solutions, fleet and energy management systems and related technologies for passenger vehicles may have a competitive advantage, through their established distribution and service networks for legacy vehicle technology, brand recognition and market acceptance of their products and services, and perceived reliability or popularity, all of which could be attractive to prospective partners and manufacturers that are exploring commercial vehicle electrification alternatives. As a result, our current and potential competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements, or devote greater resources than we can to the development, promotion, distribution and sale of their products and services. Our competitors and potential competitors may also be able to develop products or services that are equal or superior to ours, achieve greater market acceptance of their products and services, and increase sales by utilizing different distribution channels than we do. Some of our competitors may aggressively discount their products and services in order to gain market share, which could result in pricing pressures, reduced profit margins, lost market share, or a failure to grow market share for us. As the market for commercial electric vehicles grows and battery systems, electrification and charging solutions, fleet and energy management software, and related technologies gain wider adoption, we expect that additional specialized providers of battery systems, electric powertrain technology, charging infrastructure, and related software solutions and related technologies will enter the markets that we address and that larger competitors could more effectively sell their offerings.
In addition, we developed our battery system and powertrain systems and related components to be compliant with “Buy America” regulations applicable to the transit business, which means that we may have higher costs to procure components, and design, test and manufacture such products in the United States than competitors that are not compliant with Buy America or similar regulations. Our competitors may be able to manufacture comparable or competitive products in more cost-effective jurisdictions and import them to the United
States at prices lower than ours, which competition could cause us to lose market share or compel us to reduce prices for goods or services to remain competitive, which could result in reduced sales and revenue in industry segments that are not subject to Buy America or similar regulation. The production of battery systems, electrification and charging solutions, fleet and energy management systems, and related technologies in China, where production costs are lower and where the development of such technologies could be subsidized by the state, could negatively impact our competitive profile by presenting our customers and partners a more cost-effective alternative to our products and services, which could result in reduced sales and revenue and loss of market share or compel us to reduce prices for goods or services to remain competitive.
Moreover, current and future competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with others, including our current or future suppliers or business partners. By doing so, these competitors may increase their ability to meet the needs of our customers or potential customers. These developments could limit our ability to generate revenue from existing and new customers. If we are unable to compete successfully against current and future competitors, our business, prospects, financial condition, and operating results would be adversely affected.
Our future growth prospects depend upon the interest of commercial vehicle manufacturers in adopting our products and services that are designed to facilitate the electrification of commercial vehicles.
Our growth is highly dependent upon the adoption of our battery systems, electrification and charging solutions, fleet and energy management software and electric transit buses by commercial vehicle manufacturers and OEMs, and their willingness to partner with us on the design, development, testing, manufacturing, distribution, deployment, promotion, sale, and support of our products. The market for commercial electric vehicles and electrification technologies is relatively new, rapidly evolving, and characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new product and vehicle announcements, and changing demands and behaviors of customers and potential partners. For example, in August 2022, the IRA passed in the United States, adding unprecedented funding opportunities and tax credits for passenger car and commercial vehicle electrification and could make the United States an attractive market for vehicle electrification and increase competition as more industry players enter our core market. As a result, we spend resources educating our potential customers and partners on the benefits of adopting electric vehicle technology and engaging in lobbying efforts to promote clean energy initiatives that benefit our business activities.
Other factors that may influence the adoption of our commercial vehicle electrification technologies by manufacturers and OEMs include:
•perceptions about commercial electric vehicle performance, total cost of ownership, design, quality, cost and reliability that may be attributed to the use of advanced technology (in particular with respect to lithium-ion battery packs), especially if adverse events or accidents occur that are linked to the quality or safety of commercial electric vehicles;
•the amount and availability of federal, state, or other government funding and, in particular, the availability of economic incentives promoting fuel efficiency and alternate forms of energy, such as the Low or No Emission Vehicle Program, the Advanced Technology Vehicle Manufacturing Loan Program and the tax credits in the IRA;
•the range over which commercial electric vehicles may be driven on a single battery charge and the time it takes to recharge the batteries of these vehicles;
•the cost and feasibility of installing new charging infrastructure;
•concerns about electric grid capacity and reliability, the cost of electricity, and reliance of utilities on fossil fuels for electricity generation, which could derail our past and present efforts to promote commercial electric vehicles as a practical substitution for vehicles that require fossil fuels;
•the availability of alternative fuel vehicles, including diesel-hybrid and compressed natural gas vehicles, and battery electric fuel cell vehicles;
•improvements in the fuel economy of the internal combustion engine;
•perceptions about the impact of electric vehicles on the environment and the health and welfare of communities;
•perceptions about the use of electric batteries, sourcing of battery components, recyclability, and safe disposal of batteries;
•the availability of service for commercial electric vehicles;
•the environmental consciousness of corporations and public agencies;
•volatility in the cost of diesel fuel and oil;
•government regulations;
•social and political support for clean energy initiatives and commercial electric vehicles;
•perceptions about and the actual cost of alternative fuel vehicles; and
•macroeconomic factors.
Moreover, the willingness of commercial vehicle manufacturers and OEMs to embrace our battery systems, electrification and charging solutions, fleet and energy management software, and related technologies depends, in part, on the real or perceived reliability of these products and services, and their ability to provide complete electrification solutions to potential customers. Any lapse in quality, reliability or performance of any of these products or services could harm the perception of our other products and negatively impact the adoption of our products or services.
Any of the factors described above may cause current or potential customers not to purchase or adopt our products or services. If the market for commercial electric vehicles does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition, and operating results could be adversely affected.
Defects in the materials or workmanship of our composite bus bodies could harm our reputation, expose us to product warranty or other liability claims, decrease demand for our buses, or materially harm existing or prospective customer relationships.
We are one of a small number of transit bus manufacturers to use a composite unibody for our electric transit buses. In the past, we have sourced composite bus bodies from three suppliers, and now use only one supplier. Defects in the composite body, including non-structural concerns, whether caused by design, engineering, materials, manufacturing errors, or deficiencies in manufacturing or quality control processes at our suppliers, are an inherent risk in manufacturing technically advanced products for new applications. We offer our customers a twelve-year warranty on the composite bus body structure and bear the risk of possible defects. We have experienced defects in some bus bodies and have had to make repairs. For example, in October 2018 we discovered cracking in the wheel wells on some of our buses which required us to repair these defects under our warranty and will increase our field and customer service costs. In addition, in 2020 and 2021, we discovered a manufacturing quality issue that required us to repair laminate cracks that occurred near door frames of certain customer buses, and we expect that we will have to make more of these types of repairs. In 2020, we filed a recall related to the attachment of a torque limiter plate to the composite bus body that did not have proper adhesive application and could compromise the steering gear box and steering of the vehicle. In 2022, we voluntarily filed a new recall on the same issue for a new population of buses. Certain customers have experienced superficial cracking in the exterior gel coat or skin coat of the composite body which has caused certain customers to remove buses from revenue service and required us to develop inspection criteria and repair protocols, when applicable. We have also had to address vehicle inspection guidelines that are designed for metal frame buses with chassis and are not necessarily applicable to composite unibody architecture. Though these defects have not materially impacted us to date, we expect to continue to address these issues, and these defects or future defects with our
advanced body materials whether structural or not may harm our existing and prospective customer relationships, damage our brand, and result in a reduction of awards, customer contract terminations, adverse regulatory actions, increased warranty claims, product liability claims and other damages.
Our suppliers have and may fail in the future to deliver components according to schedules, prices, quality and volumes that are acceptable to us, or we may be unable to manage these suppliers effectively.
Some of our products contain thousands of parts that we purchase from hundreds of mostly single-source direct suppliers, generally without long-term supply agreements. This exposes us to multiple potential sources of component shortages. Unexpected changes in business conditions, materials pricing, labor issues, wars, governmental changes, tariffs, natural disasters, health epidemics and its related disruption of global supply chains, particularly in the industrial sector, and other factors beyond our or our suppliers’ control could also affect these suppliers’ ability to deliver components to us or to remain solvent and operational. Single source suppliers provide us with a number of components that are required for manufacturing of our current products, including our composite bus bodies. If a single source supplier was to go out of business, we might be unable to find a replacement for such source in a timely manner, or at all. If a single source supplier were to be acquired by a competitor, that competitor may elect not to sell to us in the future. We have experienced and continue to experience component shortages and delays, including wiring harnesses. In the fourth quarter of 2022, difficulty sourcing wiring harnesses from a vendor resulted in our production delays and fewer buses delivered in that quarter. In the first quarter of 2023, we experienced a shortage in certain components used to complete our battery packs, temporarily idling our manufacturing lines in City of Industry. The unavailability of any component or supplier has in the past, and could in the future result in production delays, idle manufacturing facilities, require product design changes, cause loss of access to important technology and tools for producing and supporting our products, and create delays in providing replacement parts to our customers. We have also experienced delays in sourcing replacement parts for some of our oldest transit buses in customer fleets, which has led to customer dissatisfaction and buses being out of service for lengthy periods while awaiting replacement parts.
Moreover, significant increases in our production, or product design changes made by us have required and may in the future require us to procure additional components in a short amount of time. Our suppliers may not be able to sustainably meet our timelines or our cost, quality and volume needs, or may increase prices to do so, requiring us to replace them with other sources. Our supply for battery cells and other raw materials is critical in allowing us to scale our operations and meet our growth profitability and cash flow targets, such that any supply delay or vulnerability in the battery cell supply chain could alter our growth plans. Further, we have limited manufacturing experience and we may experience issues increasing the level of localized procurement at our current or future facilities. While we have to date secured additional or alternate sources or developed our own replacements for many of our components, and we believe that we will be able to continue to do so, there is no assurance that we will be able to do so quickly or at all, particularly with highly customized components. Additionally, we may be unsuccessful in our continuous efforts to negotiate with existing suppliers to obtain cost reductions and avoid unfavorable changes to terms, source less expensive suppliers for certain parts, and redesign certain parts to make them less expensive to produce. Any of these occurrences may harm our business, prospects, financial condition and operating results.
As the scale of our production increases, we will also need to accurately forecast, purchase, warehouse and transport components at high volumes to our manufacturing facilities across the United States. If we are unable to accurately match the timing and quantities of component purchases to our actual needs or successfully implement automation, inventory management and other systems to accommodate the increased complexity in our supply chain and parts management, we may incur unexpected production disruption, storage, transportation and write-off costs, which may harm our business and operating results.
Our dependence on a limited number of suppliers introduces significant risk that could have adverse effects on our financial condition and operating results.
We are a relatively low-volume producer of battery systems, electrification and charging solutions, fleet and energy management software and electric transit buses, and related technologies, and do not have significant purchasing power with suppliers in the electric vehicle market for many components of our products, including batteries, drivetrains, high-voltage systems and electric transit buses. As a result, suppliers and other third parties may be less likely to invest time and resources in developing business relationships with us if they are not
convinced that our business will succeed. Larger suppliers have in the past and may in the future require minimum order quantities from us, which can expose us to liquidated damages or substantial penalties. For example, in 2022, we incurred nearly $8 million in penalties owed to our bus body supplier.
To build and maintain our business and obtain favorable contract terms, we must maintain our suppliers’ and other vendors’ confidence in our stability, liquidity, and business prospects. Maintaining such confidence may be complicated by certain factors, such as our limited operating history, suppliers’ unfamiliarity with our products, competition, and uncertainty regarding the future of commercial vehicle electrification. Some of these factors are outside of our control and any negative perception about our business prospects, even if exaggerated or unfounded, would likely harm our business and make it more difficult to contract with suppliers on favorable terms. In addition, some of our suppliers may have more established relationships with our competitors, and as a result of those relationships, some suppliers may choose to limit or terminate their relationship with us.
In addition, with respect to our battery manufacturing operations that supports Proterra Transit and Proterra Powered, our battery production volumes are relatively small and we are currently sole sourcing key components from select suppliers, such as LG Energy Solution, for the lithium-ion cells that we use to manufacture our battery packs and other sole source suppliers for key elements of the battery pack. Disruptions in production may result if we had to replace any of these sole source suppliers on short notice. As we increase battery production volumes, if our current sole source suppliers cannot meet our demand for increased supply, we may find our ability to grow our business constrained if there are not alternative sources of supply that we can secure in a timely fashion, or at all.
With respect to our transit business, we have few long-term agreements with suppliers and typically purchase supplies on an order-by-order basis depending on the material requirements to build customers’ buses. In many cases, we rely on a small group of suppliers, many of which are single-source suppliers, to provide us with components for our products, such as the bus bodies and components of our drivetrains. Moreover, transit bus customers have specified a certain supplier for components, such as its preferred seating or heating, ventilation, and air conditioning units, and we are then beholden to that specified supplier’s terms and delivery schedule. While we obtain components from multiple sources when that is a viable alternative, certain components used in our electric transit buses must be custom made for us. In 2022 and into early 2023 we sourced wiring harnesses for our transit and powertrain products largely from one vendor that has experienced challenges and financial instability in its business, which created disruption in our supply and slowed our production. In addition, as part of our Chapter 11 proceedings, we rejected our contract with TPI Composites, Inc., which was the sole source supplier for our bus bodies, and we may be unable to negotiate another agreement on better terms.
If these suppliers become unwilling or unable to provide components, there may be few alternatives for supply of specific components, such as wiring harnesses, which may not be available to us on acceptable terms or favorable prices, or that meet our published specifications in a timely manner or at all. We have experienced in the past, may again experience delays while we qualify new suppliers and validate their components. In addition, replacing our sole source suppliers may require us to reengineer our products, which could be time consuming and costly.
Our reliance on a small group of sole-source suppliers as well as certain suppliers specifically chosen by customers creates multiple potential sources of delivery failure or component shortages for the production of our products. As a result, we have in the past, and may be required to in the future renegotiate our existing agreements with our suppliers, potentially with less favorable terms, and incur additional costs associated with the production. In the past, we have experienced delays related to supply shortages, including, most recently, as a result of the global supply chain disruptions related to the continuing impacts of the macroeconomics conditions, and untimely or unsatisfactory delivery of components, including cells, wiring harnesses and other drivetrain components, that have stalled production with respect to our electric transit buses and our battery systems. Moreover, although we continue to expend significant time and resources vetting and managing suppliers and sourcing alternatives, we may experience future interruptions in our supply chain. Failure by our suppliers to provide components for our electric transit buses, battery systems or other products has in the past, and could in the future, severely restrict our ability to manufacture our products and prevent us from fulfilling customer orders in a timely fashion, which could harm our relationships with our customers and result in contract fines, negative publicity, damage to our reputation, and adverse effects on our business, prospects, financial condition, and operating results.
If LG Energy Solution does not satisfy its contractual obligations to us with respect to producing certain battery cells in the United States, we may incur significant additional, unplanned design, development and manufacturing costs for our products and may experience potential revenue losses.
We have entered into a long-term supply agreement with LG Energy Solution pursuant to which we have agreed to make certain prepayments that vary in size based on milestones relating to the construction of a battery cell manufacturing facility in the United States. Following the completion of the United States battery cell manufacturing facility, LG Energy Solution has agreed to sell 2170 battery cells, which is the type of cell that we use in our battery pack architecture. On October 25, 2023, LG Energy Solution issued a press release in which it stated that the planned United States battery cell manufacturing facility would only produce 46-series battery cells instead of the original plan to produce both 46-series and 2170 battery cells. We are currently in discussions with LG Energy Solution concerning our existing agreement and the production of 2170 battery cells in the United States. A failure to produce the 2170 battery cells in accordance with the existing agreement may lead to a significant delay in the availability of battery cells manufactured in the United States and any changes from the 2170 cells to another type of cell may result in significant additional design, manufacturing and development costs to us. Further, any such delay to the sourcing of 2170 battery cells manufactured in the United States may have an adverse marketing impact on our products, which may cause a loss of revenue.
We have been and may continue to be impacted by macroeconomic conditions, rising inflation rates, uncertain credit and global financial market, including recent and potential bank failures, supply chain disruption and geopolitical events, such as the conflict between Russia and Ukraine.
In recent years, the United States and other significant markets have experienced cyclical downturns and worldwide economic conditions remain uncertain, including downturns of economic displacement related to COVID-19 or other similar pandemics and the current conflict between Russia and Ukraine. Economic uncertainty and associated macroeconomic conditions, including high volatility and uncertainty in the capital markets including as a result of inflation and interest rate spikes and recent and potential disruptions in access to bank deposits or lending commitments due to bank failures, make it difficult for our customers and us to accurately forecast and plan future business activities, and could cause our customers to slow spending on our battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses, and related technologies, which could delay and lengthen sales cycles. Furthermore, during uncertain economic times our customers may face issues gaining timely access to sufficient funding, which could result in an impairment of their ability to make timely payments to us. If that were to occur, we may be required to increase our allowance for doubtful accounts and our results could be negatively impacted. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption. In addition, there is a risk that our current or future suppliers, service providers, manufacturers or other partners may not survive such difficult economic times, which would directly affect our ability to attain our operating goals on schedule and on budget.
A significant downturn in economic activity, or general spending on transit or commercial vehicle electrification technologies, may cause our current or potential customers to react by reducing their capital and operating expenditures in general or by specifically reducing their spending on electric commercial vehicles and related technologies. In addition, our customers may delay or cancel projects to upgrade or replace existing vehicles in their fleets, or other projects to electrify commercial vehicle fleets, with our products or seek to lower their costs by renegotiating contracts. Moreover, competitors may respond to challenging market conditions by lowering prices and attempting to lure away our customers.
Given the global nature of our supply chain and customer base, global political, economic, and other conditions, including geopolitical risks such as the current conflict between Russia and Ukraine and related sanctions, may adversely affect our business and results of operations in ways we cannot foresee at the outset. War and economic dislocations may spur recessions, economic downturns, slowing economic growth and social and political instability; commodity shortages, supply chain risks and price increases; instability in U.S. and global capital and credit markets which could impact us, our suppliers and customers; and currency exchange rate fluctuations among other impacts that adversely affect our business or results of operations.
We cannot predict the timing, strength, or duration of any economic slowdown or any subsequent recovery generally, or in any industry. If the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial condition, and operating results could be adversely affected.
Our business is significantly dependent on government funding for electrification of commercial vehicles and public transit, and the unavailability, reduction, or elimination of government economic incentives would have an adverse effect on our business, prospects, financial condition, and operating results.
On November 15, 2021, President Biden signed the Infrastructure and Investment Jobs Act (IIJA), also referred to as the “Bipartisan Infrastructure Law”, into law, reauthorizing surface transportation programs through the federal government’s fiscal year in 2026, increasing funding for transit focused programs and establishing additional funding opportunities for no and low emission vehicles at unprecedented levels of funding. In August 2022, the IRA was signed into law, further expanding incentives for commercial zero emission vehicles including clean vehicle tax credits.
In addition to funding and incentives under the FAST Act and the Bipartisan Infrastructure Law, and the IRA, certain states and cities offer vouchers for the purchase of electric buses and other electric commercial vehicles, such as California’s Hybrid & Zero Emission Truck & Voucher Incentive Project, and the New York Truck Voucher Incentive Program. These vouchers provide point-of-sale discounts to vehicle purchasers. Additionally, there are other state programs that help fund electric bus purchases, including California’s Transit and Intercity Rail Capital Program, which has been allocated a portion of California’s Cap-and-Trade funds annually. The California Low Carbon Fuel Standard, or LCFS, also enables transit agencies using electricity as a source of fuel to opt into the LCFS program and earn credits that can be monetized. While the value of these credits fluctuates, the credits may help to offset up to half of the fuel costs for our transit customers.
Our principal transit customers are transit authorities that depend on government funding and programs authorized for public transportation under Title 49, Chapter 53 of the U.S. Code, and administered by the FTA, including Urbanized Area Formula Grants, Formula Grants for Rural Areas, the Capital Investment Program, and the Bus and Bus Facilities Program. The Fixing America’s Surface Transportation Act, or FAST Act, enacted in December 2015, allocated over $305 billion for highway, transit, and vehicle safety programs for the five-year period that ended on December 31, 2020. Among other programs, the FAST Act reinstated a competitive Bus and Bus Facilities Infrastructure Investment Program, which grew from $268 million in 2016 to $344 million in 2020, resulting in an 89% increase over the 2015 funding levels for buses and bus facilities. To date, a substantial majority of our customers have received funding through these FAST Act programs in order to purchase new electric transit buses. For example, in 2018, nearly 70% of transit agencies that ordered buses from us were recipients of grants through the Low or No Emission Vehicle Program. The Low or No Emission Vehicle Program has enabled public transit agencies to purchase electric transit buses when the upfront cost of the electric bus was significantly higher than legacy diesel buses and the technology was new to customers.
There can be no assurance that these programs will be reauthorized following expiration of their current terms, that other government funding programs will continue to be available at the current levels or at all in the future, or that new government funding programs will be adopted, including with respect to products and services that are currently or will in the future be offered by Proterra Powered and Proterra Energy. Uncertainty or delay in extending, renewing, or adopting these incentives beyond their current or future expiration dates could negatively impact our business because sales cycles for public and other transit customers are long and customers may be unwilling to adopt electric technology if supportive funding is not assured. For example, transit authorities have reduced order sizes in the past because of a decrease in available funding.
Available government funding and economic incentives are subject to change for a variety of reasons that are beyond our control, including budget and the policy initiatives and priorities of current and future administrations at the federal and state level. In addition, future government shutdowns may impact the availability and administration of government funding, which could adversely impact future bus orders and result in payment delays for existing orders. For example, we experienced payment delays from customers during the U.S. federal government shutdown in January 2019 related to the FTA’s inability to administer grant funding during the shutdown. If government support for adoption of electric vehicles and clean energy initiatives wanes, as it did during the Trump Administration, this could adversely affect the growth of the North American public transit electric bus market and the commercial electric vehicle market generally, and could have an adverse effect on our business, prospects, financial condition, and operating results.
The growth of our transit business is dependent upon the willingness of corporate and other public transportation providers to adopt and fund the purchase of electric vehicles for mass transit.
The growth of our transit business is highly dependent upon the adoption of electric transit buses for mass transit by corporate and public transportation providers. The market for electric transit buses is relatively new, rapidly evolving, and characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements, and changing demands and behaviors of riders. As a result, we spend resources educating our potential customers on the benefits of adopting electric vehicle technology and engaging in lobbying efforts to promote clean energy initiatives.
The same factors described above that may influence the adoption of our commercial vehicle electrification technologies by manufacturers and OEMs, also may influence the adoption of electric transit buses by corporate and public transportation providers. Moreover, the willingness of corporate and public transportation providers to embrace electric transit buses depends, in part, on the willingness of users of public transportation to continue to use buses instead of alternative modes of transportation, including private car, rail, and ridesharing services including Uber, Lyft, and electric bikes and scooter services, on-demand shuttles and, in the future, autonomous vehicles. Bus ridership has been severely impacted by the COVID-19 pandemic and has been declining in large transportation markets, which may lead to fewer investments in electric transit buses in the long term.
Any of these factors may cause current or potential corporate and other public transit customers not to purchase our electric transit buses or use our services. If the market for electric vehicles for mass transit does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition, and operating results could be adversely affected.
If we fail to make the right investment decisions in our technologies and services, we may be at a competitive disadvantage.
Electrification of commercial vehicles is a relatively new field. We have invested significant resources into our technologies, including our battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses, and related technologies. For example, we invested in a single-blade overhead charging system that we have deployed and must continue to support for transit customers, even though the industry has moved to other solutions such as overhead pantograph or plug-in charging which also have required, and may continue to require, new investments on our part. In the third quarter of 2022, we made a strategic equity investment in a privately held entity that we expect to manufacture LFP cells domestically for us in the future. However, there is no guarantee that this company will succeed in making cells to our specifications, that we will develop product using these cells, or that we will be successful introducing a product with these cells into the market. If we select and invest in technology or technology standards that are not widely adopted or invest in technologies that are not widely adopted by large customers who influence the industry in the future, we may not recover our investments in these technologies and may be at a competitive disadvantage, and our business, prospects, financial condition, and operating results could be adversely affected.
We have a long sales, production, and technology development cycle for new public transit customers, which may create fluctuations in whether and when revenue is recognized, may result in unfavorably priced contracts and may have an adverse effect on our business.
The vast majority of our current and historical sales are to transit agencies that do not procure electric transit buses every year. The complexity, expense, and nature of government procurement processes result in a lengthy customer acquisition and sales process. It can take us years to attract, obtain an award from, contract with, and recognize revenue from the sale of a vehicle to a new customer, if we are successful at all. We have in the past entered contracts with customers based on certain assumptions regarding the cost of production, but the buses were produced years after the award was made when costs were much higher and it was unprofitable to fulfil the order. In 2022, we negotiated with several customers to make adjustments in pricing to acknowledge inflation but were not always successful. With long contract cycles we may continue to face this risk in the future even with contract terms that allow for inflation adjustments.
Before awarding an order for electric transit buses, transit agencies generally conduct a comprehensive and competitive proposal process based on a variety of criteria, including technical requirements, reliability, reputation, and price. Even if we are awarded an order, the actual realization and timing of revenue is subject to various contingencies, many of which are beyond our control, including the customer’s interpretation of technical or performance requirements for acceptance, timing and conditions of customer acceptance, and the customer’s reduction, modification, or termination of an order. A customer is not obligated to purchase the electric transit buses and may cancel or modify an award prior to entering into a contract with us. We have in the past, and may in the future, experience customer cancellations or modifications of awards. Customers have in the past , and customers may in the future cancel or modify an award for a variety of reasons, including as a result of improvements in our technology or the technology of our competitors between the dates of award and signed contract, or as the result of a successful bid protest.
Our sales and production cycle for a transit customer can be a long and time-consuming process. The initial sales process from first engagement to award typically ranges from 6 to 18 months. The award of a proposal is typically followed by a pre-production process where the design and specifications of the customized buses are mutually agreed and we negotiate a final contract and purchase order with our customer. Procurement of parts and production typically follow this final agreement between us and the customer. Once a bus is fully manufactured, the customer typically performs a final inspection and determines whether to accept delivery of the bus, at which time we recognize revenue on the sale. In other cases, revenue is recognized upon acceptance by the customer, typically by signing an acceptance document, which can cause delay in revenue recognition. The length of time between a customer award and vehicle acceptance typically varies between 12 and 24 months, depending on product availability, production capacity, and the pre-delivery and post-delivery inspection process by the customer which has in the past resulted in additional changes to the transit bus after manufacturing completion, re-works, further product validation and acceptance periods, and additional costs to us that we may not be able to recover. Consequently, we have in the past, and we may continue to invest significant resources and incur substantial expenses before a customer accepts a bus order and these expenses may not be recovered at all if a customer does not accept the completed bus, the bus requires costly modifications, or we extend additional warranties. For instance, we create a bill of materials and obtain the appropriate parts for each customized bus for a customer, which can result in excessive inventory risk if a customer changes or cancels the order. In addition, we may devote significant management effort to develop potential relationships that do not result in bus orders, acceptance of the bus as delivered, and the corresponding recognition of revenue, and the diversion of that effort may prevent us from pursuing other opportunities. As a result, our long sales and development cycle may subject us to significant risks that could have an adverse effect our business, prospects, financial condition, and operating results.
If we are unable to attract new customers and expand sales to existing customers, our revenue growth could be slower than we expect and our business would be adversely affected.
Our ability to achieve significant future revenue will depend in large part upon our ability both to attract new customers and to expand our sales to existing customers, including sales of Proterra Powered and Proterra Energy products and services to current and future customers, including Proterra Transit customers. If we fail to attract new customers or fail to maintain and expand our customer relationships, our business would be adversely affected. For example, if our existing transit customers do not expand their orders, our revenue may grow more slowly than expected, may not grow at all, or may decline. Additionally, we have a small direct sales force for each part of our business. We plan to continue expanding our sales efforts, but we cannot be assured that our efforts will result in sales to new customers, or increased sales to existing customers, with respect to our Proterra Powered, Proterra Transit or Proterra Energy offerings. Further, given the small size of our sales team, losing a member of our team may adversely affect our sales efforts with existing or potential new customers. If our efforts to expand sales to our existing customers are not successful, our existing customers do not continue to purchase additional products and services, or we are unable to attract new customers, our business, prospects, financial condition, and operating results would be adversely affected.
We could incur material losses and costs from product warranty claims, recalls, or remediation of electric transit buses for real or perceived deficiencies or from customer satisfaction campaigns.
We provide warranties on our Proterra Transit, Proterra Powered and Proterra Energy hardware products and process warranty claims in the ordinary course of our business. Warranty estimates are inherently uncertain and changes to our historical or projected experience, especially with respect to new battery systems, electrification and charging solutions, fleet and energy management systems or other vehicle technologies, may cause material changes to our warranty reserves in the future. If our warranty reserves are inadequate to cover future warranty claims on our products, our business, prospects, financial condition, and operating results could be adversely affected. In addition, we may also choose to upgrade parts or systems across an entire vehicle fleet or electric drivetrain product line for our own service or customer satisfaction needs, which may result in unforeseen costs.
We provide a limited warranty to customers on battery systems, electric transit buses and charging systems. The limited warranty ranges from one to twelve years depending on the components. Specifically, under the fleet defect provisions included in some transit bus purchase contracts, we are required to establish proactive programs to prevent the re-occurrence of defects in electric transit buses delivered under the contract if the same defect occurs in more than a specified percentage of the fleet within the base warranty period following delivery of the electric transit bus. We calculate an estimate of these costs into each of our contracts based on our historical experience and technical expectations. Warranty reserves include management’s best estimate of the projected costs to repair or to replace items under warranty. These estimates are based on actual claims incurred to date and an estimate of the nature, frequency, and costs of future claims.
Because of the short operating history of our current product line, we have had limited data upon which to base our warranty expense estimates. Also, although we may offer customers lengthy warranties, our ability to recover warranty claims from underlying suppliers may be limited to a shorter period by contract. We are currently aware of warranty claims on certain transit bus structures and components which may result in material warranty costs. For example, we have received warranty claims related to cracked wheel wells and rear door framing in our buses and failures with third-party charging systems installed by us that did not meet customer specifications.
We are potentially subject to recalls of our products to cure real or perceived manufacturing defects or if we fail to comply with applicable U.S. Federal Motor Vehicle Safety Standards, or FMVSS. We have filed voluntary recalls with the United States National Highway Transportation Safety Administration. We are potentially subject to recalls made by the suppliers of components or parts that we purchase and incorporate into our electric transit buses. In October 2018, for example, we initiated a recall on certain of our electric transit buses because of a defect in a brake caliper after an equipment recall by our axle supplier, even though none of our customers had experienced a problem with the part. We may also need to bring battery systems back to our facilities for warranty work and deploy staff to assist customers with battery system issues, and we may need to transport buses back to one of our facilities or retrofit transit buses in the field to address a warranty claim, a recall campaign, or to otherwise satisfy customer concerns, which may require significant staff to be deployed to customer locations.
Even if a defect or perceived defect is not subject to a warranty claim or a current recall process, we may still incur costs of a customer satisfaction campaign when we choose to upgrade our battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses, and related technologies without cost to the customer. For example, we are currently aware that the amount of weight on the front axle of certain of our buses in operation may exceed the manufacturer’s gross axle weight rating. To address this issue with our customers, in 2019 we launched a customer satisfaction campaign to upgrade our electric transit buses’ front axle, which will result in increased labor and parts costs, for which we have accrued a reserve. We are also aware of cracks in the gel coat finish on some of our composite bus bodies which has required and is expected to require customer service support at our cost.
A product warranty claim, product recall, or product remediation, as a result of real or perceived defects, caused by systems or components engineered or manufactured by us or our suppliers, could involve significant expense and could have an adverse effect on our business, prospects, financial condition, and operating results. In addition, adverse publicity or industry rumors and speculation that may result from a customer or customers taking our battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses, and related technologies out of service pending a repair or remedy, product warranty claims, or
product recalls, could slow market acceptance of our products and have an adverse effect on our reputation, brand image, and our ability to successfully market and sell our products.
If we are unable to scale production and deliver battery systems and buses on time, our business could be adversely affected.
Our business plan calls for significant increases in both vehicle and battery system production in a short amount of time to meet expected delivery dates to customers. Our ability to achieve our production plans will depend upon many factors, including adding additional battery lines, auxiliary vehicle production lines and production shifts, recruiting and training new staff while maintaining our desired quality levels, and improving our vehicle configuration process, supply chain management, and our suppliers’ ability to support our needs. Moreover, because many of our orders are with respect to products that will be delivered more than a year after the order placed, whether we are the battery system supplier or, in the case of electric transit buses, the vehicle OEM, there can be no assurance that we will be able to accurately forecast our supply chain demands or scale our manufacturing accordingly to meet the delivery deadlines for these orders. In addition, we have adopted, and may adopt in the future, new factory and supply chain management technologies and manufacturing and quality control processes, which we must successfully introduce and scale for production across our factories. We have introduced new battery system configurations for our customers and we are new to modifying our production processes to complete different configurations. Moreover, our electric transit buses are customized for our customers and certain battery systems require custom integration with our customer electric transit buses, which means that each new electric transit bus order brings its own set of challenges to vehicle configuration and supply chain. For example, each new electric transit bus configuration may introduce a multitude of parts that we have not used in previous electric transit bus builds, which in turn requires obtaining parts from new suppliers that engineering must validate and incorporate into our vehicle configuration. In the past, we have experienced changes in work instructions for electric transit buses that have not been timely communicated between factories, resulting in recalls of delivered product. We have limited experience developing, manufacturing, selling, servicing, and allocating our available resources among multiple products and multiple factories simultaneously. If we fail to effectively manage the complexity of our production process, our business, prospects, financial condition, and operating results could be adversely affected.
Our inability to deliver electric transit buses that meet customer specifications in a timely manner could significantly delay recognition of revenue and receipt of payment, because we do not recognize revenue and are not paid for electric transit buses until they are delivered to the customer. Moreover, some of our contracts with transit agencies include liquidated damages clauses that apply monetary penalties on a per vehicle per day basis if electric transit buses are not delivered to the customer by the date specified in the contract. Per day penalties can be significant depending on the contract. We have delivered battery systems, charging systems and electric transit buses late in the past, and have incurred substantial penalties with respect to certain of these late deliveries, which have reduced our revenue and margin. Although we actively manage our production schedule and our customers’ expectations, we may still fail to meet delivery deadlines and may incur penalties as a result. If we are unable to realize our production plans and deliver our battery systems and buses on time, our reputation, business, prospects, financial condition, and operating results could be adversely affected.
Our business could be adversely affected if utilities and state utility commissions do not, or are slow to, support transportation electrification efforts.
Fleet-wide adoption of electric vehicles will benefit from favorable electricity rate structures for transit authorities and other large fleet operators and investment in make-ready infrastructure for electric vehicle charging at scale by utilities. For example, pursuant to California Senate Bill 350: Clean Energy and Pollution Reduction Act, the California investor-owned utilities have submitted Integrated Resource Plans that detailed how each utility will meet its customers’ resource needs and reduce greenhouse gas emissions, including support for transportation electrification. The California Public Utilities Commission approved the plans in May 2018, including Pacific Gas and Electric Company’s proposed investment in infrastructure and rebates and Southern California Edison Corporation’s proposed time-of-use rates for charging electric transit buses. In September 2018, the Public Service Enterprise Group in New Jersey outlined a number of initiatives, including providing funding for charging system installations, deploying make-ready electric infrastructure and making grants for electric school buses. The New Jersey Board of Public Utilities will now evaluate the filing. In addition, utility commissions in
several states are also evaluating the needs and benefits of transportation electrification, including the transit bus sector.
Our customers expect to pay lower electricity costs and generally look to the utilities to invest in infrastructure upgrades that will support commercial vehicle electrification plans. Therefore, efforts on the part of utility companies and state utility commissions to develop an appropriate rate designed to ensure that electricity as a fuel is competitive with fossil fuels will improve the total cost of ownership benefits for our transit customers and vehicle fleet owners, and enhance the attractiveness of our other products and offerings. Similarly, investments that utilities make to upgrade the infrastructure necessary to support additional load on the electrical grid will save our customers from potentially having to make their own investments. However, if utilities and utility commissions do not make the necessary investments to support commercial vehicle electrification and develop the appropriate, cost-competitive electricity rates, or delay such efforts, the market for battery systems, electrification and charging solutions, fleet and energy management software and electric transit buses, and related technologies may not develop as we expect or may develop more slowly than we expect, and our business, prospects, financial condition, and operating results could be adversely affected.
Our revenue has in the past depended, and will likely continue to depend, on a small number of customers that fluctuate from year to year, and failure to add new customers or expand sales to our existing customers could have an adverse effect on our operating results for a particular period.
Because the majority of our historical and current customers are public transit authorities that do not procure new vehicle fleets every year, the composition of customers that account for a significant portion of our revenue is likely to vary from year to year based on which customers have accepted delivery of large fleet orders with us during the applicable period. For example, two customers accounted for approximately 33% of our total revenue for the year ended December 31, 2022. Moreover, because public transit authorities tend to procure new vehicles in large batch orders, our revenue in any given quarter may be highly dependent on a single customer. For example, in the third and fourth quarter of 2022, approximately 45% and 67%, respectively, of electric transit buses were delivered to a single customer, Miami-Dade County. In the second quarter of 2020, approximately 50% of the electric transit buses we delivered were delivered to a single customer, the Port Authority of New York and New Jersey and in the fourth quarter of 2020, approximately 40% of the buses we delivered were delivered to a single customer, the City of Edmonton. We believe that we may continue to depend upon a relatively small number of customers for a significant portion of our revenue in any given period for the foreseeable future because we have only recently begun to deliver our buses and other products at a larger scale and we have a lengthy sales cycle and on-ramp for new customers, particularly in our Transit business. Our failure to diversify our customer base by adding new customers or expanding sales to our existing Proterra Transit customers and our failure to add new customers and expand sales to existing customers in our Proterra Powered and Proterra Energy businesses outside of the transit industry could therefore have an adverse effect on our operating results for a particular period.
Our industry and its technology are rapidly evolving and may be subject to unforeseen changes. Developments in alternative technologies and powertrains or improvements in the internal combustion engine may adversely affect the demand for our electric transit buses and our electric battery solutions for commercial vehicles.
The electric vehicle industry, and the electric commercial vehicle industry in particular, is relatively new and has experienced substantial change in the last several years. As more companies invest in electric vehicle and autonomous vehicle technology and alternative modes of transportation, we may be unable to keep up with technology advancements and, as a result, our competitiveness may suffer. As technologies change, we plan to spend significant resources in ongoing research and development, and to upgrade or adapt our products and services, and introduce new products and services in order to continue to provide battery systems, electrification and charging solutions, fleet and energy management software for electric transit buses, and related technologies with the latest technology, in particular battery technology. Our research and development efforts may not be sufficient or could involve substantial costs and delays and lower our return on investment for our technologies. For example, we invested substantial resources into developing a charging system solution in 2018 and then replaced that solution by entering into a new contract for supply of charging systems a few years later. Delays or missed opportunities to adopt new technologies could adversely affect our business, prospects, financial condition, and operating results.
In addition, we may not be able to compete effectively with other alternative fuel vehicles and integrate the latest technology, which may include autonomous vehicle technology, into our battery systems, electrification and charging solutions, fleet and energy management systems, and related technologies. Even if we are able to keep pace with changes in technology and develop new products and services, we are subject to the risk that our prior models, products, services and designs will become obsolete more quickly than expected, resulting in unused inventory and potentially reducing our return on investment, or become increasingly difficult to service or provide replacement parts at competitive prices. For example, we incurred $0.8 million, $1.9 million and $3.0 million in inventory write-offs in 2022, 2021 and 2020, respectively, as the result of unused raw materials or adopting new technologies. In the three and six months ended June 30, 2023, we incurred $6.8 million of expenses related to the write down of inventories for excess or obsolete inventories and lower of cost or market adjustment. Additionally, given the long sales cycle of each of our products and services, customers may delay purchases and modify or cancel existing orders in anticipation of the release of new models and technology. Moreover, developments in alternative technologies, such as advanced diesel, ethanol, fuel cells, or compressed natural gas, or improvements in the fuel economy of the internal combustion engine, may adversely affect our business and prospects in ways we do not currently anticipate. Any developments with respect to these technologies, in particular fuel cell technologies and related chemical research, or the perception that they may occur, may prompt us to invest heavily in additional research to compete effectively with these advances, which research and development may not be effective. Any failure by us to successfully react to changes in existing technologies could adversely affect our competitive position and growth prospects.
If we are unable to successfully manufacture and sell our battery systems, electrification and charging solutions, fleet and energy management software and electric transit buses, and related technologies, our business could be adversely affected.
We have limited experience with manufacturing and selling battery systems, electrification and charging solutions, fleet and energy management software and electric transit buses, and related technologies to global commercial vehicle manufacturers and other types of manufacturers. As we develop partnerships with global commercial vehicle manufacturers to provide these products and other component parts to these partners and customers, we must introduce and implement manufacturing and quality control processes across our factories that are comparable to those of other Tier 1 suppliers in the automotive industry. We have identified areas for improvement as we scale and mature, such as ISO certification for our operations, that would allow us to meet quality standards required by companies such as Daimler and its subsidiaries. Furthermore, we must compete against more established battery designers, drivetrain designers, vehicle manufacturers, charging solution designers and component suppliers with greater resources and more experience in large scale manufacturing and deployment than we have. To compete effectively against these incumbent manufacturers and suppliers, we will have to devote substantial resources and effort to efficiently and effectively scale our manufacturing capabilities, implement new manufacturing and quality control processes, and enhance our existing processes. The implementation of a Tier 1 automotive supplier manufacturing operations inherently involves risks related to infrastructure and process development, quality control, and customer acceptance. If we fail to mature our manufacturing operations to the satisfaction of our customers, then our business, prospects, financial condition, and operating results could be adversely affected.
If we are unable to design, develop, market, and sell new products and services that address adjacent market opportunities, our business, prospects, and operating results may be adversely impacted.
We may not be able to successfully develop new products and services or develop a significantly broader customer base. For the past several years, we have focused our business on the development and sale of electric transit buses for the mass transit market. Our product line in the transit market is currently limited to the 40-foot and 35-foot ZX5 transit buses, and spare parts. We have recently expanded our offerings to include battery systems, electrification and charging solutions, and fleet and energy management software, and related technologies that are designed for broader application to other commercial vehicles.
In this regard, we have entered into development and supply agreements to develop and sell our battery systems, electrification and charging solutions and fleet and energy management software to other medium-duty and heavy-duty commercial vehicle manufacturers. Our business model offers end-to-end powertrain systems, energy system integrations when electric drivetrains are supplied by a third party, and battery system supply when
integration and electric drivetrains are supplied by third parties to the end customer. Achieving success in these relatively new markets will require us to, among other things:
•enter into strategic agreements with leading manufacturers in these markets and maintain and grow these relationships;
•adapt our electric powertrain technology to meet the specifications of additional commercial vehicle categories;
•successfully compete with other manufacturers in the new markets;
•effectively and efficiently scale our manufacturing capabilities;
•effectively and efficiently grow and manage our supply chain;
•expand our sales and marketing capabilities;
•enter into service partnerships or expand our internal service and parts capabilities;
•expand our integration and engineering services to compete with other integrators and suppliers of high voltage systems, controls and drivetrains;
•expand our software and telematics platform to offer competitive solutions;
•develop technology solutions that are compatible with offerings of third-party providers;
•develop charging solutions, including software and telematics that are compatible with electric vehicle technology independent of manufacturer or supplier; and
•comply with changing regulations applicable to our products and services.
If we fail to adequately improve our products and services to compete effectively against our competitors, we may not be successful in expanding our customer base in the electric commercial vehicle market.
In addition, our failure to address additional market opportunities could harm our business, financial condition, operating results, and prospects. We may not be able to successfully design, develop, or test new products and services in order to effectively compete with our competitors in these new markets. Furthermore, there may be no demand by customers to purchase newly developed or improved products and services, there may be risks and unbudgeted costs associated with launching new products and services, and we may not be able to recoup our research and development costs, all of which could have an adverse effect on our business, prospects, financial condition, and operating results.
We may not be able to develop, maintain and grow strategic relationships in the Proterra Powered or Proterra Energy business, identify new strategic relationship opportunities, or form strategic relationships, in the future.
We expect that our ability to establish, maintain, and manage strategic relationships, such as development and supply agreements with customers that could have a significant impact on the success of our business. While we expect to increase the amount of revenue associated with Proterra Powered and Proterra Energy, there can be no assurance that we will be able to identify or secure suitable and scalable business relationship opportunities in the future or that our competitors will not capitalize on such opportunities before we do. Moreover, identifying such opportunities could demand substantial management time and resources, and may involve significant costs and uncertainties.
Additionally, we cannot guarantee that the companies with which we have developed or will develop strategic relationships will continue to devote the resources necessary to promote mutually beneficial business relationships and grow our business. Our current arrangements are not exclusive, and some of our strategic
partners offer competing products. As a result of these factors, many of the companies with which we have development and supply agreements may choose to develop alternative products in addition to or in lieu of our solutions, either on their own or in collaboration with others, including our competitors. If we are unsuccessful in establishing or maintaining our relationships with key strategic partners, our overall growth could be impaired, and our business, prospects, financial condition, and operating results could be adversely affected.
Lack of long-term customer contracts, uncertainty regarding customer option exercises, and customer suspension or termination of contracts may have adverse effects on our business.
Proterra Transit relies heavily on sales to public and other transit authorities, which, consistent with general industry practice, do not make long-term purchase commitments with transit vendors. Most transit authorities usually undertake significant procurement of new transit buses once every few years and typically acquire a relatively small percentage of their fleet each time. Often, the terms of our procurements allow customers, without notice or penalty, to suspend or terminate their relationship with us at any time and for any reason. For example, one of our customers previously made an award to us for buses in 2017, but due in part to improvements in electric vehicle technology and the release of new bus models, withdrew the award in 2018 in favor of considering a new request for proposal process. Some customers have also elected to purchase fuel cell vehicles for their transit fleet. Even if customers continue their relationship with us, they may not purchase the same volume of products as in the past or they may not pay the same price for those products. This may also be true with respect to Proterra Powered, where customers may have long-term contracts, but are not subject to fixed quantity order requirements such that final orders may be below our revenue expectations or estimates.
Further, many transit authority contracts include options to purchase additional electric transit buses in the future, and while a portion of future orders may be represented by options, customers may not end up exercising these options. Although options represent a significant source of potential orders for us, we do not have an extensive history of fulfilling orders based on our customer option agreements. Even if we had a history of significant option exercises by customers, customers may not continue to exercise such options at the same rate or at all in the future. Any loss of customers or decrease in the number of electric transit buses or battery systems purchased under a contract could have an adverse effect on our business, prospects, financial condition, and operating results.
We are competing for the business of both small and large transit agencies, which place different demands on our business, and if we do not build an organization that can serve both types of transit customers, by scaling our internal resources to meet varying customer needs, our business, prospects, financial condition and operating results may be harmed.
Proterra Transit has competed for, and may in the future compete for, the business of larger transit agencies that maintain fleets of several hundred to thousands of vehicles, including Los Angeles, Miami Dade County and Chicago. This size of customer places significant demands on our business because they have large, specialized groups of professionals focused on different requirements or systems related to transit bus procurement and rigorous inspections with multiple levels of review to assure each bus meets their specifications, which may be driven by conformity with other vehicles in the fleet, large long-term supply contracts, such as for tires and other wear items, and operating contracts with maintenance and operations teams. Serving these customers requires significant investment in customer relationship managers and service professionals to support the levels of design, review, change orders, inspection, and commissioning and delivery of the electric transit buses. Similarly, servicing our Proterra Powered customers requires significant investments in customer relationship managers and other professionals as each customer requires different levels of battery integration support and service.
We also compete for the business of smaller transit agencies. Although smaller transit agencies often have less complicated procurement processes than larger transit agencies, serving these smaller agencies requires processing small order sizes while still catering to the specific vehicle configurations for each customer. If we continue to serve both large and small transit agency customers, we will need to effectively and efficiently scale our internal resources to meet varying customer needs. Our failure to do so could have an adverse effect on our business, prospects, financial condition, and operating results.
Our business is subject to substantial regulations, which are evolving, and unfavorable changes or failure by us to comply with these regulations could have an adverse effect on our business.
The majority of our current transit customers are government entities and we are subject to many local, state, and federal laws that add significant compliance costs to our operations. In addition, local, state, and federal regulations may conflict, making it difficult to build one vehicle that satisfies all requirements in all jurisdictions. Moreover, competitive bidding rules for government contracts add additional layers of complexity and require compliance with federal and state conflict of interest rules and rules governing our choice of suppliers and components.
Our electric transit buses and component products must comply with the National Traffic and Motor Vehicle Safety Act of 1966, as amended (“NTMVSA”), and regulations promulgated thereunder, which are administered by the National Highway Traffic Safety Administration (“NHTSA”). NTMVSA requires vehicle and equipment manufacturers to provide notice of safety defects to NHTSA and initiate a recall process within five days of such a determination by a manufacturer. NHTSA also administers reporting requirements from vehicle manufacturers under the Transportation Recall Enhancement, Accountability and Documentation Act of 2000 (the “TREAD Act”). We have ongoing reporting requirements under the TREAD Act and in the past have failed to timely report under the TREAD Act. NHTSA may also require a manufacturer to recall and repair vehicles that contain safety defects or that are not compliant with FMVSS or other certification requirements for vehicles. Sales into foreign countries may be subject to similar regulations. We cannot assure you that violations of these laws and regulations will not occur in the future or have not occurred in the past as a result of human error, accidents, equipment failure, manufacturing or design defects, or other causes. It is possible that our reporting for historical periods for which we failed to timely report may reveal instances where we should have taken actions required by law but failed to do so. For example, we became subject to certain early warning reporting obligations under the TREAD Act in 2018. Our ongoing reporting obligations require us to provide certain early warning data to help identify potential safety-related defects, including certain safety data dating back ten years. While we have filed reports for current periods, we are currently not in full compliance with these early warning reporting requirements for prior periods. As we work to remediate our non-compliance, we may be subject to retrospective safety recall notices on our electric transit buses. Recalls of our electric transit buses or components, whether initiated by us, NHTSA or another authority, or penalties for regulatory compliance failures could have a material adverse effect on our reputation, business and operating results and be used by our competitors to our disadvantage.
Furthermore, if we choose to expand internationally, we would likely face additional international requirements that may not be compatible with regulations that govern our business in the United States. For example, in the United States, we developed our supply chain to ensure that we comply with Buy America regulations, which govern manufactured products and rolling stock, including transit bus, procurements that are paid for, in part, with funds administered by the FTA. Buy America regulations currently require that 70% of our vehicle components by cost be manufactured in the United States, and the Made in America Office opened under the Biden-Harris administration has proposed rules which may raise this requirement further. Buy America regulations have the effect of rendering the cost of our supply chain more expensive when compared with our competitors. As we began selling buses to airports, we had to modify our operations to comply with the Buy American requirements under the FAA rules, which differ from the Buy America requirements under the FTA rules. In June 2018, we received our first order from a Canadian transit authority, and as a result, we need to comply with Canadian Content requirements, which will require sourcing components from Canadian suppliers or assembly of components in Canada. These regulations may increase the costs of doing business and add operational challenges.
In addition, there is no assurance that the current Buy America, Buy American, or Canadian Content requirements will not change or become stricter or that we will continue to be able to meet those requirements in the future. Our competitors have lobbied extensively to alter Buy America regulations to effectively prohibit our use of cylindrical battery cells produced outside of the United States for which there currently is no source of domestic supply available to us. Lack of domestic supply of cylindrical battery cells may also make our product less competitive and less desirable to customers that demand product that meets the domestic content requirements to achieve tariff-free status under the United States-Mexico-Canada trade agreement which entered into force on July 1, 2020.
Also, our ability to meet domestic content requirements is, in part, dependent on hundreds of suppliers. If any of these suppliers change the source of the components or subcomponents comprising their products, they could potentially prevent us from meeting domestic content requirements and negatively impact our business. Conversely, if domestic content requirements become less stringent in the future, foreign competitors without significant U.S. operations may be able to enter the U.S. market more easily and gain market share. Thus, any change to domestic content regulations could have an adverse effect on our business, prospects, financial condition, and operating results.
Delays in FTA mandated Model Bus Testing Program, or failure to successfully complete federally mandated testing, could adversely impact our business.
The FTA mandates that new transit bus models must undergo testing at its testing facility in Altoona, Pennsylvania and meet certain performance standards set by the FTA’s Model Bus Testing Program, known as “Altoona Testing,” in order to be eligible to receive federal funding. There is only one facility approved for testing by the FTA and in the past, we have experienced delays of several months before receiving regulatory approval to test our buses at Altoona, as well as delays in the actual testing at Altoona. The COVID-19 pandemic resulted in a shut-down of the Altoona facility in 2020 and there can be no assurances that the facility will not be shut down again due to the COVID-19 pandemic or otherwise. We may in the future choose to undergo testing or be required to do so.
When available, Altoona Testing is designed to promote production of better transit vehicles and components and to ensure that transit customers purchase vehicles that can withstand the rigors of transit service. Our 40-foot and 35-foot electric transit buses, including the ZX5 with DuoPower drivetrain, have satisfactorily completed Altoona Testing, but for each material change that we make to our transit bus platform, we must undergo a new round of testing. We have in the past and may in the future experience failures of components of our transit bus during Altoona Testing, which may prolong the test process, and cause us to be required to redesign components on the test bus and restart the testing process. Testing is available to vendors on a first-come, first-served basis. We cannot receive payment from customers relying on federal funds unless the applicable bus platform has satisfactorily completed Altoona Testing, and thus testing delays could have an adverse effect on our business, prospects, financial condition, and operating results. We have in the past and may in the future experience delays in Altoona Testing availability, including as a result of the COVID-19 pandemic, other pandemics, or other unforeseen events. In the past, a delay in receiving a required Altoona test report resulted in late delivery of buses to a customer and caused us to incur monetary penalties, delayed acceptance and delayed revenue recognition and customer payments. Moreover, there can be no assurance that the current Altoona Testing requirements will not change or become more onerous or that our future bus models will pass Altoona Testing. For instance, in 2016, the Model Bus Testing Program regulations changed to require a pass/fail test result. If we cannot produce electric transit buses that pass Altoona Testing, we would not be able to continue to sell buses to customers in the United States that rely on federal funds for their procurements, which would have a material and adverse effect on our business, prospects, financial condition, and operating results.
Failure to comply with the Disadvantaged Business Enterprise (“DBE”) program requirements or our failure to have our DBE goals approved by the FTA could adversely impact our transit business.
The FTA requires transit vehicle manufacturers that bid on federally-assisted rolling stock procurements to submit annual goals to support qualified DBEs (as defined in the DBE program regulations), and to certify that they have complied with the requirements of the DBE program established by the U.S. Department of Transportation, which aims to increase the participation of DBEs in state and local procurements. Companies are certified as DBE if they are for-profit small businesses majority-owned by socially and economically disadvantaged individuals. The FTA reviews and approves transit vehicle manufacturers’ DBE goals for the upcoming year and maintains a certified list of transit vehicle manufacturers that are eligible to bid on federally funded vehicle procurements based on their goals to contract with DBEs and good faith implementation of those goals. Our failure to comply with the DBE program requirements or a delay in having our DBE goals approved by the FTA could result in our ineligibility to bid on federally funded transit vehicle procurements, which could have an adverse effect on our business, prospects, financial condition, and operating results.
Our business and prospects depend significantly on our ability to build our brand. We may not succeed in continuing to establish, maintain, and strengthen our brand, and our brand and reputation could be harmed by negative publicity regarding our company or products.
Our business and prospects are heavily dependent on our ability to develop, maintain, and strengthen our brand. Promoting and positioning our brand will depend significantly on our ability to provide high quality battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses, and related technologies, and we have limited experience in these areas, particularly with respect to products and services that are not used in electric transit buses. In addition, we expect that our ability to develop, maintain, and strengthen our brand will also depend heavily on the success of our branding efforts. To promote our brand, we need to incur increased expenses, including product demonstrations and attending trade conferences. Brand promotion activities may not yield increased revenue, and even if they do, the increased revenue may not offset the expenses we incur in building and maintaining our brand and reputation. If we fail to promote and maintain our brand successfully or to maintain loyalty among our customers, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract new customers and partners, or retain our existing customers and partners and our business and financial condition may be adversely affected.
Moreover, any negative publicity relating to our employees, current or future partners, original equipment manufacturers deploying our battery or powertrain technology in their electric transit buses, partners or customers who use our high-voltage systems or software and telematics platforms, or others associated with these parties may also tarnish our own reputation simply by association and may reduce the value of our brand. Additionally, if safety or other incidents or product defects occur or are perceived to have occurred, whether or not such incidents or defects are our fault, we could be subject to adverse publicity, which could be particularly harmful to our business given our limited operating history. Given the popularity of social media, any negative publicity about our products or their safety, whether true or not, could quickly proliferate and harm customer and community perceptions and confidence in our brand. For example, in 2021, we were the subject of negative publicity arising out of the appearance of cracks in the composite bus body architecture, potential early retirement of some of our first generation transit buses and negative political commentary. Public transit agencies and OEMs are particularly sensitive to concerns and perceptions of the passenger and community constituencies they serve. If the passengers in our electric transit buses or people in communities where electric transit buses using our technology are deployed form a negative opinion of our electric transit buses or battery systems or charging solutions, our current and potential customers might not choose our products, and strategic partners in other markets may not adopt our battery systems or electric powertrain technology or charging solutions. Other businesses, including our competitors, and organized labor, may also be incentivized to fund negative campaigns against our company to damage our brand and reputation to further their own purposes. Future customers of our products and services may have similar sensitivities and may be subject to similar public opinion and perception risks. Damage to our brand and reputation may result in reduced demand for our products and increased risk of losing market share to our competitors. Any efforts to restore the value of our brand and rebuild our reputation may be costly and may not be successful, and our inability to develop and maintain a strong brand could have an adverse effect on our business, prospects, financial condition, and operating results.
The use of lithium-ion cells may become disfavored as a result of the availability, or perceived superiority of, other types of batteries or yet undeveloped or unknown technologies.
The battery packs that we currently produce make use of lithium-ion cells, which we believe currently represent the industry standard for battery technology for electric vehicles. It is possible, however, that other types of batteries or yet undeveloped or unknown technologies may become favored in the future, such as lithium iron phosphate (“LFP”) batteries. LFP batteries currently have a wide range of applications, including in electric vehicle applications, and are perceived by many as offering cost-effective performance as compared to lithium-ion cells. The cost-effectiveness of LFPs is due, in part, to substantial investments in this technology development and manufacturing capability in China. While we believe that our products and services based on the lithium-ion cells that we have chosen to offer our customers present advantages with respect to ease of integration with their products and services and underlying performance, it is possible that these customers and partners may deem LFP-based technology, or other technologies, as sufficient or superior for their purposes, and may demand that we shift to LFP-based technology or decide to partner with other service providers who employ such technologies. In addition, it is possible that the performance, safety features or characteristics, reliability or cost-effectiveness of LFP batteries, or another form of battery, could improve in the future such that our current lithium-ion cell based
offerings would become, or be perceived as, inferior or obsolete. In addition, it is possible that new forms of batteries or electrification technologies, such as solid state batteries, could emerge as a more cost effective or safer alternative to the batteries we currently offer. In the event that LFP or a new form of battery emerges or is deemed to exhibit better performance, operate at lower cost or exhibit better safety features, we could be compelled to attempt to integrate those new types of batteries into our platform, which may not be possible or feasible at a price that would be attractive to our customers or potential partners. Any developments with respect to LFP or new battery technology, or new electrification technologies that are based on unforeseen developments in fuel cell technology, or the perception that they may occur, may prompt us to invest heavily in additional research to compete effectively with these advances, which research and development may not be effective. Any failure by us to successfully react to changes in existing technologies could adversely affect our competitive position and growth prospects.
Our business could be adversely affected from an accident or safety incident involving our battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses or defects in the materials or workmanship of our composite bus bodies or other components.
An accident or safety incident involving one of our battery systems, electrification and charging solutions, fleet and energy management systems or electric transit buses could expose us to significant liability and a public perception that our electric transit buses and products are unsafe or unreliable. Our agreements with customers contain broad indemnification provisions, and in the event of a major accident, we could be subject to significant personal injury and property claims that could subject us to substantial liability. While we maintain liability insurance in amounts and of the type generally consistent with industry practice, the amount of such coverage may not be adequate to cover fully all claims, and we may be forced to bear substantial losses from an accident or safety incident. In addition, any accident or safety incident involving one of our buses, even if fully insured, could harm our reputation and result in a loss of future customer demand if it creates a public perception that our electric transit buses are unsafe or unreliable as compared to those offered by other transit bus manufacturers or other means of transportation. While we have not experienced significant accident or safety incidents involving our electric transit buses, we have experienced malfunctions, such as the overhead single blade charger thermal events and a bus fire related to low voltage wiring. Moreover, the public may be more sensitive to incidents involving transit buses and school buses, thereby compounding the effects of such incidents on the public and customer perception of our electric transit buses. As a result, any accident or safety incident involving our buses, or the buses of our competitors could materially and adversely affect our business, prospects, financial condition, and operating results.
Our work with government customers exposes us to unique risks inherent in government contracting.
We must comply with and are affected by laws and regulations relating to the award, administration, and performance of government contracts. Government contract laws and regulations affect how we do business with our customers and impose certain risks and costs on our business. A violation of specific laws and regulations by us, our employees, or others working on our behalf could harm our reputation and result in the imposition of fines and penalties, the termination of our contracts, suspension or debarment from bidding on or being awarded contracts, and civil or criminal investigations or proceedings.
Our performance under our contracts with government entities and our compliance with the terms of those contracts and applicable laws and regulations are subject to periodic audit, review, and investigation by various agencies of the government. If such an audit, review, or investigation uncovers a violation of a law or regulation or improper or illegal activities relating to our government contracts, we may be subject to civil or criminal penalties or administrative sanctions, including the termination of contracts, forfeiture of profits, the triggering of price reduction clauses, withholding of payments, suspension of payments, fines, and suspension or debarment from contracting with government agencies. There is inherent uncertainty as to the outcome of any audit, review, or investigation. If we incur a material penalty or administrative sanction or otherwise suffer harm to our reputation, our business, prospects, financial condition, or operating results could be adversely affected.
Further, if a government regulatory authority were to initiate suspension or debarment proceedings against us as a result of a conviction or indictment for illegal activities, we may lose our ability to be awarded contracts in the future or receive renewals of existing contracts for a period of time. We could also suffer harm to our reputation if allegations of impropriety were made against us, which would impair our ability to win awards of contracts in the
future or receive renewals of existing contracts. Inability to be awarded contracts in the future or receive renewal of existing contacts could have an adverse effect on our business, prospects, financial condition, and operating results.
A portion of our business is dependent upon U.S. government contracts and grants, which are highly regulated and subject to oversight audits by U.S. government representatives and subject to cancellations. Such audits could result in adverse findings and negatively impact our business.
Our U.S. government business is subject to specific procurement regulations with numerous compliance requirements. These requirements, although customary in government contracting in the United States, increase our performance and compliance costs. These costs may increase in the future, thereby reducing our margins, which could have an adverse effect on our financial condition. Failure to comply with these regulations or other compliance requirements could lead to suspension or debarment from U.S. government contracting or subcontracting for a period. Among the causes for debarment are violations of various laws or policies, including those related to procurement integrity, export control, U.S. government security regulations, employment practices, protection of criminal justice data, protection of the environment, accuracy of records, proper recording of costs, foreign corruption, Trade Agreements Act, Buy America Act, and the False Claims Act.
Generally, in the United States, government contracts and grants are subject to oversight audits by government representatives. For example, in December 2020, the FTA released an audit of our and other manufacturers compliance with Buy America requirements. Such audits could result in adjustments to our contracts. For contracts covered by the Cost Accounting Standards, any costs found to be improperly allocated to a specific contract may not be allowed, and such costs already reimbursed may have to be refunded. Future audits and adjustments, if required, may materially reduce our revenues or profits upon completion and final negotiation of audits. Negative audit findings could also result in investigations, termination of a contract or grant, forfeiture of profits or reimbursements, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. All contracts with the U.S. government can be terminated for convenience by the government at any time.
In addition, contacts with government officials and participation in political activities are areas that are tightly controlled by federal, state, local and international laws. Failure to comply with these laws could cost us opportunities to seek certain government sales opportunities or even result in fines, prosecution, or debarment.
We may not be able to obtain, or comply with terms and conditions for, government grants, loans, and other incentives for which we have applied and may apply for in the future, which may limit our opportunities to expand our business.
We have in the past applied for and received state grants and tax incentives designed to promote the manufacturing of electric vehicles and related technologies, including charging solutions. In April 2015, the California Energy Commission awarded us $3.0 million based on our investment of approximately $8.4 million in our manufacturing facilities in California through December 31, 2018. In April 2017, California’s Office of Business and Economic Development entered into a California Competes Tax Credit Allocation Agreement with us for an award of a California Competes Tax Credit in the amount of $7.5 million if certain conditions in that agreement are met in the prescribed time periods. In April 2019, the California Energy Commission awarded us a $1.8 million grant based on our expected investment of approximately $4.3 million in our manufacturing facility in City of Industry, California.
We anticipate that in the future there will be new opportunities for us to apply for grants, loans, and other federal and state incentives. Our ability to obtain funds or incentives from government sources is subject to the availability of funds under applicable government programs and approval of our applications to participate in such programs. The application process for these funds and other incentives is and will remain highly competitive. We may not be successful in obtaining any of these additional grants, loans, and other incentives. We have in the past failed and may also in the future fail to comply with the conditions of these incentives, which could cause us to lose funding or negotiate with governmental entities to revise such conditions. For example, we received a grant in South Carolina in 2010 that was subject to certain performance criteria, including a condition that we create no fewer than 400 new full- time jobs. We were unable to meet the original deadline but negotiated with the South Carolina Coordinating Council for Economic Development (the “Council”) for an extension on the date of
job creation and we have since fulfilled the revised condition to the Council’s satisfaction. Our estimates of job growth under our California Competes Tax Credit have also not come to fruition for certain fiscal years. We may be unable to find alternative sources of funding to meet our planned capital needs, in which case, our business, prospects, financial condition, and operating results could be adversely affected.
We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.
We provide indemnification to our customers who may be sued for product liability related to our electric transit buses and electric powertrain solutions, and we may otherwise be subject to product liability claims, including with respect to our charging solutions. The commercial vehicle market experiences significant product liability claims and we face inherent risk of exposure to claims in the event our electric transit buses or components do not perform as expected. Commercial vehicles including public transit buses have been involved and may in the future be involved in crashes resulting in death or personal injury, and in some cases catastrophic crashes resulting in the death and injury to many passengers.
While we carry insurance for product liability, it is possible that our insurance coverage may not cover the full exposure on a product liability claim of significant magnitude. A successful product liability claim against us could require us to pay a substantial monetary award. A product liability claim could also generate substantial negative publicity about our products and business and could have an adverse effect on our brand, business, prospects, financial condition, and operating results.
Changes to U.S. trade policies, including new tariffs or the renegotiation or termination of existing trade agreements or treaties, may adversely affect our financial performance.
We currently manufacture our products in the United States, but may consider other international locations, including locations in Canada. Although many of our suppliers are in the United States, we rely on a number of suppliers in other countries for key components. We are subject to risks and uncertainties associated with changing economic, political, and other conditions in foreign countries where our vendors are located, such as increased import duties, tariffs, trade restrictions, and quotas or other government regulations, work stoppages, fluctuations of foreign currencies, natural disasters, political unrest, and customs delays. Unavailability or delay of imports from our foreign vendors would likely cause interruptions in our supply chain and could have an adverse effect on our business, prospects, financial condition, and operating results.
Moreover, the U.S. federal government may alter U.S. international trade policy and to renegotiate or terminate certain existing trade agreements and treaties with foreign governments. The U.S. federal government renegotiated the North American Free Trade Agreement, renamed the U.S.-Mexico-Canada Agreement, which was signed on November 30, 2018. The U.S. federal government’s potential decision to re-enter, withdraw or modify other existing trade agreements or treaties could adversely impact our business, customers, and suppliers by disrupting trade and commercial transactions and adversely affecting the U.S. economy.
In addition, the U.S. federal government has imposed, tariffs on certain foreign goods. For example, in 2018, the U.S. federal government imposed additional tariffs under Section 232 of the Trade Expansion Act of 1962, as amended, on many products including certain aluminum products imported into the United States, which may impact the commercial vehicle market and our supply chain. Moreover, these tariffs, as well as country-specific or product-specific exemptions, may also lead to retaliatory actions from foreign governments that could adversely affect our business. Certain foreign governments, including China and the European Union, have instituted or may consider imposing additional tariffs on certain U.S. goods. Restrictions on trade with foreign countries, imposition of customs duties, or further modifications to U.S. international trade policy have the potential to disrupt our supply chain or the supply chains of our suppliers and to adversely impact our costs, customers, suppliers, and the economy, which could have an adverse effect on our business, prospects, financial condition, and operating results.
We are subject to various environmental and safety laws and regulations that could impose substantial costs upon us and negatively impact our ability to operate our manufacturing facilities if we fail in our efforts to abide by these laws and regulations.
As a manufacturer, producer and seller of battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses, and related technologies, we are subject to numerous environmental, health, and safety laws and regulations in the United States, including laws relating to exposure to, use, handling, storage, and disposal of hazardous materials, and the building, testing and use of batteries and high-voltage systems, and other components, such as HVAC systems. Moreover, we may be subject to additional regulations as we expand our operations internationally. The costs of compliance, including assessing changes to our operations and notices required in our facilities and on our electric transit buses regarding potential hazards could be substantial. In addition, we may be required to manufacture product with alternative technologies and materials that require changes to our engineering, supply and product development programs that could result in significant cost and delays in product introduction. We also may not be successful in complying with such laws and regulations which could impact our ability to sell our products in certain locations, or result in substantial fines and penalties if our products in service are found to be non-compliant with certain laws and regulations. We also expect regulation of electric powertrains will increase over time, and result in increased compliance costs. For example, beginning in 2023, we will need to receive a zero emission powertrain certification in California. In addition, we have indemnified certain of our landlords for any hazardous waste that may be found on or about property that we lease. Furthermore, delays in achieving required certifications may prevent us from selling product in certain markets, and, any violations of applicable environmental and safety laws and regulations may result in substantial fines and penalties, remediation costs, third-party damages, a suspension or cessation of our sales of product or operations, and negative publicity that could harm our business, reputation, prospects, financial condition, and operating results.
Our future success depends on the continuing efforts of our key employees and on our ability to hire, retain, and motivate additional key employees and scale our workforce.
Our future success depends upon the continuing services of our key employees and on our ability to attract and retain members of our management team and other highly skilled employees, including battery and high voltage systems engineers, electric powertrain designers and engineers, vehicle systems and integration engineers, supply chain and quality control employees, sales personnel, service personnel, and software engineers and manufacturing talent. In our key areas of operations, including California, there is increasing competition for individuals with skill sets needed for our business, including specialized knowledge of batteries, electric vehicles, software engineering, and manufacturing engineering and quality control. This competition affects both our ability to retain key employees and hire new ones. Moreover, none of our key employees has an employment agreement for a specific term and any of our employees may terminate his or her employment with us at any time. Our continued success depends upon our continued ability to retain current employees and hire new employees in a timely manner, especially to support our expansion plans and to continue to ramp up our suite of offerings related to commercial vehicle electrification. For example, we started production at our Powered 1 factory in Greer, South Carolina in January 2023, and have needed and will continue to need to hire many people to achieve maximum production there. We are also adding additional production shifts at existing facilities. If we cannot find sufficiently trained staff in a timely manner, our launch of production at this facility could be delayed and adversely impact our business. Additionally, we compete for talent with both large and established companies that have far greater financial resources than we do and start-ups and emerging companies that may promise more attractive growth opportunities.
Furthermore, the reduction in workforce that we implemented in the first quarter of 2023 may yield unintended consequences and costs, such as the loss of institutional knowledge and expertise, employee attrition beyond our intended reduction in force, a reduction in morale among our remaining employees, greater-than-anticipated costs incurred in connection with implementing the restructuring, and the risk that we may not achieve the benefits from the restructuring to the extent or as quickly as we anticipate, all of which may have a material adverse effect on our business, results of operations or financial condition. These restructuring initiatives could place substantial demands on our management and employees, which could lead to the diversion of our management’s and employees’ attention from other business priorities. In addition, we may discover that the workforce reduction and other restructuring efforts will make it difficult for us to pursue new opportunities and initiatives and require us to
hire qualified replacement personnel, which may require us to incur additional and unanticipated costs and expenses.
In addition, new employees often require significant training and, in many cases, take significant time before they achieve full productivity. As a result, we may incur significant costs to attract and retain new employees, including significant expenditures related to salaries and benefits and compensation expenses related to equity awards, and we may lose new employees to our competitors or other companies before we realize the benefit of our investment in recruiting and training them. Moreover, new employees may not be or become as productive as we expect, as we may face challenges in adequately or appropriately integrating them into our workforce and culture. Difficulties in retaining current employees or recruiting new ones could have an adverse effect on our business, prospects, financial condition, and operating results.
Our business relies heavily on our specialized sales personnel and technical sales support to market and sell our products. If we are unable to effectively hire, train, manage, and retain our sales personnel, our business may be adversely impacted.
The success of our business largely depends on our ability to hire, train, and manage our sales personnel who have experience with and connections to the public and other transit agencies and commercial vehicle OEMs that are our current and potential customers. Because we employ a small and specialized sales force, the loss of any member of our sales team or technical sales support professionals could weaken our sales expertise and our customer reach, and adversely affect our business, and we may not be able to find adequate replacements on a timely basis, or at all. Moreover, there are no assurances that we will be able to maintain a sufficient level of sales personnel to effectively meet our needs as our business continues to grow, particularly with respect to Proterra Powered and Proterra Energy.
Competition for sales personnel who are familiar with and trained to sell our products and services continues to be strong. We train our sales personnel to better understand our existing and new product technologies and how they can be positioned against our competitors’ products. We also train our sales personnel to be adept at working with long sales cycles characteristic of public agency customers and commercial vehicle manufacturers, as well as the special requirements attendant to each.
These initiatives are intended to improve the productivity of our sales personnel and our revenue and profitability. It takes time for the sales professionals to become productive following their hiring and training and there can be no assurance that sales representatives will reach adequate levels of productivity, or that we will not experience significant levels of attrition in the future. Measures we implement to improve the productivity may not be successful and may instead contribute to instability in our operations, departures from our sales and technical support organizations, or reduce our revenue, profitability, and harm our business.
If we are unable to obtain bid bonds, performance bonds, or letters of credit required by public transit agencies or other customers, our ability to obtain future projects could be negatively affected.
We have in the past been, and may in the future be, required to provide bid bonds or performance bonds to secure our performance under customer contracts or, in some cases, as a prerequisite to submitting a bid on a potential project. Our continued ability to obtain these bonds will depend primarily upon our capitalization, working capital, past performance, management expertise, reputation and certain external factors, including the overall capacity of the surety market. Surety companies consider these factors in relation to the amount of our awards and their underwriting standards, which may change from time to time. Surety companies also require that we collateralize a percentage of the bond with cash or other form of credit enhancement. With a decreasing number of insurance providers in that market, it may be difficult to find sureties who will continue to provide contract-required bonding on acceptable terms and conditions, or at all. Furthermore, events that affect surety markets generally may result in bonding becoming more difficult to obtain in the future or being available only at a significantly greater cost.
In addition, some of our Proterra Transit and Proterra Energy customers also require collateral guarantees in the form of letters of credit to secure performance or to fund possible damages in the event of default under our contracts with them. If we enter agreements that require the issuance of letters of credit, our liquidity could be negatively impacted. Our inability to obtain adequate bonding or letters of credit and, as a result, to bid or enter
into agreements, could have an adverse effect on our business, prospects, financial condition, and operating results.
We may experience outages and disruptions of our services if we fail to maintain adequate security and supporting infrastructure as we scale our information technology systems.
As we grow our business, we expect to continue to invest in our existing information technology systems, including data centers, network services, data storage, and database technologies, and cybersecurity technologies both to assist us in our business and to better provide our fleet-scale, high-power charging solutions and software services to our customers. Creating the appropriate information technology support systems for our business is time intensive, expensive, and complex. Our implementation, maintenance, and improvement of these systems may create inefficiencies, operational failures and increased vulnerability to cyber-attacks. Moreover, there are inherent risks associated with developing, improving, and implementing new information technology systems, including the disruption of our current data management, procurement, manufacturing, execution, finance, supply chain, sales, and service processes. As we continue to grow our services that rely on collecting and analyzing customer telematics and charging data, our exposure to information technology risks will increase. These risks may affect our ability to manage our data and inventory, procure parts or supplies or manufacture, sell, deliver, and service electric transit buses, or achieve and maintain compliance with applicable regulations.
We also maintain information technology measures designed to protect us against system security risks, data breaches, and cyber-attacks. Cyber-attacks could include denial-of-service attacks impacting customer service availability and reliability, the exploitation of software vulnerabilities in internet facing applications, social engineering of system administrators (for example, tricking company employees into releasing control of their systems to a hacker), or the introduction of computer viruses or malware into our systems to steal confidential or proprietary data. In 2020, we were the victim of a successful social engineering attack that resulted in the diversion of significant funds we intended to pay a supplier to a fraudulent account. In the third quarter of 2021, human error also resulted in a server for our Valence platform being accessible to the public for a short period of time, allowing unauthorized access to telematics data and, resulting in the deletion of a limited amount of data used by employees and customers for report functionality. Cyber-attacks of increasing sophistication may be difficult to detect and could result in the theft of our funds, intellectual property and data. In addition, we are vulnerable to unintentional errors or malicious actions by persons who have authorized access to our systems but exceed the scope of their access rights, or unintentionally or intentionally alter parameters or otherwise interfere with the intended operations of our technology services. The steps we take to increase the reliability, integrity, and security of our systems as they scale may be expensive and may not prevent system failures or unintended vulnerabilities resulting from the increasing number of persons with access to our systems, complex interactions within our technology platform and the increasing number of connections with third-party partners’ and vendors’ technology. Operational errors or failures or successful cyber-attacks could compromise our proprietary information, the quality of our services, and our ability to perform for our customers, resulting in damage to our reputation, which could have an adverse effect on our business, prospects, financial condition, and operating results. In addition, these events could increase the risk of claims alleging that we do not comply with applicable laws and regulations, subjecting us to potential liability and regulatory penalties under privacy laws protecting personal information.
If we update our manufacturing equipment more quickly than expected, we may have to shorten the useful lives of any equipment to be retired as a result of any such update, and the resulting acceleration in our depreciation could negatively affect our financial results.
We have invested and expect to continue to invest significantly in what we believe is state-of-the-art tooling, machinery, and other manufacturing equipment for production of our battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses, and related technologies. We depreciate the cost of such equipment and electric transit buses over their expected useful lives. However, manufacturing and commercial vehicle technology may evolve rapidly, and we may decide to update our manufacturing process with more advanced equipment or tooling. Moreover, as our engineering and manufacturing expertise and efficiency increase, we may be able to manufacture our products using less of our installed equipment. The useful life of any equipment that would be retired early as a result would be shortened, causing the depreciation on such equipment to be accelerated, and our operating results could be negatively impacted.
Our business may be adversely affected by workforce disruptions.
Our production employees in our City of Industry facility are represented by a union and we are party to a collective bargaining agreement that will expire in 2023 as we exit the City of Industry facility and no longer employ the employees that constitute the bargaining unit. Our other employees are not represented by a union, though it is common throughout the commercial vehicle industry for employees to belong to a union, and if more of our employees decide to join or form a labor union, we may become party to additional collective bargaining agreements, which could result in higher employee costs, higher administrative and legal costs, and increased risk of work stoppages. It is also possible that a union seeking to organize our facilities may mount a corporate campaign, resulting in negative publicity or other actions that require attention by our management team and our employees. Negative publicity, work stoppages, or strikes by unions could have an adverse effect on our business, prospects, financial condition, and operating results.
Moreover, some of our suppliers and vendors, including freight companies, have workforces represented by unions and are subject to collective bargaining agreements. The failure of our suppliers and vendors to successfully negotiate collective bargaining agreements could result in disruptions to our supply chain, manufacturing, and sale of our electric transit buses. Such delays could have an adverse impact on our business, prospects, financial condition, or operating results.
Any potential future international expansion will subject us to additional costs and risks that could harm our business, including unfavorable regulatory, political, tax, and labor conditions, and our potential future efforts to expand internationally may not be successful.
Should we choose to expand our business internationally in the future and establish business relationships with new international partners, we may be subject to legal, political, and regulatory requirements and social and economic conditions that may be very different from those affecting us domestically. For example, we have expanded our transit business into Canada. As we expanded into Canada, our electric transit buses were required to comply with Canadian Motor Vehicle Safety Standards, which differ from the FMVSS. Funding for transit bus procurement from certain provincial governments in Canada also requires compliance with Canadian Content requirements, which will require different supply chain partners than those that we rely on for our electric transit buses sold in the U.S. market and assembly of certain components or subcomponents in Canada. In addition, we are providing products and services to OEMs in Australia and Western Europe, and as we expand our Proterra Powered or Proterra Energy business internationally, or should we choose to further expand our Proterra Transit business outside the United States and Canada, we may face a number of risks associated with international business activities that may increase our costs, impact our ability to sell our electric transit buses, and require significant management attention. These risks include:
•conforming our products to various international regulatory and safety requirements as well as charging and other electric infrastructures;
•difficulty in establishing, staffing, and managing foreign operations and service networks;
•challenges in attracting international customers;
•preferences of foreign nations for domestically manufactured products;
•our ability to enforce our contractual rights;
•longer sales and collection cycles in some countries;
•weaker intellectual property protection in some countries;
•compliance with multiple, potentially conflicting and changing governmental laws, regulations and permitting processes, including environmental, product safety, banking, employment, and tax;
•compliance with U.S. and foreign anti-bribery laws including the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), and the UK Bribery Act of 2010;
•currency exchange rate fluctuations;
•regional economic and political instability, including as a result of acts of war or terrorism in countries where we may operate;
•restrictions on repatriations of earnings;
•trade restrictions, customs regulations, tariffs, and price or exchange controls;
•increased competition from local providers of similar products;
•increased costs to establish and maintain effective controls at foreign locations; and
•overall higher costs of doing business internationally.
As a result of these risks, any potential future international expansion efforts that we may undertake may not be successful and may incur significant operational expenses. Our failure to manage these risks and challenges successfully could have an adverse effect on our business, prospects, financial condition, and operating results.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
The consummation of the Chapter 11 plan may have an unfavorable tax impact on us, and we may be limited in the portion of net operating loss (“NOL”) carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. As of December 31, 2022, we had U.S. federal NOL carryforwards and state NOL carryforwards of approximately $729.5 million and $531.1 million, respectively, which if not utilized will begin to expire for federal and state tax purposes beginning in 2030 and 2023, respectively. Federal NOLs generated after December 31, 2017 have an indefinite carryover period, and may be utilized to offset no more than 80% of taxable income annually.
As previously disclosed, the Company is in the process of a Bankruptcy Court-approved bidding process that may result in the sale of all or substantially all of its assets. The potential gain or loss recognized with respect to these transactions will depend on, among other things, (a) the value and tax basis of the assets sold; (b) complex modeling considerations under certain U.S. Department of Treasury regulations and (c) the amount of cancellation of indebtedness income realized, if any, in connection with the Chapter 11 plan. Our NOLs (and other tax attributes) may be subject to use in connection with the implementation of any bankruptcy Chapter 11 plan or subject to reduction as a result of any cancellation of indebtedness income arising in connection with the implementation of any bankruptcy Chapter 11 plan. To the extent NOL attributes remain upon emergence from bankruptcy, realization of NOL carryforwards depends on future income, and there is a risk that these carryforwards could expire unused and be unavailable to offset future income tax liabilities.
In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income or taxes may be limited. While we have obtained entry of an order from the Bankruptcy Court limiting certain equity trades which may otherwise trigger an ownership change, we may experience ownership changes in the future, including as a result of the consummation of a Chapter 11 plan.
Accordingly, there can be no assurance that we will be able to utilize our income tax NOL carryforwards or other tax attributes to offset future taxable income, even if any such tax attributes survive any bankruptcy Chapter 11 plan.
New tax laws or unanticipated changes in existing tax laws and regulations could adversely affect us.
New legislation or regulations that could affect our tax burden could be enacted by any governmental authority. United States federal legislation affecting the tax laws was enacted in December 2017 (the “Tax Cuts and Jobs Act” or “TCJA”), March 2020 (the “Families First Coronavirus Response Act”), March 2020 (the “CARES
Act”), December 2020 (“Consolidated Appropriations Act, 2021”) and August 2022 (the “Inflation Reduction Act” or “IRA”).
We continue to examine the impact that this federal tax legislation may have on our business. The TCJA is a far- reaching and complex revision to the U.S. federal income tax laws with disparate and, in some cases, countervailing impacts on different categories of taxpayers and industries, and will require subsequent rulemaking and interpretation in a number of areas. The long-term impact of the TCJA on the overall economy, the industries in which we operate and our and our partners’ businesses cannot be reliably predicted. For example, beginning in 2022, the TCJA eliminates the option to deduct research and development expenditures in the year they were incurred and instead requires taxpayers to capitalize and amortize these expenditures over five or fifteen years pursuant to Section 174 of the Code. Although there has been proposed legislation that would repeal or defer the capitalization requirement to later years, we have no assurance that the provision will be repealed or otherwise modified. There can be no assurance that the TCJA will not negatively impact our operating results, financial condition, and future business operations. The estimated impact of the TCJA is based on our management’s current knowledge and assumptions, following consultation with our tax advisors. Because of our valuation allowance in the United States, ongoing tax effects of the Act are not expected to materially change our effective tax rate in future periods.
On August 16, 2022, President Biden signed the IRA, which became effective beginning in 2023. The IRA includes implementation of a new alternative minimum tax, an excise tax on stock buybacks, significant tax incentives for energy and climate initiatives and other provisions. These new incentives may increase competition.
The IRA contains certain expanded tax credits and other financial incentives designed to promote the development of certain domestic clean energy projects. We continue to evaluate the extent of benefits available to us, which we expect will favorably impact our results of operations in future periods. For example, we currently expect to qualify for the advanced manufacturing production credit under Section 45X of the Code, which provides certain specified benefits for domestic production and sale of qualifying solar, wind, inverter, and battery components. Such credits may be refundable or transferable to third parties and are available from 2023 to 2032, subject to phase down beginning in 2030. In order to receive the full value of such credits and incentives, we must satisfy a number of requirements. If we fail to satisfy these requirements, the value of the credits may be limited, and we may become subject to penalties. Additionally, there are currently several critical and complex aspects of the IRA with respect to which technical guidance and regulations from the Internal Revenue Service (“IRS”) and U.S. Treasury Department are needed, including, but not limited to, eligibility for and calculation of the amount of such tax credits. If the IRS and U.S. Treasury Department issue additional guidance that limits the availability of such credits, we may not be able to take full advantage of the tax benefits of the IRA as expected. There is also uncertainty if IRA incentives may be reduced or modified in the future.
We use our best judgment in attempting to quantify and reserve for these tax obligations. However, a challenge by a taxing authority, our ability to utilize tax benefits such as NOL carryforwards or tax credits, or a deviation from other tax-related assumptions may cause actual financial results to be different from previous estimates. For example, there are various provisions of the IRA that remain subject to further guidance from the Treasury Department and the Internal Revenue Service (“IRS”). We have invested resources to interpret the IRA and used our best judgment to determine its application to our business, but our interpretation may prove to be incorrect or change. Though we regularly assess the likelihood of adverse outcomes from such examinations and the adequacy of our provision for income taxes and tax reserves, there can be no assurance that such provision is sufficient and that a determination by a taxing authority will not have an adverse effect on our net income.
Our business is subject to the risk of earthquakes, fire, power outages, floods, and other catastrophic events and to interruption by man-made problems such as terrorism.
We maintain production facilities in Northern and Southern California and South Carolina. Any of our facilities may be harmed or rendered inoperable by disasters, including earthquakes, tornadoes, hurricanes, wildfires, floods, nuclear disasters, geopolitical events, acts of terrorism or other criminal activities, infectious disease outbreaks (such as COVID-19), and power outages. In the event of natural disaster or other catastrophic event, we may be unable to continue our operations and may endure production interruptions, reputational harm, delays in manufacturing, development and testing of our battery systems, electrification and charging solutions, fleet and energy management systems, electric transit buses, and related technologies, and loss of critical data, all of
which could have an adverse effect on our business, prospects, financial condition, and operating results. Moreover, our corporate headquarters and one of our current battery production facilities are in the San Francisco Bay Area, and we have facilities in Los Angeles County, regions known for seismic activity and potentially subject to catastrophic fires. If our facilities are damaged by such natural disasters or catastrophic events, our repair or replacement would likely be costly and any such efforts would likely require substantial time that may affect our ability to produce and deliver our products. For example, in July 2015, we experienced a fire in our Greenville, South Carolina manufacturing facility and then-headquarters, in which substantially all of our computer equipment, furniture and fixtures, leasehold improvements, work in progress, raw material, and finished goods inventories were damaged or destroyed. While we were insured for our losses and resumed manufacturing shortly thereafter, the disruption temporarily impacted our business. Similarly, any future disruptions in our operations could negatively impact our business, prospects, financial condition, and operating results and harm our reputation. In addition, we may not carry enough insurance to compensate for the losses that may occur.
Risks Related to Regulation
Failure to comply with anti-corruption, anti-money laundering laws, and sanctions laws,import and export controls, including the FCPA and similar laws associated with our activities outside of the United States, could subject us to penalties and other adverse consequences.
We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the UK Bribery Act of 2010, U.S. and foreign laws relating to import and export controls, economic sanctions, including the laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, and may be subject to other anti-bribery, anti-money laundering, and sanctions laws in countries in which we conduct activities. We face significant risks if we fail to comply with the FCPA and other anti-corruption laws that prohibit companies and their employees and third-party intermediaries from promising, authorizing, offering, or providing, directly or indirectly, improper payments or benefits to foreign government officials, political parties, and private sector recipients for the purpose of obtaining or retaining business, directing business to any person, or securing any advantage. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. We may have direct or indirect interactions with officials and employees of government agencies or state- owned or affiliated entities and we can be held liable for the corrupt or other illegal activities of these third- party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. We have implemented an anti-corruption compliance program but cannot assure you that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible.
Our products and solutions are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and the economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls, as well as similar laws in other countries in which we conduct business. Exports of our products, services, and technology must be made in compliance with these laws and regulations. In addition, these laws may restrict or prohibit altogether the sale or supply of certain of our products, services, and technologies to certain governments, persons, entities, countries, and territories, including those that are the target of comprehensive sanctions, unless there are license exceptions that apply or specific licenses are obtained. Any future changes in export control, import, or economic sanctions laws and regulations may adversely impact our ability to sell our products, services, and technologies in certain markets or, in some cases, prevent the export or import of our products, services, and technologies to or from certain countries, governments, or persons altogether, which could adversely affect our business, results of operations, and growth prospects.
Any violation of the FCPA, other applicable anti-corruption laws, anti-money laundering, import and export controls, economic sanctions laws and other applicable laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, or severe criminal or civil sanctions, which could have an adverse effect on our business, prospects, financial condition, and operating results. In addition, responding to any enforcement action may result in a significant diversion of management’s attention and resources, significant defense costs, and other professional fees.
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain additional executive management and qualified board members.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an emerging growth company. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future or engage outside consultants, which would increase our costs and expenses.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve or otherwise change over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards (or changing interpretations of them), and this investment may result in increased selling, general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be adversely affected. We also expect that being a public company and the associated rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, compensation committee, and nominating and governance committee, and qualified executive officers.
As a result of disclosure of information in the filings required of a public company, our business and financial condition is more visible, which may result in threatened or actual litigation, including by competitors. For example, two securities class actions have been filed against the Company and certain of its current and former directors and officers, asserting claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Plaintiffs in both actions allege that Defendants made misleading statements about the Company’s financial condition and liquidity. The Company and the individual defendants deny all allegations of wrongdoing in the complaints and intend to vigorously defend the matter. Since the cases are at an early stage, the Company is unable to predict the ultimate outcome of the lawsuits and cannot reasonably estimate the potential loss or range of loss the Company may incur. See “Legal Proceedings” for further details regarding these class actions. If these or similar claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results. In addition, as a result of our disclosure obligations as a public company, we have reduced flexibility and are under pressure to focus on short-term results, which may adversely affect our ability to achieve long-term profitability.
Regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
Pursuant to the Dodd-Frank Act, the SEC has adopted requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third
parties. These requirements require companies to perform due diligence, disclose, and report whether such minerals originate from the Democratic Republic of Congo and adjoining countries, or come from recycled or scrap sources. These requirements could adversely affect the sourcing, availability, and pricing of minerals used in the manufacture of heavy-duty electric vehicles, including our products. While these requirements continue to be subject to administrative uncertainty, we will incur additional costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all of the components of our products are certified as conflict mineral free.
Risks Related to our Intellectual Property
Failure to protect our intellectual property could adversely affect our business.
Our success depends in large part on our proprietary technology, software and data. We rely on various intellectual property rights, including patents, copyrights, trademarks, and trade secrets, as well as confidentiality provisions and contractual arrangements, and other forms of statutory protection to protect our proprietary rights. If we do not protect and enforce our intellectual property rights adequately and successfully, our competitive position may suffer, which could adversely affect our business, prospects, financial condition, and operating results.
Our pending patent or trademark applications may not be approved, or competitors or others may challenge the validity, enforceability, or scope of our patents, the scope of our copyrights, the registrability of our trademarks or the trade secret status of our proprietary information. There can be no assurance that additional patents will be issued or that any issued patents will provide significant protection for our intellectual property or for those portions of our proprietary technology and software that are the most key to our competitive positions in the marketplace. In addition, our patents, copyrights, trademarks, trade secrets, and other intellectual property rights may not provide us a significant competitive advantage. There is no assurance that the forms of intellectual property protection that we seek, including business decisions about when and where to file patents and when and how to maintain and protect copyrights, trade secrets, license and other contractual rights will be adequate to protect our business.
Moreover, recent amendments to developing jurisprudence regarding and current and possible future changes to intellectual property laws and regulations, including U.S. and foreign patent, copyright, trade secret and other statutory law, may affect our ability to protect and enforce our intellectual property rights and to protect our proprietary technology, software and data. In addition, the laws of some countries do not provide the same level of protection for our intellectual property as do the laws of the United States. As we expand our international activities, our exposure to unauthorized copying and use of our technology and proprietary information will likely increase. Despite our precautions, our intellectual property is vulnerable to unauthorized access and copying through employee or third-party error or actions, including malicious state or state-sponsored actors, theft, hacking, cybersecurity incidents, and other security breaches and incidents, and such incidents may be difficult to detect or unknown for a significant period of time. It is possible for third parties to infringe upon or misappropriate our intellectual property, to copy or reverse engineer our bus and battery pack designs, and to use information that we regard as proprietary to create products and services that compete with ours. Effective intellectual property protection may not be available to us in every country in which we may sell our electric transit buses and related or other products and services. In addition, many countries limit the enforceability of patents against certain third parties, including government agencies or government contractors, or make patents subject to compulsory licenses to third parties under certain circumstances. In these countries, patents may provide limited or no benefit.
Intellectual property laws, procedures, and restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed, or misappropriated. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States, and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology.
We enter into confidentiality and invention assignment or intellectual property ownership agreements with our employees and contractors and enter into confidentiality agreements with other third parties. We cannot ensure that these agreements, or all the terms thereof, will be enforceable or compliant with applicable law, or otherwise effective in controlling access to, use of, reverse engineering, and distribution of our proprietary information or in effectively securing exclusive ownership of intellectual property developed by our current or former employees and contractors. Further, these agreements with our employees, contractors, and other parties may not prevent other parties from independently developing technologies, products and services that are substantially equivalent or superior to our technologies, products and services.
We may need to spend significant resources securing and monitoring our intellectual property rights, and we may or may not be able to detect infringement by third parties. Our competitive position may be adversely impacted if we cannot detect infringement or enforce our intellectual property rights quickly or at all. In some circumstances, we may choose not to pursue enforcement because an infringer has a dominant intellectual property position, because of uncertainty relating to the scope of our intellectual property or the outcome of an enforcement action, or for other business reasons. In addition, competitors might avoid infringement by designing around our intellectual property rights or by developing non-infringing competing technologies. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management and our development teams and could result in the impairment or loss of portions of our intellectual property. Further, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims attacking the scope, validity, and enforceability of our intellectual property rights, or with counterclaims and countersuits asserting infringement by us of third-party intellectual property rights. Our failure to secure, protect, and enforce our intellectual property rights could adversely affect our brand and our business, any of which could have an adverse effect on our business, prospects, financial condition, and operating results.
We may be subject to intellectual property rights claims or other litigation by third parties, which could be costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.
Third parties may assert claims of infringement of intellectual property rights or violation of other statutory, license or contractual rights in technology, software or data against us or against our customers for which we may be liable or have an indemnification obligation. Any such claim by a third party, even if without merit, could cause us to incur substantial costs defending against such claim and could distract our management and our development teams from our business.
Although third parties may offer a license to their technology, software or data, the terms of any offered license may not be acceptable and the failure to obtain a license or the costs associated with any license could cause our business, prospects, financial condition, and operating results to be adversely affected. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology, software or data licensed to us. Alternatively, we may be required to develop non-infringing technology, software or data which could require significant effort and expense and ultimately may not be successful. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that prevents us from selling certain products or performing certain services or that requires us to pay substantial damages, including treble damages if we are found to have willfully infringed such claimant’s patents, copyrights, trade secrets or other statutory rights, royalties or other fees. Any of these events could have an adverse effect on our business, prospects, financial condition, and operating results.
Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.
We have in the past and may in the future become involved in private actions, collective actions, investigations, and various other legal proceedings by customers, employees, suppliers, competitors, government agencies, or others. The results of any such litigation, investigations, and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant management time, and divert significant resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition, and operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
As previously disclosed by the Company, the filing of the Bankruptcy Petitions constituted an event of default that accelerated the Company’s obligations under the Senior Credit Facility and the Convertible Notes. As a result of the bankruptcy filing, the outstanding principal and interest thereunder became immediately due and payable. Any efforts to enforce such payment obligations under the debt instruments set forth above are automatically stayed under the Bankruptcy Code. However, the Convertible Notes continue to accrue PIK and cash interest under the cash collateral order. See Note 5, Debt, for details.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits.
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| | | | Incorporated by Reference |
| Exhibit Number | | Description | | Form | | Exhibit | | Filing Date |
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10.1+ | | | | 10-Q | | 10.1 | | 8/9/2023 |
10.2+ | | | | 10-Q | | 10.2 | | 8/9/2023 |
10.3+ | | | | 10-Q | | 10.3 | | 8/9/2023 |
31.1* | | | | | | | | |
| 31.2* | | | | | | | | |
| 32.1** | | | | | | | | |
| 32.2** | | | | | | | | |
101.INS* | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | |
101.SCH* | | Inline XBRL Taxonomy Extension Schema Document. | | | | | | |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | |
101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document. | | | | | | |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | | | | | | |
| 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | |
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| + | | Indicates a management contract or compensatory plan, contract or arrangement. | | | | | | |
| * | | Filed herewith | | | | | | |
| ** | | Furnished herewith | | | | | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| PROTERRA INC |
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Date: November 6, 2023 | By: | /s/ Jeffrey D. Embt |
| Name: | Jeffrey D. Embt |
| Title: | Chief Accounting Officer |
| | (On behalf of the Registrant and as Principal Accounting Officer) |
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| By: | /s/ David S. Black |
| Name: | David S. Black |
| Title: | Chief Financial Officer |
| | (On behalf of the Registrant and as Principal Financial Officer) |
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