Proterra: Debt Covenant Violations, Elevated Cash Burn Raise Fears, Sell

On Wednesday, battery systems and electric transit bus manufacturer Proterra Inc. (NASDAQ:PTRA) reported disappointing fourth quarter results, with poor gross margin performance and elevated cash burn.

While we are excited about the significant potential growth we believe our backlog has us poised for in the years ahead, we are disappointed with our 2022 gross margins, which were pressured mostly by the impact of inflation, supply chain disruptions, supplier penalties, underutilization of bus capacity, inventory and year-end accounting true-ups, and start-up costs from our new Powered 1 factory.

Even worse, the company warned of ongoing covenant violations related to $170.8 million in convertible notes and the resulting requirement to negotiate another waiver or a more comprehensive solution with debt holders (emphasis added by author):

As reported in our 8-K filed on February 17, 2023 with respect to our outstanding debt, we received a limited waiver under our Convertible Notes of the minimum liquidity covenant (described in the 8-K) for the quarter ending December 31, 2022. We also expect that our audit report, which will be included in our Annual Report on Form 10-K for 2022, will contain a going concern qualification which would be an event of default under our debt agreements. As a result, we obtained a prospective limited waiver of the applicable covenants under our Convertible Notes until March 31, 2023 with respect to the audit report to be included in our 2022 Annual Report on Form 10-K. If we are unable to obtain a waiver beyond March 31, 2023, we will be in default under our Convertible Notes. In addition, we may not satisfy the minimum liquidity covenant for the quarter ended March 31, 2023, which would also be a default under our debt agreements. We are working with our debt holders to come to a resolution; but we cannot guarantee a resolution on a timely basis, on favorable terms or at all.

Please note that the anticipated going concern qualification would also constitute an event of default under the company's up to $75 million senior secured credit facility, which includes a $20 million letter of credit sub-line with $15.9 million outstanding as of the end of Q3.

After recording negative free cash flow of $116.7 million in the fourth quarter, Proterra ended the year with $298.1 million in unrestricted cash, cash equivalents and short-term investments.

While the company has taken measures to reduce cash consumption, the ramp-up of its new, large-scale battery manufacturing facility called "Powered 1" is expected to result in additional gross losses in the first half of the year.

We establish full-year 2023 guidance for revenue in a range of $450 million to $500 million, representing anticipated growth of between 45% and 61% year-over-year. Though we expect initial production inefficiencies and underutilization at Powered 1 to translate into gross losses in the first half of the year, we expect positive gross margin in the second half of 2023. In addition, following our workforce restructuring announced in January 2023, we expect operating expenses to decline approximately $15 million in 2023. We also expect capital expenditures of approximately $25 million for the full year 2023.

Assuming revenues of $200 million and a gross loss of $30 million for the first half of the year and applying management's projections for reductions in operating expenses and capital expenditures, Proterra's H1 cash burn would be in a range of $120 million to $130 million.

Quite frankly, with Proterra's remaining liquidity deteriorating quickly, this looks like an opportune time for debt holders to declare an event of default and demand immediate repayment.

The move would likely result in a near-term bankruptcy filing to provide Proterra more time to restructure its debt obligations and raise additional capital with either current convertible note holders or new capital providers likely to become the new owners of the business.

At least in my opinion, there are two likely outcomes for Proterra:

1. The company manages to come to terms with lenders but this will likely require a material near-term equity raise.
2. Lenders declare an event of default and demand repayment with the company likely to file for bankruptcy in this case.

Apparently, this would leave equity holders in a lose-lose situation.

That said, major dilution would still be a better outcome than bankruptcy, which might very well result in a complete wipe-out for Proterra's already badly stricken equity holders.

Bottom Line

Due to multiple debt covenant violations and rapidly deteriorating liquidity, Proterra Inc. appears to be well on its way to become the next former SPAC failure.

Particularly in the current environment, lenders are very likely to apply increased scrutiny with regards to waiving debt covenant violations thus further increasing near-term bankruptcy risk.

Proterra Inc. equity holders appear to be stuck between a rock and a hard place as they are likely to incur substantial near-term dilution or even face a potential wipe-out in bankruptcy.

Given the apparent lose-lose situation, Proterra Inc. investors should consider selling existing positions and moving on.