SPRU 10-Q
Spruce Power Holding Corp (SPRU)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM
(Mark One)
FOR
THE QUARTERLY PERIOD ENDED
OR
THE TRANSITION PERIOD FROM TO
Commission
File Number
(Exact name of Registrant as specified in its Charter)
(State
or other jurisdiction of | (I.R.S. Employer Identification Number) |
| (Address of principal executive offices) | (Zip Code) |
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telephone number, including area code:
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.
Indicate
by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
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.
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As
of November 10, 2021,
TABLE OF CONTENTS
i
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes 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”) that relate to future events or our future financial performance regarding, among other things, the plans, strategies and prospects, both business and financial, of the Company. These statements are based on the beliefs and assumptions of XL Fleet Corp.’s (the “Company”) management team. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, the Company cannot assure you that it 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,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,” “anticipates” or “intends” or similar expressions. The forward-looking statements are based on business plans prepared by, and are the responsibility of, XL Fleet Corp.’s management.
Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
| ● | our financial and business performance, including financial projections and business metrics; |
| ● | our ability to pursue sales opportunities during the ongoing global microchip shortage and in the face of other global supply chain constraints; |
| ● | our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans; |
| ● | the implementation, market acceptance and success of our business model; |
| ● | our growth may not be sustainable and depends on our ability to attract and retain customers; |
| ● | our ability to scale in a cost-effective manner; |
| ● | developments and projections relating to our competition and industry; |
| ● | our ability to realize the anticipated benefits of the acquisition of World Energy Efficiency Services, LLC or future acquisition targets; |
| ● | the impact of health epidemics, including the novel coronavirus (“COVID-19”) pandemic, on our business and supply chain and the actions we may take in response thereto; |
| ● | our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others; |
| ● | our ability to obtain funding for our operations; |
| ● | our business, expansion plans and opportunities; and |
| ● | the outcome of any known and unknown litigation and regulatory proceedings. |
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this Quarterly Report on Form 10-Q are more fully described in Item 1A under the heading “Risk Factors.” and elsewhere in this Quarterly Report on Form 10-Q and the risk factors set forth in Part I, Item 1A Risk Factors, within our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2021, as amended in our filing on Form 10-K/A filed with the SEC on May 17, 2021, which, as so amended, we refer to as the Annual Report and the risk factors set forth in Part II, Item 1A under the heading “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 filed with the SEC on May 17, 2021 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, filed with the SEC on August 13, 2021. These factors are not exhaustive. Other sections of this Quarterly Report on Form 10-Q, such as the description of our business set forth in Item 1 and our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 describe additional factors that could adversely affect the business, financial condition or results of operations of the XL Fleet Corp. and its consolidated subsidiaries. New risk factors emerge from time to time, and it is not possible to predict all such risk factors, nor can the Company assess the impact of all such risk factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements, which speak only as of the date hereof. All forward-looking statements attributable to XL Fleet Corp. or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. XL Fleet Corp. undertakes no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
We were originally known as Pivotal Investment Corporation II, or Pivotal. On December 21, 2020, Pivotal consummated the merger of its wholly-owned subsidiary with and into XL Hybrids, Inc., pursuant to a Merger Agreement, among Pivotal, Pivotal’s subsidiary and XL Hybrids, Inc. (the “Business Combination”). In connection with the consummation of the Business Combination, Pivotal changed its name to XL Fleet Corp.
This report includes certain registered trademarks, including trademarks that are the property of the Company and its affiliates. This report also includes other trademarks, service marks and trade names owned by the Company or other persons. All trademarks, service marks and traded names included herein are the property of their respective owners. Use or display by us of other parties’ trademarks, trade dress, or products in this report is not intended to, and does not, imply a relationship with, or endorsements or sponsorship of, us by the trademark or trade dress owners.
ii
Part I - Financial Information
Item 1. Financial Statements
XL Fleet Corp.
Unaudited Condensed Consolidated Balance Sheets
September 30, 2021 and December 31, 2020
| As of | ||||||||
| September 30, | December 31, | |||||||
| (In thousands, except share and per share amounts) | 2021 | 2020 | ||||||
| (audited) (restated) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Right-of-use asset | ||||||||
| Investment in convertible note | - | |||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | $ | ||||||
| Accounts payable | ||||||||
| Lease liability, current | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net of current portion | ||||||||
| Deferred revenue | ||||||||
| Lease liability, non-current | ||||||||
| Warrant liabilities | ||||||||
| Contingent consideration | ||||||||
| New market tax credit obligation(1) | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ equity | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
| (1) |
See notes to unaudited condensed consolidated financial statements.
1
XL Fleet Corp.
Unaudited Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2021 and 2020
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| (In thousands, except per share and share amounts) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| (restated) | ||||||||||||||||
Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling, general, and administrative expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income) expense: | ||||||||||||||||
| Interest expense, net | ||||||||||||||||
| Loss on extinguishment of debt | ||||||||||||||||
| Loss on asset disposal | ||||||||||||||||
| Change in fair value of obligation to issue shares of common stock to sellers of World Energy | ( | ) | ( | ) | ||||||||||||
| Change in fair value of warrant liability | ( | ) | ( | ) | ||||||||||||
| Change in fair value of convertible notes payable derivative liability | ( | ) | ||||||||||||||
| Other income | ( | ) | ( | ) | ||||||||||||
| Net (loss) income | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Net (loss) income per share, basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Net (loss) income per share, diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Weighted-average shares outstanding, basic | ||||||||||||||||
| Weighted-average shares outstanding, diluted | ||||||||||||||||
See notes to unaudited condensed consolidated financial statements.
2
XL Fleet Corp.
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the Three and Nine Months Ended September 30, 2021 and 2020
| For the Three and Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| (In thousands, except share amounts) | Shares | Amount | Capital | Deficit | Equity | |||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Exercise of warrants | ||||||||||||||||||||
| Exercise of Public warrants | ||||||||||||||||||||
| Settlement of warrant liability upon exercise of warrants | - | |||||||||||||||||||
| Settlement of warrant liability upon call of warrants | - | |||||||||||||||||||
| Proceeds from PIC shares recapitalization | - | |||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Net Income | - | |||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Exercise of stock options | ||||||||||||||||||||
| Issuance of shares in business combination with World Energy | ||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Exercise of stock options | ||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| For the Three and Nine Months Ended September 30, 2020 | ||||||||||||||||||||
| Additional | Stockholders’ | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | (Deficit) | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Exercise of warrants | ||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at June 30, 2020 (restated) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Exercise of warrants | ||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance at September 30, 2020 (restated) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
See notes to unaudited condensed consolidated financial statements.
3
XL Fleet Corp.
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2021 and 2020
| Nine Months Ended September 30, | ||||||||
| (In thousands) | 2021 | 2020 | ||||||
| (restated) | ||||||||
| Operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Bad debt expense | ||||||||
| Depreciation and amortization expense | ||||||||
| Contingent consideration | ( | ) | ||||||
| Change in fair value of obligation to issue shares of common stock to sellers of World Energy | ( | ) | ||||||
| Fair value change of derivative liability | ( | ) | ||||||
| Loss on extinguishment of debt | ||||||||
| Loss on disposal of assets | ||||||||
| Change in operating right-of-use assets | ||||||||
| Interest on finance leases | ||||||||
| Debt discount | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Inventory, net | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Deferred revenue | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Payments to acquire net assets of World Energy, net of cash acquired | ( | ) | ||||||
| Purchase of convertible note | ( | ) | ||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Proceeds from the issuance of subordinated convertible promissory notes | ||||||||
| Proceeds from paycheck protection program | ||||||||
| Repayments of revolving line of credit | ( | ) | ||||||
| Repayments of debt | ( | ) | ( | ) | ||||
| Repayments under financing leases | ( | ) | ||||||
| Proceeds from revolving line of credit | ||||||||
| Proceeds from the exercise of warrants | ||||||||
| Proceeds from recapitalization of PIC shares | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from exercise of Public Warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents and restricted cash: | ( | ) | ||||||
| Cash, cash equivalents, and restricted cash at beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Supplemental disclosures of noncash investing and financing information: | ||||||||
| Settlement of warrant liability upon exercise of Public Warrants | $ | $ | ||||||
| Settlement of warrant liability upon call of warrants | $ | $ | ||||||
| Reduce derivative liability for extinguishment of convertible notes payable | $ | $ | ( | ) | ||||
| Increase derivative liability for issuance of convertible notes payable | $ | $ | ||||||
| Equipment financing | $ | $ | ||||||
See notes to unaudited condensed consolidated financial statements.
4
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 1. Organization and Description of Business
Description of Business:
Merger and Reorganization: On December 21, 2020, privately held XL Hybrids, Inc., a Delaware corporation, (“Legacy XL”) consummated the merger pursuant to that certain Agreement and Plan of Reorganization, dated as of September 17, 2020 (the “Merger Agreement”), by and among Pivotal Investment Corporation II (“Pivotal”), PIC II Merger Sub Corp., a Delaware corporation and wholly owned subsidiary of Pivotal (“Merger Sub”), and Legacy XL. Pursuant to the terms of the Merger Agreement, a business combination between Legacy XL and Pivotal was effected through the merger of Merger Sub with and into Legacy XL, with Legacy XL surviving as a wholly-owned subsidiary of Pivotal (the “Merger” and, collectively with the other transactions described in the Merger Agreement, the “Business Combination”). In connection with the closing of the Business Combination, Pivotal Investment Corporation II changed its name to XL Fleet Corp.
Acquisition of World Energy: On May 17, 2021 (“Closing
Date”), the Company acquired
Purchase of eNow Convertible Note: On July 15, 2021, XL Fleet purchased a minority interest in eNow Inc. (“eNow”), a developer of solar and battery power systems that will enable fully-electric transport refrigeration units (eTRUs) for Class 8 commercial trailers. In connection with this investment, XL Fleet entered into a development and supply agreement with eNow (See Note 5).
COVID-19 Worldwide Pandemic: On March 11, 2020, the World Health Organization characterized the outbreak of the novel coronavirus (“COVID-19”) as a global pandemic and recommended containment and mitigation measures. Since then, extraordinary actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world. These actions include travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.
5
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 1. Organization and Description of Business, continued
COVID-19 Worldwide Pandemic, continued:
Consistent with the actions taken by governmental authorities, the Company has taken appropriately cautious steps to protect its workforce and support community efforts. As part of these efforts, and in accordance with applicable government directives, beginning in late March 2020, the Company implemented work from home policies where practical at its facilities. Effective September 30, 2021, all 150 employees were working full-time from one of the Company’s five offices or from home. Current COVID-19 policies include universal facial covering requirements if not vaccinated, rearranging facilities to follow social distancing protocols, employees self-screening before going into the office, enhanced cleaning procedures, ability to go mask-free if proof of vaccination is provided to Human Resources, and strict quarantine protocols for any suspected or confirmed employee cases. However, the COVID-19 pandemic and the continued precautionary actions taken related to COVID-19 have adversely impacted, and are expected to continue to adversely impact, its operations, its contractors and the automotive original equipment manufacturers.
The Company has experienced, and expects to continue to experience, reduced operations and production line shutdowns at vehicle OEMs due to COVID-19, limitations on travel by the Company’s personnel and personnel of the Company’s customers, and future delays or shutdowns of vehicle OEMs or the Company’s suppliers.
The COVID-19 pandemic and the protocols and procedures the Company has implemented in response to the pandemic have caused some delays in operational activities. The full impact of the COVID-19 pandemic on its business and results of operations subsequent to September 30, 2021 will depend on future developments, such as the ultimate duration and scope of the outbreak and its impact on its operations and impact on its customers and industry partners.
Note 2. Summary of Significant Accounting Policies
Basis of consolidated financial statement presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and Article 10 of Regulation S-X. The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of its wholly owned subsidiaries and variable interest entities, for which the Company is the primary beneficiary. Because the Company holds certain rights that provide the power to direct the activities of variable interests that most significantly impact the VIE economic performance, as well as to potentially receive benefits or the obligation to absorb potentially significant losses, the Company has a controlling interest in such VIEs. The Company reports its consolidated financial information as a single segment. All significant intercompany transactions have been eliminated in consolidation.
6
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of expenses during the reporting period. The Company’s most significant estimates and judgments involve deferred income taxes, valuation of share-based compensation, including the fair value of common stock, the valuation of warrant liability, the fair value of investment in convertible note, and the valuation of business combinations, including the fair values and useful lives of acquired assets and assumed liabilities and the fair value of purchase consideration. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates, and such differences could be material to the Company’s financial statements.
Concentration of Credit Risk: Financial instruments which potentially
subject the Company to concentrations of credit risk consist of cash and trade receivables. At times, such cash may be in excess of the
FDIC limit. At September 30, 2021 and December 31, 2020, the Company had cash in excess of the $
With respect to trade receivables, the Company routinely assesses the
financial strength of its customers and, as a consequence, believes that the receivable credit risk exposure is limited. As of September
30, 2021,
Cash, cash equivalents, and restricted cash: The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents include cash held in banks and money market accounts. Cash equivalents are carried at cost, which approximates fair value due to their short-term nature. The Company’s cash and cash equivalents are placed with high-credit quality financial institutions and issuers, and at times exceed federally insured limits. To date, the Company has not experienced any credit loss relating to its cash and cash equivalents.
Restricted cash held at both September 30, 2021 and December 31, 2020,
consists of $
The following table provides a reconciliation of cash, cash equivalents, and restricted cash in the condensed consolidated balance sheets to the total amount shown in the condensed consolidated statements of cash flows:
| As of September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | ||||||
7
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Accounts receivable, net: Accounts receivable are stated at
the gross invoice amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts is maintained at a level considered
adequate to provide for potential account losses on the balance based on management’s evaluation of the anticipated impact of current
economic conditions, changes in the character and size of the balance, past and expected future loss experience, among other pertinent
factors. As of September 30, 2021 and December 31, 2020, the Company’s allowance for doubtful accounts was $
Inventory, net: Inventory is comprised of raw materials, work
in process and finished goods. Inventory is stated at the lower of cost or net realizable value. Cost of raw material inventories include
the purchase and related costs incurred in bringing the products to their present location and condition. The Company uses consistent
methodologies to evaluate inventory for net realizable value and periodically reviews inventories for obsolescence and any inventories
identified as slow moving or obsolete are initially reserved for and then written-off. As of September 30, 2021 and December 31, 2020,
the Company’s inventory reserve for obsolescence was $
Fair value measurements: The Company follows the guidance in ASC Topic 820, “Fair Value Measurement”, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company can access at the measurement date.
Level 2: Significant other observable inputs other than level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s judgment about the assumptions that market participants would use in pricing an asset or liability.
An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
See Note 9 for additional information on assets and liabilities measured at fair value.
The Company believes its valuation methods are appropriate and consistent with other market participants, however the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
8
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Fair value measurements, continued:
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities, contingent consideration liability, long-term debt and warrant liability. The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates fair value because of the short-term nature of those instruments.
Prepaid expenses and other current assets: Prepaid expenses and other current assets include prepaid insurance, prepaid rent, and supplies, which are expected to be recognized or realized within the next 12 months.
Revenue: The Company’s revenue is derived from the sales of hybrid and plug-in hybrid electric powertrain systems, our Drive Systems, and turnkey energy efficiency, renewable technology, electric vehicle charging stations and other energy solutions (“XL Grid”). The Drive Systems products are marketed and sold to end-user fleet customers and channel partners in the United States and Canada. The Company’s XL Grid solutions are marketed and sold to municipalities, corporations and other businesses and principally funded through energy incentives provided through public and private utilities. The XL Grid business consists of the operations acquired through the May 2021 World Energy acquisition. Sales of products and services are subject to economic conditions and may fluctuate based on changes in the industry, trade policies and financial markets.
Revenue is recognized upon transfer of control to the customer, which occurs when the Company has a present right to payment, legal title has passed to the customer, the customer has the significant risks and rewards of ownership, and where acceptance is not a formality, the customer has accepted the product or service.
For the Drive Systems products, in general, transfer of control is upon shipment of the equipment as the terms are FOB shipping point or equivalent, as the Company has no other promised goods or services in its contracts with customers. In limited instances, the Company provides installation services to end-user fleet customers related to the purchased hybrid electric powertrain equipment. When provided, these installation services are not distinct within the context of the contract due to the fact that the end-use fleet customer is purchasing a completed modification to its vehicles and therefore, the installation services involve significant integration to integrate the hybrid electric powertrain equipment with the customer’s vehicle. As a result, the hybrid electric powertrain equipment and installation services represent a single performance obligation within these contracts with customers. The Company recognizes the revenue for the equipment sale and installation service for Drive System products at the same time, which is after the installation is complete. The Company has elected to treat shipping and handling activities related to contracts with channel partner customers for Drive System products as costs to fulfill the promise to transfer the associated equipment and not as a separate performance obligation.
9
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Revenue, continued:
For the XL Grid solutions, in general, transfer of control is upon the acceptance and certification of project completion by both the end customer and the utility who is funding the energy incentives, representing a single performance obligation of the Company. Due to the short-term nature of projects (typically two to three weeks), the Company recognizes revenues from all XL Grid solutions activities at a point in time, when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and the Company has the right to payment for the transferred asset. The Company also assesses multiple contracts entered into by the same customer in close proximity to determine if the contracts should be combined for revenue recognition purposes. During the duration of a project for XL Grid solutions, all direct material and labor costs and those indirect costs related to the project are capitalized, and customer deposits are treated as liabilities. Once a project has been completed and the energy efficiency upgrades have been deemed to meet client specifications, capitalized costs are charged to earnings.
For both Drive Systems and XL Grid solutions, when the Company’s contracts with customers contain multiple performance obligations, which is infrequent, the contract transaction price is allocated on a relative standalone selling price (SSP) basis to each performance obligation. The Company determines standalone selling prices based on observable selling prices for the sale of its systems. For extended warranties, the Company determines SSP based on expected cost plus margin. The Company establishes the margin based on review of market conditions and margins obtained by market participants for similar services. Any allocation of the transaction price required is determined at the contracts’ inception.
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods and services to the customer. Revenue is recorded based on the transaction price, which is solely made up of fixed consideration for its products and services. The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfer of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less. The Company has not identified any significant financing components to date. The Company’s sales can in certain instances include non-cash consideration in the form of the customer transferring to the Company, the customer’s rights to cash incentives from programs administered by municipalities related to hybrid vehicle programs that a customer is entitled to as a result of its purchase. The incentives are fixed amounts that are readily determinable. The Company values the non-cash consideration at its fair value, which generally is the amount of the incentive.
10
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Revenue, continued:
Payment terms on invoices range from 30 to 60 days. The Company excludes from revenue any sales tax and other government-assessed and imposed taxes on revenue generating activities that are invoiced to customers.
The Company has elected to apply the practical expedient to expense costs to obtain contracts, which principally relate to sales commissions, at the time the liability is incurred when the expected amortization period is one year or less.
Warranties
Customers who purchase the Drive Systems are
provided limited-assurance-type warranties for equipment and work performed under the contracts. The warranty period typically
extends for
Customers of XL Grid solutions are provided limited-assurance-type warranties for a term of one year for installation work performed under its contracts. Warranties for equipment sold to customers are provided by the original equipment manufacturers.
For both Drive Systems and XL Grid solutions, the Company accrues the estimated cost of product warranties for unclaimed charges based on historical experiences and expected results. Should product failure rates and material usage costs differ from these estimates revisions to the estimated warranty liability would be required. The Company periodically assesses the adequacy of its recorded product warranty liabilities and adjusts the balances as required. Warranty expense is recorded as a component of cost of product revenue in the statements of operations.
11
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Share-based compensation: The Company accounts for its share-based compensation awards in accordance with ASC Topic 718, Compensation-Stock Compensation. The Company issues stock-based awards to acquire common stock to employees, directors and non-employee consultants. Awards issued under the Company’s stock-based compensation plans include stock options, restricted stock units and restricted stock awards. Stock options, restricted stock units and restricted stock awards typically contain service based vesting conditions.
Stock Options
The Company accounts for stock-based compensation related to these awards based on the fair value of the awards. The Company uses the Black-Scholes option pricing model to determine the fair value of stock-based awards, and recognizes the compensation cost on a straight line basis over the requisite service period of the awards for employee, which is typically the four-year vesting period of the award, and effective contract period specified in the award agreement for non-employee.
The fair value of common stock is determined based on the closing price on the New York Stock Exchange at each award grant date.
The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected life, risk- free interest rate and expected dividends. The Company does not have a history of trading in its common stock as it was not a public company until December 21, 2020, and as such volatility was estimated using historical volatilities of comparable public entities. The expected life of the awards is estimated based on a simplified method, which uses the average of the vesting term and the original contractual term. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected life of the awards. The dividend yield assumption is based on history and expectation of paying no dividends. Forfeitures are accounted for as they occur.
The fair value of stock options issued for the nine months ended September 30, 2021 and 2020 was measured with the following assumptions:
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Expected volatility | % | % | ||||||
| Expected term (in years) | ||||||||
| Risk-free interest rate | % | % | ||||||
| Expected dividend yield | % | % | ||||||
Restricted Stock Units
Restricted stock units generally vest over the requisite service periods (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share of the Company’s Common stock on the grant date. The Company accounts for the forfeiture of equity awards as they occur.
12
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Warrant Liabilities: The Company evaluated the Public Warrants (“Public Warrants”) and Private Warrants (“Private Warrants”) (collectively, “Warrants”, which are discussed in Note 9) in accordance with ASC 815-40, “Derivatives and Hedging — Contracts in Entity’s Own Equity”, and concluded that a provision in the Warrant Agreement related to such warrants (“Warrant Agreement”) related to certain tender or exchange offers precludes the Warrants from being accounted for as components of equity. As the Warrants met the definition of a derivative as contemplated in ASC 815, the Warrants were initially recorded at fair value as derivative liabilities on the Unaudited Condensed Consolidated Balance Sheets and measured at fair value at each reporting date in accordance with ASC 820, “Fair Value Measurement”, with changes in fair value recognized in the Unaudited Condensed Consolidated Statement of Operations in the period of change.
Research and development expense: Research and development costs did not meet the requirements to be recognized as an asset as the associated future benefits were at best uncertain and there was no alternative future use at the time the costs were incurred. Research and development costs include, but are not limited to, costs incurred in performing research and development activities, including salaries, benefits, facilities, research- related overhead, sponsored research costs, contracted services, license fees, and other external costs.
Net income (loss) per share: Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock and potentially dilutive securities outstanding during the period determined using the treasury-stock and if-converted methods. For purposes of the diluted income (loss) per share calculation, stock options, restricted stock units, restricted stock and warrants are considered to be potentially dilutive securities. Potentially dilutive securities were excluded from the calculation of diluted income (loss) per share when their effect would be anti-dilutive.
Segment Information: The Company’s chief operating decision
maker (“CODM”) is its chief executive officer, who makes operating decisions, assesses performance and allocates resources
on a consolidated basis. The CODM reviews financial information presented on a consolidated basis for the purposes of allocating resources
and evaluating financial performance. Accordingly, management has determined that the Company operates as
Related parties: A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
13
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Recent accounting pronouncements issued and adopted: In February 2016, the FASB issued a new accounting standard, ASC Topic 842, Leases (“ASC 842”), related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most significant among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted ASC 842 effective January 1, 2021 and as a result, the Company recorded a ROU asset and lease liability (See Note 7).
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 is effective for the Company beginning January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
Note 3. Revenue
The following table represents the Company’s revenues for the three and nine months ended September 30, 2021 and 2020, respectively, disaggregated, by sales channel.
Disaggregation of revenue:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue from the sale of Drive Systems: | ||||||||||||||||
| Revenue direct to customers | $ | $ | $ | $ | ||||||||||||
| Revenue through channel partners | ||||||||||||||||
| Revenue from the sale of XL Grid solutions – which are sold direct to customers | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Remaining
performance obligations: At September 30, 2021 and December 31, 2020, there was approximately $
Contract Balances: The timing of revenue recognition, billings and cash collections results in billed trade accounts receivable, and deferred revenue (contract liabilities) on the Unaudited Condensed Consolidated Balance Sheets. In addition, the Company defers certain costs incurred to obtain a contract (contract costs).
14
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 3. Revenue, continued
Costs
to obtain a contract:
Warranties:
The Company accrues estimated warranty costs at the time of sale related to its assurance- type warranties.
The following is a roll-forward of the Company’s accrued warranty liability:
| For
the September 30, | For
the Ended December 31, | |||||||
| 2020 | 2021 | |||||||
| Balance at the beginning of the period | $ | $ | ||||||
| Acquisition date accrual for World Energy acquisition | ||||||||
| Accrual for warranties issued | ||||||||
| Warranty fulfillment charges | ( | ) | ( | ) | ||||
| Balance at the end of the period | $ | $ | ||||||
The warranty liability is included in accrued expenses and other current liabilities on the Unaudited Condensed Consolidated Balance Sheets.
15
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 4. Business Combination
World Energy
On May 17, 2021, the Company acquired all of the issued and outstanding membership interests of World Energy, a privately-held, Massachusetts-based entity, and retained two of its principals and all of World Energy’s employees. World Energy is a direct-install energy efficiency services company (“ESCO”), serving commercial, industrial and institutional customers. World Energy enables utilities to meet their energy savings mandates by developing and executing energy efficiency projects. The acquisition of World Energy expands the Company’s ability to deliver a comprehensive suite of energy savings services that enhances XL Grid’s solutions portfolio to include commercial and industrial EV charging, solar, and energy management services.
The total purchase price consideration, as adjusted, is $12,461 for the acquisition of World Energy. During the three months ended September 30, 2021, the Company remitted to the sellers of World Energy additional cash of $76 in connection with the finalization of working capital adjustments. The as adjusted purchase price consisted of the following components:
Cash of $8,496, as adjusted, consisting of the contractual purchase price of $8,000, plus working capital adjustments of an aggregate of $496.
| ● | The closing date issuance of 231,002 shares of the Company’s common stock, valued at the closing price of $6.23 per share as of May 17, 2021, for a total share fair value upon issuance of $1,439; |
| ● | An obligation to issue 244,956 shares of the Company’s common stock to certain of the sellers and their advisors of World Energy, in three equal installments on the sixth, twenty-fourth and the thirtieth monthly anniversaries of the closing date. The closing date fair value was recorded at an aggregate amount of $1,526; |
Adjustments to the initial purchase accounting for the acquisition will be completed, as needed, up to one year from the acquisition date as the Company obtains additional information regarding facts and circumstances that existed as of the acquisition date.
16
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 4. Business Combination, continued
World Energy, continued
The following details the preliminary allocation of the purchase price consideration:
| Cash | $ | |||
| Working capital adjustments | ||||
| Fair value of | ||||
| Fair value of the earnout | ||||
| Portion of deferred obligation to issue shares of common stock | ||||
| Total consideration | ||||
| Less the fair value of assets acquired less liabilities assumed | ( | ) | ||
| Goodwill | $ |
Included
in assets acquired was cash of $
In connection with the acquisition of World Energy, the Company incurred
an additional obligation to issue shares of its common stock to the three sellers, two of which also entered into employment agreements
with the Company. Pursuant to the terms of the agreement, the Company is obligated to issue
Accordingly,
the fair values of each of the three compensation share obligations are accreted as compensation over each relevant compensation period,
and for the three and nine months ended September 30, 2021, the Company recorded as selling, general and administration expense, compensation
costs of $
The
initial transaction with World Energy included an outstanding PPP loan of $
17
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 4. Business Combination, continued
World Energy, continued
The Company has accounted for this acquisition as a business combination under ASC Topic 805 “Business Combinations.” The acquisition method requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. The fair values of the assets acquired and liabilities assumed by major class were recognized as follows:
| Amount | ||||
| Cash | $ | |||
| Accounts receivable | ||||
| Inventory, net | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment, net | ||||
| Intangible assets, net | ||||
| Right-of-use asset | ||||
| Goodwill | ||||
| Other assets | ||||
| Accounts payable | ( | ) | ||
| Lease liability, current | ( | ) | ||
| Accrued expenses and other current liabilities | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Lease liability, non-current | ( | ) | ||
| Total purchase consideration | $ | |||
The
acquired intangible assets are comprised of $
The estimated fair value of the intangible asset acquired was determined based on the income approach to measure the fair value of the customer relationships. This fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.
18
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 4. Business Combination, continued
World Energy, continued
Goodwill represents the excess of the purchase consideration over the estimated acquisition date fair value of the net tangible and intangible assets acquired. Goodwill is primarily attributable to expected post-acquisition synergies from integrating World Energy’s assembled workforce, products and processes into the Company’s product offerings. Goodwill recorded is not deductible for income tax purposes.
Supplemental disclosure of pro forma information:
The following unaudited pro forma financial information presents the combined results of the operations of XL Fleet and World Energy as if the acquisition of World Energy had occurred as of January 1, 2020. The unaudited pro forma financial information is not necessarily indicative of what the condensed consolidated results of operations actually would have been had the respective acquisitions been completed on January 1, 2020. In addition, the unaudited pro forma financial information does not purport to project the future results of operations of the combined Company.
Since the merger was consummated on May 17, 2021, the results of the merger are fully incorporated into the condensed consolidated financial information for the three months ended September 30, 2021.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2020 | 2021 | 2020 | ||||||||||
| Revenues | $ | $ | $ | |||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | |||||
| Per share amounts: Net (loss) income per share – basic | $ | ( | ) | $ | $ | ( | ) | |||||
| Net loss per share – diluted | $ | ( | ) | $ | $ | ( | ) | |||||
The above pro forma information includes pro forma adjustments to remove the effect of the following non-recurring transactions:
| 1.) | Non-recurring merger expenses of $ |
| 2.) | Elimination of interest expense associated with debt that was repaid in the acquisition of World Energy of $ |
19
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 5. Purchase of Convertible Note
On July 15, 2021, XL Fleet made an investment of $
Pursuant to the terms of the eNow Convertible Note agreement, XL Fleet has the right to acquire eNow at a pre-determined valuation and has a right of first refusal with respect to competing offers to acquire eNow, which, if unexercised, will expire on December 31, 2021. In addition to the terms described above, on July 15, 2021 (“Effective Date”), XL Fleet entered into a Development and Supply Agreement (the “Development and Supply Agreement”) with eNow, whereby XL Fleet is made the exclusive provider of high voltage batteries and associated power systems for use in eNow eTRUs. For additional details, see analysis of the fair value of the investment in the eNow Convertible Note in Note 9.
Note 6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following at September 30, 2021 and December 31, 2020:
| As of | ||||||||
September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accrued warranty costs | $ | $ | ||||||
| Accrued compensation and related benefits | ||||||||
| Contingent purchase price consideration – Quantum | ||||||||
| Deferred purchase price consideration – World Energy | ||||||||
| Accreted contingent compensation to sellers – World Energy | ||||||||
| Accrued financing fees | ||||||||
| Professional fees | - | |||||||
| Accrued expenses, other | ||||||||
| $ | $ | |||||||
Note 7. ROU Assets and Lease Liabilities
XL Fleet has entered into operating and finance leases as the lessee for office space, R&D and manufacturing facilities, and vehicles. On January 1, 2021 (“Effective Date”), the Company adopted FASB Accounting Standards Codification, or ASC, Topic 842, Leases (“ASC 842”), which increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as lease assets and lease liabilities. The new guidance requires the recognition of the right-of-use (“ROU”) assets and related operating and finance lease liabilities on the balance sheet. The Company adopted the new guidance using the modified retrospective approach on January 1, 2021. As a result, the consolidated balance sheet as of December 31, 2020 was not restated and is not comparative.
The
adoption of ASC 842 resulted in the recognition of operating ROU assets of $
20
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 7. ROU Assets and Lease Liabilities, continued
The Company elected the package of practical expedients permitted within the standard, which allow an entity to forgo reassessing (i) whether a contract contains a lease, (ii) classification of leases, and (iii) whether capitalized costs associated with a lease meet the definition of initial direct costs. Also, the Company elected the expedient allowing an entity to use hindsight to determine the lease term and impairment of ROU assets and the expedient to allow the Company to not have to separate lease and non-lease components. The Company has also elected the short-term lease accounting policy under which the Company would not recognize a lease liability or ROU asset for any lease that at the commencement date has a lease term of twelve months or less and does not include a purchase option that the Company is more than reasonably certain to exercise.
For contracts entered into on or after the Effective Date, at the inception of a contract the Company will assess whether the contract is, or contains, a lease. The Company’s assessment is based on: (i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtained the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company has the right to direct the use of the asset. Leases entered into prior to January 1, 2021, which were accounted for under ASC 840, were not reassessed for classification.
For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments. For finance leases, the lease liability is initially measured in the same manner and date as for operating leases, and is subsequently presented at amortized cost using the effective interest method. The Company generally uses its incremental borrowing rate as the discount rate for leases, unless an interest rate is implicitly stated in the lease. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases, which was determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The lease term for all of the Company’s leases includes the noncancelable period of the lease plus any additional periods covered by either a Company option to extend the lease that the Company is reasonably certain to exercise, or an option to extend the lease controlled by the lessor. All ROU assets are reviewed periodically for impairment.
Lease expense for operating leases consists of the lease payments plus any initial direct costs and is recognized on a straight-line basis over the lease term. Lease expense for finance leases consists of the amortization of the asset on a straight-line basis over the shorter of the lease term or its useful life and interest expense determined on an amortized cost basis, with the lease payments allocated between a reduction of the lease liability and interest expense.
The Company’s operating leases are comprised primarily of office space and R&D and manufacturing facilities. Finance leases are comprised primarily of vehicle leases. Balance sheet information related to our leases is presented below (ASC 842 was adopted on January 1, 2021):
| September 30, 2021 | January
1, 2021 | December
31, 2020 | ||||||||||
| Operating leases: | ||||||||||||
| Right-of-use assets | $ | $ | $ | |||||||||
| Lease liability, current | ||||||||||||
| Lease liability, non-current | ||||||||||||
| Finance leases: | ||||||||||||
| Right-of-use assets | ||||||||||||
| Lease liability, current | ||||||||||||
| Lease liability, non-current | ||||||||||||
21
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 7. ROU Assets and Lease Liabilities, continued
Other information related to leases is presented below:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2021 | 2021 | |||||||
| Other information: | ||||||||
| Operating lease cost | $ | $ | ||||||
As
of | ||||
| 2021 | ||||
| Operating cash flows from operating leases | $ | |||
| Weighted-average remaining lease term – operating leases (in months) | ||||
| Weighted-average discount rate – operating leases | % | |||
As of September 30, 2021, the annual minimum lease payments of our operating lease liabilities were as follows:
| For The Years Ending December 31, | |||||
| 2021 (excluding the nine months ended September 30, 2021) | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total future minimum lease payments, undiscounted | |||||
| Less: imputed interest | ( | ) | |||
| Present value of future minimum lease payments | $ | ||||
Note 8. Note Payable
Paycheck Protection Program Loan
In March
2021, World Energy entered into a Promissory Note (the “PPP Note”) with Boston Private Bank & Trust Company as the lender
(the “Lender”), pursuant to which the Lender agreed to make a loan to the Company under the Paycheck Protection Program (the
“PPP Loan”) offered by the U.S. Small Business Administration (the “SBA”) in a principal amount of $
22
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 9. Fair Value Measurements
Mark-to-Market Measurement
The investment in the eNow Convertible Note was valued based upon a revenue multiple enterprise valuation. The contingent consideration related to the acquisition of Quantum Fuel Systems LLC (“Quantum”) was valued based upon the present value of the expected contingent consideration. The fair value of obligation to issue shares of common stock to the sellers of World Energy was based on the closing price of XL’s Common Stock on the reporting date.
The Public Warrants were traded under the symbol XL.WS and the fair values were based upon the closing price of the Public Warrants at each measurement date. The Private Warrants were valued using a Black-Scholes model, pursuant to the inputs provided in the table below:
| Mark-to-Market Measurement at | Mark-to-Market Measurement at | |||||||
| September 30, | December 31, | |||||||
| Input | 2021 | 2020 | ||||||
| Risk-free rate | % | % | ||||||
| Remaining term in years | ||||||||
| Expected volatility | % | % | ||||||
| Exercise price | $ | $ | ||||||
| Fair value of common stock | $ | $ | ||||||
The following table sets forth the Company’s assets and liabilities which are measured at fair value on a recurring basis by level within the fair value hierarchy:
| Fair
Value Measurements as of September 30, 2021 | ||||||||||||||||
| Level I | Level II | Level III | Total | |||||||||||||
| Asset: | ||||||||||||||||
| Investment in eNow Convertible Note | $ | $ | $ | $ | ||||||||||||
| Liability:. | ||||||||||||||||
| Private Warrants | $ | $ | $ | $ | ||||||||||||
| Contingent consideration -– Quantum | $ | $ | $ | $ | ||||||||||||
| Earnout – World Energy | $ | $ | $ | $ | ||||||||||||
| Fair value of obligation to issue shares of common stock to sellers of World Energy | $ | $ | $ | $ | ||||||||||||
23
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 9. Fair Value Measurements, continued
| Fair
Value Measurements as of December 31, 2020 | ||||||||||||||||
| Level I | Level II | Level III | Total | |||||||||||||
| Liability: | ||||||||||||||||
| Public Warrants | $ | $ | $ | $ | ||||||||||||
| Private Warrants | $ | $ | $ | $ | ||||||||||||
| Contingent consideration -– (Quantum) | $ | $ | $ | $ | ||||||||||||
During the
nine months ended September 30, 2021,
The following is a roll forward of the Company’s Level 3 instruments:
| As
of September 30, 2021 | ||||||||
| Asset | Liability | |||||||
| Balance, January 1, 2021 | $ | $ | ||||||
| Obligation to issue shares of common stock to sellers of World Energy | ||||||||
| Fair value adjustment – Quantum contingent consideration | ||||||||
| Fair value adjustments – Warrant liability | ( | ) | ||||||
| Fair value adjustments – World Energy | ( | ) | ||||||
| Purchase of eNow Convertible Note at fair value | ||||||||
| Earnout – World Energy | ||||||||
| Balance, September 30, 2021 | $ | $ | ||||||
Note 10. Warrants
Legacy XL Common Stock Warrants:
During the nine months ended September 30, 2021, 243,000 Legacy XL Warrants were exercised, which resulted in the issuance of 233,555 shares of the Company’s common stock, in a cashless exercise.
A summary of the warrant activity for the nine months ended September 30, 2021 was as follows:
| Weighted Average | |||||||||
| Warrants | Shares | Exercise Price | |||||||
| Outstanding at January 1, 2021 | $ | ||||||||
| Issued | |||||||||
| Exercised | ( | ) | |||||||
| Outstanding at September 30, 2021 | $ | ||||||||
| Exercisable at September 30, 2021 | | $ | |||||||
24
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 11. Share-Based Compensation Expense
Share-based
compensation expense for stock options, restricted stock awards and restricted stock units for the three months ended September 30, 2021
and 2020 was $
Stock Options
During
the nine months ended September 30, 2021, the Company issued
A summary of stock option award activity for the nine months ended September 30, 2021 was as follows:
| Options | Shares | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
|||||||||
| Outstanding at December 31, 2020 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ( |
) | ||||||||||
| Cancelled or forfeited | ( |
) | ||||||||||
| Outstanding at September 30, 2021 | $ | |||||||||||
| Exercisable at September 30, 2021 | $ | |||||||||||
The aggregate
intrinsic value of stock options outstanding as of September 31, 2021 was $
$
25
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 11. Share-Based Compensation Expense, continued
Restricted Stock Awards
The fair value of restricted stock awards is estimated by the fair value of the Company’s Common Stock at the date of grant. Restricted stock activity during the nine months ended at September 30, 2021 was as follows:
| Number of Shares | Weighted Average Grant Date Fair Value Per Share | |||||||
| Non-vested, at beginning of period | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Cancelled or forfeited | ||||||||
| Non-vested, at end of period | $ | |||||||
Restricted Stock Units
During the nine months ended September 30, 2021, the Company issued
The fair value of restricted stock unit awards is estimated by the fair value of the Company’s Common Stock at the date of grant. Restricted stock activity during the nine months ended at September 30, 2021 was as follows:
| Number
of Shares | Weighted Average Grant Date Fair Value Per Share | |||||||
| Non-vested, at beginning of period | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Cancelled or forfeited | ( | ) | ||||||
| Non-vested, at end of period | $ | |||||||
26
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 12. Related Party Transactions
Operating lease: In March 2012, the Company entered into a noncancelable lease agreement for office, research and development, and vehicle development and installation facilities with an investor of the Company. The lease term has been extended through February 29, 2022. The lease includes a rent escalation clause, and rent expense is being recorded on a straight-line basis.
Rent expense under the operating lease for the three months ended September 30, 2021 and 2020 was
$
| Future minimum lease payments for this lease are as follows: | |||||
| 2021 (Three months) | $ | ||||
| 2022 | |||||
| Total | $ | ||||
Note 13. Commitments and Contingencies
Sponsorship Commitment: On February 24, 2021, the Company
agreed to a sponsorship agreement with several entities related to the UBS Arena, Belmont Park and the NY Islanders Hockey Club.
Pursuant to that Agreement, the Company was designated an “Official Electric Transportation Partner of UBS Arena” with
various associated marketing and branding rights, including the development of electric vehicle charging stations. Through September
30, 2021, the Company has incurred costs of approximately $
Equipment
Purchase: On March 1, 2021, the Company entered into an agreement with Creative Bus Sales, Inc. to purchase six low floor electric
transit buses to be delivered in 2022 for a total purchase price of $
Purchase Commitments: The Company has entered into firm commitments
to purchase batteries and motors from major suppliers. As of September 30, 2021,
27
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 13. Commitments and Contingencies, continued
Legal proceedings: The Company is periodically involved in legal proceedings, legal actions and claims arising in the normal course of business, including proceedings relating to product liability, intellectual property, safety and health, employment and other matters. Management believes that the outcome of such legal proceedings, legal actions and claims will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.
On March 8, 2021, a putative class action complaint was filed in federal district court for the Southern District of New York (Suh v. XL Fleet Corp., et al., Case No. 1:21-cv-02002) against the Company and certain of its current officers and directors. On March 12, 2021, a second putative class action complaint was filed in federal district court for the Southern District of New York (Kumar v. XL Fleet Corp., et al., Case No. 1:21-cv-02171) against the Company and certain of its current officers and directors. Those cases were consolidated and a lead plaintiff appointed in June 2021, and an amended complaint filed on July 20, 2021 alleging that certain public statements made by the defendants between October 2, 2020 and March 2, 2021 violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company believes that the allegations asserted in the amended complaint are without merit, and the Company intends to vigorously defend the lawsuit. There can be no assurance, however, that the Company will be successful. At this time, the Company is unable to estimate potential losses, if any, related to the lawsuit.
On September 20, 2021, the Laidlaw Complaint was filed in the Delaware Court of Chancery against certain of the Company’s current officers and directors, and the Company’s sponsor, Pivotal Investment Holdings II LLC. The Laidlaw Complaint alleges various breaches of fiduciary duty, and aiding and abetting breaches of fiduciary duty, for purported actions relating to the negotiation and approval of the December 21, 2020 merger and organization of legacy XL to become XL Fleet Corp., and purportedly materially misleading statements made in connection with the merger. The Company believes that the allegations asserted in the Laidlaw Complaint are without merit, and the Company intends to vigorously defend the lawsuit.
On October 19, 2021, the Janmohamed Complaint was filed in the Delaware Court of Chancery against certain of the Company’s current officers and directors, and the Company’s sponsor, Pivotal Investment Holdings II LLC. The Janmohamed Complaint alleges various breaches of fiduciary duty, and aiding and abetting breaches of fiduciary duty, for purported actions relating to the negotiation and approval of the December 21, 2020 merger and organization of legacy XL to become XL Fleet Corp., and purportedly materially misleading statements made in connection with the merger. The Company believes that the allegations asserted in the Janmohamed Complaint are without merit, and the Company intends to vigorously defend the lawsuit.
28
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 14. Net (Loss) Income Per Share
The following is a reconciliation of the numerator and denominator used to calculate basic earnings per share and diluted earnings per share for the three and nine months ended September 30, 2021, and 2020:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Denominator: | ||||||||||||||||
| Weighted average shares outstanding, basic | ||||||||||||||||
| Dilutive effect of options, warrants, and restricted stock units | ||||||||||||||||
| Weighted average shares outstanding, diluted | ||||||||||||||||
| Net (loss) income per share, basic | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Net (loss) income per share, diluted | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
Potential dilutive securities, which include stock options, warrants and restricted stock units have been excluded from the computation of diluted net loss per share for the three months ended September 30, 2021 and the three and nine months ended September 30, 2020 as the effect would be to reduce the net loss per share. Therefore, for this period the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same.
The number of shares underlying outstanding dilutive securities which have been excluded from the computation of diluted net loss per share above, are presented below:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Stock options | ||||||||||||||||
| Private Warrants | ||||||||||||||||
| XL Legacy Warrants | ||||||||||||||||
| Restricted stock units | ||||||||||||||||
| Total | ||||||||||||||||
29
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Dollars in thousands, except share and per share data)
Note 15. Retirement Plan
The Company
has adopted a 401(k) plan to provide all eligible employees a means to accumulate retirement savings on a tax-advantaged basis. The 401(k)
plan requires participants to be at least 21 years old. In addition to the traditional 401(k), eligible employees are given the option
of making an after- tax contribution to a Roth 401(k) or a combination of both. Plan participants may make before tax elective contributions
up to the maximum percentage of compensation and dollar amount allowed under the Internal Revenue Code. Participants are allowed to contribute,
subject to IRS limitations on total annual contributions from
In connection with the acquisition of World Energy, XL Fleet adopted the World Energy 401(k) plan whose features are the same as those of the XL Fleet 401(k) plan except that (i) Participants are allowed to contribute, subject to IRS limitations on total annual contributions from 1% to 100% of eligible earnings and (ii) the safe harbor non-elective contribution is equal to 3% of employee’s compensation.
Note 16. Subsequent Event
Management has reviewed material events subsequent of the period ended September 30, 2021 and prior to the filing of financial statements in accordance with FASB ASC 855 “Subsequent Events”.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis provides information which our management believes is relevant to an assessment and understanding of our financial condition and results of operations. This discussion and analysis should be read together with our results of operations and financial condition and the audited and unaudited consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission (SEC) on March 31, 2021, as amended in our filing on Form 10-K/A filed with the SEC on May 17, 2021, which, as so amended, we refer to as the Annual Report. In addition to historical financial information, this discussion and analysis contains forward-looking statements based upon current expectations that involve risks, uncertainties and assumptions. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.” Actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report on Form 10-Q and under “Risk Factors” in Item 1A of the Annual Report and in Part II, Item 1A under the heading “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 filed with the SEC on May 17, 2021 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, filed with the SEC on August 13, 2021.
Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
As used in this discussion and analysis, references to “XL,” “the Company,” “we,” “us” or “our” refer only to XL Fleet Corp. and its consolidated subsidiaries. References to Legacy XL refer to XL Hybrids, Inc., a wholly owned subsidiary of XL Fleet Corp.
Overview
We are a provider of fleet electrification solutions for commercial vehicles in North America, offering our systems for vehicle electrification (“Drive Systems”) and through our XL Grid offerings, providing infrastructure solutions such as charging stations to enable customers to effectively plug in their electrified vehicles. XL Fleet has over 4,400 electrified powertrain systems sold and having driven over 173 million miles by over 240 fleets as of September 30, 2021. Our vision is to become a world leader in fleet electrification solutions, with a mission of accelerating the adoption of fleet electrification systems through cost effective, customer tailored and comprehensive solutions.
In over 10 years of operations, we believe that we have built a large customer base deploying Class 2-6 vehicles across North America. Our fleet electrification solutions for commercial vehicles provide the market with cost-effective hybrid and plug-in hybrid solutions with on-board telematics that are available for sale and deployment across a broad range of popular vehicle chassis from the world’s leading OEMs. We launched our infrastructure division in December 2020 and with the acquisition of World Energy Efficiency Services, LLC (“World Energy”) in May 2021, we are able to offer comprehensive solutions to commercial fleets to sustainably transform their operations.
Through the capabilities we acquired with World Energy, we are able to provide turnkey energy efficiency, renewable technology, electric vehicle charging stations and other energy solutions throughout New England, which adds capability and capacity to our XL Grid division. We believe we are positioned to capitalize on our market leadership as we seek to expand our product offering into additional propulsion technologies including full battery electric, heavier vehicles such as Class 7-8 vehicles, and additional vehicle models in Class 2-6. Our agreement with and investment in eNow, Inc. in July 2021 gives us access to electrification of the refrigerated semi-trailer market and we are continuing to develop a number of full EV Drive Systems (“XL ELECTRIC™”) including our announced agreement with Curb Tender for Class 6 refuse applications. We currently sell most of our Drive Systems through a network of commercial vehicle upfitters, which we estimate has the capacity to process over 100,000 commercial vehicles a year. We are also developing systems and solutions for application on vehicles outside of North America and expect such international sales to commence in 2022.
Our current electrified Drive Systems are comprised of an electric motor that is mounted onto the vehicle’s drive shaft, an inverter motor controller, and a lithium-ion battery pack to store energy to be used for propulsion. We deploy our electrified Drive Systems (XLH™ and XLP™) onto the chassis of vans, pickups, shuttle buses, delivery trucks, and many other commercial vehicles produced by OEMs such as Ford, RAM, GMC, Chevrolet and Isuzu. This technology can be installed as the vehicles are being manufactured by industry standard second stage manufacturers, known as upfitters, in less than one day, with no negative impact on the vehicles’ operational performance or factory warranties and with reduced maintenance cost. Our electrified powertrain systems capture and store energy during braking and subsequently deploy that energy into the driveline during acceleration, operating in parallel with the existing OEM drive train. In addition, our plug-in hybrid system offers the ability to supplement this energy via a connection with an AC electricity source, including a level 1 or level 2 charger. Our systems enable vehicles to burn less fuel and emit less CO2, resulting in increases of up to a 25-50% MPG improvement and up to a 20-33% reduction in GHG emissions. To date, vehicles deploying our electrification solutions have driven over 176 million miles.
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With our acquisition of World Energy, we became a provider of energy efficiency, renewable technology, electric vehicle charging station and other energy solutions to customers across the New England region. By leveraging our comprehensive solutions in combination with utility incentive programs, project management and financing, we assist companies throughout all aspects of the fleet vehicle electrification process. We provide full-service electric vehicle charger installations, including the assessment of a location’s electrical infrastructure, site layout of the charging area plan and equipment installation. We believe that the availability of robust electric vehicle charging and infrastructure solutions is critical to meeting the long-term fleet electrification goals of our customers which in turn will translate into growth opportunities for the Company.
Recent Developments
Acquisition of World Energy: On May 17, 2021 (“Closing Date”), we acquired 100% of the membership interests of World Energy for total consideration of $12.5 million, consisting of cash of $8.0 million, a working capital adjustment of $0.5 million, the fair value of shares issued at closing of $1.5 million, the fair value of the earnout of $1.0 million and the portion of deferred obligation to issue shares of common stock of $1.5 million. With respect to the share component of the purchase price, 231,002 shares were issued at the Closing Date, with an additional 244,956 shares issuable in three equal installments on the 6, 24 and 30 month anniversary of the Closing Date.
In addition to the above, we are obligated to issue an additional 448,050 shares in equal installments on the 6, 24 and 30 month anniversary of the Closing Date to the former owners. These shares are contingent upon their continued employment with us, and as such were considered compensation expense and are being amortized over the service period.
World Energy provides turnkey energy efficiency, renewable technology, electric vehicle charging stations and other energy solutions throughout New England. We completed the acquisition to further the strategy of our XL Grid business to provide a suite of charging and power solutions to support fleet electrification.
Minority investment in eNow: On July 15, 2021, we purchased $3 million in convertible notes in eNow, Inc. (“eNow”), a developer of solar and battery power systems that will enable fully-electric transport refrigeration units (“eTRUs”) for Class 8 commercial trailers. Additionally, we have the right to acquire eNow at a pre-determined valuation and have a right of first refusal with respect to competing offers to acquire eNow, which expire if unexercised as of December 31, 2021. If the option to purchase expires unexercised, under certain circumstances the eNow Convertible Note would be converted on such date into Series B preferred stock. XL Fleet and eNow have also entered into a Development and Supply Agreement pursuant to which we are the exclusive provider of high voltage batteries for use in eNow eTRUs.
Public Health Emergency of International Concern: On March 11, 2020, the World Health Organization characterized the outbreak of the novel coronavirus (“COVID-19”) as a global pandemic and recommended containment and mitigation measures. Since then, extraordinary actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world. These actions include travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.
Consistent with the actions taken by governmental authorities, we have taken appropriately cautious steps to protect our workforce and support community efforts. As part of these efforts, and in accordance with applicable government directives, beginning in late March 2020, we implemented work from home policies where practical at our facilities. Effective September 30, 2021 all 150 employees were working full-time from one of our five offices or from home. Current COVID policies include universal facial covering requirements if not vaccinated, rearranging facilities to follow social distancing protocols, employees self-screening before going into the office, enhanced cleaning procedures, ability to go mask-free if proof of vaccination is provided to Human Resources, and strict quarantine protocols for any suspected or confirmed employee cases. However, the COVID-19 pandemic and the continued precautionary actions taken related to COVID-19 have adversely impacted, and are expected to continue to adversely impact, our operations, our contractors and the automotive original equipment manufacturers.
32
We have experienced, and expect to continue to experience, significantly reduced operations and production line shutdowns at vehicle OEMs due to COVID-19, which reduced chassis deliveries to fleet customers. Both ourselves and OEM manufacturers have also and continue to be impacted by supply chain shortages. We are experiencing limitations on travel by our personnel and personnel of our customers.
The COVID-19 pandemic and the protocols and procedures we have implemented in response to the pandemic have caused some delays in operational activities. The full impact of the COVID-19 pandemic on its business and results of operations subsequent to September 30, 2021 will depend on future developments, such as the ultimate duration and scope of the outbreak and its impact on its operations and impact on its customers and industry partners.
As the COVID-19 pandemic continues to evolve, we believe the extent of the impact to our business, operating results, cash flows, liquidity and financial condition will be primarily driven by the severity and duration of the COVID-19 pandemic, the pandemic’s impact on the U.S. and global economies and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our knowledge and control, and as a result, at this time we are unable to predict the cumulative impact, both in terms of severity and duration, that the COVID-19 pandemic will have on our business, operating results, cash flows and financial condition, but it could be material if the current circumstances continue to exist for a prolonged period of time. Although we have made our estimates based upon current information, actual results could materially differ from the estimates and assumptions developed by management. Accordingly, it is reasonably possible that the estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, and if so, we may be subject to future impairment losses related to long-lived assets as well as changes to recorded reserves and valuations. In addition, we believe that the impact of the global microchip shortage that the entire vehicle industry is currently experiencing will adversely impact our operating results in fiscal years 2021 and 2022.
Public Company Costs
As a consequence of the Merger, we are an NYSE-listed company, which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.
Additionally, we expect our capital and operating expenditures will increase significantly in connection with ongoing activities as we:
| ● | increase our investment in marketing, advertising, sales and distribution infrastructure for our existing and future products and services; |
| ● | develop additional new products and enhancements to existing products; |
| ● | obtain, maintain and improve our operational, financial and management performance; |
| ● | hire additional personnel; |
| ● | obtain, maintain, expand and protect our intellectual property portfolio; and |
| ● | operate as a public company. |
Leadership Transition
On November 1, 2021, the Company announced that it had entered into a new Executive Employment Agreement with Eric Tech, pursuant to which Mr. Tech agreed to serve as the Company’s Chief Executive Officer effective as of December 1, 2021.
Key Factors Affecting Operating Results
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section entitled “Risk Factors—Risks Related to our Business and Industry” and in Part II, Item 1A under the heading “Risk Factors” in our Quarterly Reports on Form 10-Q for the quarter ended March 31, 2021 filed with the SEC on May 17, 2021 and Form 10-Q for the quarter ended June 30, 2021 filed with the SEC on August 13, 2021.
33
We are a provider in fleet electrification which represents a very large market opportunity as the commercial fleet industry transforms to more sustainable operations in the coming decades. To capitalize on this opportunity, we have a strategy to leverage our existing products and sales channels to market while also expanding our product line through new product development and expanding our capability to market and sell those products. Key factors affecting our operating results include our ability to increase sales of our current product offerings, expand our product offerings in the future and to realize customer demand for such product offerings. We believe that the size of our sales opportunity pipeline and committed backlog are important indicators of future performance. There are challenges and risks to our plan to capture these opportunities, such as:
| ● | system architecture design choices must provide adequate functionality and value for customers; |
| ● | component sourcing agreements must deliver targets for cost reduction while maintaining high quality and reliability; |
| ● | design, development and validation of new product systems must be on time and on budget to meet the opportunity in the market and capacity to develop and commercialize these new products will have to be increased; |
| ● | sales and marketing efforts must be effective in forging the relationships to deliver these products to market and generate demand from the end users and channel partners. We will need to increase our capabilities in market segment analysis and understanding as it relates to system requirements and functionality. |
| ● | OEMs and principal equipment component suppliers must be able to provide ample supply throughout the year to meet our sales goals. We have experienced interruptions in OEM vehicle supply amid a worldwide microchip shortage. This has resulted in very limited OEM deliveries of new chassis to our commercial customers during 2021. We are expecting some increase in deliveries in 2022, but still likely there will be a significant adverse impact on vehicle deliveries on account of the microchip shortage. Some of our customers will not purchase our electric propulsion systems without OEM vehicle chassis on which to install those systems. This has had and continues to have an adverse impact on our operating results in fiscal year 2021 and is expected to continue in 2022; This is causing a prolonged disruption to sales of our electrified Drive Systems. We have flexibility to also provide our Drive Systems as a retrofit for existing fleet vehicles and a good portion of our 2021 Drive System shipments were for retrofits. Our efforts to enhance Drive Systems revenues include helping our fleet customers obtain new chassis as well as providing retrofits where applicable. We re-entered the California market with the California Air Resources Board (CARB) approval in June 2021 for our Ford Transittm HEV systems, we have four active executive orders (EOs) and we expect additional EOs from CARB for other applications over the coming months. We have seen positive signs in terms of increased budgets from municipal customers, but we believe the OEM chip shortage is hindering the rebound in that area of the market, despite budget availability. |
| ● | energy-efficiency upgrades must translate into bottom-line savings for our clients; and |
| ● | our success will depend on our ability to make it easier, cheaper and simpler for companies to electrify their fleets. |
Key Components of Statements of Operations
Research and Development Expense
Research and development expenses consist primarily of costs incurred for the discovery and development of our electrified powertrain offerings and assessment of charging infrastructure technologies, which include:
| ● | personnel-related expenses including salaries, benefits, travel and share-based compensation, for personnel performing research and development activities; |
| ● | fees paid to third parties such as consultants and contractors for outsourced engineering services; |
| ● | expenses related to prototype materials, supplies and third-party services; and |
| ● | depreciation for equipment used in research and development activities. |
34
We expect our research and development costs to increase substantially for the foreseeable future as we expect to use a significant portion of the proceeds from the business to accelerate development of product enhancements and additional new products.
Selling, General and Administrative Expense
Selling, general and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, sales, marketing and other administrative functions, expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, sales and marketing. Personnel-related expenses consist of salaries, benefits and share-based compensation. We expect our selling, general and administrative expenses to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC that may include legal, audit, additional insurance expenses, investor relations activities and other administrative and professional services.
Other (Income) Expense, Net
Other income and expense consists of interest expense net of interest income, loss on extinguishment of debt, change in fair value of obligations to issue shares of common stock to sellers of World Energy, change in fair value of warrant liability, change in fair value of convertible notes payable derivative liabilities, and loss on asset disposal.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial position and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate estimates, which include estimates related to stock-based compensation expense, warrant valuation and reported amounts of revenues and expenses during the reported period. We base our estimates on historical experience and other market- specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions.
Results of Operations
Comparison of the Three Months Ended September 30, 2021 and 2020
The consolidated statements of operations for the three months ended September 30, 2021 and 2020 are presented below:
| Three Months Ended | $ | % | ||||||||||||||
| September 30, | Change | Change | ||||||||||||||
| 2021 | 2020 | |||||||||||||||
| (In thousands) | ||||||||||||||||
| Revenues | $ | 3,200 | $ | 6,328 | (3,128 | ) | (49.4 | ) | ||||||||
| Cost of revenues | 2,510 | 5,561 | (3,051 | ) | (54.9 | ) | ||||||||||
| Gross profit | 690 | 767 | (77 | ) | (10.0 | ) | ||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 3,217 | 1,646 | 1,571 | 95.4 | ||||||||||||
| Selling, general and administrative expenses | 12,742 | 5,304 | 7,438 | 140.2 | ||||||||||||
| Loss from operations | (15,269 | ) | (6,183 | ) | (9,086 | ) | 147.0 | |||||||||
| Other (income) expense: | ||||||||||||||||
| Interest expense, net | 14 | 1,266 | (1,252 | ) | (98.9 | ) | ||||||||||
| Loss on asset disposal | 24 | - | 24 | - | ||||||||||||
| Change in fair value of obligation to issue shares of common stock to sellers of World Energy | (532 | ) | - | (532 | ) | - | ||||||||||
| Change in fair value of warrant liability | (7,229 | ) | - | (7,229 | ) | - | ||||||||||
| Change in fair value of convertible notes payable derivative liability | - | (5,172 | ) | 5,172 | (100.0 | ) | ||||||||||
| Other income | (15 | ) | - | (15 | ) | - | ||||||||||
| Net (loss) income | $ | (7,531 | ) | $ | (2,277 | ) | (5,254 | ) | 230.7 | |||||||
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Revenues
Revenues decreased by $3.1 million, or 49.4%, to $3.2 million in the three months ended September 30, 2021 from $6.3 million for the three months ended September 30, 2020. The decrease was primarily due to a net decrease of $5.7 million in revenues from the sale of our Drive Systems. Interruptions in OEM vehicle supply amid a worldwide microchip shortage has caused OEMs to stop taking fleet orders for much of the first nine months of the year in 2021 and some OEMs are telling large fleets they will receive zero new vehicles in 2021. This decrease was partially offset by the addition of energy infrastructure solutions revenues, of $2.6 million across over 106 projects.
Cost of Revenues
Cost of revenues decreased by $3.1 million, or 54.9%, to $2.5 million in the three months ended September 30, 2021 from $5.6 million for the three months ended September 30, 2020. The decrease was primarily attributable to a net decrease in the costs of revenue of $4.8 million of Drive Systems, due to a decrease in sales. This decrease was partially offset by an increase in the cost of revenues of $1.7 million for energy infrastructure projects completed.
Gross Profit (Loss)
Gross profit decreased by $0.1 million, to $0.7 million in the three months ended September 30, 2021 from $0.8 million for the three months ended September 30, 2020. The gross profit decreased by $1.0 million for gross profit on the sale of Drive Systems. This is offset by an increase of $0.9 million on the sales of infrastructure projects.
Research and Development
Research and development expenses increased by $1.6 million, or 95.4%, to $3.2 million in the three months ended September 30, 2021 from $1.6 million for the three months ended September 30, 2020. The increase was primarily due to additional employee compensation costs of $0.9 million, professional service expenses of $0.3 million, facilities and production costs of $0.3 million and technology expenses of $0.1 million. The increase was primarily due to the hiring of 29 additional engineering staff to support sales growth and to further develop and broaden our Drive Systems product lines as well as the opening of a new research and development facility in Wixom, MI in the second quarter of 2021.
Selling, General and Administrative
Selling, general, and administrative expenses increased by $7.4 million, or 140.2%, to $12.7 million in the three months ended September 30, 2021 from $5.3 million for the three months ended September 30, 2020. The increase consisted principally of an increase in legal, accounting and other professional fees incurred in connection with meeting SEC and other financial reporting responsibilities in the amount of $0.5 million, and an increase in headcount of about 46 employees attributable to the responsibilities of becoming a public company and to build out our human resource infrastructure in the amount of $3.6 million. The aforementioned increase in legal, accounting and other professional fees consist of an increase in consulting fees of $1.2 million and a decrease in legal fees of $0.6 million. Additionally, with the acquisition of World Energy, selling, general, and administrative expenses in the period increased by approximately $1.5 million compared to the comparable period in the prior year, consisting principally of employee compensation, benefits and professional fees.
Other (Income) Expense
Interest expense, net decreased by $1.3 million, or 98.9%, to $0.0 million in the three months ended September 30, 2021 from $1.3 million for the three months ended September 30, 2020 primarily due to the Company repaying or converting substantially all debt prior to December 31, 2020. The negative change in fair value of obligation to issue shares of common stock to sellers of World Energy of $0.5 million for the three months ended September 30, 2021 was due to a decrease in the stock price from the date of the acquisition. The change in fair value of warrant liability of $7.2 million for the three months ended September 30, 2021 was principally due to a decrease in the fair value of our Common Stock.
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Comparison of the Nine Months Ended September 30, 2021 and 2020
The consolidated statements of operations for the nine months ended September 30, 2021 and 2020 are presented below:
| Nine Months Ended | $ | % | ||||||||||||||
| September 30, | Change | Change | ||||||||||||||
| 2021 | 2020 | |||||||||||||||
| (In thousands) | (restated) | |||||||||||||||
| Revenues | $ | 7,569 | $ | 9,472 | (1,903 | ) | (20.1 | ) | ||||||||
| Cost of revenues | 6,633 | 8,713 | (2,080 | ) | (23.9 | ) | ||||||||||
| Gross profit (loss) | 936 | 759 | 177 | 23.3 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | 7,438 | 3,297 | 4,141 | 125.6 | ||||||||||||
| Selling, general and administrative expenses | 31,522 | 10,798 | 20,724 | 191.9 | ||||||||||||
| Loss from operations | (38,024 | ) | (13,336 | ) | (24,688 | ) | 185.1 | |||||||||
| Other (income) expense: | ||||||||||||||||
| Interest expense, net | 35 | 4,291 | (4,256 | ) | (99.2 | ) | ||||||||||
| Loss on extinguishment of debt | - | 1,038 | (1,038 | ) | (100.0 | ) | ||||||||||
| Loss on asset disposal | 45 | - | 45 | - | ||||||||||||
| Change in fair value of obligation to issue shares of common stock to sellers of World Energy | (18 | ) | - | (18 | ) | - | ||||||||||
| Change in fair value of warrant liability | (81,960 | ) | - | (81,960 | ) | - | ||||||||||
| Change in fair value of convertible notes payable derivative liability | - | 3,565 | (3,565 | ) | (100.0 | ) | ||||||||||
| Other income | (40 | ) | - | (40 | ) | - | ||||||||||
| Net income (loss) | $ | 43,914 | $ | (22,230 | ) | 66,144 | 297.5 | |||||||||
Revenues
Revenues decreased by $1.9 million, or 20.1%, to $7.6 million in the nine months ended September 30, 2021 from $9.5 million for the nine months ended September 30, 2020. The decrease was principally due to a net decrease of $7.0 million in revenues from the sale of our Drive Systems. Interruptions in OEM vehicle supply amid a worldwide microchip shortage has caused OEMs to stop taking fleet orders for much of the first half of the year 2021 and some OEMs are telling large fleets they will receive zero new vehicles in 2021. This is causing a prolonged disruption to sales of our electrified Drive Systems. We have flexibility to also provide our Drive Systems as a retrofit for existing fleet vehicles. We will continue to develop new sales opportunities through innovative access to new vehicles for our customers as well as providing retrofits where applicable. We re- entered the California market with CARB approval in June 2021 for our Ford Transit HEV systems, we have been approved for four additional CARB EOs and we expect additional EOs from CARB for other applications over the coming months. We have seen positive signs in terms of increased budgets from municipal customers, but we believe the OEM chip shortage is hindering the rebound in that area of the market, despite budget availability. This decrease was partially offset by the addition of energy infrastructure solutions revenues of $5.1 million across over 185 projects.
Cost of Revenues
Cost of revenues decreased by $2.1 million, or 23.9%, to $6.6 million in the nine months ended September 30, 2021 from $8.7 million for the nine months ended September 30, 2020. The decrease was primarily attributable to a net decrease in the costs of revenue of $5.8 million of Drive Systems, due to a decrease in sales. This decrease was partially offset by an increase in cost of revenues of $3.0 million for energy infrastructure projects completed, $0.5 million for write-offs and allowances for Drive Systems inventory and $0.3 million for overhead allocation for Drive Systems.
Gross Profit (Loss)
Gross profit increased by $0.2 million, to $0.9 million in the nine months ended September 30, 2021 from $0.8 million for the nine months ended September 30, 2020. The gross profit increased by $2.1 million on the sales of infrastructure projects. This is offset by a decrease of $1.2 million for gross profit on the sale of Drive Systems.
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Research and Development
Research and development expenses increased by $4.1 million, or 125.6%, to $7.4 million in the nine months ended September 30, 2021 from $3.3 million for the nine months ended September 30, 2020. The increase was primarily due to additional employee compensation costs of $2.1 million, professional service expenses of $0.7 million, facilities and production costs of $1.4 million and technology expenses of $0.2 million. The increase was primarily due to the hiring of 29 additional engineering staff to support unit sales growth and to further develop and broaden our Drive Systems product lines as well as the opening of a new research and development facility in Wixom, MI in the second quarter of 2021.
Selling, General and Administrative
Selling, general, and administrative expenses increased by $20.7 million, or 191.9%, to $31.5 million in the nine months ended September 30, 2021 from $10.8 million for the nine months ended September 30, 2020. The increase consisted principally of an increase in legal, accounting and other professional fees incurred in connection with meeting SEC and other financial reporting responsibilities in the amount of $5.8 million, and an increase in headcount of about 46 employees attributable to the responsibilities of becoming a public company and to build out our human resource infrastructure in the amount of $7.6 million. The aforementioned increase in legal, accounting and other professional fees consist of increases in consulting fees of $4.8 million and legal fees of $1.1 million. Additionally, with the acquisition of World Energy, selling, general, and administrative expenses in the nine-month period increased by approximately $2.4 million compared to the comparable period in the prior year, consisting principally of employee compensation and benefits and professional fees.
Other (Income) Expense
Interest expense, net decreased by $4.3 million, or 99.2%, to $0.0 million in the nine months ended September 30, 2021 from $4.3 million for the nine months ended September 30, 2020 primarily due to the Company repaying or converting substantially all debt prior to December 31, 2020. We incurred a loss on extinguishment of $1.0 million in connection with the amendment of certain convertible notes for the nine months ended September 30, 2020. There was no loss on extinguishment of debt for the nine months ended September 30, 2021. The negative change in fair value of obligation to issue shares of common stock to sellers of World Energy of $18 for the nine months ended September 30, 2021 was due to a decrease in the stock price from the date of the acquisition. The change in fair value of warrant liability of $82.0 million for the nine months ended September 30, 2021 was principally due to a decrease in the fair value of our Common Stock.
Liquidity and Capital Resources
As of September 30, 2021, we had working capital of $371.9 million, including cash, cash equivalents and restricted cash of $366.9 million. We had net income of $43.9 million (a net loss of $38.1 million after adjusting for a non-cash gain of $82.0 million to recognize the change in fair value of warrant liability) for the nine months ended September 30, 2021 and incurred a net loss of $22.2 million for the nine months ended September 30, 2020.
During the nine months ended September 30, 2021, 7,441,020 public warrants were exercised, which resulted in the issuance of 7,441,020 shares of the Company’s Common Stock, generating cash proceeds of approximately $85.6 million.
We expect to continue to incur net losses in the short term, as we continue to execute on our strategic initiatives to optimize our production for scale, invest in the sales and channel teams, and expand our products and services. Based on our current liquidity, we believe that no additional capital will be needed to execute our current business plan over the next 12 months.
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Cash Flows Summary
Presented below is a summary of our operating, investing and financing cash flows:
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| (in thousands) | 2021 | 2020 | ||||||
| Net cash provided by (used in) | ||||||||
| Operating activities | $ | (34,215 | ) | $ | (13,087 | ) | ||
| Investing activities | $ | (14,105 | ) | $ | (162 | ) | ||
| Financing activities | $ | 85,427 | $ | 11,446 | ||||
| Net change in cash and cash equivalents | $ | 37,107 | $ | (1,803 | ) | |||
Cash Flows Used in Operating Activities
The net cash used in operating activities for the nine months ended September 30, 2021 was $34.2 million. Sources consisted of net income of $43.9 million (a net loss of $38.1 million after adjusting for a non-cash gain of $82.0 million to recognize the change in fair value of warrant liability), a decrease in accounts receivable of $10.9 million, an increase in accrued expenses and other current liabilities of $4.4 million, and noncash items in the aggregate of $3.6 million. The sources of operating cash were offset by a change in the fair value of warrant liabilities of $82.0 million, an increase of inventory of $13.2 million and a decrease in accounts payable of $2.3 million. The net cash used in operating activities for the nine months ended September 30, 2020 was $13.1 million which consisted of a net loss of $22.2 million, offset principally by a change in the fair value of warrant liabilities of $3.6 million, an increase of debt discount amortization of $3.1 million, an increase of $0.7 million to stock-based compensation, and additional noncash items in the aggregate of $2.2 million.
Cash Flows Used in Investing Activities
The net cash used in investing activities for the nine months ended September 30, 2021 was $14.1 million which consisted of a payment to acquire the membership interests of World Energy of $8.2 million, an investment in the eNow Convertible Note of $3.0 million and purchases of equipment of $2.9 million including $0.8 million towards the purchase of electric buses. The net cash used in investing activities for the nine months ended September 30, 2020 was $0.2 million which consisted of the purchase of R&D equipment.
Cash Flows Provided by Financing Activities
The net cash provided by financing activities for the nine months ended September 30, 2021 was $85.4 million, substantially all of which consisted of proceeds from the exercise of public warrants. The net cash provided by financing activities for the nine months ended September 30, 2020 was $11.4 million which consisted of proceeds from the issuance of subordinated convertible promissory notes of $8.1 million, and proceeds from the paycheck protection program of $1.1 million.
Related Parties
We are party to a noncancelable lease agreement for office, research and development, and vehicle development and installation facilities with a holder of more than 5% of our Common Stock. The lease term extends through February 28, 2022. Pursuant to the terms of the lease agreement, we currently pay monthly rent installments of $19,473 for this property. The lease includes a rent escalation clause, and rent expense is being recorded on a straight-line basis. Rent expense under the operating lease was $0.1 million and $0.1 million for the three months ended September 30, 2021 and 2020 and
$0.2 million and $0.2 million for the nine months ended September 30, 2021 and 2020, respectively.
Off-Balance Sheet Arrangements
During the periods presented, other than the New Markets Tax Credit variable interest entity, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements.
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Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with the generally accepted accounting principles of the U.S. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the consolidated balance sheet date, as well as the reported expenses incurred during the reporting periods.
Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates, and such differences could be material to our consolidated financial statements.
While our significant accounting policies are described in the notes to our historical financial statements included elsewhere in this Quarterly Report on Form 10-Q (see Note 2 in the accompanying unaudited condensed consolidated financial statements), we believe that the following accounting policies require a greater degree of judgment and complexity: revenue recognition, business combinations and convertible notes derivative accounting. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Business combinations: We account for the acquisition of a business in accordance with ASC 805, Business Combinations (ASC 805). Amounts paid to acquire a business are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. We determine the fair value of purchase consideration, including contingent consideration, and acquired intangible assets based on detailed valuations that use certain information and assumptions provided by management. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill. The results of operations of acquired businesses are included in the financial statements from the date of acquisition forward. Acquisition-related costs are expensed in periods in which the costs are incurred.
We use the income approach to determine the fair value of developed technology acquired in a business combination. This approach determines fair value by estimating the after-tax cash flows attributable to the respective asset over its useful life and then discounting these after-tax cash flows back to a present value. We base our revenue assumptions on estimates of relevant market sizes, expected market growth rates, expected trends in technology and expected product introductions by competitors. Developed technology represents patented and unpatented technology and know-how.
Revenue Recognition: Our revenue is derived from the sales of hybrid electric powertrain systems and turnkey energy efficiency, renewable technology, electric vehicle charging stations and other energy solutions (“XL Grid”). Our Drive Systems products are marketed and sold to end-user fleet customers and channel partners in the United States and Canada. The Company’s XL Grid solutions are marketed and sold to municipalities, corporations and other businesses and principally funded through energy tax credits and rebates provided by public and private utilities. Sales of products and services are subject to economic conditions and may fluctuate based on changes in the industry, trade policies and financial markets.
Revenue is recognized upon transfer of control to the customer, which occurs when we have a present right to payment, legal title has passed to the customer, the customer has the significant risks and rewards of ownership, and where acceptance is not a formality, the customer has accepted the product or service. As it relates to our Drive Systems, in general, transfer of control is upon shipment of the equipment as the terms are free on board shipping point, or equivalent and we have no other promised goods or services in our contracts with customers. In limited instances, we provide installation services to end-user fleet customers related to the purchased hybrid electric powertrain equipment. When provided, the installation services are not distinct within the context of the contract due to the fact that the end-use fleet customer is purchasing a completed modification to our vehicles and therefore, the installation services involve significant integration to integrate the hybrid electric powertrain equipment with the customer’s vehicle. As a result, the hybrid electric powertrain equipment and installation services represent a single performance obligation within these contracts with customers. We have elected to treat shipping and handling activities related to contracts with channel partner customers as costs to fulfill the promise to transfer the associated equipment and not as a separate performance obligation.
As for revenue recognition with XL Grid, in general, transfer of control is upon the acceptance and certification of project completion by both the end-customer and the utility who is funding the credits and rebates, representing a single performance obligation to us. Due to the short-term nature of projects (typically two to three weeks), we recognize revenues from all activities at a point in time, when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and we have the right to payment for the transferred asset. We also assess multiple contracts entered into by the same customer in close proximity to determine if the contracts should be combined for revenue recognition purposes. During the duration of a project, all direct material and labor costs and those indirect costs related to the project are capitalized, and customer deposits are treated as liabilities. Once a project has been completed and the energy efficiency upgrades have been deemed to meet client specifications, capitalized costs are charged to earnings.
For the XL Grid customers, we provide limited-assurance-type warranties for our equipment and work performed under our contracts. The warranty period typically extends for 3 years following transfer of control of the equipment. The warranties solely relate to correction of product defects during the warranty period, which is consistent with similar warranties offered by competitors. Therefore, we have determined that this warranty is outside the scope of ASC 606 and will continue to be accounted for under ASC 460, Guarantees. At the time of purchase of the equipment, customers may purchase from us an extended warranty for our equipment. The extended warranty commences upon the end of the assurance-based warranty period and is considered a separate performance obligation that represents a stand-ready obligation to perform warranty services after the assurance-type warranty expires. The transaction price allocated to the extended warranty is recognized ratably over the extended warranty period.
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Pertaining to our revenue from the sale of XL Grid solutions, we provide limited-assurance-type warranties for a term of one year for installation work performed under our contracts. Warranties for equipment resold to customers are provided by the original equipment manufacturers.
When our contracts with customers contain multiple performance obligations, the contract transaction price is allocated on a relative standalone selling price (“SSP”) basis to each performance obligation. We determine standalone selling prices based on observable selling prices for the sale of kits. For extended warranties, we determine SSP based on expected cost plus margin. We establish the margin based on review of market conditions and margins obtained by market participants for similar services. Any allocation of the transaction price required is determined at the contracts’ inception.
Warrant liabilities: We account for the warrants issued in connection with our initial public offering in accordance with Accounting Standards Codification (“ASC”) 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” (“ASC 815”), under which the warrants do not meet the criteria for equity classification and must be recorded as liabilities. As the warrants meet the definition of a derivative as contemplated in ASC 815, the Warrants are measured at fair value at inception and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in the Statement of Operations in the period of change.
Emerging Growth Company Status
We are an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS Act”). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We may elect not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard, until such time we are no longer considered to be an emerging growth company. At times, we may elect to early adopt a new or revised standard. See Note 2 of the accompanying unaudited condensed consolidated financial statements herein and Note 3 of the audited consolidated financial statements in our Annual Report for the recent accounting pronouncements adopted and the recent accounting pronouncements not yet adopted for the three and nine months ending September 30, 2021 and 2020.
In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an emerging growth company, we intend to rely on such exemptions, we will not be required to, among other things: (a) provide an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; (b) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act; (c) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis); and (d) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation.
We will remain an emerging growth company under the JOBS Act until December 31, 2021.
New and Recently Adopted Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are applicable to us as of the specified effective date. As of September 30, 2021, there are no new accounting pronouncements not yet adopted that will have an impact on our financial position or results of operation.
As an “emerging growth company”, we can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 4. Controls and Procedures.
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Exchange Act) designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer (our Principal Executive Officer) and our Chief Financial Officer (Principal Financial Officer), as appropriate to allow timely decisions regarding required disclosures. As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, our Principal Executive Officer and our Principal Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2021.
Based on this evaluation, including the presence of a material weakness as discussed below and the continuation of the material weaknesses described in our Annual Report, our Principal Executive Officer and our Principal Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2021.
Subsequent to the filing of the Company’s Form 10-K for the year ended December 31, 2020, the Company determined that there were material errors within its Annual Report on Form 10-K for the years ended December 31, 2020 and 2019.
Specifically, the Company identified a material weakness in internal controls related to the accounting for warrants issued in connection with our initial public offering. Our internal control over financial reporting did not result in the proper classification of certain of the warrants we issued in July 2019 which, due to its impact on our financial statements, we determined to be a material weakness.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2021, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a description of our material pending legal proceedings, see Legal Proceedings in Note 13, Commitments and Contingencies, to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and incorporated herein by reference.
Item 1A. Risk Factors
Risk Factors
An investment in our securities is speculative and involves a high degree of risk. Before deciding whether to invest in our securities, you should consider carefully the risks described below, together with other information in this Quarterly Report on Form 10-Q and the other information and documents we file with the SEC, including our Annual Report. The occurrence of any of the following risks could have a material and adverse effect on our business, reputation, financial condition, results of operations and future growth prospects, as well as our ability to accomplish our strategic objectives. As a result, the trading price of our Common Stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations and stock price.
There have not been any material changes to the risk factors disclosed in our Annual Report for the year ended December 31, 2020 other than those disclosed in our Part II, Item 1A under the heading “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 filed with the SEC on May 17, 2021 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, filed with the SEC on August 13, 2021 and the risk factors set out below.
Recent and pending management changes could disrupt our operations and impair our ability to attract and retain key personnel.
We have experienced recent changes to our senior management team, including the announced departure of Dimitri Kazarinoff and appointment of Eric Tech as our Chief Executive Officer effective as of December 1, 2021. Changes in our senior management and uncertainty regarding pending changes may disrupt our operations, impact partner relationships, and impair our ability to recruit and retain other needed personnel. Any such disruption or impairment could have an adverse effect on our business.
Our product development efforts are subject to counterparty risks
We often develop products as part of co-development agreements where our counterparty bears some of the product development and engineering costs and, among other obligations, may be responsible for supplying critical components or designs, providing access to key customers or technologies, or developing the more fulsome product or platform (a chassis or vehicle, for example) that incorporates or makes use of our products. In some instances, we’ve made investments in those counterparties to provide them with additional working capital and provide us with greater returns upon the expected commercial success of the integrated product offering. Among other initiatives, we are currently developing an electric drivetrain for use in Curbtender medium duty refuse vehicles, and a battery pack and associated power systems for use in eTRUs in refrigerated trailers for eNow. Our reliance on these and other counterparties subjects our product development efforts, the expected commercial success of those products, and any investment we’ve made in those counterparties to the risks facing those businesses, including their own financial wellbeing and liquidity, the effectiveness of their salesforce, the quality of their customer relationships, the stability of their workforce, the capability of their engineering teams, the adequacy of their own technology and manufacturing ability, and other risks that may be unforeseeable from the perspective of a co-developer. Should these businesses and/or product offerings fail to achieve the commercial success we anticipate, our own revenues may be impacted and our investments may be impaired.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
| * | Filed herewith | |
| + | Indicates a management contract or compensatory plan or arrangement. |
| ^ | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933 except to the extent that the registrant specifically incorporates it by reference. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| XL FLEET CORP. | ||
| Date: November 15, 2021 | By: | /s/ Dimitri N. Kazarinoff |
| Name: | Dimitri N. Kazarinoff | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Date: November 15, 2021 | By: | /s/ Cielo Hernandez |
| Name: | Cielo Hernandez | |
| Title: | Chief Financial Officer | |
| (Principal Financial Officer and Principal Accounting Officer) | ||
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