Greetings, and welcome to Xos Inc.'s First Quarter 2023 Earnings Call. Please note that this conference is being recorded. At this time, I would like to turn the conference over to General Counsel of Xos, Christen Romero. Thank you. You may please go ahead.

Thank you, operator, and thank you, everyone, for joining us today. Hosting the call with me today are Chief Executive Officer, Dakota Semler; Chief Operating Officer, Giordano Sordoni; and Chief Financial Officer, Kingsley Afemikhe. Ahead of this call, Xos issued its first quarter 2023 earnings press release, which we will reference during this call. This can be found on the Investor Relations section of our website at investor.xostrucks.com. On this call, management will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of factors discussed in today's earnings news release, during this conference call or in our latest reports and filings with the Securities and Exchange Commission. These documents can be found on our website at investors.xostrucks.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures and performance metrics. Please refer to the information contained in the company's first quarter 2023 earnings press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. Participants should be cautioned not to put undue reliance on forward-looking statements. With that, I'll turn it over to Dakota.

Thanks, Christen, and thank you, everyone, for joining us today for our first quarter 2023 earnings call. On today's call, I will cover the quarterly business highlights and provide an update on our charging infrastructure deployments. Then our COO, Giordano Sordoni, will provide an update on our path to begin delivering gross margin positive units at the end of the second quarter. To wrap up, our CFO, Kingsley Afemikhe, will share the company's first quarter financial performance. To begin, our focus remains on the three core tenets we outlined on our fourth quarter call. These tenets are growing demand and deliveries of our products, achieving positive gross margins at the unit level by midyear, and maintaining ample liquidity and access to capital. Regarding the first tenet, we continue to experience strong demand for our vehicles, evidenced by additional orders and customer engagement. During the first quarter, we delivered a total of 31 units to customers such as Alsco and multiple FedEx Ground ISPs. Deliveries were impacted by customer infrastructure installation delays that resulted in requests to postpone some scheduled deliveries. While infrastructure-related disruptions will likely remain a factor as utilities and permitting municipalities catch up with customer demand, we are taking actions to mitigate the impact on our deliveries. These include reprioritizing customers based on their infrastructure readiness, stricter enforcement of delivery terms, quoting excess charging services alongside every Stepvan, and launching new solutions like the Xos Hub to fill the gap between vehicle delivery and permanent charger installation. Though our first quarter deliveries fell short of expectations, we continue to maintain our forward-looking guidance for the year, as Kingsley will cover. In addition to being a critical enabler for Stepvan deliveries, charging infrastructure is also an important revenue driver for Xos. We continue to see growing demand for Xos Energy Solutions or XES, our suite of comprehensive charging infrastructure and services. We are seeing more customers realize the importance of investing in charging infrastructure alongside vehicle purchases. As we noted last quarter, our Energy Solutions team has multiple installation projects in the works, and we just delivered new chargers to customers such as Loomis, UniFirst, and multiple FedEx ground ISPs. In addition to our permanent charging infrastructure projects, we formally revealed our second-generation Xos Hub ahead of the Advanced Clean Transportation or ACT Expo last week. Customer interest in the hub was high at ACT Expo. Our team held dozens of meetings with current and potential customers that solidified our belief that flexible methods of charging like the hub will play a key role in accelerating fleet electrification. The hub is capable of charging five vehicles simultaneously from a single power connection, enabling fleet operators to transition to EVs ahead of installing permanent infrastructure. We expect the hub to begin scaling production in the third quarter of this year. Relatedly, as you may recall from the fourth quarter call, our first Xos Hub prototype was delivered to one of our Fortune 100 customers, where it has been actively charging vehicles for a parcel delivery fleet and collecting real-world usage and reliability data. Turning to our second tenet, getting to positive gross margins at the unit level by midyear, we made good progress, evidenced by significant gross margin improvement in the first quarter. Our gross margins improved to negative 19% in the first quarter of 2023 from negative 93% in the fourth quarter of 2022. This improvement was driven by better inventory management and continued growth in average selling prices that Kingsley will cover later in the call. In addition, we are excited by the launch of the 2023 Stepvan as the next step in continuing that encouraging trend and progressing towards achieving consistent positive gross margins on a unit level. The new design is expected to reduce direct material and labor costs by more than $15,000 per Stepvan, with further savings anticipated and on our product roadmap for 2023 and 2024, which Gio will provide more detail on. As we transition away from the previous generation Stepvans and begin to deliver our 2023 model Stepvan in the second quarter, those cost reductions are expected to become evident in our financials. Finally, before I wrap up, I would like to turn our attention to a management transition. Our CFO, Kingsley Afemikhe, came to us and noted some professional and personal opportunities he'd like to pursue and will be leaving the team later this month. Kingsley has helped us build a deep finance organization over the last few years and onboarded several strong leaders for each of his critical finance functions. Kingsley has been a great partner for our management team, and we would like to thank him for his service over these past three years. He will remain in his role to help ensure a smooth transition over the next few weeks, and we expect the Board to appoint our Corporate Controller, Liana Pogosyan, as acting CFO while we complete our evaluation of internal and external candidates. Liana has made major contributions to the strengthening of the finance function during her time at Xos and had a successful career prior to joining Xos in various finance and audit functions over the last 18 years. She has built a robust accounting team and will lead our finance organization as it grows and evolves to meet the needs of the organization. With that, I would now like to turn the call over to our COO, Gio Sordoni, who will share an operational update.

Thanks, Dakota. Xos' operational focus remains on beginning to deliver gross margin positive units during the second quarter. In order to achieve this goal, the team is taking steps to reduce costs and better leverage our manufacturing capacity. To that end, we've streamlined our manufacturing operations and focused production at our Tennessee facility. The Tennessee facility provides us with manufacturing capacity to meet our customers' expected needs for the foreseeable future, allowing us to focus on efficiency improvements. These efforts include improvements to the warehouse management systems and investing in our quality and supply chain teams with on-site senior leadership. Paul Sivaswamy, VP of Supply Chain; and Eric Purcell, VP of Quality are on the ground in Tennessee and put into work their immense experience built over many years at Caterpillar and Tesla, respectively. We are pleased with the early results from these actions, which include reduced freight charges and more accurate inventory counts. In addition to manufacturing process improvements, design changes included in the 2023 Stepvans are expected to further reduce the cost of manufacturing. Compared with the previous generation Stepvans, we've made changes designed to reduce costs and improve performance for fleet operators. These include centralized power electronics that shorten high-voltage cable runs, saving on copper costs, as well as switching to lithium iron phosphate or LFP battery chemistry, which reduces our need for expensive nickel and cobalt. These are just a couple of examples of the extensive updates made to the 2023 Stepvan. Looking forward, we've identified additional improvements that will integrate into the Stepvan in over 2023 and 2024 as we look to move beyond gross margin goals and towards generating positive cash flow. In summary, we believe we are well positioned to scale our business and expand margins. We're very proud of what the engineering, supply chain, and manufacturing teams have been able to accomplish during the quarter and their dedication to reducing costs without sacrificing what makes our vehicles leaders in this sector. We're all motivated by the immense opportunity for clean fleet and logistics solutions, and we expect to benefit from a secular shift to a net zero carbon economy. I'll now turn the call over to our CFO, Kingsley Afemikhe, who will cover our financial results for the quarter.

Thank you, Gio, and good afternoon, everyone. As previously noted, we continue to remain on track to deliver gross margin positive units by mid-2023, while also ensuring we meet the strong demand for our products and solutions. I'll now turn and review our financial performance for the first quarter of the year. For the first quarter, our revenue was $4.7 million compared to $7 million in the first quarter of 2022. This decrease in revenue was driven by the sequential decline in deliveries that Dakota covered earlier in the call. While revenues came in lower than desired, we were pleased to see a continued quarter-over-quarter growth in average selling prices. Relative to the fourth quarter of 2022, our first quarter average selling prices were up by 4%. Our cost of goods sold during the quarter decreased to $5.6 million compared to $13 million for the first quarter of 2022. Gross margin during the quarter was a loss of $0.9 million compared to a net loss of $6 million in Q1 2022. This represents significant improvement from negative 85% to negative 19%. In addition to pricing, this improvement came primarily from the investments in our inventory management processes, as Gio mentioned earlier, that improved count accuracy and drastically reduced write-downs. These improvements give the team confidence in our ability to deliver gross margin positive units by the end of the second quarter. Turning now to expenses. Our first quarter operating expenses decreased to $19.2 million from $20.3 million in the first quarter of 2022, and this is driven by lower research and development expenses of $5.7 million during the quarter compared to $6.9 million in the first quarter of 2022 and the decrease in sales and marketing expenses, which were $1.8 million compared to $2 million in the first quarter of 2022. These lower expenses were partially offset by an increase in general and administrative expenses to $11.6 million versus $11.3 million in the first quarter of 2022. Non-GAAP operating loss for the quarter was $18.9 million. Looking forward, as we prepare to move beyond gross margin targets and aim to position Xos as a positive cash flow business, we have put in place a plan to drive efficiency in all our operating expenses, and we'll share more details on these efforts next quarter. We closed the quarter with cash, cash equivalents, and marketable debt securities available for sale of $64 million. In addition to cash used in operating activities, we used $9.7 million in financing activities, primarily related to payments on our convertible debentures with Yorkville Advisors. On a quarter-over-quarter basis, inventories declined from $57.5 million at the end of the fourth quarter of 2022 to $57 million in the first quarter. We expect inventory to remain roughly at the same level also over the second quarter despite growing sales. Operating cash flow minus CapEx or free cash flow reduced to $15.6 million for the quarter from $24.6 million last quarter. We believe that as we grow delivery volumes, build working capital and progress towards positive gross margins, we'll have options to raise additional capital, and we'll continue to maintain ample liquidity. To wrap up, we reiterate our 2023 outlook and continue to expect to deliver 450 to 600 units, generate between $58.5 million to $84 million in revenue and a non-GAAP operating loss of between 52.8 and $80 million. As mentioned last quarter, we expect deliveries to be weighted towards the second half of 2023. In closing, as this will be my last quarterly call as CFO of Xos, I would like to say it has been the privilege of my career to work with such a committed and talented team at Xos. I'm proud to have assembled and developed a team of capable leaders within our finance organization. As I depart, I wish the entire Xos team, all our customers, and our investors, nothing but the very best in the continued journey. I'll now turn the call back to Dakota.

Thanks, Kingsley. Though the commercial EV sector remains impacted by the rollout of charging infrastructure, we remain confident that Xos is on track for long-term success. We are actively taking steps to sustain our growth, unblock the charging difficulties of our customers, and deliver gross margin positive units. Our superior products, strong customer relationships, and the supportive regulatory tailwinds position us well to achieve our goal of electrifying commercial fleets. Finally, I want to thank our extremely talented and committed team here at Xos for their ongoing efforts in pursuit of our vision for the company, as well as our valued customers and stakeholders for their continued support. With that, we'd now like to open the line for questions.

The first question comes from Mike Shlisky with D.A. Davidson. Please go ahead. I'm sorry. The first question comes from Donovan Schafer with Northland Capital Markets. Please go ahead.

I want to focus on the infrastructure aspect. It's encouraging to see you maintain your guidance despite facing some bottlenecks and challenges. Could you provide more details on the trends and timelines related to building infrastructure? I've noticed in solar and other sectors that as the industry grows rapidly, utilities often struggle to keep pace. Even if they are doing well, if they cannot match the industry's speed, bottlenecks may still arise. Is there an improvement in this trend? Are you seeing utilities increase their staffing? Additionally, could you share insights on deliveries, such as chargers to Loomis and other customers? What are the positive indicators, and what are you observing in the infrastructure area that supports your confidence in the guidance?

Yes, I’m happy to provide more context on that. There are three key trends we are currently experiencing in the industry, and we believe we can address each of them. First, there are bottlenecks in permitting and construction. Second, there’s a need for long-term planning, especially following the recent ACF rule. The third trend is the development of mobile solutions, which I'll elaborate on shortly. Many ask what we mean by charging infrastructure bottlenecks. It's important to clarify that we're not facing a shortage of chargers or access to them. While we did experience some challenges during last year's supply chain issues, the primary delays now occur in the permitting, planning, and construction phases of charging infrastructure projects. This includes working with local authorities and regional planning organizations to obtain necessary approvals and collaborating with utilities to ensure adequate power is available for the chargers. Scheduling construction contractors for the installation is also a significant part of the process, and these are inherently lengthy. With the current demand in the industry, we are facing bottlenecks specifically in these phases. Internally, Xos Energy Solutions is improving how we respond to these challenges by testing new methods to streamline permit submissions and our procurement processes. However, we do not anticipate these trends will change in the next year, particularly due to regulatory factors like the Advanced Clean Fleet rule, which mandates fleets electrify a portion of their vehicle population by the end of 2024. These regulations will continue to drive demand for charging infrastructure over the next decade, although we expect planning organizations and construction teams to become more efficient over time, reducing bottlenecks. As for mobile charging solutions, we recently launched our second-generation Xos Hub ahead of the ACT Expo in Southern California, which generated significant interest and demand. This product serves as a temporary charging solution, allowing fleets to manage delays caused by permitting and construction bottlenecks. The hub can be delivered and installed on-site within a day, charging up to five vehicles simultaneously. Once the permanent infrastructure is ready, the hub can be relocated to assist other customers until they have their own system in place. This solution is a valuable tool for addressing charging infrastructure bottlenecks. I want to ensure I'm addressing your question effectively.

Yes, you did. My follow-up is regarding the full year guidance. I understand that it's challenging with the utilities and other factors. Do you have visibility on the charging process? It seems like you are supporting customers more internally with the permitting process. Are there specific timelines for when charging services will be available at their depots? Have you discussed with certain customers who are ready to choose the Xos hub route? How far ahead can you project—three months, six months—regarding when the chargers will be where they need to be for our guidance?

We have significant visibility into our customer order book and actively work to update and revise it so we know what to expect in terms of delivery for the second half of the year. While there are some sites at risk for delays that we are closely monitoring, this visibility contributes to our confidence in reiterating guidance. We are also focused on developing long-term plans with our customers to ensure that as they purchase vehicles over the next three to five years, there is a strategy for infrastructure in place. This way, we can avoid past mistakes of having trucks ready before the necessary charging infrastructure is available.

Makes perfect sense. Okay. Thanks for the clarification there. I'll take the rest of my questions offline.

The next question is from Mike Shlisky with D.A. Davidson. Please go ahead.

Yes, hi. Good afternoon. And thanks for taking my questions. Follow up on the last few questions there, Dakota. You had mentioned in your prepared remarks, you think about enforcing delivery times. What does that mean exactly? Are folks asking you to hold off and you're saying, hey, we have a data on this contract? Or just some more color as to what you're actually doing when you say you're enforcing delivery times?

Yes, it's a good question, Mike. One of the things we're trying to do is align production schedules with the deployment of charging infrastructure. However, even if we build the truck on time and continue to get a truck out per our production schedule, you do continue to experience unforeseen delays all the way up to the final day of commissioning of a charger. In some cases, customers have requested that we hold vehicles until that charger is finally commissioned. And so we've really updated and tried to evolve our terms and conditions and our contracts with our customers to really have a set delivery date. So that when the truck comes off the line, we can deliver the truck even if the charging infrastructure is not ready. Ideally, we're going to be working with our customers to ensure their success and ensure that we can deliver vehicles as quickly as possible. But really, for the most part, we're trying to align the charging infrastructure with the production schedule so that we don't ever have to take a vehicle that's slated for a particular customer and sell it to another customer that might be ready.

Okay. Great. Thanks for that. Then I wanted to just ask about the effort to get to gross margin positive here. It sounds like things are on the right track. I guess I kind of want to just ask out to Gio, is the 2023 Stepvan, is it essentially gross margin positive just run after that from your very first one you'll be making? So in 3Q, 4Q, once your mix is mainly that, your whole math is going to be gross margin positive at that point?

Yes. We're really confident in the changes that we've made to reduce costs, and that was a big focus of the design of this 2023 new Stepvan platform, consolidating high-voltage power electronics as an example, to shorten the amount of high-voltage cable runs we have on the vehicle. In terms of whether or not each of those vehicles will be gross margin positive from the start, it's hard to say just because there are different. Different customers have different pricing, in some cases, there will be multiple battery configurations. And of course, those first vehicles off the line as we're getting production ramps, there will be more effort and hours into those initial vehicles. But that is the idea, and that's the part of the whole focus of the new 2023 step-down is to reduce the cost and improve the performance and continue to deliver a valuable product to our customers.

Okay, great. I also wanted to ask about your plans for a company-wide effort to achieve positive cash flow after reaching positive gross margins. That's quite exciting. I'm curious if there will be some cost reductions possible on an ongoing basis. Is it mainly a question of volume from that point forward? Will you have any special initiatives, like getting the MDXT HDXT operational, to help meet those volume goals? Or are there other strategies I might not be considering that would help you achieve positive cash flow?

Yes, it's a good question, Mike. And I think one of the things we're doing is taking manufacturing, and we are consolidating at Holland Tennessee. So as we've really established a good footprint in Tennessee, building trucks there and delivering them to customers, we've also migrated our battery operations there and are installing some of the battery systems on the vehicles and doing battery work in Tennessee as well. That saves us on things like overhead and freight logistics, as well as in personnel and our ability to reduce overheads that are associated with each of the vehicles delivered. Obviously, you mentioned volume. Volume is a large factor that helps us in our ability to get to generating free cash flow. And that's something that we like to balance with the infrastructure world and the readiness of our customer available charging infrastructure. The last thing is really focusing on the step in this year. As we talked about the MD and HD platforms will allow us to grow volumes. But we believe that the Stepvan business in itself is a very profitable and lucrative product portfolio and product platform, and we're going to continue to improve those margins over time. So the first indications and guidance of the 2023 Stepvan being profitable is just the first step, but we expect continued savings to come out of that vehicle platform in this year as well as in 2024 as we introduce some new technology changes that we've been working on. So it's really a combination of consolidating manufacturing, increasing volumes, and additional technology changes that we're making to the platform that will yield direct material cost savings that get us to that point where we can start to generate positive cash flows.

Okay. Got it. Thanks for the information. I'll leave it there and Kingsley, thanks for all the information over the years, and best of luck to you. Thank you.

Thank you so much.

At this time, there are no other questions in the queue. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines. Have a wonderful day.