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: XL Fleet Corp. and its subsidiaries
(“XL Fleet” or the “Company”) is a provider of fleet electrification solutions for commercial vehicles in North
America, offering solutions for vehicle electrification (“Drive Systems”) and infrastructure solutions such as vehicle charging
stations through its XL Grid programs, as further described below. XL Fleet has over 4,400 electrified powertrain systems sold and driven
over 173 million miles by over 240 fleets, as of September 30, 2021. XL Fleet’s vision is to become the world leader in commercial
fleet electrification solutions, with a mission of accelerating the adoption of fleet electrification systems through cost effective,
customer tailored and comprehensive solutions.
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 100% of the membership interests of World Energy Efficiency Services, LLC (“World Energy”).
World Energy provides turnkey energy efficiency, renewable technology, electric vehicle charging stations and other energy solutions throughout
New England. The Company completed the acquisition to further the strategy of its XL Grid business to provide a suite of charging and
power solutions to support fleet electrification (See Note 4).
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.
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.
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 $250 federally insured limit. The Company
believes it is not exposed to any significant credit risk on cash and cash equivalents.
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, two customers accounted for approximately 48% and 21% of accounts receivable. As of December 31, 2020, one customer accounted
for approximately 82% of accounts receivable. For the three months ended September 30, 2021 and 2020, two customers and two customers
accounted for approximately 80% and 73% of revenues, respectively. For the nine months ended September 30, 2021 and 2020, two customers
and two customers accounted for approximately 56% and 69% of revenues, respectively.
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 $150 for a bank deposit required for a letter of credit which is reserved for the Company’s California lease.
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
|
|
$
|
366,748
|
|
|
$
|
1,583
|
|
Restricted cash
|
|
|
150
|
|
|
|
150
|
|
Total cash, cash equivalents, and restricted cash
|
|
$
|
366,898
|
|
|
$
|
1,733
|
|
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 $517 and $0, respectively.
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 $195 and $58, respectively.
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.
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.
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.
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 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 by offered by competitors. Therefore, the Company has
determined that these warranties are 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 the Company an extended warranty for its 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.
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.
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
|
|
|
78.1
– 88.2
|
%
|
|
|
80.0 – 80.1
|
%
|
Expected term (in years)
|
|
|
6.25
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
0.4 – 1.9
|
%
|
|
|
0.1 – 0.2
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
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.
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 one operating and reportable
segment.
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.
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
|
|
$
|
366
|
|
|
$
|
959
|
|
|
$
|
1,138
|
|
|
$
|
2,020
|
|
Revenue through channel partners
|
|
|
189
|
|
|
|
5,369
|
|
|
|
1,374
|
|
|
|
7,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from the sale of XL Grid solutions – which are sold direct to customers
|
|
|
2,645
|
|
|
|
-
|
|
|
|
5,057
|
|
|
|
-
|
|
Total revenue
|
|
$
|
3,200
|
|
|
$
|
6,328
|
|
|
$
|
7,569
|
|
|
$
|
9,472
|
|
Remaining
performance obligations: At September 30, 2021 and December 31, 2020, there was approximately $239 and $305 in deferred revenue related
to unsatisfied extended warranty performance obligations. During the three and nine months ended September 30, 2021, the Company recognized
revenue of $2 from the December 31, 2020 deferred revenue balance.
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).
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: Sales commissions paid to internal sales personnel, as well as associated
payroll taxes and retirement plan contributions (together, sales commissions and associated costs) that are incremental to the acquisition
of customer contracts, are capitalized as contract acquisition cost on the balance sheet when the period of benefit is determined to be
greater than one year. In instances where an extended warranty is sold, the period of benefit would extend beyond 12 months and therefore,
the practical expedient would not be met for those contracts and require capitalization of the related costs to obtain those contracts.
The Company has elected to allocate the capitalized commissions to performance obligations on a relative basis (i.e., in proportion to
the transaction price allocated to each performance obligation) to determine the period of amortization. As a result, substantially all
of the commission is allocated to the combined equipment and installation performance obligation and is amortized upon transfer of control
of this performance obligation, which typically occurs in the same period in which commission liability is incurred. Total commission
expense recognized during the three months ended September 30, 2021 and 2020 was $198 and $13, respectively, and $397 and $46 during the
nine months ended September 30, 2021 and 2020, respectively. The amount of capitalized commissions as of September 30, 2021 and December
31, 2020 was not material.
Warranties:
The Company accrues estimated warranty costs at the time of sale related to its assurance- type warranties. In general, for the sales
of Drive Systems, manufactured products are warranted for the shorter of three years or 75,000 miles against defects in material and
workmanship when properly used for their intended purpose, installed correctly and appropriately maintained. For the XL Grid solutions,
projects are warranted for one year. The amount of the accrued warranty liability is estimated based on historical claims rates and warranty
fulfillments costs adjusted for any expected changes in fulfillment costs.
The
following is a roll-forward of the Company’s accrued warranty liability:
|
|
For
the
Nine Months Ended
September 30,
|
|
|
For
the
Year
Ended
December 31,
|
|
|
|
2020
|
|
|
2021
|
|
Balance at the beginning of the
period
|
|
$
|
1,735
|
|
|
$
|
1,009
|
|
Acquisition date accrual for World Energy acquisition
|
|
|
25
|
|
|
|
-
|
|
Accrual for warranties issued
|
|
|
126
|
|
|
|
912
|
|
Warranty fulfillment charges
|
|
|
(285
|
)
|
|
|
(186
|
)
|
Balance at the end of the period
|
|
$
|
1,601
|
|
|
$
|
1,735
|
|
The
warranty liability is included in accrued expenses and other current liabilities on the Unaudited Condensed Consolidated Balance Sheets.
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;
|
|
●
|
An obligation to pay in cash an earnout of $1,000 upon World Energy’s achievement for the calendar year 2021 revenues of $19,500. The payment of the earnout is due within 30 days following the completion of the audit of XL Fleet’s financial statements for the fiscal year ending December 31, 2021. Pursuant to the agreement, the earnout is payable only if revenues for the period equal or exceed $19,500. Should the World Energy revenues be less than $19,500, then the earnout would be $0. The Company determined that the achievement of the $19,500 revenue target was highly probable, and as such, the Company recorded a closing date fair value of the earnout in the amount of $1,000.
|
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.
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
|
|
$
|
8,000
|
|
Working capital adjustments
|
|
|
496
|
|
Fair value of 231,002 shares issued at closing
|
|
|
1,439
|
|
Fair value of the earnout
|
|
|
1,000
|
|
Portion of deferred
obligation to issue shares of common stock
|
|
|
1,526
|
|
Total consideration
|
|
|
12,461
|
|
|
|
|
|
|
Less the fair value
of assets acquired less liabilities assumed
|
|
|
(4,109
|
)
|
Goodwill
|
|
$
|
8,352
|
|
Included
in assets acquired was cash of $308.
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 448,050 shares of its common stock, with an
aggregate fair value of approximately $2,800 as of September 30, 2021, issuable in three equal installments on the sixth, twenty-fourth
and the thirtieth monthly anniversaries of the closing date, provided that seller/employee is employed by the Company at the date of issuance.
If the seller/employee is not employed at such issuance date, the shares attributable to that seller/employee are forfeited. The Company
determined that under relevant accounting guidance that this obligation to issue shares would be accounted for as compensation and not
as purchase price consideration.
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 $573 and $1,000, respectively.
The
initial transaction with World Energy included an outstanding PPP loan of $507 that was incorporated in the liabilities assumed. During
the third quarter of 2021, the PPP loan was forgiven in full which resulted in an additional payment to the sellers of World Energy.
Consequently, the fair value of assets acquired less liabilities assumed was adjusted by the entire amount of the PPP loan that was forgiven,
with a corresponding reduction in goodwill.
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
|
|
$
|
308
|
|
Accounts receivable
|
|
|
3,350
|
|
Inventory, net
|
|
|
1,282
|
|
Prepaid expenses and other
current assets
|
|
|
100
|
|
Property and equipment,
net
|
|
|
173
|
|
Intangible assets, net
|
|
|
1,560
|
|
Right-of-use asset
|
|
|
145
|
|
Goodwill
|
|
|
8,352
|
|
Other assets
|
|
|
12
|
|
Accounts payable
|
|
|
(1,096
|
)
|
Lease liability, current
|
|
|
(56
|
)
|
Accrued expenses and other
current liabilities
|
|
|
(1,297
|
)
|
Deferred revenue
|
|
|
(283
|
)
|
Lease
liability, non-current
|
|
|
(89
|
)
|
Total
purchase consideration
|
|
$
|
12,461
|
|
The
acquired intangible assets are comprised of $1,560 related to the fair value of customer relationships which is amortized over three
years.
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.
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
|
|
$
|
10,971
|
|
|
$
|
15,318
|
|
|
$
|
21,003
|
|
Net (loss) income
|
|
$
|
(1,630
|
)
|
|
$
|
44,741
|
|
|
$
|
(22,194
|
)
|
Per share amounts: Net (loss) income per share – basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.32
|
|
|
$
|
(0.27
|
)
|
Net loss per share – diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.31
|
|
|
$
|
(0.27
|
)
|
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 $498 were added back for the nine months ended September 30, 2021.
|
2.)
|
Elimination of interest expense associated with debt that was repaid in the acquisition of World Energy of $37 for the nine months ended September 30, 2021, and $23 and $64 for the three and nine months ended September 30, 2020, respectively.
|
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 $3,000 into eNow,
a developer of solar and battery power systems that will enable fully-electric transport refrigeration units (“eTRUs”) for
Class 8 commercial trailers. In exchange for the investment, eNow issued to the Company a convertible debenture (the “eNow Convertible
Note”) dated July 15, 2021 (the “Issuance Date”) in the original principal amount of $3,000. The eNow Convertible Note
bears interest at the rate of 8% per annum. The eNow Convertible Note is classified as an available-for-sale security. As discussed below,
XL Fleet has an option to purchase eNow. If XL Fleet does not exercise this option, under certain circumstances the eNow Convertible Note
would be converted on such date into Series B preferred stock. Interest on the outstanding principal sum of the eNow Convertible Note
commences accruing on the Issuance Date and is computed on the basis of a 365-day year.
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
|
|
$
|
1,601
|
|
|
$
|
1,735
|
|
Accrued compensation
and related benefits
|
|
|
3,385
|
|
|
|
1,001
|
|
Contingent purchase price
consideration – Quantum
|
|
|
1,911
|
|
|
|
926
|
|
Deferred purchase price
consideration – World Energy
|
|
|
1,503
|
|
|
|
-
|
|
Accreted contingent compensation
to sellers – World Energy
|
|
|
1,000
|
|
|
|
-
|
|
Accrued financing fees
|
|
|
-
|
|
|
|
723
|
|
Professional fees
|
|
|
940
|
|
|
|
-
|
|
Accrued
expenses, other
|
|
|
2,614
|
|
|
|
216
|
|
|
|
$
|
12,954
|
|
|
$
|
4,601
|
|
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 $3,481 and operating lease liabilities of $3,481 on the Company’s
condensed consolidated balance sheet as of January 1, 2021. The adoption of ASC 842 resulted in the recognition of finance ROU assets
of $897 and finance lease liabilities of $897 on the Company’s condensed consolidated balance sheet as of January 1, 2021.
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
|
|
$
|
3,219
|
|
|
$
|
3,481
|
|
|
$
|
–
|
|
Lease liability, current
|
|
|
433
|
|
|
|
469
|
|
|
|
–
|
|
Lease liability, non-current
|
|
|
2,841
|
|
|
|
3,012
|
|
|
|
–
|
|
Finance leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
|
1,252
|
|
|
|
897
|
|
|
|
–
|
|
Lease liability, current
|
|
|
446
|
|
|
|
265
|
|
|
|
–
|
|
Lease liability, non-current
|
|
|
685
|
|
|
|
632
|
|
|
|
–
|
|
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
|
|
$
|
222
|
|
|
$
|
617
|
|
|
|
As
of
September 30,
|
|
|
|
2021
|
|
Operating cash flows from operating
leases
|
|
$
|
561
|
|
Weighted-average remaining lease term –
operating leases (in months)
|
|
|
86.8
|
|
Weighted-average discount rate – operating
leases
|
|
|
9.6
|
%
|
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)
|
|
|
$
|
214
|
|
2022
|
|
|
|
673
|
|
2023
|
|
|
|
633
|
|
2024
|
|
|
|
597
|
|
2025
|
|
|
|
613
|
|
Thereafter
|
|
|
|
1,891
|
|
Total future minimum lease
payments, undiscounted
|
|
|
|
4,621
|
|
Less:
imputed interest
|
|
|
|
(1,347
|
)
|
Present
value of future minimum lease payments
|
|
|
$
|
3,274
|
|
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 $507 pursuant
to Title 1 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). This loan was forgiven by the SBA
during July 2021 (See Note 4).
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
|
|
|
0.81
|
%
|
|
|
0.36
|
%
|
Remaining term in years
|
|
|
4.23
|
|
|
|
4.98
|
|
Expected volatility
|
|
|
87.9
|
%
|
|
|
95.4
|
%
|
Exercise price
|
|
$
|
11.50
|
|
|
$
|
11.50
|
|
Fair value of common stock
|
|
$
|
6.16
|
|
|
$
|
23.73
|
|
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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,000
|
|
|
$
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability:.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,582
|
|
|
$
|
13,582
|
|
Contingent
consideration -– Quantum
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,911
|
|
|
$
|
1,911
|
|
Earnout
– World Energy
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
Fair
value of obligation to issue shares of common stock to sellers of World Energy
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,509
|
|
|
$
|
1,509
|
|
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
|
|
$
|
62,100
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
62,100
|
|
Private Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
81,195
|
|
|
$
|
81,195
|
|
Contingent consideration -– (Quantum)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,849
|
|
|
$
|
1,849
|
|
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 $85,555 and 225,647 Public Warrants were called at $0.01 per warrant. No Public
Warrants remain outstanding as of 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
|
|
$
|
-
|
|
|
$
|
83,044
|
|
Obligation to issue
shares of common stock to sellers of World Energy
|
|
|
-
|
|
|
|
1,526
|
|
Fair value adjustment
– Quantum contingent consideration
|
|
|
-
|
|
|
|
62
|
|
Fair value adjustments
– Warrant liability
|
|
|
-
|
|
|
|
(67,612
|
)
|
Fair value adjustments
– World Energy
|
|
|
-
|
|
|
|
(18
|
)
|
Purchase of eNow Convertible
Note at fair value
|
|
|
3,000
|
|
|
|
-
|
|
Earnout
– World Energy
|
|
|
-
|
|
|
|
1,000
|
|
Balance, September 30, 2021
|
|
$
|
3,000
|
|
|
$
|
18,002
|
|
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
|
|
|
|
249,117
|
|
|
$
|
0.76
|
|
Issued
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
|
(243,000
|
)
|
|
|
0.76
|
|
Outstanding
at September 30, 2021
|
|
|
|
6,117
|
|
|
$
|
0.76
|
|
Exercisable
at September 30, 2021
|
|
|
|
6,117
|
|
|
$
|
0.76
|
|
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 $1,194 and $386, respectively, and $2,390 and $663 for the nine months ended September 30, 2021 and 2020, respectively.
As of September 30, 2021, there was $9,507 of unrecognized compensation cost related to stock options which is expected to be recognized
over the remaining vesting periods, with a weighted-average period of 3.3 years.
Stock
Options
During
the nine months ended September 30, 2021, the Company issued 776,116 options to certain employees and board members that will vest
over a period of one to four years.
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
|
|
|
10,975,224
|
|
|
$
|
0.57
|
|
|
|
7.6
|
|
Granted
|
|
|
776,116
|
|
|
|
8.56
|
|
|
|
|
|
Exercised
|
|
|
(133,083
|
)
|
|
|
0.24
|
|
|
|
|
|
Cancelled or forfeited
|
|
|
(559,102
|
)
|
|
|
0.65
|
|
|
|
|
|
Outstanding at September 30, 2021
|
|
|
11,059,155
|
|
|
$
|
1.01
|
|
|
|
6.8
|
|
Exercisable at September 30, 2021
|
|
|
7,374,132
|
|
|
$
|
0.39
|
|
|
|
6.0
|
|
The aggregate
intrinsic value of stock options outstanding as of September 31, 2021 was $53,038. The aggregate intrinsic value of stock options exercisable
as of September 31, 2021 was $38,998. Cash received from options exercised for the nine months ended September 30, 2021 and 2020 was
$32 and
$21, respectively.
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
|
|
|
446,332
|
|
|
$
|
0.24
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Cancelled or forfeited
|
|
|
-
|
|
|
|
|
|
Non-vested, at end of period
|
|
|
446,332
|
|
|
$
|
0.24
|
|
Restricted
Stock Units
During the nine months ended September 30, 2021, the Company issued
476,050 restricted stock units to certain employees and board members that will vest over a period of one to four years.
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
|
|
|
476,050
|
|
|
|
7.08
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Cancelled or forfeited
|
|
|
(4,319
|
)
|
|
|
6.49
|
|
Non-vested, at end of period
|
|
|
471,731
|
|
|
$
|
7.08
|
|
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
$58 and $58,
respectively, and $173 and $173 for the nine months ended September 30, 2021 and 2020, respectively.
Future minimum lease payments for this lease
are as follows:
|
|
|
|
|
|
|
|
|
|
2021 (Three months)
|
|
|
$
|
58
|
|
2022
|
|
|
|
39
|
|
Total
|
|
|
$
|
97
|
|
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 $700 related to the development of the electric vehicle charging stations.
The sponsorship agreement has a term of three years with a sponsor fee of approximately $500 per year, of which $250 was paid in
March, 2021. One of the directors of XL Fleet is a co-owner of the NY Islanders Hockey Club.
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 $4,191. In connection with this agreement, on March 2, 2021, the
Company made a nonrefundable down-payment of $780. These buses will be deployed in the Company’s XL Grid business unit to support
the Company’s electrification-as-a-service strategy.
Purchase Commitments: The Company has entered into firm commitments
to purchase batteries and motors from major suppliers. As of September 30, 2021, these purchase obligations consisted of an obligation
of $7,800 to purchase batteries by December 2021, an obligation of $2,100 to purchase motors by July 2022 and an open ended commitment
of $2,700 to purchase batteries. In light of the lack of OEM chassis availability reducing demand for the Company’s Drive Systems,
the Company and the $7,800 battery supplier are negotiating an amendment to this agreement to provide the Company with an additional reasonable
period of time to consume the remaining battery commitment.
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.
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
|
|
$
|
(7,531
|
)
|
|
$
|
(2,277
|
)
|
|
$
|
43,914
|
|
|
$
|
(22,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
|
139,392,170
|
|
|
|
83,299,127
|
|
|
|
138,082,355
|
|
|
|
82,820,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of options,
warrants, and restricted stock units
|
|
|
-
|
|
|
|
-
|
|
|
|
10,386,753
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, diluted
|
|
|
139,392,170
|
|
|
|
83,299,127
|
|
|
|
148,469,108
|
|
|
|
82,820,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, basic
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.32
|
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
0.30
|
|
|
$
|
(0.27
|
)
|
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
|
|
|
11,059,155
|
|
|
|
10,793,122
|
|
|
|
173,166
|
|
|
|
10,793,122
|
|
Private Warrants
|
|
|
4,233,333
|
|
|
|
-
|
|
|
|
4,233,333
|
|
|
|
-
|
|
XL Legacy Warrants
|
|
|
6,117
|
|
|
|
2,139,593
|
|
|
|
-
|
|
|
|
2,139,593
|
|
Restricted stock units
|
|
|
471,731
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
15,770,336
|
|
|
|
12,932,715
|
|
|
|
4,406,499
|
|
|
|
12,932,715
|
|
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 1% to 90% of eligible earnings. The plan provides for automatic enrollment
at a 3% deferral rate of an employee’s eligible wages. The Company provides for safe harbor matching contributions equal to 100%
on the first 3% of an employee’s eligible earnings deferred and an additional 50% on the next 2% of an employee’s eligible
earnings deferred. Employee elective deferrals and safe harbor matching contributions are 100% vested at all times.
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”.
Hiring
of CEO: On November 1, 2021, the Company entered into an executive employment agreement with Eric Tech (the “Employment Agreement”),
pursuant to which Mr. Tech will become the Company’s CEO effective December 1, 2021. Pursuant to the Employment Agreement, Mr.
Tech will receive an annual base salary of $600, and an annual cash bonus with a target of 80% of base salary. Mr. Tech will also receive
an initial equity grant of stock options valued at $1,260 and restricted stock units valued at $540. The stock option and the restricted
stock units will vest over four years.