Item 1A. Risk Factors
Summary Risk Factors
Our business is subject to numerous risks and uncertainties,
including those highlighted in the section entitled “Risk Factors,” that represent challenges that we face in connection with
the successful implementation of our strategy and growth of our business. The occurrence of one or more of the events or circumstances
described in the section entitled “Risk Factors,” alone or in combination with other events or circumstances, may have an
adverse effect on our business, financial condition, results of operations, and prospects. Such risks include, but are not limited to:
Risks Related to our Business and Industry
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We are an early stage company with a history of losses, and we expect to incur significant expenses and continuing losses. |
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We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims. |
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We rely on a limited number of customers for a large portion of our revenues, and the loss of one or more such customers could have a material adverse impact on our business, financial condition and results of operations. |
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Our business model requires further market penetration to drive growth and failure to expand would have a material adverse effect on our operating results and business and could result in substantial liabilities that exceed our resources. |
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If we fail to manage our growth effectively, including failing to attract and integrate qualified personnel, we may not be able to develop, produce, market and sell our electrified powertrain solutions successfully. |
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Our success will depend on our ability to economically source and coordinate the installation of electrified powertrain solutions at scale, and our ability to develop and produce electrified powertrain solutions of sufficient quality and appeal to customers on schedule and at scale is unproven. |
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If we are unable to successfully produce our electrified powertrain solutions, our business will be harmed. |
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We are dependent on vehicle OEMs, upfitters and body builders to bring our electrified powertrain solutions to market, which is subject to risks. |
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Our future growth in Power Drive sales is dependent upon the fleet industry’s willingness to adopt hybrid vehicles (“xEVs”). |
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We, the OEMs and our suppliers are subject to substantial regulation, and unfavorable changes to, or failure by us, the OEMs or our suppliers to comply with, these regulations could substantially harm our business and operating results. |
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We are highly dependent on the services of Eric Tech, our Chief Executive Officer, and if we are unable to retain Mr. Tech, attract and retain key employees and hire qualified management, technical and vehicle engineering personnel, our ability to compete could be harmed. |
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Future product recalls could materially adversely affect our business, prospects, financial condition and operating results. |
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Vehicles equipped with our electrified powertrain solutions will make use of lithium-ion battery cells, which have been observed to catch fire or vent smoke and flame. |
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We are or may be subject to risks associated with strategic alliances or acquisitions and may not be able to identify adequate strategic relationship opportunities, or form strategic relationships, in the future. |
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Our electrified powertrain solutions could face competition from original equipment manufacturers and other providers of electrification solutions that enter the commercial vehicle electrification market. |
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The performance characteristics of our electrified powertrain solutions, including fuel economy and emissions levels, may vary, including due to factors outside of our control. |
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Our suppliers may rely on complex machinery for our component production, which involves a significant degree of risk and uncertainty in terms of operational performance and costs. |
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single-source suppliers, making us vulnerable to supply shortages. |
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Increased warranty claims could materially adversely affect our business, prospects, financial condition and operating results. |
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Our electrified powertrain solutions rely on software and hardware that is highly technical, and if these systems contain errors, bugs or vulnerabilities, or if we are unsuccessful in addressing or mitigating technical limitations in our systems, our business could be adversely affected. |
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If our electrified powertrain solutions fail to perform as expected, our ability to develop, market and sell our electrified powertrain solutions could be harmed. |
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Developments in alternative technology or improvements in the internal combustion engine may adversely affect the demand for our electrified powertrain solutions. |
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Our assumptions regarding the ability of our electrified powertrain solutions to limit carbon intensity and reduce GHG emissions and contribute to global decarbonization may be inaccurate. |
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We will incur increased costs as a result of operating as a public company, and our management will devote substantial time to new compliance initiatives. |
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Our management has limited experience in operating a public company. |
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We are subject to governmental export and import control laws and regulations. Our failure to comply with these laws and regulations could have an adverse effect on our business, prospects, financial condition and operating results. |
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Our intellectual property applications for registration may not issue or be registered, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours. |
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Our ability to use net operating loss carryforwards and other tax attributes may be limited in connection with the Business Combination or other ownership changes. |
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We may not be able to obtain or agree on acceptable terms and conditions for all or a significant portion of the government grants, loans and other incentives for which we may apply. As a result, our business, prospects, financial condition and operating results may be adversely affected. |
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We have been, and may in the future be, adversely affected by the global COVID-19 pandemic, the duration and economic, governmental and social impact of which is difficult to predict, which may significantly harm our business prospects, financial condition and operating results. |
Risks Related to Ownership of Our Securities
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Concentration of ownership among our existing executive officers, directors and their respective affiliates may prevent new investors from influencing significant corporate decisions. |
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Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of our common stock, par value $0.0001 (“Common Stock”). |
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Our charter contains anti-takeover provisions that could adversely affect the rights of our stockholders. |
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If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our Common Stock adversely, the price and trading volume of our Common Stock could decline. |
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We may issue additional Common Stock or preferred stock, including under our equity incentive plan. Any such issuances would dilute the interest of our stockholders and likely present other risks. |
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We are subject to legal proceedings including an SEC investigation, stockholder
fiduciary duty suits, and shareholder class actions, and we may be subject to legal proceedings in the future including product liability,
patent, copyright or trademark infringements, or trade secret misappropriation claims, which may be time-consuming and expensive, hinder
execution of our business and growth strategy or negatively affect the price of our Common Stock. |
Risk Factors
An investment in our securities is speculative and
involves a high degree of risk. Before deciding whether to invest in our securities, you should consider carefully the risks described
below, together with other information in this Annual Report on Form 10-K and the other information and documents we file with the SEC.
The occurrence of any of the following risks could have a material and adverse effect on our business, reputation, financial condition,
results of operations and future growth prospects, as well as our ability to accomplish our strategic objectives. As a result, the trading
price of our Common Stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business operations and stock price.
Risks Related to our Business and Industry
Our future growth is dependent upon the fleet industry’s willingness
to adopt xEVs.
Our growth in the Power Drives business is highly dependent
upon the adoption of xEVs by the commercial and municipal fleet industry. If the market for xEVs and our electrified powertrain solutions
does not develop at the rate or in the manner or to the extent that we expect, or if critical assumptions we have made regarding the efficiency
of our electrified powertrain solutions are incorrect or incomplete, our business, prospects, financial condition and operating results
will be harmed. The fleet market for xEVs is characterized by rapidly changing technologies, price competition, numerous competitors including
OEMs, evolving government regulation and industry standards and uncertain customer demands and behaviors.
Factors that may influence the fleet market adoption
of xEVs vehicles include:
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perceptions about xEV quality, safety, design, performance, reliability and cost, especially if adverse events or accidents occur that are linked to the quality or safety of xEVs; |
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the availability of fully-electric vehicles, which some customers may prefer due to incentives and/or a preference to do without a combustion motor entirely; |
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the perceived willingness of vehicle OEMs to honor factory warranties on vehicles equipped with our powertrain solutions; |
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perceptions about vehicle safety in general, including the use of advanced technology, such as vehicle electronics, batteries and regenerative braking systems; |
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the decline of vehicle efficiency and/or range resulting from deterioration over time in the ability of the battery to hold a charge; |
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changes or improvements in the fuel economy of internal combustion engines, the vehicle and the vehicle controls or competitors’ electrified systems; |
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the availability of service, charging and fueling and other associated costs for xEVs; |
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volatility in the cost of energy, electricity, oil and gasoline could affect buying decisions; |
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government regulations and economic incentives promoting fuel efficiency and alternate forms of energy, including new regulations mandating zero tailpipe emissions compared to overall carbon reduction; |
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the availability of tax and other governmental incentives to purchase and operate xEVs or future regulation requiring increased use of nonpolluting trucks; and |
As an example, travel restrictions and social distancing efforts in response
to the COVID-19 pandemic have negatively impacted and will continue to negatively impact the commercial fleet industry, for an unknown,
but potentially lengthy, period of time. Additionally, we may become subject to regulations that may require us to alter the design of
our electrified powertrain solutions, which could negatively impact customer interest in our products.
We may in the future experience additional competition in current
and potential future markets.
We work closely with traditional vehicle manufacturers
to provide electrification solutions for their standard gas-powered vehicles. As a result, we have historically considered our relationship
to such companies to be that of a market partner as opposed to a competitor. But as the vehicle electrification market continues to expand,
traditional vehicle manufacturers may develop and market xEV solutions in larger vehicles or all electric versions of the same vehicles
being deployed with our systems. In particular, Tesla, Inc. (“Tesla”), Hyliion, Inc. (“Hyliion”) and Nikola Corporation
(“Nikola”) have announced their plans to bring Class 8 long haul battery electric vehicles and fuel cell electric vehicles
to the market over the coming years. Cummins Inc., Daimler AG, Dana Incorporated, Navistar International Corporation, PACCAR Inc., Volvo
Group, XOS Trucks and other commercial vehicle manufacturers have also announced their plans to bring Class 8 battery electric vehicles
or fuel cell electric vehicles to the market.
In the event that traditional vehicle manufacturers
develop xEV solutions that compete with vehicles outfitted with our electrification solutions, we will experience increased industry competition.
Competitors may be able to deploy greater resources to the design, development, manufacturing, distribution, promotion, sales, marketing
and support of their electric vehicles. Additionally, such competitors may have greater name recognition, longer operating histories,
larger sales forces, broader customer and industry relationships and other resources than we do. We may experience competition with respect
to recruiting and retaining qualified research and development, sales, marketing and management personnel, as well as further competition
in acquiring technologies complementary to, or necessary for, our products. Additional mergers and acquisitions may result in even more
resources being concentrated in our competitors. There are no assurances that customers will choose our electrified systems or vehicles
over those of our competitors, and future competition could have a material adverse effect on our business, financial condition and results
of operations.
We are an early stage company with a history of losses, and we expect
to incur significant expenses and continuing losses.
We incurred net income of approximately
$28.8 million (a net loss of approximately $61.3 million after adjusting for the favorable change in fair value of warrant liability of
approximately $90.1 million) for the year ended December 31, 2021 and net losses of approximately $60.6 million and $14.9 million for
the years ended December 31, 2020 and 2019, respectively. We believe that we will continue to incur operating and net losses through the
near future. We are currently conducting a review of the risks and opportunities of our current business and expect to adjust our future
strategy based upon the findings of this analysis. Our future net income or loss will be dependent upon the determination and implementation
of this future strategy. We expect the rate at which we will incur future losses will be impacted by the following:
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Costs
which may be incurred in connection with the realignment of our business strategy, product offerings, research and development; |
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Costs to develop our electrified powertrain solutions; |
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Investment in and utilization of inventories
of parts and components; |
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Expansion of our product and service offerings in our XL Grid energy efficiency and infrastructure offerings; |
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Increase in our general and administrative functions to support our public company obligations; and |
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Acquisition and integration of other businesses. |
Because we will incur the costs and expenses from these
efforts before we receive any incremental revenues with respect thereto, our losses in future periods are expected to be significant.
In addition, we may find that these efforts are more expensive than we currently anticipate or that these efforts may not result in revenues,
which would have a material adverse effect on our results of operations and further increase our losses.
We may become subject to product liability claims, which could harm
our financial condition and liquidity if we are not able to successfully defend or insure against such claims.
Product liability claims, even those without
merit or those that do not involve our products, could harm our business, prospects, financial condition and operating results. The automobile
industry in particular experiences significant product liability claims, and we face inherent risk of exposure to claims in the event
our electric powertrain solutions do not perform or are claimed to not have performed as expected. As is true for other commercial vehicle
suppliers, we expect in the future that our electrified powertrain solutions will be installed on vehicles that will be involved in crashes
resulting in death or personal injury. Additionally, product liability claims that affect our competitors may cause indirect adverse publicity
for us and our products.
While we maintain product liability insurance,
our coverage may not be adequate to cover certain product liability claims, and we may not be able to obtain adequate insurance coverage
in the future at acceptable costs. A successful product liability claim that exceeds our policy limits could require us to pay substantial
sums. Our risks in this area are particularly pronounced given the relatively limited number of electrified powertrain solutions delivered
to date and limited field experience of our products. Moreover, a product liability claim against us or our competitors could generate
substantial negative publicity about our products and business and could have a material adverse effect on our brand, reputation, business,
prospects, financial condition and operating results.
We rely on a limited number of customers for a large portion of our
revenues, and the loss of one or more such customers could have a material adverse impact on our business, financial condition and results
of operations.
We depend on a limited number of
customers for a significant portion of our revenue. For the fiscal year ended December 31, 2021, we had two customers that accounted for
78% of our revenue. The loss of these customers could have a significant impact on our revenues and harm our business, results of operations
and cash flows.
We may not be able to further penetrate the fleet or energy efficiency/infrastructure
markets or enter into new markets in the future.
Our success, and our ability to increase
revenue and operate profitably, depends in part on our ability to expand our customer base into markets and products in which we can
operate profitably. We are currently evaluating the risk and opportunities within our current businesses and based upon this evaluation
may modify our future strategy. For our current businesses, for example, our success will in part be based upon further penetrating the
fleet markets comprised of corporations, municipalities and public utilities along with expansion into new markets. And, in our XL Grid
business, success will in part be based upon growing the base of energy efficiency and infrastructure customers, both in our current
Northeast region, but also more broadly. If we are unable to meet our customers’ performance requirements or industry specifications
limiting expansion into existing or new markets, our business, prospects, financial condition and operating results would be materially
adversely affected.
We may be unable to adequately control the costs associated with our
operations.
We are in the process of a strategic
review to evaluate our offerings, processes, and growth opportunities to ensure that we are charting the proper strategic direction. As
a preliminary result of this strategic review, we have decided to narrow our operational focus to more effectively and judiciously execute
on our strategy moving forward. We are focusing our effort and resources on what we consider to be the most profitable areas of our business
and reducing some aspects of our hybrid offering. As part of this plan to narrow our focus, we have taken some actions to align our team
and resources to better reflect our near-term needs. As part of this, we have eliminated 51 full-time positions across the organization
in February to ensure that we are operating efficiently. We will require capital to develop our business, including developing and producing
our electrified powertrain solutions, our energy efficiency and infrastructure business and any new businesses that we may enter into.
We expect to incur expenses which will impact our profitability, including research and development expenses, raw material procurement
costs, sales and distribution expenses as we manage our brand and market our products and services, and general and administrative expenses
as we scale our operations and incur costs as a public company. Our ability to become profitable in the future will depend on our ability
to deliver products and solutions that meet customer and market demands in a profitable manner and manage our expenses efficiently. If
we are unable deliver these profitable solutions, our margins, profitability and prospects would be materially and adversely affected.
Our business model requires further market penetration to drive growth
and failure to expand would have a material adverse effect on our operating results and business and could result in substantial liabilities
that exceed our resources.
It is difficult to predict our
future revenues and appropriately budget for our expenses, and we have limited insight into trends that may emerge and affect our business.
In the event that actual results differ from our estimates or we adjust our estimates in future periods, our operating results and financial
position could be materially affected. Our future results depend on the successful implementation of our management’s growth strategies
– including the launch of new products and services - and are based on assumptions and events over which we have only partial or
no control. These initiatives and products may not generate as much revenue, cost more to bring to market, and create greater liabilities
than we anticipate. We will continue to encounter risks and difficulties frequently experienced by early stage companies, including scaling
up our infrastructure and headcount, and may encounter unforeseen expenses, difficulties or delays in connection with our growth. In addition,
as a result of the capital-intensive nature of our business, we may sustain substantial operating expenses without generating sufficient
revenues to cover expenditures.
We may require continued capital investment.
We expect to have sufficient capital
for the next 12 months for the design, development and manufacture of our products. However, we may require additional capital investment
in the future to fund operations, continue research and development and improve infrastructure. There can be no assurance that we will
have access to the capital we need on favorable terms when required or at all. If we cannot raise additional funds when we need them,
our financial condition and business could be materially adversely affected.
If we fail to manage our growth effectively, including failing to
attract and integrate qualified personnel, we may not be able to develop, produce, market and sell our products and services successfully.
Any failure to manage our growth
effectively could materially and adversely affect our business, prospects, operating results and financial condition. While the Company
intends to narrow our focus in the Power Drive business in 2022 to concentrate on those areas of that business that we consider to be
the most profitable, we intend to grow our operations in those remaining areas. We expect our future growth to include:
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expanding the management team; |
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hiring and training new personnel; |
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forecasting production and revenue; |
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controlling expenses and investments in anticipation of expanded operations; |
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implementing and enhancing administrative infrastructure, systems and processes; and |
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acquiring other businesses. |
Over the long-term, we intend
to continue to hire additional personnel as needed for our current and future business. Because we operate in evolving technology fields,
such as vehicle electrification, energy efficiency and vehicle charging, individuals with sufficient training may not be available to
hire, and as a result, we will need to expend significant time and expense training any newly hired employees.
Competition for individuals with
this experience is intense, and we may not be able to attract, integrate, train, motivate or retain additional highly qualified personnel.
The failure to attract, integrate, train, motivate and retain these additional employees could seriously harm our business, prospects,
financial condition and operating results.
Our success within our Power Drives business will depend on our ability
to economically source and coordinate the installation of electrified powertrain solutions at scale, and our ability to develop and produce
electrified powertrain solutions of sufficient quality and appeal to customers on schedule and at scale is unproven.
Our Power Drives business depends
in large part on our ability to execute our plan to develop, produce, assemble, market, sell, install and service our electrified powertrain
solutions. In particular, we rely on Parker Hannifin Corporation to supply all of our motors. We further rely on other third parties to
supply batteries, wire harnesses and inverters, each of which are used in our electrified powertrain solutions. We currently source all
components and assemble them into systems which are sent to our upfitter partners. These upfitter partners then install and commission
our electrified powertrain solutions. While these arrangements can lower operating costs and enable rapid increases in installations,
they also reduce our direct control over installation. Such diminished control may have an adverse effect on the quality or quantity of
products or services, or our flexibility to respond to changing conditions.
We rely on single-source suppliers to supply
and produce certain components and rely on upfitter partners for installation of our electrified powertrain solutions. Any failure of
these suppliers or partners to perform could require us to seek alternative suppliers or to expand our production capabilities, which
could incur additional costs and have a negative impact on our cost or supply of components or finished goods. In addition, production,
logistics in supply or production areas, or transit to final destinations can be disrupted for a variety of reasons including, but not
limited to, natural and man-made disasters, information technology system failures, commercial disputes, military actions, economic, business,
labor, environmental, public health or political issues or international trade disputes.
We, along with our supply chain and upfitter partners,
have limited experience to date in high volume production of our electrified powertrain solutions. We do not know if the sources of component
supply and/or upfitters at scale will remain reliable to enable us to meet the quality, price, engineering, design and production standards,
as well as the production volumes, required to successfully mass market our electrified powertrain solutions. Even if we and our upfitter
partners are successful in developing our high volume production capability and processes and in reliably sourcing our component supply,
we do not know whether we will be able to do so in a manner that avoids significant delays and cost overruns, including as a result of
factors beyond our control such as problems with suppliers and vendors, or in time to meet our vehicle commercialization schedules or
to satisfy the requirements of customers. Any failure to develop such production processes and capabilities within our projected costs
and timelines could have a material adverse effect on our business, prospects, financial condition and operating results.
We may experience significant delays in the design, production and
launch of our electrified powertrain solutions, which could harm our business, prospects, financial condition and operating results.
Any delay in the financing, design, production
and launch of our electrified powertrain solutions could materially damage our brand, business, prospects, financial condition and operating
results. There are often delays in the design, production and commercial release of new products, and to the extent these delays postpone
the launch of new electrified powertrain solutions, our growth prospects could be adversely affected as we may fail to grow our market
share. We integrate electrified solutions into OEM vehicles, and if the OEM makes unexpected changes to the function of the vehicle, this
could significantly delay the development and therefore launch of our electrified powertrain solutions. We will rely on upfitter partners
to install our electrified powertrain solutions, and if they are not able to produce product at scale or meet our specifications, we may
need to expand our production capabilities, which would cause us to incur additional costs. Furthermore, we rely on third-party suppliers
for the provision and development of many of the key components and materials used in our electrified powertrain solutions, and to the
extent they experience any delays, we may need to seek alternative suppliers. If we experience delays by our suppliers, we could experience
delays in delivering on our timelines.
If we are unable to successfully produce our electrified powertrain
solutions, our business will be harmed.
There are numerous potential ways we could
be unable to produce our electrified powertrain solutions. Our suppliers’ production facilities, which are used to produce components
for our electrified powertrain solutions, would be costly to replace and could require substantial lead time to replace and qualify for
use. Our suppliers’ production facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes,
flooding, fire and power outages, or by health epidemics, such as the recent COVID-19 pandemic, which may render it difficult or impossible
for us to produce our electrified powertrain solutions for some period of time. The inability to produce our electrified powertrain solutions
or the backlog that could develop if our production facilities and the production facilities of our outsourcing partners and suppliers
are inoperable for even a short period of time may result in the loss of customers or harm our reputation. Although we maintain insurance
for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses
and may not continue to be available to our on acceptable terms, if at all.
We are dependent on vehicle OEMs, upfitters and body builders to
bring our electrified powertrain solutions to market, all of which are subject to risks.
Because we do not manufacture complete vehicles,
we are dependent on vehicle OEMs and body builders to provide vehicle chassis for our electrified powertrain solutions. We rely on upfitters
for the installation of our electrified powertrain solutions. Reliance on OEMs, body builders and upfitters for the production and installation
of our electrified powertrain solutions is subject to risks with respect to operations that are outside our control. By way of example,
the current global microchip shortage significantly limited the availability of chassis from several vehicle OEMs in the current year.
If OEMs or body builders are not able to produce vehicle chassis and provide them to us or upfitters, or a change in governmental regulations
or policies occurs, we would need to develop our own vehicle on which to install our electrified powertrain solutions. Either case could
have a negative impact on our ability to sell our electrified powertrain solutions at anticipated prices or margins or in expected timeframes.
Additionally, we may permit returns of vehicles installed with our electrified powertrain solutions, which may result in significant additional
costs to us if we are required to convert the vehicles back to their original form. There is risk of potential disputes with our upfitters,
and we could be affected by negative publicity related to our upfitter partners whether or not such publicity is related to their collaboration
with us. Our ability to successfully build a premium brand could also be adversely affected by perceptions about the quality of our upfitter
partners’ workmanship. In addition, although we are involved in each step of the supply chain, production and installation processes,
because we also rely on our upfitter partners and suppliers to meet our quality standards, there can be no assurance that the final product
will meet expected quality standards.
We may be unable to enter into new agreements or extend
existing agreements with upfitter partners on terms and conditions acceptable to us and therefore may need to contract with other third
parties or significantly add to our own production capacity. There can be no assurance that in such event we would be able to engage other
third parties or establish or expand our own production capacity to meet our needs on acceptable terms or at all. The expense and time
required to complete any transition, and to assure that our electrified powertrain solutions produced at facilities of new producers comply
with our quality standards and regulatory requirements, may be greater than anticipated. Any of the foregoing could adversely affect our
business, prospects, financial condition and operating results.
Our ability to sell electrified powertrain
solutions depends on compatibility with various OEM vehicle models and characteristics. The pace of change of these models and changing
model availability is outside of our control and could create adverse conditions and materially affect our financial results.
We are dependent on our suppliers, some of which are single or limited
source suppliers, and the inability of these suppliers to deliver necessary components of our systems for powertrains at prices and volumes,
performance and specifications acceptable to us could have a material adverse effect on our business, prospects, financial condition and
operating results.
We rely on third-party suppliers for the
provision and development of certain key components and materials used in our electrified powertrain solutions. While we plan to obtain
components from multiple sources whenever possible, some of the critical components used in our vehicles will be purchased by us from
a single source or a limited number of sources. For example, we purchase all of our motors from a single supplier, Parker Hannifin Corporation.
Our third-party suppliers may not be
able to meet their product specifications and performance characteristics, which would impact our ability to achieve our product
specifications and performance characteristics as well. Additionally, our third-party suppliers may be unable to obtain required
certifications for their products which we plan to use or provide warranties that are necessary for our solutions. If we are unable
to obtain components and materials used in our electrified powertrain solutions from our suppliers or if our suppliers decide to
create or supply a competing product, our business could be adversely affected. While we believe that we may be able to establish
alternate supply relationships and can obtain or engineer replacement components for our single source components, we may be unable
to do so in the short term (or at all) or at prices or quality levels that are favorable to us, which could have a material adverse
effect on our business, prospects, financial condition and operating results.
Our manufacturing operations are dependent upon third-party suppliers,
including, in certain cases, single-source suppliers, making us vulnerable to supply shortages.
Third-party suppliers provide us with raw materials,
parts and manufactured components (“Third Party Supplies”). Any delay in receiving Third Party Supplies could impair our
ability to deliver products to our customers and, accordingly, could have an adverse effect on our business, financial condition, results
of operations, and cash flows. The volatility in the financial markets and uncertainty in the automotive sector could result in exposure
related to the financial viability of certain of our suppliers. Suppliers may also exit certain business lines, causing us to find other
suppliers for materials or components. Finding new suppliers could potentially delay our ability to timely deliver products to customers
and such new suppliers may also change the terms on which they are willing to provide products to us, any of which could adversely affect
our financial condition and results of operations. In addition, many of our suppliers have unionized workforces that could be subject
to work stoppages as a result of labor relations issues. The outbreak of COVID-19 resulted in work stoppages at certain suppliers that
are part of our supply chain. The ongoing impact of the COVID-19 pandemic could result in additional work stoppages at our suppliers
in the future. All manufacturing operations at our plants are subject to change based on market conditions, component supplier disruptions,
government regulations, and the continued spread and impact of the COVID-19 pandemic. If work stoppages were to be implemented, there
could be resulting supply shortages that could impact our ability to deliver our products to our customers on schedule and, accordingly,
could have an adverse effect on our business, financial condition, results of operations, and cash flows. Some of our suppliers are the
sole source for a particular supply item (e.g., the majority of motors, certain batteries, and inverters) and cannot be quickly or inexpensively
re-sourced to another supplier due to long lead times and contractual commitments that might be required by another supplier in order
to provide the component or materials. Even as production resumes by us and our suppliers, production volumes may be volatile and we
may need to modify our production environment to ensure the health and safety of our workers and customers. If we are unsuccessful in
managing a re-start of our production, our results of operations may be materially affected. In addition to the risks described above
regarding interruption of Third Party Supplies, which are exacerbated in the case of single-source suppliers, the exclusive supplier
of a component potentially could exert significant bargaining power over price, quality, warranty claims or other terms relating to a
component. Additionally, our suppliers may prioritize their resources for any long-term commitments to third parties or larger customers
and to our detriment. We may not be in a position to find alternate suppliers in a timely manner to continue to operate consistent with
our obligations to or expectations of our customers.
We, the OEMs and our suppliers are subject
to substantial regulation, and unfavorable changes to, or failure by us, the OEMs or our suppliers to comply with, these regulations could
substantially harm our business and operating results.
Our electrified powertrain solutions, and the sale
of motor vehicles in general, are subject to substantial regulation under international, federal, state and local laws. OEMs and our suppliers
also are currently, or may in the future, become subject to such regulations. Our energy efficiency and infrastructure business is subject
to regulation and funding for projects can be through rebates and incentives, which evolve over time and are complex. We continue to evaluate
requirements for licenses, approvals, certificates and governmental authorizations necessary to manufacture, sell or service our electrified
powertrain solutions in the jurisdictions in which we plan to operate and intend to take such actions necessary to comply. We may experience
difficulties in obtaining or complying with various licenses, approvals, certifications and other governmental authorizations necessary
to manufacture, sell or service our electrified powertrain solutions in any of these jurisdictions. If we, OEMs or our suppliers are unable
to obtain or comply with any of the licenses, approvals, certifications or other governmental authorizations necessary to carry out our
operations in the jurisdictions in which they currently operate, or those jurisdictions in which they plan to operate in the future, our
business, prospects, financial condition and operating results could be materially adversely affected. We expect to incur significant
costs in complying with these regulations. Regulations related to the vehicle industry are evolving and we face risks associated with
changes to these regulations, including but not limited to:
|
● |
increased subsidies for corn and ethanol production, which could reduce the operating cost of vehicles that use ethanol or a combination of ethanol and gasoline; |
|
● |
increased support from local, state and federal governments for other alternative fuel systems, such as but not limited to hydrogen, natural gas and bio-fuels, which could have an impact on the acceptance of our electrified powertrain solutions. |
To the extent the laws change, our electrified
powertrain solutions and our suppliers’ products may not comply with applicable international, federal, state or local laws, which
would have an adverse effect on our business. Compliance with changing regulations could be burdensome, time consuming and expensive.
To the extent compliance with new regulations is cost prohibitive, our business, prospects, financial condition and operating results
would be adversely affected.
We are exposed to the credit risk of some of our direct customers,
which subjects us to the risk of non-payment for our products.
We distribute our electrified powertrain solutions
through a network of upfitters, OEMs and OEM dealers, some of which may not be well-capitalized and may be of a lower credit quality.
This direct customer network subjects us to the risk of non-payment for our electrified powertrain solutions. We sell our energy efficiency
services to both commercial and municipal customers, and in many cases funding is provided under utility provided incentives. There is
credit risk in collecting from these customers. In addition, during periods of economic downturn in the global economy, our exposure to
credit risks from our direct customers may increase, and our efforts to monitor and mitigate the associated risks may not be effective.
In the event of non-payment by one or more direct customers, our business, financial condition and results of operations could be materially
adversely affected.
We may need to raise additional funds, which may not be available
to us on favorable terms or at all. If we cannot raise additional funds when we need them, our business, prospects, financial condition
and operating results could be negatively affected.
The design, production, sale and servicing of our
electrified powertrain solutions and other businesses we may enter into is capital-intensive. We may raise additional funds through the
issuance of equity, equity related or debt securities or through obtaining credit from government or financial institutions. We cannot
be certain that additional funds will be available to us on favorable terms when required, or at all. If we cannot raise additional funds
when we need them, our business, prospects, financial condition and operating results could be materially adversely affected.
If we are unable to establish and maintain confidence in our long-term
business prospects among customers and analysts and within our industry, or are subject to negative publicity, then our financial condition,
operating results, business prospects and access to capital may suffer materially.
Customers may be less likely to purchase our products
and services if they are not convinced that our business will succeed or that our service and support and other operations will continue
in the long term. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing business
relationships with us if they are not convinced that our business will succeed. Accordingly, in order to build and maintain our business,
we must maintain confidence among customers, suppliers, analysts, ratings agencies and other parties in our products, long-term financial
viability and business prospects. Maintaining such confidence may be particularly complicated by certain factors including those that
are largely outside of our control, such as customer unfamiliarity with our electric powertrain solutions, any delays in scaling production,
delivery and service operations to meet demand, competition and uncertainty regarding the future of our products or our other services
and our production and sales performance compared with market expectations.
If we are unable to address the service requirements of our customers,
our business, prospects, financial condition and operating results may be materially and adversely affected.
With further market penetration and expansion into
new markets, we may increase our servicing network of our electrified powertrain solutions. Servicing xEVs is different than servicing
traditional vehicles and requires specialized skills, including high voltage training and servicing techniques. We partner with upfitters
to perform some or all of the servicing on our electrified powertrain solutions, and will need to expand our service network. There can
be no assurance that we will be able to enter into an acceptable arrangement with any such third-party provider. Our customers will also
depend on our customer support team to resolve technical and operational issues relating to the integrated software underlying our electrified
powertrain solutions. Our ability to provide effective customer support is largely dependent on our ability to attract, train and retain
qualified personnel with experience in supporting customers on platforms such as ours. As we continue to grow, additional pressure may
be placed on our customer support team, and we may be unable to respond quickly enough to accommodate short-term increases in customer
demand for technical support. We also may be unable to modify the future scope and delivery of our technical support to compete with changes
in the technical support provided by our competitors. Increased customer demand for support, without corresponding revenue, could increase
costs and negatively affect our operating results. If we are unable to successfully address the service requirements of our customers
or establish a market perception that we do not maintain high-quality support, we may be subject to claims from our customers, including
loss of revenue or damages, and our business, prospects, financial condition and operating results may be materially and adversely affected.
We are highly dependent on the services of Eric Tech, our Chief
Executive Officer, and if we are unable to retain Mr. Tech, attract and retain key employees and hire qualified management, technical
and vehicle engineering personnel, our ability to compete could be harmed.
Our success depends, in part, on our ability to retain
our key personnel. We are highly dependent on the services of Eric Tech, our Chief Executive Officer. Mr. Tech is the source of many of
the ideas and execution driving our company. If Mr. Tech were to discontinue his service to us due to death, disability or any other reason,
we would be significantly disadvantaged. The unexpected loss of or failure to retain one or more of our key employees could adversely
affect our business.
Our success also depends, in part, on our continuing
ability to identify, hire, attract, train and develop other highly qualified personnel. Experienced and highly skilled employees are
in high demand and competition for these employees can be intense, and our ability to hire, attract and retain them depends on our ability
to provide competitive compensation. We may not be able to attract, assimilate, develop or retain qualified personnel in the future,
and our failure to do so could adversely affect our business, including the execution of our global business strategy. We do not maintain,
and we do not expect to maintain in the future, key man life insurance policies with respect to Eric Tech. Any failure by our management
team and our employees to perform as expected may have a material adverse effect on our business, prospects, financial condition and
operating results.
We face significant barriers to enter new markets, and if we
cannot successfully overcome those barriers, our business will be negatively impacted.
The commercial trucking industry has traditionally
been characterized by significant barriers to entry, including the ability to meet performance requirements or industry specifications,
acceptance by OEMs and end users, investment costs of design and production, the need for specialized design and development expertise,
regulatory requirements, establishing a brand name and image and the need to establish sales capabilities. If we are not able to overcome
these barriers, our business, prospects, financial condition and operating results will be negatively impacted and our ability to grow
our business will be harmed.
Future product recalls could materially adversely affect our
business, prospects, financial condition and operating results.
In 2019 we experienced two recalls that were
subsequently remediated. During 2021, we incurred additional warranty claims for our electrified powertrain solutions. In the future,
we may voluntarily or involuntarily initiate a recall if any of our products (including the batteries we design, develop and include
in our systems) prove to be defective or noncompliant with applicable federal motor vehicle safety standards. Such recalls involve significant
expense and diversion of management attention and other resources, which could adversely affect our brand image, as well as our business,
prospects, financial condition and operating results.
Increases in costs, disruption of supply or shortage of our
components, particularly battery cells, could harm our business.
In the production of our electrified powertrain
solutions, we have experienced, and in the future may again experience, increases in the cost or a sustained interruption in the supply
or shortage of our components. Any such increase or supply interruption could materially negatively impact our business, prospects, financial
condition and operating results. The prices for our components fluctuate depending on market conditions and global demand and could adversely
affect our business, prospects, financial condition and operating results. For instance, we are exposed to multiple risks relating to
price fluctuations for battery cells. These risks include:
| ● | the
inability or unwillingness of current battery manufacturers to build or operate battery cell
production facilities to supply the numbers of battery cells required to support the growth
of the electric vehicle industry as demand for such cells increases; |
| ● | disruption
in the supply of cells due to quality issues or recalls by the battery cell manufacturers;
and |
| ● | an
increase in the cost of raw materials. |
Any disruption in the supply of battery cells
could temporarily disrupt production of our electrified powertrain solutions until a different supplier is fully qualified. Moreover,
battery cell manufacturers may refuse to supply electric vehicle manufacturers if they determine that the vehicles are not sufficiently
safe. Furthermore, fluctuations or shortages in petroleum and other economic conditions have in the past and may again in the future
cause us to experience significant increases in freight charges. Substantial increases in the prices for raw materials have in the past
and may again in the future increase the cost of our components and consequently, the costs of products. There can be no assurance that
we will be able to recoup increasing costs of our components by increasing prices, which could reduce our margins.
Vehicles equipped with our electrified powertrain solutions
make use of lithium-ion battery cells, which have been observed to catch fire or vent smoke and flame.
The battery packs within
our electrified powertrain solutions make use of lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release the
energy they contain by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells.
While the battery pack is designed to contain any single cell’s release of energy without spreading to neighboring cells, a
field or testing failure of our vehicles or other battery packs that we produce could occur, which could subject us to lawsuits,
product recalls, or redesign efforts, all of which would be time consuming and expensive. Also, negative public perceptions
regarding the suitability of lithium-ion cells for automotive applications or any future incident involving lithium-ion cells, such
as a vehicle or other fire, even if such incident does not involve our vehicles, could seriously harm our business and
reputation.
In addition, we store battery packs in our facility
prior to sending such battery packs to upfitters for installation on vehicles. Any mishandling of battery cells may cause disruption
to the operation of our facilities. While we have implemented safety procedures related to the handling of the cells, a safety issue
or fire related to the cells could disrupt our operations. Such damage or injury could lead to adverse publicity and potentially a safety
recall. Moreover, any failure of a competitor’s electric vehicle or energy storage product may cause indirect adverse publicity
for us and our products. Such adverse publicity could negatively affect our brand and harm our business, prospects, financial condition
and operating results.
We have been, and may in the future be, adversely affected by
the global COVID-19 pandemic, the duration and economic, governmental and social impact of which is difficult to predict, which may significantly
harm our business, prospects, financial condition and operating results.
There has been a widespread
worldwide impact from the COVID-19 pandemic, and we have been, and may in the future be, adversely affected as a result. Numerous
government regulations and public advisories, as well as shifting social behaviors, have temporarily limited or closed non-essential
transportation, government functions, business activities and person-to-person interactions, and the duration of such trends is
difficult to predict. Reduced operations and production line shutdowns at vehicle OEMs due to COVID-19, limitations on travel by our
personnel and personnel of our customers, and future delays or shutdowns of vehicle OEMs or our suppliers could impact our ability
to meet customer orders. We also instituted certain temporary cost reduction measures such as reducing or deferring discretionary
spending.
Our operations and timelines may also be affected
by global economic markets and levels of consumer comfort and spending, which could impact demand in the worldwide transportation industries.
Because the impact of current conditions on an ongoing basis is yet largely unknown, is rapidly evolving and has been varied across geographic
regions, this ongoing assessment will be particularly critical to allow us to accurately project demand and infrastructure requirements
globally and deploy our workforce and other resources accordingly. If current global market conditions continue or worsen, or if we cannot
or do not resume reduced operations at a rate commensurate with such conditions or resume full operational capacity and are later required
to or choose to reduce such operations again, our business, prospects, financial condition and operating results could be materially
harmed.
Our financial condition and results of operations for fiscal
2022 and future periods may be adversely affected by the recent COVID-19 outbreak or other outbreak of infectious disease or similar
public health threat.
COVID-19 continues to spread
globally and has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and
restrictions, quarantines, shelter in place orders, and shutdowns. These measures have impacted and may continue to impact our
workforce and operations, the operations of our customers, and those of our respective suppliers. We have experienced some
disruptions in supply from some of our suppliers. Additionally, we have experienced a shift in customer demand. There is
considerable uncertainty regarding such measures and potential future measures. Restrictions on access to our support operations or
workforce, or similar limitations for our vendors and suppliers, and restrictions or disruptions of transportation, such as reduced
availability of air transport, port closures, and increased border controls or closures, could limit our capacity to meet customer
demand, lead to increased costs and have a material adverse effect on our financial condition and results of operations.
The outbreak has significantly increased economic
and demand uncertainty. These uncertainties also make it more difficult for us to assess the quality of our product order backlog and
to estimate future financial results. The current outbreak of COVID-19 has caused an economic slowdown, and it is increasingly likely
that its continued spread will lead to a global recession, which could have a material adverse effect on demand for our products and
on our financial condition and results of operations.
The spread of COVID-19 has caused us to modify
our business practices and we may take further actions as may be required by government authorities or that we determine are in the best
interests of our employees, customers, partners, and suppliers. There is no certainty that such measures will be sufficient to mitigate
the risks posed by the virus, and our ability to perform critical functions could be harmed. In addition, in light of concerns about
the spread of COVID-19, our workforce has at times been operating at reduced levels at our facilities, which may continue to have an
adverse impact on our ability to timely meet future customer orders.
The duration of the business disruption and related
financial impact cannot be reasonably estimated at this time. However, it may materially affect our ability to obtain materials, deliver
products in a timely manner, and it also may impair our ability to meet customer demand for products, result in lost sales, additional
costs, or penalties, or damage our reputation. The extent to which COVID-19 or any other health epidemic will further impact our results
will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning
the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
Additionally, we have experienced
and may continue to experience demand uncertainty as a result of COVID-19. This demand uncertainty is expected to continue into fiscal
year 2022, with delays in the government response and postponements and reductions of orders of our products by both commercial and municipal
departments. In addition, we believe that the impact of the global microchip shortage that the entire industry is currently experiencing
will adversely impact our operating results in fiscal year 2021. Given the uncertainty related to vaccination speed and rates and potential
impacts of new variants of COVID- 19, there continues to be pandemic related risk to our results. The extent to which these impacts on
demand may continue, and the effect they may have on our business and operating results, will depend upon future developments that are
highly uncertain and cannot be accurately predicted.
Our insurance strategy may not be adequate to protect us from
all business risks.
In the ordinary course of business,
we may be subject to losses resulting from products liability, accidents, acts of God and other claims against us, for which we may have
no insurance coverage. While we currently carry commercial general liability, commercial automobile liability, excess liability and workers’
compensation policies, we may not maintain sufficient insurance coverage, and in some cases, we may not maintain any at all. Additionally,
the policies that we do have may include significant deductibles, and we cannot be certain that our insurance coverage will be sufficient
to cover all future claims against us. A loss that is uninsured or exceeds policy limits may require us to pay substantial amounts, which
could materially adversely affect our financial condition and operating results.
We are or may be subject to risks associated with strategic
alliances or acquisitions and may not be able to identify adequate strategic relationship opportunities, or form strategic relationships,
in the future.
We have entered into strategic alliances, and
may in the future enter into additional strategic alliances or joint ventures or minority equity investments, in each case with various
third parties for the production of our electrified powertrain solutions as well as with other collaborators with capabilities on data
and analytics, engineering and installation channels. These alliances subject us to a number of risks, including risks associated with
sharing proprietary information, non-performance by the third party and increased expenses in establishing new strategic alliances, any
of which may materially and adversely affect our business. We may have limited ability to monitor or control the actions of these third
parties and, to the extent any of these strategic third parties suffers negative publicity or harm to their reputation from events relating
to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with any such third party.
Strategic business relationships will be an important
factor in the growth and success of our business. However, there are no assurances that we will be able to continue to identify or secure
suitable business relationship opportunities in the future or our competitors may capitalize on such opportunities before we do. Moreover,
identifying such opportunities could require substantial management time and resources, and negotiating and financing relationships involves
significant costs and uncertainties. If we are unable to successfully source and execute on strategic relationship opportunities in the
future, our overall growth could be impaired, and our business, prospects, financial condition and operating results could be materially
adversely affected.
When appropriate opportunities arise, we may
acquire additional assets, products, technologies or businesses that are complementary to our existing business. In addition to possible
stockholder approval, we may need approvals and licenses from relevant government authorities for the acquisitions and to comply with
any applicable laws and regulations, which could result in increased delay and costs, and may disrupt our business strategy if we fail
to do so. Furthermore, acquisitions and the subsequent integration of new assets and businesses into our own require significant attention
from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect
on our operations. Acquired assets or businesses may not generate the financial results we expect and, given prevailing investment interest
in the vehicle electrification sector, may command inflated purchase consideration, excessive growth investment and/or generate significant
near term operating losses. Acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity
securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure
to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may be significant.
We are subject to cybersecurity risks to operational systems,
security systems, infrastructure, integrated software in our electrified powertrain solutions and customer data processed by our or third-party
vendors or suppliers and any material failure, weakness, interruption, cyber event, incident or breach of security could prevent us from
effectively operating our business.
We are at risk for interruptions, outages and
breaches of: (a) operational systems, including business, financial, accounting, product development, data processing or production
processes, owned by us or our third-party vendors or suppliers; (b) facility security systems, owned by us or our third-party vendors
or suppliers; (c) transmission control modules or other in-product technology, owned by us or our third-party vendors or suppliers;
(d) the integrated software in our electrified powertrain solutions; or (e) customer or driver data that our processes or our
third-party vendors or suppliers process on our behalf. Such cyber incidents could: materially disrupt operational systems; result in
loss of trade secrets or other proprietary or competitively sensitive information; compromise certain information of customers, employees,
suppliers, drivers or others; jeopardize the security of our facilities; or affect the performance of transmission control modules or
other in-product technology and the integrated software in our electrified powertrain solutions. A cyber incident could be caused by
disasters, insiders (through inadvertence or with malicious intent) or malicious third parties (including nation-states or nation-state
supported actors) using sophisticated, targeted methods to circumvent firewalls, encryption and other security defenses, including hacking,
fraud, trickery or other forms of deception. The techniques used by cyber attackers change frequently and may be difficult to detect
for long periods of time. Although we maintain information technology measures designed to protect ourselves against intellectual property
theft, data breaches and other cyber incidents, such measures will require updates and improvements, and we cannot guarantee that such
measures will be adequate to detect, prevent or mitigate cyber incidents. The implementation, maintenance, segregation and improvement
of these systems requires significant management time, support and cost. Moreover, there are inherent risks associated with developing,
improving, expanding and updating current systems, including the disruption of our data management, procurement, production execution,
finance, supply chain and sales and service processes. These risks may affect our ability to manage our data and inventory, procure parts
or supplies or produce, sell, deliver and service our electric powertrain solutions, adequately protect our intellectual property or
achieve and maintain compliance with, or realize available benefits under, applicable laws, regulations and contracts. We cannot be sure
that these systems upon which we rely, including those of our third-party vendors or suppliers, will be effectively implemented, maintained
or expanded as planned. If we do not successfully implement, maintain or expand these systems as planned, our operations may be disrupted,
our ability to accurately and timely report our financial results could be impaired, and deficiencies may arise in our internal control
over financial reporting, which may impact our ability to certify our financial results. Moreover, our proprietary information or intellectual
property could be compromised or misappropriated and our reputation may be adversely affected. If these systems do not operate as we
expect them to, we may be required to expend significant resources to make corrections or find alternative sources for performing these
functions.
A significant cyber incident could impact production
capability, harm our reputation, cause us to breach our contracts with other parties or subject us to regulatory actions or litigation,
any of which could materially affect our business, prospects, financial condition and operating results. In addition, our insurance coverage
for cyberattacks may not be sufficient to cover all the losses we may experience as a result of a cyber-incident.
We also collect, store, transmit and otherwise
process customer, driver and employee and others’ data as part of our business and operations, which may include personal data
or confidential or proprietary information. We also work with partners and third-party service providers or vendors that collect, store
and process such data on our behalf and in connection with our products and services. There can be no assurance that any security measures
that we or our third-party service providers or vendors have implemented will be effective against current or future security threats.
While we have developed systems and processes designed to protect the availability, integrity, confidentiality and security of our and
our customers’, drivers’, employees’ and others’ data, our security measures or those of our third-party service
providers or vendors could fail and result in unauthorized access to or disclosure, acquisition, encryption, modification, misuse, loss,
destruction or other compromise of such data. If a compromise of such data were to occur, we may become liable under our contracts with
other parties and under applicable law for damages and incur penalties and other costs to respond to, investigate and remedy such an
incident. Laws in all 50 states require us to provide notice to customers, regulators, credit reporting agencies and others when certain
sensitive information has been compromised as a result of a security breach. Such laws are inconsistent and compliance in the event of
a widespread data breach could be costly. Depending on the facts and circumstances of such an incident, these damages, penalties, fines
and costs could be significant. Such an event could harm our reputation and result in litigation against us. Any of these results could
materially adversely affect our business, prospects, financial condition and operating results.
Any unauthorized control or manipulation of the information
technology systems in our electrified powertrain solutions could result in loss of confidence in us and our electrified powertrain solutions
and harm our business.
Our electrified powertrain solutions contain
complex information technology systems and built-in data connectivity to accept and install periodic remote updates to improve or update
functionality. We have designed, implemented and tested security measures intended to prevent unauthorized access to our information
technology networks, our electrified powertrain solutions and related systems. However, hackers may attempt to gain unauthorized access
to modify, alter and use such networks and systems to gain control of or to change our electrified powertrain solutions’ functionality,
user interface and performance characteristics, or to gain access to data stored in or generated by the vehicles. Future vulnerabilities
could be identified and our efforts to remediate such vulnerabilities may not be successful. Any unauthorized access to or control of
our electrified powertrain solutions, or any loss of customer data, could result in legal claims or proceedings and remediation of such
problems could result in significant, unplanned capital expenditures. In addition, regardless of their veracity, reports of unauthorized
access to our electrified powertrain solutions or data, as well as other factors that may result in the perception that our electrified
powertrain solutions or data are capable of being “hacked,” could negatively affect our brand and harm our business, prospects,
financial condition and operating results.
We are subject to evolving laws, regulations, standards and
contractual obligations related to data privacy and security, and our actual or perceived failure to comply with such obligations could
harm our reputation, subject us to significant fines and liability or adversely affect our business.
We intend to use our in-vehicle services and
functionality to log information about each vehicle’s use in order to aid our in-vehicle diagnostics and servicing. Our customers
or their drivers may object to the use of this data, which may increase our vehicle maintenance costs and harm our business prospects.
Collection of our customers’, employees’ and others’ information in conducting our business may subject us to various
legislative and regulatory burdens related to data privacy and security that could require notification of data breaches, restrict our
use of such information and hinder our ability to acquire new customers or market to existing customers. The regulatory framework for
data privacy and security is rapidly evolving, and we may not be able to monitor and react to all developments in a timely manner. For
example, California requires connected devices to maintain minimum information security requirements. As legislation continues to develop,
we will likely be required to expend significant additional resources to continue to modify or enhance our protective measures and internal
processes to comply with such legislation. In addition, non-compliance with these laws or a significant breach of our third-party service
providers’ or vendors’ or our own network security and systems could have serious negative consequences for our business
and future prospects, including possible fines, penalties and damages, reduced customer demand for our vehicles and harm to our reputation
and brand.
We are subject to various environmental laws and regulations
that could impose substantial costs upon us and cause delays in building our production facilities.
Our operations are and will be subject to international,
federal, state and local environmental laws and regulations, including laws relating to the use, handling, storage, disposal of and human
exposure to hazardous materials. Environmental and health and safety laws and regulations can be complex, and we have limited experience
complying with them. Moreover, we expect that we will be affected by future amendments to such laws or other new environmental and health
and safety laws and regulations which may require us to change our operations, potentially resulting in a material adverse effect on
our business, prospects, financial condition and operating results. These laws can give rise to liability for administrative oversight
costs, cleanup costs, property damage, bodily injury, fines and penalties. Capital and operating expenses needed to comply with environmental
laws and regulations can be significant, and violations may result in substantial fines and penalties, third-party damages, suspension
of production or a cessation of our operations.
Contamination at properties we own or operate,
properties we formerly owned or operated or to which hazardous substances were sent by us, may result in liability for us under environmental
laws and regulations, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, which
can impose liability for the full amount of remediation-related costs without regard to fault, for the investigation and cleanup of contaminated
soil and ground water, for building contamination and impacts to human health and for damages to natural resources. The costs of complying
with environmental laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future,
could have a material adverse effect on our financial condition or operating results. We may face unexpected delays in obtaining required
permits and approvals that could require significant time and financial resources and delay our ability to operate these facilities,
which would adversely impact our business, prospects, financial condition and operating results.
Our electrified powertrain solutions are facing
competition from original equipment manufacturers and other providers of electrification solutions that have entered the commercial vehicle
electrification market.
The vehicle electrification market
has expanded significantly since we were founded in 2009. We are facing increasing competition in the commercial vehicle electrification
market from leading OEMs in addition to companies such as Hyliion, Workhorse Group Inc. (“Workhorse”), Nikola and Lordstown.
Because we source all of our components from third party suppliers, some of which under non-exclusive contracts, it is possible that competitors
may enter the market in the future. If these companies or other OEMs or providers of electrification solutions continue to expand into
the commercial markets, we will face increased direct competition, which could have a material adverse effect on our product prices, market
share, revenue and profitability.
The performance characteristics of our electrified powertrain
solutions, including fuel economy and emissions levels, may vary, including due to factors outside of our control.
The
performance characteristics of our electrified powertrain solutions may vary due to factors outside of our control. For instance, the
estimated fuel savings and fuel economy of vehicles installed with our electrified powertrain solutions may vary depending on factors
including, but not limited to, drive cycle, speed, terrain, hardware efficiency, payload, vehicle and weather conditions. In addition,
greenhouse gas (“GHG”) emissions of vehicles installed with our electrified powertrain solutions may also vary due to external
factors, including the type of fuel, drive cycle, the efficiency and certification of the engine and where the engine is being operated.
Additionally, the total emissions generated is subject to how the electricity used to charge our plug in products is generated, which
is also outside of our control. These external factors, as well as any operation of our electrified powertrain solutions other than as
intended, may result in emissions levels or fuel consumption that are greater than we expect. Due to these factors, there can be no guarantee
that the operators of vehicles using our electrified powertrain solutions will realize the expected fuel savings and fuel economy and
GHG emission reductions.
We have identified material weaknesses in our internal control
over financial reporting which, if not corrected, could affect the reliability of our consolidated financial statements and have other
adverse consequences.
Prior to becoming a public company, we had not been required to document
and test our internal controls over financial reporting nor had management been required to certify the effectiveness of our internal
controls and our auditors had not been required to opine on the effectiveness of our internal control over financial reporting. Similarly,
we had not been subject to the SEC’s internal control reporting requirements. Following the Business Combination in December 2020,
we became subject to these requirements. As of December 31, 2020, we had identified material weaknesses in internal control over financial
reporting. These material weaknesses related to the accounting for equity instruments, insufficient technical accounting resources and
lack of segregation of duties. During 2021, we took steps to remediate these weaknesses through, among other things, (1) the hiring of
a Chief Financial Officer; (2) the hiring of a Certified Public Accountant as the controller who had experience with public company reporting
and technical accounting; (3) the hiring of a Senior Director of SOX Compliance with experience in internal control environments and design;
(4) hiring third party professionals to perform a comprehensive assessment of the Company’s internal controls, including design
and gap assessments; and (5) the hiring of additional finance personnel to enable processes with appropriate segregation of duties.
In the course of preparing the financial statements for the year ended
December 31, 2021, we identified material weaknesses in internal control over financial reporting, which relate to the ineffective design
and implementation of Information Technology General Controls (“ITGC”) as well as the lack of properly designed management
review controls to compensate for these deficiencies. The Company’s ITGC deficiencies included improperly designed controls pertaining
to user access rights and segregation of duties over systems that are critical to the Company’s system of financial reporting. The
Company’s management review controls include the review and approval of journal entries, account reconciliations, accounting estimates,
and other technical accounting matters. The Company did not maintain sufficient evidence of these review control activities. The ITGC
deficiencies, combined with a lack of properly designed and implemented management review controls to compensate for these deficiencies,
represent material weaknesses in the Company’s internal control over financial reporting as there is a reasonable possibility that
a material misstatement with respect to the Company’s significant accounts and disclosures will not be prevented or detected on
a timely basis. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely
basis. These deficiencies could result in misstatements to our financial statements that would be material and would not be prevented
or detected on a timely basis.
Our management is in the process of developing
a remediation plan. The material weaknesses will not be considered remediated until management designs and implements effective controls
that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. Our management
will monitor the effectiveness of our remediation plans and will make changes management determines to be appropriate.
If not remediated, these material weaknesses could
result in material misstatements to our annual or interim financial statements that would not be prevented or detected on a timely basis,
or in delayed filing of required periodic reports. If we are unable to assert that our internal control over financial reporting is effective,
or when required in the future, if our independent registered public accounting firm is unable to express an unqualified opinion as to
the effectiveness of the internal control over financial reporting, investors may lose confidence in the accuracy and completeness of
our financial reports, the market price of our Common Stock could be adversely affected and we could become subject to litigation or investigations
by the NYSE, the SEC or other regulatory authorities, which could require additional financial and management resources.
Increased warranty claims could materially adversely affect
our business, prospects, financial condition and operating results.
As our business expands the sale of our electrified
powertrain solutions, we will need to increase warranty reserves to cover warranty-related claims. If our warranty reserves are inadequate
to cover future warranty claims on our vehicles, our business, prospects, financial condition and operating results could be materially
and adversely affected. We may become subject to significant and unexpected warranty expenses as well as claims from our customers, including
loss of revenue or damages. There can be no assurances that then-existing warranty reserves will be sufficient to cover all claims.
Inability to leverage vehicle and customer data could impact
our software algorithms and impact research and development operations.
We rely on data collected from the use of fleet
vehicles outfitted with our products, including vehicle data and data related to battery usage statistics. We use this data in connection
with our software algorithms and the research, development and analysis of our products. Our inability to obtain this data or the necessary
rights to use this data could result in delays or otherwise negatively impact our research and development efforts.
Interruption or failure of our information technology
and communications systems could impact our ability to effectively provide our services.
We plan to include in-vehicle services and functionality
that utilize data connectivity to monitor performance and timely capture opportunities to enhance over-the-road performance for cost-saving
preventative maintenance. The availability and effectiveness of our services depend on the continued operation of information technology
and communications systems. Our systems will be vulnerable to damage or interruption from, among others, physical theft, fire, terrorist
attacks, natural disasters, power loss, war, telecommunications failures, viruses, denial or degradation of service attacks, ransomware,
social engineering schemes, insider theft or misuse or other attempts to harm our systems. We utilize reputable third-party service providers
or vendors for all of our data other than our source code, and these providers could also be vulnerable to harms similar to those that
could damage our systems, including sabotage and intentional acts of vandalism causing potential disruptions. Some of our systems will
not be fully redundant, and our disaster recovery planning cannot account for all eventualities. Any problems with our third-party cloud
hosting providers could result in lengthy interruptions in our data services. In addition, our in-vehicle services and functionality
are highly technical and complex technology which may contain errors or vulnerabilities that could result in interruptions in our business
or the failure of our systems.
Our electrified powertrain solutions rely on software and hardware
that is highly technical, and if these systems contain errors, bugs or vulnerabilities, or if we are unsuccessful in addressing or mitigating
technical limitations in our systems, our business could be adversely affected.
Our
electrified powertrain solutions rely on software and hardware, including software and hardware developed or maintained internally or
by third parties, that is highly technical and complex and will require modification and updates over the life of the vehicle. In addition,
our electrified powertrain solutions depend on the ability of such software and hardware to store, retrieve, process and manage immense
amounts of data. Our software and hardware may contain errors, bugs, vulnerabilities, design defects or technical limitations, and our
systems are subject to certain technical limitations that may compromise our ability to meet our objectives. Some errors, bugs or vulnerabilities
within our software or hardware may be difficult to detect and may only be discovered after the code has been released for external or
internal use. Although we attempt to remedy any issues we observe in our products as effectively and rapidly as possible, such efforts
may not be timely, may hamper production or may not resolve issues to the satisfaction of our customers. Additionally, even if we are
able to deploy updates to the software addressing any issues, our over-the-air update procedures may fail to properly update the software.
In such an instance, affected vehicles would need to be brought to an upfitter or to one of our service team members for updates to be
installed, and the software would remain subject to vulnerabilities until such time as the updates are installed. If we are unable to
prevent or effectively remedy errors, bugs, vulnerabilities or defects in our software and hardware, we may suffer damage to our reputation,
loss of customers, loss of revenue or liability for damages, any of which could adversely affect our business and financial results.
If our electrified powertrain solutions fail to perform as expected,
our ability to develop, market and sell our electrified powertrain solutions could be harmed.
Our electrified powertrain solutions may contain
defects in design and production that may cause them not to perform as expected or may require repair. There can be no assurance that
we will be able to detect and fix any defects in our electrified powertrain solutions. We may experience recalls in the future, which
could adversely affect our brand and could adversely affect our business, prospects, financial condition and operating results. Our electrified
powertrain solutions may not perform consistent with customers’ expectations or consistent with other vehicles which may become
available or are consistent with other vehicles which may become available. Any product defects or any other failure of our electrified
powertrain solutions and software to perform as expected could harm our reputation and result in adverse publicity, lost revenue, delivery
delays, product recalls, negative publicity, product liability claims and significant warranty and other expenses and could have a material
adverse impact on our business, prospects, financial condition and operating results. Additionally, problems and defects experienced
by other electrified powertrain fleet solutions could by association have a negative impact on perception and customer demand for our
electrified powertrain solutions.
Developments in alternative technology or improvements in the
internal combustion engine may adversely affect the demand for our electrified powertrain solutions.
Significant developments in alternative technologies,
such as battery cell technology, advanced diesel, ethanol or natural gas, or improvements in the fuel economy of the internal combustion
engine, may materially and adversely affect our business, prospects, financial condition and operating results in ways we do not currently
anticipate. Existing and other battery cell technologies, fuels or sources of energy may emerge as customers’ preferred alternative
to our electrified powertrain solutions. Any failure by us to develop new or enhanced technologies or processes, or to react to changes
in existing technologies, could materially delay our development and introduction of new electrified powertrain solutions, which could
result in the loss of competitiveness, decreased revenue and a loss of market share to competitors. Our research and development efforts
may not be sufficient to adapt to changes in alternate technology. As technologies change, we plan to upgrade or adapt our electrified
powertrain solutions with the latest technology, in particular battery cell technology. However, our electrified powertrain solutions
may not compete effectively with alternative systems if we are not able to source and integrate the latest technology into our electrified
powertrain solutions.
Our assumptions regarding the ability of our electrified powertrain
solutions to limit carbon intensity and reduce GHG emissions and contribute to global decarbonization may be inaccurate.
We believe that our electrified powertrain solutions,
to the extent adopted, may have the ability to limit carbon intensity and reduce GHG emissions from fleet operations; however, these
beliefs are based on certain assumptions, including, but not limited to, our projections of the fuel types used, drive cycle and our
electrified powertrain solutions’ efficiencies and performance. To the extent our assumptions are materially incorrect or incomplete,
it could adversely impact our business, prospects, financial condition and operating results. In addition, if our assumptions regarding
the ability of our solutions to limit carbon intensity and reduce GHG emissions from trucking operations are materially incorrect or
incomplete, or if our beliefs regarding the availability of our products are materially incorrect or incomplete, it is possible that
our competitors’ technology may be better at limiting carbon intensity and reducing GHG emissions in certain circumstances and
in certain markets.
We will incur increased costs as a result of operating as a
public company, and our management will devote substantial time to new compliance initiatives.
As a public company, we are incurring
and expect to continue to incur significant legal, accounting and other expenses that we did not incur as a private company, and these
expenses may increase even more after we are no longer an emerging growth company, as defined in Section 2(a) of the Securities Act. As
a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street
Reform and Consumer Protection Act, as well as rules adopted, and to be adopted, by the SEC and the NYSE. Our management and other personnel
will need to devote a substantial amount of time to these compliance initiatives. Moreover, we expect these rules and regulations to substantially
increase our legal and financial compliance costs and to make some activities more time-consuming and costly. The increased costs will
increase our net loss. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements.
The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board
of directors, our board advisors or as executive officers.
Our management has limited experience in operating a public
company.
Our executive officers have limited experience
in the management of a publicly traded company. Our management team may not successfully or effectively manage our transition to a public
company that will be subject to significant regulatory oversight and reporting obligations under federal securities laws. Their limited
experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage in that it
is likely that an increasing amount of their time may be devoted to these activities, which will result in less time being devoted to
the management and growth of the post-combination company. We may not have adequate personnel with the appropriate level of knowledge,
experience and training in the accounting policies, practices or internal control over financial reporting required of public companies
in the U.S. The development and implementation of the standards and controls necessary for us to achieve the level of accounting standards
required of a public company in the U.S. may require costs greater than expected. It is possible that we will be required to expand our
employee base and hire additional employees to support our operations as a public company, which will increase our operating costs in
future periods.
Changes in U.S. trade policy, including the imposition of tariffs
and the resulting consequences, could adversely affect our business, prospects, financial condition and operating results.
The U.S. government has adopted a new approach
to trade policy and in some cases has attempted to renegotiate or terminate certain existing bilateral or multi-lateral trade agreements.
It has also imposed tariffs on certain foreign goods, including steel and certain commercial vehicle parts, which have begun to result
in increased costs for goods imported into the U.S. If we are unable to pass price increases on to our customer base or otherwise mitigate
the costs, or if demand for our exported products decreases due to the higher cost, our operating results could be materially adversely
affected. In addition, further tariffs have been proposed by the U.S. and our trading partners and additional trade restrictions could
be implemented on a broader range of products or raw materials. The resulting environment of retaliatory trade or other practices could
have a material adverse effect on our business, prospects, financial condition, operating results, customers, suppliers and the global
economy.
We are subject to U.S. and foreign anti-corruption and anti-money
laundering laws and regulations. We could face criminal liability and other serious consequences for violations, which could harm our
business.
We are subject to the U.S. Foreign Corrupt Practices
Act of 1977, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act
and possibly other anti-bribery and anti-money laundering laws in countries in which we conduct or will conduct activities. Anti-corruption
laws are interpreted broadly and prohibit companies and their employees, agents, contractors and other collaborators from authorizing,
promising, offering or providing, directly or indirectly, improper payments or anything else of value to recipients in the public or
private sector. We can be held liable for the corrupt or other illegal activities of our employees, agents, contractors and other collaborators,
even if we do not explicitly authorize or have actual knowledge of such activities. Any violations of the laws and regulations described
above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment,
tax reassessments, breach of contract and fraud litigation, reputational harm and other consequences.
Regulatory requirements may have a negative effect upon our
business.
All vehicles sold must comply with international,
federal, and state motor vehicle safety standards. In the United States, vehicles that meet or exceed all federally mandated safety standards
are certified under the federal regulations. Rigorous testing and the use of approved materials and equipment are among the requirements
for achieving federal certification. Our products may be subject to substantial regulation under federal, state, and local laws and standards.
These regulations include those promulgated by the U.S. EPA, the National Highway Traffic Safety Administration, Pipeline and Hazardous
Materials Safety Administration and various state boards, and compliance certification is required for each new model year. These laws
and standards are subject to change from time to time and we could become subject to these regulations in the future. In addition, federal,
state, and local laws and industrial standards for electric vehicles are still developing. Compliance with these regulations could be
challenging, burdensome, time consuming, and expensive. If compliance results in delays or substantial expenses, our business could be
materially adversely affected.
Unfavorable publicity, or a failure to respond effectively to
adverse publicity, could harm our reputation and adversely affect our business.
As an early stage company, maintaining and enhancing
our brand and reputation is critical to our ability to attract and retain employees, partners, customers and investors, and to mitigate
legislative or regulatory scrutiny, litigation and government investigations.
Recent significant negative publicity has adversely
affected our brand and reputation and our stock price. Negative publicity may result from allegations of fraud, improper business practices,
employee misconduct or any other matters that could give rise to litigation and/or governmental investigations. Unfavorable publicity
relating to us or those affiliated with us has and may in the future adversely affect public perception of the entire company. Adverse
publicity and its effect on overall public perceptions of our brand, or our failure to respond effectively to adverse publicity, could
have a material adverse effect on our business.
In March 2021, an entity published an article
containing certain allegations against us. This article and the public response to such article, as well as other negative publicity,
have adversely affected our brand and reputation as well as our stock price, which makes it difficult for us to attract and retain employees,
partners and customers, reduces confidence in our products and services, harms investor confidence and the market price of our securities,
invites legislative and regulatory scrutiny and has resulted in various legal proceedings. As a result, customers, potential customers,
partners and potential partners may in the future fail to award us additional business or cancel or seek to cancel existing contracts
or otherwise, direct future business to our competitors, and investors may invest in our competitors instead.
We have been named a defendant in stockholder class
actions, and the Securities and Exchange Commission has sent us requests for information, including a subpoena for documents. These, and
potential similar or related lawsuits or investigations, could result in substantial legal fees, fines, penalties or damages and may divert
management’s time and attention from our business.
Beginning on March 8, 2021, two putative class
action complaints were filed in the federal district court for the Southern District of New York against us and certain of our current
officers and directors. The cases were consolidated as In re XL Fleet Corp. Securities Litigation, Case No. 1:21-cv-02171, a lead
plaintiff was appointed, and an amended consolidated complaint was filed on July 20, 2021. The amended complaint alleges that certain
public statements made by the defendants between September 18, 2020 and March 31, 2021 violated Sections 10(b) and 20(a) of the Exchange
Act and Rule 10b-5 promulgated thereunder. Our motion to dismiss the amended complaint was denied on February 17, 2022. We believe that
the allegations asserted in the securities class action are without merit, and we intend to vigorously defend the lawsuit. There can be
no assurance, however, that we will be successful. At this time, we are unable to estimate potential losses, if any, related to the lawsuit.
On September 20, 2021, and October 19, 2021, two
class action complaints were filed in the Delaware Court of Chancery against certain of our current officers and directors, and the company’s
sponsor, Pivotal Investment Holdings II LLC. The actions were consolidated and a consolidated amended complaint was filed on January 31,
2022, alleging 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. We believe that the allegations asserted in the action are without
merit, and we intend to vigorously defend the lawsuit.
The Company has received requests for information,
including a subpoena, from the Securities and Exchange Commission (“SEC”) related to, among other things, the Company’s
business combination with XL Hybrids, Inc. and the related PIPE financing, the Company’s sales pipeline and revenue projections,
purchase orders, suppliers, CARB approvals, fuel economy from our Power Drive products, customer complaints, and disclosures and other
matters in connection with the foregoing. According to the subpoena, the investigation is a fact-finding inquiry and does not mean
that the SEC has concluded that there is a violation of the law. We intend to provide the requested information and cooperate fully with
the SEC investigation.
These legal proceedings and any other
similar or related legal proceedings or investigations are subject to inherent uncertainties, and the actual costs to be incurred relating
to these matters will depend upon many unknown factors. The outcome of these legal proceedings is uncertain, and we could be forced to
expend significant resources in the defense of these actions, and we may not prevail. Monitoring and defending against legal actions is
time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities, which
could result in delays of our testing or our development and commercialization efforts. In addition, we may incur substantial legal fees
and costs in connection with these matters. We are also generally obligated, to the extent permitted by law, to indemnify our current
and former directors and officers who are named as defendants in these and similar actions. We are not currently able to estimate the
possible cost to us from these matters, as these actions are currently at an early stage and we cannot be certain how long it may take
to resolve these matters or the possible amount of any damages that we may be required to pay. It is possible that we could, in the future,
incur judgments or enter into settlements of claims for monetary damages. Decisions adverse to our interests in these actions could result
in the payment of substantial damages, or possibly fines, and could have a material adverse effect on our cash flow, results of operations
and financial position. In addition, the uncertainty of the currently pending litigation could lead to increased volatility in our stock
price.
We may need to defend ourselves against patent, copyright or
trademark infringement claims or trade secret misappropriation claims, which may be time-consuming and cause us to incur substantial
costs.
Companies, organizations or individuals, including
our competitors, may own or obtain patents, trademarks or other proprietary rights that would prevent or limit our ability to make, use,
develop or sell our electrified powertrain solutions, which could make it more difficult for us to operate our business. We may receive
inquiries from patent, copyright or trademark owners inquiring whether we infringe upon their proprietary rights. We may also be the
subject of allegations that we have misappropriated their trade secrets or other proprietary rights. Companies owning patents or other
intellectual property rights relating to battery packs, electric motors, or electronic power management systems may allege infringement
or misappropriation of such rights. In response to a determination that we have infringed upon or misappropriated a third party’s
intellectual property rights, we may be required to do one or more of the following:
| ● | cease
development, sales or use of our products that incorporate the asserted intellectual property; |
| ● | pay
substantial damages; |
| ● | obtain
a license from the owner of the asserted intellectual property right, which license may not
be available on reasonable terms or at all; or |
| ● | redesign
one or more aspects or systems of our electrified powertrain solutions. |
A successful claim of infringement or misappropriation
against us could materially adversely affect our business, prospects, financial condition and operating results. Any litigation or claims,
whether valid or invalid, could result in substantial costs and diversion of resources.
Our business may be adversely affected if we are unable to protect
our intellectual property rights from unauthorized use by third parties.
Failure to adequately protect our intellectual
property rights could result in our competitors offering similar products, potentially resulting in the loss of some of our competitive
advantage and a decrease in our revenue, which would adversely affect our business, prospects, financial condition and operating results.
For example, we purchase many of the components for our hybrid systems from third party manufacturers and may not be able to prevent
competitors from using these third party components. Our success depends, at least in part, on our ability to protect our core technology
and intellectual property. To accomplish this, we will rely on a combination of patents, trade secrets (including know-how), employee
and third-party nondisclosure agreements, copyrights, trademarks, intellectual property licenses and other contractual rights to establish
and protect our rights in our technology.
The protection of our intellectual property rights
will be important to our future business opportunities. However, the measures we take to protect our intellectual property from unauthorized
use by others may not be effective for various reasons, including the following:
| ● | any
patent applications that we submit may not result in the issuance of patents; |
| ● | the
scope of our issued patents, including our patent claims, may not be broad enough to protect
our proprietary rights; |
| ● | our
issued patents may be challenged or invalidated by our competitors; |
| ● | our
employees or business partners may breach their confidentiality, non-disclosure and non-use
obligations to us; |
| ● | third-parties
may independently develop technologies that are the same or similar to ours; |
| ● | the
costs associated with enforcing patents, confidentiality and invention agreements or other
intellectual property rights may make enforcement impracticable; and |
| ● | current
and future competitors may circumvent our intellectual property. |
Patent, trademark, copyright and trade secret
laws vary throughout the world. Some foreign countries do not protect intellectual property rights to the same extent as do the laws
of the U.S. Further, policing the unauthorized use of our intellectual property in foreign jurisdictions may be difficult. Therefore,
our intellectual property rights may not be as strong or as easily enforced outside of the U.S.
Also, while we have registered trademarks in
an effort to protect our investment in our brand and goodwill with customers, competitors may challenge the validity of those trademarks
and other brand names in which we have invested. Such challenges can be expensive and may adversely affect our ability to maintain the
goodwill gained in connection with a particular trademark.
Our intellectual property applications for registration may
not issue or be registered, which may have a material adverse effect on our ability to prevent others from commercially exploiting products
similar to ours.
We cannot be certain that we are the first inventor
of the subject matter to which we have filed a particular patent application, or if we are the first party to file such a patent application.
If another party has filed a patent application to the same subject matter as we have, we may not be entitled to the protection sought
by the patent application. We also cannot be certain whether the claims included in a patent application will ultimately be allowed in
the applicable issued patent. Further, the scope of protection of issued patent claims is often difficult to determine. As a result,
we cannot be certain that the patent applications that we file will issue, or that issued patents will afford protection against competitors
with similar technology. In addition, our competitors may design around issued patents, which may adversely affect our business, prospects,
financial condition and operating results.
Changes in tax laws may materially adversely affect our business,
prospects, financial condition and operating results.
New
income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely
affect our business, prospects, financial condition and operating results. Further, existing tax laws, statutes, rules, regulations or
ordinances could be interpreted, changed, modified or applied adversely to us. For example, U.S. federal tax legislation enacted in 2017,
informally titled the Tax Cuts and Jobs Act (the “Tax Act”), enacted many significant changes to the U.S. tax laws. Future
guidance from the Internal Revenue Service (the “IRS”) with respect to the Tax Act may affect our, and certain aspects of
the Tax Act could be repealed or modified in future legislation. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”) has already modified certain provisions of the Tax Act. In addition, we are uncertain if and to what extent various states
will conform to the Tax Act, the CARES Act or any newly enacted federal tax legislation.
Our ability to use net operating loss carryforwards and other
tax attributes may be limited in connection with the Business Combination or other ownership changes.
We
have incurred losses during our history and do not expect to become profitable in the near future, and may never achieve profitability.
To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any,
until such unused losses expire, if at all. As of December 31, 2021, we had U.S. federal and state net operating loss carryforwards of
approximately $128.2 million and $75.0 million, respectively.
Under
the Tax Act, as modified by the CARES Act, U.S. federal net operating loss carryforwards generated in taxable periods beginning after
December 31, 2017, may be carried forward indefinitely, but the deductibility of such net operating loss carryforwards in taxable years
beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform
to the Tax Act or the CARES Act.
In
addition, our net operating loss carryforwards are subject to review and possible adjustment by the IRS and state tax authorities. Under
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), our federal net operating loss carryforwards
and other tax attributes may become subject to an annual limitation in the event of certain cumulative changes in the ownership of the
Company. An “ownership change” pursuant to Section 382 of the Code generally occurs if one or more stockholders or groups
of stockholders who own at least 5% of a company’s stock increase their ownership by more than 50 percentage points over their
lowest ownership percentage within a rolling three-year period. Our ability to utilize our net operating loss carryforwards and other
tax attributes to offset future taxable income or tax liabilities may be limited as a result of ownership changes, including potential
changes in connection with the reverse recapitalization or other transactions. Similar rules may apply under state tax laws. We have
not yet determined the amount of the cumulative change in our ownership resulting from the reverse recapitalization or other transactions,
or any resulting limitations on our ability to utilize our net operating loss carryforwards and other tax attributes. If we earn taxable
income, such limitations could result in increased future income tax liability to us and our future cash flows could be adversely affected.
We have recorded a full valuation allowance related to our net operating loss carryforwards and other deferred tax assets due to the
uncertainty of the ultimate realization of the future benefits of those assets.
We may not be able to obtain or agree on acceptable terms and
conditions for all or a significant portion of the government grants, loans and other incentives for which we may apply. As a result,
our business, prospects, financial condition and operating results may be adversely affected.
We have previously applied and may again in the
future apply for federal and state grants, loans and tax incentives under government programs designed to stimulate the economy and support
the production of alternative fuel and electric vehicles and related technologies. We anticipate that in the future there will be new
opportunities for us to apply for grants, loans and other incentives from federal, state and foreign governments. Our ability to obtain
funds or incentives from government sources is subject to the availability of funds under applicable government programs and approval
of our applications to participate in such programs. The application process for these funds and other incentives will likely be highly
competitive. We cannot assure you that we will be successful in obtaining any of these additional grants, loans and other incentives.
Our product development efforts are subject to counterparty
risks
We often develop products as part of co-development
agreements where our counterparty bears some of the product development and engineering costs and, among other obligations, may be responsible
for supplying critical components or designs, providing access to key customers or technologies, or developing the more fulsome product
or platform (a chassis or vehicle, for example) that incorporates or makes use of our products. In some instances, we’ve made investments
in those counterparties to provide them with additional working capital and provide us with greater returns upon the expected commercial
success of the integrated product offering. Among other initiatives, we are currently developing an electric drivetrain for use in Curbtender
medium duty refuse vehicles. Our reliance on these and other counterparties subjects our product development efforts, the expected commercial
success of those products, and any investment we’ve made in those counterparties to the risks facing those businesses, including
their own financial wellbeing and liquidity, the effectiveness of their salesforce, the quality of their customer relationships, the
stability of their workforce, the capability of their engineering teams, the adequacy of their own technology and manufacturing ability,
and other risks that may be unforeseeable from the perspective of a co-developer. Should these businesses and/or product offerings fail
to achieve the commercial success we anticipate, our own revenues may be impacted and our investments may be impaired.
Our XL Grid business depends in part on support from gas and
electric utilities for energy efficiency, and a decline in such support could harm our business.
Our XL Grid energy efficiency services business
depends in large part on government legislation and policies that support energy efficiency projects and that enhance the economic feasibility
of our energy efficiency services for customers. Several of the states in which we operate support our customers’ investments in
energy efficiency through legislation and regulations that provide financial incentives for customers to procure our energy efficiency
services.
Our customers frequently depend on these programs
to help justify the costs associated with, and to finance energy efficiency projects. If any of these incentives are adversely amended,
eliminated or not extended beyond their current expiration dates, or if funding for these incentives is reduced, it could adversely affect
our ability to complete projects for our existing customers and obtain project commitments from new customers.
Failure of our subcontractors to properly perform their services
in a timely manner could cause delays in the delivery of our XL Gird energy efficiency projects which could damage our reputation, have
a negative impact on our relationships with our customers and adversely affect our growth.
Our success depends on our ability to provide
quality, reliable energy efficiency services in a timely manner, which in part requires the proper removal and installation of lighting,
mechanical and electrical systems by our subcontractors upon which we depend. Substantially all of our energy efficiency solutions are
installed by subcontractors. Any delays, malfunctions, inefficiencies or interruptions in our energy efficiency services caused by improper
installation by our subcontractors could cause us to have difficulty retaining current customers and attracting new customers. Such delays
could also result in additional costs that could affect the profit margin of our projects. In addition, our brand, reputation and growth
could be negatively impacted.
Our
XL Grid energy efficiency activities and operations are subject to numerous health and safety laws and regulations, and if we violate
such regulations, we could face penalties and fines.
We are subject to numerous health and safety
laws and regulations in each of the jurisdictions in which we operate. These laws and regulations require us to obtain and maintain permits
and approvals and implement health and safety programs and procedures to control risks associated with our energy efficiency projects.
If our compliance programs are not successful, we could be subject to penalties or to revocation of our permits, which may require us
to curtail or cease operations of the affected projects. Violations of laws, regulations and permit requirements may also result in criminal
sanctions or injunctions.
Our costs of complying with current and future
health and safety laws, regulations and permit requirements, and any liabilities, fines or other sanctions resulting from violations
of them, could adversely affect our business, financial condition and operating results.
Our XL Grid energy efficiency retrofitting process often involves
responsibility for the removal and disposal of components containing hazardous materials and at times requires that our subcontractors
work in hazardous conditions, either of which could give rise to a claim against us.
When we retrofit a customer’s facility,
we typically assume responsibility for removing and disposing of its existing lighting fixtures. Certain components of these fixtures
contain trace amounts of mercury and other hazardous materials. Older components may also contain trace amounts of polychlorinated biphenyls,
or PCBs. We utilize licensed and insured hazardous wastes disposal companies to remove and/or dispose of such components. Failure to
properly handle, remove or dispose of the components containing these hazardous materials in a safe, effective and lawful manner could
give rise to liability for us, or could expose our workers or other persons to these hazardous materials, which could result in claims
against us. A successful personal injury claim against us that is not covered by insurance or is in excess of our available insurance
limits could require us to make significant payments of damages and could materially adversely affect our results of operations and financial
condition.
Risks Related to Ownership of Our Securities
Concentration of ownership among our existing executive officers,
directors and their respective affiliates may prevent new investors from influencing significant corporate decisions.
Our executive officers, directors and their respective
affiliates as a group beneficially own approximately 13.2% of our outstanding Common Stock. As a result, these stockholders will be able
to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment
of our certificate of incorporation (“Certificate of Incorporation”) and approval of significant corporate transactions. This
control could have the effect of delaying or preventing a change of control of our or changes in management and will make the approval
of certain transactions difficult or impossible without the support of these stockholders.
We do not expect to declare any dividends in the foreseeable
future.
We do not anticipate declaring any cash dividends
to holders of our Common Stock in the foreseeable future. Consequently, investors may need to rely on sales of their shares after price
appreciation, which may never occur, as the only way to realize any future gains on their investment.
The price of our Common Stock may be volatile.
The price of our Common Stock may fluctuate due
to a variety of factors, including:
| ● | actual
or anticipated fluctuations in our quarterly and annual results and those of other public
companies in industry; |
| ● | mergers
and strategic alliances in the industry in which we operate; |
|
● |
market prices and conditions
in the industry in which we operate; |
|
● |
changes in government
regulation; |
|
● |
potential or actual military
conflicts or acts of terrorism; |
|
● |
announcements concerning
us or our competitors; |
|
● |
the general state of the
securities markets; |
|
● |
threatened or actual lawsuits,
investigations or other legal proceedings; and |
|
● |
short-selling activity
related to our Common Stock. |
These market and industry factors may materially
reduce the market price of our Common Stock, regardless of our operating performance. In addition, we believe there has been and may
continue to be substantial trading in derivatives of our Common Stock, including short selling activity or related similar activities,
which are beyond our control and which may be beyond the full control of the SEC and Financial Institutions Regulatory Authority or “FINRA”.
While the SEC and FINRA rules prohibit some forms of short selling and other activities that may result in stock price manipulation,
such activity may nonetheless occur without detection or enforcement. There can be no assurance that should there be any illegal manipulation
in the trading of our stock, it will be detected, prosecuted or successfully eradicated. Significant short selling market manipulation
could cause our Common Stock trading price to decline, to become more volatile, or both.
Reports published by analysts, including projections in those
reports that differ from our actual results, could adversely affect the price and trading volume of our Common Stock.
We expect that securities research analysts will
establish and publish their own periodic projections for our business. These projections may vary widely and may not accurately predict
the results we actually achieve. Our stock price may decline if our actual results do not match the projections of these securities research
analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock or publishes inaccurate or unfavorable
research about our business, our stock price could decline. If one or more of these analysts ceases coverage of us or fails to publish
reports on us regularly, our stock price or trading volume could decline.
If securities or industry analysts do not
publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding
our Common Stock adversely, the price and trading volume of our Common Stock could decline.
The trading market for our Common Stock will
be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our
competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable
relative recommendations about our competitors, the price of our Common Stock would likely decline. If any analyst who may cover us were
to cease their coverage or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause
our stock price or trading volume to decline.
We may issue additional Common Stock or preferred stock, including
under our equity incentive plan. Any such issuances would dilute the interest of our stockholders and likely present other risks.
We may issue a substantial number of additional
shares of common or preferred stock, including under our equity incentive plan. Any such issuances of additional shares of common or
preferred stock:
|
● |
may significantly dilute
the equity interests of our investors; |
|
● |
may subordinate the rights
of holders of Common Stock if preferred stock is issued with rights senior to those afforded our Common Stock; |
|
● |
could cause a change in
control if a substantial number of shares of our Common Stock are issued, which may affect, among other things, our ability to use
our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers and directors;
and |
|
● |
may adversely affect prevailing
market prices for our Common Stock. |
We may issue additional shares of Common Stock or other equity
securities without stockholder approval, which will dilute existing stockholders’ interests and may depress the market price of
our Common Stock.
As of December 31, 2021, we have options, RSUs
and warrants outstanding to purchase up to an aggregate of 14,583,380 shares of our Common Stock, including, Private Placement Warrants
to purchase 4,233,333 shares and options, RSUs and warrants to purchase up to 10,350,047 shares. We also had the ability to initially
issue up to 11,003,180 shares of Common Stock under the XL Fleet Corp. 2020 Equity Incentive Plan (the “2020 Plan”). Pursuant
to the 2020 Plan, the number of shares available for issuance automatically increases annually on the first day of each fiscal year during
the period beginning with the fiscal year immediately following the fiscal year during which the 2020 Plan is first approved by the our
stockholders, and ending on the second day of fiscal year 2030, in an amount equal to the lesser of: (a) 5% of the number of outstanding
shares of Common Stock on such date; and (b) an amount determined by the plan administrator. We may issue additional shares of Common
Stock or other equity securities of equal or senior rank in the future in connection with, among other things, future acquisitions or
repayment of outstanding indebtedness, without stockholder approval, in a number of circumstances.
Our issuance of additional shares of Common Stock
or other equity securities of equal or senior rank would have the following effects:
|
● |
our existing stockholders’
proportionate ownership interest in our will decrease; |
|
● |
the amount of cash available
per share, including for payment of dividends (if any) in the future, may decrease; |
|
● |
the relative voting strength
of each previously outstanding share of Common Stock may be diminished; and |
|
● |
the market price of our
shares of Common Stock may decline. |
General Risk Factors
Recent management changes could disrupt our operations and impair
our ability to attract and retain key personnel.
We have experienced recent changes
to our senior management team, including the announced departure of Dimitri Kazarinoff effective December 1, 2021 and appointment of Eric
Tech as our Chief Executive Officer effective as of December 1, 2021. In addition, the Company’s Chief Financial Officer, Cielo
Hernandez, resigned as of January 31, 2022. Changes in our senior management and uncertainty regarding pending changes may disrupt our
operations, impact partner relationships, and impair our ability to recruit and retain other needed personnel. Any such disruption or
impairment could have an adverse effect on our business.
Our warrants are accounted for as liabilities and the changes
in value of our warrants could have a material effect on our financial results.
On April 12, 2021, the Acting Director of the Division
of Corporation Finance and Acting Chief Accountant of the SEC together issued a statement regarding the accounting and reporting considerations
for warrants issued by special purpose acquisition companies entitled “Staff Statement on Accounting and Reporting Considerations
for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)” (the “SEC Statement”). Specifically,
the SEC Statement focused on certain settlement terms and provisions related to certain tender offers, which terms are similar to those
contained in the warrant agreement governing our warrants. As a result of the SEC Statement, we reevaluated the accounting treatment
of our 7,666,667 public warrants and 4,233,333 private placement warrants, and determined to classify the warrants as derivative liabilities
measured at fair value, with changes in fair value each period reported in earnings.
As a result, included on our consolidated balance
sheet as of December 31, 2021 contained elsewhere in this Annual Report are derivative liabilities related to embedded features contained
within our private warrants. There are no public warrants outstanding as of December 31, 2021. Accounting Standards Codification 815,
Derivatives and Hedging (“ASC 815”), provides for the remeasurement of the fair value of such derivatives at each balance
sheet date, with a resulting non-cash gain or loss related to the change in the fair value being recognized in earnings in the statement
of operations. As a result of the recurring fair value measurement, our consolidated financial statements and results of operations may
fluctuate quarterly, based on factors which are outside of our control. Due to the recurring fair value measurement, we expect that we
will recognize non-cash gains or losses on our warrants each reporting period and that the amount of such gains or losses could be material.
As discussed under “Risks Related to Owning
Our Securities – The Price of our Common Stock may be volatile,” the price of our Common Stock may fluctuate. The
volatility of the Common Stock directly impacts the fair value of the Warrants; hence, continued volatility in the price of our Common
Stock could result in a corresponding volatility in the fair value of the liability associated with the Warrants.
Our charter contains anti-takeover provisions that could adversely
affect the rights of our stockholders.
Our Certificate of Incorporation contains provisions
to limit the ability of others to acquire control of our or cause us to engage in change-of-control transactions, including, among other
things:
| ● | provisions
that authorize our board of directors, without action by our stockholders, to issue additional
shares of Common Stock and preferred stock with preferential rights determined by our board
of directors; |
|
● |
provisions that permit
only a majority of our board of directors to call stockholder meetings and therefore do not permit stockholders to call stockholder
meetings; |
|
● |
provisions that impose
advance notice requirements, minimum shareholding periods and ownership thresholds, and other requirements and limitations on the
ability of stockholders to propose matters for consideration at stockholder meetings; |
|
● |
provisions limiting stockholders’
ability to act by written consent; and |
|
● |
a staggered board whereby
our directors are divided into three classes, with each class subject to retirement and re-election once every three years on a rotating
basis. |
These provisions could have the effect of depriving
our stockholders of an opportunity to sell their Common Stock at a premium over prevailing market prices by discouraging third parties
from seeking to obtain control of our company in a tender offer or similar transaction. With our staggered board of directors, at least
two annual or special meetings of stockholders will generally be required in order to effect a change in a majority of our directors.
Our staggered board of directors can discourage proxy contests for the election of our directors and purchases of substantial blocks
of our shares by making it more difficult for a potential acquirer to gain control of our board of directors in a relatively short period
of time.
Our Certificate of Incorporation provides, subject to limited
exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation
matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors,
officers, employees or stockholders.
Our Certificate of Incorporation provides, to
the fullest extent permitted by law, that derivative actions brought in our name, actions against directors, officers and employees for
breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware and, if brought
outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s
counsel except any action (A) as to which the Court of Chancery in the State of Delaware determines that there is an indispensable
party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction
of the Court of Chancery within ten days following such determination), (B) which is vested in the exclusive jurisdiction of a court
or forum other than the Court of Chancery, (C) for which the Court of Chancery does not have subject matter jurisdiction, or (D) any
action arising under the Securities Act, as to which the Court of Chancery and the federal district court for the District of Delaware
shall have concurrent jurisdiction. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock
shall be deemed to have notice of and consented to the forum provisions in the Certificate of Incorporation.
This choice of forum provision may limit a stockholder’s
ability to bring a claim in a judicial forum that we find favorable for disputes with our or any of our directors, officers, other employees
or stockholders, which may discourage lawsuits with respect to such claims. We cannot be certain that a court will decide that this provision
is either applicable or enforceable, and if a court were to find the choice of forum provision contained in our Certificate of Incorporation
to be inapplicable or unenforceable in an action, our may incur additional costs associated with resolving such action in other jurisdictions,
which could harm our business, operating results and financial condition.
Our Certificate of Incorporation provides that
the exclusive forum provision will be applicable to the fullest extent permitted by applicable law. Notwithstanding the foregoing, Section 27
of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange
Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not apply to suits brought to enforce any
duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.
We may become involved in legal proceedings and other matters
that, if adversely adjudicated or settled, could adversely affect our financial results.
From time to time, we may be named in lawsuits
or other legal proceedings relating to our business. In particular, the nature of our business subjects us to the risk of lawsuits filed
by customers, stockholders, competitors, business partners and others in the ordinary course of business.
As with all legal proceedings, no assurances
can be given as to the outcome of these matters. Moreover, legal proceedings can be expensive and time consuming, and we may not be successful
in defending or prosecuting these lawsuits, which could result in settlements or damages that could adversely affect our business, financial
condition and results of operations.
Our employees and independent contractors may engage in misconduct
or other improper activities, including noncompliance with regulatory standards and requirements, which could have an adverse effect
on our business, prospects, financial condition and operating results.
We are exposed to the risk that our employees
and independent contractors may engage in misconduct or other illegal activity. Misconduct by these parties could include intentional,
reckless or negligent conduct or other activities that violate laws and regulations, including production standards, U.S. federal and
state fraud, abuse, data privacy and security laws, other similar non-U.S. laws or laws that require the true, complete and accurate
reporting of financial information or data. It is not always possible to identify and deter misconduct by employees and other third parties,
and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses
or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such
laws or regulations. In addition, we are subject to the risk that a person or government could allege such fraud or other misconduct,
even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our
rights, those actions could have a significant impact on our business, prospects, financial condition and operating results, including,
without limitation, the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement,
integrity oversight and reporting obligations to resolve allegations of non-compliance, imprisonment, other sanctions, contractual damages,
reputational harm, diminished profits and future earnings and curtailment of our operations, any of which could adversely affect our
business, prospects, financial condition and operating results.
Our failure to timely and effectively implement controls and
procedures required by Section 404(a) of the Sarbanes-Oxley Act could have a material adverse effect on our business.
As a public company, we are required to comply
with Section 404 of the Sarbanes Oxley Act of 2002 (“SOX”), which requires, among other things, that companies maintain disclosure
controls and procedures to ensure timely disclosure of material information, and that management review the effectiveness of those controls
on a quarterly basis. Because we ceased to be an “emerging growth company” as defined in the Jumpstart Our Business Startups
Act of 2012 (the “JOBS Act”) with our transition to large accelerated filer status as of December 31, 2021, we are also now
subject to Section 404(b) of SOX, which requires that our independent registered public accounting firm provide an attestation report
on the effectiveness of our internal control over financial reporting for the first time in this Annual Report on Form 10-K, among other
additional requirements. Effective internal controls are necessary for us to provide reliable financial reports and to help prevent fraud,
and our management and other personnel devote a substantial amount of time to these compliance requirements. These rules and regulations
also increase our legal and financial compliance costs and make some activities more time-consuming and costly.
Industry disruptions and changes in practice could impact our
operating results.
A work stoppage or slowdown, including due to
the COVID-19 pandemic, at one or more of our or our outsourcing partners’, suppliers and vehicle OEMs has occurred in the past
due to the COVID-19 pandemic and could again in the future have a material adverse effect on our business. The Company expects to continue
to experience production line shutdowns / slowdowns at vehicle OEMs, and some of our customers will not purchase our electric propulsion
systems without OEM vehicle chassis on which to install those systems. Also, a significant disruption in the supply of a key component
due to a work stoppage at one of our suppliers could have a material adverse effect on our business. We also believe that the impact
of the global microchip shortage that the entire industry is currently experiencing will adversely impact our operating results in fiscal
year 2022. Lastly, Ford’s recent cancellation of the eQVM program industry wide is adversely impacting upfitter partners’
ability and willingness to install ours systems. This will continue to have an adverse impact on our operating results in fiscal year
2022.
Our business and operations could be negatively affected if
we become subject to any securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution
of business and growth strategy and impact the price of our Common Stock.
Shareholder activism, which could take many forms
or arise in a variety of situations, has been increasing recently. Volatility in the price of our Common Stock or other reasons may in
the future cause us to become the target of securities litigation or shareholder activism. Securities litigation and shareholder activism,
including potential proxy contests, could result in substantial costs and divert management’s and our board of director’s
attention and resources from our business. Additionally, such securities litigation and shareholder activism could give rise to perceived
uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain
qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation
and shareholder activism. Further, the price of our Common Stock could be subject to significant fluctuation or otherwise be adversely
affected by the events, risks and uncertainties of any securities litigation and shareholder activism.
Our financial results may vary significantly from period to
period due to fluctuations in our operating costs and other factors.
We expect our period-to-period financial results
to vary based on our operating costs, which we anticipate will fluctuate with the pace at which we continue to design, develop and produce
new products and increase production capacity. Additionally, our revenues from period to period may fluctuate as we introduce existing
products to new markets for the first time and as we develop and introduce new products. As a result of these factors, we believe that
quarter-to-quarter comparisons of our financial results, especially in the short term, are not necessarily meaningful and that these
comparisons cannot be relied upon as indicators of future performance. Moreover, our financial results may not meet the expectations
of equity research analysts, ratings agencies or investors, who may be focused only on quarterly financial results. If any of this occurs,
the trading price of our Common Stock could fall substantially, either suddenly or over time.
We intend to pursue acquisitions, investments, joint ventures
and dispositions, which could adversely affect our results of operations.
Our growth strategy includes the acquisition
of, and investment in, businesses that offer complementary products, services and technologies, augment our market coverage, or enhance
our technological capabilities, such as our recent acquisition of World Energy Efficiency Services, LLC, or World Energy. We may also
enter into strategic alliances or joint ventures to achieve these goals. We may not be able to identify suitable acquisition, investment,
alliance, or joint venture opportunities, or to consummate any such transactions. In addition, our original estimates and assumptions
used in assessing any transaction may be inaccurate and we may not realize the expected financial or strategic benefits of any such transaction,
including our recent acquisition of World Energy.
Any future growth through acquisitions will depend
in part upon the continued availability of suitable acquisition candidates at attractive prices, terms and conditions, as well as sufficient
liquidity and credit to fund these acquisitions. We may incur significant additional debt from time to time to finance any such acquisitions,
which could increase the risks associated with our leverage, including our ability to service our debt. Acquisitions involve risks that
business judgments made concerning the value, strengths and weaknesses of businesses acquired may prove to be incorrect. Future acquisitions
and any necessary related financings also may involve significant transaction-related expenses, which could include severance, lease
termination, transaction and deferred financing costs, among others.
We may experience, challenges in integrating
operations and information technology systems acquired from other companies. This could result in the diversion of management’s
attention from other business concerns and the potential loss of our key employees or clients or those of the acquired operations. The
integration process itself may be costly and may adversely impact our business and the acquired company’s business as it requires
coordination of geographically diverse organizations and implementation of accounting and information technology systems.
We complete acquisitions with the expectation
that they will result in various benefits, but the anticipated benefits of these acquisitions are subject to a number of uncertainties,
including the ability to timely realize accretive benefits, the level of attrition from professionals licensed or associated with the
acquired companies and whether we can successfully integrate the acquired business. Failure to achieve these anticipated benefits could
result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could
in turn materially and adversely affect our overall business, financial condition and operating results.