Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 1. Organization and Description of Business
Description of Business: XL Fleet Corp. and its subsidiaries
(“XL Fleet” or the “Company”) is a leading provider of fleet electrification solutions for commercial vehicles
in North America, with over 4,300 electrified powertrain systems sold and driven over 150 million miles by over 200 fleets, as
of March 31, 2021. XL Fleet’s vision is to become the world leader in fleet electrification solutions, with a mission of
accelerating the adoption of fleet electrification systems through cost effective, customer tailored and comprehensive solutions.
Merger and Reorganization: On December 21, 2020 (the “Closing
Date”), privately held XL Hybrids, Inc., a Delaware corporation, (“Legacy XL”) consummated the merger pursuant to that
certain Agreement and Plan of Reorganization, dated as of September 17, 2020 (the “Merger Agreement”), by and among Pivotal
Investment Corporation II (“Pivotal”), PIC II Merger Sub Corp., a Delaware corporation and wholly owned subsidiary of Pivotal
(“Merger Sub”), and Legacy XL. Pursuant to the terms of the Merger Agreement, a business combination between Legacy XL and
Pivotal was effected through the merger of Merger Sub with and into Legacy XL, with Legacy XL surviving as a wholly-owned subsidiary
of Pivotal (the “Merger” and, collectively with the other transactions described in the Merger Agreement, the “Business
Combination”). On the Closing Date, and in connection with the closing of the Business Combination (the “Closing”),
Pivotal Investment Corporation II changed its name to XL Fleet Corp.
COVID-19 Worldwide Pandemic: On March 11, 2020, the World
Health Organization characterized the outbreak of the novel coronavirus (“COVID-19”) as a global pandemic and recommended
containment and mitigation measures. Since then, extraordinary actions have been taken by international, federal, state, and local
public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the
world. These actions include travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals
to substantially restrict daily activities and for many businesses to curtail or cease normal operations.
Consistent with the actions taken by governmental authorities,
the Company has taken appropriately cautious steps to protect its workforce and support community efforts. As part of these efforts,
and in accordance with applicable government directives, the Company initially implemented work from home policies where practical
at its facilities in late March 2020. Effective March 31, 2021 all 76 employees have been working full-time from one of the 4
offices or from home. Approximately 30 to 40 employees spend the majority of their work time in one of the company’s offices
in Boston, MA, Wixom, MI, Quincy, IL, or Foothill Ranch, CA. The balance of the employees have to date been able to effectively work
their jobs remotely from their homes with limited disruptions. Current COVID-19 policies include universal facial covering
requirements, rearranging facilities to follow social distancing protocols, employees self-screening before going into the office,
enhanced cleaning procedures, and strict quarantine protocols for any suspected or confirmed employee cases. This includes universal
facial covering requirements, rearranging facilities to follow social distancing protocols, ensuring employees update the company
log to log in upon entering the building, conducting regular temperature checks and undertaking regular and thorough disinfecting of
surfaces and tools. However, the COVID-19 pandemic and the continued precautionary actions taken related to COVID-19 have adversely
impacted, and are expected to continue to adversely impact, its operations, its contractors and the automotive original equipment
manufacturers.
The Company has experienced, and expects to continue to experience,
reduced operations and production line shutdowns at vehicle OEMs due to COVID-19, limitations on travel by the Company’s
personnel and personnel of the Company’s customers, and future delays or shutdowns of vehicle OEMs or the Company’s
suppliers.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 1. Organization and Description of Business, continued
The COVID-19 pandemic and the protocols and procedures the Company
has implemented in response to the pandemic have caused some delays in operational activities. The full impact of the COVID-19
pandemic on its business and results of operations subsequent to March 31, 2021 will depend on future developments, such as the
ultimate duration and scope of the outbreak and its impact on its operations and impact on its customers and industry partners.
Note 2. Summary of Significant Accounting Policies
Basis of consolidated financial statement presentation:
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”) for interim financial information and Article 10 of Regulation
S-X. The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of its wholly owned
subsidiaries and variable interest entities, for which the Company is the primary beneficiary. Because the Company holds certain
rights that provide the power to direct the activities of variable interests that most significantly impact the VIE economic performance,
as well as to potentially receive benefits or the obligation to absorb potentially significant losses, the Company has a controlling
interest in such VIEs. The Company reports its consolidated financial information as a single segment. All significant intercompany
transactions have been eliminated in consolidation.
Use of estimates: The preparation of financial statements
in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts
of expenses during the reporting period. The Company’s most significant estimates and judgments involve deferred income taxes,
valuation of share-based compensation, including the fair value of common stock, the valuation of warrant liability, and the valuation
of business combinations, including the fair values and useful lives of acquired assets and assumed liabilities and the fair value
of purchase consideration. Management bases its estimates on historical experience and on various other assumptions believed to
be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual
results could differ from those estimates, and such differences could be material to the Company’s financial statements.
Concentration of Credit Risk: Financial instruments which
potentially subject the Company to concentrations of credit risk consist of cash and trade receivables. At times, such cash may
be in excess of the FDIC limit. At March 31, 2021 and December 31, 2020, the Company had cash in excess of the $250 federally insured
limit. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
With respect to trade receivables, the Company routinely assesses the financial
strength of its customers and, as a consequence, believes that the receivable credit risk exposure is limited. As of March 31, 2021, one
customer accounted for approximately 80% of accounts receivable. As of December 31, 2020, one customer accounted for approximately 82%
of accounts receivable. For the three months ended March 31, 2021 and 2020, three customers and two customers accounted for approximately
79% and 70% of revenues, respectively.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Cash and cash equivalents: The Company considers all
highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash
equivalents include cash held in banks and money market accounts. Cash equivalents are carried at cost, which approximates fair
value due to their short-term nature. The Company’s cash and cash equivalents are placed with high-credit quality financial
institutions and issuers, and at times exceed federally insured limits. To date, the Company has not experienced any credit loss
relating to its cash and cash equivalents.
Restricted cash: Restricted cash held at both March 31,
2021 and December 31, 2020, consists of bank deposits required for a letter of credit which is reserved for the Company’s
California lease.
Accounts receivable: Accounts receivable are stated at
the gross invoice amount, net of an allowance for doubtful accounts. The allowance
for doubtful accounts is maintained at a level considered adequate to provide for potential account losses on the balance based
on management’s evaluation of the anticipated impact of current economic conditions, changes in the character and size of
the balance, past and expected future loss experience, among other pertinent factors. As of March 31, 2021 and December 31,
2020, the Company’s allowance for doubtful accounts was $144 and $0, respectively.
Inventory: Inventory is comprised of raw materials, work
in process and finished goods. Inventory is stated at the lower of cost (determined using the weighted-average cost method) or
net realizable value. Cost of raw material inventories include the purchase and related costs incurred in bringing the products
to their present location and condition. The Company uses consistent methodologies to evaluate inventory for net realizable value
and periodically reviews inventories for obsolescence and any inventories identified as slow moving or obsolete are initially reserved
for and then written-off. As of March 31, 2021 and December 31, 2020, the Company’s inventory reserve for obsolescence was
$215 and $58, respectively.
Fair value measurements: The Company follows the guidance in
ASC Topic 820, “Fair Value Measurement”, for its financial assets and liabilities that are re-measured and reported at fair
value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
The fair value of the Company’s financial assets and liabilities
reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets
or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement
date. In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable
inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about
how market participants would price assets and liabilities). The following fair value hierarchy is used to classify assets and
liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
Level 1: Quoted prices (unadjusted) for identical assets
or liabilities in active markets that the Company can access at the measurement date.
Level 2: Significant other observable inputs other than
level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs
that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect
the Company’s judgment about the assumptions that market participants would use in pricing an asset or liability.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
An asset’s or liability’s fair value measurement
level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
See Note 7 for additional information on assets and liabilities
measured at fair value.
The Company believes its valuation methods are appropriate and
consistent with other market participants, however the use of different methodologies or assumptions to determine the fair value
of certain financial instruments could result in a different fair value measurement at the reporting date.
The Company’s financial instruments consist of cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities, contingent consideration liability and warrant liability.
The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates fair
value because of the short-term nature of those instruments.
Prepaid expenses and other current assets: Prepaid expenses
and other current assets include prepaid insurance, prepaid rent, and supplies, which are expected to be recognized or realized
within the next 12 months.
Revenue: The Company’s revenue is primarily derived
from the sales of hybrid electric powertrain systems. The Company’s products are marketed and sold to end-user fleet customers
and channel partners in the United States and Canada. Sales of products and services are subject to economic conditions and may
fluctuate based on changes in the industry, trade policies and financial markets.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Revenue, continued:
Revenue is recognized upon transfer of control to the customer,
which occurs when the Company has a present right to payment, legal title has passed to the customer, the customer has the significant
risks and rewards of ownership, and where acceptance is not a formality, the customer has accepted the product or service. In general,
transfer of control is upon shipment of the equipment as the terms are FOB shipping point, or equivalent and the Company has no
other promised goods or services in its contracts with customers. In limited instances, the Company provides installation services
to end-user fleet customers related to the purchased hybrid electric powertrain equipment. When provided, the installation services
are not distinct within the context of the contract due to the fact that the end-use fleet customer is purchasing a completed modification
to its vehicles and therefore, the installation services involve significant integration to integrate the hybrid electric powertrain
equipment with the customer’s vehicle. As a result, the hybrid electric powertrain equipment and installation services represent
a single performance obligation within these contracts with customers. The Company recognizes the revenue for the equipment sale
and installation service at the same time, which is after the installation is complete. The Company has elected to treat shipping
and handling activities related to contracts with channel partner customers as costs to fulfill the promise to transfer the associated
equipment and not as a separate performance obligation.
The Company provides limited-assurance-type warranties for its
equipment and work performed under its contracts. The warranty period typically extends for 3 years following transfer of control
of the equipment. The warranties solely relate to correction of product defects during the warranty period, which is consistent
with similar warranties by offered by competitors. Therefore, the Company has determined that this warranty is outside the scope
of ASC 606 and will continue to be accounted for under ASC 460, Guarantees. At the time of purchase of the equipment, customers
may purchase from the Company an extended warranty for its equipment. The extended warranty commences upon the end of the assurance-based
warranty period and is considered a separate performance obligation that represents a stand-ready obligation to perform warranty
services after the assurance-type warranty expires. The transaction price allocated to the extended warranty is recognized ratably
over the extended warranty period.
When the Company’s contracts with customers contain multiple
performance obligations, the contract transaction price is allocated on a relative standalone selling price (SSP) basis to each
performance obligation. The Company determines standalone selling prices based on observable selling prices for the sale of its
systems. For extended warranties, the Company determines SSP based on expected cost plus margin. The Company establishes the margin
based on review of market conditions and margins obtained by market participants for similar services. Any allocation of the transaction
price required is determined at the contracts’ inception.
The transaction price is the amount of consideration to which
the Company expects to be entitled in exchange for transferring goods and services to the customer. Revenue is recorded based on
the transaction price, which is solely made up of fixed consideration for its products and services. The Company does not adjust
transaction price for the effects of a significant financing component when the period between the transfer of the promised good
or service to the customer and payment for that good or service by the customer is expected to be one year or less. The Company
has not identified any significant financing components to date. The Company’s sales can in certain instances include non-cash
consideration in the form of the customer transferring to the Company, the customer’s rights to cash incentives from programs
administered by municipalities related to hybrid vehicle programs that a customer is entitled as a result of its purchase. The
incentives are fixed amounts that are readily determinable. The Company values the non-cash consideration at its fair value, which
generally is the amount of the incentive.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Payment terms on invoices range from 30 to 60 days. The Company
excludes from revenue any sales tax and other government-assessed and imposed taxes on revenue generating activities that are invoiced
to customers.
The Company has elected to apply the practical expedient to
expense costs to obtain contracts, which principally relate to sales commissions, at the time the liability is incurred when the
expected amortization period is one year or less.
Warranties: The Company offers a limited warranty generally
ranging from one to three years. The Company accrues the estimated cost of product warranties for unclaimed charges based on historical
experiences and expected results. Should product failure rates and material usage costs differ from these estimates revisions to
the estimated warranty liability would be required. The Company periodically assesses the adequacy of its recorded product warranty
liabilities and adjusts the balances as required. Warranty expense is recorded as a component of cost of product revenue in the
statements of operations.
Share-based compensation: The Company accounts for its
share-based compensation awards in accordance with ASC Topic 718, Compensation-Stock Compensation. The Company issues stock-based
awards to acquire common stock to employees, directors and non-employee consultants. Awards issued under the Company’s stock-based
compensation plans include stock options and restricted stock awards. Stock options and restricted stock awards typically contain service based vesting conditions.
Stock Options
The Company accounts for stock-based compensation related to
these awards based on the fair value of the awards. The Company uses the Black-Scholes option pricing model to determine the fair
value of stock-based awards, and recognizes the compensation cost on a straight line basis over the requisite service period of
the awards for employee, which is typically the four-year vesting period of the award, and effective contract period specified
in the award agreement for non-employee. Compensation cost is typically recognized on a straight-line basis.
The fair value of common stock is determined based on the closing
price on the New York Stock Exchange at each award grant date.
The determination of the fair value of share-based payment awards
utilizing the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected
life, risk- free interest rate and expected dividends. The Company does not have a history of trading in its common stock as it
was not a public company until December 21, 2020, and as such volatility was estimated using historical volatilities of comparable
public entities. The expected life of the awards is estimated based on a simplified method, which uses the average of the vesting
term and the original contractual term. The risk-free interest rate assumption is based on observed interest rates appropriate
for the expected life of the awards. The dividend yield assumption is based on history and expectation of paying no dividends.
Forfeitures are accounted for as they occur.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
The fair value of stock options issued for the three months
ended March 31, 2021 and 2020 was measured with the following assumptions:
|
|
Three Months Ended March 31,
|
|
|
2021
|
|
2020
|
|
|
|
|
|
Expected volatility
|
|
78.1 – 79.9%
|
|
80.9%
|
Expected term (in years)
|
|
6.25
|
|
6.25
|
Risk-free interest rate
|
|
0.4 – 0.5%
|
|
1.6%
|
Expected dividend yield
|
|
0.0%
|
|
0.0%
|
Warrant Liabilities: The Company evaluated the Public Warrants
(“Public Warrants”) and Private Warrants (“Private Warrants”) (collectively, “Warrants”, which are
discussed in Note 7 and Note 8) in accordance with ASC 815-40, “Derivatives and Hedging — Contracts in Entity’s Own
Equity”, and concluded that a provision in the Warrant Agreement related to such warrants (“Warrant Agreement”) related
to certain tender or exchange offers precludes the Warrants from being accounted for as components of equity. As the Warrants met the
definition of a derivative as contemplated in ASC 815, the Warrants were initially recorded at fair value as derivative liabilities on
the Unaudited Condensed Consolidated Balance Sheets and measured at fair value at each reporting date in accordance with ASC 820, “Fair
Value Measurement”, with changes in fair value recognized in the Unaudited Condensed Consolidated Statement of Operations in the
period of change.
Research and development expense: Research and development
costs did not meet the requirements to be recognized as an asset as the associated future benefits were at best uncertain and there was
no alternative future use at the time the costs were incurred. Research and development costs include, but are not limited to, costs
incurred in performing research and development activities, including salaries, benefits, facilities, research- related overhead, sponsored
research costs, contracted services, license fees, and other external costs.
Net income (loss) per share: Basic net income (loss) per share
is computed by dividing net income (loss) (the numerator) by the weighted average number of common shares outstanding for the period (the
denominator). Diluted net income (loss) is computed by taking net income (loss) and dividing the diluted net income (loss) by the weighted
average number of common shares and potential common shares outstanding (if dilutive) during each period. For purposes of this calculation,
potential dilutive common shares include stock options, restricted stock units and warrants.
Related parties: A party is considered to be related
to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under
common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or
operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly
influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate
interests is also a related party.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Recent accounting pronouncements issued and adopted: In February
2016, the FASB issued a new accounting standard, ASC Topic 842, Leases (“ASC 842”), related to leases to increase transparency
and comparability among organizations by requiring the recognition of right-of-use ("ROU") assets and lease liabilities on the
balance sheet. Most significant among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for
those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective
of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company
adopted ASC 842 effective January 1, 2021 and as a result, the Company recorded a ROU asset and lease liability (See Note 5).
In December 2019, the FASB issued ASU 2019-12, Income Taxes
(Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting
for income taxes. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning
after December 15, 2020, with early adoption permitted. ASU 2019-12 is effective for the Company beginning January 1,
2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s unaudited condensed consolidated financial
statements.
Note 3. Revenue
The following table represents the Company’s revenues
for the three months ended March 31, 2021 and 2020, respectively, disaggregated, by sales channel.
Disaggregation of revenue:
|
|
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Revenue direct to customers
|
|
$
|
111
|
|
|
$
|
225
|
|
Revenue through channel partners
|
|
|
564
|
|
|
|
1,007
|
|
Total revenue
|
|
$
|
675
|
|
|
$
|
1,232
|
|
Remaining performance obligations: At March 31, 2021 and December
31, 2020, there was approximately $305 in deferred revenue related to unsatisfied extended warranty performance obligations.
Contract Balances: The timing of revenue recognition,
billings and cash collections results in billed trade accounts receivable, and deferred revenue (contract liabilities) on the Unaudited
Condensed Consolidated Balance Sheets. In addition, the Company defers certain costs incurred to obtain a contract (contract costs).
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 3. Revenue, continued
Costs to obtain a contract: Sales commissions paid to
internal sales personnel, as well as associated payroll taxes and retirement plan contributions (together, sales commissions and
associated costs) that are incremental to the acquisition of customer contracts, are capitalized as capitalized contract acquisition
cost on the balance sheet when the period of benefit is determined to be greater than one year. In instances where an extended
warranty is sold, the period of benefit would extend beyond 12 months and therefore, the practical expedient would not be met for
those contracts and require capitalization of the related costs to obtain those contracts. The Company has elected to allocate
the capitalized commissions to performance obligations on a relative basis (i.e., in proportion to the transaction price allocated
to each performance obligation) to determine the period of amortization. As a result, substantially all of the commission is allocated
to the combined equipment and installation performance obligation and is amortized upon transfer of control of this performance
obligation, which typically occurs in the same period in which commission liability is incurred. Total commission expense recognized
during the three months ended March 31, 2021 and 2020 was $256 and $15, respectively. The amount of capitalized commissions as
of March 31, 2021 and 2020 was not material.
Warranties: The Company accrues estimated warranty costs
at the time of sale related to its assurance-type warranties. In general, manufactured products are warranted for the shorter of
three years or 100,000 miles against defects in material and workmanship when properly used for their intended purpose, installed
correctly and appropriately maintained. The amount of the accrued warranty liability is estimated based on historical claims rates
and warranty fulfillments costs adjusted for any expected changes in fulfillment costs.
The following is a roll-forward of the Company’s accrued
warranty liability:
|
|
As of
|
|
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
1,735
|
|
|
$
|
1,009
|
|
Accrual for warranties issued
|
|
|
44
|
|
|
|
912
|
|
Warranty charges
|
|
|
(82
|
)
|
|
|
(186
|
)
|
Balance at the end of the period
|
|
$
|
1,697
|
|
|
$
|
1,735
|
|
The warranty liability is included in accrued expenses and other
current liabilities on the Unaudited Condensed Consolidated Balance Sheets.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 4. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of
the following at March 31, 2021 and December 31, 2020:
|
|
As of
|
|
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Accrued warranty costs
|
|
$
|
1,697
|
|
|
$
|
1,735
|
|
Accrued compensation and related benefits
|
|
|
1,533
|
|
|
|
1,001
|
|
Contingent purchase price consideration
|
|
|
1,835
|
|
|
|
926
|
|
Accrued financing fees
|
|
|
-
|
|
|
|
723
|
|
Accrued expenses, other
|
|
|
2,057
|
|
|
|
216
|
|
|
|
$
|
7,122
|
|
|
$
|
4,601
|
|
Note 5. ROU Assets and Lease Liabilities
XL Fleet has entered into operating and
finance leases as the lessee for office space, R&D and manufacturing facilities, and vehicles. On January 1, 2021 (“Effective
Date”), the Company adopted FASB Accounting Standards Codification, or ASC, Topic 842, Leases (“ASC 842”), which
increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording
them on the balance sheet as lease assets and lease liabilities. The new guidance requires the recognition of the right-of-use
(“ROU”) assets and related operating and finance lease liabilities on the balance sheet. The Company adopted the new
guidance using the modified retrospective approach on January 1, 2021. As a result, the consolidated balance sheet as of December
31, 2020 was not restated and is not comparative.
The adoption of ASC 842 resulted in the
recognition of operating ROU assets of $3,481 and operating lease liabilities of $3,481 on the Company’s condensed consolidated
balance sheet as of January 1, 2021. The adoption of ASC 842 resulted in the recognition of finance ROU assets of $897 and finance
lease liabilities of $897 on the Company’s condensed consolidated balance sheet as of January 1, 2021.
The Company elected the package of practical expedients
permitted within the standard, which allow an entity to forgo reassessing (i) whether a contract contains a lease, (ii) classification
of leases, and (iii) whether capitalized costs associated with a lease meet the definition of initial direct costs. Also, the Company
elected the expedient allowing an entity to use hindsight to determine the lease term and impairment of ROU assets and the expedient to
allow the Company to not have to separate lease and non-lease components. The Company has also elected the short-term lease accounting
policy under which the Company would not recognize a lease liability or ROU asset for any lease that at the commencement date has a lease
term of twelve months or less and does not include a purchase option that the Company is more than reasonably certain to exercise.
For contracts entered into on or after
the Effective Date, at the inception of a contract the Company will assess whether the contract is, or contains, a lease. The Company’s
assessment is based on: (i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtained
the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company
has the right to direct the use of the asset. Leases entered into prior to January 1, 2021, which were accounted for under ASC
840, were not reassessed for classification.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 5. ROU Assets and Lease Liabilities,
continued
For operating leases, the lease liability is initially
and subsequently measured at the present value of the unpaid lease payments. For finance leases, the lease liability is initially measured
in the same manner and date as for operating leases, and is subsequently presented at amortized cost using the effective interest method.
The Company generally uses its incremental borrowing rate as the discount rate for leases, unless an interest rate is implicitly stated
in the lease. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases,
which was determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal
to the lease payments on a collateralized basis over a similar term. The lease term for all of the Company’s leases includes the
noncancelable period of the lease plus any additional periods covered by either a Company option to extend the lease that the Company
is reasonably certain to exercise, or an option to extend the lease controlled by the lessor. All ROU assets are reviewed periodically
for impairment.
Lease expense for operating leases consists
of the lease payments plus any initial direct costs and is recognized on a straight-line basis over the lease term. Lease expense
for finance leases consists of the amortization of the asset on a straight-line basis over the shorter of the lease term or its
useful life and interest expense determined on an amortized cost basis, with the lease payments allocated between a reduction of
the lease liability and interest expense.
The Company’s operating leases are comprised
primarily of office space and R&D and manufacturing facilities. Finance leases are comprised primarily of vehicle leases. Balance
sheet information related to our leases is presented below (ASC 842 was adopted on January 1, 2021):
|
|
March 31,
|
|
|
January 1,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2021
|
|
|
2020
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
$
|
3,349
|
|
|
$
|
3,481
|
|
|
$
|
–
|
|
Lease liability, current
|
|
|
465
|
|
|
|
469
|
|
|
|
–
|
|
Lease liability, non-current
|
|
|
2,922
|
|
|
|
3,012
|
|
|
|
–
|
|
Finance leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
|
875
|
|
|
|
897
|
|
|
|
–
|
|
Lease liability, current
|
|
|
292
|
|
|
|
265
|
|
|
|
–
|
|
Lease liability, non-current
|
|
|
557
|
|
|
|
632
|
|
|
|
–
|
|
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 5. ROU Assets and Lease Liabilities, continued
Other information related to leases is presented below:
Three
Months Ended March 31, 2021
|
|
|
|
Operating lease cost
|
|
$
|
179
|
|
Other information:
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
141
|
|
Weighted-average remaining lease term – operating leases (in months)
|
|
|
92.2
|
|
Weighted-average discount rate – operating leases
|
|
|
9.6
|
%
|
As of March 31, 2021, the annual minimum lease payments of our
operating lease liabilities were as follows:
For
The Years Ending March 31,
|
|
|
|
2021 (excluding the three months ended March 31, 2021)
|
|
$
|
590
|
|
2022
|
|
|
606
|
|
2023
|
|
|
582
|
|
2024
|
|
|
597
|
|
2025
|
|
|
613
|
|
Thereafter
|
|
|
1,891
|
|
Total future minimum lease payments, undiscounted
|
|
|
4,879
|
|
Less: imputed interest
|
|
|
1,492
|
|
Present value of future minimum lease payments
|
|
$
|
3,387
|
|
Note 6. Fair Value Measurements
Mark-to-Market Measurement
The Public Warrants were traded under the symbol XL.WS and the
fair values were based upon the closing price of the Public Warrants at each measurement date. The Private Warrants were valued
using a Black-Scholes model, pursuant to the inputs provided in the table below:
Input
|
|
Mark-to-Market
Measurement at
March 31,
2021
|
|
|
Mark-to-Market
Measurement at
December 31,
2020
|
|
Risk-free rate
|
|
|
0.84
|
%
|
|
|
0.36
|
%
|
Remaining term in years
|
|
|
4.73
|
|
|
|
4.98
|
|
Expected volatility
|
|
|
86.9
|
%
|
|
|
95.4
|
%
|
Exercise price
|
|
$
|
11.50
|
|
|
$
|
11.50
|
|
Fair value of common stock
|
|
$
|
8.98
|
|
|
$
|
23.73
|
|
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 6. Fair Value Measurements, continued
The following table sets forth the Company’s assets and
liabilities which are measured at fair value on a recurring basis by level within the fair value hierarchy:
|
|
Fair Value Measurements as of March 31, 2021
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,537
|
|
|
$
|
23,537
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,835
|
|
|
$
|
1,835
|
|
|
|
Fair Value Measurements as of December 31, 2020
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Warrants
|
|
$
|
62,100
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
62,100
|
|
Private Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
81,195
|
|
|
$
|
81,195
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,849
|
|
|
$
|
1,849
|
|
The following is a roll forward of the Company’s Level
3 instruments:
Balance, January 1, 2021
|
|
$
|
145,144
|
|
Fair value adjustments- Contingent consideration
|
|
|
(14
|
)
|
Settlement of derivative liability upon exercise of warrants
|
|
|
(47,162
|
)
|
Settlement of derivative liability upon call of warrants
|
|
|
(591
|
)
|
Fair value adjustments- Warrant liability
|
|
|
(72,005
|
)
|
Balance, March 31, 2021
|
|
$
|
25,372
|
|
During the three months ended March 31, 2021, 7,441,020 Public
Warrants were exercised, which resulted in the issuance of 7,441,020 shares of the Company’s Common Stock, generating cash proceeds
of $85,555 and 225,647 Public Warrants were called at $0.01 per warrant.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 7. Warrants
Common Stock Warrants:
During the three months ended March 31, 2021, 243,000 Legacy
XL Warrants were exercised, which resulted in the issuance of 233,555 shares of the Company’s common stock, in a cashless exercise.
A summary of the warrant activity for the three months ended
March 31, 2021 was as follows:
Warrants
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2021
|
|
|
249,117
|
|
|
$
|
0.76
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(243,000
|
)
|
|
|
0.76
|
|
Outstanding at March 31, 2021
|
|
|
6,117
|
|
|
$
|
0.76
|
|
Exercisable at March 31, 2021
|
|
|
6,117
|
|
|
$
|
0.76
|
|
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share data)
Note 8. Share-Based Compensation Expense
During the three months ended March 31, 2021,
the Company issued 185,066 options to certain employees and board members which will vest over a period of one to four years. The
weighted-average grant date fair value of stock options awarded during the three months ended March 31, 2021, as determined by the
Black-Scholes option pricing model, was $11.98.
Share-based compensation expense for the three months ended
March 31, 2021 and 2020 was $442 and $51, respectively. As of March 31, 2021, there was $4,777 of unrecognized compensation cost
related to share-based payments which is expected to be recognized over the remaining vesting periods, with a weighted-average
period of 3.5 years.
Stock Options
A summary of stock option award activity for the three months
ended March 31, 2021 was as follows:
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
10,975,224
|
|
|
$
|
0.57
|
|
|
|
7.6
|
|
Granted
|
|
|
185,066
|
|
|
|
15.12
|
|
|
|
|
|
Exercised
|
|
|
(65,875
|
)
|
|
|
0.24
|
|
|
|
|
|
Cancelled or forfeited
|
|
|
(9,531
|
)
|
|
|
4.74
|
|
|
|
|
|
Outstanding at March 31, 2021
|
|
|
11,084,884
|
|
|
$
|
0.81
|
|
|
|
7.4
|
|
Exercisable at March 31, 2021
|
|
|
6,026,894
|
|
|
$
|
0.26
|
|
|
|
6.3
|
|
The aggregate intrinsic value of stock options exercised in
the three months ended March 31, 2021 and 2020 was $1,340 and $0 as determined on the date of exercise. Cash received from options
exercised for the three months ended March 31, 2021 and 2020 was $16 and $0, respectively.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except
share and per share data)
Note 8. Share-Based Compensation Expense, continued
Restricted Stock Awards
The fair value of restricted stock awards is estimated by the fair
value of the Company’s Common Stock at the date of grant. Restricted stock activity during the three months ended at March 31, 2021
was as follows:
|
|
Number of
shares
|
|
|
Weighted-
average
grant-date
fair value
per share
|
|
|
|
|
|
|
|
|
Non-vested, at beginning of period
|
|
|
446,332
|
|
|
$
|
0.24
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Cancelled or forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested, at end of period
|
|
|
446,332
|
|
|
$
|
0.24
|
|
Restricted Stock Units
During the three months ended March 31, 2021, the Company issued 35,176
restricted stock units to directors which will vest over a period of one to four years.
The fair value of restricted stock awards is estimated by the fair
value of the Company’s Common Stock at the date of grant. Restricted stock activity during the three months ended at March 31, 2021
was as follows:
|
|
Number of
shares
|
|
|
Weighted-
average
grant-date
fair value
per share
|
|
|
|
|
|
|
|
|
Non-vested, at beginning of period
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
35,176
|
|
|
|
14.17
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Cancelled or forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested, at end of period
|
|
|
35,176
|
|
|
$
|
14.17
|
|
Note 9. Related Party Transactions
Operating lease: In March 2012, the Company entered into a noncancelable
lease agreement for office, research and development, and vehicle development and installation facilities with an investor of the Company.
The lease term has been extended through February 29, 2022. The lease includes a rent escalation clause, and rent expense is being recorded
on a straight-line basis.
Rent expense under the operating lease for the three months
ended March 31, 2021 and 2020 was $55.
Future minimum lease payments for this lease are as follows:
2021 (Nine months)
|
|
$
|
175
|
|
2022
|
|
|
39
|
|
|
|
$
|
214
|
|
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except
share and per share data)
Note 10. Commitments and Contingencies
Sponsorship Commitment: On February
24, 2021, the Company agreed to a sponsorship agreement with several entities related to the UBS Arena, Belmont Park and the NY Islanders
Hockey Club. Pursuant to that Agreement, the Company was designated an “Official Electric Transportation Partner of UBS Arena”
with various associated marketing and branding rights. The sponsorship agreement has a term of three years with a sponsor fee of
approximately $0.5 million per year.
Equipment Purchase: On March 1, 2021, the Company entered into
an agreement with Creative Bus Sales, Inc. to purchase six low floor electric transit buses to be delivered later in 2021 for a total
purchase price of $4.1 million. In connection with this agreement, on March 2, 2021, the Company made a nonrefundable down-payment of
$0.8 million. These buses will be deployed in the Company’s XL Grid business unit to support the Company’s electrification-as-a-service
strategy.
Legal proceedings: The Company is periodically involved
in legal proceedings, legal actions and claims arising in the normal course of business, including proceedings relating to product
liability, intellectual property, safety and health, employment and other matters. Management believes that the outcome of such
legal proceedings, legal actions and claims will not have a significant adverse effect on the Company’s financial position,
results of operations or cash flows.
On March 8, 2021, a putative class action complaint was filed
in federal district court for the Southern District of New York (Suh v. XL Fleet Corp., et al., Case No. 1:21-cv-02002) against
the Company and certain of its current officers and directors (the “Suh Complaint”). On March 12, 2021, a second putative
class action complaint was filed in federal district court for the Southern District of New York (Kumar v. XL Fleet Corp., et al.,
Case No. 1:21-cv-02171) against the Company and certain of its current officers and directors (the “Kumar Complaint”).
Both the Suh Complaint and the Kumar Complaint allege that certain public statements made by the defendants between October 2,
2020 and March 2, 2021 violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
The Company believes that the allegations asserted in the Suh Complaint and Kumar Complaint are without merit, and the Company
intends to vigorously defend both lawsuits. There can be no assurance, however, that the Company will be successful. At this time,
the Company is unable to estimate potential losses, if any, related to either lawsuit.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except
share and per share data)
Note 11. Net Income (Loss) Per Share
The following is a reconciliation of the numerator and denominator
used to calculate basic earnings per share and diluted earnings per share for the three months ended March 31, 2021, and 2020:
|
|
Three
Months Ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
Net
income / (loss)
|
|
$
|
61,914
|
|
|
$
|
(6,454
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, basic
|
|
|
135,575,145
|
|
|
|
82,165,241
|
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of options, warrants, and restricted stock units
|
|
|
12,996,234
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding, diluted
|
|
|
148,571,379
|
|
|
|
82,165,241
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share, basic
|
|
$
|
0.46
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share, diluted
|
|
$
|
0.42
|
|
|
$
|
(0.08
|
)
|
The Company’s contingently issuable unvested restricted
stock did not meet the performance based vesting condition as of March 31, 2021 and 2020.
Potential dilutive securities, which include stock options, warrants and
restricted stock units have been excluded from the computation of diluted net loss per share for the three months ended March 31, 2020
as the effect would be to reduce the net loss per share. Therefore, for this period the weighted average number of common shares outstanding
used to calculate both basic and diluted net loss per share is the same.
The number of shares underlying outstanding stock options and
warrants:
|
|
As of March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
11,084,884
|
|
|
|
11,584,747
|
|
Private Warrants
|
|
|
4,233,333
|
|
|
|
-
|
|
XL Legacy Warrants
|
|
|
6,117
|
|
|
|
2,507,338
|
|
Restricted stock units
|
|
|
35,176
|
|
|
|
-
|
|
Total
|
|
|
15,359,510
|
|
|
|
14,092,085
|
|
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except
share and per share data)
Note 12. Retirement Plan
The Company has adopted a 401(k) plan to provide all eligible
employees a means to accumulate retirement savings on a tax-advantaged basis. The 401(k) plan requires participants to be at least
21 years old. In addition to the traditional 401(k), eligible employees are given the option of making an after-tax contribution
to a Roth 401(k) or a combination of both. Plan participants may make before tax elective contributions up to the maximum percentage
of compensation and dollar amount allowed under the Internal Revenue Code. Participants are allowed to contribute, subject to IRS
limitations on total annual contributions from 1% to 90% of eligible earnings. The plan provides for automatic enrollment at a
3% deferral rate of an employee’s eligible wages. The Company provides for safe harbor matching contributions equal to 100%
on the first 3% of an employee’s eligible earnings deferred and an additional 50% on the next 2% of an employee’s eligible
earnings deferred. Employee elective deferrals and safe harbor matching contributions are 100% vested at all times.
Note 13. Subsequent Events
Acquisition of World Energy Efficiency Services, LLC
On May 17, 2021 (“Closing Date”), the Company acquired
100% of the membership interests of World Energy Efficiency Services, LLC (“World Energy”) for $8.0 million in cash paid on
the Closing Date and the obligation to issue shares of the Company’s common stock valued at $7.0 million. The purchase price is
subject to an adjustment for closing date net working capital and an additional earn out payment of $1.0 million payable if World Energy
achieves its targeted 2021 revenue. With respect to the share component of the purchase price, 231,002 shares were issued at the Closing
Date, with the balance issuable in three installments on the 6, 24 and 30 month anniversary of the Closing Date, provided that the senior
executives of World Energy remain employed with the Company. World Energy provides turnkey energy efficiency, renewable technology, electric
vehicle charging stations and other energy solutions throughout New England. The Company completed the acquisition to further the
strategy of its XL Grid business to provide a suite of charging and power solutions to support fleet electrification.