This prospectus supplement no. 7 supplements the
prospectus dated January 22, 2021 (the “Prospectus”) relating to the issuance by us of up to an aggregate of 11,900,000 shares
of our common stock, $0.0001 par value per share (“Common Stock”), which consists of (i) up to 4,233,333 shares of Common
Stock that are issuable upon the exercise of 4,233,333 warrants (the “Private Placement Warrants”) originally issued in a
private placement in connection with the initial public offering of our predecessor company, Pivotal Investment Corporation II (“Pivotal”),
and (ii) up to 7,666,667 shares of Common Stock that are issuable upon the exercise of 7,666,667 warrants (the “Public Warrants”
and, together with the Private Placement Warrants, the “Warrants”) originally issued in the initial public offering of Pivotal.
We will receive the proceeds from any exercise of any Warrants for cash.
The Prospectus and prospectus supplement also relates
to the offer and sale from time to time by the selling securityholders named in the Prospectus (the “Selling Securityholders”)
of (A) up to 48,083,495 shares of Common Stock, including (i) 15,000,000 shares of Common Stock originally issued in a private placement
at the closing of the Business Combination (as defined below), (ii) 21,504,622 shares of Common Stock issued to directors, officers and
affiliates of Legacy XL (as defined below) pursuant to the Merger Agreement (as defined below) in connection with the Business Combination,
(iii) 5,750,000 shares of Common Stock issued upon conversion of shares held by the Sponsor (as defined below) and certain affiliates
of Pivotal in connection with the Business Combination, (iv) up to 4,233,333 shares of Common Stock that are issuable upon the exercise
of the Private Placement Warrants, and (v) up to 1,595,540 shares issued or issuable upon the exercise of Legacy XL warrants (the “Legacy
XL Warrants”) assumed by us in connection with the Business Combination, and (B) up to 4,233,333 Private Placement Warrants. We
will not receive any proceeds from the sale of shares of Common Stock or Warrants by the Selling Securityholders pursuant to the Prospectus.
We registered the securities for resale pursuant
to the Selling Securityholders’ registration rights under certain agreements between us and the Selling Securityholders. Our registration
of the securities covered by the Prospectus does not mean that the Selling Securityholders will offer or sell any of the shares of Common
Stock or Warrants. The Selling Securityholders may offer, sell or distribute all or a portion of their shares of Common Stock or Warrants
publicly or through private transactions at prevailing market prices or at negotiated prices. We will not receive any proceeds from the
sale of shares of Common Stock or Warrants by the Selling Securityholders pursuant to this prospectus. We provide more information about
how the Selling Securityholders may sell the shares or Warrants in the section entitled “Plan of Distribution.”
This prospectus supplement incorporates into the
Prospectus the information contained in our attached current report on Form 10-Q, which was filed with the Securities and Exchange Commission
on May 17, 2021.
You should read this prospectus supplement in conjunction
with the Prospectus, including any supplements and amendments thereto. This prospectus supplement is qualified by reference to the Prospectus
except to the extent that the information in the prospectus supplement supersedes the information contained in the Prospectus. This prospectus
supplement is not complete without, and may not be delivered or utilized except in connection with, the Prospectus, including any supplements
and amendments thereto.
Our Common Stock is listed on the New York Stock
Exchange (the “NYSE”) under the symbol “XL”. On May 14, 2021, the closing price of our Common Stock was $6.16.
See the section entitled “Risk Factors” beginning on page
7 of the Prospectus to read about factors you should consider before buying our securities.
Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit
and post such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See definition of “large accelerated filer,” “accelerated filer, “smaller reporting company”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 13, 2021, 139,126,999 shares of the
registrant’s common stock, $0.0001 par value, were outstanding.
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.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and
analysis provides information which our management believes is relevant to an assessment and understanding of our financial condition
and results of operations. This discussion and analysis should be read together with our results of operations and financial condition
and the audited and unaudited consolidated financial statements and related notes that are included elsewhere in this Quarterly
Report on Form 10-Q and the audited financial information and the notes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2020, filed with the U.S. Securities and Exchange Commission (SEC) on March 31, 2021, as amended in
our filing on Form 10-K/A filed with the SEC on May 17, 2021, which, as so amended, we refer to as the Annual Report. In addition
to historical financial information, this discussion and analysis contains forward-looking statements based upon current expectations
that involve risks, uncertainties and assumptions. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.”
Actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as
a result of various factors. The following information and any forward-looking statements should be considered in light of factors
discussed elsewhere in this Quarterly Report on Form 10-Q and under “Risk Factors” in Item 1A of the Annual Report.
Certain figures, such as interest
rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in
this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior
to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations
using the figures in our consolidated financial statements or in the associated text. Certain other amounts that appear in this
section may similarly not sum due to rounding.
As used in this discussion and analysis,
references to “XL,” “the Company,” “we,” “us” or “our” refer only to
XL Fleet Corp. and its consolidated subsidiaries.
Overview
We are a leading provider of fleet electrification
solutions for commercial vehicles in North America, with over 4,300 electrified powertrain systems sold and having driven over
150 million miles by over 200 fleets as of March 31, 2021. Our 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.
In over 10 years of operations, we have
built one of the largest end-use commercial fleet customer bases of any Class 2-6 vehicle electrification company in North
America. Our fleet electrification solutions for commercial vehicles provide the market with cost-effective hybrid and plug-in
hybrid solutions with on-board telematics that are widely available for sale and deployment across a broad range of popular vehicle
chassis from the world’s leading OEMs. We believe we are positioned to capitalize on our market leadership as we expand
our product offering into additional propulsion technologies including full battery electric and hydrogen fuel cell systems, heavier
vehicles such as Class 7-8 vehicles, additional vehicle models in Class 2-6 and comprehensive vehicle charging and energy
solutions. We currently sell most of our systems through a network of commercial vehicle upfitters, which we estimate already produces
over 100,000 commercial vehicles a year.
Our current electrified drive systems
are comprised of an electric motor that is mounted onto the vehicle’s drive shaft, an inverter motor controller, and a lithium-ion
battery pack to store energy to be used for propulsion. We deploy our electrified drive systems (XLH™ and XLP™) onto
the chassis of vans, pickups, shuttle buses, delivery trucks, and many other commercial vehicles produced by OEMs such as Ford,
GMC, Chevrolet and Isuzu. This technology can be installed as the vehicles are being manufactured by industry standard second stage
manufacturers, known as upfitters, in less than one day, with no negative impact on the vehicles’ operational performance
or factory warranties and with reduced maintenance cost. Our electrified powertrain systems capture and store energy during braking
and subsequently deploy that energy into the driveline during acceleration, operating in parallel with the existing OEM drive train.
In addition, our plug-in hybrid system offers the ability to supplement this energy via a connection with an AC electricity source,
including a level 1 or level 2 charger. Our systems enable vehicles to burn less fuel and emit less CO2, resulting in increases
of up to a 25-50% MPG improvement and up to a 20-33% reduction in GHG emissions. To date, vehicles deploying our electrification
solutions have driven over 150 million miles.
We are developing additional offerings
to extend our range of electrification options with plans to include full battery electric propulsion (“XL ELECTRIC™”)
and, hydrogen fuel cell electric systems. We further intend to deliver our systems on a broader range of vehicle applications (including
Class 8 products and electrified refuse vehicles, among other applications). In addition, we plan to offer comprehensive charging
solutions (“XL GRID™”) and EaaS which would finance and manage vehicles, powertrains, charging systems, on-site
power and energy storage systems while charging customers on a usage and time basis.
Recent Developments
Sponsorship Commitment: On February
24, 2021, we 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, we were 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, we 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, we 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.
Public Health Emergency of International
Concern: On March 11, 2020, the World Health Organization characterized the outbreak of the novel coronavirus (“COVID-19”)
as a global pandemic and recommended containment and mitigation measures. Since then, extraordinary actions have been taken by
international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread
of COVID-19 in regions throughout the world. These actions include travel bans, quarantines, “stay-at-home” orders,
and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease
normal operations.
Consistent with the actions taken
by governmental authorities, we have taken appropriately cautious steps to protect our workforce and support community efforts.
Effective March 31, 2021 all 76 employees have been working full-time from one of the four offices or from home. Approximately 30 to
40 employees spend the majority of their work time in one of our offices in Boston, MA, Wixom, MI, Quincy, IL, or Foot Hill Ranch,
CA. The balance of the employees have to date been able to work their jobs remotely from their homes with limited disruptions.
Current COVID 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, 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.
COVID-19 and actions taken to mitigate its spread have had and are expected to continue to have an adverse impact on the economies
and financial markets of many countries, including the geographical area in which we operate.
We have experienced, and expect to continue
to experience, 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.
The COVID-19 pandemic and the protocols
and procedures we have implemented in response to the pandemic have caused some delays in operational activities. The full impact
of the COVID-19 pandemic on its business and results of operations subsequent to 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.
As the COVID-19 pandemic continues to evolve,
we believe the extent of the impact to our business, operating results, cash flows, liquidity and financial condition will be primarily
driven by the severity and duration of the COVID-19 pandemic, the pandemic’s impact on the U.S. and global economies and the
timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our
knowledge and control, and as a result, at this time we are unable to predict the cumulative impact, both in terms of severity and duration,
that the COVID-19 pandemic will have on our business, operating results, cash flows and financial condition, but it could be material
if the current circumstances continue to exist for a prolonged period of time. Although we have made our best estimates based upon current
information, actual results could materially differ from the estimates and assumptions developed by management. Accordingly, it is reasonably
possible that the estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term
as a result of these conditions, and if so, we may be subject to future impairment losses related to long-lived assets as well as changes
to recorded reserves and valuations. In addition, we believe that the impact of the global microchip shortage that the entire vehicle
industry is currently experiencing will adversely impact our operating results in fiscal year 2021.
Public Company Costs
As a consequence of the Merger, we are an
NYSE-listed company, which required us to hire a chief financial officer and additional personnel and implement procedures and
processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses
as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional
internal and external accounting, legal and administrative resources, including increased audit and legal fees.
Additionally, we expect our capital and operating
expenditures will increase significantly in connection with ongoing activities as we:
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increase our investment in marketing, advertising, sales and distribution infrastructure for our existing and future products and services;
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develop additional new products and enhancements to existing products;
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obtain, maintain and improve our operational, financial and management performance;
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hire additional personnel;
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obtain, maintain, expand and protect our intellectual property portfolio; and
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operate as a public company.
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Key Factors Affecting Operating Results
We believe that our performance and
future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including
those discussed below and in the section entitled “Risk Factors—Risks Related to our Business and Industry.”
We are a leader in fleet electrification
which represents a very large market opportunity as the commercial fleet industry transforms to more sustainable operations in
the coming decades. To capitalize on this opportunity, we have a strategy to leverage our existing products and sales channels
to market while also expanding our product line through new product development and expanding our capability to market and sell
those products. Key factors affecting our operating results include our ability to increase sales of our current product offerings
and expand our product offerings in the future and to realize customer demand for such product offerings. We believe that the size
of our sales opportunity pipeline and committed backlog are important indicators of future performance. There are challenges and
risks to our plan to capture these opportunities, such as:
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system architecture design choices must provide adequate functionality and value for customers;
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component sourcing agreements must deliver targets for cost reduction while maintaining high quality and reliability;
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design, development and validation of new product systems must be on time and on budget to meet the opportunity in the market and capacity to develop and commercialize these new products will have to be increased; and
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sales and marketing efforts must be effective in forging the relationships to deliver these products to market and generate demand from the end users and channel partners. We will need to increase our capabilities in market segment analysis and understanding as it relates to system requirements and functionality.
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OEMs and principal equipment component suppliers must be able to provide
ample supply throughout the year to meet our sales goals. We have experienced interruptions in OEM vehicle supply amid a worldwide microchip
shortage which caused the OEMs to stop taking fleet orders for much of the first half of the year 2021. Some of our customers will not
purchase our electric propulsion systems without OEM vehicle chassis on which to install those systems. This could have an adverse impact
on our operating results in fiscal year 2021.
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Key Components of Statements of Operations
Research and Development Expense
Research and development expenses consist
primarily of costs incurred for the discovery and development of our electrified powertrain offerings, which include:
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personnel-related expenses including salaries, benefits, travel and share-based compensation, for personnel performing research and development activities;
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fees paid to third parties such as consultants and contractors for outsourced engineering services;
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expenses related to prototype materials, supplies and third-party services; and
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depreciation for equipment used in research and development activities.
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We expect our research and development
costs to increase substantially for the foreseeable future as we expect to use a significant portion of the proceeds from the Business to accelerate development of product enhancements and additional
new products.
Selling, General and Administrative Expense
Selling, general and administrative
expenses consist of personnel-related expenses for our corporate, executive, finance, sales, marketing and other administrative
functions, expenses for outside professional services, including legal, audit and accounting services, as well as expenses for
facilities, depreciation, amortization, travel, sales and marketing costs. Personnel-related expenses consist of salaries, benefits
and share-based compensation. We expect our selling, general and administrative expenses to increase for the foreseeable future
as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with
the rules and regulations of the SEC that may include legal, audit, additional insurance expenses, investor relations activities
and other administrative and professional services.
Other Income (Expense), Net
Other income and expense consists of
interest expense net of interest income, loss on extinguishment of debt, change in fair value of warrant liability, and change
in fair value of convertible notes payable derivative liabilities.
Critical Accounting Policies and Significant Judgments
and Estimates
Our management’s discussion and
analysis of our financial position and results of operations is based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial
statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. On an ongoing basis, we evaluate estimates, which include estimates related to stock-based compensation
expense, and reported amounts of revenues and expenses during the reported period. We base our estimates on historical experience
and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results
may differ materially from those estimates or assumptions.
Results of Operations
Comparison of
the Three Months Ended March 31, 2021 and 2020
The consolidated statements
of operations for the three months ended March 31, 2021 and 2020 are presented below:
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Three
Months Ended
March 31,
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$
Change
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%
Change
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2021
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2020
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(In thousands, except per share and share amounts)
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Revenues
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$
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675
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$
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1,232
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(557
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)
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(45.2
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Cost of revenues
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1,391
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1,284
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107
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8.3
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Gross profit (loss)
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(716
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)
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(52
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(664
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)
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1,276.9
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Operating expenses:
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Research and development
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1,412
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1,014
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398
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39.3
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Selling, general and administrative expenses
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7,958
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2,491
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5,467
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219.5
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Loss from operations
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(10,086
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)
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(3,557
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(6,529
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)
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183.6
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Other (income) expense:
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Interest expense, net
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11
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1,296
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(1,285
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)
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(99.2
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Loss on extinguishment of debt
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-
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1,038
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(1,038
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)
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-
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Change in fair value of warrant liability
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(72,005
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)
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-
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(72,005
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)
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-
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Change in fair value of convertible notes payable derivative liability
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-
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563
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(563
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-
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Other income
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(6
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-
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(6
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-
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Net income (loss)
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$
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61,914
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$
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(6,454
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68,368
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(1,059.3
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Revenues
Revenues decreased by
$0.6 million, or 45.2%, to $0.7 million in the three months ended March 31, 2021 from $1.2 million for the three
months ended March 31, 2020. The decrease was primarily due to interruptions in OEM vehicle supply amid a worldwide microchip
shortage which caused the OEMs to stop taking fleet orders for much of the first half of the year 2021. Demand has also lagged as scheduled purchases of our products have been hindered while state and local municipalities
address budget cuts and shortfalls.
Cost of Revenues
Cost of revenues increased by $0.1 million,
or 8.3%, to $1.4 million in the three months ended March 31, 2021 from $1.3 million for the three months ended March 31,
2020. The increase was due to charges incurred for obsolete and slow moving inventory and the impact of fixed production labor costs.
Gross Profit (Loss)
Gross loss increased by $0.7 million,
or 1,276.9%, to $0.7 million in the three months ended March 31, 2021 from $0.1 million for the three months ended March 31,
2020. This increase in gross loss was primarily due to lower sales volume and charges incurred for obsolete, slow moving inventory and
fixed production labor costs.
Research and Development
Research and development expenses increased
by $0.4 million, or 39.3%, to $1.4 million in the three months ended March 31, 2021 from $1.0 million for the three
months ended March 31, 2020. The increase was primarily due to the hiring of additional engineering staff to support unit
sales growth and to further develop our product line.
Selling, General and Administrative
Selling, general, and administrative expenses increased by $5.5 million,
or 219.5%, to $8.0 million in the three months ended March 31, 2021 from $2.5 million for the three months ended March 31,
2020. The increase was primarily due to costs incurred as a public company, including an increase in accounting, legal, and other professional
fees of approximately $2.9 million, additions to headcount contributed to an increase in employee compensation of approximately $1.6 million,
inclusive of an increase of stock based compensation of approximately $0.4 million, and approximately $0.8 million of increased infrastructure
costs, including technology, insurance, vehicle and facility startup expenses.
Other (Income) Expense
Interest expense, net decreased by $1.3 million,
or 99.2%, to $0.0 million in the three months ended March 31, 2021 from $1.3 million for the three months ended March 31,
2020 primarily due to the Company repaying or converting substantially all debt prior to December 31, 2020. We incurred a loss on extinguishment
of $1.0 million in connection with the amendment of certain convertible notes for the three months ended March 31, 2020. There was no
loss on extinguishment of debt for the three months ended March 31, 2021. The change in fair value of warrant liability of $72.0 million
for the three months ended March 31, 2021 was principally due to a decrease in the fair value of our Common Stock.
Liquidity and Capital Resources
As of March 31, 2021, we had working capital
of $409.4 million, including cash and cash equivalents of $404.1 million. We had net income of $61.9 million for the three months
ended March 31, 2021 and incurred a net loss of $6.5 million for the three months ended March 31, 2020.
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 approximately $85.6 million.
We expect to continue to incur net losses
in the short term, as we continue to execute on our strategic initiatives to optimize our production for scale, invest in the sales
and channel teams, and expand our products and services. Based on our current liquidity, we believe that no additional capital
will be needed to execute our current business plan over the next 12 months.