See notes to unaudited condensed consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.
See notes to unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Note 1. Organization and Description of Business
Description of Business: XL Fleet Corp. and its subsidiaries
(“XL Fleet” or the “Company”) is a provider of fleet electrification solutions for commercial vehicles in North
America, offering solutions for vehicle electrification (“Drivetrain”) and energy efficiency infrastructure solutions (“XL
Grid”).
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.
The Company has experienced, and may experience in the future, reduced
operations and production line shutdowns at vehicle OEMs due to COVID-19, limitations on travel by the Company’s personnel and personnel
of the Company’s customers, and future delays or shutdowns of vehicle OEMs or the Company’s suppliers.
The COVID-19 pandemic and the protocols and procedures the Company
has implemented in response to the pandemic have caused some delays in operational activities. The full impact of the COVID-19 pandemic
on its business and results of operations subsequent to March 31, 2022 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 was the primary beneficiary. The Company reports its consolidated financial information under
two operating reportable segments: (i) Drivetrain and (ii) XL Grid. 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 inventory reserves, deferred income
taxes, warranty reserves, valuation of share-based compensation, 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, 2022 and December 31, 2021, the Company had cash deposited in a financial institution 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,
2022, two customers accounted for approximately 38% and 37% of accounts receivable, net. As of December 31, 2021, two customers accounted
for approximately 74% and 11% of accounts receivable, net.
For the three months ended March 31, 2022 and March 31, 2021, two customers
and three customers accounted for approximately 88% and 79% of revenues, respectively.
Cash, cash equivalents, and restricted cash: The Company considers
all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents
include cash held in banks and money market accounts. Cash equivalents are carried at cost, which approximates fair value due to their
short-term nature. The Company’s cash and cash equivalents are placed with high-credit quality financial institutions and issuers,
and at times exceed federally insured limits. To date, the Company has not experienced any credit loss relating to its cash and cash equivalents.
Restricted cash: Restricted cash held at March 31, 2022 and
December 31, 2021, consists of $150 for a bank deposit required for a letter of credit which is reserved for the Company’s California
lease.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Amounts in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
The following table provides a reconciliation of cash, cash equivalents,
and restricted cash in the condensed consolidated balance sheets to the total amount shown in the condensed consolidated statements of
cash flows:
| |
As of | |
| |
March 31,
2022 | | |
December 31,
2021 | |
Cash and cash equivalents | |
$ | 333,461 | | |
$ | 351,676 | |
Restricted cash | |
| 150 | | |
| 150 | |
Total cash, cash equivalents, and restricted cash | |
$ | 333,611 | | |
$ | 351,826 | |
Accounts receivable, net: Accounts receivable are stated at
the gross invoice amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts is maintained at a level considered
adequate to provide for potential account losses on the balance based on management’s evaluation of the anticipated impact of current
economic conditions, changes in the character and size of the balance, past and expected future loss experience, among other pertinent
factors. As of March 31, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts was $158 and $148 respectively.
Inventory, net: Inventory is comprised of raw materials, work
in process and finished goods. Inventory is stated at the lower of cost or net realizable value. Cost of raw material inventories include
the purchase and related costs incurred in bringing the products to their present location and condition. The Company uses consistent
methodologies to evaluate inventory for net realizable value and periodically reviews inventories for obsolescence and any inventories
identified as slow moving or obsolete are initially reserved for and then written-off. As of March 31, 2022 and December 31, 2021, the
Company’s inventory reserve for obsolescence was $4,349 and $2,863, respectively. The increase in the inventory reserve at March
31, 2022 reflects the restructuring undertaken and the related products that were eliminated.
Property and equipment, net: Property and equipment, net is
stated at cost less accumulated depreciation, or if acquired in a business combination, at fair value as of the date of acquisition. Depreciation
is calculated using the straight-line method, based upon the following estimated useful lives:
Equipment |
5 years |
Furniture and fixtures |
3 years |
Computer and related equipment |
2 years |
Software |
2 years |
Vehicles |
5 years |
Leasehold improvements |
Lesser of useful life of the asset or remaining life of the lease |
Improvements are capitalized, while replacements, maintenance and repairs,
which do not improve or extend the lives of the respective assets, are expensed as incurred. When property and equipment is retired or
otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition
is recorded in the statement of operations as a component of other (expense) income, net.
Depreciation expense for the three months ended March 31, 2022 and
2021 was $218 and $103, respectively.
Intangible assets, net: Intangible assets are initially recorded
at fair value and stated net of accumulated amortization and impairments. The Company amortizes its intangible assets that have finite
lives using either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset
is expected to be utilized. Amortization is recorded over the estimated useful lives, which for developed technology is 4 years. The Company
evaluates the recoverability of its definite lived intangible assets whenever events or changes in circumstances or business conditions
indicate that the carrying value of these assets may not be recoverable based on expectations of future undiscounted cash flows for each
asset group. If the carrying value of an asset or asset group exceeds its undiscounted cash flows, the Company estimates the fair value
of the assets, generally utilizing a discounted cash flow analysis based on the present value of estimated future cash flows to be generated
by the assets using a risk-adjusted discount rate. To estimate the fair value of the assets, the Company uses market participant assumptions
pursuant to ASC 820, Fair Value Measurement.
Amortization expense for the three months ended March 31, 2022 and
2021 was $226 and $116, 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.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Amounts in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
The fair value of the Company’s financial assets and liabilities
reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid
in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date. In connection
with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained
from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price
assets and liabilities). The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs
and unobservable inputs used in order to value the assets and liabilities:
Level 1: Quoted prices (unadjusted) for identical assets or
liabilities in active markets that the Company can access at the measurement date.
Level 2: Significant other observable inputs other than level
1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are
observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s
judgment about the assumptions that market participants would use in pricing an asset or liability.
An asset’s or liability’s fair value measurement level
within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation
techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
See Note 10 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, restricted cash, accounts receivable, accounts payable, accrued liabilities, contingent consideration liability, long-term
debt and warrant liability. The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses
approximates fair value because of the short-term nature of those instruments.
Prepaid expenses and other current assets: Prepaid expenses
and other current assets include prepaid insurance, prepaid rent, and supplies, which are expected to be recognized or realized within
the next 12 months.
Impairment of long-lived assets: The Company reviews long-lived assets, including property and equipment
and, intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that an asset group’s
carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analysis in accordance with ASC 360-10, Impairment
or Disposal of Long-Lived Assets, which requires the Company to group assets and liabilities at the lowest level for which identifiable
cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the
undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable,
an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value. As of March 31,
2022, the Company noted indicators that the carrying amount of its long-lived assets may not be recoverable. These indicators included
significant operating losses and reduced market capitalization of the Company due to a decline in its stock price. The Company performed
a test for impairment using estimated cash flows and determined that no impairment had occurred.
Impairment of goodwill: Goodwill represents the excess of cost
over the fair market value of net tangible and identifiable intangible assets of acquired businesses. Goodwill is not amortized but instead
is annually tested for impairment, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be
impaired. The Company has recorded goodwill in connection with its historical business acquisitions.
The Company performs its annual goodwill impairment assessment at October
1 each fiscal year, or more frequently if events or circumstances arise which indicate that goodwill may be impaired. An assessment can
be performed by first completing a qualitative assessment on the Company’s single reporting unit. The Company can also bypass the
qualitative assessment in any period and proceed directly to the quantitative impairment test, and then resume the qualitative assessment
in any subsequent period. Qualitative indicators that may trigger the need for annual or interim quantitative impairment testing include,
among other things, deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment,
or an expectation of selling or disposing of a portion of the reporting unit. Additionally, a significant change in business climate,
a loss of a significant customer, increased competition, a sustained decrease in share price, or a decrease in estimated fair value below
book value may trigger the need for interim impairment testing of goodwill.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Amounts in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
If the Company believes that, as a result of its qualitative assessment,
it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the quantitative impairment test
is required. The quantitative test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill.
If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recorded as a reduction to goodwill with a
corresponding charge to earnings in the period the goodwill is determined to be impaired. The income tax effect associated with an impairment
of tax-deductible goodwill is also considered in the measurement of the goodwill impairment. Any goodwill impairment is limited to the
total amount of goodwill.
The Company determines the fair value of its reporting unit using the
market approach. Under the market approach method, the Company compared its book value to the fair value of its public float, utilizing
the fair value of its common stock on the measurement date.
In the first quarter of 2022, the Company believed there were indicators
that the carrying amount of its goodwill may be impaired due to a decline in the Company’s stock price and market capitalization.
As a result, the Company performed an assessment of its goodwill for impairment. The Company elected to forego the qualitative test and
proceeded to perform a quantitative test. The Company compared the book value of its single reporting unit to the fair value of its public
float. The market capitalization was below the fair value of the Company by an amount in excess of its reported value of goodwill. As
a result, the Company recorded a charge of $8,606 to fully impair its goodwill.
Revenue: The Company’s revenue is derived from the sales of hybrid electric
powertrain systems, the Drivetrain business, and turnkey energy efficiency, renewable technology, and other energy solutions (the Company’s
“XL Grid” business). The Drivetrain products are marketed and sold to end-user fleet customers and channel partners in the
United States and Canada. The Company’s XL Grid solutions are marketed and sold to municipalities, corporations and other businesses
and principally funded through energy incentives provided through public and private utilities. The XL Grid business primarily consists
of the operations acquired through the May 2021 World Energy acquisition. Sales of products and services are subject to economic conditions
and may fluctuate based on changes in the industry, trade policies, financial markets, and funded energy incentives.
Revenue is recognized upon transfer of control to the customer, which
occurs when the Company has a present right to payment, legal title has passed to the customer, the customer has the significant risks
and rewards of ownership, and where acceptance is not a formality, the customer has accepted the product or service.
For the Drivetrain products, in general, transfer of control is upon
shipment of the equipment as the terms are FOB shipping point or equivalent, as the Company has no other promised goods or services in
its contracts with customers. In limited instances, the Company provides installation services to end-user fleet customers related to
the purchased hybrid electric powertrain equipment. When provided, these installation services are not distinct within the context of
the contract due to the fact that the end-use fleet customer is purchasing a completed modification to its vehicles and therefore, the
installation services involve significant integration to integrate the hybrid electric powertrain equipment with the customer’s
vehicle. As a result, the hybrid electric powertrain equipment and installation services represent a single performance obligation within
these contracts with customers. The Company recognizes the revenue for the equipment sale and installation service for Drivetrain products
at the same time, which is after the installation is complete. The Company has elected to treat shipping and handling activities related
to contracts with channel partner customers for Drivetrain products as costs to fulfill the promise to transfer the associated equipment
and not as a separate performance obligation.
For the XL Grid solutions, in general, transfer of control is upon
the acceptance and certification of project completion by both the end customer and the utility who is funding the energy incentives,
representing a single performance obligation of the Company. Due to the short-term nature of projects (typically two to three weeks),
the Company recognizes revenues from all XL Grid solutions activities at a point in time, when persuasive evidence of an arrangement exists,
delivery has occurred, the price is fixed or determinable and the Company has the right to payment for the transferred asset. The Company
also assesses multiple contracts entered into by the same customer in close proximity to determine if the contracts should be combined
for revenue recognition purposes. During the duration of a project for XL Grid solutions, all direct material and labor costs and those
indirect costs related to the project are capitalized, and customer deposits are treated as liabilities. Once a project has been completed
and the energy efficiency upgrades have been deemed to meet client specifications, capitalized costs are charged to earnings.
For both Drivetrain and XL Grid solutions, when the Company’s
contracts with customers contain multiple performance obligations, which is infrequent, the contract transaction price is allocated on
a relative standalone selling price (SSP) basis to each performance obligation. The Company determines SSP 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.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Amounts in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
The transaction price is the amount of consideration to which the Company
expects to be entitled in exchange for transferring goods and services to the customer. Revenue is recorded based on the transaction price,
which is solely made up of fixed consideration for its products and services. The Company does not adjust transaction price for the effects
of a significant financing component when the period between the transfer of the promised good or service to the customer and payment
for that good or service by the customer is expected to be one year or less. The Company has not identified any significant financing
components to date. The Company’s sales can in certain instances include non-cash consideration in the form of the customer transferring
to the Company, the customer’s rights to cash incentives from programs administered by municipalities related to hybrid vehicle
programs that a customer is entitled to as a result of its purchase. The incentives are fixed amounts that are readily determinable. The
Company values the non-cash consideration at its fair value, which generally is the amount of the incentive.
Payment terms on invoices generally range from 30 to 60 days. The Company
excludes from revenue any sales tax and other government-assessed and imposed taxes on revenue generating activities that are invoiced
to customers.
The Company has elected to apply the practical expedient to expense
costs to obtain contracts, which principally relate to sales commissions, at the time the liability is incurred when the expected amortization
period is one year or less.
Warranties: Customers who purchase Drivetrain products are provided limited-assurance-type
warranties for equipment and work performed under the contracts. The warranty period typically extends for 3 years following transfer
of control of the equipment. The warranties solely relate to correction of product defects during the warranty period, which is consistent
with similar warranties offered by competitors. Therefore, the Company has determined that these warranties are outside the scope of ASC
606 and will continue to be accounted for under ASC 460, Guarantees. At the time of purchase of the equipment, customers may purchase
from the Company an extended warranty for its equipment. The extended warranty commences upon the end of the assurance-based warranty
period and is considered a separate performance obligation that represents a stand-ready obligation to perform warranty services after
the assurance-type warranty expires. The transaction price allocated to the extended warranty is recognized ratably over the extended
warranty period.
Customers of XL Grid solutions are provided limited-assurance-type
warranties for a term of one year for installation work performed under its contracts. Warranties for equipment sold to customers are
provided by the original equipment manufacturers.
For both Drivetrain and XL Grid solutions, the Company accrues the
estimated cost of product warranties for unclaimed charges based on historical experiences and expected results. Should product failure
rates and material usage costs differ from these estimated revisions to the estimated warranty liability are 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.
The following is a roll-forward of the Company’s accrued warranty liability:
| |
Three Months Ended
March 31, | |
| |
2022 | | |
2021 | |
Balance at the beginning of the period | |
$ | 2,547 | | |
$ | 1,735 | |
Accrual for warranties issued | |
| 28 | | |
| 44 | |
Warranty fulfillment charges | |
| (172 | ) | |
| (82 | ) |
Balance at the end of the period | |
$ | 2,403 | | |
$ | 1,697 | |
The warranty liability is included in accrued expenses and other current liabilities on the Unaudited Condensed
Consolidated Balance Sheets.
Share-based compensation: The Company accounts for its share-based
compensation awards in accordance with ASC Topic 718, Compensation-Stock Compensation. The Company issues stock-based awards to
acquire common stock to employees, directors and non-employee consultants. Awards issued under the Company’s stock-based compensation
plans include stock options, restricted stock units and restricted stock awards. Stock options, restricted stock units and restricted
stock awards typically contain service based vesting conditions.
Stock Options
The Company 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 employees, which is typically the four-year vesting period of the award, and effective contract period specified in the award
agreement for non-employees.
The fair value of common stock is determined based on the closing price
of the Company’s common stock on the New York Stock Exchange at each award grant date.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Amounts in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
The determination of the fair value of share-based payment awards utilizing
the Black-Scholes model is affected by the stock price and a number of assumptions, including expected volatility, expected life, risk-
free interest rate and expected dividends. The Company does not have a history of trading in its common stock as it was not a public company
until December 21, 2020, and as such volatility was estimated using historical volatilities of comparable public entities. The expected
life of the awards is estimated based on a simplified method, which uses the average of the vesting term and the original contractual
term. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected life of the awards. The
dividend yield assumption is based on history and expectation of paying no dividends. Forfeitures are accounted for as they occur.
The fair value of stock options issued for the three months ended March
31, 2022 and 2021 was measured with the following assumptions:
|
|
Three Months Ended
March 31 |
|
|
|
2022 |
|
|
2021 |
|
Expected volatility |
|
|
86.0 – 86.4 |
% |
|
|
78.1 – 79.9 |
% |
Expected term (in years) |
|
|
6.25 |
|
|
|
6.25 |
|
Risk-free interest rate |
|
|
1.4 – 1.7 |
% |
|
|
0.4 – 0.5 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Restricted Stock Units
Restricted stock units generally vest over the requisite service periods
(vesting on a straight–line basis). The fair value of a restricted stock unit award is equal to the fair market value of a share
of the Company’s Common stock on the grant date. The Company accounts for the forfeiture of equity awards as they occur.
Warrant Liabilities: The Company evaluated the Private Warrants
(“Private Warrants”) 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.
Segment Reporting: ASC Topic 280, Segment Reporting, establishes standards for
reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well
as information about geographical areas, business segments, and major customers in its condensed consolidated financial statements. In
the first quarter of 2022, the Company’s Chief Executive Officer, as the chief operating decision maker (“CODM”), reorganized
the Company, for the management of resource allocations and measurement of performance, into two operating and reportable segments: (i)
Drivetrain and (ii) XL Grid.
Research and development expense: Research and development costs
did not meet the requirements to be recognized as an asset as the associated future benefits were at best uncertain and there was no alternative
future use at the time the costs were incurred. Research and development costs include, but are not limited to, costs incurred in performing
research and development activities, including salaries, benefits, facilities, research- related overhead, sponsored research costs, contracted
services, license fees, and other external costs.
Net income (loss) per share: Basic net income (loss) per share
is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period, without
consideration for potentially dilutive securities. Diluted net income (loss) per share is computed by dividing net income (loss) by the
weighted-average number of shares of common stock and potentially dilutive securities outstanding during the period determined using the
treasury-stock and if-converted methods. For purposes of the diluted income (loss) per share calculation, stock options, restricted stock
units, restricted stock and warrants are considered to be potentially dilutive securities. Potentially dilutive securities were excluded
from the calculation of diluted income (loss) per share when their effect would be anti-dilutive.
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
(Amounts in thousands, except share and per share data)
Note 2. Summary of Significant Accounting Policies, continued
Recent accounting pronouncements issued and adopted:
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit
Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, (ASU 2016-13”)which, together with subsequent amendments,
amends the requirement on the measurement and recognition of expected credit losses for financial assets held to replace the incurred
loss model for financial assets measured at amortized cost and require entities to measure all expected credit losses for financial assets
held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 is
effective for the Company beginning January 1, 2023. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s
unaudited condensed consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic
260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or
Exchanges of Freestanding Equity-Classified Written Call Options. This ASU clarifies the accounting for modifications or exchanges of
freestanding equity-classified written call options (i.e. warrants) so that the transaction should be treated as an exchange of the original
instrument for a new instrument. This standard is effective for the Company beginning January 1, 2022. The adoption of this update did
not have a material impact on the Company’s unaudited condensed consolidated financial statements.
Note 3. Business Combination
World Energy
On May 17, 2021, the Company acquired
all of the issued and outstanding membership interests of World Energy, a privately-held, Massachusetts-based entity, and retained its
principals and all of its employees. World Energy is a direct-install energy efficiency services company (“ESCO”), serving
commercial, industrial and institutional customers as well as offering solar and electric vehicle charging solutions. World Energy enables
utilities to meet their energy savings mandates by developing and executing energy efficiency projects. The acquisition of World Energy
expanded the Company’s ability to deliver a comprehensive suite of energy savings services that enhances XL Grid’s solutions
portfolio to include commercial and industrial EV charging, solar, and energy management services.
In March 2022, pursuant to the definitive acquisition
agreement, the Company paid contingent consideration of $1,000 to the sellers pursuant to World Energy’s achievement, for the calendar
year 2021, of minimum annual revenues of $19,500.
The following unaudited pro forma financial information
presents the combined results of the operations of XL Fleet and World Energy as if the acquisition of World Energy had occurred as of
January 1, 2021. The unaudited pro forma financial information is not necessarily indicative of what the consolidated results of operations
actually would have been had the acquisition been completed on January 1, 2021. This unaudited pro forma financial information does not
purport to project the future results of operations of the combined Company.
Since the acquisition occurred on May 17, 2021, the results of the
acquisition are fully incorporated into the condensed consolidated financial information for the three months ended March 31, 2022. The
following table presents the Company’s pro forma combined results of operations of XL Fleet and World Energy for the three months
ended March 31, 2021 as if the acquisition of World Energy had occurred as of January 1, 2021:
| |
2021 | |
Revenues | |
$ | 5,615 | |
Net income | |
$ | 62,812 | |
Per share amounts: Net income per share – basic | |
$ | 0.46 | |
Net income per share - diluted | |
$ | 0.42 | |
The above pro forma information includes a pro forma adjustment to eliminate interest expense associated with
debt that was repaid in the acquisition of World Energy of $21 for the three months ended March 31, 2021.
Note 4. Settlement of Contingent Consideration Quantum
On October 4, 2019, pursuant to the terms of an asset purchase agreement,
the Company acquired certain assets of Quantum Fuel Systems, LLC (“Quantum”) The purchase consideration included deferred
payments or share issuances upon certain milestones being met.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Note 4. Settlement of Contingent Consideration Quantum,
continued
During the three months ended March 31, 2022, the remaining final payments
were made to the sellers of Quantum as follows pursuant to the asset purchase agreement:
| ● | Second milestone event which was met upon the achievement of certain product development criteria as outlined
in the asset purchase agreement. In connection with having achieved the second milestone, in February 2022 the Company paid cash consideration
of $475 and issued 50,000 shares of the Company’s common stock. |
| ● | Third milestone event which was met upon the successful demonstration of a prototype as outlined in the asset
purchase agreement. In connection with having achieved the third milestone, in February 2022 the Company paid cash consideration of $475
and issued 50,000 shares of the Company’s common stock. |
Note 5. Revenue
The following table represents the Company’s revenues for the
three months ended March 31, 2022 and 2021, respectively, disaggregated, by sales channel.
Disaggregation of revenue:
| |
Three Months Ended
March 31 | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Revenue from the sale of Drivetrain systems: | |
| | |
| |
Revenue direct to customers | |
$ | 548 | | |
$ | 111 | |
Revenue through channel partners | |
| 50 | | |
| 564 | |
| |
| | | |
| | |
Revenue from the sale of XL Grid solutions – which are sold direct to customers | |
| 4,165 | | |
| - | |
Total revenue | |
$ | 4,763 | | |
$ | 675 | |
Remaining performance obligations: At March 31, 2022 and December
31, 2021, there was approximately $233 and $237 in deferred revenue related to unsatisfied extended warranty performance obligations,
respectively. During the three months ended March 31, 2022, the Company recognized revenue of $4 from the December 31, 2021 deferred revenue
balance.
Contract Balances: The timing of revenue recognition,
billings and cash collections results in billed trade accounts receivable, and deferred revenue (contract liabilities) on the unaudited
Condensed Consolidated Balance Sheets. In addition, the Company defers certain costs incurred to obtain a contract (contract costs).
Costs to obtain a contract: Sales commissions paid to internal
sales personnel, as well as associated payroll taxes and retirement plan contributions (together, sales commissions and associated costs)
that are incremental to the acquisition of customer contracts, are capitalized as contract acquisition cost on the balance sheet when
the period of benefit is determined to be greater than one year. In instances where an extended warranty is sold, the period of benefit
would extend beyond 12 months and therefore, the practical expedient would not be met for those contracts and require capitalization of
the related costs to obtain those contracts. The Company has elected to allocate the capitalized commissions to performance obligations
on a relative basis (i.e., in proportion to the transaction price allocated to each performance obligation) to determine the period of
amortization. As a result, substantially all of the commission is allocated to the combined equipment and installation performance obligation
and is amortized upon transfer of control of this performance obligation, which typically occurs in the same period in which commission
liability is incurred. Total commission expense recognized during the three months ended March 31, 2022 and 2021 was $278 and $256, respectively.
There were no capitalized commissions as of March 31, 2022 and December 31, 2021.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Note 6. Purchase of Convertible Note
On July 15, 2021, XL Fleet made an investment of $3,000
into eNow, a developer of solar and battery power systems that is developing fully-electric transport refrigeration units (“eTRUs”)
for commercial trailers. In exchange for the investment, eNow issued to the Company a convertible debenture (the “eNow Convertible
Note”) dated July 15, 2021 (the “Issuance Date”) in the original principal amount of $3,000, at the rate of 8% per annum
and due on December 31, 2022. The investment was classified as an available-for-sale security. After reviewing the status of eNow’s
financial condition on December 31, 2021, the Company determined that the investment in the eNow Convertible Note was fully impaired and
as such, on such date, recorded an impairment charge of $3,000. Under certain circumstances, the eNow Convertible Note could be converted
into Series B preferred stock.
In addition to the terms described above, on July 15, 2021 (“Effective
Date”), XL Fleet entered into a Development and Supply Agreement (the “Development and Supply Agreement”) with eNow,
whereby XL Fleet was made the exclusive provider of high voltage batteries and associated power systems for use in eNow eTRUs. The Company
considered the existence of adverse conditions regarding the global supply chain crisis (electronic hardware, lithium ion cells and batteries)
that causes further impediments to eNow being able to execute on its business plan. XL Fleet evaluated the supply chain issues, specifically
the lack of availability of batteries from third party suppliers. During the three months ended December 31, 2021, the supply chain issues
worsened, and in particular the lack of availability of batteries from third party suppliers. These worsened conditions, in the Company’s
opinion, negatively impacted eNow’s prospects and financial condition. In January 2022, due to the ongoing supply chain issues,
the Company notified eNow of its intention to terminate the Development and Supply Agreement (See Note 10).
Note 7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following
at March 31, 2022 and December 31, 2021:
| |
As of | |
| |
March 31,
2022 | | |
December 31,
2021 | |
Accrued warranty costs | |
$ | 2,403 | | |
$ | 2,547 | |
Accrued compensation and related benefits | |
| 2,160 | | |
| 2,254 | |
Contingent purchase price consideration – Quantum | |
| - | | |
| 1,950 | |
Deferred purchase price consideration – World Energy | |
| 234 | | |
| 278 | |
Accreted contingent compensation to sellers – World Energy | |
| - | | |
| 1,000 | |
Professional fees | |
| 1,066 | | |
| 949 | |
Accrued settlements | |
| 494 | | |
| 494 | |
Accrued expenses, other | |
| 1,786 | | |
| 2,384 | |
| |
$ | 8,143 | | |
$ | 11,856 | |
Note 8. New Markets Tax Credit Financing
On March 4, 2015, the Company entered into a financing transaction
with U.S. Bancorp Community Development Corporation (U.S. Bank) under a qualified New Markets Tax Credit (“NMTC”) program
related to the operation of the Company’s facility in Quincy, Illinois. The NMTC program was provided for in the Community Renewal
Tax Relief Act of 2000 (the Act) and is intended to encourage capital investment in qualified lower income communities. The Act permits
taxpayers to claim credits against their Federal income taxes for up to 39% of qualified investments in the equity of community development
entities (CDEs). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.
In connection with the financing, the Company made two loans totaling
$10,454 to federal ($6,455 at 1.51%) and state ($3,999 at 1.53%) NMTC investment funds (the Investment Funds). Simultaneously, U.S. Bank
made an equity investment of $4,995 to the Investment Funds and, by virtue of such contribution, is entitled to substantially all of the
tax benefits derived from the NMTC. For compliance with the NMTC rules, principal payments on the loan would not begin until June 10,
2025 (the NMTC rules prohibit principal payments during the 7-year term of the NMTC arrangement). The maturity date on the loans would
have been December 31, 2044.
The Investment Funds then contributed the loan proceeds to a CDE, which,
in turn, loaned combined funds of $15,000, net of debt issuance costs of $546, to XL Hybrid Quincy, LLC, a wholly-owned subsidiary of
the Company, at an interest rate of 1.15% per year with a maturity date of March 4, 2045. These loans were secured by the leasehold improvements
and equipment at the facility in Quincy, Illinois. Repayment of the loans would have commenced March 10, 2025. The proceeds from the loans
from the CDE were used to partially fund the build-out of the facility in Quincy, Illinois.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Note 8. New Markets Tax Credit Financing, continued
The transaction included a put/call feature whereby, at the end of
the seven-year NMTC compliance period, the Company may have been obligated or entitled to repurchase U.S. Bank’s equity interest
in the Investment Funds. U.S Bank exercised the put option in January 2022 the end of the recapture period. The value attributable to
the put/call was nominal.
The Company had determined that the financing arrangement with the
Investment Fund and CDEs contained a variable interest entity (“VIE”). As such, the Company concluded that it was the primary
beneficiary of the VIE and consolidated the Investment Fund, as a VIE, in accordance with the accounting standards for consolidation.
Because the Company consolidated an entity from which it has an approximately $10,500 loan receivable and consolidated an entity to which
it owes an approximately $15,000 loan payable through December 31, 2021, these two balances partially eliminated against each other in
consolidation. The VIE was terminated upon the exercise of the put option.
During the three months ended March 31, 2022 and 2021, the Company
amortized debt issuance costs related to the NMTC of $0 and $78, respectively. The unamortized balance of debt issuance costs as of March
31, 2022 and December 31, 2021 was $0 and $20, respectively.
On January 14, 2022, the NMTC financing arrangement was terminated
and settled, with the note receivable of $15,000 (owed by XL Hybrid Quincy) being transferred to XL Hybrids LL in payment of the $10,500
note receivable. Both notes were retired resulting in the recognition of a gain on forgiveness of debt, net of unamortized debt issuance
costs, of $4,527 for the three months ended March 31, 2022.
Note 9. ROU Assets and Lease Liabilities
The Company’s ROU assets and lease liabilities are comprised
of the following:
| |
As of | |
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Operating leases: | |
| | |
| |
Right-of-use assets | |
$ | 3,185 | | |
$ | 3,443 | |
Lease liability, current | |
| 427 | | |
| 451 | |
Lease liability, non-current | |
| 2,943 | | |
| 3,056 | |
Finance leases: | |
| | | |
| | |
Right-of-use assets | |
| 1,008 | | |
| 1,121 | |
Lease liability, current | |
| 666 | | |
| 449 | |
Lease liability, non-current | |
| 226 | | |
| 543 | |
Other information related to leases is presented below:
| |
For the Three Months Ending
March 31, | |
| |
2022 | | |
2021 | |
Other information: | |
| | |
| |
Operating lease cost | |
$ | 227 | | |
$ | 179 | |
| |
For the Three Months Ending
March 31, | |
| |
2022 | | |
2021 | |
Operating cash flows from operating leases | |
$ | 240 | | |
$ | 141 | |
Weighted-average remaining lease term – operating leases (in months) | |
| 81.1 | | |
| 92.2 | |
Weighted-average discount rate – operating leases | |
| 9.7 | % | |
| 9.6 | % |
As of March 31, 2022, the annual minimum lease payments of our operating
lease liabilities were as follows:
For The Years Ending December 31, | |
| |
2022 (excluding the three months ended March 31, 2022) | |
| 549 | |
2023 | |
| 730 | |
2024 | |
| 694 | |
2025 | |
| 709 | |
2026 | |
| 555 | |
Thereafter | |
| 1,416 | |
Total future minimum lease payments, undiscounted | |
| 4,653 | |
Less: imputed interest | |
| (1,283 | ) |
Present value of future minimum lease payments | |
$ | 3,370 | |
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Note 10. Fair Value Measurements
Mark-to-Market Measurement
The Private Warrants were valued using a Black-Scholes model, pursuant
to the inputs provided in the table below:
| |
Mark-to-Market Measurement | | |
Mark-to-Market Measurement | |
| |
at March 31, | | |
at December 31, | |
Input | |
2022 | | |
2021 | |
Risk-free rate | |
| 2.439 | % | |
| 1.111 | % |
Remaining term in years | |
| 3.725 | | |
| 3.98 | |
Expected volatility | |
| 94.35 | % | |
| 88.77 | % |
Exercise price | |
$ | 11.50 | | |
$ | 11.50 | |
Fair value of common stock | |
$ | 1.99 | | |
$ | 3.31 | |
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, 2022 |
| |
Level I | |
Level II | |
Level III | |
Total |
| |
| |
| |
| |
|
Liability: | |
| |
| |
| |
|
Private Warrants | |
$ | - | | |
$ | - | | |
$ | 2,687 | | |
$ | 2,687 | |
Earnout – World Energy | |
$ | - | | |
$ | - | | |
$ | 325 | | |
$ | 325 | |
Total | |
$ | - | | |
$ | - | | |
$ | 3,012 | | |
$ | 3,012 | |
| |
Fair Value Measurements as of December 31, 2021 |
| |
Level I | |
Level
II | |
Level III | |
Total |
| |
| |
| |
| |
|
Liability: | |
| |
| |
| |
|
Private warrants | |
$ | - | | |
$ | - | | |
$ | 5,404 | | |
$ | 5,404 | |
Contingent consideration – Quantum | |
$ | - | | |
$ | - | | |
$ | 1,950 | | |
$ | 1,950 | |
Earnout – World Energy | |
$ | - | | |
$ | - | | |
$ | 1,000 | | |
$ | 1,000 | |
Fair value of obligation to issue shares of common stock to sellers of World Energy | |
$ | - | | |
$ | - | | |
$ | 541 | | |
$ | 541 | |
Total | |
$ | - | | |
$ | - | | |
$ | 8,895 | | |
$ | 8,895 | |
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Note 10. Fair Value Measurements, continued
The following is a roll forward of the Company’s Level 3 instruments:
| |
For the Three Months Ended March 31, 2022 | |
| |
Liability | |
Balance, January 1, 2022 | |
$ | 8,895 | |
Fair value adjustment – Quantum contingent consideration | |
| (145 | ) |
Cash settlement of Quantum liability | |
| (950 | ) |
Share settlement of Quantum liability | |
| (186 | ) |
Cash settlement of World Energy liability | |
| (1,000 | ) |
Fair value adjustments – Warrant liability | |
| (2,717 | ) |
Fair value adjustments – World Energy | |
| (216 | ) |
Adjustment – Quantum liability | |
| (669 | ) |
Balance, March 31, 2022 | |
$ | 3,012 | |
Note 11. Share-Based Compensation Expense
Share-based compensation expense for stock options, restricted stock
awards and restricted stock units for the three months ended March 31, 2022 and 2021 was $381 and $442, respectively. As of March 31,
2022, there was $4,739 of unrecognized compensation cost related to stock options which is expected to be recognized over the remaining
vesting periods, with a weighted-average period of 2.8 years.
Stock Options
During the three months ended March 31, 2022 the Company issued 12,421
options to certain employees that will vest over a period of one to four years.
A summary of stock option award activity for the three months ended
March 31, 2022 was as follows:
Options | |
Shares | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term | |
| |
| | |
| | |
| |
Outstanding at December 31, 2021 | |
| 9,737,292 | | |
$ | 1.40 | | |
| 7.2 | |
Granted | |
| 12,421 | | |
| 1.98 | | |
| | |
Exercised | |
| (1,307,020 | ) | |
| 0.24 | | |
| | |
Cancelled or forfeited | |
| (613,823 | ) | |
| 3.06 | | |
| | |
Outstanding at March 31, 2022 | |
| 7,828,870 | | |
$ | 1.45 | | |
| 7.1 | |
Exercisable at March 31, 2022 | |
| 6,307,222 | | |
$ | 0.57 | | |
| 6.7 | |
The aggregate intrinsic value
of stock options outstanding as of March 31, 2022 was $11,215. The aggregate intrinsic value of stock options exercisable as of March
31, 2022 was $10,622. Cash received from options exercised for the three months ended March 31, 2022 and 2021 was $258, and $16, respectively.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Note 11. Share-Based Compensation Expense, continued
Restricted Stock Awards
The fair value of restricted stock awards is estimated by the fair
value of the Company’s Common Stock at the date of grant. Restricted stock activity during the three months ended at March 31, 2022
was as follows:
| |
Number of Shares | | |
Weighted
Average Grant Date Fair Value Per Share | |
| |
| | |
| |
Non-vested, at December 31, 2021 | |
| 446,332 | | |
$ | 0.24 | |
Granted | |
| - | | |
| - | |
Vested | |
| - | | |
| - | |
Cancelled or forfeited | |
| - | | |
| - | |
Non-vested, at March 31, 2022 | |
| 446,332 | | |
$ | 0.24 | |
Restricted Stock Units
During the three months ended March 31, 2022, the Company issued 9,098
restricted stock units to certain employees that will vest over a period of four years.
The fair value of restricted stock unit awards is estimated by the
fair value of the Company’s Common Stock at the date of grant. Restricted stock unit activity during the three months ended at March
31, 2022 was as follows:
| |
Number of Shares | | |
Weighted Average Grant Date Fair Value Per Share | |
| |
| | |
| |
Non-vested, at December 31, 2021 | |
| 604,433 | | |
$ | 6.06 | |
Granted | |
| 9,098 | | |
| 2.01 | |
Vested | |
| - | | |
| - | |
Cancelled or forfeited | |
| (134,371 | ) | |
| 6.49 | |
Non-vested, at March 31, 2022 | |
| 479,160 | | |
$ | 5.86 | |
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Note 12. Related Party Transactions
Operating lease: In March 2012, the Company entered into a noncancelable
lease agreement for office, research and development, and vehicle development and installation facilities with an investor of the Company.
On February 28, 2021, the lease term was extended through February 28, 2022. The lease includes a rent escalation clause, and rent expense
is being recorded on a straight-line basis. On December 31, 2021, the lease term was extended through August 31, 2022.
Rent expense under the operating lease for the three months ended March
31, 2022 and 2021 was $58 and $55, respectively.
Future minimum lease payments for this lease are as follows: | |
| |
2022 | |
| 97 | |
Total | |
$ | 97 | |
Note 13. Restructuring
In the first quarter of 2022, the Company conducted a strategic
review of its operations. The results of this review resulted in the following actions being taken: (1) the closure of the Company’s
production center and warehouse in Quincy, IL; (2) the termination of engineering activities in the Company’s Boston office; (3)
elimination of all of the Company’s plug-in hybrid products and a substantial majority of the Company’s hybrid drivetrain
products; (4) a reduction of the Company’s workforce of 51 employees’ and (5) the termination of the Company’s partnership
with eNow. The Company recognized a total charge of $2,358 related to these activities in the first quarter of 2022.
In connection with the Company’s reduction in its
workforce, the Company incurred severance charges totaling $840 of which was $725 was paid in the first quarter of 2022 and the
remainder will be paid in the second and third quarters of 2022. The severance charges were included in selling, general and
administrative expenses in the consolidated statement of operations. The remaining unpaid amount of $115 is included in accrued
expenses and other current liabilities in the consolidated balance sheet at March 31, 2022.
In connection with the Company’s decision to exit certain
product lines, the Company incurred an inventory obsolescence charge, included in cost of revenues, of $1,518 in the first quarter of 2022.
Note 14. Commitments and Contingencies
Sponsorship commitment: On February 24, 2021, the Company agreed
to a sponsorship agreement with several entities related to the UBS Arena, Belmont Park and the NY Islanders Hockey Club. Pursuant to
that Agreement, the Company was designated an “Official Electric Transportation Partner of UBS Arena” with various associated
marketing and branding rights, including the development of electric vehicle charging stations. Through March 31, 2022, the Company has
incurred costs of approximately $700 related to a future opportunity to develop electric vehicle charging stations on the UBS Arena area.
The sponsorship agreement has a term of three years with a sponsor fee of approximately $500 per year, of which $250 was paid on June
25, 2021 and the second payment of $250 was accrued on December 31, 2021 and paid on January 14, 2022. One of the directors of XL Fleet
is a co-owner of the NY Islanders Hockey Club. In the first quarter of 2021, the Company notified the counterparties that it would be
exercising its option to terminate the final two years of the agreement.
The Company terminated the Sponsorship Agreement effective June 1, 2022 and will incur no further sponsor fees.
Equipment purchase: On March 1, 2021, the Company entered into
an agreement with Creative Bus Sales, Inc. (“Creative) to purchase six low floor electric transit buses to be delivered in 2022
for a total purchase price of $4,191. In connection with this agreement, on March 2, 2021, the Company made a down-payment of $780. During
February 2022, the Company terminated its purchase agreement with Creative and received a refund of the down payment of $780.
Purchase commitments: The Company has entered into firm
commitments to purchase batteries and motors from major suppliers. As of March 31, 2022, these purchase obligations consisted of an
obligation of $2,533 to purchase motors by July 2022 and an open ended commitment of $2,500 to purchase batteries, and an obligation
of $343 to purchase chip-sensitive items including telematics modules and inverters.
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.
Beginning on March 8, 2021, two putative securities
class action complaints were filed in federal district court for the Southern District of New York against the Company and certain of
its current and former officers and directors. Those cases were consolidated and a lead plaintiff appointed in June 2021, and an amended
complaint filed on July 20, 2021 alleging that certain public statements made by the defendants between October 2, 2020 and March 2, 2021
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Company believes that
the allegations asserted in the amended complaint are without merit, and the Company intends to vigorously defend the lawsuit. There can
be no assurance, however, that the Company will be successful. At this time, the Company is unable to estimate potential losses, if any,
related to the lawsuit.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Note 14. Commitments and Contingencies, continued
On September 20, 2021, and October 19, 2021 two class action complaints
were filed in the Delaware Court of Chancery against certain of the Company’s current officers and directors, and the Company’s
sponsor, Pivotal Investment Holdings II LLC. The actions were consolidated as Inre XL Fleet (Pivotal) Stockholder Litigation, C.A.
No. 2121-0808, and amended complaint was filed on January 31, 2022. The amended complaint alleges various breaches of fiduciary duty,
and aiding and abetting breaches of fiduciary duty, for purported actions relating to the negotiation and approval of the December 21,
2020 merger and organization of legacy XL to become XL Fleet Corp., and purportedly materially misleading statements made in connection
with the merger. The Company believes that the allegations asserted in both the Laidlaw and Janmohamed Complaint are without merit, and
the Company intends to vigorously defend the lawsuit.
On January 6, 2022, the Company received a subpoena from the Securities
and Exchange Commission (the “SEC”) requesting the production of certain documents related to, among other things, the Company’s
business combination with XL Hybrids, Inc. and the related PIPE financing, the Company’s sales pipeline and revenue projections,
purchase orders, suppliers, CARB approvals, fuel economy from our Drivetrain products, customer complaints, and disclosures and other
matters in connection with the foregoing. The SEC has informed the Company that its current investigation is a fact-finding inquiry.
The SEC has also informed the Company that the investigation does not mean that it has concluded that anyone has violated the law and
does not mean that it has a negative opinion of any person, entity or security. We intend to provide the requested information and cooperate
fully with the SEC investigation.
Note 15. Leadership Transition
On January 31, 2022, the Company’s Chief Financial
Officer resigned. An interim replacement served until April 11, 2022, when Mr. Don Klein was appointed as Chief Financial Officer.
On March 21, 2022, Thomas (Tod) Hynes III resigned as the Company’s
President and from its Board of Directors and he and the Company entered into a separation agreement pursuant to which, provided that
Mr. Hynes does not timely revoke the agreement and thereafter complies with its material terms, he will receive (i) separation pay in
the form of a lump sum payment of $479,375 and (ii) nine months of employer paid COBRA premiums. Mr. Hynes has also agreed to chair the
Company’s advisory board. His separation agreement also includes customary provisions including those regarding cooperation, non-solicitation,
and a mutual release.
Note 16. Net (Loss) Income Per Share
The following is a reconciliation of the numerator and denominator
used to calculate basic earnings per share and diluted earnings per share for the three months ended March 31, 2022 and 2021:
| |
As of March 31, | |
| |
2022 | | |
2021 | |
Numerator: | |
| | |
| |
Net (loss) income | |
$ | (16,077 | ) | |
$ | 61,914 | |
| |
| | | |
| | |
Denominator: | |
| | | |
| | |
Weighted average share outstanding, basic | |
| 141,274,249 | | |
| 135,575,145 | |
| |
| | | |
| | |
Dilutive effect of options, warrants and restricted stock units | |
| - | | |
| 12,996,234 | |
| |
| | | |
| | |
Weighted average shares outstanding, basic and diluted | |
| 141,274,249 | | |
| 148,571,379 | |
| |
| | | |
| | |
Net (loss) income per share, basic | |
$ | (0.11 | ) | |
$ | 0.46 | |
| |
| | | |
| | |
Net (loss) income per share, diluted | |
$ | (0.11 | ) | |
$ | 0.42 | |
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,
2022 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. For the three months ended March 31, 2021, certain
dilutive securities were excluded from the computation of diluted earnings per share as the effect would have been to increase net earnings
per share.
XL Fleet Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Note 16. Net (Loss) Income Per Share, continued
The number of shares underlying outstanding dilutive securities which
have been excluded from the computation of diluted net loss per share above, are presented below:
| |
As of March 31, | |
| |
2022 | | |
2021 | |
Stock options | |
| 7,828,870 | | |
| 24,000 | |
Private Warrants | |
| 4,233,333 | | |
| - | |
XL Legacy Warrants | |
| - | | |
| - | |
Restricted stock units | |
| 479,160 | | |
| - | |
Total | |
| 12,541,363 | | |
| 24,000 | |
Note 17. Retirement Plan
The Company has adopted a 401(k) plan to provide all eligible employees
a means to accumulate retirement savings on a tax-advantaged basis. The 401(k) plan requires participants to be at least 21 years old.
In addition to the traditional 401(k), eligible employees are given the option of making an after- tax contribution to a Roth 401(k) or
a combination of both. Plan participants may make before tax elective contributions up to the maximum percentage of compensation and dollar
amount allowed under the Internal Revenue Code. Participants are allowed to contribute, subject to IRS limitations on total annual contributions
from 1% to 90% of eligible earnings. The plan provides for automatic enrollment at a 3% deferral rate of an employee’s eligible
wages. The Company provides for safe harbor matching contributions equal to 100% on the first 3% of an employee’s eligible earnings
deferred and an additional 50% on the next 2% of an employee’s eligible earnings deferred. Employee elective deferrals and safe
harbor matching contributions are 100% vested at all times.
In
connection with the acquisition of World Energy, the Company adopted the World Energy 401(k) plan whose features are the same as those
of the XL Fleet’s 401(k) plan except that (i) Participants are allowed to contribute, subject to IRS limitations on total annual
contributions from 1% to 100% of eligible earnings and (ii) the safe harbor non-elective contribution is equal to 3% of employee’s
compensation.
Note 18. Segment Reporting
Segment
reporting is based on the “management approach,” following the method that management organizes the company’s reportable
segments for which separate financial information is made available to, and evaluated regularly by, the CODM in allocating resources
and in assessing performance. The Company’s CODM is its Chief Executive Officer. Prior to the first quarter of 2022, the Company
had one operating segment. In the first quarter of 2022, the Company’s Chief Executive Officer, upon completion of a strategic
review that began upon his hiring in December 2021, restructured the Company into two distinct operating segments: (i) Drivetrain and
(ii) XL Grid. The Company’s CODM does not evaluate operating segments using asset or liability information.
Prior to the first quarter of 2022, the Company had one operating segment.
In the first quarter of 2022, the Company’s Chief Executive Officer, upon the completion of a strategic review that began upon his
hiring in December 2021, restructured the Company into two distinct operating segments: (i) Drivetrain and (ii) XL Grid. Included in Corporate
are certain corporate expenses including executive, finance, information technology, and human resource expenses.
The Drivetrain segment provides fleet electrification solutions for
commercial vehicles in North America while the XL Grid segment provides energy efficiency and infrastructure solutions to commercial customers.
The following table presents revenues and gross profit by reportable
segment:
| |
Three Months Ended March 31, | |
| |
2022 | | |
2021 | |
Revenues | |
| | |
| |
Drivetrain | |
$ | 598 | | |
$ | 675 | |
XL Grid | |
| 4,165 | | |
| - | |
Total | |
$ | 4,763 | | |
$ | 675 | |
Operating Profit | |
| | | |
| | |
Drivetrain (1) | |
$ | (5,905 | ) | |
$ | (3,562 | ) |
XL Grid | |
| (1,441 | ) | |
| (51 | ) |
Corporate (1) | |
| (16,340 | ) | |
| (6,473 | ) |
Total | |
$ | (23,686 | ) | |
$ | (10,086 | ) |
(1) | Drivetrain operating profit for the three months ended March 31, 2022 includes a restructuring charge of $1,518 related to an inventory
obsolescence charge from exiting certain product lines while Corporate operating profit for the three months ended March 31, 2022 includes
a goodwill impairment charge of $8,606 and restructuring charges of $840 for severance charges related to the reduction in force of the
Company’s workforce in the first quarter of 2022. |
Note 19. Subsequent Events
Management has reviewed material events subsequent of the period ended
March 31, 2022 and prior to the filing of financial statements in accordance with FASB ASC 855, Subsequent Events.