Spruce Power (SPRU) - 2020 Q4 - Annual Report

PART I Item 1. Business XL Fleet offers commercial vehicle electrification solutions, expanding into battery electric and hydrogen, facing competition, regulations, and lawsuits Corporate History and Background - XL Fleet Corp. was formed on December 21, 2020, through a business combination (Merger) between Pivotal Investment Corporation II (a SPAC) and XL Hybrids, Inc. (Legacy XL)[14] Company Overview - XL Fleet is a leading provider of fleet electrification solutions for commercial vehicles (Class 2-6) in North America[15] - As of December 31, 2020, the company had sold over 4,300 electrified powertrain systems, driven over 140 million miles by over 200 fleets[15] - Future plans include expanding into full battery electric (XL ELECTRIC™), hydrogen fuel cell systems, Class 7-8 vehicles, and comprehensive charging solutions (XL GRID™) and Electrification-as-a-Service (EaaS)[19] Market Opportunity - The total addressable market for XL Fleet's products and services is estimated at over $1 trillion[23] - Plans to expand product offerings to cover the full range of Class 2-8 commercial vehicles and enter the Electrification-as-a-Service (EaaS) market[23] - Exploring international sales opportunities in Asia, Europe, and South America, with sales intended to commence in one or more regions by the end of 2022[27] Our Technology and Products - Hybrid (XLH™) systems improve MPG by up to 25% and reduce CO2 emissions by up to 20%[31] - Plug-in hybrid (XLP™) systems offer up to 50% MPG improvement and up to 33% reduction in emissions[31] - Key components include an electric motor, inverter motor controller, control module with telematics (XL Link™), and a lithium-ion battery pack[33][36] - Launched XL GRID™ in December 2020 for charging and power management solutions, and anticipates offering Electrification-as-a-Service (EaaS) to select customers beginning in 2021[35][37] Industry and Competition - XL Fleet historically focuses exclusively on the commercial market (Class 2-6 hybrid and plug-in hybrid electric vehicles)[39] - Direct competitors include Workhorse (Class 2-6), Lordstown Motors (Class 2 EVs), and Hyliion (Class 8/heavy truck)[40] - Anticipates increased competition from OEMs as they release all-electric versions of vehicles and as XL Fleet expands into Class 7-8 and full EV applications[41][42] Customers - As of December 31, 2020, served over 200 end-use customers, deploying over 4,300 systems that have accumulated over 140 million miles[43] Customer Revenue Concentration (Fiscal Year 2020) | Customer | % of Total Revenue | | :--------- | :------------------- | | Farmbro Inc. | 68% | - Expects 2021 revenue to follow typical seasonal purchasing patterns, with a majority coming in the third and fourth quarters[45] Partnerships and Suppliers - Relies on an established upfitter partner network for product installation and resale throughout the U.S. and Canada[48] - Markets systems in conjunction with major fleet management companies (FMCs) in North America[49] - Parker Hannifin Corporation is a single-source supplier for motor components[51] - Experienced supply and service disruptions in 2020 due to the COVID-19 pandemic and expects adverse impact from the global microchip shortage in fiscal year 2021[52][22] Strategy - Strategy includes expanding xEV platform to battery electric options, extending offerings to Class 7-8 vehicles and new applications, providing comprehensive charging solutions (XL GRID™), growing globally, and establishing an Electrification-as-a-Service (EaaS) offering[56] - Aims to leverage its established customer base, data, and relationships for scalable production, supply chain, and service[55] Value Proposition - Hybrid and plug-in hybrid systems offer immediate fuel savings (up to 25-50% MPG improvement) and CO2 reductions (up to 20-33%)[61] - No charging infrastructure is required for hybrid systems, and plug-in hybrids can use standard Level 1/2 chargers[61] - Solutions are less expensive to purchase and operate than full battery-powered all-electric commercial fleet vehicles and are readily available for existing OEM chassis[61] Manufacturing and Production - Produces hybrid and plug-in hybrid electrification systems from components manufactured by third-party suppliers[62] - Production team resides at a leased facility in Quincy, IL, with capabilities including receiving, warehousing, production/kitting, and delivery[62] Sales and Marketing - Sales team covers direct sales to customers and indirect sales through upfitter partners and fleet management companies in the U.S. and Canada[63] - Marketing team manages digital and offline market presence, brand identity, advertising, and public relations[63] Research and Development - R&D is conducted at headquarters in Boston, MA, Southern California Technical Center in Foothill Ranch, CA, and a new fleet electrification technology center in Wixom, MI (opened February 2021)[65][77] - The XL developed hybrid controller provides remote monitoring, software updates, and system disabling capabilities[67] - The R&D team has established concept and prototype designs for all-electric and hydrogen fuel cell electric drive systems, including heavy-duty Class 7-8 applications[68] Intellectual Property - As of December 31, 2020, held 25 issued patents (including one international), 15 published patent applications, 4 provisional patent applications, and 11 trademarks[70] - Intellectual property portfolio largely relates to mechanical systems, software, vehicle data analysis, vehicle control strategies, and data processing/management[71] Facilities - Operates four separate leased facilities across the U.S.: Brighton, MA (headquarters), Quincy, IL (production), Foothill Ranch, CA (engineering), and Wixom, MI (fleet electrification technology center)[73][74][75][76][77] Employees - As of December 31, 2020, had 59 full-time employees[79] - Has not experienced any work stoppages, does not include any labor unions, and considers its relationship with employees to be very good[79] Government Regulations - Operates in an industry subject to extensive environmental regulation (water use, air emissions, hazardous materials) and vehicle safety standards (NHTSA, FMVSS)[80][81][84] - CARB classifies XL systems as aftermarket fit devices, requiring an Executive Order (EO) for sales in California; the company is pursuing new model certification[87][89][90] - Battery safety and testing comply with International Organization for Standardization (ISO) standards, SAE International J2929, and UN Recommendations on the Transport of Dangerous Goods[94][95][98] Legal Proceedings - As of March 2021, XL Fleet and certain officers/directors are defendants in two putative class action lawsuits (Suh v. XL Fleet Corp., et al., and Kumar v. XL Fleet Corp., et al.) alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5[100] - The company believes the allegations are without merit and intends to vigorously defend both lawsuits, but is unable to estimate potential losses at this time[100] Corporate Information - Principal executive offices are located at 145 Newton Street, Boston, Massachusetts 02135[101] Information Available on the Internet - Annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K are available free of charge through the Investor Relations section of www.xlfleet.com and on the SEC's website (www.sec.gov)[102](index=102&type=chunk) Item 1A. Risk Factors XL Fleet faces risks including losses, customer/supplier concentration, operational scalability, market adoption, and legal challenges as an early-stage public company Summary Risk Factors - The company is an early-stage company with a history of losses and expects to incur significant expenses and continuing losses[107][114] - Relies on a limited number of customers for a large portion of its revenues (one customer accounted for 68% of 2020 revenue)[107][120] - Dependent on vehicle OEMs, upfitters, and single-source suppliers, making it vulnerable to supply shortages and production disruptions[107][134][137][139] - Future growth is highly dependent on the fleet industry's willingness to adopt hybrid, plug-in hybrid, all-electric, and fuel cell electric vehicles (xEVs)[107][142] Risks Related to our Business and Industry Net Loss (2019-2020) | Year | Net Loss (in millions) | | :--- | :--------------------- | | 2020 | $(25.6) | | 2019 | $(14.9) | - One customer accounted for 68% of total revenue in fiscal year 2020, posing a significant risk if lost[120] - Relies on a single-source supplier, Parker Hannifin Corporation, for all of its motors, creating vulnerability to supply shortages[137] - Identified material weaknesses in internal control over financial reporting related to insufficient technical accounting resources and lack of segregation of duties[191] - The global COVID-19 pandemic and microchip shortage have adversely affected and are expected to continue to impact the business, supply chain, and operating results in fiscal year 2021[165][172][255] Risks Related to Ownership of Our Securities - The company does not anticipate declaring any cash dividends in the foreseeable future, requiring investors to rely on stock price appreciation[234] - The price of common stock may be volatile due to various factors, including market conditions, competition, and short-selling activity[235] - Issuance of additional common or preferred stock, including under equity incentive plans, could significantly dilute the equity interests of existing stockholders[238][241] - The company has been named a defendant in stockholder derivative lawsuits (Suh and Kumar complaints) alleging securities law violations, which could result in substantial damages and divert management's time[217][218] General Risk Factors - The company's charter contains anti-takeover provisions, such as authorization to issue preferred stock and a staggered board, which could limit stockholders' ability to influence corporate decisions or sell shares at a premium[242] - The Certificate of Incorporation includes an exclusive forum provision designating the Court of Chancery of the State of Delaware for certain stockholder litigation, potentially limiting forum choices[243] - A significant portion of total outstanding common stock is restricted from immediate resale but may be sold into the market in the near future, potentially causing the market price to drop[248] - Industry disruptions, including the global microchip shortage and Ford's cancellation of the eQVM program, are expected to adversely impact operating results in fiscal year 2021[255] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments - The company has no unresolved staff comments[259] Item 2. Properties XL Fleet leases four U.S. facilities for headquarters, production, engineering, and technology, believing them sufficient for current needs - As of December 31, 2020, the company leases four facilities: headquarters in Brighton, MA; production in Quincy, IL; engineering in Foothill Ranch, CA; and a new technology center in Wixom, MI (opened Feb 2021)[260][261][77] - Lease for Brighton, MA headquarters extended to February 29, 2022, with monthly rent of $19,473[260] - Lease for Quincy, IL production facility expires December 31, 2021, with monthly rent of $4,500[260] Item 3. Legal Proceedings Material pending legal proceedings are detailed in Note 17, Commitments and Contingencies, within the financial statements - Material pending legal proceedings are described in Note 17, Commitments and Contingencies, to the consolidated financial statements[263] Item 4. Mine Safety Disclosures The company has no mine safety disclosures - The company has no mine safety disclosures[264] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities XL Fleet's common stock is NYSE-listed, with no anticipated cash dividends as earnings are retained for operations and expansion - Common Stock is listed on the NYSE under the symbol "XL"[267] - As of March 31, 2021, there were approximately 175 holders of record of the company's Common Stock[267] - The company has not paid any cash dividends on its Common Stock to date and has no current plans to pay cash dividends for the foreseeable future, intending to retain future earnings for operations, expansion, and debt repayment[267] Item 6. Selected Financial Data The company has not provided selected financial data in this report - The company has not provided selected financial data in this report[268] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses XL Fleet's financial condition and operations, highlighting the 2020 recapitalization, continued net losses despite revenue growth, and impacts from the pandemic and microchip shortage Overview - XL Fleet is a leading provider of fleet electrification solutions for commercial vehicles (Class 2-6) in North America[273] - As of December 31, 2020, over 4,300 electrified powertrain systems were sold, having driven over 140 million miles by over 200 fleets[273] - The company plans to expand offerings to full battery electric (XL ELECTRIC™), hydrogen fuel cell systems, Class 8 vehicles, and comprehensive charging solutions (XL GRID™) and Electrification-as-a-Service (EaaS)[276] - Completed a business combination with Pivotal Investment Corporation II on December 21, 2020, resulting in approximately $340 million in cash after transaction costs[277][278] Reorganization and Public Company Costs - The Merger on December 21, 2020, was accounted for as a reverse recapitalization, with Legacy XL deemed the accounting predecessor[279][281] - The Business Combination and PIPE financing resulted in an increase of approximately $340 million in cash and cash equivalents[281] - As an NYSE-listed company, XL Fleet expects to incur additional annual expenses for public company regulatory requirements, including directors' and officers' liability insurance, director fees, and increased accounting/legal fees[282] Recent Developments - The COVID-19 pandemic caused significant disruptions in 2020, impacting supply chains, OEM production, and customer demand, with these effects expected to continue into fiscal year 2021[283][284] - The global microchip shortage is expected to adversely impact operating results in fiscal year 2021[284] - Over 80% of 2020 revenues were recognized in the second half of the year, a seasonal trend expected to continue in 2021[287] - Repaid a $1.1 million Payroll Protection Program (PPP) loan in full in December 2020[288] Comparability of Financial Information - Historical operations and statements of assets and liabilities may not be comparable to current operations and statements due to the Business Combination[289] Key Factors Affecting Operating Results - Future success depends on increasing sales of current product offerings and expanding product offerings to meet customer demand[290] - Challenges include ensuring system architecture provides adequate functionality, achieving cost reduction targets in component sourcing, timely new product development, and effective sales and marketing efforts[290] Key Components of Statements of Operations Research and Development Expense - Research and development expenses consist primarily of personnel-related expenses, fees paid to third parties for engineering services, expenses related to prototype materials, and depreciation for R&D equipment[291] - Expected to increase substantially in the foreseeable future to accelerate development of product enhancements and additional new products[292] Selling, General and Administrative Expense - Selling, general and administrative expenses include personnel-related costs, outside professional services (legal, audit, accounting), facilities, depreciation, travel, and sales/marketing costs[293] - Expected to increase as the company scales headcount with business growth and incurs costs associated with operating as a public company[293] Other Income (Expense), Net - Comprises interest expense net of interest income, loss on extinguishment of debt, and change in fair value of convertible notes payable derivative liabilities[294] Results of Operations Revenues Revenues (2019 vs. 2020) | Metric | 2020 (in thousands) | 2019 (in thousands) | Change ($) | Change (%) | | :------- | :------------------ | :------------------ | :--------- | :--------- | | Revenues | $20,338 | $7,215 | $13,123 | 181.9% | - The increase was primarily due to the resolution of battery supply issues, increased end customer demand, and increased order sizes[296] - Approximately $17.2 million (over 80%) of 2020 revenue was recognized during the second half of the year due to seasonality and supply chain improvements[296] Cost of Revenues Cost of Revenues (2019 vs. 2020) | Metric | 2020 (in thousands) | 2019 (in thousands) | Change ($) | Change (%) | | :------------- | :------------------ | :------------------ | :--------- | :--------- | | Cost of revenues | $17,594 | $8,075 | $9,519 | 117.9% | - The increase was due to higher unit volume as a result of increased customer orders and resolution of supply chain disruptions, increasing proportionally with revenue[297] Gross Profit (Loss) Gross Profit (Loss) (2019 vs. 2020) | Metric | 2020 (in thousands) | 2019 (in thousands) | Change ($) | Change (%) | | :----------- | :------------------ | :------------------ | :--------- | :--------- | | Gross profit | $2,744 | $(860) | $3,604 | 419.1% | - The increase in gross profit was primarily due to higher unit volume, improved price realization per unit, and cost reductions in sourcing batteries and other components[298] Research and Development Research and Development Expenses (2019 vs. 2020) | Metric | 2020 (in thousands) | 2019 (in thousands) | Change ($) | Change (%) | | :---------------------- | :------------------ | :------------------ | :--------- | :--------- | | Research and Development | $4,445 | $2,874 | $1,571 | 54.7% | - The increase was primarily due to the hiring of additional engineering staff to support unit sales growth and to further develop the product line[299] Selling, General and Administrative Selling, General and Administrative Expenses (2019 vs. 2020) | Metric | 2020 (in thousands) | 2019 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Selling, general and admin expenses | $13,593 | $9,835 | $3,758 | 38.2% | - The increase was primarily due to costs incurred for readiness to become a public company (approx. $2 million), an increase in employee compensation (approx. $1.8 million, including $0.8 million in stock-based compensation), and new hires[300] Other Income (Expense), Net Other Income (Expense), Net (2019 vs. 2020) | Metric | 2020 (in thousands) | 2019 (in thousands) | Change ($) | Change (%) | | :---------------------------------------------------- | :------------------ | :------------------ | :--------- | :--------- | | Interest expense | $6,370 | $2,151 | $4,219 | 196.1% | | Loss on extinguishment of debt | $1,038 | $0 | $1,038 | — | | Change in fair value of convertible notes payable derivative liabilities | $2,889 | $(819) | $3,708 | 452.7% | - Interest expense increased due to higher convertible debt, an increase in the term loan, a draw-down on the revolving line of credit, and accelerated amortization of debt discount[301] - A $1.0 million loss on extinguishment of debt was incurred in connection with the amendment of certain convertible notes[301] - The change in fair value of convertible notes payable derivative liabilities was principally on account of an increase in the fair value of the company's Common Stock[301] Liquidity and Capital Resources Key Financial Position Data (as of December 31, 2020) | Metric | Amount (in thousands) | | :----------------- | :-------------------- | | Working Capital | $336,200 |\n| Cash & Equivalents | $329,800 |\n| Accumulated Deficit| $(89,600) | - After December 31, 2020, warrant exercises generated approximately $85.5 million in additional cash proceeds[302] - Planned use of funds: approximately $25 million for core profitability, $50 million for new products, $25 million for international expansion, $80 million for EaaS (including customer financing), and $150 million for working capital, other potential acquisitions, and general corporate purposes[303] Silicon Valley Bank Loan and Security Agreement - The revolving line of credit and term loans with Silicon Valley Bank were fully repaid in December 2020 following the consummation of the Business Combination[305][307] Convertible Promissory Notes - In February 2020, the company issued $8.1 million in subordinated convertible promissory notes and amended existing notes[309] - The convertible notes and accrued interest were fully settled in December 2020 with a cash payment of $11.3 million and the issuance of 1,715,918 shares of Common Stock[309] Cash Flows Summary Cash Flows Summary (2019 vs. 2020) | Cash Flow Activity | 2020 (in thousands) | 2019 (in thousands) | | :----------------- | :------------------ | :------------------ | | Operating activities | $(19,881) | $(11,551) |\n| Investing activities | $(145) | $(28) |\n| Financing activities | $346,281 | $9,208 |\n| Net change in cash | $326,255 | $(2,371) | Cash Flows Used in Operating Activities - Net cash used in operating activities increased by $8.3 million to $19.9 million in 2020 from $11.6 million in 2019[311][312] - The increase was principally due to a higher net loss and increases in accounts receivable and inventory, partially offset by non-cash items and increases in accounts payable and accrued expenses[311] Cash Flows Used in Investing Activities - Net cash used in investing activities was $0.15 million in 2020, primarily for R&D equipment and a truck[313] Cash Flows Provided by Financing Activities - Net cash provided by financing activities was $346.3 million in 2020, primarily from the reverse merger recapitalization ($207.2 million) and PIPE transaction ($144.9 million)[314] - In 2019, net cash provided was $9.21 million, primarily from the issuance of subordinated convertible promissory notes[314] Related Parties - The company has a noncancelable lease agreement for office, research and development, and vehicle development and installation facilities with a holder of more than 5% of its Common Stock[315] - The lease term extends through February 29, 2022, with monthly rent installments of $19,473[315] Off-Balance Sheet Arrangements - During the periods presented, the company did not have any significant relationships with unconsolidated organizations or financial partnerships for off-balance sheet arrangements, other than the New Markets Tax Credit variable interest entity[316] Critical Accounting Policies and Estimates - The most critical accounting policies and estimates include revenue recognition, business combinations, and convertible notes derivative accounting, which require significant judgment and assumptions[318][327] Business combinations - Acquisitions are accounted for in accordance with ASC 805, Business Combinations, allocating purchase price to the fair values of assets acquired and liabilities assumed[319] - The fair value of developed technology acquired in a business combination is determined using the income approach, estimating discounted after-tax cash flows over its useful life[321] Revenue Recognition - Revenue is recognized upon transfer of control to the customer, generally at the time of equipment shipment (FOB shipping point)[323] - Installation services, when provided, are not distinct and are combined with the hybrid electric powertrain equipment as a single performance obligation[323] - Extended warranties are considered separate performance obligations and recognized ratably over the extended warranty period[324] Convertible Note and Derivative Accounting - Embedded features within convertible notes are assessed to determine if they require accounting as a derivative liability, bifurcated from the notes if they meet the definition of a derivative[326] - Combined derivative liabilities are remeasured to their fair value at each subsequent balance sheet date, with adjustments to current earnings[326] Emerging Growth Company Status - The company qualifies as an "emerging growth company" under the JOBS Act[328] - It has elected not to opt out of the extended transition period for complying with new or revised financial accounting standards and intends to rely on other JOBS Act exemptions (e.g., no auditor attestation report on internal control over financial reporting)[328][330] - This status will continue until the earliest of December 31, 2024, achieving $1.1 billion in annual gross revenue, becoming a "large accelerated filer," or issuing more than $1.0 billion in non-convertible debt securities[331] New and Recently Adopted Accounting Pronouncements - Adopted ASU 2017-04 (Goodwill Impairment) on January 1, 2020, with no material effect on financial position, results of operations, or cash flows[456] - Expects a material impact from the adoption of ASC Topic 842, Leases, on January 1, 2021, by recognizing right-of-use assets and lease liabilities[457] - Currently evaluating ASU 2016-13 (Credit Losses) for January 1, 2023, and ASU 2019-12 (Income Taxes) for January 1, 2021, with no material impact expected from these two[459][460] Quantitative and Qualitative Disclosure About Market Risk - This disclosure is not required for the company[334] Off-Balance Sheet Arrangements - The company has no significant known off-balance sheet arrangements[335] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This disclosure is not required for the company - This disclosure is not required for the company[336] Item 8. Financial Statements and Supplementary Data Financial statements are presented in pages F-1 through F-39 of this Annual Report on Form 10-K - Financial statements are contained in pages F-1 through F-39 of this Annual Report on Form 10-K[337] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes or disagreements with accountants on accounting and financial disclosure have occurred - There have been no changes in or disagreements with accountants on accounting and financial disclosure[338] Item 9A. Controls and Procedures Disclosure controls were ineffective as of December 31, 2020, due to material weaknesses in technical accounting and segregation of duties, with remediation efforts underway Evaluation of Disclosure Controls and Procedures - As of December 31, 2020, the Chief Executive Officer concluded that the company's disclosure controls and procedures were not effective at the reasonable assurance level due to the presence of material weaknesses[340] Management's Report on Internal Controls over Financial Reporting - Management identified material weaknesses in internal control over financial reporting related to insufficient technical accounting resources and lack of segregation of duties[345] - These material weaknesses are attributed to the company's prior status as a private company with limited resources and expertise in public company financial reporting[347] - A remediation plan instituted in 2021 involves hiring additional qualified personnel, further documentation and implementation of control procedures, and control monitoring[347] - Notwithstanding the identified material weaknesses, management believes that the consolidated financial statements present fairly, in all material respects, the company's financial position, results of operations, and cash flows[349] Changes in Internal Control over Financial Reporting - The company is implementing measures to remediate the identified material weaknesses in internal control over financial reporting[351] - Other than these remediation measures, there have been no changes in internal control over financial reporting during the quarter ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[351] Item 9B. Other Information No other information is reported under this item - No other information is reported under this item[352] PART III Item 10. Directors, Executive Officers and Corporate Governance Director, executive officer, and corporate governance information, including the Code of Conduct, will be in the 2021 Proxy Statement - Information required by this item will be set forth in the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders[355] - The company has adopted a Corporate Code of Conduct and Ethics and Whistleblower Policy, available on its website[356] Item 11. Executive Compensation Executive compensation details will be provided in the definitive Proxy Statement for the 2021 Annual Meeting of Stockholders - Information required by this item will be set forth in the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders[357] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan information will be disclosed in the 2021 Annual Meeting of Stockholders Proxy Statement - Information required by this item will be set forth in the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders[358] Item 13. Certain Relationships and Related Transactions, and Director Independence Related party transactions and director independence information will be presented in the 2021 Annual Meeting of Stockholders Proxy Statement - Information required by this item will be set forth in the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders[359] Item 14. Principal Accounting Fees and Services Principal accounting fees and services information will be detailed in the 2021 Annual Meeting of Stockholders Proxy Statement - Information required by this item will be set forth in the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders[360] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists consolidated financial statements and various exhibits, including the reorganization plan and corporate governance documents - Includes the consolidated financial statements of XL Fleet Corp. and Report of Marcum LLP, Independent Registered Public Accounting Firm[363] - Lists various exhibits, including the Agreement and Plan of Reorganization, Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Warrant Agreements, and the 2020 Equity Incentive Plan[366][367] Item 16. Form 10-K Summary The company has not provided a Form 10-K Summary - The company has not provided a Form 10-K Summary[370] SIGNATURES This section contains required signatures for the Annual Report on Form 10-K, affirming the filing by the CEO and directors - The Annual Report on Form 10-K was signed on March 31, 2021, by Dimitri N. Kazarinoff, Chief Executive Officer (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer), and other directors[374][377] Index to Consolidated Financial Statements This index lists the consolidated financial statements and accompanying notes included in the report - The index lists the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Changes in Stockholders' Equity (Deficit), Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[379] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Marcum LLP issued an unqualified opinion on XL Fleet Corp.'s consolidated financial statements for 2020 and 2019, affirming fair presentation under U.S. GAAP - Marcum LLP issued an unqualified opinion on the consolidated financial statements of XL Fleet Corp. and Subsidiaries for the years ended December 31, 2020 and 2019[381] - The financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with U.S. GAAP[381] - The audit did not include an opinion on the effectiveness of the company's internal control over financial reporting[383] Consolidated Financial Statements Consolidated Balance Sheets The balance sheets show a significant increase in cash, assets, and positive stockholders' equity in 2020 due to the Business Combination and PIPE financing Consolidated Balance Sheet Highlights (in thousands) | Metric | Dec 31, 2020 | Dec 31, 2019 | | :---------------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $329,641 | $3,386 |\n| Total current assets | $345,320 | $7,081 |\n| Total assets | $347,013 | $9,249 |\n| Total current liabilities | $9,083 | $15,489 |\n| Total liabilities | $14,822 | $22,949 |\n| Total stockholders' equity (deficit) | $332,191 | $(13,700) | Consolidated Statements of Operations Operations show increased revenues and gross profit in 2020, but a higher net loss due to increased operating expenses, interest, and derivative liabilities Consolidated Statements of Operations Highlights (in thousands) | Metric | 2020 | 2019 | | :---------------------------------------------------- | :----------- | :----------- | | Revenues | $20,338 | $7,215 |\n| Cost of revenues | $17,594 | $8,075 |\n| Gross profit | $2,744 | $(860) |\n| Research and development | $4,445 | $2,874 |\n| Selling, general, and administrative expenses | $13,593 | $9,835 |\n| Loss from operations | $(15,294) | $(13,569) |\n| Interest expense, net | $6,370 | $2,151 |\n| Loss on extinguishment of debt | $1,038 | $0 |\n| Change in fair value of convertible notes payable derivative liabilities | $2,889 | $(819) |\n| Net loss | $(25,591) | $(14,901) |\n| Net loss per share, basic and diluted | $(0.30) | $(0.19) | Consolidated Statements of Changes in Stockholders' Equity (Deficit) Stockholders' equity transformed from a $13.7 million deficit to $332.2 million positive equity in 2020, driven by recapitalization and PIPE financing Changes in Stockholders' Equity (Deficit) (in thousands) | Metric | Dec 31, 2020 | Dec 31, 2019 | | :---------------------------------------- | :----------- | :----------- | | Balance at January 1 | $(13,700) | $846 |\n| PIC shares recapitalized, net of issuance costs | $207,169 | - |\n| Shares issued in offering, net of issuance costs | $144,891 | - |\n| Net loss | $(25,591) | $(14,901) |\n| Balance at December 31 | $332,191 | $(13,700) | Consolidated Statements of Cash Flows Cash flows show a substantial increase from 2020 financing activities, offsetting increased cash used in operating activities due to higher net losses Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | 2020 | 2019 | | :---------------------------------- | :----------- | :----------- | | Net cash used in operating activities | $(19,881) | $(11,551) |\n| Net cash used in investing activities | $(145) | $(28) |\n| Net cash provided by financing activities | $346,281 | $9,208 |\n| Net increase/(decrease) in cash and cash equivalents and restricted cash | $326,255 | $(2,371) |\n| Cash, cash equivalents, and restricted cash at end of year | $329,791 | $3,536 | - Net cash provided by financing activities in 2020 was primarily from proceeds from the reverse merger recapitalization ($207.2 million) and the PIPE transaction ($144.9 million)[314][392] - Cash used in operating activities increased in 2020 versus 2019 by $8.3 million, principally due to higher operating expenses and net loss[311][312] Notes to Consolidated Financial Statements Notes provide detailed financial information, covering organization, accounting policies, merger impact, revenue, debt, equity, and critical accounting judgments Note 1. Organization, Description of Business and Liquidity - XL Fleet Corp. was formed on December 21, 2020, through a business combination between Legacy XL and Pivotal Investment Corporation II[395] - The COVID-19 pandemic has adversely impacted and is expected to continue to impact operations, contractors, and automotive OEMs, causing delays in operational activities[397][398][400] - The company believes its cash and cash equivalents at December 31, 2020, and management's operating plan will provide sufficient liquidity for at least the next twelve months[401] Note 2. Summary of Significant Accounting Policies - The financial statements are prepared in accordance with U.S. GAAP and include consolidated accounts of wholly-owned subsidiaries and variable interest entities[402] - The company has elected not to opt out of the extended transition period for new accounting standards as an "emerging growth company" under the JOBS Act[403] - Key estimates and judgments involve deferred income taxes, valuation of share-based compensation, convertible notes payable derivative liability, and business combinations[405] - As of December 31, 2020, one customer accounted for approximately 82% of accounts receivable and 68% of revenues[408] - Adopted ASU 2017-04 (Goodwill Impairment) on January 1, 2020, with no material effect, and expects a material impact from ASU 842 (Leases) adoption on January 1, 2021[456][457] Note 3. Merger with Pivotal Investment Corporation II - On December 21, 2020, Legacy XL consummated a merger with Pivotal Investment Corporation II, with Legacy XL surviving as a wholly-owned subsidiary of XL Fleet Corp. (formerly Pivotal)[461] - The transaction was treated as a reverse merger and recapitalization of Legacy XL for accounting purposes, with Pivotal treated as the acquired company[467] - The Business Combination and PIPE financing resulted in net proceeds of $352.06 million[468] - Outstanding convertible promissory notes were settled with a cash payment of $11.25 million and the issuance of 1,715,918 shares of Common Stock[466] Note 4. Acquisition of Quantum - On October 4, 2019, the company acquired certain assets of Quantum Fuel Systems, LLC, to accelerate product development and expand engineering capabilities[469] - The aggregate purchase consideration was $1,759 thousand, including a deferred cash payment, issuance of 458,902 shares of common stock, and contingent purchase consideration for three milestone events[470][477] - The acquisition resulted in recorded goodwill of $489 thousand, attributable to the acquired assembled workforce and synergies[476][477] Note 5. Revenue Revenue Disaggregation by Sales Channel (in thousands) | Sales Channel | 2020 | 2019 | | :---------------------- | :------ | :----- | | Revenue direct to customers | $4,013 | $3,263 |\n| Revenue through channel partners | $16,325 | $3,952 |\n| Total revenue | $20,338 | $7,215 | - Revenue is recognized upon transfer of control to the customer, typically at shipment, with installation services integrated as a single performance obligation[434] - Accrued warranty costs increased from $1,009 thousand in 2019 to $1,735 thousand in 2020[485] Note 6. Property and Equipment Property and Equipment, Net (in thousands) | Category | Dec 31, 2020 | Dec 31, 2019 | | :------------------------ | :----------- | :----------- | | Equipment | $647 | $630 |\n| Furniture and fixtures | $91 | $45 |\n| Computers | $30 | $30 |\n| Software | $359 | $346 |\n| Vehicles | $622 | $559 |\n| Leasehold improvements | $170 | $164 |\n| Total gross | $1,919 | $1,774 |\n| Less accumulated depreciation | $(1,340) | $(934) |\n| Property and equipment, net | $579 | $840 | - Depreciation expense on property and equipment was $406 thousand in 2020, up from $265 thousand in 2019[486] Note 7. Intangibles - Intangible assets consist of developed technology acquired during 2019, with a gross value of $863 thousand, amortized over a useful life of 4 years[488] Approximate Annual Aggregate Amortization Expense of Intangibles (in thousands) | Year ending December 31 | Amount | | :---------------------- | :----- | | 2021 | $216 |\n| 2022 | $216 |\n| 2023 | $161 |\n| Total amortization | $593 | - Amortization expense recognized on intangible assets was $216 thousand in 2020, up from $72 thousand in 2019[489] Note 8. Accrued Expenses and Other Current Liabilities Accrued Expenses and Other Current Liabilities (in thousands) | Category | Dec 31, 2020 | Dec 31, 2019 | | :------------------------------------------------ | :----------- | :----------- | | Accrued warranty costs | $1,735 | $1,009 |\n| Accrued compensation and related benefits | $1,001 | $398 |\n| Contingent and deferred purchase consideration connection with Quantum acquisition | $926 | $638 |\n| Accrued financing fees | $723 | $360 |\n| Accrued expenses, other | $216 | $553 |\n| Sales tax | $0 | $96 |\n| Total | $4,601 | $3,054 | Note 9. New Markets Tax Credit Financing - On March 4, 2015, the company entered into a New Markets Tax Credit (NMTC) financing transaction with U.S. Bancorp Community Development Corporation related to its Quincy, Illinois facility[491] - The company made two loans totaling $10,454 thousand to federal and state NMTC investment funds, while U.S. Bank made an equity investment of $4,995 thousand[492] - The company is the primary beneficiary of the variable interest entity (VIE) formed through this financing arrangement and consolidates the Investment Fund[495][496] - The $4,995 thousand in net proceeds received for tax credits have been deferred and will be recognized as income upon completion of the seven-year NMTC compliance period (March 2022)[496] Note 10. Debt Debt Carrying Value (in thousands) | Category | Dec 31, 2020 | Dec 31, 2019 | | :---------------------------------------- | :----------- | :----------- | | Subordinated convertible promissory notes | $0 | $10,000 |\n| Unamortized debt discount | $0 | $(898) |\n| Subordinated convertible promissory notes, net | $0 | $9,102 |\n| Term Loan | $0 | $3,100 |\n| Unamortized debt discount | $0 | $(87) |\n| Vehicle financing agreements | $208 | $271 |\n| Total debt obligations, net | $208 | $3,284 |\n| Less: current portion of debt | $(110) | $(1,435) |\n| Debt – net of current portion | $98 | $1,849 | - The revolving line of credit and term loans with Silicon Valley Bank were fully repaid on December 23, 2020[498][502] - In 2020, the company issued $8.1 million in subordinated convertible promissory notes and incurred a $1.038 million loss on extinguishment of debt due to amendments[503][504] - On December 21, 2020, convertible notes and accrued interest were settled with a $11.25 million cash payment and the issuance of 1,715,918 shares of Common Stock[509] Note 11. Fair Value Measurements - Contingent consideration liability and convertible notes payable derivative liabilities are considered Level 3 measurements due to significant unobservable inputs in their valuation[511][514] - The fair value of the contingent consideration liability is based on a Monte Carlo Simulation, evaluating the probability and timing of milestone events[511] - The fair value of convertible notes payable derivative liabilities was estimated using probability-weighted expected return models and 'with and without' valuation models[515][516] Level 3 Fair Value Liabilities (in thousands) | Liability | Dec 31, 2020 | Dec 31, 2019 | | :------------------------ | :----------- | :----------- | | Contingent consideration | $1,849 | $1,503 |\n| Derivatives | $0 | $1,349 |\n| Total Level 3 liabilities | $1,849 | $2,852 | Note 12. Stockholders' Equity - At December 31, 2020, the company authorized 350,000,000 shares of Common Stock, with holders entitled to vote and receive dividends if declared[519] Shares of Common Stock Reserved for Future Issuance | Category | Shares | | :---------------------------------------- | :----------- | | Warrants for the issuance of Common Stock | 12,149,117 |\n| Stock options issued and outstanding | 10,975,279 |\n| Authorized for future grant under 2020 Equity Incentive Plan | 12,800,000 |\n| Total | 35,924,396 | Note 13. Warrants - In 2020, the company assumed private placement warrants (4,233,333 shares at $1.50/share) and public warrants (7,666,667 shares at $11.50/share) in connection with the merger[521] - During 2020, 4,995,584 shares of Common Stock were issued from warrant exercises, generating $884 thousand in cash proceeds[522] - As of December 31, 2020, 12,149,117 warrants to purchase Common Stock were outstanding[522][524] - Subsequent to December 31, 2020, 7,441,020 public warrants were exercised, generating approximately $85.5 million in cash proceeds[523] Note 14. Share-Based Compensation Expense - Share-based compensation expense was $978 thousand in 2020, up from $208 thousand in 2019[526] - As of December 31, 2020, there was $4,857 thousand of unrecognized compensation cost related to share-based payments, expected to be recognized over a weighted-average period of 3.9 years[526] Stock Option Activity (2020) | Options | Shares | Weighted Average Exercise Price | | :------------------------ | :----------- | :------------------------------ | | Outstanding at Dec 31, 2019 | 10,087,294 | $0.25 |\n| Granted | 2,738,912 | $1.76 |\n| Exercised | (488,860) | $0.24 |\n| Cancelled or forfeited | (1,362,124) | $0.74 |\n| Outstanding at Dec 31, 2020 | 10,975,222 | $0.57 |\n| Exercisable at Dec 31, 2020 | 5,518,767 | $0.25 | - The aggregate intrinsic value of stock options exercised was $3,336 thousand in 2020 and $1,676 thousand in 2019[527] Note 15. Income Taxes Net Deferred Income Tax Assets (in thousands) | Category | Dec 31, 2020 | Dec 31, 2019 | | :---------------------------- | :----------- | :----------- | | Net operating loss carryforwards | $20,898 | $15,239 |\n| Tax credit carryforwards | $1,341 | $1,341 |\n| Reserves | $456 | $308 |\n| Share-based compensation | $172 | $308 |\n| Depreciation and amortization | $(54) | $(16) |\n| Other | $89 | $91 |\n| Total deferred tax assets | $22,902 | $17,271 |\n| Less valuation allowance | $(22,902) | $(17,271) |\n| Net deferred tax assets | $0 | $0 | - The company has provided a full valuation allowance against its net deferred tax assets due to the uncertainty of realizing future benefits, given its history of losses[534] - As of December 31, 2020, the company had federal and state net operating loss carryforwards of approximately $80.6 million and $27.5 million, respectively[536] - Utilization of NOLs and tax credit carryforwards may be subject to annual limitation under Section 382 of the Internal Revenue Code due to ownership changes[536] Note 16. Related Party Transactions - The company has a noncancelable operating lease agreement for office, research and development, and vehicle development and installation facilities with an investor (related party)[537] - Rent expense under this operating lease was $235 thousand for both 2020 and 2019[537] Future Minimum Lease Payments for Related Party Lease (in thousands) | Year ending December 31 | Amount | | :---------------------- | :----- | | 2021 | $235 |\n| 2022 | $39 |\n| Total | $274 | Note 17. Commitments and Contingencies - The company has noncancelable operating lease agreements for facilities in Quincy, Illinois (through Dec 2021), California (through Feb 2025), and Michigan (through Feb 2024)[539][540] Future Minimum Lease Payments for Operating Leases (in thousands) | Year ending December 31 | Amount | | :---------------------- | :----- | | 2021 | $791 |\n| 2022 | $606 |\n| 2023 | $582 |\n| 2024 | $462 |\n| 2025 | $74 |\n| Total | $2,515 | - As of March 2021, the company is a defendant in two putative class action lawsuits (Suh v. XL Fleet Corp., et al., and Kumar v. XL Fleet Corp., et al.) alleging securities law violations, which it intends to vigorously defend[544] Note 18. Net Loss Per Share Net Loss Per Share (2019 vs. 2020) | Metric | 2020 | 2019 | | :-------------------------------------- | :------------- | :------------- | | Net loss | $(25,591) | $(14,901) |\n| Weighted average shares outstanding, basic and diluted | 84,565,448 | 79,823,065 |\n| Net loss per share, basic and diluted | $(0.30) | $(0.19) | - Potential dilutive securities (stock options, warrants) were excluded from diluted net loss per share calculation as their effect would be anti-dilutive[547] Number of Shares Underlying Outstanding Stock Options and Warrants | Category | 2020 | 2019 | | :------------ | :----------- | :----------- | | Stock options | 10,975,222 | 10,087,294 |\n| Warrants | 12,149,117 | 5,849,164 |\n| Total | 23,124,339 | 15,936,458 | Note 19. Retirement Plan - The company has adopted a 401(k) plan for eligible employees, allowing before-tax and Roth contributions[548] - The plan provides for safe harbor matching contributions: 100% on the first 3% of eligible earnings deferred and an additional 50% on the next 2%[548] - Employee elective deferrals and safe harbor matching contributions are 100% vested at all times[548]