Spruce Power (SPRU) - 2021 Q3 - Quarterly Report

General Information This section provides foundational details about XL Fleet Corp.'s filing, forward-looking statements, and corporate history Filing Details This Quarterly Report on Form 10-Q for the period ended September 30, 2021, is filed by XL Fleet Corp., a Delaware corporation listed on the NYSE as a non-accelerated, smaller reporting, and emerging growth company - XL Fleet Corp. is filing a Quarterly Report on Form 10-Q for the period ended September 30, 2021[1] Filing Details | Detail | Value | | :--- | :--- | | Registrant Name | XL Fleet Corp. | | State of Incorporation | Delaware | | Trading Symbol | XL | | Exchange | New York Stock Exchange | | Filer Status | Non-accelerated filer, Smaller reporting company, Emerging growth company | - As of November 10, 2021, there were 139,418,820 shares of common stock outstanding[3] Cautionary Note Regarding Forward Looking Statements This section highlights that the report contains forward-looking statements based on management's beliefs and assumptions, which are subject to inherent risks, uncertainties, and assumptions - The report includes forward-looking statements related to future events, financial performance, business strategies, and prospects[7] - Forward-looking statements are subject to risks, uncertainties, and assumptions, and actual results may differ materially[7][8] - The company does not undertake obligations to update or revise publicly any forward-looking statements, except as required by law[8] Company Background XL Fleet Corp. was formerly known as Pivotal Investment Corporation II and consummated a merger with XL Hybrids, Inc. on December 21, 2020 - XL Fleet Corp. was originally Pivotal Investment Corporation II[9] - The company completed a business combination with XL Hybrids, Inc. on December 21, 2020, and subsequently changed its name to XL Fleet Corp[9] PART I – FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis of XL Fleet Corp.'s financial condition and results of operations Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements of XL Fleet Corp. for the periods ended September 30, 2021, and December 31, 2020, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with detailed notes explaining the company's organization, accounting policies, and specific financial items Condensed Consolidated Balance Sheets This section provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific reporting dates Condensed Consolidated Balance Sheets (In thousands) | (In thousands) | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $366,748 | $329,641 | | Total current assets | $389,034 | $345,320 | | Total assets | $410,400 | $347,013 | | Liabilities | | | | Total current liabilities | $17,117 | $9,083 | | Warrant liabilities | $13,582 | $143,295 | | Total liabilities | $40,346 | $158,117 | | Stockholders' Equity | | | | Total stockholders' equity | $370,054 | $188,896 | | Total liabilities and stockholders' equity | $410,400 | $347,013 | - Total assets increased from $347.0 million at December 31, 2020, to $410.4 million at September 30, 2021[11] - Warrant liabilities significantly decreased from $143.3 million to $13.6 million, contributing to a decrease in total liabilities[11] - Total stockholders' equity nearly doubled from $188.9 million to $370.1 million[11] Condensed Consolidated Statements of Operations This section details the company's revenues, expenses, and net income or loss over specific reporting periods Condensed Consolidated Statements of Operations (In thousands, except per share amounts) | (In thousands, except per share amounts) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $3,200 | $6,328 | $7,569 | $9,472 | | Cost of revenues | $2,510 | $5,561 | $6,633 | $8,713 | | Gross profit | $690 | $767 | $936 | $759 | | Research and development | $3,217 | $1,646 | $7,438 | $3,297 | | Selling, general, and administrative expenses | $12,742 | $5,304 | $31,522 | $10,798 | | Loss from operations | $(15,269) | $(6,183) | $(38,024) | $(13,336) | | Net (loss) income | $(7,531) | $(2,277) | $43,914 | $(22,230) | | Net (loss) income per share, basic | $(0.05) | $(0.03) | $0.32 | $(0.27) | | Net (loss) income per share, diluted | $(0.05) | $(0.03) | $0.30 | $(0.27) | - Revenues decreased by 49.4% for the three months and 20.1% for the nine months ended September 30, 2021, compared to the prior year periods[13] - Net income for the nine months ended September 30, 2021, was $43.9 million, a significant improvement from a net loss of $22.2 million in the prior year, primarily due to a large non-cash gain from the change in fair value of warrant liability[13] - Operating expenses, particularly R&D and SG&A, increased substantially for both the three and nine-month periods, reflecting investments in growth and public company costs[13] Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) This section outlines the changes in the company's equity accounts, including common stock, additional paid-in capital, and accumulated deficit Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) (In thousands, except share amounts) | (In thousands, except share amounts) | Balance at Dec 31, 2020 | Balance at Sep 30, 2021 | | :--- | :--- | :--- | | Common Stock Shares | 131,365,254 | 139,403,914 | | Common Stock Amount | $13 | $14 | | Additional Paid-In Capital | $317,084 | $454,327 | | Accumulated Deficit | $(128,201) | $(84,287) | | Total Stockholders' Equity | $188,896 | $370,054 | - Total stockholders' equity increased significantly from $188.9 million at December 31, 2020, to $370.1 million at September 30, 2021[15] - The increase was driven by $85.6 million from the exercise of Public Warrants and $47.2 million from the settlement of warrant liability upon exercise of warrants[15] - Accumulated deficit improved from $(128.2) million to $(84.3) million, reflecting the net income reported for the nine months ended September 30, 2021[15] Condensed Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (In thousands) | (In thousands) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(34,215) | $(13,087) | | Net cash used in investing activities | $(14,105) | $(162) | | Net cash provided by financing activities | $85,427 | $11,446 | | Net increase in cash and cash equivalents and restricted cash | $37,107 | $(1,803) | | Cash, cash equivalents, and restricted cash at end of period | $366,898 | $1,733 | - Net cash used in operating activities increased to $34.2 million for the nine months ended September 30, 2021, from $13.1 million in the prior year[17] - Net cash used in investing activities significantly increased to $14.1 million, primarily due to the World Energy acquisition and eNow convertible note purchase[17] - Net cash provided by financing activities surged to $85.4 million, mainly from the exercise of public warrants[17] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1. Organization and Description of Business XL Fleet Corp. provides fleet electrification solutions for commercial vehicles in North America, including Drive Systems and XL Grid infrastructure solutions, with recent acquisitions and ongoing COVID-19 impacts - XL Fleet provides fleet electrification solutions (Drive Systems) and infrastructure solutions (XL Grid) for commercial vehicles in North America[18] - The company acquired World Energy Efficiency Services, LLC on May 17, 2021, to expand its XL Grid business with turnkey energy efficiency and EV charging solutions[20] - On July 15, 2021, XL Fleet invested $3 million in eNow Inc., a developer of solar and battery power systems for electric transport refrigeration units, and entered into a development and supply agreement[21] - The COVID-19 pandemic continues to adversely impact operations, production lines, and supply chains, leading to reduced OEM vehicle availability[24][25][26] Note 2. Summary of Significant Accounting Policies This note outlines the significant accounting policies, including the basis of consolidated financial statement presentation, use of estimates, revenue recognition, and the adoption of new accounting standards - The financial statements are prepared in accordance with U.S. GAAP, consolidating wholly-owned subsidiaries and variable interest entities[27] - Revenue is recognized upon transfer of control to the customer, which for Drive Systems is generally upon shipment, and for XL Grid solutions, upon acceptance and certification of project completion by the customer and funding utility[45][46][48] - The company adopted ASC 842 (Leases) on January 1, 2021, recognizing ROU assets and lease liabilities on the balance sheet[71] - Warrant liabilities are accounted for as derivative liabilities and measured at fair value at each reporting date, with changes recognized in the Statement of Operations[65] Note 3. Revenue This note details the company's revenue breakdown by source, highlighting decreases in Drive Systems sales and contributions from XL Grid solutions, along with warranty accruals Revenue by Source (In thousands) | Revenue Source (In thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Drive Systems (direct) | $366 | $959 | $1,138 | $2,020 | | Drive Systems (channel partners) | $189 | $5,369 | $1,374 | $7,452 | | XL Grid solutions | $2,645 | $- | $5,057 | $- | | Total Revenue | $3,200 | $6,328 | $7,569 | $9,472 | - Revenue from Drive Systems decreased significantly due to OEM vehicle supply interruptions and microchip shortages[74] - XL Grid solutions, acquired in May 2021, contributed $2.6 million in revenue for the three months and $5.1 million for the nine months ended September 30, 2021[74] Accrued Warranty Liability (In thousands) | Accrued Warranty Liability (In thousands) | Sep 30, 2020 | Dec 31, 2021 | | :--- | :--- | :--- | | Balance at beginning of period | $1,735 | $1,009 | | Acquisition date accrual for World Energy | $25 | $- | | Accrual for warranties issued | $126 | $912 | | Warranty fulfillment charges | $(285) | $(186) | | Balance at end of period | $1,601 | $1,735 | Note 4. Business Combination This note describes XL Fleet's acquisition of World Energy Efficiency Services, LLC, including the purchase price, goodwill recognized, and contingent compensation arrangements - XL Fleet acquired World Energy Efficiency Services, LLC on May 17, 2021, for $12.461 million[81][82] Purchase Price Consideration (In thousands) | Purchase Price Consideration (In thousands) | Amount | | :--- | :--- | | Cash (as adjusted) | $8,496 | | Fair value of 231,002 shares issued at closing | $1,439 | | Obligation to issue 244,956 shares (deferred) | $1,526 | | Earnout obligation | $1,000 | | Total Consideration | $12,461 | - Goodwill of $8.352 million was recognized, attributable to expected synergies from integrating World Energy's workforce, products, and processes[85][93] - An additional 448,050 shares are to be issued to former owners, contingent on employment, and are accounted for as compensation expense ($573 thousand for Q3 2021, $1 million for 9M 2021)[86][87] Note 5. Purchase of Convertible Note This note details XL Fleet's $3.0 million investment in eNow Inc. via a convertible debenture, granting acquisition rights and exclusive battery supply agreements - XL Fleet purchased a $3.0 million convertible debenture in eNow Inc. on July 15, 2021, bearing 8% interest[97] - The investment includes an option for XL Fleet to acquire eNow and a right of first refusal, expiring December 31, 2021[98] - XL Fleet entered a Development and Supply Agreement with eNow, becoming the exclusive provider of high voltage batteries for eNow's eTRUs[98] Note 6. Accrued Expenses and Other Current Liabilities This note provides a breakdown of accrued expenses and other current liabilities, highlighting significant increases due to compensation and acquisition-related obligations Accrued Expenses and Other Current Liabilities (In thousands) | (In thousands) | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Accrued warranty costs | $1,601 | $1,735 | | Accrued compensation and related benefits | $3,385 | $1,001 | | Contingent purchase price consideration – Quantum | $1,911 | $926 | | Deferred purchase price consideration – World Energy | $1,503 | $- | | Accreted contingent compensation to sellers – World Energy | $1,000 | $- | | Accrued financing fees | $- | $723 | | Professional fees | $940 | $- | | Accrued expenses, other | $2,614 | $216 | | Total | $12,954 | $4,601 | - Accrued compensation and related benefits increased significantly from $1.0 million to $3.4 million[99] - New liabilities related to the World Energy acquisition, including deferred purchase price consideration ($1.5 million) and accreted contingent compensation ($1.0 million), were recorded[99] Note 7. ROU Assets and Lease Liabilities This note explains the company's adoption of ASC 842, Leases, and the recognition of operating and finance ROU assets and lease liabilities on the balance sheet - The company adopted ASC 842, Leases, on January 1, 2021, recognizing ROU assets and lease liabilities on the balance sheet[100] ROU Assets and Lease Liabilities (In thousands) | (In thousands) | Sep 30, 2021 | Jan 1, 2021 | | :--- | :--- | :--- | | Operating ROU assets | $3,219 | $3,481 | | Operating lease liability, current | $433 | $469 | | Operating lease liability, non-current | $2,841 | $3,012 | | Finance ROU assets | $1,252 | $897 | | Finance lease liability, current | $446 | $265 | | Finance lease liability, non-current | $685 | $632 | - Operating lease cost for the nine months ended September 30, 2021, was $617 thousand[108] - The weighted-average remaining lease term for operating leases is 86.8 months, with a weighted-average discount rate of 9.6%[108] Note 8. Note Payable World Energy, acquired by XL Fleet, had a Paycheck Protection Program (PPP) loan of $507 thousand, which was fully forgiven by the SBA during July 2021 - A $507 thousand PPP loan associated with World Energy was fully forgiven in July 2021[110] Note 9. Fair Value Measurements The company measures certain assets and liabilities at fair value on a recurring basis, including the eNow Convertible Note (Level 3), Private Warrants (Level 3), contingent consideration for Quantum (Level 3), earnout for World Energy (Level 3), and obligation to issue shares to World Energy sellers (Level 3) Fair Value Measurements (In thousands) | Fair Value Measurements (In thousands) | Sep 30, 2021 (Level III) | Dec 31, 2020 (Level III) | | :--- | :--- | :--- | | Investment in eNow Convertible Note | $3,000 | $- | | Private Warrants | $13,582 | $81,195 | | Contingent consideration – Quantum | $1,911 | $1,849 | | Earnout – World Energy | $1,000 | $- | | Obligation to issue shares to sellers of World Energy | $1,509 | $- | | Public Warrants (Level I) | $- | $62,100 | - The fair value of Private Warrants decreased significantly from $81.2 million at December 31, 2020, to $13.6 million at September 30, 2021, primarily due to a decrease in the fair value of common stock[113][178] - All Public Warrants were exercised or called during the nine months ended September 30, 2021, generating $85.6 million in cash proceeds[114] Note 10. Warrants During the nine months ended September 30, 2021, 243,000 Legacy XL Warrants were exercised via a cashless exercise, resulting in the issuance of 233,555 shares of common stock - 243,000 Legacy XL Warrants were exercised via cashless exercise, resulting in 233,555 common stock shares issued[116] Warrants Activity (9 Months Ended Sep 30, 2021) | Warrants Activity (9 Months Ended Sep 30, 2021) | Shares | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding at January 1, 2021 | 249,117 | $0.76 | | Exercised | (243,000) | $0.76 | | Outstanding at September 30, 2021 | 6,117 | $0.76 | | Exercisable at September 30, 2021 | 6,117 | $0.76 | Note 11. Share-Based Compensation Expense Share-based compensation expense increased significantly to $1.194 million for the three months and $2.390 million for the nine months ended September 30, 2021, compared to the prior year periods Share-Based Compensation Expense (In thousands) | Share-Based Compensation Expense (In thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Expense | $1,194 | $386 | $2,390 | $663 | - Unrecognized compensation cost related to stock options was $9.507 million as of September 30, 2021, with a weighted-average recognition period of 3.3 years[118] Stock Option Activity (9 Months Ended Sep 30, 2021) | Stock Option Activity (9 Months Ended Sep 30, 2021) | Shares | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding at Dec 31, 2020 | 10,975,224 | $0.57 | | Granted | 776,116 | $8.56 | | Exercised | (133,083) | $0.24 | | Cancelled or forfeited | (559,102) | $0.65 | | Outstanding at Sep 30, 2021 | 11,059,155 | $1.01 | Restricted Stock Unit Activity (9 Months Ended Sep 30, 2021) | Restricted Stock Unit Activity (9 Months Ended Sep 30, 2021) | Number of Shares | Weighted Average Grant Date Fair Value Per Share | | :--- | :--- | :--- | | Non-vested, at beginning of period | - | $- | | Granted | 476,050 | $7.08 | | Cancelled or forfeited | (4,319) | $6.49 | | Non-vested, at end of period | 471,731 | $7.08 | Note 12. Related Party Transactions The company has an operating lease agreement for office, R&D, and manufacturing facilities with an investor who holds more than 5% of its common stock - XL Fleet has an operating lease with a related party (an investor holding >5% common stock) for its facilities[123] Rent Expense (In thousands) | Rent Expense (In thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Rent Expense | $58 | $58 | $173 | $173 | Future Minimum Lease Payments (In thousands) | Future Minimum Lease Payments (In thousands) | Amount | | :--- | :--- | | 2021 (remaining three months) | $58 | | 2022 | $39 | | Total | $97 | Note 13. Commitments and Contingencies XL Fleet has various commitments, including a three-year sponsorship agreement with UBS Arena/NY Islanders Hockey Club ($500k/year), an agreement to purchase six electric transit buses for $4.191 million (with a $780k down-payment), and firm purchase obligations for batteries ($7.8 million by Dec 2021, $2.7 million open-ended) and motors ($2.1 million by July 2022) - The company has a three-year sponsorship agreement with UBS Arena/NY Islanders Hockey Club, with an annual fee of approximately $500 thousand[125] - XL Fleet committed to purchase six electric transit buses for $4.191 million, with a nonrefundable down-payment of $780 thousand[126] - Firm purchase commitments include $7.8 million for batteries by December 2021, $2.1 million for motors by July 2022, and an open-ended commitment of $2.7 million for batteries[127] - The company is defending against putative class action lawsuits alleging securities fraud and breaches of fiduciary duty related to the December 2020 merger[130][131][132] Note 14. Net (Loss) Income Per Share For the three months ended September 30, 2021, basic and diluted net loss per share were both $(0.05) Net (Loss) Income Per Share (In thousands, except per share amounts) | (In thousands, except per share amounts) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | $(7,531) | $(2,277) | $43,914 | $(22,230) | | Weighted average shares outstanding, basic | 139,392,170 | 83,299,127 | 138,082,355 | 82,820,099 | | Weighted average shares outstanding, diluted | 139,392,170 | 83,299,127 | 148,469,108 | 82,820,099 | | Net (loss) income per share, basic | $(0.05) | $(0.03) | $0.32 | $(0.27) | | Net (loss) income per share, diluted | $(0.05) | $(0.03) | $0.30 | $(0.27) | - Dilutive securities, including stock options, warrants, and restricted stock units, were excluded from diluted net loss per share calculations for the three months ended September 30, 2021, and both periods in 2020, as their effect would be anti-dilutive[134][135] Note 15. Retirement Plan XL Fleet offers a 401(k) plan with automatic enrollment and safe harbor matching contributions (100% on the first 3% deferred, 50% on the next 2%) - XL Fleet offers a 401(k) plan with automatic enrollment at a 3% deferral rate[137] - The plan includes safe harbor matching contributions: 100% on the first 3% deferred and 50% on the next 2% deferred[137] - The World Energy 401(k) plan, adopted post-acquisition, has similar features but allows up to 100% of eligible earnings contributions and a 3% safe harbor non-elective contribution[138] Note 16. Subsequent Event Effective December 1, 2021, Eric Tech was appointed as the new CEO of XL Fleet - Eric Tech was appointed as the new CEO, effective December 1, 2021[140] CEO Compensation Details | CEO Compensation Details | Amount | | :--- | :--- | | Annual Base Salary | $600,000 | | Annual Cash Bonus Target | 80% of base salary | | Initial Stock Options Grant | $1,260,000 | | Initial Restricted Stock Units Grant | $540,000 | | Vesting Period | Four years | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on XL Fleet's financial condition and operational results, highlighting the company's business model, recent strategic developments, and the impact of external factors Overview XL Fleet is a provider of fleet electrification solutions for commercial vehicles in North America, offering Drive Systems and XL Grid infrastructure solutions, with strategic expansions into new markets and product lines - XL Fleet provides fleet electrification solutions (Drive Systems) and infrastructure solutions (XL Grid) for commercial vehicles in North America[145] - The company has sold over 4,400 electrified powertrain systems, accumulating over 173 million miles across more than 240 fleets as of September 30, 2021[145] - XL Fleet aims to expand its product offerings into full battery electric, heavier vehicles (Class 7-8), and international markets, building on its acquisition of World Energy and investment in eNow[147] - The company's electrified Drive Systems (XLH™ and XLP™) offer up to 25-50% MPG improvement and 20-33% reduction in GHG emissions for Class 2-6 vehicles[148] Recent Developments Recent developments include the acquisition of World Energy and investment in eNow, alongside ongoing adverse impacts from the COVID-19 pandemic and microchip shortages on operations - Acquired World Energy on May 17, 2021, for $12.5 million, enhancing XL Grid's energy efficiency and EV charging solutions[151][153] - Made a $3 million minority investment in eNow on July 15, 2021, and became the exclusive provider of high voltage batteries for eNow's eTRUs[154] - The COVID-19 pandemic continues to cause reduced operations, production line shutdowns at OEMs, and supply chain shortages (e.g., microchips), adversely impacting business and expected to continue into 2022[158][160] Public Company Costs As a public company, XL Fleet expects to incur significant additional annual expenses for regulatory compliance, insurance, director fees, and increased accounting, legal, and administrative resources - Operating as an NYSE-listed public company incurs additional annual expenses for regulatory compliance, insurance, director fees, and increased accounting, legal, and administrative resources[161] - Capital and operating expenditures are expected to increase significantly to support marketing, R&D, operational improvements, hiring, and intellectual property protection[162][164] Leadership Transition XL Fleet announced the appointment of Eric Tech as its new Chief Executive Officer, effective December 1, 2021, following the departure of Dimitri Kazarinoff - Eric Tech was appointed as the new Chief Executive Officer, effective December 1, 2021[162] Key Factors Affecting Operating Results XL Fleet's future success hinges on increasing sales of current products and expanding its offerings, while navigating challenges like OEM supply shortages and ensuring system functionality - Key factors for success include increasing sales of current products and expanding future product offerings[165] - Challenges include ensuring system functionality, meeting cost reduction targets, timely new product development, effective sales, and securing OEM component supply[167] - The worldwide microchip shortage has significantly reduced OEM vehicle supply, adversely impacting Drive Systems sales in 2021 and expected to continue in 2022[167] - The company is mitigating impacts by providing Drive Systems as retrofits for existing fleet vehicles and re-entering the California market with CARB approvals[167] Key Components of Statements of Operations This section defines the key components of the statements of operations, including research and development, selling, general, and administrative expenses, and other income/expense items - Research and development expenses consist of personnel, third-party engineering services, prototype materials, and depreciation, and are expected to increase substantially to accelerate product development[166][167][168] - Selling, general, and administrative expenses include personnel, professional services (legal, audit, accounting), facilities, and sales/marketing costs, and are expected to increase due to business growth and public company operations[169] - Other (income) expense includes interest, loss on debt extinguishment, and changes in fair value of obligations to issue shares and warrant liabilities[170] Results of Operations For the three months ended September 30, 2021, revenues decreased by 49.4% to $3.2 million, primarily due to a $5.7 million drop in Drive Systems sales, partially offset by $2.6 million from XL Grid solutions Results of Operations (3 Months Ended Sep 30) (In thousands) | (In thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $3,200 | $6,328 | $(3,128) | (49.4)% | | Cost of revenues | $2,510 | $5,561 | $(3,051) | (54.9)% | | Gross profit | $690 | $767 | $(77) | (10.0)% | | Research and development | $3,217 | $1,646 | $1,571 | 95.4% | | Selling, general and administrative expenses | $12,742 | $5,304 | $7,438 | 140.2% | | Loss from operations | $(15,269) | $(6,183) | $(9,086) | 147.0% | | Net (loss) income | $(7,531) | $(2,277) | $(5,254) | 230.7% | Results of Operations (9 Months Ended Sep 30) (In thousands) | (In thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $7,569 | $9,472 | $(1,903) | (20.1)% | | Cost of revenues | $6,633 | $8,713 | $(2,080) | (23.9)% | | Gross profit (loss) | $936 | $759 | $177 | 23.3% | | Research and development | $7,438 | $3,297 | $4,141 | 125.6% | | Selling, general and administrative expenses | $31,522 | $10,798 | $20,724 | 191.9% | | Loss from operations | $(38,024) | $(13,336) | $(24,688) | 185.1% | | Net income (loss) | $43,914 | $(22,230) | $66,144 | 297.5% | - The decrease in Drive Systems revenue was primarily due to OEM vehicle supply interruptions caused by the worldwide microchip shortage[173][181] - The significant net income for the nine months ended September 30, 2021, was largely driven by an $82.0 million non-cash gain from the change in fair value of warrant liability[187] Liquidity and Capital Resources As of September 30, 2021, XL Fleet had working capital of $371.9 million, including $366.9 million in cash, cash equivalents, and restricted cash Liquidity and Capital Resources (In millions) | (In millions) | Sep 30, 2021 | | :--- | :--- | | Working Capital | $371.9 | | Cash, cash equivalents and restricted cash | $366.9 | | Net income (9 months) | $43.9 | | Net loss (9 months, adjusted for non-cash gain) | $(38.1) | - The exercise of public warrants generated approximately $85.6 million in cash proceeds during the nine months ended September 30, 2021[189] - Management believes current liquidity is sufficient to execute the business plan for the next 12 months, despite expected short-term net losses[190] Cash Flows Summary For the nine months ended September 30, 2021, net cash used in operating activities was $34.2 million, primarily due to a non-cash gain from warrant liability changes and increases in inventory Cash Flows Summary (In thousands) | (In thousands) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(34,215) | $(13,087) | | Net cash used in investing activities | $(14,105) | $(162) | | Net cash provided by financing activities | $85,427 | $11,446 | | Net change in cash and cash equivalents | $37,107 | $(1,803) | - Operating cash outflow increased due to a non-cash gain from warrant liability changes ($82.0 million) and increased inventory ($13.2 million)[193] - Investing cash outflow was driven by the World Energy acquisition ($8.2 million), eNow convertible note purchase ($3.0 million), and equipment purchases ($2.9 million)[194] - Financing cash inflow was primarily from proceeds from the exercise of public warrants ($85.6 million)[195] Related Parties XL Fleet maintains an operating lease for its facilities with a related party, an investor holding over 5% of its common stock - The company has an operating lease agreement for facilities with a related party (an investor with >5% common stock)[196] - Rent expense was $0.1 million for the three and nine months ended September 30, 2021 and 2020, respectively[196] Off-Balance Sheet Arrangements Excluding the New Markets Tax Credit variable interest entity, XL Fleet did not have any off-balance sheet arrangements with unconsolidated organizations or financial partnerships during the reported periods - The company did not have any off-balance sheet arrangements, other than the New Markets Tax Credit variable interest entity, during the periods presented[197] Critical Accounting Policies and Estimates XL Fleet's financial statements rely on estimates and assumptions, with critical policies including revenue recognition, business combinations, and convertible notes derivative accounting - Critical accounting policies include revenue recognition, business combinations, and convertible notes derivative accounting[201] - Revenue for Drive Systems is generally recognized upon shipment, while for XL Grid solutions, it's upon acceptance and certification of project completion[205][206] - Business combinations are accounted for by allocating purchase price to acquired assets and liabilities at fair value, with any excess recorded as goodwill[202] - Warrant liabilities are classified as derivative liabilities and measured at fair value at each reporting date, with changes recognized in the Statement of Operations[211] Emerging Growth Company Status XL Fleet is an 'emerging growth company' under the JOBS Act, allowing it to opt out of certain new accounting standards and reduced reporting requirements, such as auditor attestation on internal controls and full executive compensation disclosure - XL Fleet is an 'emerging growth company' under the JOBS Act, allowing it to elect an extended transition period for new accounting standards[212] - The company can rely on exemptions from certain reporting requirements, including auditor attestation on internal controls and full executive compensation disclosure[213] - XL Fleet will remain an emerging growth company until December 31, 2021[214] New and Recently Adopted Accounting Pronouncements As of September 30, 2021, there are no new accounting pronouncements not yet adopted that are expected to materially impact XL Fleet's financial position or results of operations - As of September 30, 2021, no new accounting pronouncements not yet adopted are expected to materially impact the company's financial position or results of operations[215] - As an 'emerging growth company,' XL Fleet can elect to adopt new or revised accounting standards at the same time as private companies[216] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not required for XL Fleet Corp. in this filing - This item is not required for the company[218] Item 4. Controls and Procedures Management concluded that XL Fleet's disclosure controls and procedures were not effective as of September 30, 2021, due to a material weakness in internal controls related to the accounting for warrants issued in connection with its initial public offering - Management concluded that disclosure controls and procedures were not effective as of September 30, 2021[220] - A material weakness was identified in internal controls related to the proper classification of warrants issued in connection with the initial public offering[222] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, these controls during the quarter[223] PART II – OTHER INFORMATION This part provides additional information on legal proceedings, risk factors, equity sales, defaults, mine safety, other disclosures, and exhibits Item 1. Legal Proceedings XL Fleet is involved in various legal proceedings arising in the normal course of business, including product liability and intellectual property matters - The company is periodically involved in legal proceedings, including product liability and intellectual property matters[129] - XL Fleet is defending against putative class action complaints (Suh v. XL Fleet Corp., Kumar v. XL Fleet Corp., Laidlaw Complaint, Janmohamed Complaint) alleging securities fraud and breaches of fiduciary duty related to the December 2020 merger[130][131][132] - Management believes the allegations are without merit and intends to vigorously defend the lawsuits, but cannot estimate potential losses at this time[130][131][132] Item 1A. Risk Factors Investing in XL Fleet securities involves a high degree of risk - An investment in XL Fleet securities is speculative and involves a high degree of risk[228] - Recent management changes, including the appointment of Eric Tech as CEO, could disrupt operations and impair the ability to attract and retain key personnel[230] - Product development efforts are subject to counterparty risks, as reliance on co-development partners (e.g., Curbtender, eNow) exposes the company to their business risks and potential impairment of investments[231] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for this period - No unregistered sales of equity securities or use of proceeds to report[232] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for this period - No defaults upon senior securities to report[232] Item 4. Mine Safety Disclosures This item is not applicable to XL Fleet Corp. - This item is not applicable[232] Item 5. Other Information There is no other information to report for this period - No other information to report[233] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including various agreements, certifications (e.g., CEO/CFO certifications under Sarbanes-Oxley Act), and Inline XBRL documents - The report includes exhibits such as the Executive Employment Agreement for Eric Tech, CEO/CFO certifications, and Inline XBRL documents[235]