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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  __________ to __________
Commission file number 001-39598
https://cdn.kscope.io/274656710e521859722bfde900a6f572-xos-20210930_g1.jpg
XOS, INC.
______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware
98-1550505
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3550 Tyburn Street
Los Angeles, CA
90065
(Address of Principal Executive Offices)
(Zip Code)
    
Registrant’s telephone number, including area code: (818) 316-1890

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTickerName of exchange on which registered
Common Stock, $0.0001 par value per shareXOSNasdaq Global Market
Warrants, each whole warrant exercisable for one share of Common Stock at an exercise price of $11.50 per shareXOSWWNasdaq Global Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes    No  
The registrant had outstanding 162,904,938 shares of Common Stock, $0.0001 par value as of October 1, 2021.


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Forward-Looking Statements

This Report, including, without limitation, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, (“the Exchange Act”). We have based these forward-looking statements on our current expectations and projections about future events. All statements, other than statements of present or historical fact included in this Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of such terms or other similar expressions. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control.

As a result of a number of known and unknown risks and uncertainties, the Company’s actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:

our ability to recognize the anticipated benefits of the Business Combination (as defined below) and proceeds from the concurrent private placement, which may be affected by, among other things, competition and the ability of the combined business to grow and manage growth profitably;

changes in domestic and foreign business, market, financial, political and legal conditions;

changes in applicable laws or regulations;

the outcome of any legal proceedings against the Company;

the financial and business performance of the Company, including financial projections and business metrics and any underlying assumptions thereunder;

changes in the Company’s strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans;

our ability to maintain an effective system of internal controls over financial reporting;

our ability to grow market share in its existing markets or any new markets it may enter;

our ability to respond to general economic conditions;

our ability to manage its growth effectively;

our ability to achieve and maintain profitability in the future;

our ability to access sources of capital, including debt financing and other sources of capital to finance operations and growth;

our ability to maintain and enhance its products and brand, and to attract customers;

our ability to execute its business model, including market acceptance of its planned products and services and achieving sufficient production volumes at acceptable quality levels and prices;

ability to source certain of our critical inventory items, for instance battery cells, semiconductor chips and vehicle bodies and aluminum

our ability to successfully manage supply shortages and disruptions, product delivery delays, and anticipate costs and production timing in light of those challenges;

the success of strategic relationships with third parties;

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our ability to scale in a cost-effective manner, including hiring qualified personnel, particularly during recent hiring difficulties, to meet our manufacturing and delivery goals;

developments and projections relating to our competitors and industry;

the impact of health epidemics, including the COVID-19 pandemic, on the Company’s business and the actions the Company may take in response thereto;

our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others;

expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012, as amended;

our future capital requirements and sources and uses of cash;

the outcome of any known and unknown litigation and regulatory proceedings; and

other risks and uncertainties set forth in this Quarterly Report on Form 10-Q in the section entitled “Risk Factors”.
A discussion of these and other factors affecting our business and prospects is set forth in Part II, Item 1A. Risk Factors. We encourage investors to review these risk factors.

Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.

Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.


Part I - Financial Information
Glossary of Terms
Unless otherwise stated in this Quarterly Report or the context otherwise requires, reference to:

Business Combination” means the Domestication, the Merger and the other transactions contemplated by the Merger Agreement, collectively, including the PIPE Financing;

Class 5 to 8 Vehicles” means medium and heavy duty trucks that typically travel on predictable routes and cover less than 200 miles a day;

Closing” means the closing of the Business Combination;

Closing Date” means August 20, 2021;

Common Stock” means the shares of common stock, par value $0.0001 per share, of Xos;

Company” means Xos, Inc. (Nasdaq: XOS) following the Closing of the Business Combination

Domestication” means the transfer by way of continuation and deregistration of NextGen from the Cayman Islands and the continuation and domestication of NextGen as a corporation incorporated in the State of Delaware;

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Energy Services” means our infrastructure-as-a-service offering which includes charging infrastructure deployment, energy procurement and management, and the Xos HubTM, our proprietary mobile charging unit deployable for on-demand charging requirements;

Fleet-as-a-Service Offerings” means our comprehensive suite of products and services facilitating commercial battery-electric fleet operations through a combination of in-house proprietary technology and turnkey solutions from industry-leading partners. The platform includes our X-Pack battery system, X-Platform modular chassis, Energy Services, service and maintenance, digital fleet management products, over-the-air software update technology, and a wide range of additional service products;

Flex Manufacturing Strategy” means leveraging smaller, more-nimble existing facilities and labor talent to assemble vehicles through our strategic manufacturing partnerships, while the Company coordinates other aspects of the manufacturing process, including supply chain logistics, quality control, and manufacturing engineering;

Founder Shares” means Class B ordinary shares, par value $0.0001 per share, of NextGen, which were converted into shares of Common Stock in connection with the Business Combination;

initial public offering” means NextGen’s initial public offering that was consummated on October 9, 2020;

“Legacy Xos Common Stock” means shares of common stock, par value $0.0001 per share, issued by Legacy Xos prior to the Business Combination;

“Legacy Xos Preferred Stock” means Class A through A-10 shares of preferred stock, par value $0.001 per share, issued by Legacy Xos prior to the Business Combination;

Legacy Xos” means Xos, Inc, a Delaware corporation, prior to the consummation of the Business Combination;

Merger” means the merger of NextGen Merger Sub with and into Legacy Xos pursuant to the Merger Agreement, with Legacy Xos as the surviving company in the Merger and, after giving effect to such Merger, Legacy Xos becoming a wholly owned subsidiary of Xos;

Merger Agreement” means that certain Merger Agreement, dated as of February 21, 2021, as amended on May 14, 2021, by and among NextGen, Sky Merger Sub I, Inc., a Delaware corporation and direct wholly owned subsidiary of NextGen, and Legacy Xos;

NextGen” means NextGen Acquisition Corp., a Cayman Islands exempted company, prior to the consummation of the Domestication;

PIPE Financing” means the transactions contemplated by the Subscription Agreements, pursuant to which the PIPE Investors collectively subscribed for 21,600,000 shares of Common Stock for an aggregate purchase price of $216,000,000 in connection with the Closing;

PIPE Investors” means the investors who participated in the PIPE Financing and entered into the Subscription Agreements;

Powertrain” means an assembly of every component that pushes a vehicle forward. A vehicle’s powertrain creates power from the engine and delivers it to the wheels on the ground. The key components of a powertrain include an engine, transmission, driveshaft, axles, and differential;

Preferred Stock” means preferred stock, par value $0.0001 per share, authorized under the Certificate of Incorporation of Xos, Inc.;

Private Placement Warrants” means the 6,333,334 warrants to purchase Common Stock originally issued in a private placement in connection with the initial public offering of NextGen;

Public Warrants” means the 12,499,964 redeemable warrants to purchase shares of Common Stock at an exercise price of $11.50 per share originally issued in connection with the initial public offering of NextGen;

“Sponsor” means NextGen’s sponsor, NextGen Sponsor LLC;

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Subscription Agreements” means the subscription agreements entered into by NextGen and each of the PIPE Investors in connection with the PIPE Financing;

Warrants” means Private Placement Warrants and Public Warrants;

Xos” means Xos, Inc. (Nasdaq: XOS) following the Closing of the Business Combination;

X-Pack” means our proprietary battery system; and,

X-Platform” means our proprietary, purpose-built vehicle chassis platform.


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Item 1.    Financial Statements
Xos, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
September 30, 2021
(Unaudited)
December 31, 2020
Assets
Cash and cash equivalents$207,388 $10,359 
Accounts receivable, net583 408 
Inventories20,834 1,867 
Prepaid expenses and other current assets17,840 56 
Total current assets246,645 12,690 
Property and equipment, net4,629 1,084 
Other assets505  
Total assets$251,779 $13,774 
Liabilities and Stockholders’ Equity (Deficit)
Accounts payable$12,468 $1,168 
Current portion of equipment loans payable151 142 
Current portion of convertible notes payable 18,360 
Current portion of derivative liability
 6,394 
Current portion of SAFE notes payable 30 
Legacy Xos Preferred Stock Warrant liability
 1,707 
Other current liabilities2,836 5,142 
Total current liabilities15,455 32,943 
Equipment loans payable, net of current portion876 166 
Contingent earn-out shares liability
53,542  
Common stock warrant liability
19,963  
Total liabilities89,836 33,109 
Commitment and Contingencies
Legacy Xos Preferred Stock – $0.0001 par value
    Series A – 27,041 shares authorized; 0 and 2,762 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
 7,862 
 
Stockholders’ Equity (Deficit)
Common Stock $0.0001 par value, authorized 1,000,000 shares,
  162,905 and 72,277 shares issued and outstanding at September 30, 2021
  and December 31, 2020, respectively
16 7 
Preferred Stock $0.0001 par value, authorized 10,000 shares, 0 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
  
Additional paid in capital177,533 290 
Accumulated deficit(15,606)(27,494)
Total stockholders’ equity (deficit)161,943 (27,197)
Total liabilities, Legacy Xos Preferred Stock and stockholders’ equity (deficit)$251,779 $13,774 

See Notes to Unaudited Condensed Consolidated Financial Statements
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Xos, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands; Unaudited)
Three Months Ended September 30
Nine Months Ended September 30
2021202020212020
Revenues$357 $1,125 $1,746 $1,698 
Cost of Goods Sold418 1,161 1,675 1,639 
Gross Margin(61)(36)71 59 
Operating Expenses
Research and development3,237 727 6,867 2,440 
Sales and marketing549 65 700 142 
General and administrative10,211 2,198 19,580 4,122 
Depreciation expense248 66 628 214 
Total Operating Expenses
14,245 3,056 27,775 6,918 
Loss from Operations(14,306)(3,092)(27,704)(6,859)
Other Income (Expenses)
Interest expense(65)(867)(78)(2,186)
Change in fair value of derivatives
1,066  6,030  
Change in fair value of contingent earn-out shares liability
48,202  48,202  
Write off of subscription receivable  (379) 
Realized loss on debt extinguishment
  (14,104) 
Miscellaneous
(1) (5)4 
Total Other Income (Expenses)
49,202 (867)39,666 (2,182)
Net Income (Loss)
$34,896 $(3,959)$11,962 $(9,041)
Net income (loss) per share
Basic
$0.31 $(0.05)$0.14 $(0.13)
Diluted
$(0.08)$(0.05)$(0.28)$(0.13)
Weighted average shares outstanding
Basic113,797 72,277 86,192 72,145 
Diluted148,791 72,277 121,186 72,145 

See Notes to Unaudited Condensed Consolidated Financial Statements
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Xos, Inc. and Subsidiaries
Condensed Consolidated Statements of Legacy Xos Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands)
Legacy Xos
Preferred Stock
Common Stock
Add’l Paid-in Capital
Accumulated
Deficit
Total
Stockholders’
Equity (Deficit)
SharesAmountShares
Par Value
Balance at December 31, 2020 (as previously reported)
1,412 $7,862 36,943 $4 $293 $(27,494)$(27,197)
Recapitalization1,350  35,334 3 (3)  
Balance at December 31, 2020 (as adjusted; unaudited)
2,762 7,862 72,277 7 290 (27,494)(27,197)
Payment of subscription receivable— 2,430 — — 380 (74)306 
Issuance of Legacy Xos Preferred Stock, including note conversion49,518 66,701 — — — — — 
Options exercised— — 206 — 3 — 3 
Stock repurchased and retired— — (94)— (1)— (1)
Stock based compensation expense— — — — 2 — 2 
Net loss— — — — — (13,776)(13,776)
Balance at March 31, 2021 (unaudited)
52,280 76,993 72,389 7 674 (41,344)(40,663)
Stock based compensation expense— — — — 2 — 2 
Stock options exercised— — 2 — — — — 
Net loss— — — — — (9,158)(9,158)
Balance at June 30, 2021 (unaudited)
52,280 76,993 72,391 7 676 (50,502)(49,819)
Stock based compensation expense— — — — 1 — 1 
Stock options exercised— — 315 — 7 — 7 
Legacy Xos Preferred Stock warrant exercise625 2,715 — — — — — 
Conversion of Legacy Xos Preferred Stock into Common Stock(52,905)(79,708)52,905 5 79,767 — 79,772 
Issuance of Common Stock upon merger, net of transaction costs of $55,424
— — 17,694 2 20,719 — 20,721 
Issuance of PIPE Common Stock— — 19,600 2 195,998 — 196,000 
Recognition of Public and Private Warrants as liability— — — — (17,891)— (17,891)
Recognition of contingent earn-out shares liability— — — — (101,744)(101,744)
Net income— — — — — 34,896 34,896 
Balance at September 30, 2021 (unaudited)
 $ 162,905 $16 $177,533 $(15,606)$161,943 
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Balance at December 31, 2019 (as previously reported)
 $ 36,822 $4 $289 $(10,827)$(10,534)
Recapitalization  35,218     
Balance at December 31, 2019 (as adjusted)
  72,040 4 289 (10,827)(10,534)
Net loss— — — — — (1,237)(1,237)
Balance at March 31, 2020 (unaudited)
  72,040 4 289 (12,064)(11,771)
Stock options exercised— — 78 — 2 — 2 
Stock based compensation expense— — — — 4 — 4 
Net loss— — — — — (3,845)(3,845)
Balance at June 30, 2020 (unaudited)
  72,118 4 295 (15,909)(15,610)
Stock options exercised— — 358 — 6 — 6 
Stock repurchased— — (199)— (3)— (3)
Stock based compensation expense— — — — 3 — 3 
Net loss— — — — — (3,959)(3,959)
Balance at September 30, 2020 (unaudited)
 $ 72,277 $4 $301 $(19,868)$(19,563)

See Notes to Unaudited Condensed Consolidated Financial Statements
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Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands, Unaudited)
Nine Months Ended September 30
20212020
OPERATING ACTIVITIES:
Net income (loss)$11,962 $(9,041)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation628 214 
Non-cash interest expense 2,186 
Write off of subscription receivable379  
Realized loss on debt extinguishment
14,104  
Change in fair value of derivatives
(6,030) 
Change in fair value of contingent earn-out shares liability(48,202) 
Stock-based compensation expense5 7 
Changes in operating assets and liabilities:
Accounts receivable(175)(904)
Inventories(18,967)(1,616)
Prepaid expenses and other current assets(17,784)(278)
Other assets(505)(376)
Accounts payable11,300 (346)
Other current liabilities150 305 
Net cash used in operating activities(53,135)(9,849)
INVESTING ACTIVITIES:
Purchase of property and equipment(3,343)(427)
Net cash used in investing activities(3,343)(427)
FINANCING ACTIVITIES:
Proceeds from reverse merger, net20,721  
Proceeds from PIPE investment196,000  
Proceeds from issuance of shares of Legacy Xos Preferred Stock31,757 1,646 
Proceeds from subscription receivable – preferred2,430  
Proceeds from issuance of convertible notes 13,440 
Proceeds from exercise of Legacy Xos Preferred Stock warrant2,715  
Principal payment of equipment loans(126)(60)
Proceeds from stock option exercises10  
Net cash provided by financing activities253,507 15,026 
Net increase in cash and cash equivalents
197,029 4,750 
Cash and cash equivalents, beginning of period
10,359 19 
Cash and cash equivalents, end of period
$207,388 $4,769 
Supplemental disclosure of non-cash financing activities
Conversion of notes payable to Legacy Xos Preferred Stock:
Conversion of interest payable on convertible notes$2,453 $ 
Fair value adjustment of related party debt at conversion$3,763 $ 
Issuance of Legacy Xos Preferred Stock
$34,918 $ 
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Conversion of notes payable into Legacy Xos Preferred Stock
$21,540 $ 
Conversion of Legacy Xos Preferred Stock into Common Stock
$79,708 $ 
Assumption of Public and Private Warrants
$17,891 $ 
Recognition of earn-out shares liability
$101,744 $ 
Transaction costs relating to the reverse merger offset against additional paid-in capital
$55,424 $ 

See Notes to Unaudited Condensed Consolidated Financial Statements
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Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1Description of Business

Xos, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Xos”) is a mobility solutions company manufacturing Class 5 to 8 battery-electric commercial vehicles and facilitating fleet operations. Xos developed the X-Platform (its proprietary, purpose-built vehicle chassis platform) and the X-Pack (its proprietary battery system) specifically for the medium- and heavy-duty commercial vehicle segment with a focus on last-mile commercial fleet operations. Xos’ “Fleet-as-a-Service” package offers customers a comprehensive suite of commercial products and services to facilitate electric fleet operations and seamlessly transition their traditional combustion-engine fleets to battery-electric vehicles. Xos Fleet, Inc. (“Legacy Xos”), the new legal entity name of the legacy Xos operating entity and Rivordak, Inc. (“Rivordak”), the subsidiary holding a dealership license to re-sell Xos vehicles to fleet customers, are wholly owned subsidiaries of Xos, Inc., and make up 100% of the operations of the Company.

Business Combination

Xos, Inc. was initially incorporated on July 29, 2020 as a Cayman Islands exempted company under the name “NextGen Acquisition Corporation” (“NextGen”). On August 20, 2021, as contemplated by the Agreement and Plan of Merger, as amended on May 14, 2021, by and among NextGen, Sky Merger Sub I, Inc., a Delaware corporation and a direct wholly owned subsidiary of NextGen (“Merger Sub”), and Xos, Inc., a Delaware corporation (now known as Xos Fleet, Inc., “Legacy Xos”), consummated the merger transactions contemplated by the Merger Agreement (the “Closing”), whereby (i) Merger Sub merged with and into Legacy Xos, the separate corporate existence of Merger Sub ceased and Legacy Xos became the surviving corporation and a wholly owned subsidiary of NextGen (such transaction the “Merger” and, collectively with the Domestication, the “Business Combination”). As a result, Xos became the publicly traded entity listed on the Nasdaq Global Market.
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups Act (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement declared effective pursuant to the Securities Act of 1933, as amended (the “Securities Act”), or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard, until such time the Company is no longer considered to be an emerging growth company. At times, the Company may elect to early adopt a new or revised standard.
Risks and Uncertainties
Global Pandemic and Coronavirus Response: On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate its spread have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the areas in which the Company operates.
As the COVID-19 pandemic continues to evolve, the Company believes the extent of the impact to its business, operating results, cash flows, liquidity and financial condition will be primarily driven by the severity and duration of the COVID-19 pandemic, the pandemic’s impact on the United States and global economies and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. Those primary drivers are beyond the Company’s knowledge and control, and as a result, at this time the Company is unable to predict the cumulative impact, both in terms of severity and duration, that the COVID-19 pandemic will have on its business, operating results, cash flows and financial condition. However, the impact of the COVID-19 pandemic could be material if the current circumstances continue to exist for a
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Notes to Unaudited Condensed Consolidated Financial Statements
prolonged period of time or worsen. Although the Company has used the best current information available to it in its estimates, actual results could materially differ from the estimates and assumptions developed by management.
Accordingly, it is reasonably possible that the estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, and if so, the Company may be subject to future impairment losses related to long-lived assets as well as changes to recorded reserves and valuations.
Supply Chain Disruptions

Negative global economic conditions, which the COVID-19 pandemic has contributed to, has impacted our ability to source certain critical inventory items. The series of restrictions imposed and the speed and nature of the recovery in response to the pandemic have placed burdens on our supply chain management, such as the semiconductor chip and battery cell shortage and supply limitations on vehicle bodies and aluminum.

Despite supply chain disruptions, we have continued to source inventory for our vehicles and our purchasing team has been working with vendors to find alternative solutions to areas where there are supply chain constraints, and where appropriate and critical, has placed orders in advance of projected need to ensure inventory is able to be delivered in time for production plans.

Note 2Basis of Presentation and Summary of Significant Accounting Policies

The following is a summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements:

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company 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. They do not include all of the information and footnotes required by U.S. GAAP for complete audited financial statements. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Legacy Xos and Rivordak. All significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments (primarily consisting of normal accruals) considered for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the years ended December 31, 2020, 2019 and 2018 presented in the Company’s registration statement filed with the Securities and Exchange Commission (“SEC”) and declared effective September 23, 2021.
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 revenues and expenses during the reporting periods. The areas with significant estimates and judgments include, among others, share-based compensation, the fair value of the Company’s Common Stock and Preferred Stock, valuation of the convertible notes and the related embedded derivative, SAFE Note (as defined below), Warrants and warrant liability on Legacy Xos Preferred Stock. 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.
Revenue Recognition

The Company generates revenue from the sale of its battery-electric fleet of commercial vehicles and battery-electric systems, the licensing of its software systems, and warranty contracts. There were no warranty contracts with material financial impact as of September 30, 2021.

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Notes to Unaudited Condensed Consolidated Financial Statements
The Company recognizes revenue consisting of product sales, inclusive of shipping and handling charges, net of estimates for customer allowances. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. All revenue is recognized when the Company satisfies its performance obligations under the contract. Any deposits from customers represent contract liabilities, which are included in “other current liabilities” on the condensed consolidated balance sheet. The Company recognizes revenue by transferring the promised products to the customer, with the revenue recognized at the point in time the customer takes control of the products. The Company recognizes revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. The majority of its contracts have a single performance obligation, which is met at the point in time that the product is delivered, and title passes to the customer, and are short term in nature.

The following table presents the revenue disaggregation by type (in thousands):

Three Months Ended September 30Nine Months Ended September 30
2021202020212020
Powertrains$357 $777 $1,073 $1,350 
Stepvans & vehicle incentives 348 673 348 
Total Revenues$357 $1,125 $1,746 $1,698 

Inventories

Inventories consisted of parts and work-in-progress inventories. As of September 30, 2021 and December 31, 2020, inventory amounted to $20.8 million and $1.9 million, respectively.
Inventories are stated at the lower of cost or net realizable value. Cost is computed using average cost. Inventory write-downs are based on reviews for obsolescence determined primarily by future demand forecasts.
Fair Value of Financial Instruments

ASC 820, Fair Value Measurements and Disclosures, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability.

U.S. GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

Level 1: Quoted prices in active markets for identical assets and liabilities.

Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

Level 3: Significant inputs to the valuation model are unobservable and significant to the overall fair value measurement of the assets or liabilities. Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The Company’s financial instruments consist primarily of cash, accounts receivable, accounts payable, other current liabilities, Warrants, the Legacy Xos Preferred Stock Warrant (defined below), convertible notes and the associated derivative liability. The fair value of cash and accounts receivable approximates carrying value due to their short-term maturity.

As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Derivative financial instruments which are required to be measured at fair value on a recurring basis are measured at fair value using Level 3 inputs for all periods presented. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

There were no transfers into or out of Level 3 during the three and nine months ending September 30, 2021 and 2020.
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Notes to Unaudited Condensed Consolidated Financial Statements

The following tables summarize the Company’s assets and liabilities measured at fair value of a recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):

September 30, 2021
TotalLevel 1Level 2Level 3
Financial Liabilities:
Private Placement Warrants$6,713 $ $6,713 $ 
Public Warrants13,250 13,250   
Contingent earn-out shares liability53,542   53,542 
Total$73,505 $13,250 $6,713 $53,542 

December 31, 2020
TotalLevel 1Level 2Level 3
Financial Liabilities:
Derivative liability on convertible notes$6,394 $ $ $6,394 
Legacy Xos Preferred Stock Warrant1,707   1,707 
Total$8,101 $ $ $8,101 
The changes in the fair value of the financial liabilities during the nine months ended September 30, 2021 follow (in thousands):
Private Placement WarrantsPublic WarrantsContingent
Earn-out Shares Liability
Derivative Liability on Convertible NotesLegacy Xos Preferred Stock Warrant
Fair value at December 31, 2020$ $ $ $6,394 $1,707 
Release due to extinguishment of convertible notes— — — (6,394)— 
Release due to warrant exercise— — — — (3,136)
Initial recognition upon merger consummation
6,017 11,875 101,744 — — 
Change in fair value during the period696 1,375 (48,202)— 1,429 
Fair value at September 30, 2021
$6,713 $13,250 $53,542 $ $ 
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, under which deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Share-Based Compensation

The Company accounts for share-based compensation in accordance with ASC 718, Compensation — Stock Compensation, under which shared based payments that involve the issuance of Common Stock to employees and non-employees and meet the criteria for equity-classified awards are recognized in the financial statements as compensation expense based on the fair value on the date of grant.

Prior to the Business Combination the Company issued stock options to purchase shares of common stock (“Options”) to employees and non-employees under the Xos, Inc. 2018 Stock Plan (the “2018 Stock Plan”). The Company allows employees to exercise options prior to vesting. The Company considers the consideration received for the early exercise of an option to be
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Notes to Unaudited Condensed Consolidated Financial Statements
a deposit and the related amount is recorded as a liability. The liability is relieved when the options vest. The Company has the right to repurchase any unvested (but issued) shares upon termination of service of an employee at the original exercise price. The Company stopped issuing options under the 2018 Stock Plan in the fourth quarter of 2020.

The Company estimates the fair value of options on the date of the grant using the Black-Scholes option pricing model. Each of the Black-Scholes inputs generally require significant judgement, including the assumptions discussed below.

Fair value of Common Stock – equals the closing stock price on the day of award grant.

Expected term – the expected term represents the period that the Company’s Options are expected to be outstanding and is determined based on the “simplified” method, as prescribed in SEC Staff Accounting Bulletin (SAB) No. 107. The expected term of non-employee options is equal to the contractual term.

Risk-free rate – the risk-free interest rate is based on the interest rate payable on the U.S. Treasury securities with an equivalent expected term of the options.

Expected volatility – the Company determines the price volatility factor based on the historical volatilities of several publicly listed peer companies as the Company does not have trading history for its Common Stock.

Expected dividend yield – the expected dividend yield assumption is based on the Company’s current expectations about its anticipated dividend policy.
Recent Accounting Pronouncements Issued and Adopted:

ASC 718, Compensation — Stock Compensation: In June 2018, the FASB issued ASC 718, Compensation — Stock Compensation, as part of its simplification initiative to identify and refine areas where cost and complexity can be refined while providing more useful information to users of financial statements. The new guidance requires equity classified share-based payment awards issued to nonemployees to be measured on the grant date, instead of being re-measured through the performance completion date under the previous guidance.
The Company adopted ASC 718 as part of its issuance and implementation of the 2018 Stock Plan.
Recent Accounting Pronouncements Issued and not yet Adopted:

ASC 842, Leases: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as subsequently amended, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors), and replaces the existing guidance in ASC 840, Leases. The new standard also requires lessees to recognize operating and finance lease liabilities and corresponding right-of-use (“ROU”) assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company is required to adopt the standard on January 1, 2022 and is currently evaluating the full impact that ASU 2016-02 will have on the financial statements and related disclosures.

The adoption of the new lease standard on January 1, 2022 will likely have a material impact on the Company’s consolidated financial statements, the most significant of which would be the recognition of ROU assets and lease liabilities for operating leases on the consolidated balance sheet.


Note 3 — Recapitalization and Contingent Earn-out Shares Liability

Recapitalization

As discussed in Note 1, on August 20, 2021, Legacy Xos and NextGen consummated the Business Combination contemplated by the Merger Agreement. Xos has been determined to be the accounting acquirer based on evaluation of the following facts and circumstances:

Xos stockholders have the largest voting interest in the post-combination company;

The board of directors of Xos is authorized to be up to nine members and had six members designated at the time of closing, and Xos having the ability to nominate the majority of the members of the board of directors as of closing;

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Notes to Unaudited Condensed Consolidated Financial Statements
Xos management holds executive management roles (including Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Chief Technology Officer, among others) for the post-combination company and is responsible for the day-to-day operations;

The post-combination company assumed the Xos name: “Xos, Inc.”; and

The intended strategy of the post-combination entity continued Legacy Xos’ strategy of being a leader in the electric vehicle industry.

Accordingly, all historical financial information presented in these combined and consolidated financial statements represents the accounts of Legacy Xos and its wholly owned subsidiaries “as if” Legacy Xos is the predecessor and legal successor. The historical operations of Legacy Xos are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of Legacy Xos prior to the business combination; (ii) the combined results of NextGen and Legacy Xos following the Business Combination; and (iii) the assets and liabilities of Legacy Xos at their historical cost. No step-up basis of intangible assets or goodwill was recorded in the business combination transaction consistent with the treatment of the transaction as a reverse capitalization.

In connection with the Business Combination, each share of Legacy Xos Common Stock and Legacy Xos Preferred Stock issued and outstanding immediately prior to the Business Combination (with each share of Legacy Xos Preferred Stock being treated as if it were converted into Legacy Xos Common Stock immediately prior to the Business Combination) converted into the right to receive 1.956440 shares (the “Exchange Ratio”) of Common Stock.

Also, in connection with the Business Combination, the following occurred:

the merger of Legacy Xos into a wholly owned subsidiary of NextGen, with Legacy Xos surviving the merger as a wholly owned subsidiary of NextGen, with the combined company is referred to as “Xos”;

142,584,621 shares of Common Stock issued, including: (i) the Legacy Xos’ Common Stock, and (ii) Legacy Xos’ Preferred Stock, including the exercise and conversion of Legacy Xos’ Preferred Stock warrant (as if the Legacy Xos Preferred Stock had converted into the Legacy Xos’ Common Stock immediately prior to the reverse merger);

the issuance and sale of 19,600,000 shares of Common Stock (PIPE investment) for a purchase price of $10.00 per share and an aggregate purchase price of $196.0 million (which excludes the sale of 2,000,000 shares in the aggregate for a purchase price of $10.00 per share and an aggregate purchase price of $20.0 million pursuant to an offering of Common Stock by the founders of Legacy Xos). On the Closing Date, one of the PIPE Investors, Grantchester C Change, LLC., did not fund their $4.0 million committed amount under the binding Subscription Agreement.;

the settlement of the outstanding underwriting fees incurred in connection with the initial public offering of NextGen on October 9, 2020, for which the final cash amount owed was $11.2 million;

the settlement of the direct and incremental transaction costs incurred prior to, or concurrent with, the closing of the business combination in the amount of $44.2 million, which are recorded as reduction to additional paid-in capital;

the recognition of contingent earn-out interests provision as liability with a fair value of $101.7 million on the day of the merger consummation; and,

the assumption of the Public Warrants (12,499,964 units) and Private Placement Warrants (6,333,334 units) at fair value of $17.9 million on the day of merger consummation.

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Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The net proceeds from the Business Combination, as reported in the consolidated statement of cash flows for the nine months ended September 30, 2021, within the financing section are summarized below (in thousands):

Cash from NextGen trust, net of redemptions$76,145 
Cash from PIPE investment196,000 
Less: fees paid to the underwriters, including NextGen’s IPO underwriters(24,285)
Less: other transaction costs(31,139)
Net cash received from the business combination$216,721 

The number of shares of Common Stock issued in connection with the transaction follows:

Third party PIPE investors19,600,000 
NextGen sponsor and related parties7,613,884 
NextGen public shareholders9,375,000 
Xos stockholders125,595,737 
Total shares of Common Stock issued in the Business Combination162,184,621 

Contingent Earn-out Shares Liability

The Company has a contingent obligation to issue 16.2 million shares (the “Earn-out Shares”) of Common Stock and grant 261,000 restricted stock units (“Earn-out RSUs”) to certain stockholders and employees upon the achievement of certain market share price milestones within specified periods following the Business Combination on August 20, 2021.

The Earn-out Shares will be issued in tranches based on the following conditions:

i.If the volume-weighted average closing share price (“VWAP”) of the Common Stock equals or exceeds $14.00 per share for any 10 trading days within any consecutive 20-trading day period between the merger closing date and the five year anniversary of such closing date (“Earn-out Period”), then the Company is required to issue an aggregate of 5.4 million shares (“Tranche 1 Earn-out Shares”) of Common Stock to holders with the contingent right to receive Earn-out Shares (excluding any Earn-out RSUs). If after Closing and during the Earn-out Period, there is a Change in Control (as defined in the Merger Agreement), the Company is required to issue Tranche 1 Earn-out Shares when the value per share of the Company is equal to or greater than $14.00 per share, but less than $20.00. If there is a change in control where the value per share of commons stock is less than $14.00, then the Earn-out Shares shall terminate prior to the end of the Earn-out Period and no common stock shall be issuable.

ii.If the VWAP of the Common Stock equals or exceeds $20.00 per share for any 10 trading days within any consecutive 20-trading day period during the Earn-out Period, then the Company is required to issue an aggregate of 5.4 million shares (“Tranche 2 Earn-out Shares”) of Common Stock to holders with the contingent right to receive Earn-out Shares (excluding any Earn-out RSUs). If after Closing and during the Earn-out Period, there is a Change in Control (as defined in the Merger Agreement), the Company is required to issue Tranche 2 Earn-out Shares when the value per share of the Company is equal to or greater than $20.00 per share, but less than $25.00.

iii.If the VWAP of the Common Stock equals or exceeds $25.00 per share for any 10 trading days within any consecutive 20-trading day period during the Earn-out Period, then the Company is required to issue an aggregate of 5.4 million shares (“Tranche 3 Earn-out Shares”) of Common Stock to holders with the contingent right to receive Earn-out Shares (excluding any Earn-out RSUs). If after Closing and during the Earn-out Period, there is a Change in Control (as defined in the Merger Agreement), the Company is required to issue Tranche 3 Earn-out Shares when the valuer per share of the Company is equal to or greater than $25.00 per share.

Pursuant to the guidance under ASC 815, Derivatives and Hedging, the right to Earn-out Shares was classified as a Level 3 fair value measurement liability, and the increase or decrease in the fair value during the reporting period is recognized in the condensed consolidated statement of operations accordingly. The fair value of the Earn-out Shares liability was estimated using
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Notes to Unaudited Condensed Consolidated Financial Statements
the Monte Carlo simulation of the stock prices based on historical and implied market volatility of a peer group of public companies.

As of August 20, 2021, the initial fair value of the Earn-out Shares liability was recognized at $101.7 million with a corresponding reduction from the additional paid-in capital in stockholders’ (deficit) equity. As of September 30, 2021, the fair value of the Earn-out Shares liability was estimated to be $53.5 million. The Company recognized a gain on the fair value change in Earn-out Shares liability of $48.2 million in its condensed consolidated statements of operations for the three and nine months ended September 30, 2021.

In regards the Earn-out RSUs, which is covered by ASU 718, Compensation — Stock Compensation. the allocated fair value to the Earn-out RSU component will be recognized as share-based compensation expense over the vesting period commencing on the grant date of the award.

Note 4 — Convertible Notes

Between 2016 through 2020, the Legacy Xos issued approximately $21.5 million of convertible notes payable, with maturities ranging from ten years to less than one year at issuance. The convertible notes were to be automatically converted upon Legacy Xos obtaining additional equity financing, or in some cases, a change in control. Proceeds from the converted note issuances were primarily used to fund Legacy Xos’ operations during these periods. As of September 30, 2021, Legacy Xos converted all $21.5 million of convertible notes to Legacy Xos’ Preferred Stock, which was converted to Common Stock upon merger consummation.

At December 31, 2020, the carrying value of the convertible notes, which approximates fair value, was as follows (in thousands):
December 31, 2020
Convertible notes, current portion$21,540 
Debt discount recognized(4,884)
Debt discount amortized1,704 
Net convertible notes, current portion$18,360 

All of the converted notes bore simple interest at a rate of 8.0%. Interest on the notes was accumulated until the earlier of maturity or a transaction that triggered exercise of the conversion feature. All of the notes were unsecured and had varying maturity dates, as described below.

For disclosure purposes, management has divided the convertible notes into three groups: Group 1 Converted Notes, Group 2 Converted Notes, and a Group 3 Converted Note.

Group 1 Converted Notes
Group 1 Converted Notes consisted of notes with an aggregated issue amount of $6.4 million, with ten years maturities ranging from December 2026 to July 2029, and that provide for two distinct resolutions: (a) payment of principal and accrued interest in cash at maturity, or (b) conversion to a form of equity interest in Legacy Xos at the lesser of (i) eighty percent (80%) to ninety percent (90%) of the per share price of the equity issued in the qualified financing or (ii) a valuation cap divided by a fully diluted capitalization. Principal and accrued interest is payable at the maturity date. The valuation cap ranges from $10,000 to $200,000 and varies by issuance.

The conversion at a discount to the subsequent qualified financing was evaluated as an embedded put feature requiring bifurcation as a separately recorded derivative liability instrument. The conversion based upon the stated valuation cap and fully diluted capitalization was evaluated as a conversion feature and did not require bifurcation as an embedded derivative. This conversion feature had zero intrinsic value on the commitment date. The bifurcated derivative feature of the Group 1 Converted Notes was recorded as a debt discount which is amortized to interest expense over the life of the respective converted note. The Company incurred debt discounts totaling $0.5 million related to the conversion feature. The unamortized debt discounts at conversion, equaled $1.2 million at conversion and were eliminated upon conversion in accordance with ASC 470.
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Notes to Unaudited Condensed Consolidated Financial Statements

Group 2 Converted Notes
Group 2 Converted Notes consisted of notes with an aggregated issue amount of $14.1 million, with varying maturities ranging from March 2021 to August 2030, and of varying issuance dates that provide for four distinct resolutions: (a) payment of principal and accrued interest in cash at maturity, (b) conversion to a form of equity interest in Legacy Xos issued in a subsequent qualified financing at the lesser of (i) eighty percent (80%) to ninety percent (90%) of the per share price of the equity issued in the qualified financing or (ii) a valuation cap of $60,000,000 divided by the fully diluted capitalization, or (c) following certain corporate transactions, including a change in control a settlement in cash at an amount equal to the accrued interest plus three times the principal balance of the note or converted into Common Stock at a price per share equal to a valuation cap of $60,000,000 divided by the fully diluted capitalization, or (d) optionally converted into Common Stock at maturity at a per share price obtained by dividing $30,000,000 valuation cap by the fully diluted capitalization. Principal and accrued interest is payable on the maturity date. The conversion at a discount to the subsequent qualified financing, and the cash settlement following certain corporate transactions, were evaluated as embedded put features requiring bifurcation as a separately recorded derivative instruments. The conversion based upon the stated valuation cap and fully diluted capitalization was evaluated as a conversion feature and did not require bifurcation as an embedded derivative. This conversion feature had zero intrinsic value on the commitment date. The fair value of the bifurcated derivatives of the Group 2 Converted Notes was recorded as a debt discount which is amortized to interest expense over the life of the respective converted note. The Company incurred debt discounts totaling $5.2 million. The unamortized debt discounts at conversion, equaled $4.0 million at conversion and were eliminated upon conversion in accordance with ASC 470.

Group 3 Converted Note
The Group 3 Converted Note is a single note with a $1.0 million issue amount in December 2018, maturing in December 2020. This note was converted in the first quarter of fiscal year 2021. The noteholder elected to wait for conversion rather than collect the principal and accrued interest amounts. The Group 3 Converted Note allowed for payment in cash at maturity or, in the event of a conversion event, a conversion of the principal and accrued interest of the note into two percent (2%) of the outstanding equity of the Company after the conversion transaction.

The conversion into 2% of the outstanding equity was evaluated as a conversion feature and did not require bifurcation as an embedded derivative. This conversion feature had zero intrinsic value on the commitment date, accordingly, no discount on the debt issuance was recorded and no discount had been amortized during the periods under presentation. However, during the fourth quarter of 2020, it became evident that all the converted notes were likely to be exercised and it was possible to determine an intrinsic value of the conversion feature. Accordingly, as of September 30, 2021, the Company recognized a discount on the converted note of $0.6 million and an offsetting derivative liability in the same amount. Due to the immediacy of conversion, the discount on the Group 3 Converted Note was not amortized.

Note 5 — Equity
Xos Common and Preferred Stock
The Company is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares which the Company is authorized to issue is 1,010,000,000 shares. 1,000,000,000 shares shall be Common Stock, each having a par value of one-hundredth of one cent ($0.0001). 10,000,000 shares shall be Preferred Stock, each having a par value of one-hundredth of one cent ($0.0001).
Voting Rights: Each outstanding share of Common Stock shall entitle the holder thereof to one vote on each matter properly submitted to the stockholders of the Company for their vote; provided, however, that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon by law or pursuant to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock).
Preferred Stock: The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Company (the “Board of Directors”) is hereby expressly authorized to provide for the issue of all or any number of the shares of
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Notes to Unaudited Condensed Consolidated Financial Statements
the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designation, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such shares and as may be permitted by the DGCL. The Board of Directors is also expressly authorized to increase (but not above the total number of authorized shares of the class) or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issuance of shares of that series. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series.
Legacy Xos’ Preferred Stock
During the fourth quarter of 2020, Legacy Xos executed a financing round and issued shares of preferred stock (the “2020 Series A Financing’’). The 2020 Series A Financing included the authorization of 25,794,475 shares of Legacy Xos Preferred Stock in classes A through A-10. The shares of Class A Legacy Xos Preferred Stock was allocated to investors who contributed new money to Legacy Xos, while the shares of Class A-1 through A-10 Legacy Xos Preferred Stock were issued in exchange to convertible note holders. As part of this raise, 1,411,764 shares of Class A Legacy Xos Preferred Stock and one warrant exercisable for 319,411 shares of Class A Legacy Xos Preferred Stock were issued for aggregate cash proceeds of $9.6 million and a subscription receivable for $2.4 million. During the quarter ended March 31, 2021, the Legacy Xos issued an additional 3,739,846 shares of Class A Legacy Xos Preferred Stock raising $31.8 million in cash proceeds, and the conversion of the SAFE Note (refer to Note 8).
As part of this transaction, Legacy Xos converted $21.5 million of convertible notes and $2.5 million in accrued interest into 21,570,308 shares of Class A-1 through A-10 Legacy Xos Preferred Stock. These exchanges from convertible notes into shares of Legacy Xos Preferred Stock included transactions with both related and unrelated parties. The differences between the total carrying value of the converted notes held by third parties, and the fair value of the issued shares of Legacy Xos Preferred stock, was recorded as realized loss on debt extinguishment in the consolidated statement of operations.
We have determined the fair value of the issued shares of Legacy Xos Preferred Stock in connection with the note conversion using market rates experienced in other non-related party transactions, through the issuance of shares of Legacy Xos Preferred Stock. As some of the converted third-party notes have voting rights and others do not, the fair value of non-voting shares were reduced by 3%.
Concurrent with the Business Combination, outstanding shares of Legacy Xos Preferred Stock were converted into shares of Common Stock in accordance with the Exchange Ratio.
Note 6 — Derivative Instruments

Public and Private Placement Warrants

As of September 30, 2021, the Company had 12,499,964 Public Warrants and 6,333,334 Private Placement Warrants outstanding, with fair values of $13.2 million and $6.7 million, respectively.

The Public Warrants have an exercise price of $11.50 per share, subject to adjustments, and will expire on August 20, 2026 or earlier upon redemption or liquidation. The Public Warrants have an exercise price of $11.50 per share, subject to adjustments, and will expire on August 20, 2026 or earlier upon redemption or liquidation. The Public Warrants may only be exercised for a whole number of shares. No fractional Public Warrants will be issued upon separation of the units and only whole Public Warrants will trade. The Public Warrants became exercisable; provided that the Company has an effective registration statement under the Securities Act covering the issuance of the Common Stock issuable upon exercise of the Warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities, or blue sky, laws of the state of residence of the holder (or the Company permits holders to exercise their Warrants on a cashless basis under the circumstances specified in the warrant agreement). A registration statement was filed with the SEC covering the issuance of the Common Stock issuable upon exercise of the Warrants, and the Company will use its commercially reasonable efforts to maintain the effectiveness of such registration statement and a current prospectus relating to those shares of Common Stock until the Public Warrants expire or are redeemed. If the shares of Common Stock are at the time of any exercise of a Public Warrant not listed on a national securities exchange such that they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, requires holders of Public
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Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, it will not be required to file or maintain in effect a registration statement.

The Private Placement Warrants are identical to the Public Warrants, except that the Private Placement Warrants and the Common Stock issuable upon exercise of the Private Placement Warrants were not be transferable, assignable or salable until September 19, 2021, subject to certain limited exceptions. Additionally, the Private Placement Warrants will be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial shareholders or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

Redemption of Warrants for cash when the price per Common Stock equals or exceeds $18.00:

Once the Warrants become exercisable, the Company may redeem the outstanding Warrants (except as described above with respect to the Private Placement Warrants):

in whole and not in part;
at a price of $0.01 per Warrant;
upon not less than 30 days’ prior written notice of redemption to each Warrant holder; and
if, and only if, the last reported sale price of Common Stock for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the Warrant holders (the “Reference Value”) equals or exceeds $18.00 per share (as adjusted for share sub-divisions, share dividends, rights issuances, consolidations, reorganizations, recapitalizations and the like).

The Company will not redeem the Warrants as described above unless a registration statement under the Securities Act covering the issuance of the Common Stock issuable upon exercise of the Warrants is then effective and a current prospectus relating to those Common Stock is available throughout the 30-day redemption period. If and when the Warrants become redeemable by the Company, it may exercise its redemption right even if the Company is unable to register or qualify the underlying securities for sale under all applicable state securities laws.

Redemption of Warrants for Common Stock when the price per share equals or exceeds $10.00:

Once the Warrants become exercisable, the Company may redeem the outstanding Warrants (including both Public Warrants and Private Placement Warrants):

in whole and not in part;
at $0.10 per Warrant upon a minimum of 30 days’ prior written notice of redemption provided that holders will be able to exercise their Warrants on a cashless basis prior to redemption and receive that number of shares determined by reference to an agreed table based on the redemption date and the “fair market value” of Common Stock;
if, and only if, the Reference Value equals or exceeds $10.00 per share (as adjusted for share splits, share dividends, rights issuances, subdivisions, reorganizations, recapitalizations and the like); and
if the Reference Value is less than $18.00 per share (as adjusted), the Private Placement Warrants must also concurrently be called for redemption on the same terms as the outstanding Public Warrants, as described above.

The “fair market value” of Common Stock shall mean the average reported last sale price of Common Stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of Warrants.

In no event will the Company be required to net cash settle any Warrant. The Warrants may also expire worthless.

Warrant Liability on Legacy Xos Preferred Stock

In connection with the Series A Financing (see Note 4), the Company issued one warrant to a holder of Legacy Xos Preferred Stock (the “Legacy Xos Preferred Stock Warrant”), which permitted a purchase of up to 319,411 shares of Class A Legacy Xos Preferred Stock at an exercise price of $8.50. The Legacy Xos Preferred Stock Warrant was exercisable for 5 years from issuance date and expires on 2025 or earlier upon the consummation of a liquidation event or a SPAC transaction. The Company has classified this Level 3 derivative instrument as a liability, with fair value changes flowing through the consolidated statements of operations.
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Notes to Unaudited Condensed Consolidated Financial Statements

The Company recognized a warrant liability on the Legacy Xos Preferred Stock Warrant based on its current fair value $1.7 million as of December 31, 2020, respectively.

As of June 30, 2021, due to proximity of the expected consummation of the Business Combination, the valuation of the Legacy Xos Preferred Stock Warrant was determined using the probability weighted expected return method (“PWERM”) framework, incorporating the weighting of likely two (2) scenarios, as described more fully below:

a.Merger/public scenario: 75% probability of occurrence with per share value determined on a discounted basis using post-merger equity value of existing Xos stockholders less expected proceeds from the exercise of the Legacy Xos Preferred Stock Warrant.

b.Private scenario: 25% probability of occurrence with per share value determined based on equal 50-50 weighting of the (i) market approach (i.e., average revenue multiples derived from our peer group under the guideline public company method) and (ii) income approach (i.e., utilizing the company’s projections under the discounted cashflow method).

As of December 31, 2020, the valuation of the Legacy Xos Preferred Stock Warrant was determined based on Black-Scholes option pricing model utilizing the following assumptions:
Expected dividend yield0%
Standard deviation of share price0.80
Expected term5 years
Risk-free interest rate0.36%
Grant-date fair value (estimated)$8.50

During the quarter ended September 30, 2021, the Legacy Xos Preferred Stock Warrant was exercised, resulting in a proceeds of $2.7 million.

Embedded Derivative Liability on Convertible Notes

The convertible notes were principally a debt financial instrument host containing embedded features and for options which would otherwise be required to be bifurcated from the debt hosts and recognized as separate derivative liabilities subject to initial and subsequent periodic estimated fair value measurements under ASC 815. The Company determined that, with the 2020 Series A Financing (see Note 4), the likelihood of the notes converting had risen to a near certainty as of December 31, 2020. Accordingly, the related derivative liability for these notes were revalued assuming a probability of 100% for conversion according to the notes’ terms, causing the associated derivative liability to be valued at $6.4 million as of December 31, 2020.

The fair value of the derivative liability was estimated using a probability weighted assessment of the settlement value. The significant unobservable inputs to the fair value calculation are the estimated probability that settlement will occur as well as the timing of such settlement. These are subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, these techniques are highly volatile and sensitive to changes in inputs. Because derivative financial instruments are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in these estimates and assumption changes. The Company has determined that as a result of the conversion, the probability of settlement occurring increased to 100% and adjusted the fair value of derivative liability accordingly.

The carrying value of the embedded derivative on the convertible notes was recorded as a derivative liability on the consolidated balance sheet. As of December 31, 2020, the embedded derivative liability was presented in the current classification, reflecting the Company’s anticipation of a conversion exercise. As of September 30, 2021, there was no associated balance in the derivative liability as a result of the conversion in conjunction with the Series A Financing. See Note 4 for further details.

Note 7 — Share-Based Compensation

2018 Stock Plan

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Notes to Unaudited Condensed Consolidated Financial Statements
On November 27, 2018, the Legacy Xos’ board of directors and stockholders adopted the 2018 Stock Plan. There are no shares available for issuance under the 2018 Stock Plan, however, the 2018 Stock Plan continues to govern the terms and conditions of the outstanding awards granted under the 2018 Stock Plan.

Options

As of September 30, 2021 there were 2,016,933 Options outstanding under the 2018 Stock Plan. The amount and terms of Option grants were determined by the board of directors of Legacy Xos. The Options granted under the 2018 Stock Plan generally expire within 10 years from the date of grant and generally vest over 4 years, at the rate of 25% on the first anniversary of the date of grant and ratably on a monthly basis over the remaining 36-month period thereafter based on continued service.

2021 Equity Plan

On August 19, 2021 the Company’s stockholders approved the 2021 Equity Plan, which was ratified by the Company’s board of directors on August 20, 2021. The 2021 Equity Plan provides for the grant of incentive stock options (“ISOs”), within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) to employees, including employees of any parent or subsidiary, and for the grant of no statutory stock options (“NSOs”), stock appreciation rights, restricted stock awards, RSUs, performance awards and other forms of awards to employees, directors and consultants, including employees and consultants of Xos’ affiliates.

As of September 30, 2021, there were 3,284,383 shares of Common Stock available for issuance under the 2021 Equity Plan and no equity awards outstanding.

The Company recognized stock-based compensation expense for the nine months ended September 30, 2021, and 2020 totaling approximately $10,000 and $7,000, respectively.

Note 8 — SAFE Notes
On October 30, 2020, the Company entered into a SAFE agreement (Simple Agreement for Future Equity) totaling $30,000 issued to Elemental Excelerator (the “SAFE” Note”).
Conversion or cash-out events: In the event of an equity financing in which the Company issues and sells Preferred Stock for the purpose of raising capital and upon approval by the Company’s Board of Directors, the SAFE Notes will convert into a series of Preferred Stock of the company. The SAFE Note will convert into a number of shares of preferred stock equal to the quotient obtained by dividing (x) the principal amount of the SAFE Note by (y) the product of (A) the applicable price per share in the then-applicable financing round and (B) 80%.
The SAFE Note holder will either receive cash for its notes, or Common Stock if a liquidity event were to occur before the expiration or termination of the SAFE Note. In the event of a dissolution, the SAFE Note holder will receive the purchase amount, due and payable immediately prior to, or concurrent with, the consummation of the dissolution event. The SAFE Note will terminate or expire upon either the issuance of capital stock to the investor, or payment of the amount due to the investor.
Preference upon dissolution: Should the Company dissolve or wind-up operations prior to a conversion or cash-out event, the SAFE Note holder will be paid back their purchase amount prior to the distribution of assets to Common Stock investors and concurrent with payments for other Convertible Securities and/or Preferred Stock.
As part of its February 2021 meeting, the Company’s Board approved the conversion of the SAFE Note to Class A Preferred shares. The SAFE Note holder contributed an additional $620,000 in cash and the $30,000 SAFE Note in exchange for 76,471 preferred shares.
Note 9 — Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of insurance premiums, deposits for equipment, and software licenses which have been paid and are being amortized over the policy years. Refer to the table below for details (in thousands):
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Prepaid Expenses and Other Current AssetsSeptember 30, 2021December 31, 2020
Deposits (primarily deposits relating to equipment purchases)
$4,085 $ 
Prepaid insurance6,946 48 
Prepaid inventories5,325 8 
Others (including software licenses)
1,484  
Total$17,840 $56 
Note 10 — Property and Equipment, net
Property and equipment, net consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):
Property and EquipmentSeptember 30, 2021December 31, 2020
Equipment$2,944 $957 
Furniture & fixtures
96 11 
Company vehicles
759 320 
Leasehold improvements
268 29 
Computers, software and related equipment
857 444 
Construction in progress1,012  
Property and Equipment, gross5,936 1,761 
Accumulated depreciation
(1,307)(677)
Property and Equipment, net$4,629 $1,084 

Depreciation expense during the three months ended September 30, 2021 and 2020 totaled approximately $248,000 and $66,000, respectively. Depreciation expense during the nine months ended September 30, 2021 and 2020 totaled approximately $628,000 and $