UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2022
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
______________________________________________________________________________
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(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 class | Trading Symbol | Name of exchange on which registered | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
| ☒ | Smaller 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 163,637,247 shares of Common Stock, $0.0001 par value as of May 4, 2022.
TABLE OF CONTENTS
| Page | |||||
Item 1. Financial Statements (Unaudited) (As restated) | |||||
Item 4. Controls and Procedures (As restated) | |||||
Item 1A. Risk Factors (As restated) | |||||
3
Explanatory Note
Restatement Background
As disclosed in the Company’s Current Report on Form 8-K, as furnished or filed, as applicable, with the SEC on March 8, 2023, the Company is restating its previously issued unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022 due to (1) errors in recording results of a physical inventory count, which caused inventories to be overstated and cost of goods sold to be understated for the three months ended March 31, 2022, and (2) errors in the improper recording of duplicate inventory receipts as well as improper and inaccurate recording of prepaid inventories, which caused inventories, prepaid inventories (included within Prepaid expenses and other current assets), accounts payable and accrued expenses (included within Other current liabilities) to be overstated for the three months ended March 31, 2022. On March 8, 2023, the Audit Committee of the Board of Directors of the Company, after discussion with the Company’s management, concluded that the Company’s unaudited condensed consolidated financial statements as of March 31, 2022 and for the three months ended March 31, 2022 included in the Original Report should be restated (the “Restatement”) to correct these errors. Accordingly, the Company’s previously furnished or filed reports, related earnings releases, investor presentations or similar communications of the Company describing the Company’s financial results contained in the Original Report should no longer be relied upon.
In connection with the misstatement, management identified a material weakness in internal control over financial reporting relating to the ineffective operation of controls related to inventory management that resulted in the error above and concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2022. For a discussion of management’s evaluation of our disclosure controls and procedures and the material weakness identified, see Part I, Item 4, “Controls and Procedures” of this Form 10-Q/A.
Items Amended in this Form 10-Q/A
This Form 10-Q/A presents the Original Report, amended, and restated with modifications as necessary to reflect the Restatement. The following items have been amended to reflect the Restatement:
•Part I, Item 1. Financial Information
•Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
•Part I, Item 4, Controls and Procedures
•Part II, Item 1A. Risk Factors
•Part II, Item 6. Exhibits and Signatures
In addition, this Form 10-Q/A includes an updated signature page and new certifications of the Company’s Chief Executive Officer and Chief Financial Officer, dated as of the date of this filing (Exhibits 31.1, 31.2 and 32.1).
This Form 10-Q/A sets forth the Original Report in its entirety, as amended to reflect the restatement. Among other things, forward-looking statements made in the Original Report have not been revised to reflect events that occurred or facts that became known to the Company after the filing of the Original Report, and such forward-looking statements should be read in their historical context. Except as described above, this Form 10-Q/A does not amend, update or change any other items or disclosures in the Original Report and does not purport to reflect any information or events subsequent to the filing thereof. As such, this Form 10-Q/A speaks only as of the date the Original Report was filed, and we have not undertaken herein to amend, supplement or update any information contained in the Original Report to give effect to any subsequent events. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Report, including any amendment to those filings.
4
Forward-Looking Statements
This Quarterly Report on Form 10-Q/A (the “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 (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, our 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 successfully commercialize our Fleet-as-a-Service offering to customers over time;
•delays in the design, manufacturing and wide-spread deployment of our vehicles, powertrains and battery packs;
•our ability to grow market share in our existing markets or any new markets we may enter;
•our ability to successfully complete strategic relationships and alliances with third parties or acquisitions in the future;
•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 us;
•our financial and business performance, including financial projections and business metrics and any underlying assumptions thereunder;
•changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans;
•the restatement of our financial statements as of and for the three months ended March 31, 2022 and our ability to maintain an effective system of internal controls over financial reporting, including our ability to remediate the existing material weakness in our internal controls;
•our ability to respond to general economic conditions, including supply chain delays or interruptions that may occur;
•our ability to manage our 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 our products and brand, and to attract customers;
•our ability to execute our business model, including market acceptance of our planned products and services and achieving sufficient production volumes at acceptable quality levels and prices;
5
•ability to source certain of our critical inventory items, including 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;
•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;
•general economic and political conditions, such as the effects of the COVID-19 pandemic, recessions, interest rates, local and national elections, fuel prices, international currency fluctuations, corruption, political instability and acts of war or military conflict, including repercussions of the recent military conflict between Russia and Ukraine, or terrorism on our business and the actions we 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
A discussion of these and other factors affecting our business and prospects is set forth in Part II, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2022 (the “2021 Form 10-K”), as supplemented by other SEC filings, including this Report and future SEC filings. 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 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 per day;
•“Closing” means the closing of the Business Combination;
•“Closing Date” means August 20, 2021;
6
•“Common Stock” means the shares of common stock, par value $0.0001 per share, of Xos;
•“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;
•“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” 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;
•“Founders” means Dakota Semler and Giordano Sordoni;
•“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 $0.0001 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;
•”NextGen Sponsor” means NextGen Sponsor LLC.
•“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.;
7
•“Private Placement Warrants” means the warrants to purchase Common Stock originally issued in a private placement in connection with the Initial Public Offering;
•“Public Warrants” means the 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;
•“Sponsor” means NextGen’s sponsor, NextGen Sponsor LLC;
•“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;
•“X-Pack” means our proprietary battery system; and
•“X-Platform” means our proprietary, purpose-built vehicle chassis platform.
Item 1. Financial Statements
Index to Unaudited Condensed Consolidated Financial Statements
| Page | |||||
8
Xos, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
(in thousands, except par value)
March 31, 2022 (As restated)(1) | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Restricted cash | |||||||||||
Accounts receivable | |||||||||||
Marketable debt securities, available-for-sale — short-term | |||||||||||
Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Marketable debt securities, available-for-sale — long-term | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
Liabilities and Stockholders’ Equity | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
Earn-out shares liability | |||||||||||
Common stock warrant liability | |||||||||||
Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitment and Contingencies | |||||||||||
Stockholders’ Equity | |||||||||||
Common Stock $ and December 31, 2021, respectively | |||||||||||
Preferred Stock $ | |||||||||||
Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
Accumulated other comprehensive loss | ( | ( | |||||||||
Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
(1) For discussion on the restatement adjustments, see Note 2 – Basis of Presentation and Summary of Significant Accounting Policies – Restatement of Unaudited Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
9
Xos, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
Unaudited
(in thousands, except per share amounts)
| Three Months Ended March 31 | ||||||||||||||
2022 (As restated)(1) | 2021 | |||||||||||||
| Revenues | $ | $ | ||||||||||||
Cost of goods sold | ||||||||||||||
Gross (loss) margin | ( | |||||||||||||
Operating expenses | ||||||||||||||
General and administrative | ||||||||||||||
Research and development | ||||||||||||||
Sales and marketing | ||||||||||||||
Total operating expenses | ||||||||||||||
Loss from operations | ( | ( | ||||||||||||
Other income (expense), net | ( | |||||||||||||
Change in fair value of derivative instruments | ( | |||||||||||||
Change in fair value of earn-out shares liability | ||||||||||||||
| Write off of subscription receivable | ( | |||||||||||||
Realized loss on debt extinguishment | ( | |||||||||||||
Loss before provision for income taxes | ( | ( | ||||||||||||
Provision for income taxes | ||||||||||||||
Net loss | ( | ( | ||||||||||||
Other comprehensive loss | ||||||||||||||
Marketable debt securities, available-for-sale | ||||||||||||||
Change in net unrealized loss, net of tax of $ | ( | |||||||||||||
Total comprehensive loss | $ | ( | $ | ( | ||||||||||
Net loss per share | ||||||||||||||
Basic | $ | ( | $ | ( | ||||||||||
Diluted | $ | ( | $ | ( | ||||||||||
| Weighted average shares outstanding | ||||||||||||||
| Basic | ||||||||||||||
| Diluted | ||||||||||||||
(1) For discussion on the restatement adjustments, see Note 2 – Basis of Presentation and Summary of Significant Accounting Policies – Restatement of Unaudited Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
10
Xos, Inc. and Subsidiaries
Condensed Consolidated Statements of Legacy Xos Preferred Stock and Stockholders’ Equity (Deficit)
Unaudited
(in thousands)
Legacy Xos Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit (As restated)(1) | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) (As restated)(1) | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Par Value | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | — | $ | ( | |||||||||||||||||||||||||||||||||||||||||
| Payment of subscription receivable | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Legacy Xos Preferred Stock, including note conversion | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Options exercised | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock repurchased and retired | — | — | ( | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | — | $ | ( | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | — | $ | — | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for vesting of restricted stock units | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement of stock-based awards | — | — | ( | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for commitment shares under Standby Equity Purchase Agreement | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Net and comprehensive loss (As restated) | — | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 (As restated) | — | $ | — | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
____________
(1) For discussion on the restatement adjustments, see Note 2 – Basis of Presentation and Summary of Significant Accounting Policies – Restatement of Unaudited Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
11
Xos, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
| Three Months Ended March 31 | |||||||||||
2022 (As restated)(1) | 2021 | ||||||||||
| OPERATING ACTIVITIES: | |||||||||||
Net loss | $ | ( | $ | ( | |||||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation | |||||||||||
Amortization of right-of-use assets | |||||||||||
Inventory reserve | |||||||||||
| Write off of subscription receivable | |||||||||||
Realized loss on debt extinguishment | |||||||||||
Change in fair value of derivative instruments | ( | ||||||||||
| Change in fair value of earn-out shares liability | ( | ||||||||||
Net realized losses on marketable debt securities, available-for-sale | |||||||||||
| Stock-based compensation expense | |||||||||||
Other non-cash items | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Other assets | ( | ||||||||||
| Accounts payable | ( | ( | |||||||||
Other liabilities | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
Proceeds from sales and maturities of marketable debt securities, available-for-sale | |||||||||||
Net cash provided by (used in) investing activities | ( | ||||||||||
| FINANCING ACTIVITIES: | |||||||||||
| Proceeds from issuance of shares of Legacy Xos Preferred Stock | |||||||||||
| Proceeds from subscription receivable – preferred | |||||||||||
Principal payment of equipment leases | ( | ( | |||||||||
Taxes paid related to net share settlement of stock-based awards | ( | ||||||||||
| Proceeds from stock option exercises | |||||||||||
Net cash (used in) provided by financing activities | ( | ||||||||||
Net (decrease) increase in cash, cash equivalents and restricted cash | ( | ||||||||||
Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
Reconciliation of Cash, Cash Equivalents and Restricted Cash to Condensed Consolidated Balance Sheets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Restricted cash | |||||||||||
Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
12
Supplemental disclosure of non-cash investing and financing activities | |||||||||||
Purchase of property and equipment in accounts payable | $ | $ | |||||||||
Recognition of right-of-use asset and lease liabilities upon ASC 842 adoption on 1/1/2022 | $ | $ | — | ||||||||
Right-of-use asset obtained in exchange for operating lease obligations | $ | $ | |||||||||
Conversion of notes payable to Legacy Xos Preferred Stock: | |||||||||||
| Issuance of redeemable convertible preferred stock | $ | $ | |||||||||
| Conversion of interest payable on convertible notes | $ | $ | |||||||||
| Conversion of notes payable into preferred stock | $ | $ | |||||||||
____________
(1) For discussion on the restatement adjustments, see Note 2 – Basis of Presentation and Summary of Significant Accounting Policies – Restatement of Unaudited Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
13
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1— Description of Business
Xos, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Xos”) is a mobility solutions company. Xos manufactures Class 5 to 8 battery-electric commercial vehicles, facilitates fleet transition from traditional internal combustion engine vehicles to electric vehicles, and enables electric fleets to better manage their fleet operations through a portfolio of management tools. 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 Xos Services, Inc. (“Xos Services”, formerly Rivordak, Inc.), the subsidiary holding a California dealer license to sell Xos vehicles, are wholly owned subsidiaries of Xos, Inc., and make up 100% of the operations of the Company.
Business Combination
Emerging Growth Company
Risks and Uncertainties
COVID-19 and actions taken to mitigate its spread have had and may 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 pandemic’s 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 prolonged period of time or worsen.
14
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Additionally, recent geopolitical events, such as the recent military conflict between Russia and Ukraine, may increase the severity of supply chain disruptions and further hinder our ability to source inventory for our vehicles. The conflict continues to evolve and its ultimate impact on the Company is uncertain, but a prolonged conflict may have a material negative impact on the Company’s business, operating results, cash flows, liquidity and financial condition.
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.
Supply Chain Disruptions
Negative global economic conditions, which the COVID-19 pandemic has contributed to, has impacted the Company’s 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 the Company’s supply chain management, such as the semiconductor chip and battery cell shortage and supply limitations on vehicle bodies and aluminum.
Despite supply chain disruptions, the Company has continued to source inventory for its vehicles and its 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 2— Basis 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”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. 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 Xos Services. 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 ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021 and 2020 presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 30, 2022.
Restatement of Unaudited Condensed Consolidated Financial Statements
Subsequent to the original issuance of the interim financial statements for the quarterly period ended March 31, 2022 on May 9, 2022, management determined, upon further analysis, that the Company’s previously issued unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022 should be restated due to (1) errors in recording results of a physical inventory count, which caused inventories to be overstated and cost of goods sold to be understated for the three months ended March 31, 2022, and (2) errors in the improper recording of duplicate inventory receipts as well as improper and inaccurate recording of prepaid inventories, which caused inventories, prepaid inventories (included within Prepaid expenses and other current assets), accounts payable and accrued expenses (included within Other current liabilities) to be overstated for the three months ended March 31, 2022.
15
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
| March 31, 2022 | |||||||||||||||||
| Condensed Consolidated Balance Sheets | As Previously Reported | Adjustments | As Restated | ||||||||||||||
| Inventories | $ | $ | ( | $ | |||||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||||||||
| Total current assets | ( | ||||||||||||||||
| Total assets | ( | ||||||||||||||||
| Accounts payable | ( | ||||||||||||||||
| Other current liabilities | ( | ||||||||||||||||
| Total current liabilities | ( | ||||||||||||||||
| Total liabilities | ( | ||||||||||||||||
| Accumulated deficit | ( | ( | ( | ||||||||||||||
| Total stockholders' equity | ( | ||||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | ( | $ | |||||||||||||
| Three Months Ended March 31, 2022 | |||||||||||||||||
| Condensed Consolidated Statement of Operations and Comprehensive Loss | As Previously Reported | Adjustments | Restated | ||||||||||||||
| Cost of goods sold | $ | $ | $ | ||||||||||||||
| Gross loss | ( | ( | ( | ||||||||||||||
| Loss from operations | ( | ( | ( | ||||||||||||||
| Loss before provision from income taxes | ( | ( | ( | ||||||||||||||
| Net loss | ( | ( | ( | ||||||||||||||
| Total comprehensive loss | $ | ( | $ | ( | $ | ( | |||||||||||
| Net loss per share | |||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | |||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | |||||||||||
16
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
| Three Months Ended March 31, 2022 | |||||||||||||||||
| Condensed Consolidated Statement of Legacy Xos Preferred Stock and Stockholders' Equity (Deficit) | As Previously Reported | Adjustments | As Restated | ||||||||||||||
| Net and comprehensive loss | $ | ( | $ | ( | $ | ( | |||||||||||
| Accumulated deficit | ( | ( | ( | ||||||||||||||
| Total stockholders' equity (deficit) | $ | $ | ( | $ | |||||||||||||
| Three Months Ended March 31, 2022 | |||||||||||||||||
| Condensed Consolidated Statement of Cash Flows | As Previously Reported | Adjustments | Restated | ||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | |||||||||||
| Inventory reserve | ( | ||||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Inventories | ( | ( | |||||||||||||||
| Prepaid expenses and other current assets | |||||||||||||||||
| Accounts payable | ( | ( | ( | ||||||||||||||
| Other liabilities | $ | $ | ( | $ | |||||||||||||
The remainder of the notes to the Company’s condensed consolidated financial statements have been updated and restated, as applicable, to reflect the impacts of the restatement described above.
Use of Estimates
Reclassifications
Warranty Liability
17
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The reconciliation of the change in the Company’s product liability balances for the three months ended March 31, 2022 consisted of the following (in thousands):
| March 31, 2022 | ||||||||
| Warranty liability, beginning of period | $ | |||||||
| Reduction in liability (payments) | ||||||||
| Increase in liability (new warranties) | ||||||||
| Warranty liability, end of period | $ | |||||||
Leases
Upon inception of a contract, the Company evaluates if the contract, or part of the contract, contains a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The lease liability is measured as the present value of the unpaid lease payments, and the ROU asset value is derived from the calculation of the lease liability, including prepaid lease payments, if any. Lease payments include fixed and in-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, fees paid by the lessee to the owners of a special-purpose entity for restructuring the transaction, and probable amounts the lessee will owe under a residual value guarantee. Lease payments do not include (i) variable lease payments other than those that depend on an index or rate, (ii) any guarantee by the lessee of the lessor’s debt, or (iii) any amount allocated to non-lease components, if such election is made upon adoption, per the provisions of ASU 2016-02, Leases.
When the Company cannot determine the actual implicit rates a lease, it uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company gives consideration to its recent debt issuances, if any, as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rate. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company's lease term includes any option to extend the lease when it is reasonably certain to be exercised based on considering all relevant economic factors. Operating expense charges from the lessor are accounted for on an accrual basis. The Company has elected not to separate the lease and non-lease components.
The leases have remaining initial terms ranging from less than 1 year to 6 years.
The Company reviews the carrying value of its right-of-use assets for impairment whenever events or changes in circumstances indicate that the recorded value may not be recoverable. Recoverability of assets is measured by comparing the carrying amounts of the assets to the estimated future undiscounted cash flows, excluding financing costs. If the Company determines that an impairment exists, any related impairment loss is estimated based on fair values.
18
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Recent Accounting Pronouncements Issued and 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 ROU assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements.
On January 1, 2022, the Company adopted ASC 842 using the modified retrospective method. The Company has presented financial results and applied its accounting policies for the period beginning January 1, 2022 under ASC 842, while prior period results and accounting policies have not been adjusted and are reflected under legacy GAAP pursuant to ASC 840. In connection with the adoption of ASC 842, the Company performed an analysis of contracts under ASC 840 to ensure proper assessment of leases (or embedded leases) in existence as of January 1, 2022. The Company elected the package of practical expedients permitted under ASC 842, which allows the Company not to reassess 1) whether any expired or existing contracts as of the adoption date are or contain a lease, 2) lease classification for any expired or existing leases as of the adoption date and 3) initial direct costs for any existing leases as of the adoption date. The most significant impact of applying ASC 842 was the recognition of ROU asset and lease liabilities for operating leases in its condensed consolidated balance sheets. On January 1, 2022, the Company recognized an initial operating ROU asset of $7.7 million and associated operating lease liabilities of $7.7 million.
Refer to Note 6 — Leases for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements, as well as its various accounting policies for each lease type.
Recent Accounting Pronouncements Issued and not yet Adopted:
ASU 2016-13, Financial Instruments — Credit Losses (“ASU 2016-13”): In June 2016, the FASB issued ASU 2016-13, the Company will be required to use an expected-loss model for its marketable debt securities, available-for sale, which requires that credit losses be presented as an allowance rather than as an impairment write-down. Reversals of credit losses (in situations in which the estimate of credit losses declines) is permitted in the reporting period that the change occurs. Current U.S. GAAP prohibits reflecting reversals of credit losses in current period earnings. At March 31, 2022, the Company had $117.9 million in marketable debt securities, available for sale which would be subject to this new standard. As of December 31, 2021, these marketable debt securities, available for sale have an average credit rating of A+ and no impairment write-downs have been recorded. The Company is currently evaluating the impact of this new standard on its investment policy and investments and does not expect the standard to have a material impact on its financial statements at adoption or in subsequent periods. The Company expects to adopt the new standard effective January 1, 2023.
Note 3— Revenue Recognition
Disaggregated revenues by major source for the three months ended March 31, 2022 and 2021 consisted of the following (in thousands):
| Three Months Ended | ||||||||||||||
| March 31, 2022 | March 31, 2021 | |||||||||||||
| Product and service revenue | ||||||||||||||
| Stepvans & vehicle incentives | $ | $ | ||||||||||||
| Powertrains | ||||||||||||||
| Fleet-as-a-Service | ||||||||||||||
| Total product revenue | ||||||||||||||
| Ancillary revenue | ||||||||||||||
| Total revenue | $ | $ | ||||||||||||
19
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 4— Inventories
March 31, 2022 (As restated)(1) | December 31, 2021 | |||||||||||||
| Raw materials | $ | $ | ||||||||||||
| Work in process | ||||||||||||||
Finished goods | ||||||||||||||
Inventories, gross of reserves | ||||||||||||||
Less: inventory reserve | ( | ( | ||||||||||||
Inventories | $ | $ | ||||||||||||
(1) For discussion on the restatement adjustments, see Note 2 – Basis of Presentation and Summary of Significant Accounting Policies – Restatement of Unaudited Condensed Consolidated Financial Statements.
Note 5— Selected Balance Sheet Data
March 31, 2022 (As restated)(1) | December 31, 2021 | |||||||||||||
Prepaid inventories | $ | $ | ||||||||||||
Prepaid insurance | ||||||||||||||
Deposits (primarily relating to deposits on equipment purchases) | ||||||||||||||
Assets held for sale | ||||||||||||||
Prepaid licenses and subscriptions | ||||||||||||||
Others | ||||||||||||||
Total | $ | $ | ||||||||||||
(1) For discussion on the restatement adjustments, see Note 2 – Basis of Presentation and Summary of Significant Accounting Policies – Restatement of Unaudited Condensed Consolidated Financial Statements.
Other current liabilities as of March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
March 31, 2022 (As restated)(1) | December 31, 2021 | |||||||||||||
Accrued expenses(2) | $ | $ | ||||||||||||
Lease liabilities, current | ||||||||||||||
Customer deposits | ||||||||||||||
Warranty liability | ||||||||||||||
Others | ||||||||||||||
Total | $ | $ | ||||||||||||
____________
20
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(1) For discussion on the restatement adjustments, see Note 2 – Basis of Presentation and Summary of Significant Accounting Policies – Restatement of Unaudited Condensed Consolidated Financial Statements.
(2) Primarily relates to accrued inventory purchases, personnel costs — wages, health benefits, vacation and other accruals.
Note 6— Leases
A summary of the balances relating to the Company’s lease assets and liabilities as of March 31, 2022 consisted of the following (in thousands):
| Balance Sheet Location | March 31, 2022 | ||||||||||
| Assets | |||||||||||
| Operating leases | Operating lease right-of-use assets, net | $ | |||||||||
| Equipment finance leases | |||||||||||
| Total Lease Assets | $ | ||||||||||
| Liabilities | |||||||||||
| Current | |||||||||||
| Operating leases | $ | ||||||||||
| Equipment finance leases | |||||||||||
| Sub-total | $ | ||||||||||
| Non-current | |||||||||||
| Operating leases | $ | ||||||||||
| Equipment finance leases | |||||||||||
| Sub-total | $ | ||||||||||
| Total Lease Liabilities | $ | ||||||||||
Operating Leases
The Company has a 5-year office lease on its headquarter facility in Los Angeles, which commenced in January 2022, as well as certain other leases (both short-term and long-term) within the United States.
The Company records lease expense on a straight-line basis over the lease term in general and administrative expense. Total lease expense for the three months ended March 31, 2022 and 2021 was $0.4 million and $0.2 million, respectively.
Lease terms include renewal or termination options that the Company is reasonably certain to exercise. For leases with a term of 12 months or less, the Company has made an accounting policy election to not record a ROU asset and associated lease liability on its unaudited condensed consolidated balance sheet. Total lease expense recorded for these short-term leases is immaterial for the three months ended March 31, 2022.
21
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Equipment Finance Leases
The Company leases certain equipment facilities under finance leases that expire on various dates through 2027. The finance lease cost for the three months ended March 31, 2022 and 2021 consisted of the following (in thousands):
Income Statement Location | March 31, 2022 | March 31, 2021 | ||||||||||||||||||
Amortization | General and administrative expense | $ | $ | |||||||||||||||||
Interest accretion on finance lease liabilities | Other income (expense), net | |||||||||||||||||||
Total | $ | $ | ||||||||||||||||||
Supplemental Cash Flow Information, Weighted-Average Remaining Lease Term and Discount Rate
The weighted-average remaining lease term and discount rates, as well as supplemental cash flow information for the three months ended March 31, 2022 consisted of the following (in thousands for the supplemental cashflow information):
| Supplemental cashflow information: | ||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | |||||||
| ROU assets obtained in exchange for operating lease obligations | $ | |||||||
| Weighted average remaining lease term: | ||||||||
| Operating leases | ||||||||
| Equipment finance leases | ||||||||
| Weighted average discount rate: | ||||||||
| Operating lease - IBR | % | |||||||
| Equipment finance leases - rate implicit in the lease | % | |||||||
Maturity Analysis
A summary of the undiscounted cash flows and a reconciliation to the Company’s lease liabilities as of March 31, 2022 consisted of the following (in thousands):
| March 31, 2022 | ||||||||||||||||||||
Operating Leases | Equipment Finance Leases | Total | ||||||||||||||||||
2022 (remaining nine months) | $ | $ | $ | |||||||||||||||||
2023 | ||||||||||||||||||||
2024 | ||||||||||||||||||||
2025 | ||||||||||||||||||||
2026 | ||||||||||||||||||||
Thereafter | ||||||||||||||||||||
Total future minimum lease payments | $ | $ | $ | |||||||||||||||||
Less: imputed interest | ||||||||||||||||||||
Present value of Lease Liabilities | $ | $ | $ | |||||||||||||||||
22
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Schedule of future minimum lease payments for operating and finance leases as of December 31, 2021 consisted of the following (in thousands):
| December 31, 2021 | ||||||||||||||||||||
Operating Leases | Equipment Finance Leases | Total | ||||||||||||||||||
2022 | $ | $ | $ | |||||||||||||||||
2023 | ||||||||||||||||||||
2024 | ||||||||||||||||||||
2025 | ||||||||||||||||||||
2026 | ||||||||||||||||||||
Thereafter | ||||||||||||||||||||
Total future minimum lease payments | $ | $ | $ | |||||||||||||||||
Note 7— Recapitalization and 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;
•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.
23
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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.
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 .
24
Xos, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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 the Monte Carlo simulation of the stock prices based on historical and implied market volatility of a peer group of public companies.
The Company recognized a gain on the fair value change in Earn-out Shares liability of $2.6 million in its unaudited condensed consolidated statements of operations for the three months ended March 31, 2022.
Note 8— Investments
Amortized cost, gross unrealized gains/losses in accumulated other comprehensive loss and fair value of marketable debt securities, available-for-sale, by type of security as of March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
March 31, 2022 | |||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Corporate debt security | $ | $ | $ | ( | $ | ||||||||||||||||||
| U.S. treasuries | ( | ||||||||||||||||||||||
| Asset-backed security and other | ( | ||||||||||||||||||||||
| Non-U.S. government and supranational bonds | ( | ||||||||||||||||||||||
| Certificate of deposit | |||||||||||||||||||||||
| $ | $ | $ | ( | $ | |||||||||||||||||||