Filing summary
Entity note: The request identifies Spruce Power Holding Corp., but the supplied Form 10-Q is for XL Fleet Corp. This summary reflects the filing provided, for the quarter ended September 30, 2021; investors should verify the company and filing match.
Business context and reporting period
XL Fleet provides commercial fleet electrification systems and, following its May 2021 acquisition of World Energy, energy-efficiency, renewable-energy and EV-charging solutions. The unaudited filing reports the three and nine months ended September 30, 2021, compared with the same periods in 2020. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3.2 million | $6.3 million | $7.6 million | $9.5 million |
| Gross profit | $0.7 million | $0.8 million | $0.9 million | $0.8 million |
| Gross margin | 21.6% | 12.1% | 12.4% | 8.0% |
| Operating loss | $15.3 million | $6.2 million | $38.0 million | $13.3 million |
| Net income (loss) | $(7.5) million | $(2.3) million | $43.9 million | $(22.2) million |
| Operating cash flow | Not separately provided | Not separately provided | $(34.2) million | $(13.1) million |
The nine-month 2021 reported net income included an $82.0 million noncash gain from a decline in warrant-liability fair value. Management presents an adjusted net loss of approximately $38.1 million after removing that gain. Thus, reported net income did not reflect positive operating performance. Quarterly and year-to-date operating expenses rose substantially, particularly selling, general and administrative costs and research and development.
At September 30, 2021, cash and cash equivalents were $366.7 million (plus $0.2 million restricted cash), working capital was $371.9 million, and total liabilities were $40.3 million. Long-term debt, including its current portion, was approximately $0.1 million; lease liabilities were approximately $4.4 million. Nine-month investing cash outflow was $14.1 million and financing cash inflow was $85.4 million, principally from public warrant exercises.
Material changes versus prior period
- Q3 revenue fell 49.4%; nine-month revenue fell 20.1%. Management attributed the decline primarily to lower Drive Systems sales amid OEM chassis shortages and the global microchip shortage.
- World Energy contributed $2.6 million of Q3 revenue and $5.1 million for the first nine months, partially offsetting weaker Drive Systems sales. The acquisition closed May 17, 2021.
- For the first nine months, gross profit increased modestly, but operating loss widened to $38.0 million as R&D and SG&A expenses increased.
- Cash increased from $329.6 million at year-end 2020, aided by $85.6 million of proceeds from public warrant exercises. Public warrants were fully exercised or called by September 30.
- Total liabilities fell from $158.1 million at year-end, mainly reflecting the reduction in warrant liabilities as well as repayment or conversion of substantially all debt before year-end 2020. The 2020 comparative figures are identified as restated in the filing.
Outlook, commentary, risks and unusual items
- Management expects near-term net losses as it invests in production, sales, product development and expansion. It said existing liquidity should fund the current business plan for the next 12 months.
- Management expects the microchip shortage and constrained OEM vehicle supply to adversely affect 2021 results and likely continue to significantly affect vehicle deliveries in 2022. It reported limited chassis availability and prolonged disruption to Drive Systems sales; retrofits are one mitigation.
- The company reported CARB approval for Ford Transit hybrid systems in June 2021 and said it had four active executive orders, with additional approvals expected. These are expectations, not guaranteed outcomes.
- World Energy acquisition consideration was approximately $12.5 million. The company also recorded a $1.0 million earnout liability based on a 2021 revenue target and compensation expense for contingent shares tied to continued employment.
- The company invested $3.0 million in an 8% eNow convertible note and had an option to acquire eNow, expiring December 31, 2021, plus a right of first refusal. It also became the exclusive supplier of specified battery and power systems for eNow eTRUs.
- Commitments include $7.8 million of battery purchases due by December 2021, $2.1 million of motor purchases by July 2022, and an open-ended $2.7 million battery commitment. Management was negotiating an extension for the $7.8 million commitment because chassis shortages reduced demand.
- Pending matters include securities class-action litigation and two Delaware fiduciary-duty complaints. The company disputes the allegations; it could not estimate potential losses for the securities suit.
- Disclosure controls were deemed ineffective as of September 30, 2021, due to a material weakness involving accounting for warrants and previously identified material errors in the 2020 and 2019 annual reports.
- COVID-19, supply-chain constraints, customer concentration, execution of new products and acquisitions, and the ability to scale profitably remain risks. Two customers represented approximately 80% of Q3 revenue; two customers accounted for 69% of receivables at quarter-end.
- A new CEO was scheduled to take office December 1, 2021. The filing states annual base salary of $600,000, target cash bonus of 80% of base salary, and initial equity awards.
Most important facts to verify
- Confirm whether this XL Fleet filing is the intended filing for the requested Spruce Power Holding Corp.
- Assess the underlying operating trend excluding the noncash warrant-liability gain; reported nine-month net income was $43.9 million, while management cited an adjusted net loss of about $38.1 million.
- Track OEM chassis availability, microchip-related supply constraints, Drive Systems sales and the company’s ability to meet supplier purchase commitments.
- Review cash burn, planned investment spending, World Energy performance against its earnout target, and the company’s stated 12-month liquidity outlook.
- Monitor remediation of the material weakness and developments in the pending litigation and management transition.