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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, 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
xos-20220930_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 classTrading SymbolName 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 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
☐
Non-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 168,034,218 shares of Common Stock, $0.0001 par value as of November 7, 2022.

TABLE OF CONTENTS
2
Forward-Looking Statements

This Quarterly Report on Form 10-Q (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,” “intend,” “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;

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

•changes in applicable laws or regulations;

•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;

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

•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 future capital requirements and 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;

•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 labor shortages, to meet our manufacturing and delivery goals;
3

•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, inflation, 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 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;

•our future capital requirements and sources and uses of cash;

•the outcome of, and costs associated with, any known and unknown legal, litigation and regulatory proceedings; and

•any other risks and uncertainties set forth in this Report 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 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 amended and 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;

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

4
•“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.;

5
•“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;

•“X-Platform” means our proprietary, purpose-built vehicle chassis platform; and

•“Xosphere Intelligence Platform” means our advanced connected vehicle ecosystem that combines our proprietary hardware and embedded software with a modern and intuitive user platform.

Item 1.    Financial Statements
Index to Unaudited Condensed Consolidated Financial Statements

6
Xos, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
(in thousands, except par value)
September 30, 2022
December 31, 2021
Assets
Cash and cash equivalents$46,433 $16,142 
Restricted cash
3,037 3,034 
Accounts receivable
4,150 3,353 
Marketable debt securities, available-for-sale — short-term
59,700 94,696 
Inventories, net
66,306 30,883 
Prepaid expenses and other current assets20,054 17,850 
Total current assets199,680 165,958 
Marketable debt securities, available-for-sale — long-term— 54,816 
Property and equipment, net18,023 7,426 
Operating lease right-of-use assets, net6,933 — 
Other non-current assets
1,600 506 
Total assets$226,236 $228,706 
Liabilities and Stockholders’ Equity
Accounts payable$5,239 $10,122 
Other current liabilities20,760 5,861 
Total current liabilities25,999 15,983 
Convertible debt, net
53,722 — 
Earn-out shares liability
5,150 29,240 
Common stock warrant liability
2,337 7,496 
Other non-current liabilities
11,214 1,594 
Total liabilities98,422 54,313 
Commitments and Contingencies (Note 14)
Stockholders’ Equity
Common Stock $0.0001 par value, authorized 1,000,000 shares,
166,432 and 163,137 shares issued and outstanding at September 30, 2022
and December 31, 2021, respectively
17 16 
Preferred Stock $0.0001 par value, authorized 10,000 shares,
0 shares issued and outstanding at September 30, 2022
and December 31, 2021, respectively
— — 
Additional paid-in capital
187,014 178,851 
Accumulated deficit(58,001)(4,093)
Accumulated other comprehensive loss
(1,216)(381)
Total stockholders’ equity
127,814 174,393 
Total liabilities and stockholders’ equity$226,236 $228,706 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
7
Xos, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income
Unaudited
(in thousands, except per share amounts)
Three Months Ended September 30,Nine Months Ended September 30,
2022
2021
2022
2021
Revenues$11,008 $357 $27,805 $1,746 
Cost of goods sold
21,777 418 46,854 1,675 
Gross (loss) margin
(10,769)(61)(19,049)71 
Operating expenses
General and administrative
9,470 7,606 30,991 15,756 
Research and development
8,573 5,302 24,493 9,846 
Sales and marketing
2,345 1,337 7,891 2,173 
Total operating expenses
20,388 14,245 63,375 27,775 
Loss from operations
(31,157)(14,306)(82,424)(27,704)
Other expense, net
(642)(66)(787)(83)
Change in fair value of derivative instruments
1,890 1,066 5,158 6,030 
Change in fair value of earn-out shares liability
6,654 48,202 24,148 48,202 
Write off of subscription receivable— — — (379)
Realized loss on debt extinguishment
— — — (14,104)
(Loss) income before provision for income taxes
(23,255)34,896 (53,905)11,962 
Provision for income taxes
— — 3 — 
Net (loss) income
$(23,255)$34,896 $(53,908)$11,962 
Other comprehensive (loss) income
Marketable debt securities, available-for-sale
Change in net unrealized gain (loss), net of tax of $0, for the three and nine months ended September 30, 2022 and 2021
141 — (835)— 
Total comprehensive (loss) income
$(23,114)$34,896 $(54,743)$11,962 
Net (loss) income per share
Basic
$(0.14)$0.31 $(0.33)$0.14 
Diluted
$(0.14)$0.30 $(0.33)$0.14 
Weighted average shares outstanding
Basic165,901 113,797 164,379 86,192 
Diluted165,901 115,932 164,379 88,487 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
8
Xos, Inc. and Subsidiaries
Condensed Consolidated Statements of Legacy Xos Preferred Stock and Stockholders’ Equity (Deficit)
Unaudited
(in thousands)
Legacy Xos
Preferred Stock		Common StockAdditional Paid-in CapitalAccumulated
Deficit		Accumulated Other Comprehensive LossTotal
Stockholders’
Equity (Deficit)
SharesAmountShares
Par Value
Balance at December 31, 2020
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 — — — — — — 
Stock 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, 202152,280 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, 202152,280 76,993 72,391 7 676 (50,502)— (49,819)
Stock based compensation expense— — — — 1 — — 1 
Stock options exercised— — 315 — 7 — — 7 
Preferred stock warrant exercise625 2,715 — — — — — — 
Conversion of preferred into common shares(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 common stock public and private warrants as liability— — — — (17,891)— — (17,891)
Recognition of earn-out interests liability— — — — (101,744)— — (101,744)
Net income— — — — — 34,896 — 34,896 
Balance at September 30, 2021— $— 162,905 $16 $177,533 $(15,606)$— $161,943 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
9
Xos, Inc. and Subsidiaries
Condensed Consolidated Statements of Legacy Xos Preferred Stock and Stockholders’ Equity (Deficit)
Unaudited
(in thousands)
Legacy Xos
Preferred Stock		Common StockAdditional Paid-in CapitalAccumulated
Deficit		Accumulated Other Comprehensive LossTotal
Stockholders’
Equity (Deficit)
SharesAmountShares
Par Value
Balance at December 31, 2021
— $— 163,137 $16 $178,851 $(4,093)$(381)$174,393 
Stock based compensation expense— — — — 1,068 — — 1,068 
Issuance of common stock for vesting of restricted stock units— — 133 — — — — — 
Shares withheld related to net share settlement of stock-based awards— — (36)— (97)— — (97)
Issuance of common stock for commitment shares under the Standby Equity Purchase Agreement— — 19 — 62 — — 62 
Net and comprehensive loss— — — — — (21,186)(826)(22,012)
Balance at March 31, 2022— — 163,253 16 179,884 (25,279)(1,207)153,414 
Stock options exercised— — 385 — 1 — — 1 
Stock based compensation expense— — — — 1,407 — — 1,407 
Issuance of common stock for vesting of restricted stock units— — 89 — — — — — 
Shares withheld related to net share settlement of stock-based awards— — (33)— (86)— — (86)
Issuance of common stock under the Standby Equity Purchase Agreement— — 1,810 1 4,310 — — 4,311 
Net and comprehensive loss— — — — — (9,467)(150)(9,617)
Balance at June 30, 2022— — 165,504 17 185,516 (34,746)(1,357)149,430 
Stock options exercised— — 4 — 1 — — 1 
Stock based compensation expense— — — — 1,343 — — 1,343 
Issuance of common stock for vesting of restricted stock units— — 441 — — — — — 
Shares withheld related to net share settlement of stock-based awards— — (69)— (111)— — (111)
Conversion of convertible notes— — 202 — 265 — — 265 
Issuance of restricted stock— — 350 — — — — — 
Net and comprehensive income (loss)— — — — — (23,255)141 (23,114)
Balance at September 30, 2022
— $— 166,432 $17 $187,014 $(58,001)$(1,216)$127,814 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
10
Xos, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
(in thousands, unaudited)
Nine Months Ended September 30,
2022
2021
OPERATING ACTIVITIES:
Net income (loss)
$(53,908)$11,962 
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation1,193 628 
Amortization of right-of-use assets
1,188 — 
Amortization of debt discounts and issuance costs76 — 
Amortization of insurance premiums362 — 
Inventory write-downs
5,538 — 
Write off of subscription receivable— 379 
Realized loss on debt extinguishment
— 14,104 
Change in fair value of derivative instruments
(5,158)(6,030)
Change in fair value of earn-out shares liability(24,148)(48,202)
Net realized losses on marketable debt securities, available-for-sale
147 — 
Stock-based compensation expense3,751 5 
Other non-cash items
1,496 — 
Changes in operating assets and liabilities:
Accounts receivable(812)(175)
Inventories(40,150)(18,967)
Prepaid expenses and other current assets(5,831)(17,784)
Other assets(1,094)(505)
Accounts payable(5,399)11,300 
Other liabilities
17,152 150 
Net cash used in operating activities(105,597)(53,135)
INVESTING ACTIVITIES:
Purchase of property and equipment(11,898)(3,343)
Proceeds from sales and maturities of marketable debt securities, available-for-sale
87,413 — 
Net cash provided by (used in) investing activities
75,515 (3,343)
FINANCING ACTIVITIES:
Proceeds from reverse merger, net— 20,721 
Proceeds from PIPE investment— 196,000 
Proceeds from issuance of shares of Legacy Xos Preferred Stock— 31,757 
Proceeds from subscription receivable – preferred— 2,430 
Proceeds from exercise of Legacy Xos Preferred Stock warrant— 2,715 
Proceeds from short-term insurance financing note3,627 — 
Payment for short-term insurance financing note(567)— 
Proceeds from issuance of convertible notes54,300 — 
Debt issuance costs(167)— 
Principal payment of equipment loans(835)(126)
Taxes paid related to net share settlement of stock-based awards(294)— 
Proceeds from stock option exercises2 10 
Proceeds from issuance of common stock under Standby Equity Purchase Agreement4,310 — 
Net cash provided by financing activities60,376 253,507 
Net increase in cash, cash equivalents and restricted cash
30,294 197,029 
Cash, cash equivalents and restricted cash, beginning of period
19,176 10,359 
Cash, cash equivalents and restricted cash, end of period
$49,470 $207,388 
11
Reconciliation of Cash, Cash Equivalents and Restricted Cash to Unaudited Condensed Consolidated Balance Sheets:
Cash and cash equivalents
$46,433 $207,388 
Restricted cash
3,037 — 
Total cash, cash equivalents and restricted cash
$49,470 $207,388 
Supplemental disclosure of non-cash investing and financing activities
Purchase of property and equipment in accounts payable$577 $— 
Recognition of ROU asset and lease liabilities upon ASC 842 adoption at 1/1/2022$7,682 $— 
ROU asset obtained in exchange for operating lease obligations$437 $— 
Accrued debt issuance costs$237 $— 
Conversion of notes payable and accrued interest to Common Stock$(265)$— 
Conversion of notes payable to redeemable convertible preferred stock:
Issuance of Legacy Xos Preferred Stock$— $34,918 
Conversion of interest payable on convertible notes$— $2,453 
Conversion of notes payable into Legacy Xos Preferred Stock$— $21,540 
Fair value adjustment of related party debt at conversion    $— $3,763 
Non-cash activities relating to the reverse merger:
Conversion of Legacy Xos Preferred Stock into Common Stock$— $79,708 
Assumption of Public and Private Warrants$— $17,891 
Recognition of earn-out shares liability$— $101,744 
Transaction costs relating to the reverse merger offset against additional paid-in capital$— $55,424 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
12
Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited

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

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, the transactions 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”), were consummated (the “Closing”), whereby 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 its 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.

Negative global economic conditions, which the COVID-19 pandemic and the military conflict between Russia and Ukraine have contributed to, have 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.

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.

Inflation and Other Risks

The Company is exposed to a variety of market and other risks, including the effects of changes in interest rates and inflation, as well as risks to the availability of funding sources, hazard events, and specific asset risks. The U.S. economy is experiencing
13
Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
broad and rapid inflation. The Company monitors inflation and the effects of changing prices. Inflation increases the cost of goods and services used. If the Company’s costs were to become subject to significant inflationary pressures, the Company may not be able to fully offset these higher costs through price increases or mitigate the impact through alternative solutions.

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 and nine months ended September 30, 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.

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, inventory valuation, incremental borrowing rates for assessing operating and financing lease liabilities, useful lives of property and equipment, earn-out shares liability, stock-based compensation, common stock warrant liability and product warranty liability. 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 condensed consolidated financial statements.

Reclassifications

Certain prior period balances have been reclassified to conform to the current period presentation in the unaudited condensed consolidated financial statements and the accompanying notes, including (i) classification of operating expenses in the unaudited condensed consolidated statements of operations and comprehensive loss, (ii) presenting equipment leases as part of other current and non-current liabilities and (iii) classification of amounts comprising prepaid expenses and other current assets as well as other current liabilities as included in Note 5 - Selected Balance Sheet Data. The Company reclassified a portion of its payroll related expenses in general and administrative to sales and marketing and research and development. Additionally, the Company reclassified depreciation expense to general and administrative expense. These reclassifications have no effect on previously reported net loss.

Revision of Previously Issued Financial Statements

The Company has identified an immaterial prior period revision with respect to the calculation of diluted net loss per share for the three and nine months ended September 30, 2021. The Company identified that they incorrectly adjusted both the numerator for the change in fair value included in earnings and the incremental shares in the denominator when calculating diluted earnings per share for the three months ended September 30, 2021. Adjustments related to public and private placement
14
Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
warrants should have been excluded as they were out-of-the-money and adjustments related to earn-out shares should have been excluded because the earn-out triggering event had not been met. This resulted in a misstatement of dilutive earnings per share on the condensed consolidated statement of operations for the three and nine months ended September 30, 2021. The Company evaluated the effects of this error on our previously-issued condensed consolidated financial statements in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 250, “Accounting Changes and Error Corrections,” ASC Topic 250-10-S99-1, “Assessing Materiality,” and ASC Topic 250-10-S99-2, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” and concluded that no prior period is materially misstated. Accordingly, we have revised our condensed consolidated financial statements for the impacted prior periods herein.

The total identified misstatement to net (loss) income per share – diluted for the three and nine months ended September 30, 2021 was $0.38 per share and $0.42 per share, increasing diluted EPS from the reported diluted EPS for the three and nine months ended September 30, 2021 from $(0.08) and $(0.28) per share to the corrected amounts of $0.30 and $0.14 per share, respectively. The misstatement to weighted average shares outstanding (“WASO”) – diluted for the three and nine months ended September 30, 2021 was (32,858,513) shares and (32,698,874) shares, respectively, decreasing WASO – diluted for the three and nine months ended September 30, 2021 from 148,790,656 and 121,186,219 to the corrected amounts of 115,932,143 and 88,487,345, respectively. Refer to Note 17 — Net (Loss) Income per Share in the condensed consolidated financial statements for further details.

Inventory and Inventory Valuation

The Company’s inventory, which includes raw materials, work in-process, and finished goods, is carried at the lower of cost or net realizable value (“NRV”). Inventory is valued using average costing, as that method accurately reflects the frequency of the Company’s inventory purchases. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on operating capacity.

At the end of each reporting period, the Company evaluates whether its inventories are damaged, obsolete, or have material changes in price or other causes, and if so, a loss is recognized in the period in which it occurs. Inventory write-downs are also based on reviews for obsolescence determined primarily by future demand forecasts. If the Company’s inventory on-hand is in excess of future demand forecast, the excess amounts are written-off. The Company reserves for any excess or obsolete inventories when it is believed that the net realizable value of inventories is less than the carrying value.

The Company also reviews its inventory to determine whether its carrying value exceeds the net amount realizable upon the ultimate sale of the inventory. NRV is the estimated selling price of inventory in the ordinary course of business, less estimated costs of completion, disposal, and transportation. At the end of each reporting period, the Company determines the estimated selling price of its inventory based on market conditions. Once inventory is written-down, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

Warranty Liability

Since 2021, the Company provides customers with a product warranty that assures that the products meet standard specifications and are free for periods typically between 2 to 5 years. The Company accrues a warranty reserve for the products sold, which includes its best estimate of the projected costs to repair or replace items under warranties and recalls if identified. These estimates are based on actual claims incurred to date and an estimate of the nature, frequency and costs of future claims. These estimates are inherently uncertain given the Company’s relatively short history of sales, and changes to its historical or projected warranty experience may cause material changes to the warranty reserve in the future. Claims incurred under the Company’s standard product warranty programs are recorded based on open claims. Claims incurred in each of the three and nine months ended September 30, 2022 were $32,000 and $38,000, respectively; no claims were incurred for the year ended December 31, 2021. The Company recorded warranty liability within other current liabilities in the consolidated balance sheets as of September 30, 2022 and December 31, 2021. The Company did not record warranty liability for the three or nine months ended September 30, 2021 as the product warranty had not been established.

15
Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
The reconciliation of the change in the Company’s warranty liability balances during the three months and nine months ended September 30, 2022 consisted of the following (in thousands):
Three Months Ended September 30, 2022Nine Months Ended September 30, 2022
Warranty liability, beginning of period$832 $177 
Reduction in liability (payments) (32)(38)
Increase in liability (new warranties)195 856 
Change in estimate(1)
$(411)(411)
Warranty liability, end of period$584 $584 
____________
(1) Relates to new information not previously known at the time of determination of estimated reserve balance.

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 rate in 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 4 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.

Convertible Debt

The Company accounts for convertible debt pursuant to ASC 815, Derivatives and Hedging. The Company evaluates convertible debt instruments to determine whether any embedded features require bifurcation and separate periodic valuation. Convertible debt is recorded net of stated discounts as well as debt issuance costs. Debt discounts and issuance costs are amortized over the contractual term of the debt using the effective interest rate method. The Company elected to early adopt Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”).

16
Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
Recent Accounting Pronouncements Issued and Adopted:

ASC 842, Leases: In February 2016, the FASB issued Accounting Standards Update (“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.

ASU 2020-06: In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies (i) the accounting for convertible financing instruments issued, including preferred stock, (ii) the derivatives scope exception for contracts in an entity’s own equity, and (iii) the calculation of earnings per share. Early adoption is permissible, and the Company elected to early adopt the provisions of the ASU on January 1, 2022 using the modified retrospective method. At the date of adoption, the ASU did not have a material impact on the Company’s consolidated financial statements.
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, which states 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 September 30, 2022, the Company had $59.7 million in marketable debt securities, available for sale which would be subject to this new standard. As of September 30, 2022, 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 during the three and nine months ended September 30, 2022 and 2021 consisted of the following (in thousands):
17
Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
Three Months Ended September 30,Nine Months Ended September 30,
2022
2021
2022
2021
Product and service revenue
Stepvans & vehicle incentives$9,952 $— $25,376 $673 
Powertrains382 357 1,052 1,073 
Fleet-as-a-Service285 — 418 — 
Total product revenue10,619 357 26,846 1,746 
Ancillary revenue389 — 959 — 
Total revenues$11,008 $357 $27,805 $1,746 

Note 4— Inventories
Inventory amounted to $66.3 million and $30.9 million, respectively, as of September 30, 2022 and December 31, 2021 and consisted of the following (in thousands):
September 30, 2022
December 31, 2021
Raw materials$47,841 $20,382 
Work in process15,440 10,659 
Finished goods
9,622 901 
Inventories, gross of reserves
72,903 31,942 
Less: inventory reserves
(6,597)(1,059)
Inventories, net
$66,306 $30,883 
Inventory as of September 30, 2022 and December 31, 2021 was comprised of raw materials, work in progress related to the production of vehicles for sale and finished goods inventory including vehicles in transit to fulfill customer orders, new vehicles available for sale, and new vehicles awaiting final pre-delivery quality review inspection.
Note 5— Selected Balance Sheet Data
Prepaid expenses and other current assets as of September 30, 2022 and December 31, 2021 consisted of the following (in thousands):
September 30, 2022
December 31, 2021
Prepaid inventories
$11,098 $7,303 
Prepaid expenses and other(1)
2,779 5,916 
Financed insurance premiums
3,265 — 
Deposits(2)