XL FLEET CORP. Management report and analysis of the financial situation and operating results. (Form 10-Q) | MarketScreener

The following discussion and analysis provides information which our management
believes is relevant to an assessment and understanding of our financial
condition and results of operations. This discussion and analysis should be read
together with our results of operations and financial condition and the audited
and unaudited consolidated financial statements and related notes that are
included elsewhere in this Quarterly Report on Form 10-Q and the audited
financial information and the notes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2021, filed with the U.S. Securities
and Exchange Commission (SEC) on March 1, 2022. In addition to historical
financial information, this discussion and analysis contains forward-looking
statements based upon current expectations that involve risks, uncertainties and
assumptions. See the section entitled "Cautionary Note Regarding Forward-Looking
Statements." Actual results and timing of selected events may differ materially
from those anticipated in these forward-looking statements as a result of
various factors. The following information and any forward-looking statements
should be considered in light of factors discussed elsewhere in this Quarterly
Report on Form 10-Q and under "Risk Factors" in Item 1A of the Annual Report.

Certain figures, such as interest rates and other percentages, included in this
section have been rounded for ease of presentation. Percentage figures included
in this section have not in all cases been calculated on the basis of such
rounded figures but on the basis of such amounts prior to rounding. For this
reason, percentage amounts in this section may vary slightly from those obtained
by performing the same calculations using the figures in our consolidated
financial statements or in the associated text. Certain other amounts that
appear in this section may similarly not sum due to rounding.

As used in this discussion and analysis, references to “XL”, “the company”, “we”, “us” or “our” only refer to XL Fleet Corp. and its consolidated subsidiaries.

Insight

Historically the Company has provided fleet electrification solutions for
commercial vehicles in North America, offering its systems for vehicle
electrification (the "Drivetrain" segment) and through its energy efficiency and
infrastructure solutions business, including offering and installing charging
stations to enable customers to effectively and cost-effectively develop the
charging infrastructure required for their electrified vehicles (the "XL Grid"
segment).

In the fourth quarter of 2021, Eric Tech was hired as the Company's new Chief
Executive Officer, replacing the position formerly held by Dimitri Kazarinov
since the fourth quarter of 2020. In the first quarter of 2022, under the
direction of Mr. Tech, the Company initiated a strategic review of its overall
business operations which included assessing its offerings, strategy, processes
and growth opportunities. As a result of the strategic review, in the first
quarter of 2022 the Company made the following decisions relating to a
restructuring of its Drivetrain business: (i) the elimination of a substantial
majority of the Company's hybrid drivetrain products; (ii) the elimination of
its Plug-In Hybrid Electric Vehicles ("PHEV") products; (iii) the reduction in
the size of the Company's workforce by approximately 50 employees; (iv) the
closure of the Company's production center and warehouse in Quincy, IL; (v) the
closure of the Company's engineering activities in its Boston office; and (vi)
the termination of the Company's partnership with eNow. In March 2022, the
Company announced that Tod Hynes, the founder of XL Fleet, stepped down from his
position as President of the Company.

Following the strategic review, the Company announced its decision to pursue
transformational M&A, enabled by a significant cash balance resulting from the
Company's go-public transaction completed in December 2020. This included the
implementation of a process to institutionalize the M&A effort including the
formation of an investment committee comprised of senior members of our team and
members of the Board. The objective was to continue the exploration of
value-generative opportunities in the decarbonization and energy transition
ecosystem, focused on three core requirements, (i) a business that is making an
impact on decarbonization, (ii) a leader in an established, growing market
segment, and (iii) a company that is generating positive EBITDA.

As a result of these efforts, on September 9, 2022, the Company acquired Spruce
Power. Spruce Power was the largest privately held owner and operator of
residential rooftop solar systems in the U.S. at the time of the transaction,
with more than 52,000 customer subscribers. Spruce Power sells the power
generated by its systems to homeowners pursuant to long-term agreements that
obligate the Company's subscribers to make recurring monthly payments. Spruce
Power's revenues have more than doubled since 2019, driven primarily by the
acquisition of 10 rooftop solar portfolios. The company does not have a
significant salesforce nor installation technicians. Spruce Power has grown by
acquiring portfolios of residential solar systems from other companies and
investors rather than selling individual systems to homeowners through a
direct-to-consumer salesforce like many of its competitors. This approach has
allowed the company to keep its customer acquisition costs low and enabled it to
generate consistent Adjusted EBITDA.

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The Company believes that the combination of Spruce Power's existing
subscriber-base and proven servicing platform with the Company's capital and
small business relationships amplifies its ability to take advantage of rapid
growth in rooftop solar, energy storage and electric vehicle adoption while
creating a path to more predictable revenues, profits and cash flow for the
Company's shareholders.

In parallel with the change in strategy and acquisition of Spruce Power, the
Company initiated a comprehensive review of strategic alternatives for its
Drivetrain business with the goal of maximizing shareholder value. That review
is now in advanced stages toward an outcome of streamlining the Company's
operations.

New Corporate Strategy
As described above, over the past several quarters, the Company's management and
Board of Directors conducted a comprehensive review of the company's existing
business as well as potential acquisitions that could accelerate growth and
increase profitability. Based on that review, as well as learnings from the
operation of the XL Grid segment, the Company determined that refocusing its
business on providing subscription-based solutions to homeowners and small
businesses for rooftop solar, energy storage, EV charging and other
energy-related products would yield greater value for the company's
shareholders. Key elements of the Company's new corporate strategy include:
a.Leveraging the Spruce Power platform to become a leading provider of
subscription-based solutions for distributed energy resources - Spruce Power has
more than a decade of experience owning and operating rooftop solar systems as
well as energy efficiency upgrades. The Company believes that Spruce Power's
proven platform for managing residential solar can be extended to other
categories of distributed energy resources. Through leveraging the Spruce Power
platform, XL Fleet intends to grow its revenues by providing subscription-based
solutions for rooftop solar, energy storage, EV charging and other
energy-related products to homeowners and small businesses. Over the last 18
months the company has focused on delivering best-in-class customer service,
with investment into process and platform improvement for on-site monitoring,
customer billing and working with qualified partners for field services.
b.Profitably growing return on assets by focusing on channels with the lowest
customer acquisition cost - The Company will seek to grow its subscriber
revenues by focusing on the channels that have lowest customer acquisition costs
and the ability to increase return on assets, including: acquiring existing
systems from other companies or investment funds, selling additional services to
existing subscribers, selling services to new customers online and partnering
with selected independent installers to provide a subscription-based solution
for their customers.
c.Increasing shareholder value by delivering predictable revenues, profits and
cash flow - By focusing on subscription-based solutions with long-term customer
agreements, the Company will seek to generate consistent revenues, profits and
cash flow.

Reportable Segments
With the acquisition of Spruce Power, the Company has three reportable segments,
Residential Solar, Drivetrain and XL Grid, and separately calculate the costs of
its corporate operations. The Company's CEO Eric Tech, who is its chief
operating decision maker, evaluates the performance of its operating segments at
the operating profit level. The CODM does not evaluate the performance of the
operating segments on a balance sheet basis.

The Company's Residential Solar segment consists of the operations of Spruce
Power for the period from the acquisition date of September 9, 2022 through
September 30, 2022. As noted above, Spruce Power currently owns and operates
more than 52,000 residential rooftop solar systems in 16 states. In addition to
providing management services to it own portfolio, Spruce Power also provides
management services to over 28,000 systems owned by other companies. These
services include (i) billing and collections, (ii) account management services,
(iii) financial reporting, (iv) homeowner support and (v) maintenance monitoring
and dispatch.

The XL Grid segment includes the activities of World Energy, which was acquired in May 2021. World Energy provides turnkey energy efficiency, renewable technology, electric vehicle charging stations and other energy solutions around the world. New England and New York.


The Drivetrain segment provides fleet electrification solutions for commercial
vehicles with cost-effective hybrid solutions containing on-board telematics
that are available for sale and deployment across a broad range of popular
vehicle chassis from the world's leading OEMs. In over 10 years of operation,
the Company has built a large customer base deploying Class 2 - 5 vehicles
across North America.

Company Name Change to Spruce Power
On November 4, 2022, XL Fleet announced that that it will change its corporate
name from XL Fleet Corp. to Spruce Power Holding Corporation, effective on
November 14, 2022. The Company will be known as Spruce Power. Additionally, the
Company will change its New York Stock Exchange ("NYSE") ticker symbol from "XL"
to "SPRU" at
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the open of market trading on November 14, 2022. The Company's common stock will
continue to be listed on the NYSE and its CUSIP will change in connection with
the name change.

Results of Operations

Comparison of the three months ended September 30, 2022 and 2021

The consolidated statements of income for the three months ended
September 30, 2022 and 2021 are shown below:


                                           For the Three Months Ended
                                                  September 30,
(in thousands, except per share                                                      $                   %
amounts)                                     2022                2021              Change              Change
Revenues                                $     8,360          $   3,200          $   5,160                 161     %
Operating expenses:
Cost of revenues                              4,677              2,510              2,167                  86     %
Engineering, research and development         2,348              3,217               (869)                (27)    %
Selling, general and administrative
expenses                                     29,343             12,742             16,601                 130     %
Loss from operations                        (28,008)           (15,269)           (12,739)                 83     %
Other income                                 (6,422)            (7,738)             1,316                 (17)    %
Net loss                                    (21,586)            (7,531)           (14,055)                187     %
Less: Net income attributable to
noncontrolling interests                        419                  -                419                    N.M. %

Net loss attributable to XL fleet $(22,005) ($7,531)

    $ (14,474)                192     %

Net loss per common share:
Basic and diluted                       $     (0.15)         $   (0.05)         $   (0.10)                185     %

Drivetrain Segment
Revenues                                $       858          $     555          $     303                  55     %
Operating loss                               (3,614)            (4,857)             1,243                 (26)    %

XL Grid Segment
Revenues                                $     2,422          $   2,645          $    (223)                 (8)    %
Operating loss                                 (484)            (1,648)             1,164                 (71)    %

Residential Solar Segment
Revenues                                $     5,080          $       -          $   5,080                    N.M. %
Operating loss                               (1,190)                 -             (1,190)                   N.M. %


Revenues

Revenues increased by $5.2 million, or 161.3%, to $8.4 million for the three
months ended September 30, 2022 from $3.2 million for the three months ended
September 30, 2021. The increase was primarily due to the addition of the
Residential Solar segment which contributed $5.1 million of revenues due to the
acquisition of Spruce Power on September 9, 2022. Drivetrain revenues increased
$0.3 million while XL Grid revenues declined $0.2 million.
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Revenue cost


Cost of revenues represent direct costs of Drivetrain and XL Grid revenues. Cost
of revenues increased by $2.2 million, or 86.3%, to $4.7 million in the three
months ended September 30, 2022 from $2.5 million for the three months ended
September 30, 2021. The increase was primarily attributable to increased
inventory reserves in the Drivetrain segment.

Engineering, Research and Development


Engineering, research and development expenses decreased by $0.9 million, or
27.0%, to $2.3 million in the three months ended September 30, 2022 from $3.2
million for the three months ended September 30, 2021. The decrease was
primarily due to lower development expenses and lower consulting and development
expenses as a result of the Company's decision in the first quarter of 2022 to
discontinue plug-in hybrid products and scale back other hybrid platforms.

Selling, general and administrative expenses


Selling, general, and administrative expenses increased by $16.6 million to
$29.3 million in the three months ended September 30, 2022 from $12.7 million
for the three months ended September 30, 2021. The addition of the Residential
Solar segment with the acquisition of Spruce Power on September 9, 2022
accounted for $6.0 of the increase during the quarter. Expenses for the three
months ended September 30, 2022 include $13.6 million of transaction related
expenses related to the acquisition of Spruce Power. The remaining net decrease
was driven by lower compensation, temporary help and marketing expenses offset
by higher legal expenses due to the Securities and Exchange Commission
investigation and higher stock compensation expenses due to a one-time award
given to the Chief Executive Office of Spruce Power.

Other (income) Expenses


Other income was $6.4 million for the three months ended September 30, 2022
versus $7.7 million for the three months ended September 30, 2021. Other income
for the three months ended September 30, 2022 includes $8.8 million of income
from the change in the fair value of interest rate swaps used by Spruce Power to
reduce the volatility of its variable-rate debt. In addition, other income, net,
for the nine months ended September 30, 2022 includes $2.0 million of interest
expense related to the debt assumed as part of the Spruce Power acquisition. The
change in fair value of the warrant liability was a gain of $0.6 million for the
three months ended September 30, 2022 compared to a gain of $7.2 million for the
three months ended September 30, 2021 due to a larger decline in the value of
the Company's stock in the third quarter of 2021.
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Comparison of the nine months ended September 30, 2022 and 2021

The consolidated statements of income for the nine months ended
September 30, 2022 and 2021 are shown below:


                                       For the Nine Months Ended September
                                                       30,
(in thousands, except per share                                                        $                    %
amounts)                                    2022                 2021               Change                Change
Revenues                               $     16,133          $    7,569          $    8,564                   113     %
Operating expenses:
Cost of revenues                             12,318               6,633               5,685                    86     %
Engineering, research and development         7,741               7,438                 303                     4     %
Selling, general and administrative
expenses                                     53,802              31,522              22,280                    71     %
Impairment of goodwill                        8,606                   -               8,606                      N.M. %
Loss from operations                        (66,334)            (38,024)            (28,310)                   74     %
Other income                                (15,973)            (81,938)             65,965                   (81)    %
Net (loss) income                           (50,361)             43,914             (94,275)                 (215)    %
Less: Net income attributable to
noncontrolling interests                        419                   -                 419                      N.M. %
Net (loss) income attributable to XL
Fleet                                  $    (50,780)         $   43,914          $  (94,694)                 (216)    %

Net (loss) income per common share:
Basic                                  $      (0.36)         $     0.32          $    (0.68)                 (212)    %
Diluted                                $      (0.36)         $     0.30          $    (0.65)                 (221)    %

Drivetrain Segment
Revenues                               $      2,264          $    2,512          $     (248)                  (10)    %
Operating loss                              (12,923)            (12,368)               (555)                    4     %

XL Grid Segment
Revenues                               $      8,789          $    5,057          $    3,732                    74     %
Operating loss                               (3,378)             (2,137)             (1,241)                   58     %

Residential Solar Segment
Revenues                               $      5,080          $        -          $    5,080                      N.M. %
Operating loss                               (1,190)                  -              (1,190)                     N.M. %


Revenues

Revenues increased by $8.6 million to $16.1 million in the nine months ended
September 30, 2022 from $7.6 million for the nine months ended September 30,
2021. Revenues were positively impacted by addition of the Residential Solar
segment through the acquisition of Spruce Power on September 9, 2022. The
Residential Solar segment contributed $5.1 million of revenues in the third
quarter of 2022. The remaining increase was primarily due to higher revenues in
the XL Grid segment of $3.7 million which increased to $8.8 million for the nine
months ended September 30, 2022 from $5.1 million for the nine months ended
September 30, 2021 as a result of the 2022 period including a full nine months
of activity of World Energy while the 2021 period only included activity from
the acquisition date of May 17, 2021. Revenues in the Drivetrain segment
declined $0.2 million, or 9.9%, to $2.3 million for the nine months ended
September 30, 2022 from $2.5 million for the nine months ended September 30,
2021.
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Revenue cost


Cost of revenues increased by $5.7 million, or 85.7%, to $12.3 million in the
nine months ended September 30, 2022 from $6.6 million for the nine months ended
September 30, 2021. Cost of revenues in the XL Grid segment accounted for $3.0
million of the increase as a result of the higher revenues in 2022 from World
Energy which was acquired on May 17, 2021. Cost of revenues in the Drivetrain
segment increased $0.7 million as a result of charges of approximately $1.9
million related to the write-down of inventory to net realizable value primarily
for certain components that were deemed obsolete as a result of the Company's
plan to discontinue plug-in hybrid and scale back other hybrid platforms. The
remaining decrease was due to lower revenues in 2022.

Engineering, Research and Development


Engineering, research and development expenses increased by $0.3 million, or
4.1%, to $7.7 million in the nine months ended September 30, 2022 from $7.4
million for the nine months ended September 30, 2021. The increase was solely
attributable to research and development activities within the Drivetrain
segment. The increase related to higher employee compensation and benefits due
to increased incentive expense in 2022 and higher headcount prior to the
reduction in force. The increase in compensation were offset by lower
development and consulting expenses in 2022.

Selling, general and administrative expenses


Selling, general, and administrative expenses increased by $22.3 million, or
70.7%, to $53.8 million in the nine months ended September 30, 2022 from $31.5
million for the nine months ended September 30, 2021. The increase was primarily
due to the acquisition of Spruce Power on September 9, 2022. Selling, general
and administrative expense of Spruce Power for the period was $6.0 million. In
addition, expenses for the nine months ended September 30, 2022 include $13.6
million of transaction related expenses related to the purchase of Spruce Power.
Expenses in the XL Grid segment increased $3.3 million due to the impact of
World Energy which was acquired on May 17, 2021. The remaining increase was due
to higher legal expenses in 2022 due to the Securities and Exchange Commission
investigation, severance charges of $1.4 million related to restructuring
actions and the separation of the Company's former President and Chief Financial
Officer in the first quarter of 2022 as well as higher stock compensation costs
due to a stock award of $1.1 million granted to the Company's new President
which vested immediately. These increases were offset by lower marketing
expenses and professional fees in 2022.

Impairment of Good will


In the first quarter of 2022, due to reductions in the Company's stock price and
related market capitalization, the Company performed an assessment of its
goodwill for impairment. Based on its assessment, the Company concluded that the
goodwill was fully impaired and recognized a charge to $8.6 million.

Other (income) Expenses


Other income was $16.0 million for the nine months ended September 30, 2022
compared to $81.9 million for the nine months ended September 30, 2021. The
decrease in other income was driven by a decrease in the gain on the change in
fair value of the warrant liability, which was $5.1 million for the nine months
ended September 30, 2022 versus $82.0 million for the nine months ended
September 30, 2021. This decrease related to a higher decrease in the fair value
of the Company's common stock in the nine months ended September 30, 2021
compared to the nine months ended September 30, 2022. This decrease was
partially offset by a gain on the extinguishment of debt of $4.5 million in the
nine months ended September 30, 2022 related to the wind-down of the New Market
Tax Credit obligation in January 2022. Other income for the nine months ended
September 30, 2022 includes a gain of $8.8 million on the change in fair value
of interest rate swap agreements used by Spruce Power to reduce volatility of
its variable-rate debt.

Cash and capital resources


The Company's cash requirements depend on many factors, including the execution
of its business strategy and plan. With the acquisition of Spruce Power in
September 2022, the Company assumed debt of $539.1 million. The Company remains
focused on carefully managing costs, including capital expenditures, maintaining
a strong balance sheet, and ensuring adequate liquidity. The Company's primary
cash needs are for debt service, acquisition of solar systems, operating
expenses, working capital and capital expenditures to support the growth in its
business. Working capital is impacted by
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the timing and extent of the Company’s business needs. From September 30, 2022the Company had cash and cash equivalents and restricted cash of $271.6 million.

From September 30, 2022the Company has long-term debt, including current portions, of $542.5 million.


The Company expects to continue to incur net losses in the short term, as it
continues its strategic review. Based on the Company's current liquidity,
management believes that no additional capital will be needed to execute its
current business plan over the next 12 months.

Other than the factors discussed in this section, the Company is not aware of
any other trends, demands or commitments that would materiality affect liquidity
or those that relate to its resources as of September 30, 2022.

Cash flow summary


Presented below is a summary of our operating, investing and financing cash
flows:

                                                                   Nine Months Ended
                                                                     September 30,
(in thousands)                                                    2022           2021
Net cash provided by (used in)
Operating activities                                           $ (46,396)     $ (34,215)
Investing activities                                             (31,533)       (14,105)
Financing activities                                              (2,263)        85,427

Net change in cash and cash equivalents and restricted cash ($80,192)

$37,107

Cash flows used in operating activities


The Company's cash flows from operating activities have historically been
significantly affected by its cash investments to support the growth and
operations of its business in areas such as research, development and
engineering and selling, general and administrative expense and working capital.
During the nine months ended September 30, 2022, the Company scaled back its
Drivetrain, XL Grid and corporate operations, which has reduced near term
operating cash burn.

The net cash used in operating activities for the nine months ended
September 30, 2022 was $46.4 million. Uses of cash consisted principally of a
net loss of $50.8 million, offset by an increase of $2.1 million in accrued
expenses and other current liabilities driven by higher accrued interest at
Spruce Power as well the net utilization of $2.7 million of prepaid expenses.
The increase in cash utilized by operations in the nine months ended September
30, 2022 versus the nine months ended September 30, 2021 represents increased
acquisition expenses in the nine months ended September 30, 2022 due to the
acquisition of Spruce Power as well as higher legal expenses due to the
Securities and Exchange Commission investigation.

Cash flows generated by investing activities


The changes in cash flows from investing activities are primarily related to the
acquisition of Spruce Power. Cash outflows of $32.6 million represent the cash
consideration paid of $61.8 million net of cash acquired of $29.2 million. 2021
cash flows from investing activities includes $8.2 million of net cash paid to
purchase World Energy in May of 2021. Cash used for purchases of property and
equipment were $0.3 million and $2.9 million for the nine months ended September
30, 2022 and 2021, respectively. Cash used in investing activities for the nine
months ended September 30, 2021 includes a cash expenditure of $3.0 million to
invest in the eNow convertible note.

Cash flows generated by financing activities


The net cash provided by financing activities for the nine months ended
September 30, 2022 was $2.3 million which primarily consisted of $2.6 million of
capital distributions made by Spruce Power offset by proceeds from stock option
exercises of $0.5 million For the nine months ended September 30, 2021, the cash
provided by financing activities of $85.4 million primarily consisted of
proceeds from the exercise of public warrants of $85.6 million.
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Off-balance sheet arrangements


Through the date of its liquidation in the first quarter of 2022, the Company
maintained the New Markets Tax Credit variable interest entity, which was
reported within our Condensed Consolidated Financial Statements. Other than this
entity, the Company did not have any relationships with unconsolidated
organizations or financial partnerships, such as structured finance or special
purpose entities, which were established for the purpose of facilitating
off-balance sheet arrangements.

Significant Accounting Policies and Estimates



The Condensed Consolidated Financial Statements have been prepared in accordance
with the generally accepted accounting principles of the U.S. as set forth in
the Financial Accounting Standards Board's Accounting Standards Codification
("ASC"), and we evaluate the various staff accounting bulletins and other
applicable guidance issued by the SEC. The preparation of these Condensed
Consolidated Financial Statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the consolidated balance sheet date, as
well as the reported expenses incurred during the reporting periods. 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 our
Condensed Consolidated Financial Statements.

While our significant accounting policies are described in the notes to our
historical financial statements included elsewhere in this Quarterly Report on
Form 10-Q (see Note 2. Summary of Significant Accounting Policies of Notes to
the accompanying Unaudited Condensed Consolidated Financial Statements), we
believe that the following accounting policies require a greater degree of
judgment and complexity:

?  Business combinations

?  Revenue recognition
?  Warrant liabilities

? Reserves and net realizable value adjustments for the Company’s warranty liabilities and inventory, respectively

?  Derivative instruments and hedging activities

?  Noncontrolling interests

?  Variable interest entities

?  Impairment assessment of goodwill and long-lived assets

?  Valuation of deferred tax assets

New and Recently Adopted Accounting Pronouncements


For information with respect to recent accounting pronouncements and the impact
of these pronouncements on the Company's Unaudited Condensed Consolidated
Financial Statements, see Note 2. Summary of Significant Accounting Policies of
Notes to Unaudited Condensed Consolidated Financial Statements included
elsewhere in this Quarterly Report.

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