SPRUCE POWER HOLDING CORPORATION 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 endedDecember 31, 2021 , filed with theU.S. Securities and Exchange Commission (SEC) onMarch 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" refer only to
Overview
We are a provider of fleet electrification solutions for commercial vehicles in
We have two operating segments, Drivetrain and XL Grid, and separately calculate
the costs of our corporate operations. Our CEO,
In over 10 years of operations, we believe that we have built a large customer base deploying Class 2-5 vehicles acrossNorth America . Our fleet electrification solutions for commercial vehicles provide the market with cost-effective hybrid solutions with on-board telematics that are available for sale and deployment across a broad range of popular vehicle chassis from the world's leading OEMs. We launched our XL Grid Business inDecember 2020 , and with the acquisition ofWorld Energy Efficiency Services, LLC ("World Energy") inMay 2021 , we are able to offer comprehensive solutions to commercial fleets to sustainably transform their operations. Through the capabilities we acquired with World Energy, we are able to provide turnkey energy efficiency, renewable technology, electric vehicle charging stations and other energy solutions throughoutNew England , which adds capability and capacity to our XL Grid division. We currently sell most of our Drivetrains through a network of commercial vehicle upfitters. 21 In the first quarter of 2022, the Company conducted a strategic review which included assessing its offerings, strategy, processes and growth opportunities. While the Company is continuing to look at its business strategy, the Company made the following decisions in the first quarter of 2022 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 51 employees; (iv) the closure of the Company's production center and warehouse inQuincy, IL ; (v) the closure of the Company's engineering activities in itsBoston office; and (vi) the termination of the Company's partnership with eNow. With our acquisition of World Energy, we became a provider of energy efficiency, renewable technology, electric vehicle charging stations, and other energy solutions to customers across theNew England region. By leveraging our comprehensive solutions in combination with utility incentive programs, project management and financing, we assist companies throughout all aspects of the fleet vehicle electrification process. We provide full- service electric vehicle charger installations, including the assessment of a location's electrical infrastructure, site layout of the charging area plan and equipment installation. In addition, World Energy provides solar solutions to commercial and industrial customers. We believe that the availability of robust electric vehicle charging and infrastructure solutions is critical to meeting the long-term fleet electrification goals of our customers which in turn will translate into growth opportunities for the Company. Recent Developments Leadership Changes: OnMarch 21, 2022 ,Tod Hynes resigned hisXL Fleet roles of President and a member of its board of directors. OnApril 11, 2022 ,XL Fleet appointedDonald P. Klein as Chief Financial Officer. Public Health Emergency of International Concern: OnMarch 11, 2020 , theWorld Health Organization categorized the COVID-19 outbreak a "Public Health Emergency of International Concern" as global pandemic and recommended containment and mitigation measures. As the coronavirus pandemic continues to evolve, we believe the extent of the impact to our business, operating results, cash flows, liquidity and financial condition will be primarily driven by the severity and duration of the coronavirus pandemic and its impact on theU.S. and global economies. Those primary drivers are beyond our knowledge and control, and as a result, at this time we are unable to predict the cumulative impact, both in terms of severity and duration, that the coronavirus pandemic will have on our business, operating results, cash flows and financial condition. Accordingly, it is reasonably possible that the estimates made in the financial statements have been, or will be, materially and adversely impacted in the near term by these conditions, and if so, we may be subject to future impairment losses related to long-lived assets as well as changes to recorded reserves and valuations. In addition, we believe that the impact of the global microchip shortage that the entire vehicle industry is currently experiencing will adversely impact our operating results in fiscal year 2022 and possibly thereafter. 22
Key Factors Affecting Operating Results
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed in this Quarterly Report on Form 10-Q, below, and as more fully described in Part II, Item 1A under the heading "Risk Factors," and within our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theU.S. Securities and Exchange Commission (the "SEC") onMarch 1, 2022 . We are a provider in fleet electrification and energy efficiency infrastructure solutions. We have a strategy to leverage our existing products and sales channels to market. Key factors affecting our operating results include our ability to execute on the results of the Company's strategic review, which includes narrowing the focus of the Company on the most profitable products and strategically reducing some aspects of the Company's hybrid offering. There are challenges and risks to our plan to capture these opportunities, such as:
? system architecture design choices must provide adequate functionality and
value for customers;
? component sourcing agreements must deliver targets for cost reduction while
maintaining high quality and reliability;
? sales and marketing efforts must be effective in forging the relationships to
deliver these products to market and generate demand from the end users and
channel partners;
? OEMs and principal equipment component suppliers must be able to provide ample
supply throughout the year to meet our Drivetrain sales goals. We have
experienced interruptions in OEM vehicle supply amid a worldwide microchip
shortage. This resulted in very limited OEM deliveries of new chassis to our
commercial customers during 2021 and the first quarter of 2022. We are
expecting some increase in deliveries in 2022, but there will likely be an
ongoing significant adverse impact on vehicle deliveries resulting from the
microchip shortage. This had a material and adverse impact on our operating
results in fiscal year 2021 and is expected to continue in 2022; We have seen
positive signs in terms of increased budgets from municipal customers, but we
believe the OEM chip shortage is hindering the rebound in that area of the
market, despite budget availability;
? energy-efficiency upgrades must translate into bottom-line savings for our
clients; and
? our success will depend on our ability to make it easier, cheaper and simpler
for companies to electrify their fleets.
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Key Components of Statements of Operations
Research and Development Expense
Research and development expenses consist primarily of costs incurred for the discovery and development of our electrified powertrain offerings, which include:
? personnel-related expenses including salaries, benefits, travel and share-based
compensation, for personnel performing research and development activities;
? fees paid to third parties such as consultants and contractors for outsourced
engineering services;
? expenses related to prototype materials, supplies and third-party services; and
? depreciation for equipment used in research and development activities.
Selling, General and Administrative Expense
Selling, general and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, sales, marketing and other administrative functions, expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, sales and marketing costs. Personnel-related expenses consist of salaries, benefits and share-based compensation. We expect our selling, general and administrative expenses to decrease in 2022 as we narrow our focus and take actions to align our team and resources with our
short- term needs Other (Income) Expense, Net Other income and expense consists of interest expense net of interest income, change in fair value of obligations to issue shares of common stock to sellers of World Energy, change in fair value of warrant liability, and gain (loss)
on asset disposal.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial position and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America , or GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate estimates, which include estimates related to warrant valuation, the valuation of the assets and liabilities related to the business combination of World Energy, reserves and net realizable value adjustments for inventory and warranty obligations, impairment assessments for goodwill and long-lived assets and valuation allowance as it relates to the realization of deferred tax assets. The Company's critical accounting policies include revenue recognition and the accounting for business combinations. We base our estimates on historical experience and other market- specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions. The Company's critical accounting policies include revenue recognition and the accounting
for
business combinations.
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Results of Operations
Comparison of the Three Months Ended
The consolidated statements of operations for the three months ended
For the Three Months Ended
March 31,
(in thousands, except per share amounts) 2022 2021 Change % Change Revenues$ 4,763 $ 675 $ 4,088 606 % Cost of revenues 5,196 1,391 3,805 274 % Gross loss (433 ) (716 ) 283 (40 )% Operating expenses: Research, development and engineering expenses 2,989 1,412 1,577 112 % Selling, general and administrative expenses 11,658 7,958 3,700 46 % Impairment of goodwill 8,606 - 8,606 N.M. Total operating expenses 23,253 9,370 13,833 148 % Loss from operations (23,686 ) (10,086 ) (13,600 ) 135 % Other (income) expense (7,609 ) (72,000 ) 64,391 (89 )% Net (loss) income$ (16,077 ) $ 61,914 $ (77,991 ) (126 )% (Loss) income per common share: Basic$ (0.11 ) $ 0.46 $ (0.57 ) (124 )% Diluted$ (0.11 ) $ 0.42 $ (0.53 ) (126 )% For the Three Months Ended March 31, (in thousands) 2022 2021 Change % Change Drivetrain segment revenues$ 598 $ 675 $ (77 ) (11.4 )% Drivetrain segment loss (5,906 ) (3,562 ) (2,344 ) 66 % For the Three Months Ended March 31, (in thousands) 2022 2021 Change % Change XL Grid segment revenues$ 4,165 $
-$ 4,165 N.M. XL Grid segment loss (1,441 ) (51 ) (1,390 ) 2,725 % Revenues Total revenues increased by$4.1 million , or 606%, to$4.8 million in the three months endedMarch 31, 2022 from$0.7 million for the first quarter of 2021. Drivetrain revenues of$0.6 million for the current quarter were flat compared to the prior year quarter. XL Grid revenues were$4.2 million for the three months endedMarch 31, 2022 . This increase was the result of the acquisition of World Energy's energy infrastructure solutions in the second quarter of 2021. Cost of Revenues
Cost of revenues increased by$3.8 million , or 274%, to$5.2 million in the three months endedMarch 31, 2022 from$1.4 million for the first quarter of 2021. Cost of revenues for the Drivetrain segment increased by approximately$0.8 million to$2.2 million , primarily due to a charge of approximately$1.5 to write inventory down to net realizable value for certain components that were deemed obsolete, as the result of the Company's plans to discontinue plug-in hybrid and scale back other hybrid platforms. Cost of revenues for the XL Grid segment were$3.0 million for the three months endedMarch 31, 2022 which were related to the acquisition of World Energy's energy infrastructure solutions in the second quarter of 2021. 25 Gross Loss Gross loss decreased by$0.3 million , to$0.4 million in the three months endedMarch 31, 2022 from$0.7 million for the first quarter of 2021. The improvement was primarily due to gross profit in the XL Grid segment with the acquisition of World Energy's energy infrastructure solutions in the second quarter of 2021 partially offset by the Drivetrain segment gross loss which was driven by the charge for the inventory reserve.
Research, Development and Engineering
Research, development and engineering expenses increased by$1.6 million , or 112%, to$3.0 million in the three months endedMarch 31, 2022 from$1.4 million for the first quarter of 2021. The increase was solely attributable to research and development activities within the Drivetrain segment. The increase was principally attributable to$1.2 million in increased employee compensation, due to higher headcount prior to the reduction in force and higher research and development expenses related to the Company's Curbtender project.
Selling, General and Administrative
Selling, general, and administrative expenses increased by$3.7 million , or 46%, to$11.7 million in the three months endedMarch 31, 2022 from$8.0 million for the first quarter of 2021. The increase was primarily due to the acquisition of World Energy in the second quarter of 2021 as well as severance charges of$1.4 million related to restructuring actions and the separation of the Company's President and Chief Financial Officer in the first quarter of 2022. Higher compensation costs due to higher headcount (prior to the reduction in force onFebruary 25, 2022 ) was offset by lower professional fees. Impairment ofGoodwill 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 in the
three months endedMarch 31, 2022 . Other (Income) Expense Other income decreased by$64.4 million , or 89%, to$7.6 million in the three months endedMarch 31, 2021 from$72.0 million for the first quarter of 2021. The decrease was primarily due to a decrease of$69.3 million of income from the change in the fair value of the warrant liability which was the result of the decrease in the fair value of the Company's Common Stock in 2022 compared to the same quarter of 2021. This was partially offset by a gain of$4.5 million the Company recognized on the extinguishment of debt during the three months endedMarch 31, 2022 related to the wind-down of the New Market Tax Credit obligation inJanuary 2022 .
Liquidity and Capital Resources
The Company's cash requirements depend on many factors, including the execution of its business strategy and plan. 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 operating expenses, working capital and capital expenditures to support the growth in its business. Working capital is impacted by the timing and extent of the Company's business needs. As ofMarch 31, 2022 , we had working capital of$345.2 million , including cash and cash equivalents of$333.5 million . As part of its strategic review, the Company decided to narrow its operational focus in order to more effectively and judiciously execute on its strategy moving forward as well as to preserve cash. As part of this process, the Company strategically reduced some aspects of the hybrid offerings and limiting its products to those platforms and applications that are most scalable and provide the most substantial return on investment. As part of this narrowing of focus, the Company took actions in the first quarter of 2022 to align our team and resources with its near-term needs. As part of this, the Company eliminated 51 positions across the organization and incurred severance charges of$840 . The Company expects to continue to incur net losses in the short term, as it continues its strategic review. Based on the Company's current liquidity, management believes that no additional capital will be needed to execute its current business plan over the next 12 months. Other than the factors discussed in this section, the Company is not aware of any other trends, demands or commitments that would materiality affect liquidity or those that relate to its resources as ofMarch 31, 2022 . Cash Flows Summary Presented below is a summary of our operating, investing and financing cash flows: Three Months Ended March 31, (in thousands) 2022 2021 Net cash provided by (used in) Operating activities$ (19,096 ) $ (9,962 ) Investing activities$ 754 $ (1,104 ) Financing activities$ 127 $ 85,557
Net change in cash and cash equivalents
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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 three months endedMarch 31, 2022 , the Company has scaled back our Drivetrain, XL Grid and corporate operations, which is expected to reduce near term operating cash burn.
The net cash used in operating activities for the three months endedMarch 31, 2022 was$19.1 million . Uses of cash consisted principally of a net loss of$16.1 million , and a decrease of$3.3 million in accrued expenses and other current liabilities due to the payment of 2021 bonuses in the first quarter of 2022 as well the as the payment of$1.9 million of contingent consideration payments in the first quarter of 2022.
Cash Flows Provided by Investing Activities
The changes in cash flows from investing activities are related to purchases of property and equipment. The net cash provided by investing activities for the three monthsMarch 31, 2022 was principally$0.8 million from the return of a deposit for the acquisition of equipment made in 2021 for a project which the Company discontinued in the first quarter of 2022.
Cash Flows Provided by Financing Activities
The net cash provided by financing activities for the three months endedMarch 31, 2022 was$0.1 million which primarily consisted of$0.3 million in proceeds from the exercise of stock options offset by financing lease payments and repayments of long-term debt. For the three months endedMarch 31, 2021 , the cash provided by financing activities primarily consisted of proceeds from
the exercise of public warrants.
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 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.
Critical Accounting Policies and Estimates
The consolidated financial statements have been prepared in accordance with the generally accepted accounting principles of theU.S. as set forth in theFinancial Accounting Standards Board's Accounting Standards Codification (ASC), and we evaluate the various staff accounting bulletins and other applicable guidance issued by theSEC . The preparation of these 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 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 in the accompanying unaudited condensed consolidated financial statements), we believe that the following accounting policies require a greater degree of judgment and complexity: business combinations accounting, revenue recognition, warrant liabilities, reserves and net realizable value adjustments for the Company's warranty liability and inventory, respectively, impairment of goodwill and the valuation of deferred tax assets Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. ? Business combinations ? Revenue recognition 27 ? Warrant liabilities
? Reserves and net realizable value adjustments for the Company's warranty
liability and inventory, respectively
? 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 our condensed consolidated financial statements, see Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.
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