XOS, INC. XOS' MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which Xos' management
believes is relevant to an assessment and understanding of our consolidated
results of operations and financial condition. The discussion should be read
together with the unaudited condensed consolidated financial statements and
related notes that are included in this Report. You should read the following
discussion and analysis of our financial condition and results of operations
together with our unaudited interim condensed consolidated financial statements
and the related notes included elsewhere in this Report and our Annual Report on
Form 10-K for the year ended December 31, 2021 filed with the SEC on March 30,
2022 , as amended and supplemented by other SEC filings, including this Report
and future SEC filings. This discussion may contain forward-looking statements
based upon current expectations that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under the
section entitled "Risk Factors". Unless the context otherwise requires,
references in this "Xos Management's Discussion and Analysis of Financial
Condition and Results of Operations" to "we", "us", "our", and "the Company" are
intended to mean the business and operations of Xos and its consolidated
subsidiaries.
Overview
We are a leading technology company which provides fleet services, software solutions, and manufactures 100% battery-electric Class 5 to Class 8 commercial vehicles. We facilitate the transition of fleets from internal combustion engine vehicles to zero-emission vehicles with proprietary technology suited to the commercial use case. We also provide a range of services to facilitate the transition of fleets to electric vehicles, including charging infrastructure, vehicle maintenance, financing and service. Our X-Platform (our proprietary, purpose-built vehicle chassis platform) and X-Pack (our proprietary battery system) provide modular features that allow us to accommodate a wide range of last-mile applications and enable us to offer clients a lower total cost of ownership compared to many of our peers. The X-Platform and X-Pack are available for purchase as part of the Xos vehicle. The X-Platform and X-Pack were both engineered to be modular in nature to allow fleet operators to customize their vehicles to fit their commercial applications (e.g., upfitting with a specific vehicle body and/or tailoring battery range). In addition to a competitive vehicle purchase price, our technology can also drive savings throughout ownership through increased vehicle uptime, greater payload capacity and reduced service and maintenance expense. Ninety percent of vehicles in our targeted segments operate on routes under 200 miles per shift (referred to as "last-mile" routes). Vehicles that fulfill these predictable last-mile routes generally return to base hubs on a daily basis. We believe that such vehicles are ideal candidates for electrification as operators are able to connect the vehicles to dedicated charging infrastructure at return-to-base hubs. Our modular and cost-effective vehicles have been on the road and in customers' hands since 2018, further validating the durability of satisfaction with our vehicles. During the nine months endedSeptember 30, 2022 , we sold 211 vehicles and 6 powertrains. During the nine months endedSeptember 30, 2021 , we sold 3 vehicles and 9 powertrains. Our Fleet-as-a-Service product facilitates the transition from traditional internal combustion engine vehicles to battery electric vehicles and provides fleet operators with a comprehensive set of solutions and products (including, but not limited to, Energy Services, service and maintenance, vehicle telematics, OTA updates and financing) to transition to and to operate an electric fleet. This product offering will combine traditionally disaggregated services into a bundled service package, thus reducing the cost and friction associated with electrifying commercial fleets. Services to be offered in our Fleet-as-a-Service offerings include our proprietary technologies and in-house services and offerings from our industry partners. Our Fleet-as-a-Service offering includes (i) Energy Services (on-site vehicle charging infrastructure as well as our proprietary mobile charging unit Xos HubTM); (ii) service and maintenance (provided by our internal maintenance team and industry partners); (iii) replacement parts; (iv) financing via our external partners; (v) risk mitigation products (e.g., GAP insurance and warranties); and (vi) our telematics unit, the Xosphere Intelligence Platform. Fleet-as-a-Service is expected to increase the lifetime revenue of each vehicle sold by us. During the nine months endedSeptember 30, 2022 , we have generated$26.8 million in revenue (or 97% of revenue) from vehicle sales and Fleet-as-a-Service and$1.0 million from ancillary revenue (or 3% of revenue). During the nine months endedSeptember 30, 2021 , we generated$1.7 million (or 100% of revenue) from vehicle sales. 40 -------------------------------------------------------------------------------- Table of Contents We believe our growth in the coming years is supported by the strong secular tailwinds of an increased focus on the impact of climate change and the growth of e-commerce and last-mile delivery. Commercial trucks are the largest emitters of greenhouse gases per capita in the transportation industry. TheU.S. federal, state and foreign governments, along with corporations such as FedEx,UPS and Amazon, have set ambitious goals to reduce greenhouse gas emissions. Simultaneously, e-commerce continues to grow rapidly and has been accelerated by changes in consumer purchasing behavior during the COVID-19 pandemic. We believe the increased regulation relating to commercial vehicles, the launch of sustainability initiatives from leading financial and corporate institutions and the rapid growth of last-mile logistics will fuel accelerated adoption of our products worldwide. In addition, the Inflation Reduction Act passed this year expands significantly federal support for green energy initiatives.
We expect our operating expenditures will increase in connection with our ongoing activities, as we:
•continue to invest in servicing our growing portfolio of vehicles on the road including account management, maintenance and service technicians and the Xosphere Intelligence Platform;
•continue to invest in research and development and further develop and commercialize our core proprietary technologies, including our Xos Hub (charging solution) and Xosphere Intelligence Platform (fleet-as-a-service platform);
•continue to build out our supply chain team as well as additional battery and vehicle Flex assembly lines to bolster manufacturing capacity and meet demand targets, and to adjust to macroeconomic changes, including supply chain shortages;
•increase our investment in marketing and advertising, sales and distribution infrastructure to accelerate the growth in sales of our products and services;
•continue to build out finance operations to maintain and improve financial controls, financial planning and risk management;
•invest in operations functions including IT, administration and human resources to maintain and improve our operational systems, processes and procedures;
•obtain, maintain, expand and protect our intellectual property portfolio including patents, trade secrets, trademarks and copyrights; and
•further invest in infrastructure to operate in accordance with public company standards and guidelines.
Recent Developments During the nine months endedSeptember 30, 2022 , we conducted a reduction in force to reduce costs, streamline our organizational structure and drive operational efficiencies. The plan included total workforce reductions of approximately 16% of our employees, reorganizing certain functions and reallocating resources to continue to focus on key strategic initiatives and unit deliveries. Business Combination OnAugust 20, 2021 , the transactions contemplated by the Agreement and Plan of Merger, as amended onMay 14, 2021 , by and among NextGen,Sky Merger Sub I, Inc. , aDelaware corporation and a direct wholly owned subsidiary of NextGen ("Merger Sub"), andXos, Inc. , aDelaware corporation (now known asXos 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 transfer by way of continuation and deregistration of NextGen from theCayman Islands and the continuation and domestication of NextGen as a corporation incorporated in theState of Delaware (the "Domestication"), the "Business Combination"). As a result of the Merger, NextGen completed the Domestication, Merger Sub merged with and intoXos Fleet, Inc. (which was formerly known asXos, Inc. ), the separate corporate existence of Merger Sub ceased andXos Fleet, Inc. was to be the surviving corporation and a wholly owned subsidiary of NextGen, and NextGen changed its name to "Xos, Inc. "Xos Fleet, Inc. is the accounting predecessor and the combined entity will be the successorSEC registrant, and Xos' financial statements for previous periods will be disclosed in the registrant's future periodic reports filed with theSEC . The Business Combination is accounted for as a reverse recapitalization. Under this method of accounting, NextGen has been treated as the acquired company for financial statement reporting purposes. The most significant change in the successor's future reported financial position and results is an increase in cash by$216.7 million , net of transaction costs and redemptions. Total non-recurring transaction costs was approximately$55.4 million . 41 --------------------------------------------------------------------------------
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As a consequence of the completion of the Business Combination, we became the successor to anSEC -registered and Nasdaq-listed company with ticker "XOS", which has required us and will continue to require us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred and expect to incur additional annual expenses as a public company for, among other things, directors' and officers' liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees.
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 Report.
Successful Commercialization of our Products and Services
We expect to derive future revenue from sales of our vehicles, battery systems and Fleet-as-a-Service offering. As many of these products are in development, we will require substantial additional capital to continue developing our products and services and bring them to full commercialization as well as fund our operations for the foreseeable future. Until we can generate sufficient revenue from product sales, we expect to finance our operations through commercialization and production with proceeds from the Business Combination as well as additional subsequent financing transactions, including potentially asset-based lending and/or receivable financing. The amount and timing of our future funding requirements, if any, will depend on many factors, including the pace and results of our commercialization efforts. Global economic conditions have been worsening, with disruptions to, and volatility in, the credit and financial markets inthe United States and worldwide resulting from the effects of COVID-19, military conflict betweenRussia andUkraine , inflation and otherwise. If these conditions persist and deepen, we could experience an inability to access additional capital or our liquidity could otherwise be impacted. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our commercialization, research and development programs and/or other efforts.
Customer Demand and Deployment
While we have sold hundreds of our vehicles to our existing customers, have agreements with future customers and have received interest from other potential customers, our ability to deploy more of our units and services will remain a key indicator of our success. This includes the ability of our customers to receive and deploy their trucks in active use, which is affected by charging infrastructure deployment. We expect that the sales of our vehicles and services to our existing and future customers will be an important indicator of our performance. Our operational focus is to increase delivery volume and begin delivering gross margin positive units by the end of the second half of 2023, which includes taking action to increase prices.
As described more fully below, there are certain areas in our supply chain management that have been disrupted due to global economic conditions and the prolonged effect of the COVID-19 pandemic. Our ability to find alternative solutions to meet customer demands will affect our financial performance.
Global economic conditions, which the COVID-19 pandemic and the military conflict betweenRussia andUkraine have contributed to, have impacted our ability to source certain of our critical inventory items. The series of restrictions imposed and the speed and nature of the recovery in response to the pandemic has placed a burden on our supply chain management, including but not limited to the following areas:
•Semiconductor chip shortage: The global silicon semiconductor industry has experienced a shortage in supply and difficulties in its ability to meet customer demand. This shortage has led to an increase in lead-times of production of semiconductor chips and components since the beginning of 2020.
•Battery cells: The battery cell industry is facing a shortage in supply which is causing suppliers to limit customer allocations.
•Supply limitation on vehicle bodies and aluminum: Vehicle body suppliers are currently experiencing elevated pricing or a shortage of key materials such as aluminum. Additionally, recent geopolitical events, such as the recent military conflict betweenRussia andUkraine , may increase the severity of supply chain disruptions and further hinder our ability to source inventory for our vehicles. The conflict continues to 42 -------------------------------------------------------------------------------- Table of Contents evolve and its ultimate impact on the Company is uncertain, but a prolonged conflict may have a material negative impact to our business, operating results, cash flows, liquidity and financial condition. Despite supply chain disruptions, we have continued to source inventory for our vehicles and our purchasing team has been working with vendors to find alternative solutions to areas where there are supply chain constraints. Where appropriate and critical, we have placed orders in advance of projected need to try and offset disruptions. While we are working to minimize the impact of these supply limitations, we cannot be certain that all inventory will be able to be delivered in time for production plans. Tightness in supply availability could lead to previously unforeseen cost and delivery pressures on certain material and logistical costs in 2022. As the Company accelerates execution of its strategic plans, we will endeavor to be strategic in our cost action plans, including working with various vendors and service providers to provide us cost-effective arrangements.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Xos and its wholly owned subsidiaries, Legacy Xos and Xos Services. All significant intercompany accounts and transactions have been eliminated in consolidation. All long-lived assets are maintained in, and all losses are attributable to,the United States . Currently, we conduct business through one operating segment. We are an early-stage growth company with minimal commercial operations and our activities to date have been conducted primarily withinNorth America . For more information about our basis of operations, refer to Note 1 - Description of Business
in
the accompanying unaudited condensed consolidated financial statements.
Components of Results of Operations
Revenues
To date, we have primarily generated revenues from the sale of electric stepvan and stripped chassis vehicles and battery systems and our fleet-as-a service product offerings. Our stripped chassis is our vehicle offering that comprises our X-Platform electric vehicle base and X-Pack battery systems, which customers can upfit with their preferred vehicle body. As we continue to expand our commercialization, we expect our revenue to come from these products and other vehicle offerings including chassis cabs, which will feature our chassis and powertrain with the inclusion of a proprietary designed cab, and tractors, a shortened version of the chassis cab designed to haul trailers (also known as "day cabs"), that travel in last-mile use cases. In addition, we offer a full suite of service offerings including Energy Services, service and maintenance, telematics and financing. Revenue consists of product sales, inclusive of shipping and handling charges, net of estimates for customer allowances. Revenue is measured as the amount of consideration we expect to receive in exchange for delivering products. All revenue is recognized when we satisfy the performance obligations under the contract. We recognize revenue by delivering the promised products to the customer, with the revenue recognized at the point in time the customer takes control of the products. For shipping and handling charges, revenue is recognized at the time the products are delivered to or picked up by the customer. The majority of our current contracts have a single performance obligation, which is met at the point in time that the product is delivered, and title passes, to the customer, and are short term in nature.
Cost of Goods Sold
Cost of goods sold includes materials and other direct costs related to production of our vehicles, including components and parts, batteries, direct labor costs and manufacturing overhead, among others. Materials include inventory purchased from suppliers, as well as assembly components that are assembled by company personnel, including allocation of stock-based compensation expense. Direct labor costs relate to the wages of those individuals responsible for the assembly of vehicles delivered to customers. Cost of goods sold also includes depreciation expense on property and equipment related to cost of goods sold activities, calculated over the estimated useful life of the property and equipment on a straight-line basis. Upon property and equipment retirement or disposal, the cost of the asset disposed, and the related accumulated depreciation from the accounts and any gain or loss is reflected in the consolidated statements of operations and comprehensive income (loss), allocated to cost of goods sold.
Cost of goods sold also includes reserves to write down the carrying value of our inventory to their net realizable value and to provide for obsolete and on-hand inventory in excess of forecasted demand.
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We are continuing to undertake efforts to find more cost-effective vendors and
sources of parts, streamline our manufacturing operation by focusing on
production in our Byrdstown, Tennessee facility, reducing the manufacturing time
for our vehicles and optimizing our design and engineering to lower our overall
cost of production. Direct labor and overhead costs relate primarily to expenses
incurred through our third-party manufacturing partners. We expect these
expenses to increase in future periods as production volume increases to meet
expected growth in customer demand.
General and Administrative Expenses
General and administrative ("G&A") expenses consist of personnel-related
expenses, outside professional services, including legal, audit and accounting
services, as well as expenses for facilities, non-sales related travel, and
general office supplies and expenses. Personnel-related expenses consist of
salaries, benefits, allocations of stock-based compensation, and associated
payroll taxes. Overhead items including rent, insurance, utilities, and other
items are included as G&A expenses. G&A expenses also include depreciation
expense on property and equipment related to G&A activities, calculated over the
estimated useful life of the property and equipment on a straight-line basis.
Upon property and equipment retirement or disposal, the cost of the asset
disposed, and the related accumulated depreciation from the accounts and any
gain or loss is reflected in the consolidated statements of operations and
comprehensive income (loss), allocated to G&A.
We expect our G&A to increase for the foreseeable future as we scale headcount
with the growth of our business, and as a result of operating as a public
company, including compliance with the rules and regulations of the SEC , legal,
audit, additional insurance expenses, investor relations activities, and other
administrative and professional services.
Research and Development Expenses
Research and development ("R&D") expenses consist primarily of costs incurred for the design and development of our vehicles and battery systems, which include:
•Expenses related to materials and supplies consumed in the development and
modifications to existing vehicle designs, new vehicle designs contemplated for
additional customer offerings, and our battery pack design;
•Fees paid to third parties such as consultants and contractors for engineering
and computer-aided design ("CAD") work on vehicle designs and other third-party
services; and
•Payroll expense for employees primarily engaged in R&D activities, including allocation of stock-based compensation expense.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of expenses related to our marketing of vehicles and brand initiatives, which includes:
•Web design, marketing and promotional items, and consultants who assist in the marketing of the Company.
•Payroll expense for employees primarily engaged in sales and marketing activities, including allocation of stock-based compensation expense.
•Travel expenses of our sales force who are primarily responsible for introducing our platform and offerings to potential customers.
•Depreciation expense on property and equipment related to sales and marketing
activities, calculated over the estimated useful life of the property and
equipment on a straight-line basis. Upon property and equipment retirement or
disposal, the cost of the asset disposed, and the related accumulated
depreciation from the accounts and any gain or loss is reflected in the
consolidated statements of operations and comprehensive income (loss), allocated
to sales and marketing.
Other Income (Expense), Net
Other income (expense), net primarily includes interest income from our
investments in marketable debt securities, available-for-sale, interest paid on
our equipment leases and interest expense related to our financing obligations,
including the amortization for debt discount and issuance costs.
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Change in Fair Value of Derivatives
Change in fair value of derivative instruments relates to common stock warrant liability assumed as part of the Business Combination and the conversion feature on the convertible notes issued in prior years. Changes in the fair value relate to remeasurement of our public and private placement warrants to fair value as of any respective exercise date and as of each subsequent balance sheet date.
Change in Fair Value of Contingent Earn-out Interests Liability
The contingent earn-out interest liability was established as part of the Business Combination. Changes in the fair value relate to remeasurement to fair value as of each subsequent balance sheet date.
Results of Operations
Comparison of the Three and Nine Months Ended
The following table sets forth our historical operating results for the periods indicated:
For the Three Months Ended September 30,
(in thousands) 2022 2021 $ Change % Change
Revenues $ 11,008 $ 357 $ 10,651 nm(1)
Cost of goods sold 21,777 418 21,359 nm(1)
Gross margin loss (10,769) (61) (10,708) nm(1)
Operating expenses
General and administrative 9,470 7,606 1,864 25 %
Research and development 8,573 5,302 3,271 62 %
Sales and marketing 2,345 1,337 1,008 75 %
Total operating expenses 20,388 14,245 6,143 43 %
Loss from operations (31,157) (14,306) (16,851) 118 %
Other income (expense), net (642) (66) (576) nm(1)
Change in fair value of derivative
instruments 1,890 1,066 824 77 %
Change in fair value of earn-out interests
liability 6,654 48,202 (41,548) (86) %
Loss before provision for income taxes (23,255) 34,896 (58,151) (167) %
Provision for income taxes - - - 100 %
Net (loss) income $ (23,255) $ 34,896 $ (58,151) (167) %
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For the Nine Months Ended September 30,
(in thousands) 2022 2021 $ Change % Change
Revenues $ 27,805 $ 1,746 $ 26,059 nm(1)
Cost of goods sold 46,854 1,675 45,179 nm(1)
Gross margin loss (19,049) 71 (19,120) nm(1)
Operating expenses
General and administrative 30,991 15,756 15,235 97 %
Research and development 24,493 9,846 14,647 149 %
Sales and marketing 7,891 2,173 5,718 263 %
Total operating expenses 63,375 27,775 35,600 128 %
Loss from operations (82,424) (27,704) (54,720) 198 %
Other income (expense), net (787) (83) (704) nm(1)
Change in fair value of derivative
instruments 5,158 6,030 (872) (14) %
Change in fair value of earn-out interests
liability 24,148 48,202 (24,054) (50) %
Write-off of subscription receivable - (379) 379 (100) %
Realized loss on debt extinguishment - (14,104) 14,104 (100) %
Loss before provision for income taxes (53,905) 11,962 (65,867) nm(1)
Provision for income taxes 3 - 3 100 %
Net (loss) income $ (53,908) $ 11,962 $ (65,870) nm(1)
___________(1) Percentage changes greater than or equal to 400% are not meaningful and noted as "nm" in the table above.
Revenues
Our total revenues increased by$10.7 million , from$0.4 million in the three months endedSeptember 30, 2021 to$11.0 million in the three months endedSeptember 30, 2022 primarily driven by an increase in unit sales. During the three months endedSeptember 30, 2022 , we sold 84 stepvans and 4 powertrains, compared to 3 powertrains during the three months endedSeptember 30, 2021 . Our total revenues increased by$26.1 million , from$1.7 million in the nine months endedSeptember 30, 2021 to$27.8 million in the nine months endedSeptember 30, 2022 primarily driven by an increase in unit sales. During the nine months endedSeptember 30, 2022 , we sold 211 stepvans and 6 powertrains, compared to 3 stepvans and 9 powertrain during the nine months endedSeptember 30, 2021 .
Cost of Goods Sold
Cost of goods sold increased by$21.4 million , from$0.4 million in the three months endedSeptember 30, 2021 to$21.8 million in the three months endedSeptember 30, 2022 . The increase in cost of goods sold is directly attributable to the increase in our product revenues and increases of (i)$3.5 million in inventory reserves and associated write-downs of excess and obsolete inventories with no such comparable reserves or write-downs during the three months endedSeptember 30, 2021 , (ii)$1.9 million in unfavorable physical inventory count and other adjustments and (iii)$16.0 million in direct materials, direct labor, manufacturing overhead and other direct and indirect costs. Cost of goods sold increased by$45.2 million , from$1.7 million in the nine months endedSeptember 30, 2021 to$46.9 million in the nine months endedSeptember 30, 2022 . The increase in cost of goods sold is directly attributable to the increase in our product revenues and increases of (i)$5.8 million in inventory reserves and write-downs of excess and obsolete inventories with no such comparable reserves write-downs during the nine months endedSeptember 30, 2021 and (ii)$39.4 million in direct materials, direct labor, manufacturing overhead and other direct and indirect costs. The increase in direct labor encompasses both employee and subcontractor labor costs. The direct labor costs are primarily attributable to an increased headcount and the temporary labor used to manufacture and fulfill current and future orders. Additionally, the use of our contract manufacturing partners to assist in our chassis production line has increased direct labor costs. The increase in direct material costs, is due to limited supplier contract agreements necessary to get competitive pricing 46 -------------------------------------------------------------------------------- Table of Contents for raw materials. As production increases and we order materials in larger quantities, we expect to have supply contract agreements that decrease the costs of raw materials. A significant portion of the overhead costs incurred include indirect salaries, facility rent, utilities, and depreciation of production equipment, which are primarily fixed in nature and allocated based on production levels. Accordingly, these costs are still incurred when we experience a reduction in production volume. In the near term, we plan to increase production activities, expecting fixed and semi-fixed overhead costs to be absorbed through the production of our batteries and chassis.
General and Administrative
General and administrative expenses increased by$1.9 million , or 25%, from$7.6 million in the three months endedSeptember 30, 2021 to$9.5 million in the three months endedSeptember 30, 2022 , attributable to increase of (i)$1.4 million in personnel costs driven general and administrative functions necessary to support our business growth, (ii)$0.9 million in insurance costs driven by overall coverage increase and the amortization expense of directors & officers ("D&O") insurance, (iii)$0.2 million increase in depreciation expense due to growth in business activities and (iv)$0.1 million in net other expense categories. These increases were partially offset by a decrease of$0.7 million in facilities expenses due to the allocation of overhead costs to cost of goods sold. General and administrative expenses increased by$15.2 million , or 97%, from$15.8 million in the nine months endedSeptember 30, 2021 to$31.0 million in the nine months endedSeptember 30, 2022 , attributable to increases of (i)$7.0 million in headcount and personnel cost for supply chain, sales, legal, accounting, information technology and general and administrative functions necessary to support our business growth, (ii)$4.8 million in insurance costs driven by overall coverage increase and the amortization expense of D&O insurance, (iii)$2.0 million in consulting and professional services expenses related to the implementation of our new ERP system and financial processes, (iv)$0.5 million in investment for equipment and technology driven by an increase in our headcount and (v)$1.3 million in other operating expenses, including travel, depreciation and other costs. These increases were offset by a$0.4 million decrease in facilities expenses due to the allocation of overhead costs to cost of goods sold. Research and Development Research and development expenses increased by$3.3 million , from$5.3 million in the three months endedSeptember 30, 2021 to$8.6 million in the three months endedSeptember 30, 2022 . The growth was primarily due to increases of (i)$3.0 million in allocation of personnel costs driven by higher headcount in engineering, including the allocation of stock-based compensation expense and (ii)$0.3 million in net other costs, driven by equipment and material purchases used solely for research and development purposes. Research and development expenses increased by$14.6 million , or 149%, from$9.8 million in the nine months endedSeptember 30, 2021 to$24.5 million in the nine months endedSeptember 30, 2022 . The growth was primarily due to increases of (i)$10.4 million in allocation of personnel costs driven by higher headcount in engineering, including the allocation of stock-based compensation expense and (ii)$4.2 million in net other costs, driven by equipment and material purchases used solely for research and development purposes.
Sales and Marketing
Sales and marketing expense increased by$1.0 million , from$1.3 million in the three months endedSeptember 30, 2021 to$2.3 million in the three months endedSeptember 30, 2022 . The growth was primarily due to increases of$1.5 million in allocation of personnel costs driven by higher headcount, including the allocation of stock-based compensation expense. This increase was offset by a$0.5 million decrease in consulting fees, public relations costs, participation in tradeshows and general marketing efforts. Sales and marketing expense increased by$5.7 million , from$2.2 million in the nine months endedSeptember 30, 2021 to$7.9 million in the nine months endedSeptember 30, 2022 . The growth was primarily due to increases of (i)$5.0 million in allocation of personnel costs driven by higher headcount, including the allocation of stock-based compensation expense and (ii)$0.7 million related to consulting fees, public relations costs, participation in tradeshows and general marketing efforts to enhance brand recognition in the first two quarters of 2022. Other Income (Expense), net Other income (expense), net increased by$0.6 million , from$0.1 million of net expense in the three months endedSeptember 30, 2021 to$0.6 million of net expense in the three months endedSeptember 30, 2022 . This increase is primarily driven by interest expense, as well as amortization of debt discounts and debt issuance costs on convertible debt of$0.5 million . 47 --------------------------------------------------------------------------------
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Additionally, interest income related to marketable securities, available for sale increased by$0.3 million , offset by accretion/amortization expense of$0.2 million . Other income (expense), net increased by$0.7 million , from$0.1 million of expense in the nine months endedSeptember 30, 2021 to$0.8 million of expense in the nine months endedSeptember 30, 2022 . This increase is driven by an increase in interest expense of$0.8 million primarily related to convertible debt, including amortization of debt discount and debt issuance costs on convertible debt. Additionally, interest income related to marketable securities, available for sale increased by$1.4 million , offset by accretion/amortization expense of$1.0 million and realized losses from sales of$0.2 million .
Change in Fair Value of Derivatives
The gain on the change in fair value of derivative instruments increased by$0.8 million , or 77%, from$1.1 million in the three months endedSeptember 30, 2021 to$1.9 million in the three months endedSeptember 30, 2022 and decreased by$0.9 million , or 14%, from$6.0 million in the nine months endedSeptember 30, 2021 to$5.2 million in the nine months endedSeptember 30, 2022 . The change in fair value for the three and nine months endedSeptember 30, 2022 is primarily attributable to the change in our stock price and the resulting valuation at the respective reporting period.
Change in Fair Value of Contingent Earn-out Interests Liability
The gain on the change in fair value of contingent earn-out interests liability was$6.7 million and$24.1 million for the three and nine months endedSeptember 30, 2022 , respectively compared to$48.2 million for the three and nine months endedSeptember 30, 2021 , respectively. The change in fair value for the three and nine months endedSeptember 30, 2022 is primarily attributable to the change in our stock price and the resulting valuation at the respective reporting period.
Write-off of Subscription Receivable
In 2020, the Company had a promissory note receivable in the amount of$364,000 due from the Company's COO,Giordano Sordoni . The note was utilized to exercise options granted to him by the Company. The principal balance of the note and the associated accrued interest was subsequently forgiven during the nine months endedSeptember 30, 2021 . No similar transaction occurred during the nine months endedSeptember 30, 2022 .
Realized Loss on Debt Extinguishment
This represents the loss on the conversion of convertible debt into preferred shares during the nine months endedSeptember 30, 2021 . No similar transaction occurred during the nine months endedSeptember 30, 2022 .
Provision for income taxes
The Company recorded income tax provision of$0 during each of the three months endedSeptember 30, 2022 and 2021, respectively. The Company recorded income tax provision of$3,000 and$0 during the during the nine months endedSeptember 30, 2022 and 2021, respectively.
Liquidity and Capital Resources
As an early stage growth company, the net losses and cash outflows we have incurred since inception are consistent with our strategy and budget. We will continue to incur net losses and cash outflows in accordance with our operating plan as we continue to expand our research and development activities with respect to our vehicles and battery systems, scale our operations to meet anticipated demand and establish our Fleet-as-a-Service product offering. Our ability to access capital when needed is not assured and, if capital is not available to us when and in the amounts needed, we could be required to delay, scale back or abandon some or all of our development programs and other operations, which could materially harm our business, prospects, financial condition and operating results. Global economic conditions have been worsening, with disruptions to, and volatility in, the credit and financial markets inthe United States and worldwide resulting from the effects of COVID-19, military conflict betweenRussia andUkraine , inflation and otherwise. If these conditions persist and deepen, we could experience an inability to access additional capital or our liquidity could otherwise be impacted. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our commercialization, research and development programs and/or other efforts. We consummated the Business Combination, which resulted in net cash proceeds of approximately$216.7 million . InDecember 2020 , we had the initial closing of our Series A Financing, and in the first quarter of 2021, we completed the Series A Financing, including the conversion of all our convertible notes into shares of Legacy Xos preferred stock. Prior to our Series 48 -------------------------------------------------------------------------------- Table of Contents A Financing inDecember 2020 and the Business Combination, we had financed our operations primarily from the sales of convertible notes. As ofSeptember 30, 2022 , our principal sources of liquidity were our cash and cash equivalents (excluding restricted cash) and investments in marketable debt securities, available-for-sale aggregating$106.1 million . We expect additional debt financing through asset-based lending and/or receivable financing in the future. Our short-term uses of cash are for working capital and to pay interest on our debt and our long-term uses of cash are for working capital and to pay the principal of our indebtedness. We believe that our existing cash resources, are sufficient to support planned operations for the next 12 months. Additionally, onMarch 23, 2022 , we entered into a Standby Equity Purchase Agreement (the "SEPA") withYorkville , whereby the Company shall have the right, but not the obligation, to sell toYorkville up to$125.0 million of its shares of common stock at our request during the 36 months following the execution of the SEPA, subject to certain conditions. As ofSeptember 30, 2022 , remaining commitment of$120.7 million was available under the SEPA, provided that, pursuant to the issuance of convertible debentures toYorkville described below, we shall not effect any advance under the SEPA without the prior mutual consent ofYorkville and the Company until the earliest of the date (i) all such convertible debentures have been repaid or converted into common stock or (ii)Yorkville no longer has any right or ability to convert any portion of the convertible debentures into common stock. In connection with the foregoing, the term set forth in the SEPA will be extended for a corresponding number of days. We used the net proceeds received from sales of common stock pursuant to the SEPA to date for working capital and general corporate purposes and expects similar use of proceeds going forward. Further, onAugust 11, 2022 andSeptember 21, 2022 , we issued toYorkville convertible debentures in the aggregate principal amount of$35.0 million , with a maturity date ofNovember 11, 2023 . Also onAugust 11, 2022 , we issued toAljomaih a convertible promissory note (the "Original Note") with a principal amount of$20.0 million and a maturity date ofAugust 11, 2025 , pursuant to a note purchase agreement datedAugust 9, 2022 ; the note purchase agreement includes an option forAljomaih to purchase additional convertible notes, on terms and conditions to be negotiated in good faith, in a principal amount of up to an additional$20.0 million . OnSeptember 28, 2022 , the Company andAljomaih agreed to amend and restate the Original Note to, among other things, adjust the calculation of the shares of our common stock issuable as interest (as amended and restated, the "Note"). We will use the net proceeds from theYorkville convertible debentures and the Note for operational liquidity, working capital and general and administrative expenses.
As a result, our management believes that our current financial resources are
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