Legal Proceedings
From time to time,
we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Regardless of outcome,
such proceedings or claims can have an adverse impact on us because of defense and settlement costs, diversion of resources and other
factors and there can be no assurances that favorable outcomes will be obtained.
On March 8, 2021,
a putative class action complaint was filed in federal district court for the Southern District of New York (Suh v. XL Fleet Corp., et
al., Case No. 1:21-cv-02002) against us and certain of our current officers and directors (the “Suh Complaint”). On March
12, 2021, a second putative class action complaint was filed in federal district court for the Southern District of New York (Kumar v.
XL Fleet Corp., et al., Case No. 1:21-cv-02171) against us and certain of our current officers and directors (the “Kumar Complaint”).
Both the Suh Complaint and the Kumar Complaint allege that certain public statements made by the defendants between October 2, 2020 and
March 2, 2021 violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. We believe that the allegations
asserted in the Suh Complaint and Kumar Complaint are without merit, and we intend to vigorously defend both lawsuits. There can be no
assurance, however, that we will be successful. At this time, we are unable to estimate potential losses, if any, related to either lawsuit.
Corporate Information
Our principal
executive offices are located at 145 Newton Street, Boston, Massachusetts 02135, and our telephone number is (617) 718-0329. Our website
address is www.xlfleet.com and the information contained in, or that can be accessed through, our website is not part of this Annual
Report on Form 10-K and should not be considered part of this Annual Report on Form 10-K.
Information Available on the Internet
Our internet
address is www.xlfleet.com, to which we regularly post copies of our press releases as well as additional information about us. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available
to you free of charge through the Investor Relations section of our website as soon as reasonably practicable after such materials have
been electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an
internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC. We include our web site address in this Annual Report on Form 10-K only as an inactive textual reference.
Information contained in our website does not constitute a part of this report or our other filings with the SEC.
Item 1A. Risk Factors
Summary Risk Factors
Our business
is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors,” that
represent challenges that we face in connection with the successful implementation of our strategy and growth of our business. The occurrence
of one or more of the events or circumstances described in the section entitled “Risk Factors,” alone or in combination with
other events or circumstances, may have an adverse effect on our business, financial condition, results of operations, and prospects.
Such risks include, but are not limited to:
Risks Related to our Business and Industry
|
●
|
We
are an early stage company with a history of losses, and we expect to incur significant expenses and continuing losses.
|
|
●
|
We
may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully
defend or insure against such claims.
|
|
●
|
We
rely on a limited number of customers for a large portion of our revenues, and the loss of one or more such customers could have a material
adverse impact on our business, financial condition and results of operations.
|
|
●
|
Our
business model requires further market penetration to drive growth and failure to expand would have a material adverse effect on our
operating results and business and could result in substantial liabilities that exceed our resources.
|
|
●
|
If
we fail to manage our growth effectively, include failing to attract and integrate qualified personnel, we may not be able to develop,
produce, market and sell our electrified powertrain solutions successfully.
|
|
●
|
Our success will depend on our
ability to economically source and coordinate the installation of electrified powertrain solutions at scale, and our ability to develop
and produce electrified powertrain solutions of sufficient quality and appeal to customers on schedule and at scale is unproven.
|
|
●
|
If
we are unable to successfully produce our electrified powertrain solutions, our business will be harmed.
|
|
●
|
We
are dependent on vehicle OEMs, upfitters and body builders to bring our electrified powertrain solutions to market, which is subject
to risks.
|
|
●
|
Our
future growth is dependent upon the fleet industry’s willingness to adopt hybrid, plug-in hybrid, all electric and fuel cell electric
vehicles (“xEVs”).
|
|
●
|
We,
the OEMs and our suppliers are subject to substantial regulation, and unfavorable changes to, or failure by us, the OEMs or our suppliers
to comply with, these regulations could substantially harm our business and operating results.
|
|
●
|
We
are highly dependent on the services of Dimitri N. Kazarinoff, our Chief Executive Officer, and Thomas (Tod) J. Hynes III, our President,
and if we are unable to retain Mr. Kazarinoff or Mr. Hynes, attract and retain key employees and hire qualified management, technical
and vehicle engineering personnel, our ability to compete could be harmed.
|
|
●
|
Future
product recalls could materially adversely affect our business, prospects, financial condition and operating results.
|
|
●
|
Vehicles
equipped with our electrified powertrain solutions will make use of lithium-ion battery cells, which have been observed to catch fire
or vent smoke and flame.
|
|
●
|
We
are or may be subject to risks associated with strategic alliances or acquisitions and may not be able to identify adequate strategic
relationship opportunities, or form strategic relationships, in the future.
|
|
●
|
Our
electrified powertrain solutions could face competition from original equipment manufacturers and other providers of electrification
solutions that enter the commercial vehicle electrification market.
|
|
●
|
The
performance characteristics of our electrified powertrain solutions, including fuel economy and emissions levels, may vary, including
due to factors outside of our control.
|
|
●
|
Our
suppliers may rely on complex machinery for our component production, which involves a significant degree of risk and uncertainty in
terms of operational performance and costs.
|
|
●
|
Our
manufacturing operations are dependent upon third-party suppliers, including, in certain cases, single-source suppliers, making us vulnerable
to supply shortages.
|
|
●
|
Insufficient
warranty reserves to cover future warranty claims could materially adversely affect our business, prospects, financial condition and
operating results.
|
|
●
|
Our
electrified powertrain solutions rely on software and hardware that is highly technical, and if these systems contain errors, bugs or
vulnerabilities, or if we are unsuccessful in addressing or mitigating technical limitations in our systems, our business could be adversely
affected.
|
|
●
|
If
our electrified powertrain solutions fail to perform as expected, our ability to develop, market and sell our electrified powertrain
solutions could be harmed.
|
|
●
|
Developments
in alternative technology or improvements in the internal combustion engine may adversely affect the demand for our electrified powertrain
solutions.
|
|
●
|
Our
beliefs regarding the ability of our electrified powertrain solutions to limit carbon intensity and reduce GHG emissions and contribute
to global decarbonization may be based on materially inaccurate assumptions.
|
|
●
|
We
will incur increased costs as a result of operating as a public company, and our management will devote substantial time to new compliance
initiatives.
|
|
●
|
Our
management has limited experience in operating a public company.
|
|
●
|
We
intend in the future to expand internationally and will face risks associated with our international operations, including unfavorable
regulatory, political, tax and labor conditions, which could harm our business.
|
|
●
|
We
are subject to governmental export and import control laws and regulations. Our failure to comply with these laws and regulations could
have an adverse effect on our business, prospects, financial condition and operating results.
|
|
●
|
Our
intellectual property applications for registration may not issue or be registered, which may have a material adverse effect on our ability
to prevent others from commercially exploiting products similar to ours.
|
|
●
|
Our
ability to use net operating loss carryforwards and other tax attributes may be limited in connection with the Business Combination or
other ownership changes.
|
|
●
|
We
may not be able to obtain or agree on acceptable terms and conditions for all or a significant portion of the government grants, loans
and other incentives for which we may apply. As a result, our business, prospects, financial condition and operating results may be adversely
affected.
|
|
●
|
We
have been, and may in the future be, adversely affected by the global COVID-19 pandemic, the duration and economic, governmental and
social impact of which is difficult to predict, which may significantly harm our business prospects, financial condition and operating
results.
|
Risks Related to Ownership
of Our Securities
|
●
|
Concentration
of ownership among our existing executive officers, directors and their respective affiliates may prevent new investors from influencing
significant corporate decisions.
|
|
|
|
|
●
|
Reports published
by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading
volume of our common stock, par value $0.0001 (“Common Stock”).
|
|
|
|
|
●
|
Our charter
contains anti-takeover provisions that could adversely affect the rights of our stockholders.
|
|
|
|
|
●
|
If securities
or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change
their recommendations regarding our Common Stock adversely, the price and trading volume of our Common Stock could decline.
|
|
|
|
|
●
|
A significant
portion of our total outstanding shares of our Common Stock are restricted from immediate resale but may be sold into the market
in the near future. This could cause the market price of our Common Stock to drop significantly, even if our business is doing well.
|
|
|
|
|
●
|
We may issue
additional Common Stock or preferred stock, including under our equity incentive plan. Any such issuances would dilute the interest
of our stockholders and likely present other risks.
|
|
|
|
|
●
|
We may by subject
to legal proceedings related to shareholder derivative suits, product liability, patent, copyright or trademark infringements, or
trade secret misappropriation claims, which may be time-consuming and expensive, hinder execution of our business and growth strategy
or negatively affect the price of our Common Stock.
|
|
|
|
Risk Factors
An investment
in our securities is speculative and involves a high degree of risk. Before deciding whether to invest in our securities, you should
consider carefully the risks described below, together with other information in this Annual Report on Form 10-K and the other information
and documents we file with the SEC. The occurrence of any of the following risks could have a material and adverse effect on our business,
reputation, financial condition, results of operations and future growth prospects, as well as our ability to accomplish our strategic
objectives. As a result, the trading price of our Common Stock could decline and you could lose all or part of your investment. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations and stock
price.
Risks Related to our
Business and Industry
We are an early stage company with
a history of losses, and we expect to incur significant expenses and continuing losses.
We incurred a net loss
of approximately $60.6 million and $14.9 million for the years ended December 31, 2020 and 2019, respectively. We believe that we
will continue to incur operating and net losses until at least such time in the future as our annual revenue reaches over $200 million,
which may occur later, or not at all. We have an established customer base and product line and our potential profitability is dependent
upon the continued successful development and successful commercial acceptance of our electrified powertrain solutions, which may occur
later than anticipated, if at all. Our potential profitability is further contingent on the reduction in product system costs, which
also may occur later than anticipated, if at all.
We expect the rate
at which we will incur losses to be significantly higher in future periods as we:
|
●
|
expand
product offerings to include anti-idle technology, onboard power, new versions of plug-in hybrid solutions, full battery electric propulsion,
comprehensive charging and power solutions and hydrogen fuel cell enabled hybrid electric systems;
|
|
●
|
expand
our production capabilities to produce our electrified powertrain solutions, including costs associated with outsourcing the production
of our electrified powertrain solutions;
|
|
●
|
build
up inventories of parts and components for our fleet electrification solutions;
|
|
●
|
produce
an inventory of our electrified powertrain solutions;
|
|
●
|
expand
our design, development, installation and servicing capabilities;
|
|
●
|
increase
our sales and marketing activities and develop our distribution infrastructure;
|
|
●
|
increase
our general and administrative functions to support our growing operations; and
|
|
●
|
acquire
and integrate other businesses.
|
Because we will incur
the costs and expenses from these efforts before we receive any incremental revenues with respect thereto, our losses in future periods
are expected to be significant. In addition, we may find that these efforts are more expensive than we currently anticipate or that these
efforts may not result in revenues, which would have a material adverse effect on our results of operations and further increase our
losses.
We may become subject to product
liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against
such claims.
Product
liability claims, even those without merit or those that do not involve our products, could harm our business, prospects, financial condition
and operating results. The automobile industry in particular experiences significant product liability claims, and we face inherent risk
of exposure to claims in the event our electric powertrain solutions do not perform or are claimed to not have performed as expected.
As is true for other commercial vehicle suppliers, we expect in the future that our electrified powertrain solutions will be installed
on vehicles that will be involved in crashes resulting in death or personal injury. Additionally, product liability claims that affect
our competitors may cause indirect adverse publicity for us and our products.
While
we maintain product liability insurance, our coverage may not be adequate to cover certain product liability claims, and we may not be
able to obtain adequate insurance coverage in the future at acceptable costs. A successful product liability claim that exceeds our policy
limits could require us to pay substantial sums. Our risks in this area are particularly pronounced given the relatively limited number
of electrified powertrain solutions delivered to date and limited field experience of our products. Moreover, a product liability claim
against us or our competitors could generate substantial negative publicity about our products and business and could have a material
adverse effect on our brand, reputation, business, prospects, financial condition and operating results.
We rely on a limited number of customers
for a large portion of our revenues, and the loss of one or more such customers could have a material adverse impact on our business,
financial condition and results of operations.
We depend
on a limited number of customers for a significant portion of our revenue. For the fiscal year ended December 31, 2020, we had one
customer that accounted for 68% of our revenue. The loss of this customer could have a significant impact on our revenues and harm our
business, results of operations and cash flows.
We may not be able to further penetrate
the fleet market or enter into new markets in the future.
Our success,
and our ability to increase revenue and operate profitably, depends in part on our ability to expand our customer base, further penetrating
the fleet markets comprised of corporations, municipalities and public utilities along with expansion into new markets. We have an established
customer base in the light and medium duty commercial and municipal fleet markets, although there is no assurance that we will be able
to make additional sales to our existing or prior customers. As part of our growth plan, an increase in revenue is expected to be generated
from further market penetration into the light and medium duty commercial and municipal fleet markets. In addition, as we develop new
technologies, part of the growth plan involves expansion into new markets, such as the heavy duty commercial fleet market. If we are
unable to meet our customers’ performance requirements or industry specifications limiting expansion into existing or new markets,
our business, prospects, financial condition and operating results would be materially adversely affected.
We may be unable to adequately control
the costs associated with our operations.
We will
require significant capital to develop and grow our business, including developing and producing our electrified powertrain solutions
and building our brand. We expect to incur significant expenses which will impact our profitability, including research and development
expenses, raw material procurement costs, sales and distribution expenses as we build our brand and market our electrified powertrain
solutions, and general and administrative expenses as we scale our operations and incur costs as a public company. Our ability to become
profitable in the future will depend on our ability to complete the design and development of additional electrified powertrain solutions
to meet projected performance metrics and successfully market our electrified powertrain solutions and services. Additionally, for us
to become profitable, we must develop powertrain solutions that are cost effective to help achieve our expected margins. If we are unable
to efficiently design, produce, market, sell, distribute and service our electrified powertrain solutions, our margins, profitability
and prospects would be materially and adversely affected.
Our business model requires further
market penetration to drive growth and failure to expand would have a material adverse effect on our operating results and business and
could result in substantial liabilities that exceed our resources.
It is difficult
to predict our future revenues and appropriately budget for our expenses, and we have limited insight into trends that may emerge and
affect our business. In the event that actual results differ from our estimates or we adjust our estimates in future periods, our operating
results and financial position could be materially affected. Our future results depend on the successful implementation of our management’s
growth strategies – including the launch of new products and services through our XL Grid and EaaS offerings - and are based on
assumptions and events over which we have only partial or no control. These initiatives and products may not generate as much revenue,
cost more to bring to market, and create greater liabilities than we anticipate. We will continue to encounter risks and difficulties
frequently experienced by early stage companies, including scaling up our infrastructure and headcount, and may encounter unforeseen
expenses, difficulties or delays in connection with our growth. In addition, as a result of the capital-intensive nature of our business,
we can be expected to continue to sustain substantial operating expenses without generating sufficient revenues to cover expenditures.
Any investment in us is therefore highly speculative and could result in the loss of your entire investment.
We may require continued capital
investment.
We should
have sufficient capital in the near future for the design, development and manufacture of electrified powertrain solutions. However,
we may require additional capital investment in the future to fund operations, continue research and development and improve infrastructure.
There can be no assurance that we will have access to the capital we need on favorable terms when required or at all. If we cannot raise
additional funds when we need them, our financial condition and business could be materially adversely affected.
If we fail to manage our growth effectively,
including failing to attract and integrate qualified personnel, we may not be able to develop, produce, market and sell our electrified
powertrain solutions successfully.
Any failure
to manage our growth effectively could materially and adversely affect our business, prospects, operating results and financial condition.
We intend to expand our operations significantly. We expect our future expansion to include:
|
●
|
expanding
the management team;
|
|
●
|
hiring
and training new personnel;
|
|
●
|
forecasting
production and revenue;
|
|
●
|
controlling
expenses and investments in anticipation of expanded operations;
|
|
●
|
establishing
or expanding design, production, sales and service facilities;
|
|
●
|
implementing
and enhancing administrative infrastructure, systems and processes;
|
|
●
|
expanding
into international markets; and
|
|
●
|
acquiring
other businesses.
|
We intend
to continue to hire a significant number of additional personnel, including controls and systems engineers, design and development engineers
and production personnel for our electrified powertrain solutions. Because our electrified powertrain solutions are based on a different
technology platform than traditional internal combustion engines, individuals with sufficient training in electrified vehicles may not
be available to hire, and as a result, we will need to expend significant time and expense training any newly hired employees. Competition
for individuals with experience designing and producing electrified vehicles and their software is intense, and we may not be able to
attract, integrate, train, motivate or retain additional highly qualified personnel. The failure to attract, integrate, train, motivate
and retain these additional employees could seriously harm our business, prospects, financial condition and operating results.
Our success will depend on our ability
to economically source and coordinate the installation of electrified powertrain solutions at scale, and our ability to develop and produce
electrified powertrain solutions of sufficient quality and appeal to customers on schedule and at scale is unproven.
Our business
depends in large part on our ability to execute our plan to develop, produce, assemble, market, sell, install and service our electrified
powertrain solutions. In particular, we rely on Parker Hannifin Corporation to supply all of our motors. We further rely on other third
parties to supply wire harnesses and inverters, each of which are used in our electrified powertrain solutions. We currently source all
components and assemble them into systems which are sent to our upfitter partners. These upfitter partners then install and commission
our electrified powertrain solutions. While these arrangements can lower operating costs and enable rapid increases in installations,
they also reduce our direct control over installation. Such diminished control may have an adverse effect on the quality or quantity
of products or services, or our flexibility to respond to changing conditions.
We rely
on single-source suppliers to supply and produce certain components and rely on upfitter partners for installation of our electrified
powertrain solutions. Any failure of these suppliers or partners to perform could require us to seek alternative suppliers or to expand
our production capabilities, which could incur additional costs and have a negative impact on our cost or supply of components or finished
goods. In addition, production, logistics in supply or production areas, or transit to final destinations can be disrupted for a variety
of reasons including, but not limited to, natural and man-made disasters, information technology system failures, commercial disputes,
military actions, economic, business, labor, environmental, public health or political issues or international trade disputes.
We, along with our
supply chain and upfitter partners, have limited experience to date in high volume production of our electrified powertrain solutions.
We do not know if the sources of component supply and/or upfitters at scale will remain reliable to enable us to meet the quality, price,
engineering, design and production standards, as well as the production volumes, required to successfully mass market our electrified
powertrain solutions. Even if we and our upfitter partners are successful in developing our high volume production capability and processes
and in reliably sourcing our component supply, we do not know whether we will be able to do so in a manner that avoids significant delays
and cost overruns, including as a result of factors beyond our control such as problems with suppliers and vendors, or in time to meet
our vehicle commercialization schedules or to satisfy the requirements of customers. Any failure to develop such production processes
and capabilities within our projected costs and timelines could have a material adverse effect on our business, prospects, financial
condition and operating results.
We may experience significant delays
in the design, production and launch of our electrified powertrain solutions, which could harm our business, prospects, financial condition
and operating results.
Any delay
in the financing, design, production and launch of our electrified powertrain solutions could materially damage our brand, business,
prospects, financial condition and operating results. There are often delays in the design, production and commercial release of new
products, and to the extent these delays postpone the launch of our electrified powertrain solutions, our growth prospects could be adversely
affected as we may fail to grow our market share. We integrate electrified solutions into OEM vehicles, and if the OEM makes unexpected
changes to the function of the vehicle, this could significantly delay the development and therefore launch of our electrified powertrain
solutions. We will rely on upfitter partners to install our electrified powertrain solutions, and if they are not able to produce product
at scale or meet our specifications, we may need to expand our production capabilities, which would cause us to incur additional costs.
Furthermore, we rely on third-party suppliers for the provision and development of many of the key components and materials used in our
electrified powertrain solutions, and to the extent they experience any delays, we may need to seek alternative suppliers. If we experience
delays by our suppliers, we could experience delays in delivering on our timelines.
If we are unable to successfully
produce our electrified powertrain solutions, our business will be harmed.
There
are numerous potential ways we could be unable to produce our electrified powertrain solutions. Our suppliers’ production facilities,
which are used to produce components for our electrified powertrain solutions, would be costly to replace and could require substantial
lead time to replace and qualify for use. Our suppliers’ production facilities may be harmed or rendered inoperable by natural
or man-made disasters, including earthquakes, flooding, fire and power outages, or by health epidemics, such as the recent COVID-19 pandemic,
which may render it difficult or impossible for us to produce our electrified powertrain solutions for some period of time. The inability
to produce our electrified powertrain solutions or the backlog that could develop if our production facilities and the production facilities
of our outsourcing partners and suppliers are inoperable for even a short period of time may result in the loss of customers or harm
our reputation. Although we maintain insurance for damage to our property and the disruption of our business, this insurance may not
be sufficient to cover all of our potential losses and may not continue to be available to our on acceptable terms, if at all.
We are dependent on vehicle OEMs,
upfitters and body builders to bring our electrified powertrain solutions to market, all of which are subject to risks.
Because
we do not manufacture complete vehicles, we are dependent on vehicle OEMs and body builders to provide vehicle chassis for our electrified
powertrain solutions. We rely on upfitters for the installation of our electrified powertrain solutions. Reliance on OEMs, body builders
and upfitters for the production and installation of our electrified powertrain solutions is subject to risks with respect to operations
that are outside our control. By way of example, the current global microchip shortage has begun to limit the availability of chassis
from several vehicle OEMs in the current year. If OEMs or body builders are not able to produce vehicle chassis and provide them to us
or upfitters, or a change in governmental regulations or policies occurs, we would need to develop our own vehicle on which to install
our electrified powertrain solutions. Either case could have a negative impact on our ability to sell our electrified powertrain solutions
at anticipated prices or margins or in expected timeframes. Additionally, we may permit returns of vehicles installed with our electrified
powertrain solutions, which may result in significant additional costs to us if we are required to convert the vehicles back to their
original form. There is risk of potential disputes with our upfitters, and we could be affected by negative publicity related to our
upfitter partners whether or not such publicity is related to their collaboration with us. Our ability to successfully build a premium
brand could also be adversely affected by perceptions about the quality of our upfitter partners’ workmanship. In addition, although
we are involved in each step of the supply chain, production and installation processes, because we also rely on our upfitter partners
and suppliers to meet our quality standards, there can be no assurance that the final product will meet expected quality standards.
We may be unable
to enter into new agreements or extend existing agreements with upfitter partners on terms and conditions acceptable to us and therefore
may need to contract with other third parties or significantly add to our own production capacity. There can be no assurance that in
such event we would be able to engage other third parties or establish or expand our own production capacity to meet our needs on acceptable
terms or at all. The expense and time required to complete any transition, and to assure that our electrified powertrain solutions produced
at facilities of new producers comply with our quality standards and regulatory requirements, may be greater than anticipated. Any of
the foregoing could adversely affect our business, prospects, financial condition and operating results.
Our ability
to sell electrified powertrain solutions depends on compatibility with various OEM vehicle models and characteristics. The pace of change
of these models and changing model availability is outside of our control and could create adverse conditions and materially affect our
financial results.
We are dependent on our suppliers,
some of which are single or limited source suppliers, and the inability of these suppliers to deliver necessary components of our systems
for powertrains at prices and volumes, performance and specifications acceptable to us could have a material adverse effect on our business,
prospects, financial condition and operating results.
We rely
on third-party suppliers for the provision and development of certain key components and materials used in our electrified powertrain
solutions. While we plan to obtain components from multiple sources whenever possible, some of the critical components used in our vehicles
will be purchased by us from a single source or a limited number of sources. For example, we purchase all of our motors from a single
supplier, Parker Hannifin Corporation.
Our third-party
suppliers may not be able to meet their product specifications and performance characteristics, which would impact our ability to achieve
our product specifications and performance characteristics as well. Additionally, our third-party suppliers may be unable to obtain required
certifications for their products which we plan to use or provide warranties that are necessary for our solutions. If we are unable to
obtain components and materials used in our electrified powertrain solutions from our suppliers or if our suppliers decide to create
or supply a competing product, our business could be adversely affected. While we believe that we may be able to establish alternate
supply relationships and can obtain or engineer replacement components for our single source components, we may be unable to do so in
the short term (or at all) or at prices or quality levels that are favorable to us, which could have a material adverse effect on our
business, prospects, financial condition and operating results.
Our manufacturing operations are
dependent upon third-party suppliers, including, in certain cases, single-source suppliers, making us vulnerable to supply shortages.
Third-party suppliers
provide us with raw materials, parts and manufactured components (“Third Party Supplies”). Any delay in receiving Third Party
Supplies could impair our ability to deliver products to our customers and, accordingly, could have an adverse effect on our business,
financial condition, results of operations, and cash flows. The volatility in the financial markets and uncertainty in the automotive
sector could result in exposure related to the financial viability of certain of our suppliers. Suppliers may also exit certain business
lines, causing us to find other suppliers for materials or components. Finding new suppliers could potentially delay our ability to timely
deliver products to customers and such new suppliers may also change the terms on which they are willing to provide products to us, any
of which could adversely affect our financial condition and results of operations. In addition, many of our suppliers have unionized
workforces that could be subject to work stoppages as a result of labor relations issues. The outbreak of COVID-19 resulted in work stoppages
at certain suppliers that are part of our supply chain. The ongoing impact of the COVID-19 pandemic could result in additional work stoppages
at our suppliers in the future. All manufacturing operations at our plants are subject to change based on market conditions, component
supplier disruptions, government regulations, and the continued spread and impact of the COVID-19 pandemic. If work stoppages were to
be implemented, there could be resulting supply shortages that could impact our ability to deliver our products to our customers on schedule
and, accordingly, could have an adverse effect on our business, financial condition, results of operations, and cash flows. Some of our
suppliers are the sole source for a particular supply item (e.g., the majority of motors, certain batteries, and inverters) and cannot
be quickly or inexpensively re-sourced to another supplier due to long lead times and contractual commitments that might be required
by another supplier in order to provide the component or materials. Even as production resumes by us and our suppliers, production volumes
may be volatile and we may need to modify our production environment to ensure the health and safety of our workers and customers. If
we are unsuccessful in managing a re-start of our production, our results of operations may be materially affected. In addition to the
risks described above regarding interruption of Third Party Supplies, which are exacerbated in the case of single-source suppliers, the
exclusive supplier of a component potentially could exert significant bargaining power over price, quality, warranty claims or other
terms relating to a component. Additionally, our suppliers may prioritize their resources for any long-term commitments to third parties
or larger customers and to our detriment. We may not be in a position to find alternate suppliers in a timely manner to continue to operate
consistent with our obligations to or expectations of our customers.
Our future growth is dependent upon
the fleet industry’s willingness to adopt xEVs.
Our growth is highly
dependent upon the adoption of xEVs by the commercial and municipal fleet industry. If the market for xEVs and our electrified powertrain
solutions does not develop at the rate or in the manner or to the extent that we expect, or if critical assumptions we have made regarding
the efficiency of our electrified powertrain solutions are incorrect or incomplete, our business, prospects, financial condition and
operating results will be harmed. The fleet market for xEVs is characterized by rapidly changing technologies, price competition, numerous
competitors including OEMs, evolving government regulation and industry standards and uncertain customer demands and behaviors.
Factors that may
influence the fleet market adoption of xEVs vehicles include:
|
●
|
perceptions
about xEV quality, safety, design, performance, reliability and cost, especially if adverse events or accidents occur that are linked
to the quality or safety of xEVs;
|
|
●
|
the perceived willingness of vehicle
OEMs to honor factory warranties on vehicles equipped with our powertrain solutions;
|
|
●
|
perceptions
about vehicle safety in general, including the use of advanced technology, such as vehicle electronics, batteries and regenerative braking
systems;
|
|
●
|
the
decline of vehicle efficiency and/or range resulting from deterioration over time in the ability of the battery to hold a charge;
|
|
●
|
changes
or improvements in the fuel economy of internal combustion engines, the vehicle and the vehicle controls or competitors’ electrified
systems;
|
|
●
|
the
availability of service, charging and fueling and other associated costs for xEVs;
|
|
●
|
volatility
in the cost of energy, electricity, oil and gasoline could affect buying decisions;
|
|
●
|
government regulations and economic
incentives promoting fuel efficiency and alternate forms of energy, including new regulations mandating zero tailpipe emissions compared
to overall carbon reduction;
|
|
●
|
the
availability of tax and other governmental incentives to purchase and operate xEVs or future regulation requiring increased use of nonpolluting
trucks; and
|
As an example, the market
price of oil has dropped since January 2020, and it is unknown to what extent any corresponding decreases in the cost of fuel may impact
the market for xEVs. Moreover, travel restrictions and social distancing efforts in response to the COVID-19 pandemic may negatively
impact the commercial fleet industry, for an unknown, but potentially lengthy, period of time. Additionally, we may become subject to
regulations that may require us to alter the design of our electrified powertrain solutions, which could negatively impact customer interest
in our products.
We may in the future experience additional
competition in current and potential future markets.
We work closely with
traditional vehicle manufacturers to provide electrification solutions for their standard gas-powered vehicles. As a result, we have
historically considered our relationship to such companies to be that of a market partner as opposed to a competitor. But as the vehicle
electrification market continues to expand, traditional vehicle manufacturers may develop and market xEV solutions in larger vehicles
or all electric versions of the same vehicles being deployed with our systems. In particular, Tesla, Inc. (“Tesla”), Hyliion,
Inc. (“Hyliion”) and Nikola Corporation (“Nikola”) have announced their plans to bring Class 8 long haul
battery electric vehicles and fuel cell electric vehicles to the market over the coming years. Cummins Inc., Daimler AG, Dana Incorporated,
Navistar International Corporation, PACCAR Inc., Volvo Group, XOS Trucks and other commercial vehicle manufacturers have also announced
their plans to bring Class 8 battery electric vehicles or fuel cell electric vehicles to the market.
In the event that
traditional vehicle manufacturers develop xEV solutions that compete with vehicles outfitted with our electrification solutions, we will
experience increased industry competition. Competitors may be able to deploy greater resources to the design, development, manufacturing,
distribution, promotion, sales, marketing and support of their electric vehicles. Additionally, such competitors may have greater name
recognition, longer operating histories, larger sales forces, broader customer and industry relationships and other resources than we
do. We may experience competition with respect to recruiting and retaining qualified research and development, sales, marketing and management
personnel, as well as further competition in acquiring technologies complementary to, or necessary for, our products. Additional mergers
and acquisitions may result in even more resources being concentrated in our competitors. There are no assurances that customers will
choose our electrified systems or vehicles over those of our competitors, and future competition could have a material adverse effect
on our business, financial condition and results of operations.
We, the OEMs and our suppliers are
subject to substantial regulation, and unfavorable changes to, or failure by us, the OEMs or our suppliers to comply with, these regulations
could substantially harm our business and operating results.
Our electrified powertrain
solutions, and the sale of motor vehicles in general, are subject to substantial regulation under international, federal, state and local
laws. OEMs and our suppliers also are currently, or may in the future, become subject to such regulations. We continue to evaluate requirements
for licenses, approvals, certificates and governmental authorizations necessary to manufacture, sell or service our electrified powertrain
solutions in the jurisdictions in which we plan to operate and intend to take such actions necessary to comply. We may experience difficulties
in obtaining or complying with various licenses, approvals, certifications and other governmental authorizations necessary to manufacture,
sell or service our electrified powertrain solutions in any of these jurisdictions. If we, OEMs or our suppliers are unable to obtain
or comply with any of the licenses, approvals, certifications or other governmental authorizations necessary to carry out our operations
in the jurisdictions in which they currently operate, or those jurisdictions in which they plan to operate in the future, our business,
prospects, financial condition and operating results could be materially adversely affected. We expect to incur significant costs in
complying with these regulations. Regulations related to the vehicle industry are evolving and we face risks associated with changes
to these regulations, including but not limited to:
|
●
|
increased
subsidies for corn and ethanol production, which could reduce the operating cost of vehicles that use ethanol or a combination of ethanol
and gasoline;
|
|
●
|
increased
support from local, state and federal governments for other alternative fuel systems, such as but not limited to hydrogen, natural gas
and bio-fuels, which could have an impact on the acceptance of our electrified powertrain solutions.
|
To the extent the laws
change, our electrified powertrain solutions and our suppliers’ products may not comply with applicable international, federal,
state or local laws, which would have an adverse effect on our business. Compliance with changing regulations could be burdensome, time
consuming and expensive. To the extent compliance with new regulations is cost prohibitive, our business, prospects, financial condition
and operating results would be adversely affected.
We are exposed to the credit risk
of some of our direct customers, which subjects us to the risk of non-payment for our products.
We distribute our
electrified powertrain solutions through a network of upfitters, OEMs and OEM dealers, some of which may not be well-capitalized and
may be of a lower credit quality. This direct customer network subjects us to the risk of non-payment for our electrified powertrain
solutions. In addition, during periods of economic downturn in the global economy, our exposure to credit risks from our direct customers
may increase, and our efforts to monitor and mitigate the associated risks may not be effective. In the event of non-payment by one or
more direct customers, our business, financial condition and results of operations could be materially adversely affected.
We may need to raise additional funds,
which may not be available to us on favorable terms or at all. If we cannot raise additional funds when we need them, our business, prospects,
financial condition and operating results could be negatively affected.
The design, production,
sale and servicing of our electrified powertrain solutions is capital-intensive. We currently expect that no additional capital will
be needed to achieve profitability. However, we may subsequently determine that additional funds are necessary earlier than anticipated.
This capital may be necessary to fund our ongoing operations, continue research, development and design efforts, acquire companies or
technologies and improve infrastructure. We may raise additional funds through the issuance of equity, equity related or debt securities
or through obtaining credit from government or financial institutions. We cannot be certain that additional funds will be available to
us on favorable terms when required, or at all. If we cannot raise additional funds when we need them, our business, prospects, financial
condition and operating results could be materially adversely affected.
If we are unable to establish and
maintain confidence in our long-term business prospects among customers and analysts and within our industry, or are subject to negative
publicity, then our financial condition, operating results, business prospects and access to capital may suffer materially.
Customers may be
less likely to purchase our electric powertrain solutions if they are not convinced that our business will succeed or that our service
and support and other operations will continue in the long term. Similarly, suppliers and other third parties will be less likely to
invest time and resources in developing business relationships with us if they are not convinced that our business will succeed. Accordingly,
in order to build and maintain our business, we must maintain confidence among customers, suppliers, analysts, ratings agencies and other
parties in our products, long-term financial viability and business prospects. Maintaining such confidence may be particularly complicated
by certain factors including those that are largely outside of our control, such as customer unfamiliarity with our electric powertrain
solutions, any delays in scaling production, delivery and service operations to meet demand, competition and uncertainty regarding the
future of hybrid electric vehicles or our other services and our production and sales performance compared with market expectations.
If we are unable to address the service
requirements of our customers, our business, prospects, financial condition and operating results may be materially and adversely affected.
With further market
penetration and expansion into new markets, we plan to increase our servicing network of our electrified powertrain solutions. Servicing
xEVs is different than servicing traditional vehicles and requires specialized skills, including high voltage training and servicing
techniques. We partner with upfitters to perform some or all of the servicing on our electrified powertrain solutions, and will need
to expand our service network. There can be no assurance that we will be able to enter into an acceptable arrangement with any such third-party
provider. Our customers will also depend on our customer support team to resolve technical and operational issues relating to the integrated
software underlying our electrified powertrain solutions. Our ability to provide effective customer support is largely dependent on our
ability to attract, train and retain qualified personnel with experience in supporting customers on platforms such as ours. As we continue
to grow, additional pressure may be placed on our customer support team, and we may be unable to respond quickly enough to accommodate
short-term increases in customer demand for technical support. We also may be unable to modify the future scope and delivery of our technical
support to compete with changes in the technical support provided by our competitors. Increased customer demand for support, without
corresponding revenue, could increase costs and negatively affect our operating results. If we are unable to successfully address the
service requirements of our customers or establish a market perception that we do not maintain high-quality support, we may be subject
to claims from our customers, including loss of revenue or damages, and our business, prospects, financial condition and operating results
may be materially and adversely affected.
We are highly dependent on the services
of Dimitri N. Kazarinoff, our Chief Executive Officer, and Thomas (Tod) J. Hynes III, our President, and if we are unable to retain Mr. Kazarinoff
or Mr. Hynes, attract and retain key employees and hire qualified management, technical and vehicle engineering personnel, our ability
to compete could be harmed.
Our success depends,
in part, on our ability to retain our key personnel. We are highly dependent on the services of Dimitri N. Kazarinoff, our Chief Executive
Officer, and Tod Hynes, our President. Mr. Kazarinoff and Mr. Hynes are the source of many, if not most, of the ideas and execution
driving our company. If Mr. Kazarinoff or Mr. Hynes were to discontinue their service to us due to death, disability or any
other reason, we would be significantly disadvantaged. The unexpected loss of or failure to retain one or more of our key employees could
adversely affect our business.
Our success also
depends, in part, on our continuing ability to identify, hire, attract, train and develop other highly qualified personnel. Experienced
and highly skilled employees are in high demand and competition for these employees can be intense, and our ability to hire, attract
and retain them depends on our ability to provide competitive compensation. We may not be able to attract, assimilate, develop or retain
qualified personnel in the future, and our failure to do so could adversely affect our business, including the execution of our global
business strategy. We do not maintain, and we do not expect to maintain in the future, key man life insurance policies with respect to
Dimitri N. Kazarinoff or Tod Hynes. Any failure by our management team and our employees to perform as expected may have a material adverse
effect on our business, prospects, financial condition and operating results.
We face significant barriers to enter
new markets, and if we cannot successfully overcome those barriers, our business will be negatively impacted.
The commercial trucking
industry has traditionally been characterized by significant barriers to entry, including the ability to meet performance requirements
or industry specifications, acceptance by OEMs and end users, investment costs of design and production, the need for specialized design
and development expertise, regulatory requirements, establishing a brand name and image and the need to establish sales capabilities.
If we are not able to overcome these barriers, our business, prospects, financial condition and operating results will be negatively
impacted and our ability to grow our business will be harmed.
Future product recalls could materially
adversely affect our business, prospects, financial condition and operating results.
In 2019 we experienced
two recalls that were subsequently remediated. In the future, we may voluntarily or involuntarily initiate a recall if any of our products
(including the batteries we design, develop and include in our systems) prove to be defective or noncompliant with applicable federal
motor vehicle safety standards. Such recalls involve significant expense and diversion of management attention and other resources, which
could adversely affect our brand image, as well as our business, prospects, financial condition and operating results.
Increases in costs, disruption of
supply or shortage of our components, particularly battery cells, could harm our business.
In the production
of our electrified powertrain solutions, we have experienced, and in the future may again experience, increases in the cost or a sustained
interruption in the supply or shortage of our components. Any such increase or supply interruption could materially negatively impact
our business, prospects, financial condition and operating results. The prices for our components fluctuate depending on market conditions
and global demand and could adversely affect our business, prospects, financial condition and operating results. For instance, we are
exposed to multiple risks relating to price fluctuations for battery cells. These risks include:
|
●
|
the
inability or unwillingness of current battery manufacturers to build or operate battery cell production facilities to supply the numbers
of battery cells required to support the growth of the electric vehicle industry as demand for such cells increases;
|
|
●
|
disruption
in the supply of cells due to quality issues or recalls by the battery cell manufacturers; and
|
|
●
|
an
increase in the cost of raw materials.
|
Any disruption in the
supply of battery cells could temporarily disrupt production of our electrified powertrain solutions until a different supplier is fully
qualified. Moreover, battery cell manufacturers may refuse to supply electric vehicle manufacturers if they determine that the vehicles
are not sufficiently safe. Furthermore, fluctuations or shortages in petroleum and other economic conditions have in the past and may
again in the future cause us to experience significant increases in freight charges. Substantial increases in the prices for raw materials
have in the past and may again in the future increase the cost of our components and consequently, the costs of products. There can be
no assurance that we will be able to recoup increasing costs of our components by increasing prices, which could reduce our margins.
Vehicles equipped with our electrified
powertrain solutions will make use of lithium-ion battery cells, which have been observed to catch fire or vent smoke and flame.
The battery packs
within our electrified powertrain solutions will make use of lithium-ion cells. On rare occasions, lithium-ion cells can rapidly release
the energy they contain by venting smoke and flames in a manner that can ignite nearby materials as well as other lithium-ion cells.
While the battery pack is designed to contain any single cell’s release of energy without spreading to neighboring cells, a field
or testing failure of our vehicles or other battery packs that we produce could occur, which could subject us to lawsuits, product recalls,
or redesign efforts, all of which would be time consuming and expensive. Also, negative public perceptions regarding the suitability
of lithium-ion cells for automotive applications or any future incident involving lithium-ion cells, such as a vehicle or other fire,
even if such incident does not involve our vehicles, could seriously harm our business and reputation.
In addition, we store
battery packs in our facility prior to sending such battery packs to upfitters for installation on vehicles. Any mishandling of battery
cells may cause disruption to the operation of our facilities. While we have implemented safety procedures related to the handling of
the cells, a safety issue or fire related to the cells could disrupt our operations. Such damage or injury could lead to adverse publicity
and potentially a safety recall. Moreover, any failure of a competitor’s electric vehicle or energy storage product may cause indirect
adverse publicity for us and our products. Such adverse publicity could negatively affect our brand and harm our business, prospects,
financial condition and operating results.
We have been, and may in the future
be, adversely affected by the global COVID-19 pandemic, the duration and economic, governmental and social impact of which is difficult
to predict, which may significantly harm our business, prospects, financial condition and operating results.
There has been a
widespread worldwide impact from the COVID-19 pandemic, and we have been, and may in the future be, adversely affected as a result. Numerous
government regulations and public advisories, as well as shifting social behaviors, have temporarily limited or closed non-essential
transportation, government functions, business activities and person-to-person interactions, and the duration of such trends is difficult
to predict. Reduced operations and production line shutdowns at vehicle OEMs due to COVID-19, limitations on travel by our personnel
and personnel of our customers, and future delays or shutdowns of vehicle OEMs or our suppliers could impact our ability to meet customer
orders. We also instituted certain temporary cost reduction measures such as reducing or deferring discretionary spending.
Our operations and
timelines may also be affected by global economic markets and levels of consumer comfort and spending, which could impact demand in the
worldwide transportation industries. Because the impact of current conditions on an ongoing basis is yet largely unknown, is rapidly
evolving and has been varied across geographic regions, this ongoing assessment will be particularly critical to allow us to accurately
project demand and infrastructure requirements globally and deploy our workforce and other resources accordingly. If current global market
conditions continue or worsen, or if we cannot or do not resume reduced operations at a rate commensurate with such conditions or resume
full operational capacity and are later required to or choose to reduce such operations again, our business, prospects, financial condition
and operating results could be materially harmed.
Our financial condition and results
of operations for fiscal 2021 and future periods may be adversely affected by the recent COVID-19 outbreak or other outbreak of infectious
disease or similar public health threat.
COVID-19 continues
to spread globally and has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and
restrictions, quarantines, shelter in place orders, and shutdowns. These measures have impacted and may continue to impact our workforce
and operations, the operations of our customers, and those of our respective suppliers. We have experienced some disruptions in supply
from some of our suppliers. Additionally, we have experienced a shift in customer demand. There is considerable uncertainty regarding
such measures and potential future measures. Restrictions on access to our support operations or workforce, or similar limitations for
our vendors and suppliers, and restrictions or disruptions of transportation, such as reduced availability of air transport, port closures,
and increased border controls or closures, could limit our capacity to meet customer demand, lead to increased costs and have a material
adverse effect on our financial condition and results of operations.
The outbreak has
significantly increased economic and demand uncertainty. These uncertainties also make it more difficult for us to assess the quality
of our product order backlog and to estimate future financial results. The current outbreak of COVID-19 has caused an economic slowdown,
and it is increasingly likely that its continued spread will lead to a global recession, which could have a material adverse effect on
demand for our products and on our financial condition and results of operations.
The spread of COVID-19
has caused us to modify our business practices and we may take further actions as may be required by government authorities or that we
determine are in the best interests of our employees, customers, partners, and suppliers. There is no certainty that such measures will
be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed. In addition, in
light of concerns about the spread of COVID-19, our workforce has at times been operating at reduced levels at our facilities, which
may continue to have an adverse impact on our ability to timely meet future customer orders.
The duration of the
business disruption and related financial impact cannot be reasonably estimated at this time. However, it may materially affect our ability
to obtain materials, deliver products in a timely manner, and it also may impair our ability to meet customer demand for products, result
in lost sales, additional costs, or penalties, or damage our reputation. The extent to which COVID-19 or any other health epidemic will
further impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information
which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others.
Additionally, we have
experienced and may continue to experience demand uncertainty as a result of COVID-19. This demand uncertainty has continued into fiscal
year 2021, with delays in the government response and postponements of purchases of our products by municipal departments due to major
budget shortfalls. In addition, we believe that the impact of the global microchip shortage that the entire industry is currently experiencing
will adversely impact our operating costs in fiscal year 2021. Given the uncertainty related to vaccination speed and rates and potential
impacts of new variants of COVID-19, there continues to be pandemic related risk to our results. The extent to which these impacts on
demand may continue, and the effect they may have on our business and operating results, will depend upon future developments that are
highly uncertain and cannot be accurately predicted.
Our insurance strategy may not be
adequate to protect us from all business risks.
In the ordinary course
of business, we may be subject to losses resulting from products liability, accidents, acts of God and other claims against us, for which
we may have no insurance coverage. While we currently carry commercial general liability, commercial automobile liability, excess liability
and workers’ compensation policies, we may not maintain sufficient insurance coverage, and in some cases, we may not maintain any
at all. Additionally, the policies that we do have may include significant deductibles, and we cannot be certain that our insurance coverage
will be sufficient to cover all future claims against us. A loss that is uninsured or exceeds policy limits may require us to pay substantial
amounts, which could materially adversely affect our financial condition and operating results.
We are or may be subject to risks
associated with strategic alliances or acquisitions and may not be able to identify adequate strategic relationship opportunities, or
form strategic relationships, in the future.
We have entered into
strategic alliances, and may in the future enter into additional strategic alliances or joint ventures or minority equity investments,
in each case with various third parties for the production of our electrified powertrain solutions as well as with other collaborators
with capabilities on data and analytics, engineering and installation channels. These alliances subject us to a number of risks, including
risks associated with sharing proprietary information, non-performance by the third party and increased expenses in establishing new
strategic alliances, any of which may materially and adversely affect our business. We may have limited ability to monitor or control
the actions of these third parties and, to the extent any of these strategic third parties suffers negative publicity or harm to their
reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association
with any such third party.
Strategic business
relationships will be an important factor in the growth and success of our business. However, there are no assurances that we will be
able to continue to identify or secure suitable business relationship opportunities in the future or our competitors may capitalize on
such opportunities before we do. Moreover, identifying such opportunities could require substantial management time and resources, and
negotiating and financing relationships involves significant costs and uncertainties. If we are unable to successfully source and execute
on strategic relationship opportunities in the future, our overall growth could be impaired, and our business, prospects, financial condition
and operating results could be materially adversely affected.
When appropriate
opportunities arise, we may acquire additional assets, products, technologies or businesses that are complementary to our existing business.
In addition to possible stockholder approval, we may need approvals and licenses from relevant government authorities for the acquisitions
and to comply with any applicable laws and regulations, which could result in increased delay and costs, and may disrupt our business
strategy if we fail to do so. Furthermore, acquisitions and the subsequent integration of new assets and businesses into our own require
significant attention from our management and could result in a diversion of resources from our existing business, which in turn could
have an adverse effect on our operations. Acquired assets or businesses may not generate the financial results we expect and, given prevailing
investment interest in the vehicle electrification sector, may command inflated purchase consideration, excessive growth investment and/or
generate significant near term operating losses. Acquisitions could result in the use of substantial amounts of cash, potentially dilutive
issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible
assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions
may be significant.
We are subject to cybersecurity risks
to operational systems, security systems, infrastructure, integrated software in our electrified powertrain solutions and customer data
processed by our or third-party vendors or suppliers and any material failure, weakness, interruption, cyber event, incident or breach
of security could prevent us from effectively operating our business.
We are at risk for
interruptions, outages and breaches of: (a) operational systems, including business, financial, accounting, product development,
data processing or production processes, owned by us or our third-party vendors or suppliers; (b) facility security systems, owned
by us or our third-party vendors or suppliers; (c) transmission control modules or other in-product technology, owned by us or our
third-party vendors or suppliers; (d) the integrated software in our electrified powertrain solutions; or (e) customer or driver
data that our processes or our third-party vendors or suppliers process on our behalf. Such cyber incidents could: materially disrupt
operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise certain
information of customers, employees, suppliers, drivers or others; jeopardize the security of our facilities; or affect the performance
of transmission control modules or other in-product technology and the integrated software in our electrified powertrain solutions. A
cyber incident could be caused by disasters, insiders (through inadvertence or with malicious intent) or malicious third parties (including
nation-states or nation-state supported actors) using sophisticated, targeted methods to circumvent firewalls, encryption and other security
defenses, including hacking, fraud, trickery or other forms of deception. The techniques used by cyber attackers change frequently and
may be difficult to detect for long periods of time. Although we maintain information technology measures designed to protect ourselves
against intellectual property theft, data breaches and other cyber incidents, such measures will require updates and improvements, and
we cannot guarantee that such measures will be adequate to detect, prevent or mitigate cyber incidents. The implementation, maintenance,
segregation and improvement of these systems requires significant management time, support and cost. Moreover, there are inherent risks
associated with developing, improving, expanding and updating current systems, including the disruption of our data management, procurement,
production execution, finance, supply chain and sales and service processes. These risks may affect our ability to manage our data and
inventory, procure parts or supplies or produce, sell, deliver and service our electric powertrain solutions, adequately protect our
intellectual property or achieve and maintain compliance with, or realize available benefits under, applicable laws, regulations and
contracts. We cannot be sure that these systems upon which we rely, including those of our third-party vendors or suppliers, will be
effectively implemented, maintained or expanded as planned. If we do not successfully implement, maintain or expand these systems as
planned, our operations may be disrupted, our ability to accurately and timely report our financial results could be impaired, and deficiencies
may arise in our internal control over financial reporting, which may impact our ability to certify our financial results. Moreover,
our proprietary information or intellectual property could be compromised or misappropriated and our reputation may be adversely affected.
If these systems do not operate as we expect them to, we may be required to expend significant resources to make corrections or find
alternative sources for performing these functions.
A significant cyber
incident could impact production capability, harm our reputation, cause us to breach our contracts with other parties or subject us to
regulatory actions or litigation, any of which could materially affect our business, prospects, financial condition and operating results.
In addition, our insurance coverage for cyberattacks may not be sufficient to cover all the losses we may experience as a result of a
cyber-incident.
We also collect,
store, transmit and otherwise process customer, driver and employee and others’ data as part of our business and operations, which
may include personal data or confidential or proprietary information. We also work with partners and third-party service providers or
vendors that collect, store and process such data on our behalf and in connection with our products and services. There can be no assurance
that any security measures that we or our third-party service providers or vendors have implemented will be effective against current
or future security threats. While we have developed systems and processes designed to protect the availability, integrity, confidentiality
and security of our and our customers’, drivers’, employees’ and others’ data, our security measures or those
of our third-party service providers or vendors could fail and result in unauthorized access to or disclosure, acquisition, encryption,
modification, misuse, loss, destruction or other compromise of such data. If a compromise of such data were to occur, we may become liable
under our contracts with other parties and under applicable law for damages and incur penalties and other costs to respond to, investigate
and remedy such an incident. Laws in all 50 states require us to provide notice to customers, regulators, credit reporting agencies and
others when certain sensitive information has been compromised as a result of a security breach. Such laws are inconsistent and compliance
in the event of a widespread data breach could be costly. Depending on the facts and circumstances of such an incident, these damages,
penalties, fines and costs could be significant. Such an event could harm our reputation and result in litigation against us. Any of
these results could materially adversely affect our business, prospects, financial condition and operating results.
Any unauthorized control or manipulation
of the information technology systems in our electrified powertrain solutions could result in loss of confidence in us and our electrified
powertrain solutions and harm our business.
Our electrified powertrain
solutions contain complex information technology systems and built-in data connectivity to accept and install periodic remote updates
to improve or update functionality. We have designed, implemented and tested security measures intended to prevent unauthorized access
to our information technology networks, our electrified powertrain solutions and related systems. However, hackers may attempt to gain
unauthorized access to modify, alter and use such networks and systems to gain control of or to change our electrified powertrain solutions’
functionality, user interface and performance characteristics, or to gain access to data stored in or generated by the vehicles. Future
vulnerabilities could be identified and our efforts to remediate such vulnerabilities may not be successful. Any unauthorized access
to or control of our electrified powertrain solutions, or any loss of customer data, could result in legal claims or proceedings and
remediation of such problems could result in significant, unplanned capital expenditures. In addition, regardless of their veracity,
reports of unauthorized access to our electrified powertrain solutions or data, as well as other factors that may result in the perception
that our electrified powertrain solutions or data are capable of being “hacked,” could negatively affect our brand and harm
our business, prospects, financial condition and operating results.
We are subject to evolving laws, regulations,
standards and contractual obligations related to data privacy and security, and our actual or perceived failure to comply with such obligations
could harm our reputation, subject us to significant fines and liability or adversely affect our business.
We intend to use
our in-vehicle services and functionality to log information about each vehicle’s use in order to aid our in-vehicle diagnostics
and servicing. Our customers or their drivers may object to the use of this data, which may increase our vehicle maintenance costs and
harm our business prospects. Collection of our customers’, employees’ and others’ information in conducting our business
may subject us to various legislative and regulatory burdens related to data privacy and security that could require notification of
data breaches, restrict our use of such information and hinder our ability to acquire new customers or market to existing customers.
The regulatory framework for data privacy and security is rapidly evolving, and we may not be able to monitor and react to all developments
in a timely manner. For example, California requires connected devices to maintain minimum information security requirements. As legislation
continues to develop, we will likely be required to expend significant additional resources to continue to modify or enhance our protective
measures and internal processes to comply with such legislation. In addition, non-compliance with these laws or a significant breach
of our third-party service providers’ or vendors’ or our own network security and systems could have serious negative consequences
for our business and future prospects, including possible fines, penalties and damages, reduced customer demand for our vehicles and
harm to our reputation and brand.
We are subject to various environmental
laws and regulations that could impose substantial costs upon us and cause delays in building our production facilities.
Our operations are
and will be subject to international, federal, state and local environmental laws and regulations, including laws relating to the use,
handling, storage, disposal of and human exposure to hazardous materials. Environmental and health and safety laws and regulations can
be complex, and we have limited experience complying with them. Moreover, we expect that we will be affected by future amendments to
such laws or other new environmental and health and safety laws and regulations which may require us to change our operations, potentially
resulting in a material adverse effect on our business, prospects, financial condition and operating results. These laws can give rise
to liability for administrative oversight costs, cleanup costs, property damage, bodily injury, fines and penalties. Capital and operating
expenses needed to comply with environmental laws and regulations can be significant, and violations may result in substantial fines
and penalties, third-party damages, suspension of production or a cessation of our operations.
Contamination at
properties we own or operate, properties we formerly owned or operated or to which hazardous substances were sent by us, may result in
liability for us under environmental laws and regulations, including, but not limited to, the Comprehensive Environmental Response, Compensation
and Liability Act, which can impose liability for the full amount of remediation-related costs without regard to fault, for the investigation
and cleanup of contaminated soil and ground water, for building contamination and impacts to human health and for damages to natural
resources. The costs of complying with environmental laws and regulations and any claims concerning noncompliance, or liability with
respect to contamination in the future, could have a material adverse effect on our financial condition or operating results. We may
face unexpected delays in obtaining required permits and approvals that could require significant time and financial resources and delay
our ability to operate these facilities, which would adversely impact our business, prospects, financial condition and operating results.
Our electrified powertrain solutions
could face competition from original equipment manufacturers and other providers of electrification solutions that enter the commercial
vehicle electrification market.
The vehicle electrification
market has expanded significantly since we were founded in 2009. While we currently face limited direct competition in the commercial
vehicle electrification market, which includes companies such as Hyliion, Workhorse Group Inc. (“Workhorse”), Nikola and
Lordstown, because we source all of our components from third party suppliers, some of which under non-exclusive contracts, it is possible
that competitors may enter the market in the future. In addition, OEMs that have traditionally focused on the consumer market may expand
into the commercial markets. If these companies or other OEMs or providers of electrification solutions expand into the commercial markets,
we will face increased direct competition, which could have a material adverse effect on our product prices, market share, revenue and
profitability.
The performance characteristics
of our electrified powertrain solutions, including fuel economy and emissions levels, may vary, including due to factors outside of our
control.
The performance characteristics
of our electrified powertrain solutions may vary due to factors outside of our control. For instance, the estimated fuel savings and
fuel economy of vehicles installed with our electrified powertrain solutions may vary depending on factors including, but not limited
to, drive cycle, speed, terrain, hardware efficiency, payload, vehicle and weather conditions. In addition, GHG emissions of vehicles
installed with our electrified powertrain solutions may also vary due to external factors, including the type of fuel, drive cycle, the
efficiency and certification of the engine and where the engine is being operated. Additionally, the total emissions generated is subject
to how the electricity used to charge our plug in products is generated, which is also outside of our control. These external factors,
as well as any operation of our electrified powertrain solutions other than as intended, may result in emissions levels that are greater
than we expect. Due to these factors, there can be no guarantee that the operators of vehicles using our electrified powertrain solutions
will realize the expected fuel savings and fuel economy and GHG emission reductions.
Our suppliers may rely on complex machinery
for our component production, which involves a significant degree of risk and uncertainty in terms of operational performance and costs.
Our suppliers may
rely on complex machinery for the production and assembly of components used in our electrified powertrain solutions, which will involve
a significant degree of uncertainty and risk in terms of operational performance and costs. Some of our suppliers’ production facilities
consist of large-scale machinery combining many components. These components may suffer unexpected malfunctions from time to time and
will depend on repairs and spare parts to resume operations, which may not be available when needed. Unexpected malfunctions of these
components may significantly affect the intended operational efficiency. Operational performance and costs can be difficult to predict
and are often influenced by factors outside of our control, such as, but not limited to, scarcity of natural resources, environmental
hazards and remediation, costs associated with decommissioning of machines, labor disputes and strikes, difficulty or delays in obtaining
governmental permits, damages or defects in electronic systems, industrial accidents, fire, seismic activity and natural disasters. Should
operational risks materialize, they may result in the personal injury to or death of workers, the loss of production equipment, damage
to production facilities, monetary losses, delays and unanticipated fluctuations in production, environmental damage, administrative
fines, increased insurance costs and potential legal liabilities, all which could have a material adverse effect on our business, prospects,
financial condition or operating results.
We have identified material weaknesses
in our internal control over financial reporting which, if not corrected, could affect the reliability of our consolidated financial
statements and have other adverse consequences.
As a private company,
we had not been required to document and test our internal controls over financial reporting nor had management been required to certify
the effectiveness of our internal controls and our auditors had not been required to opine on the effectiveness of our internal control
over financial reporting. Similarly, we had not been subject to the SEC’s internal control reporting requirements. Following the
Business Combination, we became subject to these requirements.
In
the course of preparing the financial statements for the year ended December 31, 2019
and 2020, we identified material weaknesses in internal control over financial reporting,
which relate to the accounting for equity instruments, in addition to insufficient technical
accounting resources and lack of segregation of duties. A material weakness is a deficiency
or combination of deficiencies in internal control over financial reporting such that there
is a reasonable possibility that a material misstatement of our financial statements would
not be prevented or detected on a timely basis. These deficiencies could result in misstatements
to our financial statements that would be material and would not be prevented or detected
on a timely basis.
Our management has
concluded that these material weaknesses in our internal control over financial reporting are due to the fact that, prior to the Business
Combination, we were a private company with limited resources. We did not have the necessary business processes and related internal
controls, or the appropriate resources or level of experience and technical expertise, that would be required to oversee financial reporting
processes or to address the accounting and financial reporting requirements. Our management is in the process of developing a remediation
plan. The material weaknesses will not be considered remediated until management designs and implements effective controls that operate
for a sufficient period of time and management has concluded, through testing, that these controls are effective. Our management will
monitor the effectiveness of our remediation plans and will make changes management determines to be appropriate.
If not remediated,
these material weaknesses could result in further material misstatements to our annual or interim financial statements that would not
be prevented or detected on a timely basis, or in delayed filing of required periodic reports. If we are unable to assert that our internal
control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is
unable to express an unqualified opinion as to the effectiveness of the internal control over financial reporting, investors may lose
confidence in the accuracy and completeness of our financial reports, the market price of our Common Stock could be adversely affected
and we could become subject to litigation or investigations by the NYSE, the SEC or other regulatory authorities, which could require
additional financial and management resources.
Insufficient warranty reserves
to cover future warranty claims could materially adversely affect our business, prospects, financial condition and operating results.
As our business expands
the sale of our electrified powertrain solutions, we will need to increase warranty reserves to cover warranty-related claims. If our
warranty reserves are inadequate to cover future warranty claims on our vehicles, our business, prospects, financial condition and operating
results could be materially and adversely affected. We may become subject to significant and unexpected warranty expenses as well as
claims from our customers, including loss of revenue or damages. There can be no assurances that then-existing warranty reserves will
be sufficient to cover all claims.
Inability to leverage vehicle and
customer data could impact our software algorithms and impact research and development operations.
We rely on data collected
from the use of fleet vehicles outfitted with our products, including vehicle data and data related to battery usage statistics. We use
this data in connection with our software algorithms and the research, development and analysis of our products. Our inability to obtain
this data or the necessary rights to use this data could result in delays or otherwise negatively impact our research and development
efforts.
Interruption or failure of our information
technology and communications systems could impact our ability to effectively provide our services.
We plan to include
in-vehicle services and functionality that utilize data connectivity to monitor performance and timely capture opportunities to enhance
over-the-road performance for cost-saving preventative maintenance. The availability and effectiveness of our services depend on the
continued operation of information technology and communications systems. Our systems will be vulnerable to damage or interruption from,
among others, physical theft, fire, terrorist attacks, natural disasters, power loss, war, telecommunications failures, viruses, denial
or degradation of service attacks, ransomware, social engineering schemes, insider theft or misuse or other attempts to harm our systems.
We utilize reputable third-party service providers or vendors for all of our data other than our source code, and these providers could
also be vulnerable to harms similar to those that could damage our systems, including sabotage and intentional acts of vandalism causing
potential disruptions. Some of our systems will not be fully redundant, and our disaster recovery planning cannot account for all eventualities.
Any problems with our third-party cloud hosting providers could result in lengthy interruptions in our data services. In addition, our
in-vehicle services and functionality are highly technical and complex technology which may contain errors or vulnerabilities that could
result in interruptions in our business or the failure of our systems.
Our electrified powertrain solutions
rely on software and hardware that is highly technical, and if these systems contain errors, bugs or vulnerabilities, or if we are unsuccessful
in addressing or mitigating technical limitations in our systems, our business could be adversely affected.
Our electrified powertrain
solutions rely on software and hardware, including software and hardware developed or maintained internally or by third parties, that
is highly technical and complex and will require modification and updates over the life of the vehicle. In addition, our electrified
powertrain solutions depend on the ability of such software and hardware to store, retrieve, process and manage immense amounts of data.
Our software and hardware may contain errors, bugs, vulnerabilities, design defects or technical limitations, and our systems are subject
to certain technical limitations that may compromise our ability to meet our objectives. Some errors, bugs or vulnerabilities within
our software or hardware may be difficult to detect and may only be discovered after the code has been released for external or internal
use. Although we attempt to remedy any issues we observe in our products as effectively and rapidly as possible, such efforts may not
be timely, may hamper production or may not resolve issues to the satisfaction of our customers. Additionally, even if we are able to
deploy updates to the software addressing any issues, our over-the-air update procedures may fail to properly update the software. In
such an instance, affected vehicles would need to be brought to an upfitter or to one of our service team members for updates to be installed,
and the software would remain subject to vulnerabilities until such time as the updates are installed. If we are unable to prevent or
effectively remedy errors, bugs, vulnerabilities or defects in our software and hardware, we may suffer damage to our reputation, loss
of customers, loss of revenue or liability for damages, any of which could adversely affect our business and financial results.
If our electrified powertrain solutions
fail to perform as expected, our ability to develop, market and sell our electrified powertrain solutions could be harmed.
Our electrified powertrain
solutions may contain defects in design and production that may cause them not to perform as expected or may require repair. There can
be no assurance that we will be able to detect and fix any defects in our electrified powertrain solutions. We may experience recalls
in the future, which could adversely affect our brand and could adversely affect our business, prospects, financial condition and operating
results. Our electrified powertrain solutions may not perform consistent with customers’ expectations or consistent with other
vehicles which may become available. Any product defects or any other failure of our electrified powertrain solutions and software to
perform as expected could harm our reputation and result in adverse publicity, lost revenue, delivery delays, product recalls, negative
publicity, product liability claims and significant warranty and other expenses and could have a material adverse impact on our business,
prospects, financial condition and operating results. Additionally, problems and defects experienced by other electrified powertrain
fleet solutions could by association have a negative impact on perception and customer demand for our electrified powertrain solutions.
Developments in alternative technology
or improvements in the internal combustion engine may adversely affect the demand for our electrified powertrain solutions.
Significant developments
in alternative technologies, such as battery cell technology, advanced diesel, ethanol or natural gas, or improvements in the fuel economy
of the internal combustion engine, may materially and adversely affect our business, prospects, financial condition and operating results
in ways we do not currently anticipate. Existing and other battery cell technologies, fuels or sources of energy may emerge as customers’
preferred alternative to our electrified powertrain solutions. Any failure by us to develop new or enhanced technologies or processes,
or to react to changes in existing technologies, could materially delay our development and introduction of new electrified powertrain
solutions, which could result in the loss of competitiveness, decreased revenue and a loss of market share to competitors. Our research
and development efforts may not be sufficient to adapt to changes in alternate technology. As technologies change, we plan to upgrade
or adapt our electrified powertrain solutions with the latest technology, in particular battery cell technology. However, our electrified
powertrain solutions may not compete effectively with alternative systems if we are not able to source and integrate the latest technology
into our electrified powertrain solutions.
Our beliefs regarding the ability of
our electrified powertrain solutions to limit carbon intensity and reduce GHG emissions and contribute to global decarbonization may
be based on materially inaccurate assumptions.
We believe that our electrified
powertrain solutions, to the extent adopted, may have the ability to limit carbon intensity and reduce GHG emissions from fleet operations;
however, these beliefs are based on certain assumptions, including, but not limited to, our projections of the fuel types used, drive
cycle and our electrified powertrain solutions’ efficiencies and performance. To the extent our assumptions are materially incorrect
or incomplete, it could adversely impact our business, prospects, financial condition and operating results. In addition, if our assumptions
regarding the ability of our solutions to limit carbon intensity and reduce GHG emissions from trucking operations are materially incorrect
or incomplete, or if our beliefs regarding the availability of our products are materially incorrect or incomplete, it is possible that
our competitors’ technology may be better at limiting carbon intensity and reducing GHG emissions in certain circumstances and
in certain markets.
We will incur increased costs as
a result of operating as a public company, and our management will devote substantial time to new compliance initiatives.
As a public company,
we will incur significant legal, accounting and other expenses that we did not incur as a private company, and these expenses may increase
even more after we are no longer an emerging growth company, as defined in Section 2(a) of the Securities Act. As a public company,
we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, as well as rules adopted, and to be adopted, by the SEC and the NYSE. Our management and other personnel will need to
devote a substantial amount of time to these compliance initiatives. Moreover, we expect these rules and regulations to substantially
increase our legal and financial compliance costs and to make some activities more time-consuming and costly. The increased costs will
increase our net loss. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be forced to accept reduced policy limits or incur substantially higher costs to
maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond
to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons
to serve on our board of directors, our board advisors or as executive officers.
Our management has limited experience
in operating a public company.
Our executive officers
have limited experience in the management of a publicly traded company. Our management team may not successfully or effectively manage
our transition to a public company that will be subject to significant regulatory oversight and reporting obligations under federal securities
laws. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage
in that it is likely that an increasing amount of their time may be devoted to these activities, which will result in less time being
devoted to the management and growth of the post-combination company. We may not have adequate personnel with the appropriate level of
knowledge, experience and training in the accounting policies, practices or internal control over financial reporting required of public
companies in the U.S. We are in the process of upgrading our finance and accounting systems to an enterprise system suitable for a public
company, and a delay could impact our ability or prevent we from timely reporting our operating results, timely filing required reports
with the SEC and complying with Section 404 of the Sarbanes-Oxley Act. The development and implementation of the standards and controls
necessary for us to achieve the level of accounting standards required of a public company in the U.S. may require costs greater than
expected. It is possible that we will be required to expand our employee base and hire additional employees to support our operations
as a public company, which will increase our operating costs in future periods.
Changes in U.S. trade policy, including
the imposition of tariffs and the resulting consequences, could adversely affect our business, prospects, financial condition and operating
results.
The U.S. government
has adopted a new approach to trade policy and in some cases has attempted to renegotiate or terminate certain existing bilateral or
multi-lateral trade agreements. It has also imposed tariffs on certain foreign goods, including steel and certain commercial vehicle
parts, which have begun to result in increased costs for goods imported into the U.S. In response to these tariffs, a number of U.S.
trading partners have imposed retaliatory tariffs on a wide range of U.S. products, which makes it more costly for us to export our products
to those countries. If we are unable to pass price increases on to our customer base or otherwise mitigate the costs, or if demand for
our exported products decreases due to the higher cost, our operating results could be materially adversely affected. In addition, further
tariffs have been proposed by the U.S. and our trading partners and additional trade restrictions could be implemented on a broader range
of products or raw materials. The resulting environment of retaliatory trade or other practices could have a material adverse effect
on our business, prospects, financial condition, operating results, customers, suppliers and the global economy.
We intend in the future to expand internationally
and will face risks associated with our international operations, including unfavorable regulatory, political, tax and labor conditions,
which could harm our business.
We will face risks
associated with our future international operations, including possible unfavorable regulatory, political, tax and labor conditions,
which could harm our business. We anticipate having international operations which would subject us to the legal, political, regulatory
and social requirements and economic conditions in any future jurisdictions. Additionally, as part of our growth strategy, we intend
to expand our sales and servicing programs internationally. However, we have no experience to date selling and servicing our electrified
powertrain solutions internationally except for in Canada, and such expansion would require us to make significant expenditures, including
the hiring of local employees and establishing facilities, in advance of generating any revenue. We are subject to a number of risks
associated with international business activities that may increase our costs, impact our ability to sell our electrified powertrain
solutions and require significant management attention. These risks include:
|
●
|
conforming
our electrified powertrain solutions to various international regulatory requirements where our electrified powertrain solutions are
sold, or homologation;
|
|
●
|
difficulties
in obtaining or complying with various licenses, approvals, certifications and other governmental authorizations necessary to manufacture,
sell or service our electrified powertrain solutions in any of these jurisdictions;
|
|
●
|
difficulty
in staffing and managing foreign operations;
|
|
●
|
difficulties
attracting customers in new jurisdictions;
|
|
●
|
foreign
government taxes, regulations and permit requirements, including foreign taxes that we may not be able to offset against taxes imposed
upon our in the U.S., and foreign tax and other laws limiting our ability to repatriate funds to the U.S.;
|
|
●
|
fluctuations
in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities
our undertakes;
|
|
●
|
U.S.
and foreign government trade restrictions, tariffs and price or exchange controls;
|
|
●
|
foreign
labor laws, regulations and restrictions;
|
|
●
|
changes
in diplomatic and trade relationships;
|
|
●
|
political
instability, natural disasters, global health concerns, including health pandemics such as the COVID-19 pandemic, war or events of terrorism;
and
|
|
●
|
the
strength of international economies.
|
If we fail
to successfully address these risks, our business, prospects, financial condition and operating results could be materially harmed.
We are subject to U.S. and foreign
anti-corruption and anti-money laundering laws and regulations. We could face criminal liability and other serious consequences for violations,
which could harm our business.
We are subject to
the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the
U.S. Travel Act, the USA PATRIOT Act and possibly other anti-bribery and anti-money laundering laws in countries in which we conduct
or will conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, contractors
and other collaborators from authorizing, promising, offering or providing, directly or indirectly, improper payments or anything else
of value to recipients in the public or private sector. We can be held liable for the corrupt or other illegal activities of our employees,
agents, contractors and other collaborators, even if we do not explicitly authorize or have actual knowledge of such activities. Any
violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment,
the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm and
other consequences.
We are subject to governmental
export and import control laws and regulations. Our failure to comply with these laws and regulations could have an adverse effect on
our business, prospects, financial condition and operating results.
Our products and
solutions are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs
regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign
Assets Controls. U.S. export control laws and regulations and economic sanctions prohibit the shipment of certain products and services
to U.S. embargoed or sanctioned countries, governments and persons. In addition, complying with export control and sanctions regulations
for a particular sale may be time-consuming and result in the delay or loss of sales opportunities. Exports of our products and technology
must be made in compliance with these laws and regulations. If we fail to comply with these laws and regulations, we and certain of our
employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges, fines,
which may be imposed on our and responsible employees or managers and, in extreme cases, the incarceration of responsible employees or
managers.
In addition, changes
in our products or solutions or changes in applicable export or import laws and regulations may create delays in the introduction and
sale of our products and solutions in international markets, increase costs due to changes in import and export duties and taxes, prevent
our customers from deploying our products and solutions or, in some cases, prevent the export or import of our products and solutions
to certain countries, governments or persons altogether. Any change in export or import laws and regulations, shift in the enforcement
or scope of existing laws and regulations, or change in the countries, governments, persons or technologies targeted by such laws and
regulations, could also result in decreased use of our products and solutions or in our decreased ability to export or sell our products
and solutions to customers. Any decreased use of our products and solutions or limitation on our ability to export or sell our products
and solutions would likely adversely affect our business, prospects, financial condition and operating results.
Regulatory requirements may have
a negative effect upon our business.
All vehicles sold
must comply with international, federal, and state motor vehicle safety standards. In the United States, vehicles that meet or exceed
all federally mandated safety standards are certified under the federal regulations. Rigorous testing and the use of approved materials
and equipment are among the requirements for achieving federal certification. Our products may be subject to substantial regulation under
federal, state, and local laws and standards. These regulations include those promulgated by the U.S. EPA, the National Highway Traffic
Safety Administration, Pipeline and Hazardous Materials Safety Administration and various state boards, and compliance certification
is required for each new model year. These laws and standards are subject to change from time to time and we could become subject to
these regulations in the future. In addition, federal, state, and local laws and industrial standards for electric vehicles are still
developing. Compliance with these regulations could be challenging, burdensome, time consuming, and expensive. If compliance results
in delays or substantial expenses, our business could be materially adversely affected.
Unfavorable publicity, or a failure
to respond effectively to adverse publicity, could harm our reputation and adversely affect our business.
As an early stage
company, maintaining and enhancing our brand and reputation is critical to our ability to attract and retain employees, partners, customers
and investors, and to mitigate legislative or regulatory scrutiny, litigation and government investigations.
Recent significant
negative publicity has adversely affected our brand and reputation and our stock price. Negative publicity may result from allegations
of fraud, improper business practices, employee misconduct or any other matters that could give rise to litigation and/or governmental
investigations. Unfavorable publicity relating to us or those affiliated with us has and may in the future adversely affect public perception
of the entire company. Adverse publicity and its effect on overall public perceptions of our brand, or our failure to respond effectively
to adverse publicity, could have a material adverse effect on our business.
In March 2021, an
entity published an article containing certain allegations against us. This article and the public response to such article, as well
as other negative publicity, have adversely affected our brand and reputation as well as our stock price, which makes it difficult for
us to attract and retain employees, partners and customers, reduces confidence in our products and services, harms investor confidence
and the market price of our securities, invites legislative and regulatory scrutiny and has resulted in shareholder derivative suits.
As a result, customers, potential customers, partners and potential partners may in the future fail to award us additional business or
cancel or seek to cancel existing contracts or otherwise, direct future business to our competitors, and investors may invest in our
competitors instead.
We have been named a defendant
in stockholder derivative lawsuits. This, and potential similar or related lawsuits, could result in substantial damages and may divert
management’s time and attention from our business.
On March 8, 2021,
the Suh Complaint was filed in federal district court for the Southern District of New York against us and certain of our current officers
and directors. On March 12, 2021, the Kumar Complaint was filed in federal district court for the Southern District of New York against
us and certain of our current officers and directors. Both the Suh Complaint and the Kumar Complaint allege that certain public statements
made by the defendants between October 2, 2020 and March 2, 2021 violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
promulgated thereunder. We believe that the allegations asserted in the Suh Complaint and Kumar Complaint are without merit, and we intend
to vigorously defend both lawsuits.
This lawsuit
and any other similar or related lawsuits are subject to inherent uncertainties, and the actual costs to be incurred relating to the
lawsuit will depend upon many unknown factors. The outcome of this lawsuit is necessarily uncertain, and we could be forced to expend
significant resources in the defense of this lawsuits, and we may not prevail. Monitoring and defending against legal actions is time-consuming
for our management and detracts from our ability to fully focus our internal resources on our business activities, which could result
in delays of our testing or our development and commercialization efforts. In addition, we may incur substantial legal fees and costs
in connection with these lawsuits. We are also generally obligated, to the extent permitted by law, to indemnify our current and former
directors and officers who are named as defendants in these and similar lawsuits. We are not currently able to estimate the possible
cost to us from this matter, as this lawsuit is currently at an early stage and we cannot be certain how long it may take to resolve
this matter or the possible amount of any damages that we may be required to pay. It is possible that we could, in the future, incur
judgments or enter into settlements of claims for monetary damages. Decisions adverse to our interests in this lawsuits could result
in the payment of substantial damages, or possibly fines, and could have a material adverse effect on our cash flow, results of operations
and financial position. In addition, the uncertainty of the currently pending litigation could lead to increased volatility in our stock
price
We may need to defend
ourselves against patent, copyright or trademark infringement claims or trade secret misappropriation claims, which may be time-consuming
and cause us to incur substantial costs.
Companies, organizations
or individuals, including our competitors, may own or obtain patents, trademarks or other proprietary rights that would prevent or limit
our ability to make, use, develop or sell our electrified powertrain solutions, which could make it more difficult for us to operate
our business. We may receive inquiries from patent, copyright or trademark owners inquiring whether we infringe upon their proprietary
rights. We may also be the subject of allegations that we have misappropriated their trade secrets or other proprietary rights. Companies
owning patents or other intellectual property rights relating to battery packs, electric motors, or electronic power management systems
may allege infringement or misappropriation of such rights. In response to a determination that we have infringed upon or misappropriated
a third party’s intellectual property rights, we may be required to do one or more of the following:
|
●
|
cease
development, sales or use of our products that incorporate the asserted intellectual property;
|
|
●
|
pay
substantial damages;
|
|
●
|
obtain
a license from the owner of the asserted intellectual property right, which license may not be available on reasonable terms or at all;
or
|
|
●
|
redesign
one or more aspects or systems of our electrified powertrain solutions.
|
A successful claim
of infringement or misappropriation against us could materially adversely affect our business, prospects, financial condition and operating
results. Any litigation or claims, whether valid or invalid, could result in substantial costs and diversion of resources.
Our business may be adversely affected
if we are unable to protect our intellectual property rights from unauthorized use by third parties.
Failure to adequately
protect our intellectual property rights could result in our competitors offering similar products, potentially resulting in the loss
of some of our competitive advantage and a decrease in our revenue, which would adversely affect our business, prospects, financial condition
and operating results. For example, we purchase many of the components for our hybrid systems from third party manufacturers and may
not be able to prevent competitors from using these third party components. Our success depends, at least in part, on our ability to
protect our core technology and intellectual property. To accomplish this, we will rely on a combination of patents, trade secrets (including
know-how), employee and third-party nondisclosure agreements, copyrights, trademarks, intellectual property licenses and other contractual
rights to establish and protect our rights in our technology.
The protection of
our intellectual property rights will be important to our future business opportunities. However, the measures we take to protect our
intellectual property from unauthorized use by others may not be effective for various reasons, including the following:
|
●
|
any
patent applications that we submit may not result in the issuance of patents;
|
|
●
|
the
scope of our issued patents, including our patent claims, may not be broad enough to protect our proprietary rights;
|
|
●
|
our
issued patents may be challenged or invalidated by our competitors;
|
|
●
|
our
employees or business partners may breach their confidentiality, non-disclosure and non-use obligations to us;
|
|
●
|
third-parties
may independently develop technologies that are the same or similar to ours;
|
|
●
|
the
costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may make enforcement
impracticable; and
|
|
●
|
current
and future competitors may circumvent our intellectual property.
|
Patent, trademark,
copyright and trade secret laws vary throughout the world. Some foreign countries do not protect intellectual property rights to the
same extent as do the laws of the U.S. Further, policing the unauthorized use of our intellectual property in foreign jurisdictions may
be difficult. Therefore, our intellectual property rights may not be as strong or as easily enforced outside of the U.S.
Also, while we have
registered trademarks in an effort to protect our investment in our brand and goodwill with customers, competitors may challenge the
validity of those trademarks and other brand names in which we have invested. Such challenges can be expensive and may adversely affect
our ability to maintain the goodwill gained in connection with a particular trademark.
Our intellectual property applications
for registration may not issue or be registered, which may have a material adverse effect on our ability to prevent others from commercially
exploiting products similar to ours.
We cannot be certain
that we are the first inventor of the subject matter to which we have filed a particular patent application, or if we are the first party
to file such a patent application. If another party has filed a patent application to the same subject matter as we have, we may not
be entitled to the protection sought by the patent application. We also cannot be certain whether the claims included in a patent application
will ultimately be allowed in the applicable issued patent. Further, the scope of protection of issued patent claims is often difficult
to determine. As a result, we cannot be certain that the patent applications that we file will issue, or that issued patents will afford
protection against competitors with similar technology. In addition, our competitors may design around issued patents, which may adversely
affect our business, prospects, financial condition and operating results.
Changes in tax laws may materially
adversely affect our business, prospects, financial condition and operating results.
New income, sales,
use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely affect
our business, prospects, financial condition and operating results. Further, existing tax laws, statutes, rules, regulations or ordinances
could be interpreted, changed, modified or applied adversely to us. For example, U.S. federal tax legislation enacted in 2017, informally
titled the Tax Cuts and Jobs Act (the “Tax Act”), enacted many significant changes to the U.S. tax laws. Future guidance
from the Internal Revenue Service (the “IRS”) with respect to the Tax Act may affect our, and certain aspects of the Tax
Act could be repealed or modified in future legislation. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)
has already modified certain provisions of the Tax Act. In addition, we are uncertain if and to what extent various states will conform
to the Tax Act, the CARES Act or any newly enacted federal tax legislation.
Our ability to use net operating
loss carryforwards and other tax attributes may be limited in connection with the Business Combination or other ownership changes.
We have incurred losses
during our history and do not expect to become profitable in the near future, and may never achieve profitability. To the extent
that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused
losses expire, if at all. As of December 31, 2020, we had U.S. federal and state net operating loss carryforwards of approximately
$80.6 million and $27.5 million, respectively.
Under the Tax Act,
as modified by the CARES Act, U.S. federal net operating loss carryforwards generated in taxable periods beginning after December 31,
2017, may be carried forward indefinitely, but the deductibility of such net operating loss carryforwards in taxable years beginning
after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform
to the Tax Act or the CARES Act.
In addition, our
net operating loss carryforwards are subject to review and possible adjustment by the IRS and state tax authorities. Under Sections 382
and 383 of the Internal Revenue Code of 1986, as amended (the “Code”), our federal net operating loss carryforwards and other
tax attributes may become subject to an annual limitation in the event of certain cumulative changes in the ownership of the Company.
An “ownership change” pursuant to Section 382 of the Code generally occurs if one or more stockholders or groups of
stockholders who own at least 5% of a company’s stock increase their ownership by more than 50 percentage points over their lowest
ownership percentage within a rolling three-year period. Our ability to utilize our net operating loss carryforwards and other tax attributes
to offset future taxable income or tax liabilities may be limited as a result of ownership changes, including potential changes in connection
with the reverse recapitalization or other transactions. Similar rules may apply under state tax laws. We have not yet determined the
amount of the cumulative change in our ownership resulting from the reverse recapitalization or other transactions, or any resulting
limitations on our ability to utilize our net operating loss carryforwards and other tax attributes. If we earn taxable income, such
limitations could result in increased future income tax liability to us and our future cash flows could be adversely affected. We have
recorded a full valuation allowance related to our net operating loss carryforwards and other deferred tax assets due to the uncertainty
of the ultimate realization of the future benefits of those assets.
We may not be able to obtain or
agree on acceptable terms and conditions for all or a significant portion of the government grants, loans and other incentives for which
we may apply. As a result, our business, prospects, financial condition and operating results may be adversely affected.
We have previously
applied and may again in the future apply for federal and state grants, loans and tax incentives under government programs designed to
stimulate the economy and support the production of alternative fuel and electric vehicles and related technologies. We anticipate that
in the future there will be new opportunities for us to apply for grants, loans and other incentives from federal, state and foreign
governments. Our ability to obtain funds or incentives from government sources is subject to the availability of funds under applicable
government programs and approval of our applications to participate in such programs. The application process for these funds and other
incentives will likely be highly competitive. We cannot assure you that we will be successful in obtaining any of these additional grants,
loans and other incentives.
Risks Related to Ownership of Our
Securities
Concentration of ownership among
our existing executive officers, directors and their respective affiliates may prevent new investors from influencing significant corporate
decisions.
Our executive
officers, directors and their respective affiliates as a group beneficially own approximately 14.3% of our outstanding Common Stock.
As a result, these stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval,
including the election of directors, amendment of our certificate of incorporation (“Certificate of Incorporation”) and approval
of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our or changes
in management and will make the approval of certain transactions difficult or impossible without the support of these stockholders.
We do not expect to declare any dividends
in the foreseeable future.
We do not anticipate
declaring any cash dividends to holders of our Common Stock in the foreseeable future. Consequently, investors may need to rely on sales
of their shares after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
The price of our Common Stock may
be volatile.
The price of our
Common Stock may fluctuate due to a variety of factors, including:
|
●
|
actual
or anticipated fluctuations in our quarterly and annual results and those of other public companies in industry;
|
|
●
|
mergers
and strategic alliances in the industry in which we operate;
|
|
●
|
market
prices and conditions in the industry in which we operate;
|
|
●
|
changes
in government regulation;
|
|
●
|
potential
or actual military conflicts or acts of terrorism;
|
|
●
|
announcements
concerning us or our competitors;
|
|
●
|
the
general state of the securities markets;
|
|
●
|
threatened
or actual lawsuits, investigations or other legal proceedings; and
|
|
●
|
short-selling
activity related to our Common Stock.
|
These market and
industry factors may materially reduce the market price of our Common Stock, regardless of our operating performance. In addition, we
believe there has been and may continue to be substantial trading in derivatives of our Common Stock, including short selling activity
or related similar activities, which are beyond our control and which may be beyond the full control of the SEC and Financial Institutions
Regulatory Authority or “FINRA”. While the SEC and FINRA rules prohibit some forms of short selling and other activities
that may result in stock price manipulation, such activity may nonetheless occur without detection or enforcement. There can be no assurance
that should there be any illegal manipulation in the trading of our stock, it will be detected, prosecuted or successfully eradicated.
Significant short selling market manipulation could cause our Common Stock trading price to decline, to become more volatile, or both.
Reports published by analysts,
including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of our
Common Stock.
We expect that securities
research analysts will establish and publish their own periodic projections for our business. These projections may vary widely and may
not accurately predict the results we actually achieve. Our stock price may decline if our actual results do not match the projections
of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock or publishes
inaccurate or unfavorable research about our business, our stock price could decline. For example, in March 2021, an entity published
an article containing certain allegations against us that we believe has negatively impacted the trading price of our Common Stock. If
one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our stock price or trading volume could
decline. While we expect research analyst coverage, if no analysts commence coverage of us, the trading price and volume for our Common
Stock could be adversely affected.
If securities
or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their
recommendations regarding our Common Stock adversely, the price and trading volume of our Common Stock could decline.
The trading market
for our Common Stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business,
our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or
provide more favorable relative recommendations about our competitors, the price of our Common Stock would likely decline. If any analyst
who may cover us were to cease their coverage or fail to regularly publish reports on us, we could lose visibility in the financial markets,
which could cause our stock price or trading volume to decline.
We may issue additional Common
Stock or preferred stock, including under our equity incentive plan. Any such issuances would dilute the interest of our stockholders
and likely present other risks.
We may issue a substantial
number of additional shares of common or preferred stock, including under our equity incentive plan. Any such issuances of additional
shares of common or preferred stock:
|
●
|
may
significantly dilute the equity interests of our investors;
|
|
●
|
may
subordinate the rights of holders of Common Stock if preferred stock is issued with rights senior to those afforded our Common Stock;
|
|
●
|
could
cause a change in control if a substantial number of shares of our Common Stock are issued, which may affect, among other things, our
ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers
and directors; and
|
|
●
|
may
adversely affect prevailing market prices for our Common Stock.
|
We may issue additional shares
of Common Stock or other equity securities without stockholder approval, which will dilute existing stockholders’ interests and
may depress the market price of our Common Stock.
We have options and
warrants outstanding to purchase up to an aggregate of 23,124,339 shares of our Common Stock, including, Private Placement Warrants to
purchase 4,233,333 shares and options and warrants to purchase up to 11,224,339 shares. We also have the ability to initially issue up
to 12,800,000 shares of Common Stock under the XL Fleet Corp. 2020 Equity Incentive Plan (the “2020 Plan”). Pursuant to the
2020 Plan, the number of shares available for issuance automatically increases annually on the first day of each fiscal year during the
period beginning with the fiscal year immediately following the fiscal year during which the 2020 Plan is first approved by the our stockholders,
and ending on the second day of fiscal year 2030, in an amount equal to the lesser of: (a) 5% of the number of outstanding shares of
Common Stock on such date; and (b) an amount determined by the plan administrator. We may issue additional shares of Common Stock
or other equity securities of equal or senior rank in the future in connection with, among other things, future acquisitions or repayment
of outstanding indebtedness, without stockholder approval, in a number of circumstances.
Our issuance of additional
shares of Common Stock or other equity securities of equal or senior rank would have the following effects:
|
●
|
our
existing stockholders’ proportionate ownership interest in our will decrease;
|
|
●
|
the
amount of cash available per share, including for payment of dividends (if any) in the future, may decrease;
|
|
●
|
the
relative voting strength of each previously outstanding share of Common Stock may be diminished; and
|
|
●
|
the
market price of our shares of Common Stock may decline.
|
General Risk Factors
Our warrants are accounted for as
liabilities and the changes in value of our warrants could have a material effect on our financial results.
On April 12, 2021,
the Acting Director of the Division of Corporation Finance and Acting Chief Accountant of the SEC together issued a statement regarding
the accounting and reporting considerations for warrants issued by special purpose acquisition companies entitled “Staff Statement
on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)”
(the “SEC Statement”). Specifically, the SEC Statement focused on certain settlement terms and provisions related to certain
tender offers, which terms are similar to those contained in the warrant agreement governing our warrants. As a result of the SEC Statement,
we reevaluated the accounting treatment of our 7,666,667 public warrants and 4,233,333 private placement warrants, and determined to
classify the warrants as derivative liabilities measured at fair value, with changes in fair value each period reported in earnings.
As a result, included
on our consolidated balance sheet as of December 31, 2020 contained elsewhere in this Annual Report are derivative liabilities related
to embedded features contained within our warrants. Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”),
provides for the remeasurement of the fair value of such derivatives at each balance sheet date, with a resulting non-cash gain or loss
related to the change in the fair value being recognized in earnings in the statement of operations. As a result of the recurring fair
value measurement, our consolidated financial statements and results of operations may fluctuate quarterly, based on factors, which are
outside of our control. Due to the recurring fair value measurement, we expect that we will recognize non-cash gains or losses on our
warrants each reporting period and that the amount of such gains or losses could be material.
As discussed under
“Risks Related to Owning Our Securities – The Price of our Common Stock may be volatile,” the price of our Common
Stock may fluctuate. The volatility of the Common Stock directly impacts the fair value of the Warrants; hence, continued volatility
in the price of our Common Stock could result in a corresponding volatility in the fair value of the liability associated with the Warrants.
We have identified a material weakness
in our internal control over financial reporting as of December 31, 2020. If we are unable to develop and maintain an effective system
of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which
may adversely affect investor confidence in us and materially and adversely affect our business and operating results.
Following this issuance
of the SEC Statement, on April 22, 2021, after consultation with our independent registered public accounting firm, our management and
our audit committee concluded that, in light of the SEC Statement, it was appropriate to restate our previously issued audited financial
statements as of and for the year ended December 31, 2020 (the “Restatement”). See “—Our warrants are accounted
for as liabilities and the changes in value of our warrants could have a material effect on our financial results.” As part of
such process, we identified a material weakness in our internal controls over financial reporting.
A material weakness
is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will not be prevented, or detected and corrected on a timely
basis.
Effective internal
controls are necessary for us to provide reliable financial reports and prevent fraud. We continue to evaluate steps to remediate the
material weakness. These remediation measures may be time consuming and costly and there is no assurance that these initiatives will
ultimately have the intended effects.
If we identify any
new material weaknesses in the future, any such newly identified material weakness could limit our ability to prevent or detect a misstatement
of our accounts or disclosures that could result in a material misstatement of our annual or interim financial statements. In such case,
we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable
stock exchange listing requirements, investors may lose confidence in our financial reporting and our stock price may decline as a result.
We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid
potential future material weaknesses.
We may face litigation and other
risks as a result of the material weakness in our internal control over financial reporting.
Following the issuance
of the SEC Statement, after consultation with our independent registered public accounting firm, we concluded that it was appropriate
to restate our previously issued audited financial statements as of December 31, 2020. See “—Our warrants are accounted
for as liabilities and the changes in value of our warrants could have a material effect on our financial results.” As part
of the Restatement, we identified a material weakness in our internal controls over financial reporting.
As a result of such
material weakness, the Restatement, the change in accounting for the warrants, and other matters raised or that may in the future be
raised by the SEC, we face potential for litigation or other disputes which may include, among others, claims invoking the federal and
state securities laws, contractual claims or other claims arising from the Restatement and material weaknesses in our internal control
over financial reporting and the preparation of our financial statements. As of the date of this Form 10-K/A, we have no knowledge of
any such litigation or dispute, other than those related to the matters described under the heading “Business – Legal Proceedings”.
However, we can provide no assurance that additional litigation or disputes will not arise in the future. Any such litigation or dispute,
whether successful or not, could have a material adverse effect on our business, results of operations and financial condition or our
ability to complete a Business Combination.
Our charter contains anti-takeover
provisions that could adversely affect the rights of our stockholders.
Our Certificate of
Incorporation contains provisions to limit the ability of others to acquire control of our or cause us to engage in change-of-control
transactions, including, among other things:
|
●
|
provisions
that authorize our board of directors, without action by our stockholders, to issue additional shares of Common Stock and preferred stock
with preferential rights determined by our board of directors;
|
|
●
|
provisions
that permit only a majority of our board of directors to call stockholder meetings and therefore do not permit stockholders to call stockholder
meetings;
|
|
●
|
provisions
that impose advance notice requirements, minimum shareholding periods and ownership thresholds, and other requirements and limitations
on the ability of stockholders to propose matters for consideration at stockholder meetings;
|
|
●
|
provisions
limiting stockholders’ ability to act by written consent; and
|
|
●
|
a
staggered board whereby our directors are divided into three classes, with each class subject to retirement and re-election once every
three years on a rotating basis.
|
These provisions
could have the effect of depriving our stockholders of an opportunity to sell their Common Stock at a premium over prevailing market
prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. With our
staggered board of directors, at least two annual or special meetings of stockholders will generally be required in order to effect a
change in a majority of our directors. Our staggered board of directors can discourage proxy contests for the election of our directors
and purchases of substantial blocks of our shares by making it more difficult for a potential acquirer to gain control of our board of
directors in a relatively short period of time.
Our Certificate of Incorporation provides,
subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder
litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our
directors, officers, employees or stockholders.
Our Certificate of Incorporation
requires us, to the fullest extent permitted by law, that derivative actions brought in our name, actions against directors, officers
and employees for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of Delaware
and, if brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such
stockholder’s counsel except any action (A) as to which the Court of Chancery in the State of Delaware determines that there
is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the
personal jurisdiction of the Court of Chancery within ten days following such determination), (B) which is vested in the exclusive
jurisdiction of a court or forum other than the Court of Chancery, (C) for which the Court of Chancery does not have subject matter
jurisdiction, or (D) any action arising under the Securities Act, as to which the Court of Chancery and the federal district court
for the District of Delaware shall have concurrent jurisdiction. Any person or entity purchasing or otherwise acquiring any interest
in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in the Certificate of Incorporation.
This choice of forum
provision may limit a stockholder’s ability to bring a claim in a judicial forum that we find favorable for disputes with our or
any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims. We cannot
be certain that a court will decide that this provision is either applicable or enforceable, and if a court were to find the choice of
forum provision contained in our Certificate of Incorporation to be inapplicable or unenforceable in an action, our may incur additional
costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
Our Certificate of
Incorporation will provide that the exclusive forum provision will be applicable to the fullest extent permitted by applicable law. Notwithstanding
the foregoing, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty
or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision will not
apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have
exclusive jurisdiction.
A significant portion of our total
outstanding shares of our Common Stock are restricted from immediate resale, but may be resold into the market in the near future. This
could cause the market price of our Common Stock to drop significantly, even if our business is doing well.
Sales of a substantial
number of shares of our Common Stock in the public market could occur at any time. These sales, or the perception in the market that
the holders of a large number of shares intend to sell shares, could reduce the market price of our Common Stock. In connection with
the consummation of the Business Combination, certain of Legacy XL’s stockholders and each initial stockholder of Pivotal entered
into lockup agreements with us which provides that the Common Stock issued to such holders in connection with the Business Combination
is subject to a 12-month lock-up period during which the holders have agreed, subject to certain restrictions, not to, directly or indirectly,
sell, transfer or otherwise dispose of their shares, which period may be earlier terminated if the reported closing sale price of our
Common Stock equals or exceeds $15.00 per share (subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations
or other similar transactions) for a period of 20 trading days during any 30-trading day period commencing at least 150 days following
the consummation of the Business Combination, subject to certain exceptions.
Furthermore, under
a registration rights agreement and the Subscription Agreements, we filed a registration statement after the Closing to register the
resale of any shares of Common Stock issued to the Sponsor, the Subscribers pursuant to the Subscription Agreements and certain
of the stockholder parties.
We may become involved in legal proceedings
and other matters that, if adversely adjudicated or settled, could adversely affect our financial results.
From time to time,
we may be named in lawsuits or other legal proceedings relating to our business. In particular, the nature of our business subjects us
to the risk of lawsuits filed by customers, stockholders, competitors, business partners and others in the ordinary course of business.
As with all legal
proceedings, no assurances can be given as to the outcome of these matters. Moreover, legal proceedings can be expensive and time consuming,
and we may not be successful in defending or prosecuting these lawsuits, which could result in settlements or damages that could adversely
affect our business, financial condition and results of operations.
Our employees and independent contractors
may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could
have an adverse effect on our business, prospects, financial condition and operating results.
We are exposed to
the risk that our employees and independent contractors may engage in misconduct or other illegal activity. Misconduct by these parties
could include intentional, reckless or negligent conduct or other activities that violate laws and regulations, including production
standards, U.S. federal and state fraud, abuse, data privacy and security laws, other similar non-U.S. laws or laws that require the
true, complete and accurate reporting of financial information or data. It is not always possible to identify and deter misconduct by
employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling
unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from
a failure to be in compliance with such laws or regulations. In addition, we are subject to the risk that a person or government could
allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful
in defending ourselves or asserting our rights, those actions could have a significant impact on our business, prospects, financial condition
and operating results, including, without limitation, the imposition of significant civil, criminal and administrative penalties, damages,
monetary fines, disgorgement, integrity oversight and reporting obligations to resolve allegations of non-compliance, imprisonment, other
sanctions, contractual damages, reputational harm, diminished profits and future earnings and curtailment of our operations, any of which
could adversely affect our business, prospects, financial condition and operating results.
Our failure to timely and effectively
implement controls and procedures required by Section 404(a) of the Sarbanes-Oxley Act could have a material adverse effect on our business.
As a public company,
we will be required to provide management’s attestation on internal controls. The standards required for a public company under
Section 404(a) of the Sarbanes-Oxley Act are significantly more stringent than those that were required of us as a private company. We
will need to continue to implement additional finance, accounting, and business operating systems, procedures, and controls as we grow
our business and organization and to satisfy existing reporting requirements. If we fail to maintain or implement adequate controls,
if we are unable to complete the required Section 404 assessment as to the adequacy of our internal control over financial reporting
in future Form 10-K filings, or if our independent registered public accounting firm is unable to provide us with an unqualified report
as to the effectiveness of our internal control over financial reporting in future Form 10-K filings, the market price of our stock could
decline and we could be subject to sanctions or investigations by the SEC, the Nasdaq or other regulatory authorities, which could require
additional financial and management resources.
Industry disruptions
and changes in practice could impact our operating results.
A work stoppage or
slowdown, including due to the COVID-19 pandemic, at one or more of our or our outsourcing partners’, suppliers and vehicle OEMs
has in the past due to the COVID-19 pandemic and could again in the future have a material adverse effect on our business. The Company
expects to continue to experience production line shutdowns / slowdowns at vehicle OEMs, and some of our customers will not purchase
our electric propulsion systems without OEM vehicle chassis on which to install those systems. Also, a significant disruption in the
supply of a key component due to a work stoppage at one of our suppliers could have a material adverse effect on our business. We also
believe that the impact of the global microchip shortage that the entire industry is currently experiencing will adversely impact our
operating results in fiscal year 2021. Lastly, Ford’s recent cancellation of the eQVM program industry wide is adversely impacting
upfitter partners’ ability and willingness to install ours systems. This could have an adverse impact on our operating results
in fiscal year 2021.
Our business and operations could
be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to incur significant
expense, hinder execution of business and growth strategy and impact the price of our Common Stock.
Shareholder activism,
which could take many forms or arise in a variety of situations, has been increasing recently. Volatility in the price of our Common
Stock or other reasons may in the future cause us to become the target of securities litigation or shareholder activism. Securities litigation
and shareholder activism, including potential proxy contests, could result in substantial costs and divert management’s and our
board of director’s attention and resources from our business. Additionally, such securities litigation and shareholder activism
could give rise to perceived uncertainties as to our future, adversely affect its relationships with service providers and make it more
difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related
to any securities litigation and activist shareholder matters. Further, the price of our Common Stock and could be subject to significant
fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and shareholder activism.
Our financial
results may vary significantly from period to period due to fluctuations in our operating costs and other factors.
We expect our period-to-period
financial results to vary based on our operating costs, which we anticipate will fluctuate with the pace at which we continue to design,
develop and produce new products and increase production capacity. Additionally, our revenues from period to period may fluctuate as
we introduce existing products to new markets for the first time and as we develop and introduce new products. As a result of these factors,
we believe that quarter-to-quarter comparisons of our financial results, especially in the short term, are not necessarily meaningful
and that these comparisons cannot be relied upon as indicators of future performance. Moreover, our financial results may not meet the
expectations of equity research analysts, ratings agencies or investors, who may be focused only on quarterly financial results. If any
of this occurs, the trading price of our Common Stock could fall substantially, either suddenly or over time.