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Form 424B3 Xos, Inc.

August 12, 2022 7:27 AM EDT

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PROSPECTUS SUPPLEMENT NO. 5
(TO PROSPECTUS DATED MAY 6, 2022)
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-259509


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_____________________________
This prospectus supplement updates and supplements the prospectus dated May 6, 2022 (the “Prospectus”), which forms a part of our Registration Statement on Form S-1, as amended (Registration No. 333-259509). This prospectus supplement is being filed to update and supplement the information in the Prospectus with the information contained in our Quarterly Report on Form 10-Q covering the quarter ended June 30, 2022, filed with the Securities and Exchange Commission on August 11, 2022 (the “Quarterly Report on Form 10-Q”). Accordingly, we have attached the Quarterly Report on Form 10-Q to this prospectus supplement.
You should read this prospectus supplement in conjunction with the Prospectus, including any amendments or supplements to it. This prospectus supplement is not complete without, and may not be delivered or used except in conjunction with, the Prospectus, including any amendments or supplements to it. This prospectus supplement is qualified by reference to the Prospectus, except to the extent that the information provided by this prospectus supplement supersedes information contained in the Prospectus. You should not assume that the information provided in this prospectus supplement, the Prospectus or any prior prospectus supplement is accurate as of any date other than their respective dates. Neither the delivery of this prospectus supplement, the Prospectus, or any prior prospectus supplement, nor any sale made hereunder or thereunder, shall under any circumstances create any implication that there has been no change in our affairs since the date of this prospectus supplement, or that the information contained in this prospectus supplement, the Prospectus or any prior prospectus supplement is correct as of any time after the date of that information.
Our Common Stock and Public Warrants are listed on The Nasdaq Capital Market (“Nasdaq”) under the symbols “XOS” and “XOSWW,” respectively. On August 10, 2022, the closing price of our Common Stock was $2.08 and the closing price for our Public Warrants was $0.215.
_____________________________
See the section entitled “Risk Factors” beginning on page 7 of the Prospectus, as updated and supplemented by the section entitled “Risk Factors” in this prospectus supplement and under similar headings in any further amendments or supplements to the prospectus to read about factors you should consider before buying our securities.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if the prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus supplement is August 11, 2022.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  __________ to __________
Commission file number 001-39598
xos_logoxwm-blackxwhitexbaa.jpg
XOS, INC.
______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware
98-1550505
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3550 Tyburn Street
Los Angeles, CA
90065
(Address of Principal Executive Offices)
(Zip Code)
    
Registrant’s telephone number, including area code: (818) 316-1890

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of exchange on which registered
Common Stock, $0.0001 par value per shareXOSNasdaq Global Market
Warrants, each whole warrant exercisable for one share of Common Stock at an exercise price of $11.50 per shareXOSWWNasdaq Global Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes    No  
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The registrant had outstanding 166,092,078 shares of Common Stock, $0.0001 par value as of August 8, 2022.


TABLE OF CONTENTS
4

Forward-Looking Statements

This Quarterly Report on Form 10-Q (the “Report”), including, without limitation, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (“the Exchange Act”). We have based these forward-looking statements on our current expectations and projections about future events. All statements, other than statements of present or historical fact included in this Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of such terms or other similar expressions. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control.

As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:

our ability to successfully commercialize our Fleet-as-a-Service offering to customers over time;

delays in the design, manufacturing and wide-spread deployment of our vehicles, powertrains and battery packs;

our ability to grow market share in our existing markets or any new markets we may enter;

our ability to successfully complete strategic relationships and alliances with third parties or acquisitions in the future;

our ability to recognize the anticipated benefits of the Business Combination (as defined below) and proceeds from the concurrent private placement, which may be affected by, among other things, competition and the ability of the combined business to grow and manage growth profitably;

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

changes in applicable laws or regulations;

the outcome of any legal proceedings against us;

our financial and business performance, including financial projections and business metrics and any underlying assumptions thereunder;

changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans;

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

our ability to respond to general economic conditions, including supply chain delays or interruptions that may occur;

our ability to manage our growth effectively;

our ability to achieve and maintain profitability in the future;

our ability to access sources of capital, including debt financing and other sources of capital to finance operations and growth;

our ability to maintain and enhance our products and brand, and to attract customers;

our ability to execute our business model, including market acceptance of our planned products and services and achieving sufficient production volumes at acceptable quality levels and prices;

ability to source certain of our critical inventory items, including battery cells, semiconductor chips and vehicle bodies and aluminum;
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our ability to successfully manage supply shortages and disruptions, product delivery delays, and anticipate costs and production timing in light of those challenges;

our ability to scale in a cost-effective manner, including hiring qualified personnel, particularly during recent labor shortages, to meet our manufacturing and delivery goals;

developments and projections relating to our competitors and industry;

general economic and political conditions, such as the effects of the COVID-19 pandemic, recessions, interest rates, inflation, local and national elections, fuel prices, international currency fluctuations, corruption, political instability and acts of war or military conflict, including repercussions of the recent military conflict between Russia and Ukraine, or terrorism on our business and the actions we may take in response thereto;

our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others;

expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012, as amended;

our future capital requirements and sources and uses of cash;

the outcome of any known and unknown litigation and regulatory proceedings; and

any other risks and uncertainties set forth in this Report in the section entitled “Risk Factors”.

A discussion of these and other factors affecting our business and prospects is set forth in Part II, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2022 (the “2021 Form 10-K”). We encourage investors to review these risk factors.

Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.

Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.


Part I - Financial Information
Glossary of Terms
Unless otherwise stated in this Report or the context otherwise requires, reference to:

Business Combination” means the Domestication, the Merger and the other transactions contemplated by the Merger Agreement, collectively, including the PIPE Financing;

Class 5 to 8 Vehicles” means medium and heavy duty trucks that typically travel on predictable routes and cover less than 200 miles per day;

Closing” means the closing of the Business Combination;

Closing Date” means August 20, 2021;

Common Stock” means the shares of common stock, par value $0.0001 per share, of Xos;
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Domestication” means the transfer by way of continuation and deregistration of NextGen from the Cayman Islands and the continuation and domestication of NextGen as a corporation incorporated in the State of Delaware;

Energy Services” means our infrastructure-as-a-service offering which includes charging infrastructure deployment, energy procurement and management, and the Xos HubTM, our proprietary mobile charging unit deployable for on-demand charging requirements;

Fleet-as-a-Service” means our comprehensive suite of products and services facilitating commercial battery-electric fleet operations through a combination of in-house proprietary technology and turnkey solutions from industry-leading partners. The platform includes our X-Pack battery system, X-Platform modular chassis, Energy Services, service and maintenance, digital fleet management products, over-the-air software update technology, and a wide range of additional service products;

Flex Manufacturing Strategy” means leveraging smaller, more-nimble existing facilities and labor talent to assemble vehicles through our strategic manufacturing partnerships, while the Company coordinates other aspects of the manufacturing process, including supply chain logistics, quality control, and manufacturing engineering;

Founders” means Dakota Semler and Giordano Sordoni;

Founder Shares” means Class B ordinary shares, par value $0.0001 per share, of NextGen, which were converted into shares of Common Stock in connection with the Business Combination;

Initial Public Offering” means NextGen’s initial public offering that was consummated on October 9, 2020;

“Legacy Xos Common Stock” means shares of common stock, par value $0.0001 per share, issued by Legacy Xos prior to the Business Combination;

“Legacy Xos Preferred Stock” means Class A through A-10 shares of preferred stock, par value $0.0001 per share, issued by Legacy Xos prior to the Business Combination;

Legacy Xos” means Xos, Inc., a Delaware corporation, prior to the consummation of the Business Combination;

Merger” means the merger of NextGen Merger Sub with and into Legacy Xos pursuant to the Merger Agreement, with Legacy Xos as the surviving company in the Merger and, after giving effect to such Merger, Legacy Xos becoming a wholly owned subsidiary of Xos;

Merger Agreement” means that certain Merger Agreement, dated as of February 21, 2021, as amended on May 14, 2021, by and among NextGen, Sky Merger Sub I, Inc., a Delaware corporation and direct wholly owned subsidiary of NextGen, and Legacy Xos;

NextGen” means NextGen Acquisition Corp., a Cayman Islands exempted company, prior to the consummation of the Domestication;

NextGen Sponsormeans NextGen Sponsor LLC.

PIPE Financing” means the transactions contemplated by the Subscription Agreements, pursuant to which the PIPE Investors collectively subscribed for 21,600,000 shares of Common Stock for an aggregate purchase price of $216,000,000 in connection with the Closing;

PIPE Investors” means the investors who participated in the PIPE Financing and entered into the Subscription Agreements;

Powertrain” means an assembly of every component that pushes a vehicle forward. A vehicle’s powertrain creates power from the engine and delivers it to the wheels on the ground. The key components of a powertrain include an engine, transmission, driveshaft, axles, and differential;

Preferred Stock” means preferred stock, par value $0.0001 per share, authorized under the Certificate of Incorporation of Xos, Inc.;

Private Placement Warrants” means the warrants to purchase Common Stock originally issued in a private placement in connection with the Initial Public Offering;
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Public Warrants” means the redeemable warrants to purchase shares of Common Stock at an exercise price of $11.50 per share originally issued in connection with the Initial Public Offering;

Sponsor” means NextGen’s sponsor, NextGen Sponsor LLC;

Subscription Agreements” means the subscription agreements entered into by NextGen and each of the PIPE Investors in connection with the PIPE Financing;

Warrants” means Private Placement Warrants and Public Warrants;

X-Pack” means our proprietary battery system;

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

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

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

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Xos, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited
(in thousands, except par value)
June 30, 2022
December 31, 2021
Assets
Cash and cash equivalents$4,251 $16,142 
Restricted cash
3,034 3,034 
Accounts receivable
12,931 3,353 
Marketable debt securities, available-for-sale — short-term
64,651 94,696 
Inventories, net
62,197 30,883 
Prepaid expenses and other current assets20,971 17,850 
Total current assets168,035 165,958 
Marketable debt securities, available-for-sale — long-term13,218 54,816 
Property and equipment, net16,754 7,426 
Operating lease right-of-use assets, net7,306 — 
Other non-current assets
1,504 506 
Total assets$206,817 $228,706 
Liabilities and Stockholders’ Equity
Accounts payable$8,761 $10,122 
Other current liabilities21,767 5,861 
Total current liabilities30,528 15,983 
Earn-out shares liability
11,894 29,240 
Common stock warrant liability
4,227 7,496 
Other non-current liabilities
10,738 1,594 
Total liabilities57,387 54,313 
Commitments and Contingencies (Note 13)
Stockholders’ Equity
Common Stock $0.0001 par value, authorized 1,000,000 shares,
  165,504 and 163,137 shares issued and outstanding at June 30, 2022
  and December 31, 2021, respectively
17 16 
Preferred Stock $0.0001 par value, authorized 10,000 shares, 0 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively
— — 
Additional paid-in capital
185,516 178,851 
Accumulated deficit(34,746)(4,093)
Accumulated other comprehensive loss
(1,357)(381)
Total stockholders’ equity
149,430 174,393 
Total liabilities and stockholders’ equity$206,817 $228,706 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
9

Xos, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
Unaudited
(in thousands, except per share amounts)
Three Months Ended
June 30,
Six Months Ended
June 30,
2022
2021
2022
2021
Revenues$9,766 $596 $16,797 $1,389 
Cost of goods sold
14,891 585 25,077 1,257 
Gross margin
(5,125)11 (8,280)132 
Operating expenses
General and administrative
12,093 4,599 23,415 6,953 
Research and development
7,635 2,742 14,584 5,741 
Sales and marketing
2,960 524 4,988 836 
Total operating expenses
22,688 7,865 42,987 13,530 
Loss from operations
(27,813)(7,854)(51,267)(13,398)
Other income (expense), net
(226)126 (145)(91)
Change in fair value of derivative instruments
3,703 (1,430)3,268 4,964 
Change in fair value of earn-out shares liability
14,870 — 17,494 — 
Write off of subscription receivable— — — (379)
Realized loss on debt extinguishment
— — — (14,104)
Loss before provision for income taxes
(9,466)(9,158)(30,650)(23,008)
Provision for income taxes
— — 
Net loss
$(9,467)$(9,158)$(30,653)$(23,008)
Other comprehensive loss
Marketable debt securities, available-for-sale
Change in net unrealized loss, net of tax of $0, for the three and six months ended June 30, 2022 and 2021
(150)— (976)— 
Total comprehensive loss
$(9,617)$(9,158)$(31,629)$(23,008)
Net loss per share
Basic
$(0.06)$(0.13)$(0.19)$(0.32)
Diluted
$(0.06)$(0.13)$(0.19)$(0.32)
Weighted average shares outstanding
Basic164,041 72,389 163,606 72,372 
Diluted164,041 72,389 163,606 72,372 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
10

Xos, Inc. and Subsidiaries
Condensed Consolidated Statements of Legacy Xos Preferred Stock and Stockholders’ Equity (Deficit)
Unaudited
(in thousands)
Legacy Xos
Preferred Stock
Common Stock
Additional Paid-in Capital
Accumulated
Deficit
Accumulated Other Comprehensive LossTotal
Stockholders’
Equity (Deficit)
SharesAmountShares
Par Value
Balance at December 31, 2020
2,762 $7,862 72,277 $$290 $(27,494)$— $(27,197)
Payment of subscription receivable— 2,430 — — 380 — — 380 
Issuance of Legacy Xos Preferred Stock, including note conversion49,518 66,701 — — — — — — 
Stock options exercised
— — 206 — — — 
Stock repurchased and retired— — (94)— (1)— — (1)
Stock based compensation expense— — — — — — 
Net loss— — — — — (13,850)— (13,850)
Balance at March 31, 202152,280 $76,993 72,389 $7 $674 $(41,344)$ $(40,663)
Stock based compensation expense— — — — — — 
Stock options exercised— — — — — — — 
Net loss— — — — — (9,158)— (9,158)
Balance at June 30, 2021
52,280 $76,993 72,391 $7 $675 $(50,502)$ $(49,820)
Balance at December 31, 2021
 $ 163,137 $16 $178,851 $(4,093)$(381)$174,393 
Stock based compensation expense— — — — 1,068 — — 1,068 
Issuance of common stock for vesting of restricted stock units— — 133 — — — — — 
Shares withheld related to net share settlement of stock-based awards— — (36)— (97)— — (97)
Issuance of common stock for commitment shares under the Standby Equity Purchase Agreement— — 19 — 62 — — 62 
Net and comprehensive loss— — — — — (21,186)(826)(22,012)
Balance at March 31, 2022 $ 163,253 $16 $179,884 $(25,279)$(1,207)$153,414 
Stock options exercised— — 385 — — — 
Stock based compensation expense— — — — 1,407 — — 1,407 
Issuance of common stock for vesting of restricted stock units— — 89 — — — — — 
Shares withheld related to net share settlement of stock-based awards— — (33)— (86)— — (86)
Issuance of common stock under the Standby Equity Purchase Agreement— — 1,810 4310000— — 4,311 
Net and comprehensive loss— — — — — (9,467)(150)(9,617)
Balance at June 30, 2022
 $ 165,504 $17 $185,516 $(34,746)$(1,357)$149,430 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
11

Xos, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited
(in thousands, unaudited)
Six Months Ended
June 30,
2022
2021
OPERATING ACTIVITIES:
Net loss
$(30,653)$(23,008)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation562 380 
Amortization of right-of-use assets
815 — 
Inventory reserve
2,212 — 
Write off of subscription receivable— 379 
Realized loss on debt extinguishment
— 14,104 
Change in fair value of derivative instruments
(3,268)(4,964)
Change in fair value of earn-out shares liability(17,494)— 
Net realized losses on marketable debt securities, available-for-sale
69 — 
Stock-based compensation expense2,469 
Other non-cash items
1,191 — 
Changes in operating assets and liabilities:
Accounts receivable(9,578)(392)
Inventories(33,058)(4,941)
Prepaid expenses and other current assets(3,121)(1,697)
Other assets(998)— 
Accounts payable(2,102)(581)
Other liabilities
17,126 564 
Net cash used in operating activities(75,828)(20,153)
INVESTING ACTIVITIES:
Purchase of property and equipment(9,462)(702)
Proceeds from sales and maturities of marketable debt securities, available-for-sale
69,561 — 
Net cash provided by (used in) investing activities
60,099 (702)
FINANCING ACTIVITIES:
Proceeds from issuance of shares of Legacy Xos Preferred Stock— 31,757 
Proceeds from subscription receivable – preferred— 2,430 
Principal payment of equipment leases
(289)(77)
Taxes paid related to net share settlement of stock-based awards
(183)— 
Proceeds from stock option exercises— 
Proceeds from issuance of common stock under Standby Equity Purchase Agreement
4,310 — 
Net cash provided by financing activities3,838 34,113 
Net (decrease) increase in cash, cash equivalents and restricted cash
(11,891)13,258 
Cash, cash equivalents and restricted cash, beginning of period
19,176 10,359 
Cash, cash equivalents and restricted cash, end of period
$7,285 $23,617 
Reconciliation of Cash, Cash Equivalents and Restricted Cash to Unaudited Condensed Consolidated Balance Sheets:
Cash and cash equivalents
$4,251 $23,617 
Restricted cash
3,034 — 
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Total cash, cash equivalents and restricted cash
$7,285 $23,617 
Supplemental disclosure of non-cash investing and financing activities
Purchase of property and equipment in accounts payable
$741 $— 
Recognition of right-of-use asset and lease liabilities upon ASC 842 adoption
$7,682 $— 
Right-of-use asset obtained in exchange for operating lease obligations
$437 $— 
Conversion of notes payable to Legacy Xos Preferred Stock:
Issuance of redeemable convertible preferred stock$— $34,918 
Conversion of interest payable on convertible notes$— $2,453 
Conversion of notes payable into preferred stock$— $21,540 
Fair value adjustment of related party debt at conversion$— $3,763 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
13

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited

Note 1— Description of Business

Xos, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Xos”) is a mobility solutions company. Xos manufactures Class 5 to 8 battery-electric commercial vehicles, facilitates fleet transition from traditional internal combustion engine vehicles to electric vehicles, and enables electric fleets to better manage their fleet operations through a portfolio of management tools. Xos developed the X-Platform (its proprietary, purpose-built vehicle chassis platform) and the X-Pack (its proprietary battery system) specifically for the medium- and heavy-duty commercial vehicle segment with a focus on last-mile commercial fleet operations. Xos’ “Fleet-as-a-Service” package offers customers a comprehensive suite of commercial products and services to facilitate electric fleet operations and seamlessly transition their traditional combustion-engine fleets to battery-electric vehicles.

Xos Fleet, Inc. (“Legacy Xos”), the new legal entity name of the legacy Xos operating entity and Xos Services, Inc. (“Xos Services”, formerly Rivordak, Inc.), the subsidiary holding a California dealer license to sell Xos vehicles, are wholly owned subsidiaries of Xos, Inc., and make up 100% of the operations of the Company.

Business Combination

Xos, Inc. was initially incorporated on July 29, 2020 as a Cayman Islands exempted company under the name “NextGen Acquisition Corporation” (“NextGen”). On August 20, 2021, the transactions contemplated by the Agreement and Plan of Merger, as amended on May 14, 2021, by and among NextGen, Sky Merger Sub I, Inc., a Delaware corporation and a direct wholly owned subsidiary of NextGen (“Merger Sub”), and Xos, Inc., a Delaware corporation (now known as Xos Fleet, Inc., “Legacy Xos”), were consummated (the “Closing”), whereby Merger Sub merged with and into Legacy Xos, the separate corporate existence of Merger Sub ceased and Legacy Xos became the surviving corporation and a wholly owned subsidiary of NextGen (such transaction the “Merger” and, collectively with the Domestication, the “Business Combination”). As a result, Xos became the publicly traded entity listed on the Nasdaq Global Market.

Emerging Growth Company

Section 102(b)(1) of the Jumpstart its Business Startups Act (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement declared effective pursuant to the Securities Act of 1933, as amended (the “Securities Act”), or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard, until such time the Company is no longer considered to be an emerging growth company. At times, the Company may elect to early adopt a new or revised standard.

Risks and Uncertainties

COVID-19 and actions taken to mitigate its spread have had and may continue to have an adverse impact on the economies and financial markets of many countries, including the areas in which the Company operates. As the COVID-19 pandemic continues to evolve, the Company believes the extent of the pandemic’s impact to its business, operating results, cash flows, liquidity and financial condition will be primarily driven by the severity and duration of the COVID-19 pandemic, the pandemic’s impact on the United States and global economies and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. Those primary drivers are beyond the Company’s knowledge and control, and as a result, at this time the Company is unable to predict the cumulative impact, both in terms of severity and duration, that the COVID-19 pandemic will have on its business, operating results, cash flows and financial condition. However, the impact of the COVID-19 pandemic could be material if the current circumstances continue to exist for a prolonged period of time or worsen.

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Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
Additionally, recent geopolitical events, such as the recent military conflict between Russia and Ukraine, may increase the severity of supply chain disruptions and further hinder our ability to source inventory for our vehicles. The conflict continues to evolve and its ultimate impact on the Company is uncertain, but a prolonged conflict may have a material negative impact on the Company’s business, operating results, cash flows, liquidity and financial condition.

Although the Company has used the best current information available to it in its estimates, actual results could materially differ from the estimates and assumptions developed by management.

Supply Chain Disruptions

Negative global economic conditions, which the COVID-19 pandemic has contributed to, has impacted the Company’s ability to source certain critical inventory items. The series of restrictions imposed and the speed and nature of the recovery in response to the pandemic have placed burdens on the Company’s supply chain management, such as the semiconductor chip and battery cell shortage and supply limitations on vehicle bodies and aluminum.

Despite supply chain disruptions, the Company has continued to source inventory for its vehicles and its purchasing team has been working with vendors to find alternative solutions to areas where there are supply chain constraints, and where appropriate and critical, has placed orders in advance of projected need to ensure inventory is able to be delivered in time for production plans.

Inflation and Other Risks

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

Note 2— Basis of Presentation and Summary of Significant Accounting Policies

The following is a summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements:

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. They do not include all of the information and footnotes required by U.S. GAAP for complete audited financial statements. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Legacy Xos and Xos Services. All significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments (primarily consisting of normal accruals) considered for a fair presentation have been included. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the years ended December 31, 2021 and 2020 presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 30, 2022.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenues and expenses during the reporting periods. The areas with significant estimates and judgments include, among others, inventory valuation, incremental borrowing rates for assessing operating and financing lease liabilities, useful lives of property and equipment, earn-out shares liability, stock-based compensation, common stock warrant liability and product warranty liability. Management bases its estimates on historical
15

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates, and such differences could be material to the Company’s condensed consolidated financial statements.

Reclassifications

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

Inventory and Inventory Valuation

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

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

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

Warranty Liability

Since 2021, the Company provides customers with a product warranty that assures that the products meet standard specifications and are free for periods typically between 2 to 5 years. The Company accrues warranty reserve for the products sold, which includes its best estimate of the projected costs to repair or replace items under warranties and recalls if identified. These estimates are based on actual claims incurred to date and an estimate of the nature, frequency and costs of future claims. These estimates are inherently uncertain given the Company’s relatively short history of sales, and changes to its historical or projected warranty experience may cause material changes to the warranty reserve in the future. Claims incurred under the Company’s standard product warranty programs are recorded based on open claims. Claims incurred in each of the three and six months ended June 30, 2022 were $6,000, respectively; no claims were incurred for the year ended December 31, 2021. The Company recorded warranty liability within other current liabilities in the consolidated balance sheets as of June 30, 2022 and December 31, 2021. The Company did not record warranty liability for the three or six months ended June 30, 2021 as the product warranty had not been established.

The reconciliation of the change in the Company’s product liability balances during the three months and six months ended June 30, 2022 consisted of the following (in thousands):
Three Months Ended June 30, 2022Six Months Ended June 30, 2022
Warranty liability, beginning of period$475 $177 
Reduction in liability (payments) (6)(6)
Increase in liability (new warranties)363 661 
Warranty liability, end of period$832 $832 

Leases
16

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited

Upon inception of a contract, the Company evaluates if the contract, or part of the contract, contains a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Right-of-use (“ROU”) assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The lease liability is measured as the present value of the unpaid lease payments, and the ROU asset value is derived from the calculation of the lease liability, including prepaid lease payments, if any. Lease payments include fixed and in-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, fees paid by the lessee to the owners of a special-purpose entity for restructuring the transaction, and probable amounts the lessee will owe under a residual value guarantee. Lease payments do not include (i) variable lease payments other than those that depend on an index or rate, (ii) any guarantee by the lessee of the lessor’s debt, or (iii) any amount allocated to non-lease components, if such election is made upon adoption, per the provisions of ASU 2016-02, Leases.

When the Company cannot determine the actual implicit rate in a lease, it uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company gives consideration to its recent debt issuances, if any, as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rate. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company's lease term includes any option to extend the lease when it is reasonably certain to be exercised based on considering all relevant economic factors. Operating expense charges from the lessor are accounted for on an accrual basis. The Company has elected not to separate the lease and non-lease components.

The leases have remaining initial terms ranging from less than 1 year to 5 years.

The Company reviews the carrying value of its right-of-use assets for impairment whenever events or changes in circumstances indicate that the recorded value may not be recoverable. Recoverability of assets is measured by comparing the carrying amounts of the assets to the estimated future undiscounted cash flows, excluding financing costs. If the Company determines that an impairment exists, any related impairment loss is estimated based on fair values.

Recent Accounting Pronouncements Issued and Adopted:

ASC 842, Leases: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as subsequently amended, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors), and replaces the existing guidance in ASC 840, Leases. The new standard also requires lessees to recognize operating and finance lease liabilities and corresponding ROU assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements.

On January 1, 2022, the Company adopted ASC 842 using the modified retrospective method. The Company has presented financial results and applied its accounting policies for the period beginning January 1, 2022 under ASC 842, while prior period results and accounting policies have not been adjusted and are reflected under legacy GAAP pursuant to ASC 840. In connection with the adoption of ASC 842, the Company performed an analysis of contracts under ASC 840 to ensure proper assessment of leases (or embedded leases) in existence as of January 1, 2022. The Company elected the package of practical expedients permitted under ASC 842, which allows the Company not to reassess 1) whether any expired or existing contracts as of the adoption date are or contain a lease, 2) lease classification for any expired or existing leases as of the adoption date and 3) initial direct costs for any existing leases as of the adoption date. The most significant impact of applying ASC 842 was the recognition of ROU asset and lease liabilities for operating leases in its condensed consolidated balance sheets. On January 1, 2022, the Company recognized an initial operating ROU asset of $7.7 million and associated operating lease liabilities of $7.7 million.

Refer to Note 6 — Leases for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements, as well as its various accounting policies for each lease type.
Recent Accounting Pronouncements Issued and not yet Adopted:

ASU 2016-13, Financial Instruments — Credit Losses (“ASU 2016-13”): In June 2016, the FASB issued ASU 2016-13, which states the Company will be required to use an expected-loss model for its marketable debt securities, available-for sale, which requires that credit losses be presented as an allowance rather than as an impairment write-down. Reversals of credit losses (in situations in which the estimate of credit losses declines) is permitted in the reporting period that the change occurs. Current
17

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
U.S. GAAP prohibits reflecting reversals of credit losses in current period earnings. At June 30, 2022, the Company had $77.9 million in marketable debt securities, available for sale which would be subject to this new standard. As of December 31, 2021, these marketable debt securities, available for sale have an average credit rating of A and no impairment write-downs have been recorded. The Company is currently evaluating the impact of this new standard on its investment policy and investments and does not expect the standard to have a material impact on its financial statements at adoption or in subsequent periods. The Company expects to adopt the new standard effective January 1, 2023.

Note 3— Revenue Recognition
Disaggregated revenues by major source during the three and six months ended June 30, 2022 and 2021 consisted of the following (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2022
2021
2022
2021
Product and service revenue
Stepvans & vehicle incentives$8,561 $— $15,424 $715 
Powertrains656 596 670 674 
Fleet-as-a-Service38 — 133 — 
Total product revenue9,255 596 16,227 1,389 
Ancillary revenue511 — 570 — 
Total revenues$9,766 $596 $16,797 $1,389 

Note 4 — Inventories
Inventory amounted to $62.2 million and $30.9 million, respectively, as of June 30, 2022 and December 31, 2021 and consisted of the following (in thousands):
June 30, 2022
December 31, 2021
Raw materials$40,138 $20,382 
Work in process25,330 10,659 
Finished goods
— 901 
Inventories, gross of reserves
65,468 31,942 
Less: inventory reserve
(3,271)(1,059)
Inventories, net
$62,197 $30,883 

Note 5 — Selected Balance Sheet Data
Prepaid expenses and other current assets as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):
18

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
June 30, 2022
December 31, 2021
Prepaid inventories
$15,735 $7,303 
Prepaid insurance
1,102 4,996 
Deposits (primarily relating to deposits on equipment purchases)
805 2,783 
Assets held for sale
1,848 1,848 
Prepaid licenses and subscriptions
741 801 
Others
740 119 
Total
$20,971 $17,850 
Other current liabilities as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):
June 30, 2022December 31, 2021
Accrued expenses and other(1)
$16,346 $4,303 
Lease liabilities, current
3,520 482 
Customer deposits
1,068 899 
Warranty liability
833 177 
Total
$21,767 $5,861 
____________
(1) Primarily relates to personnel costs — wages, health benefits, vacation and other accruals.
Note 6 — Leases
A summary of the balances relating to the Company’s lease assets and liabilities as of June 30, 2022 consisted of the following (in thousands):
Balance Sheet Location
June 30, 2022
Assets
Operating leasesOperating lease right-of-use assets, net$7,306 
Equipment finance leasesProperty and equipment, net7,734 
Total Lease Assets$15,040 
Liabilities
Current
Operating leasesOther current liabilities$1,484 
Equipment finance leasesOther current liabilities2,036 
Sub-total$3,520 
Non-current
Operating leasesOther non-current liabilities$5,950 
Equipment finance leasesOther non-current liabilities4,788 
Sub-total$10,738 
Total Lease Liabilities$14,258 
Operating Leases

The Company has a 5-year office lease on its headquarter facility in Los Angeles, which commenced in January 2022, as well as certain other leases (both short-term and long-term) within the United States.

19

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
The Company records lease expense on a straight-line basis over the lease term in general and administrative expense and cost of goods sold, depending on the nature and use of the leased asset. Total lease expense for the three months ended June 30, 2022 and 2021 was $0.4 million and $0.1 million, respectively. Total lease expense recorded was $0.9 million and $0.3 million, for the six months ended June 30, 2022 and 2021,respectively.

Lease terms include renewal or termination options that the Company is reasonably certain to exercise. For leases with a term of 12 months or less, the Company has made an accounting policy election to not record a ROU asset and associated lease liability on its unaudited condensed consolidated balance sheet. Total lease expense recorded for these short-term leases was $0.3 million and $0.4 million for the three and six months ended June 30, 2022, respectively.
Equipment Finance Leases

The Company leases certain equipment facilities under finance leases that expire on various dates through 2027. The finance lease cost during the three and six months ended June 30, 2022 and 2021 consisted of the following (in thousands):

Three Months Ended
June 30,
Six Months Ended
June 30,
Income Statement Location
2022
2021
2022
2021
Amortization
General and administrative expense$78 $19 $238 $48 
Interest accretion on finance lease liabilities
Other income (expense), net65 92 10 
Total
$143 $23 $330 $58 
Supplemental Cash Flow Information, Weighted-Average Remaining Lease Term and Discount Rate
The weighted-average remaining lease term and discount rates, as well as supplemental cash flow information as of and for the six months ended June 30, 2022 consisted of the following (in thousands for the supplemental cashflow information):
Supplemental cashflow information:
Cash paid for amounts included in the measurement of operating lease liabilities$808 
ROU assets obtained in exchange for operating lease obligations$437 
Weighted average remaining lease term:
Operating leases4.4 years
Equipment finance leases3.1 years
Weighted average discount rate:
Operating lease - IBR5.5 %
Equipment finance leases - rate implicit in the lease7.8 %
Maturity Analysis
A summary of the undiscounted cash flows and a reconciliation to the Company’s lease liabilities as of June 30, 2022 consisted of the following (in thousands):
20

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
June 30, 2022
 Operating Leases
Equipment Finance LeasesTotal
2022 (remaining six months)
$926 $1,311 $2,237 
2023
1,860 2,408 4,268 
2024
1,907 2,329 4,236 
2025
1,963 1,224 3,187 
2026
1,631 360 1,991 
Thereafter
114 29 143 
Total future minimum lease payments
$8,401 $7,661 $16,062 
Less: imputed interest
967 837 1,804 
Present value of Lease Liabilities
$7,434 $6,824 $14,258 
Schedule of future minimum lease payments for operating and finance leases as of December 31, 2021 consisted of the following (in thousands):
December 31, 2021
Operating Leases
Equipment Finance LeasesTotal
2022
$1,167 $482 $1,649 
2023
1,158 442 1,600 
2024
1,192 386 1,578 
2025
1,228 401 1,629 
2026
1,265 339 1,604 
Thereafter
106 27 133 
Total future minimum lease payments
$6,116 $2,077 $8,193 

Note 7 — Recapitalization and Earn-out Shares Liability

Recapitalization

As discussed in Note 1, on August 20, 2021, Legacy Xos and NextGen consummated the Business Combination contemplated by the Merger Agreement. Xos has been determined to be the accounting acquirer based on evaluation of the following facts and circumstances:

Xos stockholders have the largest voting interest in the post-combination company;

The board of directors of Xos is authorized to be up to nine members and had six members designated at the time of closing, and Xos having the ability to nominate the majority of the members of the board of directors as of closing;

Xos management holds executive management roles (including Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Chief Technology Officer, among others) for the post-combination company and is responsible for the day-to-day operations;

The post-combination company assumed the Xos name: “Xos, Inc.”; and

21

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
The intended strategy of the post-combination entity continued Legacy Xos’ strategy of being a leader in the electric vehicle industry.

Accordingly, all historical financial information presented in these combined and consolidated financial statements represents the accounts of Legacy Xos and its wholly owned subsidiaries “as if” Legacy Xos is the predecessor and legal successor. The historical operations of Legacy Xos are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of Legacy Xos prior to the business combination; (ii) the combined results of NextGen and Legacy Xos following the Business Combination; and (iii) the assets and liabilities of Legacy Xos at their historical cost. No step-up basis of intangible assets or goodwill was recorded in the business combination transaction consistent with the treatment of the transaction as a reverse capitalization.

In connection with the Business Combination, each share of Legacy Xos Common Stock and Legacy Xos Preferred Stock issued and outstanding immediately prior to the Business Combination (with each share of Legacy Xos Preferred Stock being treated as if it were converted into Legacy Xos Common Stock immediately prior to the Business Combination) converted into the right to receive 1.956440 shares (the “Exchange Ratio”) of Common Stock.

Also, in connection with the Business Combination, the following occurred:

the merger of Legacy Xos into a wholly owned subsidiary of NextGen, with Legacy Xos surviving the merger as a wholly owned subsidiary of NextGen, with the combined company is referred to as “Xos”;

142,584,621 shares of Common Stock issued, including: (i) the Legacy Xos’ Common Stock, and (ii) Legacy Xos’ Preferred Stock, including the exercise and conversion of Legacy Xos’ Preferred Stock warrant (as if the Legacy Xos Preferred Stock had converted into the Legacy Xos’ Common Stock immediately prior to the reverse merger);

the issuance and sale of 19,600,000 shares of Common Stock (PIPE investment) for a purchase price of $10.00 per share and an aggregate purchase price of $196.0 million (which excludes the sale of 2,000,000 shares in the aggregate for a purchase price of $10.00 per share and an aggregate purchase price of $20.0 million pursuant to an offering of Common Stock by the Founders of Legacy Xos). On the Closing Date, one of the PIPE Investors, Grantchester C Change, LLC., did not fund their $4.0 million committed amount under the binding Subscription Agreement.;

the settlement of the outstanding underwriting fees incurred in connection with the initial public offering of NextGen on October 9, 2020, for which the final cash amount owed was $11.2 million;

the settlement of the direct and incremental transaction costs incurred prior to, or concurrent with, the closing of the business combination in the amount of $44.2 million, which are recorded as reduction to additional paid-in capital;

the recognition of contingent earn-out interests provision as liability with a fair value of $101.7 million on the day of the merger consummation; and,

the assumption of the Public Warrants (12,499,964 units) and Private Placement Warrants (6,333,334 units) at fair value of $17.9 million on the day of merger consummation.

Contingent Earn-out Shares Liability

The Company has a contingent obligation to issue 16.2 million shares (the “Earn-out Shares”) of Common Stock and grant 261,000 restricted stock units (“Earn-out RSUs”) to certain stockholders and employees upon the achievement of certain market share price milestones within specified periods following the Business Combination on August 20, 2021.

The Earn-out Shares will be issued in tranches based on the following conditions:

i.If the volume-weighted average closing share price (“VWAP”) of the Common Stock equals or exceeds $14.00 per share for any 10 trading days within any consecutive 20-trading day period between the merger closing date and the five year anniversary of such closing date (“Earn-out Period”), then the Company is required to issue an aggregate of 5.4 million shares (“Tranche 1 Earn-out Shares”) of Common Stock to holders with the contingent right to receive Earn-out Shares (excluding any Earn-out RSUs). If after Closing and during the Earn-out Period, there is a Change in
22

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
Control (as defined in the Merger Agreement), the Company is required to issue Tranche 1 Earn-out Shares when the value per share of the Company is equal to or greater than $14.00 per share, but less than $20.00. If there is a change in control where the value per share of commons stock is less than $14.00, then the Earn-out Shares shall terminate prior to the end of the Earn-out Period and no common stock shall be issuable.

ii.If the VWAP of the Common Stock equals or exceeds $20.00 per share for any 10 trading days within any consecutive 20-trading day period during the Earn-out Period, then the Company is required to issue an aggregate of 5.4 million shares (“Tranche 2 Earn-out Shares”) of Common Stock to holders with the contingent right to receive Earn-out Shares (excluding any Earn-out RSUs). If after Closing and during the Earn-out Period, there is a Change in Control (as defined in the Merger Agreement), the Company is required to issue Tranche 2 Earn-out Shares when the value per share of the Company is equal to or greater than $20.00 per share, but less than $25.00.

iii.If the VWAP of the Common Stock equals or exceeds $25.00 per share for any 10 trading days within any consecutive 20-trading day period during the Earn-out Period, then the Company is required to issue an aggregate of 5.4 million shares (“Tranche 3 Earn-out Shares”) of Common Stock to holders with the contingent right to receive Earn-out Shares (excluding any Earn-out RSUs). If after Closing and during the Earn-out Period, there is a Change in Control (as defined in the Merger Agreement), the Company is required to issue Tranche 3 Earn-out Shares when the valuer per share of the Company is equal to or greater than $25.00 per share.

Pursuant to the guidance under ASC 815, Derivatives and Hedging, the right to Earn-out Shares was classified as a Level 3 fair value measurement liability, and the increase or decrease in the fair value during the reporting period is recognized in the condensed consolidated statement of operations accordingly. The fair value of the Earn-out Shares liability was estimated using the Monte Carlo simulation of the stock prices based on historical and implied market volatility of a peer group of public companies.

The Company recognized a gain on the fair value change in Earn-out Shares liability of $14.9 million and $17.5 million in its unaudited condensed consolidated statements of operations during the three and six months ended June 30, 2022, respectively.
Note 8 — Investments
Amortized cost, gross unrealized gains/losses in accumulated other comprehensive loss and fair value of marketable debt securities, available-for-sale, by type of security as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):
June 30, 2022
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Short-term investments:
Corporate debt security$42,945 $— $(695)$42,250 
U.S. treasuries5,608 — (74)5,534 
Asset-backed security and other5,868 — (77)5,791 
Non-U.S. government and supranational bonds9,179 — (107)9,072 
Certificate of deposit2,004 — — 2,004 
$65,604 $ $(953)$64,651 
Long-term investments:
Corporate debt security$11,580 $— $(349)$11,231 
Asset-backed security and other2,042 — (55)1,987 
$13,622 $ $(404)$13,218 
23

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
December 31, 2021
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Short-term investments:
Corporate debt security$71,406 $— $(57)$71,349 
U.S. treasuries3,415 — (7)3,408 
Asset-backed security and other2,555 — (4)2,551 
Non-U.S. government and supranational bonds16,405 (19)16,387 
Certificate of deposit1,001 — — 1,001 
$94,782 $1 $(87)$94,696 
Long-term investments:
Corporate debt security$42,703 $— $(246)$42,457 
U.S. treasuries2,201 — (5)2,196 
Asset-backed security and other5,438 — (28)5,410 
Non-U.S. government and supranational bonds3,769 — (16)3,753 
Certificate of deposit1,000 — — 1,000 
$55,111 $ $(295)$54,816 

The Company’s investments in marketable debt securities, available-for-sale that have been in a continuous unrealized loss position by type of security as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):

June 30, 2022
Less than 12 months12 months or greaterTotal
Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
Corporate debt security$53,481 $(1,044)$— $— $53,481 $(1,044)
US treasuries5,534 (74)— — 5,534 (74)
Asset-backed security and other7,778 (132)— — 7,778 (132)
Non-U.S. government and supranational bonds9,072 (107)— — 9,072 (107)
Certificates of deposit2,004 — — — 2,004 — 
$77,869 $(1,357)$ $ $77,869 $(1,357)
24

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
December 31, 2021
Less than 12 months12 months or greaterTotal
Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
Corporate debt security$113,806 $(303)$— $— $113,806 $(303)
US treasuries5,604 (12)— — 5,604 (12)
Asset-backed security and other7,961 (32)— — 7,961 (32)
Non-U.S. government and supranational bonds20,140 (34)— — 20,140 (34)
Certificates of deposit2,001 — — — 2,001 — 
$149,512 $(381)$ $ $149,512 $(381)

Gross realized gains and gross realized losses from the sales of the Company’s marketable debt securities, available-for-sale for the three and six months ended June 30, 2022 and 2021 consisted of the following (in thousands):
Three Months Ended
June 30,
Six Months Ended
June 30,
2022
2021
2022
2021
Gross realized gains$— $— $— $— 
Gross realized losses$(63)$— $(69)$— 

Amortized cost and fair value of marketable debt securities, available-for-sale by contractual maturity as of June 30, 2022 consisted of the following (in thousands, except weighted average data):

Amortized CostFair Value
Due in one year or less$65,604 $64,651 
Due after one year through five years13,622 13,218 
$79,226 $77,869 
Weighted average contractual maturity0.7 years

Amortized cost and fair value of marketable debt securities, available-for-sale by contractual maturity as of December 31, 2021 consisted of the following (in thousands, except weighted average data):    
Amortized CostFair Value
Due in one year or less$94,782 $94,696 
Due after one year through five years55,111 54,816 
$149,893 $149,512 
Weighted average contractual maturity0.8 years

Actual maturities may differ from contractual maturities because certain issuers may have the right or obligation to prepay certain obligations with or without penalties.
25

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
Note 9 — Equity
Xos Common and Preferred Stock
The Company is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares which the Company is authorized to issue is 1,010,000,000 shares. 1,000,000,000 shares shall be Common Stock, each having a par value of one-hundredth of one cent ($0.0001). 10,000,000 shares shall be Preferred Stock, each having a par value of one-hundredth of one cent ($0.0001).
Voting Rights: Each outstanding share of Common Stock shall entitle the holder thereof to one vote on each matter properly submitted to the stockholders of the Company for their vote; provided, however, that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon by law or pursuant to this Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock).
Preferred Stock: The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Company (the “Board of Directors”) is hereby expressly authorized to provide for the issue of all or any number of the shares of the Preferred Stock in one or more series, and to fix the number of shares and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designation, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such shares and as may be permitted by the Delaware General Corporation Law (the “DGCL”). The Board of Directors is also expressly authorized to increase (but not above the total number of authorized shares of the class) or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issuance of shares of that series. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series.
Legacy Xos’ Preferred Stock
During the fourth quarter of 2020, Legacy Xos executed a financing round and issued shares of preferred stock (the “Series A Financing’’). The Series A Financing included the authorization of 25,794,475 shares of Legacy Xos Preferred Stock in classes A through A-10. The shares of Class A Legacy Xos Preferred Stock were allocated to investors who contributed new money to Legacy Xos, while the shares of Class A-1 through A-10 Legacy Xos Preferred Stock were issued in exchange to convertible note holders. As part of this raise, 1,411,764 shares of Class A Legacy Xos Preferred Stock and one warrant exercisable for 319,411 shares of Class A Legacy Xos Preferred Stock were issued for aggregate cash proceeds of $9.6 million and a subscription receivable for $2.4 million. During the quarter ended March 31, 2021, the Legacy Xos issued an additional 3,739,846 shares of Class A Legacy Xos Preferred Stock raising $31.8 million in cash proceeds, and the conversion of the SAFE agreement (Simple Agreement for Future Equity) issued to Elemental Excelerator (the “SAFE Note”).
As part of this transaction, Legacy Xos converted $21.5 million of convertible notes and $2.5 million in accrued interest into 21,570,308 shares of Class A-1 through A-10 Legacy Xos Preferred Stock. These exchanges from convertible notes into shares of Legacy Xos Preferred Stock included transactions with both related and unrelated parties (refer to Note 14). The differences between the total carrying value of the converted notes held by third parties, and the fair value of the issued shares of Legacy Xos Preferred stock, was recorded as realized loss on debt extinguishment in the consolidated statement of operations.
We have determined the fair value of the issued shares of Legacy Xos Preferred Stock in connection with the note conversion using market rates experienced in other non-related party transactions, through the issuance of shares of Legacy Xos Preferred Stock. As some of the converted third-party notes have voting rights and others do not, the fair value of non-voting shares were reduced by 3%.
Concurrent with the Business Combination, outstanding shares of Legacy Xos Preferred Stock were converted into shares of Common Stock in accordance with the Exchange Ratio.

26

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
Standby Equity Purchase Agreement

On March 23, 2022, the Company entered into a Standby Equity Purchase Agreement (the "SEPA") with YA II PN, Ltd. (“Yorkville”), whereby the Company has the right, but not the obligation, to sell to Yorkville up to $125.0 million of shares of its Common Stock at its request any time during the 36 months following the execution of the SEPA, subject to certain conditions. The Company expects to use any net proceeds for working capital and general corporate purposes.

As consideration for Yorkville’s commitment to purchase shares of common stock at the Company’s direction upon the terms and subject to the conditions set forth in the purchase agreement, upon execution of the purchase agreement, the Company issued 18,582 shares of common stock to Yorkville.

During the three months ended June 30, 2022, the Company issued 1,809,515 shares of Common Stock under the SEPA for proceeds of $4.3 million. As of June 30, 2022, the remaining commitment available under the agreement was $120.7 million.
Note 10 — Derivative Instruments

Public and Private Placement Warrants

As of June 30, 2022, the Company had 18,613,299 Public Warrants and 219,999 Private Placement Warrants outstanding, with fair values of $4.2 million and $49,000, respectively.

The Public Warrants have an exercise price of $11.50 per share, subject to adjustments, and will expire on August 20, 2026 or earlier upon redemption or liquidation. The Public Warrants may only be exercised for a whole number of shares. No fractional Public Warrants will be issued upon separation of the units and only whole Public Warrants will trade. The Public Warrants became exercisable; provided that the Company has an effective registration statement under the Securities Act covering the issuance of the Common Stock issuable upon exercise of the Warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities, or blue sky, laws of the state of residence of the holder (or the Company permits holders to exercise their Warrants on a cashless basis under the circumstances specified in the warrant agreement). A registration statement was filed with the SEC covering the issuance of the Common Stock issuable upon exercise of the Warrants, and the Company will use its commercially reasonable efforts to maintain the effectiveness of such registration statement and a current prospectus relating to those shares of Common Stock until the Public Warrants expire or are redeemed. If the shares of Common Stock are at the time of any exercise of a Public Warrant not listed on a national securities exchange such that they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, requires holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, it will not be required to file or maintain in effect a registration statement.

The Private Placement Warrants are identical to the Public Warrants, except that the Private Placement Warrants and the Common Stock issuable upon exercise of the Private Placement Warrants were not transferable, assignable or salable until September 19, 2021, subject to certain limited exceptions. Additionally, the Private Placement Warrants will be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial shareholders or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

Redemption of Warrants for cash when the price per Common Stock equals or exceeds $18.00:

Once the Warrants become exercisable, the Company may redeem the outstanding Warrants (except as described above with respect to the Private Placement Warrants):

in whole and not in part;
at a price of $0.01 per Warrant;
upon not less than 30 days’ prior written notice of redemption to each Warrant holder; and
if, and only if, the last reported sale price of Common Stock for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the Warrant holders (the “Reference Value”) equals or exceeds $18.00 per share (as adjusted for share sub-divisions, share dividends, rights issuances, consolidations, reorganizations, recapitalizations and the like).

27

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
The Company will not redeem the Warrants as described above unless a registration statement under the Securities Act covering the issuance of the Common Stock issuable upon exercise of the Warrants is then effective and a current prospectus relating to those Common Stock is available throughout the 30-day redemption period. If and when the Warrants become redeemable by the Company, it may exercise its redemption right even if the Company is unable to register or qualify the underlying securities for sale under all applicable state securities laws.

Redemption of Warrants for Common Stock when the price per share equals or exceeds $10.00:

Once the Warrants become exercisable, the Company may redeem the outstanding Warrants (including both Public Warrants and Private Placement Warrants):

in whole and not in part;
at $0.10 per Warrant upon a minimum of 30 days’ prior written notice of redemption provided that holders will be able to exercise their Warrants on a cashless basis prior to redemption and receive that number of shares determined by reference to an agreed table based on the redemption date and the “fair market value” of Common Stock;
if, and only if, the Reference Value equals or exceeds $10.00 per share (as adjusted for share splits, share dividends, rights issuances, subdivisions, reorganizations, recapitalizations and the like); and
if the Reference Value is less than $18.00 per share (as adjusted), the Private Placement Warrants must also concurrently be called for redemption on the same terms as the outstanding Public Warrants, as described above.

The “fair market value” of Common Stock shall mean the average reported last sale price of Common Stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of Warrants.

In no event will the Company be required to net cash settle any Warrant. The Warrants may also expire worthless.
Note 11 — Share-Based Compensation

2018 Stock Plan

On November 27, 2018, the Legacy Xos’ board of directors and stockholders adopted the 2018 Stock Plan. There are no shares available for issuance under the 2018 Stock Plan; however, the 2018 Stock Plan continues to govern the terms and conditions of the outstanding awards granted under the 2018 Stock Plan.

Options

As of June 30, 2022, there were 1,786,679 Options outstanding under the 2018 Stock Plan. The amount and terms of Option grants were determined by the board of directors of Legacy Xos. The Options granted under the 2018 Stock Plan generally expire within 10 years from the date of grant and generally vest over 4 years, at the rate of 25% on the first anniversary of the date of grant and ratably on a monthly basis over the remaining 36-month period thereafter based on continued service.

28

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
Stock option activity during the six months ended June 30, 2022 consisted of the following:

OptionsWeighted Average Fair ValueWeighted Average Exercise PriceWeighted Average Remaining YearsIntrinsic Value
December 31, 2021 — Options outstanding1,838,759 $0.02 $0.02 8.22$5,756,797 
Granted— — — 
Exercised400 0.02 0.02 
Forfeited3,678 0.03 0.02 
March 31, 2022 — Options outstanding1,834,681 $0.02 $0.02 7.98$5,450,514 
Granted— — — 
Exercised38,693 0.02 0.04 
Forfeited9,309 0.02 0.03 
June 30, 2022 — Options outstanding1,786,679 $0.02 $0.02 7.69$3,253,977 
June 30, 2022 — Options vested and exercisable767,020 $0.02 $0.02 7.48$1,396,965 

Aggregate intrinsic value represents the difference between the exercise price of the options and the fair value of the Company’s common stock. The aggregate intrinsic value of options exercised during the three months ended June 30, 2022 and 2021 were approximately $114,000 and $0, respectively. The aggregate intrinsic value of options exercised during the six months ended June 30, 2022 and 2021 were approximately $115,000 and $6,000, respectively.

The Company estimates the fair value of options utilizing the Black-Scholes option pricing model, which is dependent upon several variables, including expected option term, expected volatility of the Company's share price over the expected term, expected risk-free rate and expected dividend yield rate. There were no option grants during the three and six months ended June 30, 2022 and 2021.

2021 Equity Plan

On August 19, 2021 the Company’s stockholders approved the 2021 Equity Plan, which was ratified by the Company’s board of directors on August 20, 2021. The 2021 Equity Plan provides for the grant of incentive stock options (“ISOs”), within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) to employees, including employees of any parent or subsidiary, and for the grant of no statutory stock options (“NSOs”), stock appreciation rights, restricted stock awards, RSUs, performance awards and other forms of awards to employees, directors and consultants, including employees and consultants of Xos’ affiliates.

As of June 30, 2022, there were 20,431,516 shares of Common Stock available for issuance under the 2021 Equity Plan.

RSU activity during the six months ended June 30, 2022 consisted of the following:
29

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
RSUsWeighted Average Grant Date Fair Value Weighted Average Fair Value
December 31, 2021 — RSU outstanding1,844,820 $3.60 $5,811,183 
Granted1,618,442 2.67 3,960,984 
Vested133,349 3.21 347,382 
Forfeited117,532 3.38 279,746 
March 31, 2022 — RSU outstanding3,212,381 $3.27 $9,605,019 
Granted724,299 2.51 1,818,247 
Vested88,730 3.48 228,923 
Forfeited208,375 3.14 530,965 
June 30, 2022 — RSU outstanding3,639,575 $3.12 $6,696,818 

The Company’s recognized stock-based compensation expense (including earn-out RSUs) in the condensed consolidated statements of operations and comprehensive loss during the three and six months ended June 30, 2022, and 2021 consisted of the following (in thousands):

Three Months Ended
June 30,
Six Months Ended
June 30,
2022
2021
2022
2021
Cost of goods sold
$198 $— $227 $— 
Research and development
93 — 354 — 
Sales and marketing
36 — 94 — 
General and administrative
751 1,794 
Total
$1,078 $1 $2,469 $3 

The unamortized stock-based compensation expense was $9.3 million as of June 30, 2022, and weighted average remaining amortization period as of June 30, 2022 was 3.12 years.

The aggregate fair value of RSUs that vested was $0.2 and $0.6 during the three and six months ended June 30, 2022, respectively.
Note 12 — Property and Equipment, net
Property and equipment, net consisted of the following at June 30, 2022 and December 31, 2021 (in thousands):
June 30, 2022December 31, 2021
Equipment$8,985 $5,244 
Furniture & fixtures
168 141 
Company vehicles
629 153 
Leasehold improvements
626 626 
Computers, software and related equipment
1,762 1,289 
Construction in progress6,930 1,444 
Property and Equipment, gross19,100 8,897 
Accumulated depreciation
(2,346)(1,471)
Property and Equipment, net$16,754 $7,426 

30

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
Depreciation expense during each of the three months ended June 30, 2022 and 2021 totaled $0.3 million, respectively. Depreciation expense during the six months ended June 30, 2022 and 2021 totaled $0.6 million and $0.4 million, respectively.
Note 13 — Commitments and Contingencies
Operating and Finance Leases
Refer to Note 6, Leases for future minimum lease commitments.
Legal Contingencies

Legal claims may arise from time to time in the normal course of business, the results of which may have a material effect on the Company’s accompanying consolidated financial statements. As of June 30, 2022 and December 31, 2021, the Company was not a party to any legal proceedings, that individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition or cash flows.
Note 14 — Related Party Transactions

The Company leases property in North Hollywood, California from Valley Industrial Properties which is owned by the Sunseeker Trust. The Sunseeker Trust is an irrevocable trust with the beneficiary being the mother of the CEO, Dakota Semler. Rent expense during each of the three months ended June 30, 2022 and 2021 totaled $35,000, respectively. Rent expense during each of the six months ended June 30, 2022 and 2021 totaled $70,000, respectively.

The Company has contract manufacturing agreements with Metalsa S.A. de C.V. and Fitzgerald Manufacturing Partners. We utilize Metalsa, a Mexico-based automotive supplier, to provide parts and manufacturing services. Metalsa had an investment in the Company in the form of a convertible note payable which was converted as part of the Series A Financing (see Note 9 above). Similarly, we utilize Fitzgerald Manufacturing Partners to provide parts and manufacturing services; the owner is a stockholder of the Company. We also have lease agreements with Fitzgerald Manufacturing Partners, for which we recorded rent expense of $189,000 and $361,000 during the three and six months ended June 30, 2022. No rent expense was recorded for these lease agreements during the three and six months ended June 30, 2021.

The Company had a partial recourse promissory note in the amount of $364,000 due from the COO, Giordano Sordoni. The note was utilized to exercise options provided to him by the Company. Interest is compounded annually at a rate of 2.38%. The note was issued in the amount of $364,000 on June 24, 2019. The full balance and interest of $15,000 was forgiven by the Company during the first quarter of 2021.

The Company converted 34 notes payable with outstanding carrying value of $18.9 million from related parties into 19,664,000 preferred shares of Legacy Xos Preferred Stock as described above in Note 9 - Equity. These related parties consisted of the CEO, COO, board members, board advisors, and various trusts whose beneficiaries are relatives of the CEO.

The Company utilized employees from an entity owned by the CEO in conducting repairs and maintenance at their headquarters. Amounts charged for these services were at the employees’ current salary rates including benefits and totaled $0 and $37,000 during the three months ended June 30, 2022 and 2021, respectively. Amounts charged totaled $0 and $74,000 during the six months ended June 30, 2022 and 2021, respectively.
Note 15 — Income Taxes

The effective tax rate during the three months ended June 30, 2022 and 2021 was (0.01)% and 0%, respectively. The effective tax rate during the six months ended June 30, 2022 and 2021 was (0.01)% and 0%, respectively. State taxes coupled with losses not benefited resulted in an effective tax rate, below the statutory tax rate of 21% for the six months ended June 30, 2022.
The Company recognizes tax benefits related to positions taken, or expected to be taken, on its tax returns, only if the positions are "more-likely-than-not" sustainable. Once this threshold has been met, the Company's measurement of its expected tax benefits is recognized in its financial statements. The Company does not have any uncertain tax positions that meet this threshold as of June 30, 2022 and December 31, 2021.

31

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
The Company files income tax returns with the Internal Revenue Service and the taxing authorities of various states. The tax periods 2018 through 2021 remain open in most jurisdictions. The Company is not currently under examination by income tax authorities in any federal or state jurisdiction.

At June 30, 2022, the Company's deferred income taxes were in a net asset position mainly due to deferred tax assets generated by net operating losses. The Company assesses the likelihood that its deferred tax assets will be realized. A full review of all positive and negative evidence needs to be considered, including the Company's current and past performance, the market environments in which the Company operates, the utilization of past tax credits, length of carryback and carryforward periods, as well as tax planning strategies that might be implemented. Management believes that, based on a number of factors, it is more likely than not, that all or some portion of the deferred tax assets may not be realized; and accordingly, for the periods ended June 30, 2022 and 2021, the Company has provided a valuation allowance against net US deferred tax assets.

Note 16 — Net Loss per Share

Basic and diluted net loss per share during the three and six months ended June 30, 2022 and 2021 consisted of the following (in thousands, except per share amounts):

Three Months Ended
June 30,
Six Months Ended
June 30,
2022
2021
2022
2021
Numerator:
Net income (loss)
$(9,467)$(9,158)$(30,653)$(23,008)
Denominator:
Basic
Weighted average common shares outstanding — basic
164,041 72,389 163,606 72,372 
Basic net loss per share
$(0.06)$(0.13)$(0.19)$(0.32)
Diluted
Weighted average common shares outstanding from above164,041 72,389 163,606 72,372 
Add: dilutive effect of options— — — — 
Add: dilutive effect of RSUs— — — — 
Weighted average common shares outstanding
164,041 72,389 163,606 72,372 
Diluted net loss per share$(0.06)$(0.13)$(0.19)$(0.32)

Potential weighted average shares that were excluded from the computation of diluted net income (loss) per share because their effect was anti-dilutive as of June 30, 2022 and 2021 consisted of the following (in thousands):

Three Months Ended
June 30,
Six Months Ended
June 30,
2022
2021
2022
2021
Contingent earn-out shares
16,422 — 16,422 — 
Common stock public and private warrants
18,833 — 18,833 — 
Restricted stock units
708 — 717 — 
Stock options
1,783 2,339 1,798 2,390 

Note 17 — Fair Value Measurements

ASC 820, Fair Value Measurements and Disclosures, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such,
32

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability.

U.S. GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

Level 1: Quoted prices in active markets for identical assets and liabilities.

Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

Level 3: Significant inputs to the valuation model are unobservable and significant to the overall fair value measurement of the assets or liabilities. Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments in marketable debt securities, available-for-sale, accounts payable, other current liabilities, public and private placement warrants, and the contingent earn-out shares liability. The fair value of cash and accounts receivable approximates carrying value due to their short-term maturity.

As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Derivative financial instruments which are required to be measured at fair value on a recurring basis are measured at fair value using Level 3 inputs for all periods presented. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities carried at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 consisted of the following (in thousands):

33

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
June 30, 2022
Fair ValueLevel 1Level 2Level 3
Financial Assets
Cash and Cash Equivalents(1):
Money market funds$2,207 $2,207 $— $— 
$2,207 $2,207 $ $ 
Short-Term Investments:
U.S. treasuries$5,534 $5,534 $— $— 
Corporate debt security42,250 — 42,250 — 
Asset-backed security and other5,791 — 5,791 — 
Non-U.S. government and supranational bonds9,072 — 9,072 — 
Certificate of Deposit2,004 — 2,004 — 
$64,651 $5,534 $59,117 $ 
Long-Term Investments:
Corporate debt security$11,231 $— $11,231 $— 
Asset-backed security and other1,987 — 1,987 — 
$13,218 $ $13,218 $ 
Total Financial Assets$80,076 $7,741 $72,335 $ 
Financial Liabilities:
Private Placement Warrants$49 $— $49 $— 
Public Warrants4,178 4,178 — — 
Contingent Earn-out Shares liability11,894 — — 11,894 
Total Financial Liabilities$16,121 $4,178 $49 $11,894 

____________
(1) Included in total cash and cash equivalents in the condensed consolidated balance sheets.
34

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
December 31, 2021
Fair ValueLevel 1Level 2Level 3
Financial Assets
Cash and Cash Equivalents(1):
Money market funds$5,868 $5,868 $— $— 
Non-U.S. government and supranational bonds647 — 647 — 
Corporate debt security1,805 — 1,805 — 
$8,320 $5,868 $2,452 $ 
Short-Term Investments:
U.S. treasuries$3,408 $3,408 $— $— 
Corporate debt security71,349 — 71,349 — 
Asset-backed security and other2,551 — 2,551 — 
Non-U.S. government and supranational bonds16,387 — 16,387 — 
Certificate of Deposit1,001 — 1,001 — 
$94,696 $3,408 $91,288 $ 
Long-Term Investments:
U.S. treasuries$2,196 $2,196 $— $— 
Corporate debt security42,457 — 42,457 — 
Asset-backed security and other5,410 — 5,410 — 
Non-U.S. government and supranational bonds3,753 — 3,753 — 
Certificate of Deposit1,000 — 1,000 — 
$54,816 $2,196 $52,620 $ 
Total Financial Assets$157,832 $11,472 $146,360 $ 
Financial Liabilities:
Private Placement Warrants$140 $— $140 $— 
Public Warrants7,356 7,356 — — 
Contingent Earn-out Shares liability29,240 — — 29,240 
Total Financial Liabilities$36,736 $7,356 $140 $29,240 

____________
(1) Included in total cash and cash equivalents in the condensed consolidated balance sheets.

The changes in the fair value of Level 3 financial liabilities during the three six months ended June 30, 2022 consisted of the following (in thousands):
Three months ended June 30, 2022
Six months ended June 30, 2022
Fair value, beginning of period$26,938 $29,240 
Recognition of earn-out RSUs(174)148 
Change in fair value during the period(14,870)(17,494)
Fair value, end of period$11,894 $11,894 

35

Xos, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Unaudited
Significant unobservable inputs related to Level 3 earn-out shares liability consisted of the following as of June 30, 2022:

June 30, 2022
Stock price
$1.84
Stock price volatility
80.0%
Expected term
4.14 years
Risk-free interest rate
3.0%

Note 18 — Subsequent Events
The Company evaluated all events or transactions that occurred through August 11, 2022, the date the condensed consolidated financial statements were issued.
Convertible Debentures

On August 9, 2022, the Company entered into a securities purchase agreement with Yorkville for the issuance of convertible debentures in the principal amount of up to $35.0 million (the “Convertible Debentures”). $20.0 million in principal amount of Convertible Debentures was issued on August 11, 2022, and an additional $15.0 million in principal amount will be issued to Yorkville upon the effectiveness of the registration statement registering the resale of Common Stock resulting from the conversion of the Convertible Debentures. The maturity date of the Convertible Debentures shall be November 11, 2023, which may be extended by an additional three months in certain instances. The Convertible Debentures bear interest at an annual rate of 6.0%, payable at maturity, which will increase to an annual rate of (i) 10.0% upon the occurrence and during the continuance of an event of default, and (ii) 7.5% for so long as “Registration Event” (as defined in the Convertible Debenture) remains in effect in accordance with the registration rights agreement. The Convertible Debentures provide a conversion right, in which Yorkville may, at any time after the issuance date, convert any portion of the principal amount of the Convertible Debenture, together with any accrued but unpaid interest, into shares of Common Stock at the lower of (i) $2.4733 per share or (ii) 97% of the lowest daily volume weighted average price of the Common Stock during the three trading days immediately preceding the date of conversion (but not lower than a floor price of $0.50 per share, subject to adjustment in accordance with the terms of the Convertible Debentures).

Convertible Notes

On August 9, 2022, the Company entered into an agreement with Aljomaih Automotive Co. (“Aljomaih”) for the issuance of convertible note with a principal amount of $20.0 million and a maturity date of August 11, 2025 (the “Note”). The Note includes an option to issue and sell additional convertible notes in a principal amount of up to an additional $20.0 million, upon the mutual consent of both parties by November 30, 2022, on terms and conditions to be negotiated in good faith. The Note bears interest at a rate of 10.0% per annum, payable at maturity in validly issued, fully paid and non-assessable shares of Common Stock, calculated based on the 10-day volume weighted average price ending on the trading day immediately prior to the applicable payment date, unless earlier converted or paid. The conversion price for the Note will initially be equal to $2.3817 per share, subject to adjustment in some events pursuant to the terms of the Note.
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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
XOS’ MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information which Xos’ management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read together with the unaudited condensed consolidated financial statements and related notes that are included in this Report. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited interim condensed consolidated financial statements and the related notes included elsewhere in this Report and our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 30, 2022. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section entitled “Risk Factors”. Unless the context otherwise requires, references in this “Xos Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we”, “us”, “our”, and “the Company” are intended to mean the business and operations of Xos and its consolidated subsidiaries.
Overview

We are a leading technology company which provides fleet services, software solutions, and manufactures 100% battery-electric Class 5 to Class 8 commercial vehicles. We facilitate the transition of fleets from internal combustion engine vehicles to zero-emission vehicles with proprietary technology suited to the commercial use case. We also provide a range of services to facilitate the transition of fleets to electric vehicles, including charging infrastructure, vehicle maintenance, financing and service.

Our X-Platform (our proprietary, purpose-built vehicle chassis platform) and X-Pack (our proprietary battery system) provide modular features that allow us to accommodate a wide range of last-mile applications and enable us to offer clients at a lower total cost of ownership compared to traditional diesel fleets. The X-Platform and X-Pack are available for purchase as part of the Xos vehicle. The X-Platform and X-Pack were both engineered to be modular in nature to allow fleet operators to customize their vehicles to fit their commercial applications (e.g., upfitting with a specific vehicle body and/or tailoring battery range). In addition to a competitive vehicle purchase price, our technology can also drive savings throughout ownership through increased vehicle uptime, greater payload capacity and reduced service and maintenance expense. Ninety percent of vehicles in our targeted segments operate on routes under 200 miles per shift (referred to as “last-mile” routes). Vehicles that fulfill these predictable last-mile routes generally return to base hubs on a daily basis. Such vehicles are ideal candidates for electrification as operators are able to connect the vehicles to dedicated charging infrastructure at return-to-base hubs. Our modular and cost-effective vehicles have been on the road and in customers’ hands since 2018, further validating the durability of satisfaction with our vehicles. During the six months ended June 30, 2022, we sold 127 vehicles and 2 powertrains. During the six months ended June 30, 2021, we sold 3 vehicles and 6 powertrains.

We have taken a conservative approach to capital investment with our Flex Manufacturing Strategy, which leverages our strategic partners’ existing facilities and labor to assemble up to 5,000 vehicles annually per facility once fully ramped up. This strategy will enable us to scale our operations in a capital efficient manner and in lockstep with market demand. We have partnered with two third-party contract manufacturer partners to operate two Flex facilities. Our Flex facilities are currently tooled to produce up to approximately 2,000 vehicles per annum in total, assuming we are able to mitigate current supply chain constraints.

Our Fleet-as-a-Service product facilitates the transition from traditional internal combustion engine vehicles to battery electric vehicles and provides fleet operators with a comprehensive set of solutions and products (including, but not limited to, Energy Services, service and maintenance, vehicle telematics, OTA updates and financing) to transition to and to operate an electric fleet. This product offering will combine traditionally disaggregated services into a bundled service package, thus reducing the cost and friction associated with electrifying commercial fleets. Services to be offered in our Fleet-as-a-Service offerings include our proprietary technologies and in-house services and offerings from our industry partners. Our Fleet-as-a-Service offering includes (i) Energy Services (on-site vehicle charging infrastructure as well as our proprietary mobile charging unit Xos Hub
TM); (ii) service and maintenance (provided by our internal maintenance team and industry partners); (iii) replacement parts; (iv) financing via our external partners; (v) risk mitigation products (e.g., GAP insurance and warranties); and (vi) our telematics unit, the Xosphere Intelligence Platform. Fleet-as-a-Service is expected to increase the lifetime revenue of each vehicle sold by us. During the six months ended June 30, 2022, we have generated $16.2 million in revenue (or 97% of revenue) from vehicle sales and Fleet-as-a-Service and $0.6 million from ancillary revenue (or 3% of revenue). During the six months ended June 30, 2021, we generated $1.4 million (or 100% of revenue) from vehicle sales.

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We believe our growth in the coming years is supported by the strong secular tailwinds of an increased focus on the impact of climate change and the growth of e-commerce and last-mile delivery. Commercial trucks are the largest emitters of greenhouse gases per capita in the transportation industry. The U.S. federal, state and foreign governments, along with corporations such as FedEx, UPS and Amazon, have set ambitious goals to reduce greenhouse gas emissions. Simultaneously, e-commerce continues to grow rapidly and has been accelerated by changes in consumer purchasing behavior during the COVID-19 pandemic. We believe the increased regulation relating to commercial vehicles, the launch of sustainability initiatives from leading financial and corporate institutions and the rapid growth of last-mile logistics will fuel accelerated adoption of our products worldwide.

We expect both our capital and operating expenditures will increase significantly in connection with our ongoing activities, as we:

continue to invest in research and development and further develop and commercialize our core proprietary technologies, including our X-Platform chassis platform, X-Pack battery system and Fleet-as-a-Service platform;

increase our investment in marketing and advertising, sales and distribution infrastructure to accelerate the growth in sales of our products and services;

continue to invest in servicing our growing portfolio of vehicles on the road including account management, maintenance and service technicians and the Xosphere Intelligence Platform;

continue to build out our supply chain team as well as additional battery and vehicle Flex assembly lines to bolster manufacturing capacity and meet demand targets, and to adjust to macroeconomic changes, including supply chain shortages;

continue to build out finance operations to maintain and improve financial controls, financial planning and risk management;

invest in operations functions including IT, administration and human resources to maintain and improve our operational systems, processes and procedures;

obtain, maintain, expand, and protect our intellectual property portfolio including patents, trade secrets, trademarks and copyrights; and

further invest in infrastructure to operate in accordance with public company standards and guidelines.

Business Combination

On August 20, 2021, the transactions contemplated by the Agreement and Plan of Merger, as amended on May 14, 2021, by and among NextGen, Sky Merger Sub I, Inc., a Delaware corporation and a direct wholly owned subsidiary of NextGen (“Merger Sub”), and Xos, Inc., a Delaware corporation (now known as Xos Fleet, Inc., “Legacy Xos”), were consummated (the “Closing”), whereby Merger Sub merged with and into Legacy Xos, the separate corporate existence of Merger Sub ceased and Legacy Xos became the surviving corporation and a wholly owned subsidiary of NextGen (such transaction the “Merger” and, collectively with the transfer by way of continuation and deregistration of NextGen from the Cayman Islands and the continuation and domestication of NextGen as a corporation incorporated in the State of Delaware (the “Domestication”), the “Business Combination”). As a result of the Merger, NextGen completed the Domestication, Merger Sub merged with and into Xos Fleet, Inc. (which was formerly known as Xos, Inc.), the separate corporate existence of Merger Sub ceased and Xos Fleet, Inc. was to be the surviving corporation and a wholly owned subsidiary of NextGen, and NextGen changed its name to “Xos, Inc.” Xos Fleet, Inc. is the accounting predecessor and the combined entity will be the successor SEC registrant, and Xos’ financial statements for previous periods will be disclosed in the registrant’s future periodic reports filed with the SEC.
The Business Combination is accounted for as a reverse recapitalization. Under this method of accounting, NextGen has been treated as the acquired company for financial statement reporting purposes. The most significant change in the successor’s future reported financial position and results is an increase in cash by $216.7 million, net of transaction costs and redemptions. Total non-recurring transaction costs was approximately $55.4 million.

As a consequence of the completion of the Business Combination, we became the successor to an SEC-registered and Nasdaq-listed company with ticker “XOS”, which has required us and will continue to require us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred and expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees.
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Recent Developments

On August 9, 2022, we entered into a securities purchase agreement with YA II PN, Ltd. (“Yorkville”) for the issuance of convertible debentures in the principal amount of up to $35.0 million. Also on August 9, 2022, we entered into a note purchase agreement with Aljomaih Automotive Co. (“Aljomaih”) for the issuance of a convertible promissory note with a principal amount of $20.0 million. For more information related to these agreements, refer to Note 18 - Subsequent Events in the accompanying unaudited condensed consolidated financial statements.
Key Factors Affecting Operating Results
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed in this Report.
Successful Commercialization of our Products and Services

We expect to derive future revenue from sales of our vehicles, battery systems and Fleet-as-a-Service offering. As many of these products are in development, we will require substantial additional capital to continue developing our products and services and bring them to full commercialization as well as fund our operations for the foreseeable future. Until we can generate sufficient revenue from product sales, we expect to finance our operations through commercialization and production with proceeds from the Business Combination as well as additional subsequent financing transactions. The amount and timing of our future funding requirements, if any, will depend on many factors, including the pace and results of our commercialization efforts.

Customer Demand

We have sold a