SPRUCE POWER HOLDING CORP 10-K

Item 1. Business. Corporate History and Background On December 21, 2020 (the “Closing Date”), Pivotal Investment Corporation II, a special purpose acquisition company incorporated on March 20, 2019 (“Pivotal”), consummated a business combination pursuant to that certain Agreement and Plan of Reorganization, dated as of September 17, 2020 (the “Merger Agreement”), by and among Pivotal, PIC II Merger Sub Corp., a Delaware corporation and wholly owned subsidiary of Pivotal (“Merger Sub”), and XL Hybrids, Inc., a Delaware corporation (“Legacy XL”). Pursuant to the terms of the Merger Agreement, a business combination between Pivotal and Legacy XL was affected through the merger of Merger Sub with and into Legacy XL, with Legacy XL surviving as the surviving company and as a wholly-owned subsidiary of Pivotal (the “Merger” and, collectively with the other transactions described in the Merger Agreement, the “Business Combination”). On the Closing Date, and in connection with the closing of the Business Combination (the “Closing”), Pivotal Investment Corporation II changed its name to XL Fleet Corp. Company Overview We are a provider of fleet electrification solutions for commercial vehicles in North America, offering our systems for vehicle electrification (our “Power Drive” business) and through our energy efficiency and infrastructure solutions business, including charging stations to enable customers to effectively plug in their electrified vehicles (our “XL Grid” business) . XL Fleet has sold over 4,450 electrified powertrain systems that have been driven over 181 million miles by over 245 fleet customers, as of December 31, 2021. In over 10 years of operations, we believe that we have built a large customer base deploying Class 2-5 vehicles across North America. Our fleet electrification solutions for commercial vehicles provide the market with cost-effective hybrid solutions with on-board telematics that are available for sale and deployment across a broad range of popular vehicle chassis from the world’s leading OEMs. We launched our XL Grid business in December 2020 and with the acquisition of World Energy Efficiency Services, LLC (“World Energy”) in May 2021, we are able to offer comprehensive solutions to commercial fleets to sustainably transform their operations. With the acquisition of World Energy, we became a provider of energy efficiency, renewable technology, electric vehicle charging station and other energy solutions to customers across the New England region. By leveraging our comprehensive solutions in combination with project management and utility incentive and financing programs, we assist companies throughout all aspects of the fleet vehicle electrification process. We provide full-service electric vehicle charger installations, including the assessment of a location’s electrical infrastructure, site layout of the charging area plan and equipment installation. We believe that the availability of robust electric vehicle charging and infrastructure solutions is critical to meeting the long-term fleet electrification goals of our customers which in turn will translate into growth opportunities for the Company. We are currently conducting a strategic review which includes assessing our product and service offerings, strategy, processes and growth opportunities. While this strategic review is ongoing, the Company will be narrowing its focus in 2022 to concentrate on those areas of our Power Drive business that we believe to be the most profitable, both in the short- and long-term. As part of this refocusing effort, in February of 2022, we eliminated 51 full-time positions across the organization. 1 Market Opportunity Within the last two years, there has been substantial disruption in the electrification of municipal and commercial fleets and renewed emphasis on decarbonization across many commercial sectors. Federal and regional mandates and incentive programs are increasing the adoption rate of fleet electrification, particularly in fully-electric offerings. These disruptive forces have led to the emergence and growth of more fully electric OEM vehicle offerings, reductions in the availability of fossil fuel powered OEM vehicle chassis and the continuation of the microchip shortage. In light of these and other factors, we are re-assessing the risks and market opportunities for our Power Drives business. Based upon that assessment, we have taken actions during the first quarter of 2022 to scale back our Power Drive business. We believe, however, that these same disruptions have the ability to create more demand for our energy efficiency, infrastructure and vehicle charging business. With commercial and municipal fleets increasingly migrating to electric vehicles, we believe that organizations will require enhancements to their energy infrastructures in charging stations and electrical distribution to recharge those vehicles. Furthermore, organizations will need to invest significantly in energy efficient solutions within their footprint to both free up kilowatt hour capacity for vehicle charging and to meet increasing broad commitments to reduce their carbon footprint. All of these electrification, distribution and efficiencies initiatives will create demand for service providers who can assist fleet operators with implementation of solutions and navigation through the complex and rapidly changing mandate and incentive landscape. Our Technology and Products Our XL Grid energy efficiency and infrastructure services business is primarily project driven where we identify efficiency measures and infrastructure enhancements that commercial and municipal customers can implement to improve efficiency and expand capacity for fleet electrification. Many of our projects are partially funded through incentives provided by regional electric utilities. Typical energy efficiency projects address improvements in heating, ventilation or air conditioning (“HVAC”) equipment, and the upgrade of lighting. Infrastructure projects consist principally of the design and build out of facilities and infrastructure to provide on-site vehicle charging. An essential component of our XL Grid offering is the technology assessment, regulatory and project management services we provide to assist the customer with maximizing the return on its investment. Our electrified Power Drives systems are comprised of an electric motor that is mounted onto the vehicle’s drive shaft, an inverter motor controller, and a lithium ion battery pack to store energy to be used for propulsion. No other significant modifications to the vehicle are required, and no changes are made to the internal combustion engine or transmission. We deploy our electrified Power Drives systems (XLH™ and XLP™) onto the chassis of vans, pickups, shuttle buses, delivery trucks, and many other commercial vehicles produced by leading OEMs such as Ford, RAM, GMC, Chevrolet and Isuzu. This technology can be installed as the vehicles are being manufactured by industry standard second stage manufacturers, known as upfitters, in less than one day, with no negative impact on the vehicles’ operational performance or factory warranties and with reduced maintenance cost. Our electrified powertrain systems capture and store energy during braking and subsequently deploy that energy into the driveline during acceleration, operating in parallel with the existing OEM drive train. Our systems enable vehicles to burn less fuel and emit less CO2. To date, vehicles deploying our electrification solutions have driven over 181 million miles. The Power Drive system allows the vehicle to continue leveraging its internal combustion engine, while an electric motor mounted on the driveshaft provides an electric assist during acceleration that reduces strain on the engine and lowers the amount of fuel consumed. During deceleration, that motor serves as a generator that captures energy through a process called regenerative braking, which stores that energy in the system’s battery pack. When the vehicle accelerates, that power is transferred into the driveline once again, and the process repeats. This allows our systems to operate in parallel with the OEM drivetrain, maintain factory vehicle warranties, and regenerate energy automatically to help power the vehicle. We have begun leveraging the technology and know-how of our Power Drive business into related electrification initiatives. We have been awarded a contract with the US Military to develop a retrofit kit for a tactical vehicle. This kit, if adopted by the US Military, has the potential to be fitted to over 60,000 vehicles in service today providing a significant fuel saving. We also have in the prototype stage a fully-electric Class 6 refuse vehicle developed in partnership with Curb Tender. 2 Industry and Competition Within our XL Grid business, we generally compete against local, regional and national competitors. Typically national competitors are much larger, operate across the United States and often internationally, and offer products and services that extend beyond those that we offer. These competitors often target customers that are national and international in scope, whereas we are principally targeting commercial and municipal organizations within our Northeast regional footprint. Competitors who operate nationally include Ameresco, AECO and Willdan, as well as separate divisions of many of the regional public utility companies. There has been substantial growth in the electric vehicle sector, which when combined with the reduced availability of OEM chassis for us to install Power Drives, represents significant competition. For example, nearly all traditional OEMs and many new market entrants have accelerated and expanded their own electric vehicle lineups. We expect that in our Power Drives business, our potential customers will see electric vehicle manufacturers as our competitors. These competitors include current manufacturers such as Lion Electric Company, Hyliion, Inc., GreenPower Motor Company, Lightning eMotors, XOS, Inc., Nikola Motor Company and Proterra, Inc. Customers In our XL Grid business, our customers have traditionally been small and medium sized businesses, as well as municipalities, such as schools and offices. The XL Grid service is scalable, so customers may include facilities in multiple locations throughout the U.S. that can benefit from energy efficiency improvements, especially in lighting and HVAC. Given the growth that we expect to see in charging stations and energy infrastructure projects, we anticipate that our customer pool may be larger than the small and medium sized businesses that we have traditionally served. We believe that there will be substantial new capital flowing into EV charging installation and customer-sited energy storage and energy generation infrastructure projects. Customers for our Power Drive systems are generally commercial and government operators of large service and delivery fleets. Our end-use customers most often purchase our systems from upfitters, OEM dealerships or other participants in our sales channels, who are our direct customers. Our end-use customer base is comprised of Fortune 500 corporate enterprises, public utilities, and municipalities of all sizes. In our 11-year existence, we have served over 245 end-use customers deploying over 4,450 systems. These systems have combined use in real world applications in excess of 181 million miles as of December 31, 2021. 3 Partnerships and Suppliers In our XL Grid business, we purchase lighting and infrastructure equipment from major national and international equipment suppliers. We rely on a skilled group of sub-contractors to install and implement our energy efficiency and infrastructure solutions. In our Power Drive business, we rely on an established upfitter partner network with locations throughout the U.S. and Canada to support the installation of our product via the industry standard ship-thru and upfit processes. We, or our upfitters, arrange for the customers’ purchase of the vehicle chassis in which our products are installed. This requires advance planning and coordination between us and the OEM to schedule chassis production and specifications of each vehicle to ensure conformance with the specifications of our products. We rely on third-party suppliers for the provision and development of many of the key components and materials used in our electrified powertrain solutions. While we obtain components from multiple, redundant suppliers whenever possible, some of the components used in our vehicles are purchased from a single source or a limited number of sources. We are reliant upon a single source, Parker Hannifin Corporation, for the supply of motor components operating under a three-year non-exclusive supply agreement with volume and pricing commitments. In the case of batteries, we rely on more than one supplier. Strategy and Value Proposition We are currently conducting a strategic review of the risks and market opportunities of our businesses. Based upon our initial indications, we are taking actions in the first quarter of 2022 to narrow our operational focus and concentrate efforts and resources on the most profitable areas of the business. As part of this process, we will be strategically reducing some aspects of our Power Drive product lines and limiting those offerings to those platforms and applications that we believe are most scalable and provide the most substantial return on investment. As part of this realignment, we have recently taken actions to align our team and resources with our short-term needs. In February 2022, the Company eliminated 51 full-time positions across the organization. The severance charges related to this reduction were approximately $1.3 million. We will continue to invest in and grow the energy efficiency and infrastructure offerings of our XL Grid business. Our goal is to leverage our core competencies in electrification and energy efficiency to deliver to customers cost effective solutions that help them to realize their goals in electrification and decarbonization of operations. Manufacturing and Production We produce our electrification systems and energy efficiency and infrastructure equipment from components manufactured by third party suppliers. We also rely on system installation support from certified upfitters as required to meet demand volume. Our production team capabilities include receiving, warehousing, production/kitting, delivery, install/upfit training and system/component level troubleshooting. Our support functions, including supply chain, quality, and engineering operate remotely with daily contact with the production team. Sales and Marketing We maintain a sales and marketing team designed to promote, sell and communicate to our core target customers throughout the U.S. and Canada. Research and Development We conduct vehicle electrification research and development in support of our Power Drive offerings at our 3 locations: our corporate headquarters in Boston, MA, the Southern California Technical Center in Foothill Ranch, CA and at our Michigan Technical Center in Wixom, MI. These facilities are equipped with prototyping and testing capabilities to support product development. As needed, we supplement testing with outside test facilities to support product development along with ensuring compliance to applicable standards and regulations such as Federal Motor Vehicle Safety Standards (“FMVSS”). To support development, these facilities have engineering and support staff. As part of our strategic reduction of our Power Drive business, we will be terminating research and development activities in Boston, MA in the first half of 2022. We have begun leveraging the technology and know-how of our Power Drive business into related electrification initiatives. We are developing a prototype for the US Military of a kit that can be retrofitted to tactical vehicles in the field. This development started in 2021 and will continue throughout 2022. Development is being conducted according to the required US Military standards. We also have in the prototype stage a fully-electric Class 6 refuse vehicle developed in partnership with Curb Tender. 4 Intellectual Property Our success depends in part upon our ability to protect our core technology and intellectual property, and we rely on a combination of patents, know-how, copyrights, trademarks, trade secrets and non-disclosure agreements to establish and protect our intellectual property. As of December 31, 2021, we had 27 issued patents, including one international patent from China. In addition, as of December 31, 2021, we had 14 patent applications that were published (or awaiting publication) and are under examination at the U.S. Patent Office. We also have four provisional patent application that have been filed with the U.S. Patent Office. In addition to the above, eleven trademarks have been assigned to us. Our intellectual property portfolio largely relates to mechanical systems, software, vehicle data analysis, vehicle control strategies, and data processing/management, and the utilization of data to optimize vehicle functions. Intellectual property is generated organically as part of our product development efforts. Concepts, ideas and solutions that are generated are reviewed to determine if they are patentable, and we hold regular executive level reviews to determine if disclosures are to be further processed for filing as a patent application. We cannot conclusively state that any pending applications, existing patents or future patents will be definitively useful in protecting or promoting our business and growth plans. Please see the section entitled “ Risk Factors ” for additional information on the risks associated with our intellectual property strategy and portfolio. Facilities We currently operate five separate leased facilities across the U.S., strategically positioned across the East coast, Midwest and West coast in order to best leverage proximity to customers, partners and employee talent pools. Our headquarters is located in Brighton, MA, a neighborhood of Boston. This flagship facility houses members of the executive leadership team, along with the engineering, sales & marketing, finance, human resources, service and supply chain functions. The facility includes a mixture of upper floor offices and lower floor automotive engineering equipment, including vehicle lifts and a dynamometer which enables the team to conduct extensive system and emissions testing on-site. Our lease was extended to August 31, 2022. In 2021 our production team moved into a new leased facility in Quincy, IL. It is strategically located near OEM and key upfitter partner headquarters facilities. This facility is predominantly responsible for receiving material inventory and completing and shipping finished kits to customers. Site capabilities include receiving, warehousing, production/kitting, delivery, install/upfit training and basic system/component level troubleshooting. Our lease expires on April 30, 2026. We also operate a facility in Foothill Ranch, CA which houses members of the engineering team that were brought into the business through the 2019 acquisition of Quantum Fuel’s electrification division. This team includes expertise in electrical, mechanical and systems engineering and is responsible for new product development, testing and component integration. Our lease expires on February 28, 2025, with the option to extend for an additional 60-month term. Effective February 2021 we opened a location in Wixom, MI, which will serve as a fleet electrification technology center to support the design, development, testing and validation of a wide range of commercial vehicle electrification solutions. The facility includes a component test lab including vibration capability, a vehicle chassis dynamometer, an electronics lab and battery testing equipment. Our lease expires in February 2024. We lease a facility in Worcester, MA that houses members of the World Energy team. The lease expires in September 2023. In addition, roughly 10 percent of our employees work remotely on a regular basis across a range of functions for whom frequent travel is required, including sales & marketing, service and quality. Throughout the COVID-19 pandemic, the majority of our employees have worked remotely unless required to be at a facility to perform their core functions. Employees As of December 31, 2021, we had 177 full time employees, including 34 employees at World Energy Efficiency Services. We have not experienced any work stoppages, do not include any labor unions and consider our relationship with employees to be very good. Government Regulations We operate in an industry that is subject to extensive regulation. Regulatory compliance and product safety are our key areas of focus. As part of product development cycles, regulatory compliance is assessed early on in the development program and plans are implemented to assure compliance when a product is released to customers. We also operate in an industry that is subject to extensive environmental regulation, which has become more stringent over time. The environmental laws and regulations to which we are subject govern, among others, water use, air emissions, use of recycled materials, energy sources, the storage, handling, treatment, transportation and disposal of hazardous materials, the protection of the environment, natural resources and endangered species and the remediation of environmental contamination. We may be required to obtain and comply with the terms and conditions of multiple environmental permits, many of which are difficult and costly to obtain and could be subject to legal challenges. Compliance with such laws and regulations at an international, regional, national, provincial and local level is an important aspect of our ability to continue our operations. 5 Environmental standards applicable to us are established by the laws and regulations of the countries in which we operate, standards adopted by regulatory agencies and the permits and licenses that we hold. Each of these sources is subject to periodic modifications and increasingly stringent requirements. Violations of these laws, regulations or permits and licenses may result in substantial civil and criminal fines, penalties, orders to cease the violating operations or to conduct or pay for corrective works. In some instances, violations may also result in the suspension or revocation of permits and licenses. Vehicle Safety and Testing Regulation The vehicles containing our systems are subject to, and required to comply with, numerous regulatory requirements established by the National Highway Traffic Safety Administration (“NHTSA”), including applicable Federal Motor Vehicle Safety Standards (“FMVSS”). The OEMs must self-certify that its vehicles meet or are exempt from all applicable FMVSSs before a vehicle can be imported into or sold in the U.S. There are numerous FMVSSs that apply to our systems that are included in our customers’ vehicles. Examples of these requirements include: ● Electric Vehicle Safety—limitations on electrolyte spillage, battery retention, and avoidance of electric shock following specified crash tests; ● Flammability of Interior Materials—burn resistance requirements for materials used in the occupant compartment; and ● Crash Tests for High-Voltage System Integrity—preventing electric shock from high voltage systems. We are also required to comply with other NHTSA requirements and federal laws administered by NHTSA, including early warning reporting requirements regarding warranty claims, field reports, death and injury reports, foreign recalls, and owner’s manual requirements. CARB Emissions Compliance and Certification Our hybrid and plug-in hybrid systems are fitted to vehicles that have been certified to meet the requirements of U.S. Environmental Protection Agency (the “EPA”) and California Air Resources Board (“CARB”). The OEMs are responsible for ensuring compliance with the appropriate regulations for the base vehicle for emissions, fuel economy and on-board diagnostics. CARB classifies the XL hybrid and plug-in system as an aftermarket fit system / device. As such, CARB requires that an Executive Order (“EO”) is obtained for the sale of the system intended for use on a vehicle to be operated in the state of California. In order to obtain the EO, we are required to submit an application to CARB for each vehicle group or family, which is required for each model year. The vehicle models included in a group or family are determined by the level of commonality of vehicle systems on both the base vehicle and the hybrid or plug-in hybrid systems that are fitted. CARB will then issue a test order that details the required testing and the specification of the vehicle to be used to demonstrate compliance. The essence of the testing is not to confirm the performance of the hybrid or plug-in hybrid system fitted to the vehicle, but to demonstrate that addition of the system does not negatively impact the emissions or diagnostic monitoring performance of the vehicle. In 2021 we have obtained 7 EOs for hybrid systems covering 2021 and 2022 Model Years, and in February 2022 received an EO for the sale of our battery electric Ford F-600 platform. We are in the process of conducting testing against CARB issued test orders for future products to be introduced into the California market. EOs issued by CARB to us are public record and are available to view on the CARB database for aftermarket, performance, and add-on parts. EOs also include requirements to collect data from vehicles in the field (in-use data). We have obtained our first EO for our first battery electric vehicle. This is based on the conversion of a 2021MY vehicle. An application has been filed for a 2022 MY vehicle and an EO is expected to be issued by March 31, 2022. Battery Safety and Testing Regulation Our electrified powertrain solutions are intended to meet the International Organization for Standardization’s standards for electrically propelled vehicles in vehicle operational safety specifications and connecting to an external power supply. Additionally, we may incorporate other battery system standards of the International Organization for Standardization in our electrified powertrain solutions. Our battery portfolio has leveraged three commercially available Lithium-ion batteries. Further, we have developed a hybrid battery and a plug-in hybrid pack with industry partners. The commercially available batteries were designed and tested by the suppliers, while the developed packs went under stringent testing to comply with Society of Automotive Engineers International J2929 Standard, “Safety Standard for Electric and Hybrid Vehicle Propulsion Battery Systems Utilizing Lithium Based Rechargeable Cells.” We have developed and instituted the recommended practice for conductive charging systems to the SAE International Surface Vehicle Standard J1722 SAE Electric Vehicle and Plug in Hybrid Electric Vehicle Conductive Charge Coupler. We have designed systems in accordance to SAE J2344 Guidelines for Electric Vehicle Safety mandating use of Hazardous Voltage Interlock Loop, charge interlocks, access cover interlocks, grounding practices and safety labeling for Electrical Energy Storage devices following the recommended practice of SAE J2936. 6 All XL developed batteries have been tested and meet the requirements for USDOT Federal Regulations Title 49 Part 173.185 General Requirements for Shipments and Packaging; Lithium Cells and Batteries issued by the Pipeline and Hazardous Materials Safety Administration. Testing was performed following the United Nations (“UN”) Recommendations on the Transport of Dangerous Goods; Manual of Tests and Criteria Section 38.3. Our battery packs and modules have met the compliance requirements of the UN Manual of Tests and Criteria demonstrating our ability to ship the battery packs with completion of the following tests: ● Altitude Simulation ● Thermal Test ● Vibration ● Shock ● External Short Circuit ● Overcharge ● Forced Discharge (Module) Legal Proceedings From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Regardless of outcome, such proceedings or claims can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors and there can be no assurances that favorable outcomes will be obtained. Beginning on March 8, 2021, two putative class action complaints were filed in the federal district court for the Southern District of New York against us and certain of our current officers and directors. The cases were consolidated as In re XL Fleet Corp. Securities Litigation , Case No 1:21-cv-02171, a lead plaintiff was appointed, and an amended consolidated complaint was filed on July 20, 2021. The amended complaint alleges that certain public statements made by the defendants between September 18, 2020 and March 31, 2021 violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. Our motion to dismiss the amended complaint was denied on February 17, 2022. The Company believes that the allegations asserted in the securities class action are without merit, and we intend to vigorously defend the action. There can be no assurance, however, that we will be successful. At this time, we are unable to estimate potential losses, if any, related to this action. On September 20, 2021, and October 19, 2021, two class actions were filed in the Delaware Court of Chancery against certain of the Company’s current officers and directors, and the Company’s sponsor, Pivotal Investment Holdings II LLC. The actions were consolidated as In re XL Fleet (Pivotal) Stockholder Litigation , C.A. No. 2121-0808, and an amended consolidated class action complaint was filed on January 31, 2022. The amended complaint alleges various breaches of fiduciary duty, and aiding and abetting breaches of fiduciary duty, for purported actions relating to the negotiation and approval of the December 21, 2020 merger and organization of Legacy XL to become XL Fleet Corp., and purportedly materially misleading statements made in connection with the merger. The Company believes that the allegations asserted in the action are without merit, and the Company intends to vigorously defend the lawsuit. The Company has received requests for information including a subpoena, from the Securities and Exchange Commission (“SEC”) related to, among other things, the Company’s business combination with XL Hybrids, Inc. and the related PIPE financing, the Company’s sales pipeline and revenue projections, purchase orders, suppliers, CARB approvals, fuel economy from our Power Drive products, customer complaints, and disclosures and other matters in connection with the foregoing. According to the subpoena, the investigation is a fact-finding inquiry and does not mean that the SEC has concluded that there is a violation of the law. We intend to provide the requested information and cooperate fully with the SEC investigation. Corporate Information Our principal executive offices are located at 145 Newton Street, Boston, Massachusetts 02135, and our telephone number is (617) 718-0329. Our website address is www.xlfleet.com and the information contained in, or that can be accessed through, our website is not part of this Annual Report on Form 10-K and should not be considered part of this Annual Report on Form 10-K. Information Available on the Internet Our internet address is www.xlfleet.com, to which we regularly post copies of our press releases as well as additional information about us. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available to you free of charge through the Investor Relations section of our website as soon as reasonably practicable after such materials have been electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We include our web site address in this Annual Report on Form 10-K only as an inactive textual reference. Information contained in our website does not constitute a part of this report or our other filings with the SEC. 7