XL Fleet Corp. (NYSE:XL) caught my eye as I sifted through companies that had been under pricing pressure since the third quarter earnings release and challenged Looking for Alpha quantitative assessments. I focus on third quarter results as a precursor to the release of audited financial statements, which XL must file with the SEC by 3/15/22 and because as a former CPA, it’s my favorite stock analysis metric. On 02/02/22, XL announced that it will release its fourth quarter and full year 2021 results on 03/01/22. XL also revealed that their Chief Financial Officer (who was appointed to her position on 4/20/21) resigned on 1/31/22 “to pursue other career opportunities”. This article mainly focuses on post-Q3 earnings reporting issues and my thesis is that XL has a “heavy weight” going forward, meaning “the past is prologue”, and more.
About XL Fleet Corp.
On 12/21/20, XL Fleet Corp. was formed as a result of a business combination between privately held XL Hybrids Inc. and Pivotal Investment Corporation II (PIC), a publicly traded Special Purpose Acquisition Company (SPAC). The company’s stated vision is to become a global leader in fleet electrification solutions, with a mission to accelerate the adoption of fleet electrification systems through cost-effective, customized and comprehensive solutions. As of 12/23/20, XL CEO and Founder Tod Hynes predicted 2021 revenue of $75.0 million in this CNBC interview. This statement is intended to be classified as an “On Promise Under Delivery” (OPUD) vintage as set forth in this article.
After the third quarter, the performance of equities is revealing
As the chart above shows, XL’s stock price has been completely gutted since the third quarter earnings release. XL closed at $5.51 on 11/14/21, the day before the third quarter earnings announcement and as of 2/2/22, XL is at $2.04, down 63.0% . It is particularly important to note that the average daily earnings report volume after the third quarter is much lower than the average daily earnings report volume before the third quarter, indicating that investors have been unwilling to buy XL stock even though the price has fallen sharply, which is an indicator of growing bearish sentiment. the Looking for Alpha the quantitative rating for XL of 1.64 is a “sell” and the profitability and momentum factors are rated “F”, which is evidence of declining support for XL stock. From a technical standpoint, it appears that below $1.80 the stock price presents a precipitous downside risk. Given that XL’s 52-week low is $1.79, if that’s breached, there can be near-existential ramifications for both the stock price and the company as a whole. Now let’s see how the current situation has evolved, shall we?
The SPAC market – yesterday and today
The SPAC market was fire when XL was formed during “the year of the SPAC” and Santa gave a big Christmas gift to XL shareholders as the company closed at $29.47 on 12/24/20. However, since late 2021 or thereabouts, SPAC-led deals have become Humpty Dumpty and the macro environment has shunned companies with minimal revenue and profit. In 2022, a company that merges with a SPAC is often considered negotium non grata. On a company specific (micro level) basis, XL is in the crosshairs of an evolving industry with direct competitors Lordstown Motors Corp. (RIDE) and Workhorse Group Inc. (WKHS) both of which recently declined as the electric vehicle sector imploded.
XL balance sheet, income statement and cash flow statement data
The key findings from my review of XL’s 3 main financial statements are as follows:
Condensed consolidated balance sheets
As noted above, as of 9/30/21, XL’s cash balance has increased by $37.1 million year-to-date. In 2021, 441,020 public warrants were exercised resulting in the issuance of 7,441,020 common shares of the Company, generating cash proceeds of approximately $85.6 million.
Condensed Consolidated Statements of Earnings
As noted above, for the 9 months ended 9/30/21, revenue was $7.6 million, down 20.1% year over year. However, for the 9 months ended 9/30/21, XL recorded an operating loss of $38.0 million, an increase of 185.1% year-over-year.
Condensed Consolidated Statements of Cash Flows
As indicated above, the $37.1 million increase in cash as of 09/30/21 comes from these 3 components:
31/12/21 pro forma:
- Revenue of $12.8 million, based on year-to-date revenue of $7.6 million and fourth quarter consensus revenue estimate of $5.2 million (a generous number in my opinion).
- Operating loss of $43.5 million, based on year-to-date operating loss of $38.0 million and operating loss of $5.5 million in the fourth quarter ( a conservative figure in my opinion).
The projections above mean that XL’s 2021 revenue would be $7.5M less, or 37% less year-over-year and $62.2M less revenue, or 82 .9% less than the $75.0M revenue projected by the President of XL on 12/23/20 as referenced earlier. And it’s worth mentioning that the above is largely a “best case scenario” as third quarter revenue from drive system sales totaled $0.6 million versus $6.3 million. dollars per year due to the negative impacts of ongoing supply chain issues, including microchip shortages that have led to a lack of new fleet chassis. Since these issues are likely to affect the fourth quarter as well, this tells me that the consensus fourth quarter revenue estimate of $5.2 million may not materialize and could be a big miss.
The acquisition of World Energy Efficiency Services, LLC
On 05/17/21, XL announced the “highly complementary” acquisition of 100% of the member interests of World Energy Efficiency Services, LLC (World Energy) to continue the strategy of its XL Grid business to provide a suite of charging and power solutions to support the adoption of fleet electrification. The third quarter was the 1st full quarter that World Energy’s operating results were included in XL’s financial statements and I confess to being baffled by what I consider to be conflicting data related to this transaction. I say this because XL stated in this filing with the SEC that World Energy was a “profitable business with $18.0 million in revenue generated in 2020”, which translates (proportionally) to $4.5 million dollars per quarter. However, third quarter revenue for the entire XL Grid segment (which includes World Energy) was only $2.6 million. In my view, this material difference calls into question XL’s ability to realize the expected benefits of this acquisition, and the timing seems uncertain. In addition, it should be noted that the preliminary purchase price allocation of World Energy allocated $8.4 million of the $12.5 million (or 67.2%) to goodwill. I expect the 10-K to resolve this issue and the final purchase price allocation for this acquisition will impact the condensed consolidated balance sheet and condensed consolidated statement of income of XL.
I view this acquisition as a tacit acknowledgment by XL that they needed to offer ancillary services because the Total Addressable Market (TAM) for fleet electrification services is simply not as robust as they considered it when the company was founded in 2009. My introduction to the company dates back to that 2012 MIT event where I was blown away by the technology presented by the founders of XL Hybrids, Inc. and their representation of a 3-5 year old. recovery period was breathtaking. Fast forward to now and this space is now filled with plenty of other viable options, and the growing presence of Fortune 50 members General Motors Company (GM) and Ford Motor Company (F) in the electric vehicle space will present some serious competition. for XL. This means that much of the company’s capital resources and efforts in the future will have to be focused on developing and marketing its products, thus depleting their cash reserves.
T4 and future developments
- On 1/11/21, XL issued a press release stating that Eric Tech, (what a big name for a tech company CEO) a veteran in the automotive and mobility industry, would become CEO of the business from 12/1/21.
- The sudden departure of XL’s CFO announced on 02/02/22 has fueled speculation about the company’s future, as shown by the recent sharp drop in the share price.
Based on the foregoing financial and operational analysis, XL Fleet Corp. faces strong headwinds and lacks a clear path to profitability given its flawed business model and value proposition. It is the responsibility of XL management to provide reliable guidance to stakeholders in the 3/1/22 earnings call, as their credibility is at stake. The modeling work I performed to develop the pro formas 2021 that I presented earlier strongly suggests that the company may need to shift its focus in order to be competitive in the current environment. In my opinion, the main thing is that XL faces a very difficult year 2022, because the past of the company is a prologue, and more.