Good afternoon and welcome to Xos' Third Quarter 2021 Earnings Conference Call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Henry Kwon, Head of Investor Relations for Xos. Thank you, you may begin.

Thank you, operator and thank you everyone for joining us today. Hosting the call today our Xos' Co-Founder and Chief Executive Officer Dakota Semler; Co-Founder and Chief Operating Officer, Giordano Sordoni; and Chief Financial Officer, Kingsley Afemikhe. Ahead of this call, Xos issued its third quarter 2021 earnings press release and presentation, which we will reference today. These can be found on the Investor Relations section of our website at investors.xostrucks.com. On this call, management will be making statements based on current expectations and assumptions which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of factors discussed in today's earnings news release during this conference call or in our latest reports and filings with the Securities and Exchange Commission. These documents can be found on our website at investors.xostrucks.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures and performance metrics. You should refer to the information contained in the company's third quarter 2021 earnings press release for definitional information and reconciliation of historical non-GAAP measures to the comparable GAAP financial measures. With that, let me turn it over to Dakota.

Thanks Henry and thank you everyone for joining us. In today's presentation, we will refer to the slides that were posted to the Investor Relations section of our website earlier this afternoon. Before we proceed with our earnings call, I would like to remind everyone that today is Veterans Day. I want to take a moment on behalf of everyone at Xos to honor and express gratitude to all veterans and those who serve our country. This is our first earnings call since the closing of the business combination with NextGen in August. I'd like to start by thanking our partners and employees for their contribution to Xos' ongoing success and to thank our shareholders for their continued support during this pivotal year. Listing as a public company was an important milestone and we are excited about the new opportunities it creates for us. The year 2021 has been filled with milestones for Xos, but it has also presented challenges. The well-known disruptions in the global supply chain and new logistical complexities caused by the pandemic have had a negative impact on our business. Many of our efforts this year have been directed towards ameliorating and better forecasting the downstream impact of these challenges. We are confident in our path forward, but we must also acknowledge that aforementioned delays will impact our deliveries for the next few months as we continue to ramp up production in automation and solidify alternative suppliers and solutions. Turning to the next slide, my Co-Founder Gio and I founded Xos to address the unique problems faced by fleets. As former fleet operators, we know firsthand the challenges of managing a fleet, while confronting rising maintenance costs, supply chain complexities, and rapidly changing emissions regulations. Xos was born out of the revelation that a customer-centric approach…

Thank you, Dakota. The third quarter saw expand production capacity at our two Flex manufacturing sites, commenced production of the Lyra Series battery system, complete key validation milestones such as durability testing, and expand our Xosphere Fleet-as-a-service offering. Before I dive into each of these, I'd like to recap Xos' Flex manufacturing strategy. Our Flex manufacturing model leverages the existing facilities and labor pools of our strategic manufacturing partners, while Xos manages other aspects of the manufacturing process, including supply chain logistics, quality control, battery assembly, and manufacturing engineering. We purposely designed our X-Platform so that the chassis could be built in a more nimble and flexible manufacturing setting and to avoid capital-intensive processes like stamping and robotic welding. Our approach provides an advantage in speed, cost savings, and strategic flexibility as we continue to scale production. We are happy to report that in the third quarter, we achieved the 2,000 unit combined annual production capacity for our two vehicle assembly facilities, Flex 1 and Flex 2. Flex 1 in Eastern Tennessee is where we assemble the X-Platform in partnership with Fitzgerald manufacturing partners. We're actively producing vehicles in this facility and also preparing for the addition of a fully automated battery manufacturing cell on the same site. We're also actively producing vehicles at Flex 2 in Monterrey, Mexico in partnership with Metalsa, a leading Tier 1 provider of vehicle frame rails and chassis systems to the North American market. We are proud to count both Metalsa and Fitzgerald as long-term strategic partners and investors in Xos. In addition to our chassis assembly facilities, Xos has ramped production of our proprietary battery systems at our Los Angeles headquarters. While we experienced delays and ramping manufacturing of our next generation Lyra battery series, I'm proud to report that our teams have…

Thanks Gio and good evening, everyone. Now, I will review our financials over the quarter with a focus on revenue and operating expenses. Then I will turn to our balance sheet, in particular cash use. Finally, I'll provide some guidance for the full fiscal year 2021. Our revenue over the quarter was $0.4 million, driven by a decrease in unit deliveries. For the quarter, we delivered three units compared to eight in the same period in the prior year. As Dakota mentioned, we've been developing and deploying our new battery design in our vehicles and this delay which we experienced, impacts of our delivery schedule over the quarter. The delay in battery automation equipment is symptomatic of the supply chain challenges that we, like all OEMs, are currently facing. We have taken steps such as increasing safety stock of critical components, swapping out suppliers by redesigning certain parts, and expediting logistics. You will see some of the effects of these steps in both gross margin and in working capital on the balance sheet. Ultimately, in a hardware technology companies such as ours, the critical goal is to optimize operations by increasing scale and utilization, both of which will take place in the next 12 to 18 months. Turning to expenses, third quarter GAAP operating expenses were minus $14.3 million compared to minus $3.1 million during the same period in the prior year. Adjusted EBITDA was minus $14.1 million for the third quarter compared to minus $3 million in the prior period. Our G&A represents that this stage in our development, our investments in future growth and headcount additions as we scale production. We see current levels of operating losses as reflecting our commitment to delivering industry-leading products and solutions to our customers. Over 60% of our headcount is in engineering…

Thanks Kingsley. Before we open it up for questions, I want to reiterate that we remain optimistic on our future based on market growth, our technology platform, and the exceptional people we have here at Xos. Now, we will open up the line for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes in the line of Daniel Ives with Wedbush. Please proceed with your question.

Yes, thanks. Hope everyone's well. So, could you maybe just talk about how conversations with change of prospective customers over the last call it, three, six months? I mean does it really feel like there's an acceleration, especially in shift, more to EV, especially on the fleet tag? Thanks.

Yes, thanks, Dan, for that question. There's absolutely been a shift, particularly, with some of the recent announcements that have been made by the Federal Administration, announcing funding for infrastructure and helping this entire industry along. We've seen that really come through in a variety of interests from some of our largest customers, like our FedEx ISPs as well as a number of other types of fleets, food and beverage fleets, parcel delivery fleets, LTL, and other trucking fleets, that interest has only continued to grow in the last few months.

And to that point, I mean given just chip issues, obviously, across the industry, how are you sort of handle that going into 2022 in terms of just demand/supply dynamic, right? I mean, it feels like demand -- underlying demand exceeding supply. How do you sort of navigate that just as a business?

It's an important question and supply chain disruptions have been top of mind through the entire year and they have had an impact on financials this quarter, in both deliveries and in margin. Part of the challenge was we were launching our new Lyra battery system that was set to start manufacturing. And we had delays coming from not just the components that went into that battery system, but also the manufacturing automation equipment that built that battery system. That pushed back some of the production starts in Q3, and ultimately, impacted us in being able to deliver the same number of vehicles for this year. But what we see those changes as really being transitory, and issues that we've already overcome, but that doesn't mean we don't expect additional issues and additional delays into 2022. So, as we look further out into the supply chain disruption for next year, we're really spending the next quarter or so understanding all of the risks that we faced and really trying to understand if we can meet our original projections of 2,000 units, and what might be disrupted throughout the supply chain.

Great. Thanks.

Thank you. Our next question comes from the line of Mike Shlisky with DA Davidson. Please proceed with your question.

Hey, guys, good afternoon. I'd like to maybe start on the Lyra system that you've put out here. Can you tell us I know it's different from your prior system, something that's very much improved, which was already great system? What can you tell us about how your system now compares against other EV companies and other battery makers and what they have to offer? And if it is a better system, do you feel like it's something you can maybe adolescence out or sell to other companies out there at this point?

Absolutely. Thanks for the question, Mike. So, really, we start from the requirements of the commercial vehicle industry and we began development of this Lyra battery system, we really understood exactly what those customer requirements were from a durability and longevity perspective. And that went into the engineering all the way from the cell level up to the complete pack system. We designed it to actually be modular, so that it could be used in various configurations on our own vehicles, such as our Stepvan, or strip chassis applications, as well as our chassis cab and tractor applications. But you made a really, really good point, which is that, this system is modular. So it can be used in our powertrain business for other customers that are building other off highway equipment, or on highway equipment. The core focus of what we've been doing is building an incredibly durable and reliable battery system. And so that really does carry over into other customer use cases.

Okay, great. And then can you maybe -- just talk about maybe the update on the Class 7, 8 platform, where are you now and getting that developed and getting that launched? And are there any, is there any early customer interested in that product at this point?

Yes, it's a great, great question. We are right now in the engineering validation phase on the heavier duty platform. So what's really important about that heavy duty platform is that we leveraged a lot of the learning and a lot of the engineering experience and expertise from our medium duty platform, and applied it to these heavier and larger vehicles. With that, we've taken input and customer feedback from some contracted customers already, as well as some very interested customers, and incorporated that into a product that we're going to be testing throughout 2022. And we'll plan to be releasing some test units to customers throughout the year in 2022. But ultimately, plan to go into production with that vehicle into 2023. I'd say that, the market for that vehicle is growing as at as fast of a rate as our medium duty platform is today. And we're seeing a lot broader interest in different fleet profiles, not just the food and beverage types of fleets, but also in drayage in medium-haul and middle mile haul, and a lot of other different tractor applications that customers are utilizing today.

And, Mike, this is Gio, I would just add to that by saying that, we're extremely proud of the team that we're building here at Xos. And a lot of the headcount growth that we've seen over the quarter, and in the last few months has been in the engineering world, and folks that have experienced it other EV companies, or even other traditional OEMs in bringing products like our Class 8 and 8 vehicles to market. That's another really exciting update for us as the headcount growth, especially in engineering and R&D.

Got it. And maybe one last one for me from the demand side, maybe comment on, if there were no supply chain issues, do you have the demand, not just for this quarter, but the 2,000 trucks next year, is that still very much a possibility? What if and when the supply chain issue that we're all seeing here, go away?

Absolutely. I mean, the supply chain disruptions in the world today are a reality. And they put downside risk on our ability to reach our original projection of 2,000 units next year. However, what we're seeing is the demand has not slowed down whatsoever. And you should still expect from us and our production team, strong sequential improvement, quarter-over-quarter throughout next year, as we continue to deliver more vehicles. And if we're able to rectify some of those supply chain issues, we'll try and get as close to those goals as we can.

So the overall governor here just to kind of -- just kind of confirm the overall governor to the production is simply the supply chain, you got the quarters are very good last night to firm orders the full 2,000 next year at this time.

That is correct.

All right. Thanks so much, guys. I'm going to pass it along.

Thank you.

[Operator Instructions] Our next question comes from the line of Steven Fox with Fox Advisors. Please proceed with your question.

Hi. Good afternoon. A couple questions from me if I could. First of all, I guess, I'm curious about the timing of transitioning to the new battery system, given all the supply chain issues. Was that sort of designed into the existing customer wins? Or was that re-specified into as, as the battery came out? And if so, given sort of what the customer applications are, why not just push that advancement out until you had a better line of sight on the equipment, et cetera? And then I had a couple follow-ups?

Absolutely, it's an important question. And a good one as well, Steve, thanks for asking. When it came to the battery system, we're always focused on reducing the cost of that battery system, so that we can create a more compelling TCO equation for our customers, but also improving the longevity and durability of our existing systems. So as we began engineering, we're focused on building something that was going to be better from a performance standpoint and from a cost standpoint. We have some customers that are still committed to buying our vehicles with the former battery system that we engineered several years ago, and has gone through validation and testing. But a number of our newer customers and larger volume orders are coming through with the opportunity to basically utilize this new battery system, given the performance improvements, the energy density improvements, and ultimately the cost improvements, which translates into the price of the vehicle.

That's helpful.

Hi, Steven, this is Gio. I would add that the two systems share some similar components and the same cell technology and similar battery management and cooling technology as well. So it's not as much of a leap from a risk perspective, but it was a way for us to bake in a lot of the improvements that we wanted to get into this next series and next battery system.

Okay. That makes sense to me. And then secondly, just understand where you are on production capacity. You said 2,000 units, does that mean that you're 2,000 units with on an equipment basis or equipment with the employees you need? Can you just sort of go into a little bit more detail given that you have some delays on receiving certain equipment?

Yeah. Mostly on the equipment and facilities perspective and that 2,000 unit number relates to past the assembly at our flex manufacturing plants just to be abundantly clear. And this is something that we spent some time talking about in the script. And we talked about before, of our flex manufacturing strategy where we have smaller, more nimble, more capital light plants with partners like Fitzgerald, manufacturing partners, and Metalsa in Mexico. So each of those plants have about 1,000 units of total production capacity for the chasse ease that we build there.

Okay. So maybe just to sort of last question, just to sort of dial that out a little bit, when we think about production constraints today. What is your ability to produce, specifically? And how does that change maybe over the course of the quarters as whatever line of sight you have? I know it's difficult.

Yeah. So from a capacity perspective, we have the ability to produce it produce 1,000 vehicles, and both of those locations. But the roadblocks that we're facing are more on the supply chain side. So it's not really as much of a capacity issue as it is supply chain.

Got it. So you have the equipment delays themselves out, does that back to the supply chain?

That's correct.

Great. Understood. Thank you so much.

Thank you. Our next question comes from the line of Dick Ryan with Colliers Securities. Please proceed with your question.

Hi, guys. It's Jacob Parsons on for Dick Ryan. My first question relates to the Lyra battery. It sounds like it provides some pretty good value to customers. And we'll have some general cost improvements for them but on the site for Xos. Is there any significant cost differential margin profile between like the Lyra 30 versus the Lyra 60 for you guys?

It's a great question, Jacob and something we've been focused on since starting this new program. For us internally, there is significant cost improvements. So as we look at the entire system architecture, not necessarily on the individual components that they share. But the complete battery system, we've seen significant cost reduction, both in the cost of the components, as well as a new automation processes that were introduced in building this battery system. So it has less labor content that goes into every pack that we build. And that just translates to our overall cost of goods and ultimately our margin profile for the vehicles that we're putting on the road with customers.

All right. Excellent. And just in one list one last question. I'm just kind of thinking about like cash burn rates and the closing of the stack. With the $260 million in capital, is the capital remind you is that going to last for the coming years given the current gold of the company and the given cash burn rates?

Look, hey, Its Kingsley here. Clearly, we didn't raise as much cash as we hope to in the stack process. But we did do is raise significant capital to fund R&D, as you can see what Lyra battery system, ramp production, the build out of the organization. Taking a step back, clearly, we have a very CapEx like approach. And you can see that, on the balance sheet as well. And we've always been financially prudent throughout the development of this company. And I mentioned in the prepared remarks, the two things that really drive cash use is working capital and people growth, both of which we control and toggle. And we feel very confident as we scale production, scale deliveries and investing working capital, we will get the capital required to take that next step in the company's development.

All right. Perfect. Thank you.

Thanks, Jacob.

Ladies and gentlemen, we have reached the end of the question-and-answer session. This does conclude today's conference. And you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.