Item 1. Business
ITEM
1. BUSINESS
Corporate Information
Overview
Hyliion is a Delaware
corporation headquartered in Cedar Park, Texas. On October 1, 2020 (the “Closing Date”), Tortoise Acquisition Corp.
(“TortoiseCorp”) entered into a business combination agreement (the “Business Combination”) with each of
the shareholders of Hyliion Inc. (“Legacy Hyliion”), and consummated the merger contemplated by the Business Combination,
with Legacy Hyliion surviving the merger as a wholly-owned subsidiary of TortoiseCorp. As a result of the Business Combination,
we became a NYSE listed company.
Our mission is to
be the leading provider of electrified powertrain solutions for the commercial vehicle industry. Our goal is to reduce the carbon
intensity and Greenhouse Gas (“GHG”) emissions of the transportation sector by providing electrified powertrain solutions
for Class 8 commercial vehicles at the lowest total cost ownership (“TCO”). Our solutions utilize our proprietary battery
systems, control software and data analytics, combined with fully integrated electric motors and power electronics, to produce
electrified powertrain systems that either augment, in the case of our Hybrid system, or fully replace, in the case of the Hypertruck
ERX system, a natural gas fueled engine powering the battery that improves their performance. By reducing both GHG emissions and
TCO, our environmentally conscious solutions support our customers’ pursuit of their sustainability and financial objectives.
We are currently developing
two electrified powertrain systems for long-haul Class 8 commercial vehicles: our Hybrid system and our Hypertruck ERX system.
Our Hybrid system has been installed in low volume on our initial customers’ commercial vehicles. Across the customer installations
and over the entire Hyliion fleet we have accumulated millions of real world road miles on Class 8 commercial vehicles. Our Hybrid
system can either be installed on a new vehicle during assembly and prior to entering fleet service or retrofit to an existing
in-service vehicle. Our Hypertruck ERX system is in the development stage with vehicles being built for testing and validation.
Our Hypertruck ERX system’s design and technology leverages the experience and operating data from our Hybrid system to replace
the traditional diesel powertrain installed in new vehicles. Our Hypertruck ERX system will offer commercial vehicle owners and
operators a net carbon negative electrified powertrain option for Class 8 commercial vehicles, when using certain Renewable Natural
Gas (“RNG”).
Our
initial expected deliveries of our Hypertruck ERX systems to customers are designed to have their batteries recharged with Compressed
Natural Gas (“CNG”). CNG fueled recharging is preferable due to both the current comparable cost of fuels and existing
availability of CNG refueling infrastructure. Class 8 commercial vehicles can currently be refueled with CNG through existing,
geographically diverse and third-party accessible natural gas refueling stations established across North America. Globally, RNG,
CNG and liquefied natural gas (“LNG”) are used widely for land-based transport and trucking and Hyliion believes there
are established, geographically diverse and third-party accessible refueling stations available in certain areas in which Hyliion
expects it may sell its electrified powertrain solutions in the future. We believe there is opportunity for adoption of our electrified
powertrain solutions across Europe. This existing and accessible refueling infrastructure will significantly reduce the buildout
time and cost required to utilize our Hypertruck ERX system as compared to other proposed potential electrified solutions. See
“Risk Factors — Our future growth is dependent upon the commercial trucking industry’s willingness to adopt
alternative fuel, hybrid and electric vehicles.”
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Our Hybrid and Hypertruck
ERX systems are designed to be installed on most major Class 8 commercial vehicles, which gives our customers the flexibility
to continue using their preferred vehicle brands and maintain their existing fleet maintenance and operations strategies. Our
early Hybrid system deployments include leaders in the transportation and logistics sector. We are focusing its initial
marketing efforts on large fleet operators as well as companies committed to reducing the overall environmental impact and fuel
costs of their owned and operated trucking fleets.
Market Opportunity
We estimate that
the global market opportunity for our products is $800 billion, based on ACT Research’s estimate of eight million Class
8 commercial vehicles currently in operation. In addition, ACT Research estimates that the active Class 8 commercial vehicle population
will grow by approximately 4.5% annually from 2020 to 2024.
Challenges with
Other Solutions
With the global focus
on reducing the environmental impact of commercial transportation, a number of companies have begun developing solutions to lower
GHG emissions in commercial vehicles, including plug-in commercial battery electric vehicles (“BEVs”) and commercial
fuel cell electric vehicles (“FCEVs”). However, neither of these solutions have been commercialized or delivered in
volume for the long-haul Class 8 commercial vehicle space at this time. We believe these other proposed solutions face unique
challenges for widespread adoption, which may include:
● limited
availability of such commercial vehicles or solutions;
● a
higher TCO relative to currently available diesel commercial vehicles;
● limited
availability and capacity of electric charging infrastructure and hydrogen fueling infrastructure;
● higher
lifecycle GHG emissions due to emissions from electricity generation to recharge the
batteries (from the electrical grid or hydrogen production) and the emissions associated
with the production of the battery cells;
● the
need or choice to completely redesign the commercial vehicle to implement the solution;
● reduced
available payload capacity (and resulting loss of revenue-producing transportation capacity)
due to the size and weight of required on-board batteries;
● limited
range on a single charge or fueling;
● longer
recharging or refueling times compared to refueling times for currently available diesel
and natural gas fueled commercial vehicles; and
● the
need to change customers’ existing fleet operations, including procurement, dispatch,
logistics, maintenance, repair, servicing and driver training.
Our Technology
and Solutions
Our electrified powertrain
solutions utilize our proprietary battery systems, control software and data analytics, combined with electric motors and power
electronics, to produce an electrified powertrain system technology platform that can be used to either augment, in the case of
our Hybrid system, or fully replace, in the case of our Hypertruck ERX system, conventional powertrains in Class 8 commercial
vehicles and improve their performance. Our solutions are designed to be compatible with most major Class 8 commercial vehicle
manufacturers and are fuel and generator agnostic, giving our customers flexibility to choose the vehicles and fuel source that
best fit their overall commercial vehicle operations strategy in their transition to electrified transportation.
Hybrid Electric Powertrain
Systems
Our Hybrid system
can be installed on most major Class 8 commercial vehicles to reduce fuel usage, decrease GHG emissions, improve performance and/or
reduce operating costs. Our Demonstrator Hybrid system is comprised of our proprietary battery system and an associated software
management solution, a control module running our software and data analytics, high and low voltage power distribution and a thermal
management system. These components are attached to the frame rails of a Class 8 commercial vehicle. The solution also includes
an axle with an electric motor, which replaces the third axle on the vehicle, and our CoPilot in-cab driver display. This system
is charged by regenerative braking and downhill deceleration and discharged to provide additional horsepower and torque when called
upon by our control software, thereby reducing fuel usage and related GHG emissions or applying additional power to improve vehicle
performance. Our Hybrid system’s battery power can be utilized as an auxiliary power unit (“APU”) to supply electricity
for in-cab devices and air conditioning to reduce or eliminate idling when the driver is “hoteling” in the truck.
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We are developing our next generation Hybrid system, which we
intend to introduce in 2021. The system is being designed to consolidate the separate control, battery system and glycol thermal
control system boxes from the Demonstrator Hybrid system into a single enclosure that can be attached to the frame rail of most
major Class 8 commercial vehicles, providing additional cost savings and simplifying installation, and incorporating a custom e-axle
solution with associated cooling box to reduce weight and improve system efficiencies. Our next generation Hybrid system will also
include enhanced on-board data analytics capabilities among other improvements. Based on internal and third-party testing and customer-reported
experiences, we believe the benefits of utilizing our Hybrid system compared to conventional diesel or CNG commercial vehicles
will reduce fuel usage, emissions, idling, and/or improved performance.
We
also believe that reduced operating costs will be the main decision factor for many fleets in adopting our Hybrid system. Our
Hybrid system enables fleets to transition from diesel to natural gas engines, which can currently be fueled at a cost significantly
lower than the fuel cost of a diesel engine. Additionally, our customers should save on overall vehicle maintenance with reduced
wear and tear on the vehicles’ engines and brakes.
Range Extender Powertrain
System
Our Hypertruck ERX
system, which is an electric range extender powertrain system, is being designed for installation on most major Class 8 commercial
vehicles to create a net carbon negative electrified Class 8 commercial vehicle when using RNG. Our Hypertruck ERX system builds
upon our Hybrid system and consists of a larger version of our proprietary battery system, an associated software management and
data analytics solution, a range extending electric generator powered by a customer’s choice of fuel, a primary electric
traction drive system and power electronics with integrated controls and our CoPilot in-cab driver display. The system works by
pairing a fully electric powertrain with a battery system that is recharged by an onboard generator that produces electricity.
This system fully replaces the traditional powertrain in Class 8 commercial vehicles, while giving our customers the flexibility
to choose between most major Class 8 commercial vehicle brands and fuel type for their long-haul applications.
Our
Hypertruck ERX system combines the performance of fully electric powertrains with the refueling efficiency of traditionally fueled
vehicles. In most cases, we estimate that it will be less
expensive to run our onboard generator to produce electricity than recharging a BEV from the grid. By using an onboard generation
of electricity, rather than using a large battery pack for a BEV, our Hypertruck ERX system will provide an extended range over
commercial BEVs and improve payload capacity compared to currently available diesel commercial vehicles.
We believe the benefits
of our Hypertruck ERX system will include:
●
Time to Market .
●
Lowest TCO .
●
Net carbon negative electric Class 8 commercial vehicle solution potential .
●
Utilizes existing infrastructure .
●
Industry leading payload capacity .
●
Range comparable to diesel .
●
Industry standard refueling times .
●
Familiar existing Class 8 commercial vehicle brands .
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Rollout Timeline
We are currently developing our initial Hypertruck ERX system
at our facility in Cedar Park, Texas. We intend to deliver demonstration vehicles incorporating our Hypertruck ERX system to our
customers in late 2021 and begin commercial delivery in 2022.
CNG
and RNG as a Fuel
Our Hypertruck ERX
system will leverage existing CNG fueling stations that provide a cross country refueling network. In the continental United States,
there are approximately 700 public CNG fueling stations already in operation for Class 8 commercial vehicles. These stations are
geographically dispersed across the United States enabling long-haul trucking without the need for incremental refueling infrastructure
buildout. Our Hypertruck ERX system is being designed to allow operation for multiple days before refueling. Furthermore, our Hypertruck
ERX system is being designed to be refueled in approximately ten minutes, which is on par with existing diesel solutions. Internationally,
we believe CNG infrastructure is even more prevalent due to government mandates requiring reduced carbon emissions from transportation.
Additionally, we believe that in certain international jurisdictions, the necessary heavy-duty infrastructure exists that would
support adoption of our Hypertruck ERX system.
The ability to utilize
the existing CNG fueling infrastructure eliminates the time and cost needed to build expensive fueling infrastructure before our
Hypertruck ERX system can be utilized, as compared to Class 8 commercial BEVs and FCEVs, which currently lack electric charging
and hydrogen fueling infrastructure.
RNG is a form of
natural gas that is much cleaner for the environment than most other fuel sources. RNG is generated by capturing methane from
landfills, livestock operations such as dairies, wastewater treatment and other sources or through anaerobic digestion and processing
of food and animal waste streams. Depending on the source, RNG can have a significantly negative carbon intensity score, enabling
our solutions to achieve a net carbon negative emissions profile. RNG is widely available today and new sources are in development.
Our customers interested in achieving a negative carbon intensity score are expected to be able to contract long-term delivery
of 100% RNG at various average carbon intensity scores from their fuel suppliers.
Generator and Fuel
Agnostic
Although our initial
Hypertruck ERX system is being used injunction with CNG it is designed to be generator and fuel agnostic. Our current designs would
allow our Hypertruck ERX system to use any available fuel generator to recharge the battery system without needing to change other
components of its electric powertrain system. In addition to natural gas, other potential generator options include hydrogen fuel
cells, microturbines, and diesel or gasoline generators. The effect of the system’s design is to allow our Hypertruck ERX
system customers to choose their preferred recharging fuel based on their unique priorities, including fuel cost and availability
and emissions objectives. By designing our solutions in this manner, we will be able to quickly adapt to changing commodity price
and availability fundamentals, customer preferences and regulatory signals and mandates without the need to redesign our solutions.
Battery Systems
In addition to designing
battery systems for our powertrain solutions, we intend to design, develop and sell advanced battery systems to customers for use
in their own applications. These applications are expected to include lower range and smaller class commercial vehicles, specialty
vehicles such as airport or transportation terminal vehicles, as well as standalone components, such as APUs and systems to power
vehicle accessories such as pumps, lifts and thermal control.
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Software and Data
Analytics
Our software and algorithms
seek to control and optimize the fuel economy and performance of our powertrain systems by controlling and optimizing the charging
and discharging of the battery systems and the performance of the electric motor and power electronics. Our software and control
algorithms can be remotely updated over the air to enable our customers to receive improvements and the latest features and functionalities.
We intend to develop
additional value-added services and software programs for its customers by further utilizing the data it harvests and the insights
into vehicle performance and utilization its solutions provide, which could include predictive maintenance and other logistics
and fleet management services.
Our CoPilot product
runs on our in-cab display and provides real-time vehicle performance, vehicle status metrics and driving feedback to the vehicle
operators. CoPilot also brings gamification to the driver experience by giving real-time feedback of driving behaviors to help
coach drivers of all experience levels to drive more efficiently.
Additional Future
Products
We intend to design,
develop and sell additional commercial transportation products in the future. For example, our Hybrid technology could also be
utilized on trailers for either trailer electrical loads, such as refrigeration, or to provide power assist or additional battery
recharging to the vehicle when driving.
Customers and Backlog
We have deployed demonstration
Hybrid system units to certain companies we expect to be customers in the future, including leaders in the transportation and logistics
sector as well as companies committed to reducing the overall environmental impact and fuel costs of their owned and operated trucking
fleets.
Our initial customer
and launch partner for its Hypertruck ERX system is Agility Transport, from which we have received a pre-launch order of up to
1,000 trucks equipped with our Hypertruck ERX system in one or more future purchase orders, subject to certain testing and performance
requirements and termination rights (including a right to terminate the Agility Pre-Launch Agreement prior to purchasing all or
any portion of Agility Transport’s pre-order). In October 2020, we entered into a sales agreement that includes a pre-order
of up to 250 Hypertruck ERX vehicles, allowing for early availability of our Hypertruck ERX to American Natural Gas (“ANG”)
and its fleet customers.
Strategy
Our mission is to
be the leading provider of electrified powertrain solutions for the commercial vehicle industry. Our value proposition to our customers
has five key elements: reduced GHG emissions, cost savings, performance, availability and no new infrastructure requirements. Key
elements of our strategy include:
Maintaining Technology
Leadership and First-Mover Advantage
Our Hybrid system
is currently being deployed into our customers’ fleets, and we intend to be one of the first to the market with an electric
powertrain solution for long-haul Class 8 commercial vehicles. Our Hypertruck ERX system is in advanced development, and we intend
to deliver demonstration vehicles incorporating our Hypertruck ERX system to our customers in late 2021 and begin commercial delivery
in 2022. We expect to capture a market share for low and zero emission commercial vehicles by being one of the first to the market
and by having a solution that can offer a net carbon negative electrified powertrain option to the industry. Our software and the
algorithms that drive our solutions have been utilized in millions of real-world road miles, which are used to drive continuous
improvements in the system management software.
Leveraging Existing
Infrastructure
We intend to leverage the substantial infrastructure of the
existing commercial transportation sector of diesel and CNG to accelerate adoption of its solutions. To start, utilizing CNG allows
for electrified Class 8 commercial vehicle solutions that do not require substantial new infrastructure, such as the construction
of electric charging or hydrogen fueling stations. By utilizing existing commercial transportation fueling infrastructure, we believe
our customers can achieve low GHG emissions, when utilizing CNG, or carbon negative status, when utilizing RNG, with our solutions.
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Focusing on Powertrains
Our electrified powertrain
solutions are designed to be installed on Class 8 commercial vehicles from most major commercial vehicle OEMs. By focusing
on the powertrain and its associated components and including compatibility into its design, our solutions are intended to give
its customers the flexibility to use their preferred vehicle brand. This will allow our customers to adopt our Hybrid or Hypertruck
ERX system while continuing to utilize their existing maintenance and service organizations. We believe this approach will increase
the adoption of our solutions by reducing our customers’ cost and risk of transitioning to electrified transportation.
Continuing to Build
and Leverage Strategic Relationships
We intend to continue
developing partnerships to accelerate the development and production of our solutions. We have entered into (a) agreements
with Dana, Sensata Technologies, Inc. and other companies for component development and potential future sourcing, (b) non-binding
letters of intent with FEV North America Inc. for design and system integration support and (c) non-binding letters of intent
with Lonestar Specialty Vehicles and Fontaine Modification Company for vehicle installation and (d) partnership agreement
with ANG that offers our customers discounted pricing for RNG at ANG fueling stations across the country. Our strategic, engineering,
production and technology partners augment our internal resources, and we intend to leverage their capabilities and infrastructure
to bring our solutions to market more quickly and to meet industry standards, without requiring us to invest substantial amounts
of capital in internal production operations. See “Risk Factors — Certain of our strategic, development and deployment
arrangements could be terminated or may not materialize into long-term contract partnership arrangements.” and “Risk
Factors — We are dependent on our suppliers, some of which are single or limited source suppliers, and the inability of these
suppliers to deliver necessary components of our vehicles at prices and volumes, performance and specifications acceptable to us
could have a material adverse effect on our business, prospects, financial condition and operating results.”
Production, Assembly
and Installation
We intend to primarily
outsource the production, assembly and installation of our electrified powertrain systems to our partners at volume, while maintaining
in-house research, development and prototyping capabilities, including low-volume assembly and installation.
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Sales and Marketing
We currently market
and sell our electrified powertrain solutions domestically through a direct sales organization and with our marketing partners
to Class 8 commercial vehicle fleet owners and operators, and we expect to begin marketing and selling our electrified powertrain
solutions internationally in the future.
Research and Development
Our research and
development activities primarily take place at our headquarters in Cedar Park, Texas, on our testing and demonstration vehicles
on roads and highways, and at our partners’ facilities.
Our research and
development is primarily focused on:
● electrified
powertrain development and system integration;
● control
software and algorithms for our powertrain systems;
● BMS
enhancement;
● next
generation packaging and cooling for our battery systems;
● interoperability
with third-party powertrain components, such as e-motors, inverters and axles;
● component
integration;
● accelerated
lifetime testing processes to improve reliability, maintainability and system-level robustness;
● data
analytics; and
● alternative
products for existing and in development components and technology.
The majority of our
current activities are primarily focused on the research and development of our electrified powertrain systems, third-party component
integration and the underlying proprietary battery and software technology platforms. We undertake significant testing and validation
of our products and components in order to ensure that they will meet the demands of our customers.
Intellectual Property
Intellectual property
is important to our business, and we seek protection for our strategic intellectual property. We rely upon a combination of patents,
copyrights, trade secrets, know-how and trademark laws, along with employee and third-party non-disclosure agreements and other
contractual restrictions to establish and protect our intellectual property rights.
As of December 31,
2020, we had 15 issued U.S. patents and 20 pending U.S. patent applications. We pursue the registration of our domain names, trademarks
and service marks in the United States and in some locations abroad. In an effort to protect our brand, as of December 31,
2020, we had three registered and four pending trademarks in the United States and 26 registered and 14 are pending internationally.
We regularly review
our development efforts to assess the existence and patentability of new intellectual property. To that end, we are prepared to
file additional patent applications as we consider appropriate under the circumstances relating to the new technologies that we
develop.
We cannot be sure
that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications
we may own or license in the future, nor can we be sure that any of our existing patents or any patents we may own or license
in the future will be useful in protecting our technology. Please see the section entitled “Risk Factors” for additional
information on the risks associated with our intellectual property strategy and portfolio.
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Facilities
Our headquarters
are located in an approximately 104,000 square foot facility that we lease in Cedar Park, Texas, just north of Austin, Texas,
where we design, develop, prototype and perform low volume assembly and installation of our electrified powertrain systems and
components. Our lease of this facility expires in January 2026 and we have the option to extend the lease for an additional
five-year term. We also lease a 2,500 square foot facility in Braddock, Pennsylvania that is used to support our operations.
Human Capital
As of December 31,
2020, we had 91 employees. We have not experienced any work stoppages and we consider our relationship with our employees to be
good. None of our employees are subject to a collective bargaining agreement or represented by a labor union. Our people
are integral to our business, and we are highly dependent on our ability to attract and retain key employees and hire qualified
management, and technical and vehicle engineering personnel. We seek to provide our employees with competitive compensation
and benefits, including grants of equity under our equity incentive plan. While we are currently still a small company in
terms of headcount, we have plans to grow, and expect that our practices and programs with respect to human capital management
will grow as we do.
Government Regulations
We operate in an
industry that is subject to extensive environmental regulation, which has become more stringent over time. The 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 its operations.
Environmental standards
applicable to us are established by the laws and regulations of the countries in which we operate, and our product are sold, 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.
EPA and CARB Emissions
Compliance and Certification
Under the U.S. Clean
Air Act, some of our electrified powertrain solutions may be required to obtain a Certificate of Conformity issued by the Environmental
Protection Agency (“EPA”) and a California Executive Order issued by the California Air Resources Board (“CARB”),
demonstrating that our powertrains and vehicles comply with requirements including as applicable, emission standards for both
criteria pollutants, such as nitrogen oxides (“NOx”) and particulate matter (“PM”), and GHGs, such as
CO2 and nitrous oxide (“N2O”). A Certificate of Conformity is required for vehicles sold in all states and an Executive
Order is required for vehicles sold in California and states that have adopted the California standards. CARB sets the California
standards for emissions control for certain regulated pollutants for new vehicles and engines sold in California and must obtain
a waiver of preemption from the EPA before implementing and enforcing such standards. States that have adopted the California
standards, as approved by the EPA, also require a CARB Executive Order for sales of vehicles in those states. There are currently
four states that have adopted the California standard for heavy-duty vehicles.
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Pursuant to its authority
under the Clean Air Act, the EPA adopted Phase 1 fuel efficiency and GHG standards for heavy-duty vehicles and engines effective
2014 through 2018. The EPA subsequently adopted more stringent fuel efficiency and GHG standards for heavy-duty vehicles and engines
in October 2015. Phase II CARB also has adopted GHG and fuel efficiency standards for heavy-duty vehicles and engines effective
2018 to 2027, and is considering an Advanced Clean Trucks rule that would require heavy-duty vehicle manufacturers to produce
and offer for sale in California a certain number of zero-emission vehicles. Manufacturers of vehicles and engines must comply
with the GHG standards as a condition of the EPA Certificate of Conformity and the CARB Executive Order.
Additionally, CARB is also providing more stringent criteria
on heavy-duty engines, now testing requirements an expanded emissions warranty for specific engines and powertrain components in
CARB’s Low NOX Omnibus rule. As currently proposed, CARB’s Low NOV Omnibus rule would begin in 2024 and be implemented
through 2031.
All vehicles and engines
manufactured for sale in the United States must be covered by an EPA Certificate of Conformity (and CARB Executive Order if
sold in California), including engines and vehicles using zero-emission or low-carbon technology. As is necessary, an EPA Certificate
of Conformity and/or CARB Executive Order, covering both criteria pollutants and GHG, must be obtained each model year for each
engine family and heavy-duty vehicle. Failure to obtain or comply with the terms of a Certificate of Conformity or Executive Order
is subject to civil penalty and administrative or judicial enforcement.
Receipt of an EPA
Certificate of Conformity and CARB Executive Order obligates the holder to ensure that the covered engine or vehicle complies
with applicable standards throughout the full useful life of the product, which ranges from ten years or 185,000 miles, whichever
comes first, for medium heavy-duty vehicles, to ten years or 435,000 miles, whichever comes first, for heavy heavy-duty vehicles.
Emissions control system warranty coverage must be provided for a period of five years or 50,000 to 100,000 miles, whichever comes
first and depending on the engine and vehicle size. During this time, manufacturers must repair emission-related defects at no
cost to the customer. Throughout the full useful life of the engine or vehicle, manufacturers are required to remedy in-use problems
that cause engines or vehicles to exceed emission standards for criteria pollutants or GHGs. Manufacturers may have to conduct
recalls, service campaigns or other field actions, or provide extended warranties to address any such in-use issues that may arise.
Both the EPA and CARB are considering extending the emissions warranty period, depending on the engine size.
Manufacturers of
heavy-duty engines and vehicles also must ensure that their products comply with On Board Diagnostics (“OBD”) requirements.
The OBD system is intended to identify and diagnose malfunctions within the engine, aftertreatment and emission control systems
and alert the driver to the underlying issue so the vehicle can be brought in for service. CARB issues approval of the OBD system
as part of its issuance of an Executive Order; the EPA typically deems CARB OBD approval to be compliance with the EPA’s
requirements. As with emissions compliance, manufacturers are required to ensure that the OBD system functions as designed and
is able to identify component malfunctions throughout the full useful life of the vehicle or engine.
Natural Gas and RNG
Credits
Generation and
Sale of Renewable Identification Numbers (“RIN”) Credits and low carbon fuel standards (LCFS) Credits. In
February 2010, the EPA finalized the Renewable Fuel Standard (“RFS”) (which was established by the Energy Policy
Act of 1992/2005), which creates RINs that can be generated by the production and use of RNG in the transportation sector and
sold to fuel providers that are not compliant under the RFS. In addition, CARB and comparable agencies in Oregon have adopted
the LCFS, which encourages low carbon “compliant” transportation fuels (including CNG) in the California and Oregon
marketplace by allowing producers of these fuels to generate LCFS Credits that can be sold to noncompliant regulated parties.
Sale of Natural
Gas Vehicle Fuel: Alternative Fuel Tax Credit (AFTC). Under separate pieces of U.S. federal legislation, natural gas
vehicle fuel sales made during the year ending December 31, 2020 are eligible for an AFTC. The AFTC credit is equal to $0.50 per
gasoline gallon equivalent of CNG sold as vehicle fuel. The AFTC may not be reinstated for vehicle fuel sales after December 31,
2020.
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GHG Credits —
U.S. EPA
The EPA’s Greenhouse
Gas Regulation requires all manufacturers of heavy-duty engines and vehicles to comply with fleet average GHG standards. Manufacturers
may comply with the standards by producing engines or vehicles, all of which comply with the standards, or by averaging, banking
and trading GHG credits within vehicle or engine categories. Manufacturers may also comply with GHG standards by purchasing credits
from manufacturers with a surplus of credits. The failure to comply with GHG standards can lead to civil penalties or the voiding
of a manufacturer’s EPA Certificate of Conformity. In connection with the delivery and placement into service of zero-emission
and low-emission vehicles, we may earn tradable GHG credits that under current laws and regulations can be sold to other manufacturers.
Under the EPA’s Greenhouse Gas Regulation, plug-in hybrid, all-electric and fuel cell vehicles earn a credit multiplier
of 3.5, 4.5, and 5.5, respectively, for use in the calculation of GHG emission credits.
Commercial engine
and vehicle manufacturers are required to meet the NOx emission standard for each type of engine or vehicle produced. Typical
diesel engine emission control technology limits the fuel economy and GHG improvements that can be made while maintaining compliance
with the NOx standard. As the fleet-average GHG standards continue to decrease over time, compliance with the NOx standard will
increase the difficulty for conventional diesel vehicles to meet the applicable GHG standard. Until technology catches up for
commercial vehicles, manufacturers of diesel trucks will likely need to purchase GHG credits to cover their emission deficit.
The EPA’s Greenhouse Gas Regulation provides the opportunity for the sale of excess credits to other manufacturers who apply
such credits to comply with these regulatory requirements. Furthermore, the regulation does not limit the number of GHG credits
that can be sold within the same commercial vehicle categories.
GHG Credits —
California Air Resources Board
California also has
a separate GHG emissions regulatory program which is very similar to the EPA requirements. Like the EPA’s Greenhouse Gas
Rule, the CARB rule allows for averaging, banking and trading of credits to comply with the fleet-average GHG standard and the
failure to comply with the California GHG standard may lead to the imposition of civil penalties. The delivery and placement into
service of our zero-emission and low-emission vehicles in California may earn us tradable credits that can be sold. Under CARB
GHG regulations, advanced technology vehicles also earn a credit multiplier of for use in the calculation of emission credits
in the same amounts as under the EPA’s Greenhouse Gas Rule.
Examples of other
potential incentive and grant programs that either we or our customers can apply for include:
●
Low
Carbon Fuel Standard (LCFS). The LCFS was initially developed in California and is quickly gaining traction in other jurisdictions
around the world. The goal is to reduce the well-to-wheel carbon intensity of fuels by providing both mandated reduction targets
as well as tradable and sellable credits.
●
Purchase
Incentives. Both California and New York have active programs that provide “cash on the hood” incentives
to customers that purchase newer, lower emissions vehicles, including zero-emission vehicles. Other states are considering
developing similar programs.
● Grant
Programs. Government entities at all levels from federal, including the U.S. Department
of Energy, state (for example, CARB) and local (for example, North Texas Council of Governments),
have grant programs designed to increase and accelerate the development and deployment
of zero-emission vehicles and infrastructure technologies.
● EPA
Smartway. The EPA Smartway program provides grants and funding for the retrofit
of heavy-duty vehicles with components and technologies that reduce emissions. Drivers
and fleet owners who repower vehicles with advanced technology powertrains or CNG engines
may be able to access funding to offset a portion of the cost.
European and Other Requirements for
Heavy-Duty Vehicles
Similar to requirements
in the US, Europe and other jurisdictions regulate pollutants, operational characteristics, and content of heavy-duty vehicles
and vehicle equipment. For example, European emission regulations of heavy-duty vehicles (currently under “Euro VI”
regulations) specify criteria pollutant emission limits from various vehicles, including heavy-duty vehicles, that are similar
to those of EPA and CARB. The European regulations also require similar engine and vehicle OBD systems to those of EPA and CARB.
However, as these are ‘similar’ emissions and diagnostic regulations, the EPA and CARB are not the same as European
emissions and diagnostic regulations. Unlike the generally synergistic relation and regulations between EPA and CARB, current European
emissions and diagnostic regulations require separate design, validation, testing and approval such that EPA and/or CARB approval
does not directly correlate to European approval of similar powertrain and vehicle equipment. Other requirements regulating vehicles
and vehicle equipment components similar to Hyliion systems may be applicable to or exempted by regulation. For example, European
Restriction of Hazardous Substance (“ROHS”) regulates materials in electrical equipment, but currently exempts transport
vehicles. As Hyliion considers these other markets, Hyliion systems will be configured to meet these requirements in other jurisdictions.
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Heavy-Duty Vehicle Safety Requirements
Manufacturers of vehicles
that operate on US highways are subject to, and must comply with, various regulations established by the National Highway Traffic
Safety Administration (“NHTSA”). These federal motor vehicle safety standards (“FMVSS”) cover a wide variety
of vehicle equipment and components. Manufacturers of vehicles, including heavy-duty vehicles, must confirm that their vehicles
and vehicle equipment comply with applicable standards or, as appropriate, are exempt from those standards. Currently, there are
several FMVSS that apply to vehicle manufacturers and may be applicable to Hyliion’s hybrid and ERX systems. As may be required,
Hyliion is evaluating FMVSS requirements for applicability to Hyliion products.
Manufacturers of vehicles that operate on
US highways must also comply with NHTSA safety reporting requirements concerning safety involving Hyliion systems concerning various
issues including, but not limited to, accidents, warranty claims, field actions and reports, and recalls. As situations may arise,
Hyliion will take appropriate actions to comply with these reporting requirements.
Competition
We have experienced,
and expect to continue to experience, intense competition from a number of companies, particularly as the commercial transportation
sector increasingly shifts towards low-emission, zero-emission or carbon neutral solutions. We face competition from many different
sources, including major commercial vehicle OEMs and companies that are developing alternative fuel and electric commercial vehicles.
Existing commercial vehicle OEMs such as Paccar, Navistar, Volvo, Mack Trucks and Daimler maintain the largest market shares in
the sector. Given we primarily develop and sell powertrains that are designed to be installed into an OEM’s commercial vehicle
to augment or replace conventionally fueled powertrains, as opposed to a complete commercial vehicle, we believe we primarily compete
with new low emissions vehicle entrants in the commercial vehicle market and to a lesser extent the in-house powertrain development
efforts of the incumbent commercial vehicle OEMs, as well as existing traditional powertrain component manufacturers. While there
are many competitors addressing electrification of commercial vehicles, many of them are focused on shorter range vehicles. We
are providing electrified solutions that are addressing both the long-haul and regional transportation sectors. We believe the
primary competitive factors in the long-haul Class 8 commercial vehicle market include, but are not limited to:
● total
cost of ownership;
● emissions
profile;
● availability
of charging or fueling network;
● ease
of integration into existing operations;
● product
performance and uptime;
● vehicle
quality, reliability and safety;
● vehicle
support, parts and on-road service network;
● technological
innovation specifically around battery, software and data analytics; and
● fleet
management.
We believe that we compete favorably with our competitors on
the basis of these factors; however, most of our current and potential competitors have greater financial, technical, manufacturing,
marketing and other resources than us. Our competitors may be able to deploy greater resources to the design, development, manufacturing,
distribution, promotion, sales, marketing and support of their alternative fuel and electric truck programs. Additionally, our
competitors also have greater name recognition, longer operating histories, larger sales forces, broader customer and industry
relationships and other tangible and intangible resources than us. These competitors also compete with us in recruiting and retaining
qualified research and development, sales, marketing and management personnel, as well as in acquiring technologies complementary
to, or necessary for, our products. Additional mergers and acquisitions may result in even more resources being concentrated in
our competitors. We cannot provide assurances that our electrified systems will be the first to market. Even if our electrified
systems are first to market, or among the first to market, we cannot be sure that customers will choose vehicles with our electrified
systems over those of our competitors, or over conventional diesel-powered vehicles.
Tesla and Nikola have
announced their plans to bring long-haul Class 8 commercial BEVs and FCEVs to the market over the coming years. Cummins, Daimler,
Dana, Navistar, PACCAR, Volvo, Lion Electric, Hyzon and other commercial vehicle manufacturers have announced their plans to bring
Class 8 commercial BEVs or FCEVs to the market. Furthermore, we will also face competition from manufacturers of internal combustion
engines powered by diesel fuel. We expect additional competitors to enter the market as well.
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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. We are not
currently a party to any material legal proceedings. 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.
Strategic Collaborations
Dana Limited (“Dana”)
Commercial Matters
Agreement
In June 2020,
Hyliion and Dana entered into an agreement as to certain commercial arrangements (the “Commercial Matters Agreement”).
The Commercial Matters Agreement amended and replaced certain prior commercial arrangements between Hyliion and Dana.
Among other things,
pursuant to the Commercial Matters Agreement, as long as Dana or its affiliates hold at least 1,000,000 shares of our common stock
or equity securities issued in exchange therefor or into which such shares are otherwise converted (in each case subject to customary
adjustments for stock splits or dividends or other similar changes), and in the case of the Dana Sourcing Arrangement (defined
below), for five years following the date of certain change in control transactions affecting us or our respective affiliates:
(a) we agreed to purchase from Dana and its affiliates, unless we are directed by a customer to use a different
vendor, any component, product or service required or utilized by us that Dana or any of its affiliates manufactures, sells or
provides or unless Dana is not capable or willing to supply on reasonably competitive terms such component, product or service;
provided that if a customer so directs us to use an alternative source, we agreed to use our good faith efforts to cause such customer
to use Dana’s or its affiliates’ component, product or service by providing Dana or its affiliates with the opportunity
to meet and speak with such customer (the “Dana Sourcing Arrangement”); (b) Dana agreed to provide Hyliion with
a sourcing arrangement that granted us certain preferred payment terms when purchasing components from Dana or its affiliates for
our own use in connection with its commercial vehicle business operations; (c) Dana and Hyliion agreed to execute joint marketing
and branding activities; (d) Dana and its affiliates were granted a right of first refusal with respect to any assembly or
manufacturing activities required by us; and (e) we agreed not to engage in certain business activities with certain competitors
of Dana, subject to certain conditions.
For a period of three
years following the closing of the Business Combination, Dana agreed to provide to us, at no charge (other than reimbursement
of certain expenses), support services related to our business and operations, substantially comparable to the scope and quantity
of services provided by Dana to us prior to entering into the Commercial Matters Agreement (the “Dana Support Services”)
upon the terms and conditions of a new services agreement to be mutually agreed to, based upon good faith negotiations. In consideration
for the Dana Support Services, Hyliion agreed to issue $10.0 million worth of Hyliion common stock to Dana immediately prior to
the consummation of the Business Combination.
Sensata Technologies,
Inc.
Sensata Collaboration
Agreement
In June 2019,
in connection with the notes payable issued to Sensata (“Sensata Notes”), we entered into a Collaboration and Development
Agreement with Sensata relating to the development and supply of power distribution units (“PDUs”) for use in certain
of our products (the “Sensata Collaboration Agreement”). Pursuant to the Sensata Collaboration Agreement, we and Sensata
agreed to collaborate in connection with Sensata’s development, at its cost and expense, of PDUs that meet our specifications.
The Sensata Collaboration Agreement does not require Sensata to complete development of PDUs that meet our specifications. However,
if Sensata is able to deliver PDUs to us that meet our qualifications, we have agreed to negotiate in good faith a definitive
supply agreement for Sensata to manufacture and supply PDUs to us for use in certain of our products. Such definitive supply agreement
shall require us to purchase Hyliion’s total requirements for such PDUs from Sensata for an initial term of three years,
so long as Sensata is willing and able to satisfy our pricing, timing and performance objectives. If we fail to enter into such
definitive supply agreement or, if entered into, fail to purchase our total requirements of PDUs exclusively from Sensata during
such three-year period, Sensata shall be entitled to certain remedies including reimbursement for all of the documented costs
incurred by Sensata in the development of the PDUs pursuant to the Sensata Collaboration Agreement. All intellectual property
developed by Sensata in connection with the Sensata Collaboration Agreement that does not incorporate any of our intellectual
property shall be solely owned by Sensata; however, Sensata has granted us a perpetual, worldwide, irrevocable, royalty-free,
non-exclusive, non-transferable and non-sublicensable license to such intellectual property. The term of the Sensata Collaboration
Agreement is 18 months and may be extended by the parties’ written mutual agreement. Either party may terminate the Sensata
Collaboration Agreement by providing the other party with 30 days’ written notice.
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Sensata Data Sharing
Agreement
In June 2019,
in connection with the Sensata Notes, we also entered into a Data Sharing and Research Agreement with Sensata, pursuant to which
we and Sensata agreed to engage in predictive maintenance and data capture collaborations in connection with trucks operated by
us (the “Sensata Data Sharing Agreement”). Pursuant to the Sensata Data Sharing Agreement, we agreed to deliver to
Sensata data from its vehicle fleet tests related to powertrain and other applications, and Sensata agreed to use commercially
reasonable efforts to work with Logistics Management Institute (formerly Clockwork Solutions) (“Clockwork”), a data
science and predictive maintenance consulting firm engaged by us, to analyze such data in order to develop and delineate analytics,
patterns and predictive algorithms for the purpose of enhancing Class 8 truck performance. The Sensata Data Sharing Agreement
further specified that all data provided by us to Sensata shall remain our property. To date, we and Sensata have collaborated
pursuant to the Sensata Data Sharing Agreement in connection with capturing data from trucks operated by us to permit a data study
conducted by Clockwork. We have not entered into a definitive agreement with Clockwork to undertake advanced analytic data processing
and to assist with data analysis.
FEV Letter of Intent
for Commercial Agreement
In May 2020,
we entered into a non-binding letter of intent with FEV North America Inc. (“FEV”) relating to the provision of engineering
services (the “FEV LOI”). The FEV LOI provides that we will negotiate a definitive agreement for FEV to provide services
to us on a non-exclusive basis relating to engineering and research and development in connection with our development of electrified
solutions for medium and heavy-duty trucks, among other matters. The FEV LOI contemplates that following the execution of a definitive
agreement, we will, from time to time, provide FEV with the details of projects that it is working on and request that FEV submit
a proposal to provide services to us in connection with such projects. If mutually agreed to by us and FEV, FEV would then provide
such services to us pursuant to the definitive agreement. The FEV LOI also contemplates collaboration on customer leads and opportunities,
as mutually agreed to by us and FEV from time to time.
We are now renegotiating
the definitive agreement, but the term of the FEV LOI will continue until the execution of a definitive agreement. Either party
may terminate the FEV LOI by delivering written notice to the other party. In August 2020, we and FEV entered into a statement
of work, pursuant to which FEV is providing limited engineering services to us. As contemplated by the FEV LOI, we and FEV intend
to enter into a definitive agreement that will govern all future work, but there is no guarantee that a binding definitive agreement
will be achieved.
Fontaine Letter of
Intent for Commercial Agreement
In May 2020,
we entered into a non-binding letter of intent with Fontaine Modification Company (“Fontaine”), a North America based
provider of comprehensive post-production truck modification services for OEMs, relating to the provision of post-production truck
modification services (the “Fontaine LOI”). The Fontaine LOI provides that we will negotiate a definitive agreement
for Fontaine to provide services to us on a non-exclusive basis relating to design, engineer, test and build truck modifications
and custom solutions for our products, among other matters. The Fontaine LOI contemplates that Fontaine will have the capacity
and capability to modify an agreed upon number of trucks per year (and per month) on its production lines pursuant to the definitive
agreement. The Fontaine LOI also contemplates that following the completion of modification services by Fontaine, Fontaine will
work cooperatively with us to coordinate delivery of trucks to our customers, including utilizing “ship-thru” agreements
with the OEMs of such trucks. The term of the Fontaine LOI will continue until the execution of a definitive agreement. Either
party may terminate the Fontaine LOI by delivering written notice to the other party. There is no guarantee that a binding definitive
agreement will be achieved.
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Lonestar Letter of
Intent for Commercial Agreement
Since 2019, Lonestar
Specialty Vehicles (“Lonestar”), an installer of powertrains in rolling chassis and glider trucks, has been providing
us with installation services in connection with certain of our products. In April 2020, we entered into a non-binding letter
of intent with Lonestar relating to the provision of truck production, installation and customization services (the “Lonestar
LOI”). The Lonestar LOI provides that we will negotiate a definitive agreement for Lonestar to provide services to us on
a non-exclusive basis relating to the production, installation and customization of trucks that contain or utilize our products,
among other matters. The Lonestar LOI contemplates that Lonestar will reserve capacity on its production line to build an agreed
upon number of trucks per year pursuant to specifications provided by us, and that Lonestar will be responsible for sourcing the
truck body and all truck components from applicable manufacturers, installing our products in such trucks and performing all customization
requested by us and our customers. The Lonestar LOI also contemplates that following the completion of each truck, Lonestar will
coordinate delivery of such truck directly to our customers, Lonestar will be designated as one of our nationally recognized authorized
servicers, Lonestar will offer extended warranty contracts directly to our customers and Lonestar will offer financing and leasing
terms directly to our customers to assist them in purchasing or leasing trucks. The term of the Lonestar LOI will continue until
the execution of a definitive agreement. Either party may terminate the Lonestar LOI by delivering written notice to the other
party. There is no guarantee that a binding definitive agreement will be achieved.
Collaboration with
American Natural Gas
Since 2018, we and
American Natural Gas (“ANG”) have collaborated, on a non-exclusive basis, in connection with customer inquiries, on
potential co-marketing opportunities and potential opportunities for ANG to provide our customers with RNG/CNG at fueling stations
built, owned or operated by ANG across the United States. In October 2020, we entered into a sales agreement and partnership
agreement with ANG. The sales agreement includes a pre-order of up to 250 Hypertruck ERX vehicles and the partnership agreement
offers our customers discounted pricing for RNG at ANG fueling stations across the country and, for qualifying fleet customers,
ANG has also agreed to build new fueling stations near our customer locations with no upfront capital costs to such customers.
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