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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