Hyliion Holdings Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations References to “we,” “us,” “our” or the “Company” are to Hyliion Holdings Corp., together with its wholly owned subsidiary, except where the context requires otherwise. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report and our audited consolidated financial statements and related notes thereto in our 2020 Amended Annual Report. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Our forward-looking statements include, but are not limited to, statements regarding our or our management team’s expectations, hopes, beliefs, intentions, or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, our ability to disrupt the powertrain market, our focus in 2021 and beyond; the effects of our dynamic and proprietary solutions on its commercial truck customers; the ability to accelerate the commercialization of the Hypertruck ERX; our ability to meet 2021 and future product milestones; the impact of COVID-19 on long-term objectives; the ability of our solutions to reduce carbon intensity and greenhouse gas emissions and the other risks and uncertainties described under the heading “Risk Factors” in our other SEC filings including in our 2020 Amended Annual Report (See Item 1A. Risk Factors). Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. Overview Hyliion is a Delaware corporation headquartered in Cedar Park, Texas. On October 1, 2020, Tortoise Acquisition Corp. (“Tortoise”) entered into a 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 Tortoise, which was renamed “Hyliion Holdings Corp.” 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 the Greenhouse Gas ("GHG") emissions of the transportation sector by providing electrified powertrain solutions for Class 8 semi trucks at the lowest total cost of 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, traditional diesel or natural gas fueled powertrains and improve 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 volumes 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”). 14 Table of Contents 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” discussed in our 2020 Amended Annual Report. 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. Recent Developments None. Comparability of Financial Information Our historical operations and statements of assets and liabilities may not be comparable to our operations and statements of assets and liabilities as a result of the Business Combination and becoming a public company. Business Combination and Public Company Costs On October 1, 2020, we consummated the merger contemplated by the Business Combination, with Legacy Hyliion surviving the merger as a wholly-owned subsidiary of Tortoise, which was renamed Hyliion Holdings Corp. Immediately prior to the closing of the Business Combination, all shares of issued and outstanding redeemable convertible preferred stock converted into shares of Legacy Hyliion common stock and all outstanding convertible notes payable plus accrued interest converted into shares of Legacy Hyliion common stock at the discount rates set forth in the original agreements. Upon the consummation of the Business Combination, each share of Legacy Hyliion common stock issued and outstanding was cancelled and converted into the right to receive the per share merger consideration. Additionally, Legacy Hyliion issued 1,000,000 shares of Legacy Hyliion common stock with a grant date fair value of $10.00 per share to one of the convertible noteholders in connection with the Commercial Matters Agreement entered into in June 2020. Upon the closing of the Business Combination, Tortoise’s certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares of capital stock to 260,000,000 shares, of which 250,000,000 shares were designated common stock, $.0001 par value per share, and of which 10,000,0000 shares were designated preferred stock, $0.0001 par value per share. In connection with the Business Combination, a number of investors purchased from the Company an aggregate of 30,750,000 shares of common stock, for a purchase price of $10.00 per share and an aggregate purchase price of $307.5 million pursuant to separate subscription agreements entered into effective June 18, 2020 (the “PIPE”). The PIPE investment closed simultaneously with the consummation of the Business Combination. Additionally, a purchaser purchased 1,750,000 Tortoise units (each unit consisting of one share of common stock and one half of one warrant, consisting of 1,750,000 shares of common stock and warrants to purchase 875,000 shares of common stock for an aggregate purchase price of $17.5 million pursuant to a forward purchase agreement entered into effective February 6, 2019, as amended by the First Amendment to Amended and Restated Forward Purchase Agreement, dated June 18, 2020. On November 30, 2020, the Company issued a notice of redemption of all its outstanding Public Warrants and Forward Purchase Warrants which was completed in December 2020. Legacy Hyliion was deemed the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in ASC 805. The determination was primarily based on Legacy Hyliion’s stockholders prior to the Business Combination 15 Table of Contents having a majority of the voting interests in the combined company, Legacy Hyliion’s board of directors comprising a majority of the board of directors of the combined company, Legacy Hyliion’s existing shareholders’ control over decisions regarding the election and removal of directors and officers of the combined company’s board of directors, and Legacy Hyliion’s senior management comprising the senior management of the combined company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy Hyliion issuing stock for the net assets of Tortoise, accompanied by a recapitalization. The net assets of Tortoise are stated at historical cost, with no goodwill or intangible assets recorded. As a result of the Business Combination, we became a NYSE listed company, which will require us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred, and expect to continue to incur, additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit, compliance, and legal fees. Key Factors Affecting Operating Results We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including but not limited to those discussed below and in Item 1A “Risk Factors” in our 2020 Amended Annual Report.. Successful commercialization of our drivetrain solutions We expect to derive future revenue from our Hybrid systems and Hypertruck ERX system. Our Demonstrator Hybrid system is available today, offering customers the immediate ability to lower costs and improve environmental impact, and we intend to introduce our improved Hybrid system for customer deliveries in late 2021 and will continue to make improvements to this next iteration Hybrid system in 2022. Demos of our Hypertruck ERX system is projected to be delivered to customers for evaluation and testing in beginning late 2021 with commercial availability projected for 2022. To reach commercialization, we must purchase and integrate related property and equipment, as well as achieve several research and development milestones. We anticipate that a substantial portion of our capital resources and efforts in the near future will be focused on the continued development and commercialization of our drivetrain solutions. The amount and timing of our future funding requirements, if any, will depend on many factors, including the pace and results of our research and development efforts, as well as factors that are outside of our control. Customer Demand As discussed above in more detail, we have deployed demonstration Hybrid system units to a number of companies, and our Hypertruck ERX system is generating interest from companies who have received demonstration Hybrid system units and potential new customers. Key Components of Statements of Operations Research and Development Expense Research and development expenses consist primarily of costs incurred for the discovery and development of our electrified powertrain solutions, which include: ● personnel-related expenses including salaries, benefits, travel, and share-based compensation, for personnel performing research and development activities; ● fees paid to third parties such as consultants and contractors for outsourced engineering services; ● expenses related to materials, supplies and third-party services; ● depreciation for equipment used in research and development activities; and ● allocation of general overhead costs. We expect research and development costs to increase for the foreseeable future as we continue to invest in research and development activities to achieve operational and commercial goals. 16 Table of Contents Selling, General and Administrative Expense Selling, general and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, sales, marketing and other administrative functions, expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, sales, and marketing costs. Personnel-related expenses consist of salaries, benefits, and share-based compensation. We expect our selling, general and administrative expenses, including legal, audit, and additional insurance expenses, investor relations activities and other administrative and professional services, to increase for the foreseeable future as we scale headcount with the growth of our business and operate as a public company in compliance with the rules and regulations of the SEC. Other Income (Expense), Net Other income and expenses consist primarily of interest expense incurred on our debt obligations, interest income earned on our investments and a remeasurement gain or loss associated with the change in the fair value on our convertible notes payable derivative liabilities and a loss on the extinguishment of our convertible notes payable. Results of Operations Comparison of Quarters Ended March 31, 2021 and 2020 The following table summarizes our results of operations on a consolidated basis for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, $ % 2021 2020 Change Change Operating expenses Research and development (9,332) (2,671) (6,661) 249.4 % Selling, general and administrative (7,399) (691) (6,708) 970.8 % Loss from operations (16,731) (3,362) (13,369) 397.7 % Other income (expense): Interest expense — (1,565) 1,565 (100.0) % Interest income 169 — 169 — % Change in fair value of convertible notes payable derivative liabilities — (635) 635 (100.0) % Total other income (expense) 169 (2,200) 2,369 (107.7) % Net loss (16,562) (5,562) (11,000) 197.8 % Net loss per share, basic and diluted (0.10) -0.06 (0.04) 60.0 % Weighted-average shares outstanding, basic and diluted 170,249,708 86,762,463 83,487,245 96.2 % Research and Development Research and development expenses increased by $6.7 million from $2.7 million for the three months ended March 31, 2020 to $9.3 million for the three months ended March 31, 2021 primarily as a result of increased expenditures for external consultancy by $2.5 million, increased research and development costs by $2.0 million which was associated with the purchase of vehicles and equipment to be used in testing of our products, increased labor by $1.2 million as we build out our engineering team and continue to build out our operations team and capabilities and increased expenditures for components utilized in the development process by $1.0 million in our efforts to finalize the design of our Hybrid system and continue the design and testing of our Hypertruck ERX system during three months ended March 31, 2021. 17 Table of Contents Selling, General and Administrative Selling, general, and administrative expenses increased by $6.7 million from $0.7 million for the three months ended March 31, 2020 to $7.4 million for the three months ended March 31, 2021, primarily due to additional costs incurred to operate as a public company which include increased expenses for personnel and benefits by $3.0 million, increased expenditures for directors and officers insurance by $1.1 million, increased expenditures for legal and professional fees by $1.9 million, and increased expenditures for other expenses by $0.7 million. Other Income (Expense) Total other expense decreased by $2.4 million from $2.2 million of other expense for the three months ended March 31, 2020 to $0.2 million of other income for the three months ended March 31, 2021. The decrease was primarily due to the following: • Interest expense for the three months ended March 31, 2020 was primarily related to our convertible notes payable, which was converted to shares of common stock as part of the Business Combination in October 2020. As such, there was no interest expense during the three months ended March 31, 2021. • A loss from the change in fair value of convertible notes payable derivative liabilities of $0.6 million for the three months ended March 31, 2020, • and interest income of $0.2 million on investments owned during the three months ended March 31, 2021 that were not owned during the comparative period. Liquidity and Capital Resources Prior to the Business Combination, the Company’s operations were financed through private placements of redeemable convertible preferred stock and the issuance of convertible notes payable. As of March 31, 2021, our principal sources of liquidity were our cash and cash equivalents in the amount of $334.7 million, which are primarily invested in money market funds. On November 30, 2020, we issued a notice of redemption to the warrant holders for a redemption of all the outstanding warrants, on a cash basis, or in the case of the private placement warrants issued in connection with Tortoise’s initial public offering in March 2019 on a cashless basis. As a result, we raised gross proceeds of $140.8 million, $16.3 million of which was received during the first quarter of 2021. As of the date of this Quarterly Report on Form 10-Q, we have yet to generate revenue from our core business operations. As of March 31, 2021, our current assets were $483.2 million, consisting primarily of cash and cash equivalents of $334.7 million, short-term investments of $144.8 million, and prepaid expenses of $3.6 million. Our current liabilities were $7.9 million primarily comprised of accounts payable, accrued expenses, and operating lease liabilities. We believe the credit quality and liquidity of our investment portfolio as of March 31, 2021 is strong and will provide sufficient liquidity to satisfy operating requirements, working capital purposes and strategic initiatives. The unrealized gains and losses of the portfolio may remain volatile as changes in the general interest environment and supply/demand fluctuations of the securities within our portfolio impact daily market valuations. To mitigate the risk associated with this market volatility, we deploy a relatively conservative investment strategy focused on capital preservation and liquidity whereby no investment security may have a final maturity of more than 36 months from the date of acquisition or a weighted average maturity exceeding 18 months. Eligible investments under the Company’s investment policy bearing a minimum credit rating of A1, A-1, F1 or higher for short-term investments and A2, A, or higher for longer-term investments include money market funds, commercial paper, certificates of deposit, and municipal securities. Additionally, all our debt securities are classified as held-to-maturity as we have the intent and ability to hold these investment securities to maturity, which minimizes the realized losses that we would recognize. However, even with this approach we may incur investment losses as a result of unusual or unpredictable market developments, and we may experience reduced investment earnings if the yields on investments deemed to be low risk remain low or decline further due to unpredictable market developments. In addition, these unusual and unpredictable market developments may also create liquidity challenges for certain of the assets in our investment portfolio. Based on our past performance, we believe our current assets will be sufficient to continue and execute on our business strategy and meet our capital requirements for the next twelve months. Our primary short-term cash needs are paying operating expenses. We expect to continue to incur net losses in the short term, as we continue to execute on our strategic initiatives by (i) 18 Table of Contents completing the development and commercialization of the hybrid and electrified drive systems for long haul “Class 8” semi-tractors, (ii) scaling the Company’s operations to meet anticipated demand, and (iii) hiring personnel. However, actual results could vary materially and negatively as a result of a number of factors including, but not limited to, those discussed in the section “Risk Factors” in Item 1A “Risk Factors” in our 2020 Amended Annual Report. Cash Flows Summary Presented below is a summary of Hyliion’s operating, investing, and financing cash flows: Cash Flows Used in Operating Activities For the three months ended March 31, 2021, cash flows used in operating activities were $10.8 million. The cash used primarily related to Hyliion’s net loss of $16.6 million, adjusted for changes in Hyliion’s working capital accounts and certain non-cash expense of $1.9 million (including $0.2 million related to non-cash lease expense, $0.2 million related to depreciation and amortization, and $1.5 million related to share based compensation). For the three months ended March 31, 2020, cash flows used in operating activities were $3.3 million. The cash used primarily related to Hyliion’s net loss of $5.6 million, adjusted for changes in Hyliion’s working capital accounts and certain non-cash expense of $2.8 million (including $0.3 million related to non-cash lease expenses, $0.3 million related to depreciation and amortization, $0.6 million related to a loss from the change in fair value of the convertible notes payable derivative liabilities, $1.3 million related to amortization of the debt discount and $0.3 million related to paid-in-kind interest on convertible notes payable). Cash Flows Used in Investing Activities Net cash used in investing activities primarily related to the purchase of investments during the three months ended March 31, 2021 totaling $219.5 million, offset by the proceeds from the sale of investments of $160.0 million. Net cash used in investing primarily related to capital expenditures of $0.1 million for the three months ended March 31, 2020. Net cash used in investing activities is expected to continue to increase substantially as we purchase additional property and equipment as we continue the development of our Hybrid and Hypertruck ERX systems and scale the manufacturing operations to meet anticipated demand. Cash Flows Provided by Financing Activities Cash provided by financing activities was $15.6 million for the three months ended March 31, 2021, which was primarily generated from proceeds from the exercise of warrants of $16.2 million and proceeds from the exercise of stock options of $0.3 million, partially offset by the repayment of PPP loan of $0.9 million. Cash provided by financing activities was $3.1 million for the three months ended March 31, 2020, which was primarily due to $3.2 million of proceeds from the issuance of a convertible note payable, partially offset by the repayment on finance lease obligations of $0.1 million. Critical Accounting Policies and Estimates In preparing our condensed consolidated financial statements, we applied the same critical accounting policies as described in our 2020 Amended Annual Report that affect judgments and estimates of amounts recorded for certain assets, liabilities, revenues, and expenses. Off-Balance Sheet Arrangements During the periods presented, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements. 19 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required by this item.