What changed in this filing

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Item 7. Management’s Discussion and Analysis

2026-02-25 compared with 2025-02-25 · 63 added, 69 removed, 113 unchanged (54% of the section changed)

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Our actual results could differ materially from those discussed in these forward-looking statements.

We do not undertake, and expressly disclaim, any obligation to publicly update any forward-looking statements, whether as a result of new information, new developments or otherwise, except to the extent that such disclosure is required by applicable law.

Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed elsewhere in this Form 10-K, particularly in Part I, Item 1A, “Risk Factors.” We do not undertake, and expressly disclaim, any obligation to publicly update any forward-looking statements, whether as a result of new information, new developments or otherwise, except to the extent that such disclosure is required by applicable law.

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 current economic uncertainties and supply chain disruptions, as well as those discussed below and referenced in Item 1A “Risk Factors.”

Commercialization of KARNO Generator

Our focus is on continuing development and testing of our fuel-agnostic KARNO stationary generator and planning for the deployment of initial units with customers in 2025.

We anticipate that a substantial portion of our capital resources and efforts in the near future will be focused these activities.

The amount and timing of our future funding requirements, if any, will depend on many factors, including but not limited to the pace of completing initial KARNO generator testing and validation, the pace at which we invest in generator additive printing capacity, our plans for manufacturing KARNO generator components (whether in-house or through outsourcing to third parties), the range of product offerings we plan to bring to market and external market factors beyond our control.

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 economic uncertainties, supply chain disruptions, inflation, high interest rates, and other risks discussed below and referenced in Part I, Item 1A “Risk Factors.”

Commercialization of KARNO Power Module

Our focus is on continuing development and testing of our fuel-agnostic KARNO Power Module and the deployment of initial units with customers.

We anticipate that a substantial portion of our capital resources and efforts in the near future will be focused on these activities.

The amount and timing of our future funding requirements will depend on many factors, including but not limited to the pace of completing initial KARNO Power Module testing and validation, the timing of KARNO Power Module commercialization, the pace at which we invest in KARNO Core additive printing capacity, our plans for manufacturing KARNO Power Module components (whether in-house or through outsourcing to third parties), the range of product offerings we plan to bring to market and external market factors beyond our control.

Key Components of Statements of Operations

We historically generated revenues from sales of hybrid systems for Class 8 semi-trucks and limited quantities of Class 8 semi-trucks outfitted with the hybrid system.

As a result of the discontinuation of the electrified powertrain systems business and the shift to focus on the development and commercialization of the Company’s fuel-agnostic KARNO generator technology, we anticipate generating revenue after commercialization of our KARNO generator.

Additionally, we generate revenue from R&D services under contracts with third-parties including the U.S.

We generate revenue by providing R&D services under contracts with third parties, including the U.S.

Additionally, we expect to begin generating product revenue following the commercialization of our KARNO Power Module.

Cost of Revenue

Cost of revenue includes all direct costs such as labor and materials, overhead costs, warranty costs and any write-down of inventory to net realizable value, and costs associated with R&D services revenue.

Cost of revenue includes costs associated with R&D services revenue, such as direct costs, including labor and materials, and applicable overhead costs.

Research and Development Expense

R&D expenses consist primarily of costs incurred for the discovery and development of our KARNO stationary generator, which include:

R&D expenses consist primarily of costs incurred for the discovery and development of our KARNO Power Module, which include:

• personnel-related expenses including salaries, benefits, travel and share-based compensation, for personnel performing R&D activities;

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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.

Selling, general and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, information technology, sales, marketing and other administrative functions, expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, software licenses, depreciation, amortization, travel, sales and marketing costs.

Personnel-related expenses consist of salaries, benefits and share-based compensation.

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Exit and termination costs consist of employee severance and retention payments, accelerated non-cash stock-based compensation expense, contract termination and other cancellation costs, non-cash charges including accelerated depreciation and amortization, carrying value adjustment to assets held for sale, and recoveries from resale of assets.

These costs are a result of the plan approved on November 7, 2023 to wind down our powertrain business.

Other Income (Expense)

Other income currently consists primarily of interest income earned on our investments.

Since the acquisition of our KARNO generator technology, we have continued to perform as a subcontractor on a contract with the ONR and recorded such amounts, net of costs incurred, as other income (expense).

Beginning in the quarter ending December 31, 2024, we no longer record amounts received for the performance of R&D services as other income (expense) and now record such amounts received as revenue.

Since the acquisition of our KARNO technology, we have continued to perform as a subcontractor on a contract with the ONR and recorded such amounts, net of costs incurred, as other income.

Beginning in the quarter ending December 31, 2024, we no longer record amounts received for the performance of R&D services as other income and now record such amounts received as revenue.

Results of Operations

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2025 2024 $ Change % Change

Product sales and other $ — $ 672 $ (672) (100.0) %

Research and development services 1,509 — 1,509 N/A

Research and development services $ 3,475 $ 1,509 $ 1,966 130.3 %

Total revenues 3,475 1,509 1,966 130.3 %

Cost of revenues

Product sales and other — 1,716 (1,716) (100.0) %

Research and development services 1,415 — 1,415 N/A

Research and development services 3,305 1,415 1,890 133.6 %

Total cost of revenues 3,305 1,415 1,890 133.6 %

Gross profit (loss) 94 (1,044) 1,138 (109.0) %

Gross profit 170 94 76 80.9 %

Operating expenses

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Revenue and Cost of Revenues

In the fourth quarter of 2024, we began recognizing revenue for R&D services performed as both a prime and subcontractor to the United States government.

In the fourth quarter of 2024, we began recognizing revenue for R&D services performed as both a prime and subcontractor to the U.S.

Revenue for R&D services increased $2.0 million and associated cost of revenues increased $1.9 million.

Revenue associated with our hybrid products decreased $0.7 million and associated cost of revenues decreased $1.7 million as a result of our strategic review and decision to discontinue our powertrain business.

Research and Development

R&D expenses decreased $45.2 million due to:

• a decrease of $63.6 million for the design and testing of our Hypertruck ERX system due to our strategic decision to wind down our powertrain business;

• an increase of $18.4 million for the design and testing of our KARNO stationary generator.

Selling, General and Administrative

Selling, general, and administrative expenses decreased $18.2 million primarily due to wind down of our powertrain business:

• a decrease of $9.3 million in personnel and benefits;

• a decrease of $3.7 million in professional services;

• a decrease of $1.1 million in marketing;

R&D expenses increased $5.5 million due to higher spending related to the design and testing of our KARNO Power Module, growth in the production of additive components, and the procurement of parts for our ongoing KARNO Power Module deployments.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses decreased $1.6 million primarily due to:

• a decrease of $0.9 million in facilities costs;

• a decrease of $0.7 million in insurance;

partially offset by

• an increase of $0.8 million in personnel and benefits.

Exit and Termination Costs

On November 7, 2023, the Board approved a strategic plan to wind down its powertrain business and preserve technology relating to the powertrain business, to better align its workforce with the Company’s future needs, and to reduce the Company’s operating costs (the “Plan”).

Exit and termination costs decreased by $8.5 million as a result of the adoption of the Plan and items discussed in Note 2 of the notes to the consolidated financial statements, including recoveries from assets sold.

Exit and termination costs decreased by $2.5 million as a result of the adoption of the Plan and items discussed in Note 2, “Disposals” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K, including recoveries from assets sold.

Interest Income

Interest income decreased $1.6 million primarily due to the decline in our investment balance.

Net cash, cash equivalents and restricted cash provided by or used in operating activities, investing activities and financing activities is summarized as follows for the periods indicated and should be read in conjunction with our consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K (in thousands):

Interest income decreased $3.9 million primarily due to the decline in our investment balance and lower interest rates.

Year Ended December 31,

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For the year ended December 31, 2025, cash flows used in operating activities were $46.5 million.

Cash used primarily related to a net loss of $52.0 million, adjusted for $14.6 million change in working capital accounts and $9.9 million in certain non-cash expenses (including $6.5 million related to carrying value adjustments to assets held for sale offset by $2.9 million in gains on asset sales, $4.6 million related to share-based compensation, and $1.6 million related to lease charges, inclusive of $1.1 million received for tenant improvements).

Cash used primarily related to a net loss of $57.2 million, adjusted for $1.6 million change in working capital accounts and $12.2 million in certain non-cash expenses (including $5.5 million related to share-based compensation, $4.4 million related to depreciation and amortization, $2.1 million related to prepaid expenses and other assets, and $1.4 million related to accounts receivable, partially offset by $2.7 million related to accounts payable and accrued expenses and other liabilities).

For the year ended December 31, 2024, cash flows used in operating activities were $56.7 million.

Cash used primarily related to a net loss of $123.5 million, adjusted for $2.9 million change in working capital accounts and $9.5 million in certain non-cash expenses (including $6.2 million related to share-based compensation, $1.1 million related to inventory write-downs and $0.6 million related to depreciation, amortization and accretion charges).

Cash from Investing Activities

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Cash provided related to the purchase of investments totaling $46.4 million and property and equipment of $23.7 million, offset by the sale or maturity of investments of $128.8 million and proceeds from sale of property and equipment of $2.2 million.

For the year ended December 31, 2023, cash flows used in investing activities were $18.3 million.

Cash used primarily related to the purchase of investments totaling $189.7 million and property and equipment of $7.4 million, offset by the sale or maturity of investments of $215.4 million.

For the year ended December 31, 2024, cash flows provided by investing activities were $59.5 million.

Cash provided related to the purchase of investments totaling $96.3 million and property and equipment of $16.5 million, offset by the sale or maturity of investments of $166.9 million and proceeds from sale of property and equipment of $5.4 million.

Cash from Financing Activities

For the year ended December 31, 2025, cash flows used in financing activities were $0.7 million, primarily due to taxes paid on equity awards.

For the year ended December 31, 2024, cash flows used in financing activities were $14.3 million, primarily due to stock repurchases.

For the year ended December 31, 2023, cash flows used in financing activities were nil.

Liquidity and Capital Resources

At December 31, 2025, our current assets were $98.6 million, consisting primarily of cash and cash equivalents of $22.9 million, short-term investments of $69.4 million, and prepaid expenses of $4.6 million.

Our current liabilities were $14.3 million primarily comprised of accounts payable, accrued expenses and operating lease liabilities.

Our total current liabilities were $9.9 million primarily and were comprised of accounts payable, accrued expenses and operating lease liabilities.

We also had $60.0 million of investments in longer-term liquid securities which we maintain to generate higher income on capital that we do not expect to spend in the next 12 months.

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Additionally, all of 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 any realized losses that we would recognize prior to maturity.

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.

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 and long-term 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 costs associated with KARNO generator development, building our initial deployment units and capital investments for additive printer acquisitions.

Longer term, our capital needs will be determined by our go-to-market strategy as well as governmental R&D, which may include development of our own KARNO generator manufacturing capacity or outsourcing this work to third parties or business partners.

In December 2023, we announced an authorized share repurchase program to repurchase up to $20 million of our outstanding common stock.

We repurchased $14.0 million in common stock during the year ended December 31, 2024 but have currently paused any additional repurchases under this program.

Based on our past performance, we believe our current and long-term assets will be sufficient to continue to execute on our business strategy and meet our capital requirements for the next twelve months.

Our primary short-term cash needs are costs associated with KARNO Power Module development, building our initial deployment units and capital investments for additive printer acquisitions and other assets.

Longer term, our capital needs will be determined by our go-to-market strategy as well as governmental R&D, which may include development of our own KARNO Power Module manufacturing capacity or outsourcing this work to third parties or business partners.

We have up to $6.1 million remaining authorized for repurchases under our $20 million share repurchase program but have currently paused any additional repurchases.

Based on current projections of operating expenses, capital spending, working capital growth and historical share repurchases, we expect to have approximately $100 million in cash, short-term and long-term investments remaining on our balance sheet at the end of 2026.

We expect to continue to incur net losses in the short term, as we continue to execute on our strategic initiatives by completing the development and commercialization of the KARNO generator with anticipated initial customer deployments in 2025.

This projection assumes the completion of about $10 million in equipment-backed financing or debt.

It is possible that this financing could be delayed or may not occur at all if acceptable terms cannot be obtained.

We expect to continue to incur net losses in the short term as we execute on our strategic initiatives by completing the development and commercialization of the KARNO Power Module with customer deployments anticipated to continue throughout 2026.

However, actual results could vary materially and adversely as a result of a number of factors including, but not limited to, those discussed in Part I, Item 1A.

“Risk Factors.”

The amount and timing of our future funding requirements, if any, will depend on many factors, including the scope and results of our R&D efforts, the breadth of product offerings we plan to commercialize, the growth of sales, working capital needs, and our long-term manufacturing plan for the KARNO generator including the pace of investments in additive manufacturing assets, methods of financing these investments, as well as factors that are outside of our control.

The amount and timing of our future funding requirements will depend on many factors, including the scope and results of our R&D efforts, the breadth of product offerings we plan to commercialize, the growth of sales, working capital needs, and our long-term manufacturing plan for the KARNO Power Module including the pace of investments in additive manufacturing assets, methods of financing these investments, as well as factors that are outside of our control.

We regularly evaluate our funding needs and sources of capital and may seek external funding in the appropriate circumstances.

While we expect that we have sufficient capital to get through commercialization of the KARNO Power Module, we do anticipate that, at some time, we will seek additional sources of capital to accelerate investments in assets needed for growth following commercialization, primarily additive printing machines and related assets.

With our current cash and investments, we believe we are well positioned to be deliberate and opportunistic in determining the timing and structure of a capital raise.

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.

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Our cash requirements beyond twelve months include:

• Leases — Refer to Note 8 of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.

• Purchase Commitments — Purchase obligations include non-cancelable purchase commitments related to materials purchase agreements and volume commitments which are entered into from time to time.

As of December 31, 2024,

there were no such non-cancelable purchase commitments.

Refer to Note 2 of the notes to the consolidated financial statements for further information on our exit obligations and the timing of expected payments.

• Leases — Refer to Note 8, “Leases” of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for further information of our obligations and the timing of expected payments.

• Purchase Commitments — Purchase obligations include primarily non-cancelable purchase commitments related to materials purchase agreements and volume commitments that are entered into from time to time.

As of December 31, 2025, there were no such non-cancelable purchase commitments.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date, as well as the reported expenses incurred during the reporting period.

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We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

While our significant accounting policies are described in the notes to our financial statements (see Note 3 in the accompanying audited consolidated financial statements), we believe that the following accounting policies require a greater degree of judgment and complexity.

While our significant accounting policies are described in the notes to our financial statements (see Note 3, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K), we believe that the following accounting policies require a greater degree of judgment and complexity.

Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition

The Company performs under three contracts as both a prime and subcontractor to the United States government to provide R&D services, primarily to research the suitability of its KARNO generator for Navy ships and stationary power applications on a best effort cost-plus-fixed fee basis.

The transaction price allocated to the remaining unsatisfied performance obligations under these contracts was up to $15.7 million as of December 31, 2024, which is expected to be recognized in 2025 and 2026.

The Company performs under contracts as both a prime and subcontractor to the United States government to provide R&D services, primarily to research the suitability of its KARNO generator for Navy ships and stationary power applications on a best effort cost-plus-fixed fee basis.

The transaction price allocated to the remaining unsatisfied performance obligations under these contracts was up to $13.7 million as of December 31, 2025, which is expected to be recognized primarily in 2026.

There is a single research and development services performance obligation in each of these contracts that is measured over time as the services are performed.

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Payment is ordinarily due within 90 days of invoice submission.

Through December 31, 2024, we have not yet commercialized the KARNO generator.

Through December 31, 2025, we have not yet commercialized the KARNO Power Module.

Costs incurred for components acquired prior to our determination of reaching a commercial stage are expensed as R&D costs, resulting in zero cost basis for those components.

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Inventory is consumed in the performance of R&D revenue contracts in the quarter in which it is purchased, and we therefore do not record inventory at each reporting period pertaining to these contracts.

O n November 7, 2023, the Board approved a strategic plan to wind down its powertrain business and preserve technology relating to the powertrain business, to better align its workforce with the Company’s future needs, and to reduce the Company’s operating costs (the “Plan”).

We have made certain estimates of the cash expenditures and charges that the Company expects to incur in connection with the Plan which may differ m aterially from estimates.

Share-Based Compensation

We account for share-based payments that involve the issuance of shares of our common stock to employees and nonemployees and meet the criteria for share-based awards as share-based compensation expense based on the grant-date fair value of the award.

We account for share-based payments that involve the issuance of shares of our common stock to employees and non-employees and meet the criteria for share-based awards as share-based compensation expense based on the grant-date fair value of the award.

The Company has elected to recognize the adjustment to share-based compensation expense in the period in which forfeitures occur.

We recognize compensation expense for awards with only service conditions on a straight-line basis over the requisite service period for the entire award.

If factors change, and we utilize different assumptions including the probability of achieving performance conditions, share-based compensation cost on future award grants may differ significantly from share-based compensation cost recognized on past award grants.

If we were to utilize different assumptions, including the estimate of underlying share volatility of our market-conditioned awards, share-based compensation cost could be under or overstated.

If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate any remaining unearned share-based compensation cost or incur incremental cost.

Share-based compensation cost affects our R&D and selling, general and administrative expenses.

We granted 2.7 million restricted stock units in 2024 that will vest between February 13, 2025 and December 31, 2026 contingent upon achieving time-based requirements.

These awards were valued at $0.83 per unit using fair value hierarchy Level III inputs including an underlying share volatility of 90% and a risk-free rate of 4.35%.

Share-based compensation cost affects our research and development and selling, general and administrative expenses.

The Company granted 2.7 million restricted stock units in 2025 that are subject to vest between February 18, 2026 and December 31, 2027 contingent upon achieving underlying closing stock price thresholds.

Through December 31, 2025, there was no achievement of underlying closing stock price thresholds on these awards.

These awards were valued at $1.46 per unit using a Monte Carlo simulation including a blend of historical and implied share volatility of 90% and a risk-free rate of 4.23%.

The Company granted 2.7 million restricted stock units in 2024 that are subject to vest between February 13, 2025 and December 31, 2026 contingent upon achieving underlying closing stock price thresholds, which thresholds were met resulting in 100% of these awards vesting or to vest between August 2025 and December 2026.

These awards were valued at $0.83 per unit using a Monte Carlo simulation including a blend of historical and implied share volatility of 90% and a risk-free rate of 4.35%.

Incom e Taxes

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Due to cumulative losses over recent years and based on all available positive and negative evidence, we have determined that it is not more likely than not that our net deferred tax assets will be realizable as of December 31, 2025.

We intend to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

We intend to continue maintaining a full

valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

A release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense or an income tax benefit for the period in which the release is recorded.

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Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations under adoption.

See Recent Accounting Pronouncements under Note 3 – Summary of Significant Accounting Policies in the notes to the 2024 consolidated financial statements for more information about recent accounting pronouncements, the timing of their adoption and our assessment, to the extent we have made one, of their potential impact on our financial condition and results of operations.

See Recent Accounting Pronouncements under Note 3, “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for more information about recent accounting pronouncements, the timing of their adoption and our assessment, to the extent we have made one, of their potential impact on our financial condition and results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis