Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Form 10-K. Dollar amounts in this discussion are expressed in millions, except as otherwise noted. The following discussion contains forward-looking statements that reflect future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside of our control. Our actual results could differ materially from those discussed in these forward-looking statements. 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.
For discussion related to changes in financial condition and the results of operations for fiscal year 2019-related items, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Amended Annual Report on Form 10-K/A for fiscal year 2020, which was filed with the Securities and Exchange Commission on May 17, 2021.
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.
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”.
Successful Commercialization of Our Drivetrain Solutions
Our Hybrid eX system officially launched, and our first Hypertruck ERX showcase unit was unveiled, on August 31, 2021 at the ACT Expo in Long Beach, CA. Compared to previous Hyliion Hybrid systems, the Hybrid eX offers fleets a lighter solution that is easier to install, service and operate. The Hybrid eX draws upon the real-world feedback Hyliion has received from customers and the millions of miles logged with the previous system. Due to shortages of various components caused by global supply chain disruptions, we are experiencing longer delivery times because of supply delays for a portion of the orders we have received on new Hybrid eX units. In addition, we are assessing the potential demand impact for the Hybrid eX product offering in light of recent changes within the competitive landscape.
We began our Hypertruck ERX roadshow in November 2021 with a two-day showcase event focused on demonstrating the features and benefits of the electric powertrain firsthand. The roadshow consists of ride-alongs and in-depth product education of the Hypertruck ERX’s features and benefits, including how it enables fleets’ decarbonization goals while also reducing total cost of ownership. Our development timeline has been extended to allow for design verification and testing inclusive of critical summer and winter seasons, as well as the accumulation of up to one million miles prior to production. We expect to complete design verification and begin initial controlled fleet trials by the end of 2022.
While we have recently achieved critical product milestones, shortages in the supply chain and changes to the development program have led to an extension in the go-forward development timeline. Similar to others in the automotive industry, the semiconductor shortage, as well as several other key components, is extending our timelines longer than expected. These supply chain challenges have been especially prominent in the trucking industry, and one of the impacts has been significantly extended lead times for ordering new trucks. Fleets are experiencing lead times on new truck purchases that extend out for delivery into 2023. We have already placed orders with Peterbilt for all chassis needed in 2022 and are working to secure build slots for the 2023 calendar year in an effort to mitigate future potential supply chain impacts to our Hypertruck ERX development schedule. We continue to work closely with our current supply base to improve delivery of components for the quarters ahead and are diligently seeking alternative sources of supply for components that meet our technical specifications with shorter lead times.
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
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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
We have deployed demonstration Hybrid eX systems to certain early adopters we expect some 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. Further, we commercialized and began selling the Hybrid eX system in the fourth quarter of 2021.
In 2021, Hyliion announced its Hypertruck Innovation Council, which consists of some of the largest fleets who will be assisting Hyliion along the development journey and will be among the first to experience the Hypertruck ERX. We anticipate our initial customers for the Hypertruck ERX system will be our Hypertruck Innovation Council members who will be the first to operate the Hypertruck ERX through controlled fleet deployments which will begin with some fleets in 2022 with further controlled fleet deployments anticipated. The successful launch program and deployment of the Hypertruck ERX met with positive feedback from customer operations teams and drivers and generated further interest in the Hypertruck ERX solution and longer-term commercial relationships with Hyliion.
Key Components of Statements of Operations
Revenue
We currently generate revenues from sales of Hybrid eX Powertrains for long haul “Class 8” semi-trucks.
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.
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.
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 to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the U.S. Securities and Exchange Commission, legal, audit, additional insurance expenses, investor relations activities and other administrative and professional services.
Other Income (Expense)
Other income and expenses consist primarily of interest expense incurred on our debt obligations, interest income earned on our investments, remeasurement gain or loss associated with the change in the fair value on our warrant and convertible notes payable derivative liabilities and a loss on the extinguishment of our convertible notes payable.
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Results of Operations
Comparison of Years Ended December 31, 2021 and 2020
Our results of operations on a consolidated basis for the years ended December 31, 2021 and 2020 are summarized as follows (in thousands, except share and per share data):
Year Ended December 31,
2021 2020 $ Change % Change
Revenues
Product sales and other $ 200 $ — $ 200 N/A
Total revenues 200 — 200 N/A
Cost of revenues
Product sales and other (2,737) — (2,737) N/A
Total cost of revenues (2,737) — (2,737) N/A
Gross loss (2,537) — (2,537) N/A
Operating expenses
Research and development (58,261) (12,598) (45,663) 362.5 %
Selling, general and administrative expenses (35,299) (9,585) (25,714) 268.3 %
Total operating expenses (93,560) (22,183) (71,377) 321.8 %
Loss from operations (96,097) (22,183) (73,914) 333.2 %
Interest expense — (5,465) 5,465 (100.0) %
Interest income 779 6 773 12,883.3 %
Loss on impairment and disposal of assets (730) — (730) N/A
Change in fair value of convertible notes payable derivative liabilities — (1,358) 1,358 (100.0) %
Change in fair value of warrant liabilities — 363,299 (363,299) (100.0) %
Other expense — (12) 12 (100.0) %
Loss on extinguishment of debt — (10,170) 10,170 (100.0) %
Net (loss) income $ (96,048) $ 324,117 $ (420,165) N/A
Net (loss) income per share, basic $ (0.56) $ 3.11 $ (3.67) N/A
Net loss per share, diluted $ (0.56) $ (0.35) $ (0.21) 60.0 %
Weighted-average shares outstanding, basic 172,216,477 104,324,059 17,680,484 65.1 %
Weighted-average shares outstanding, diluted 172,216,477 112,570,960 17,680,484 53.0 %
Revenue
Sales inc reased by $0.2 million for the year ended December 31, 2021, which includes an increase in vol ume related to our initial production of the Hybrid eX.
Cost of Revenues
Cost o f revenues increased by $2.7 million the year ended December 31, 2021, which includes an increase in volume related to our initial production of the Hybrid eX. The increase in cost of revenues includes:
• Inventory write-downs of $2.3 million for the year ended December 31, 2021 attributable to inventory on hand that had a cost higher than its net realizable value; and
• Warranty costs of $44 thousand for the year ended December 31, 2021 for estimated costs to administer and maintain the warranty program for labor, transportation and parts, and excludes any contribution from vendors.
Research and Development
Research and development expenses increased by $45.7 million from $12.6 million in the prior year ended December 31, 2020 to $58.3 million for the year ended December 31, 2021 due to increased expenditures for components utilized in the development process by $29.7 million in our efforts to commercialize our Hybrid system and continue the design and testing of
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our Hypertruck ERX system, increased expenditures for external consultancy by $3.8 million to bring in industry expertise to assist in achieving our commercialization milestones, increased labor by $9.9 million as we build out our engineering, operations, and supply chain teams and associated capabilities, increased costs by $2.0 million associated with the purchase of vehicles and equipment to be used in testing of our products, and increased other expenditures by $0.3 million.
Selling, General and Administrative
Selling, general, and administrative expenses increased by $25.7 million from $9.6 million in the prior year ended December 31, 2020 to $35.3 million for the year ended December 31, 2021, due to additional costs incurred to operate as a public company which includes increased expenses for personnel and benefits by $12.9 million, increased expenditures for legal and professional fees by $5.9 million, increased expenditures for insurance primarily relating to our directors' and officers' liability insurance policy by $4.0 million, increased marketing and promotional expenses by $1.3 million, increased information technology expenses associated with additional resources and computer system upgrades of $1.5 million, and increased other expenditures by $0.1 million.
Other Income (Expense)
Total other income decreased by $346.3 million from $346.3 million of other income for the year ended December 31, 2020 to nil for the year ended December 31, 2021. The decrease was primarily due to:
• A gain from the change in fair value of warrant liabilities of $363.3 million for the year ended December 31, 2020.
• Loss on extinguishment of debt of $10.2 million for the year ended December 31, 2020 that is attributable to the extinguishment of convertible notes in connection with the Business Combination.
• Interest expense for the year ended December 31, 2020 of $5.5 million was primarily related to our convertible notes payable, which were converted to shares of common stock as part of the Business Combination in October 2020.
• A loss from the change in fair value of convertible notes payable derivative liabilities of $1.4 million for the year ended December 31, 2020. The convertible notes payable were converted to shares of common stock as part of the Business Combination in October 2020.
• Interest income of $0.8 million on investments owned during the year ended December 31, 2021 that were not owned during the comparative period.
• A loss on impairment and disposal of assets of $0.7 million for the year ended December 31, 2021.
Cash Flows
The following table summarizes our net cash, cash equivalents, and restricted cash provided by or used in operating activities, investing activities and financing activities 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):
Year Ended December 31,
2021 2020
Cash from operating activities $ (80,502) $ (22,944)
Cash from investing activities (65,991) (238,140)
Cash from financing activities 15,898 644,504
$ (130,595) $ 383,420
Cash from Operating Activities
For the year ended December 31, 2021, cash flows used in operating activities were $80.5 million. Cash used primarily related to a net loss of $96.0 million, adjusted for changes in working capital accounts and certain non-cash expense of $15.5 million (including $0.7 million related to non-cash lease expense, $0.9 million related to depreciation and amortization, $1.8 million related to amortization of investment premiums and discounts, $0.7 million related to loss on impairment or disposal of assets and $4.9 million related to share-based compensation).
For the year ended December 31, 2020, cash flows used in operating activities were $22.9 million. Cash used primarily related to net income of $324.1 million, adjusted for changes in working capital accounts and certain non-cash income of $347.1 million (including $363.3 million related to the change in fair value of warrant liability, $10.2 million related to the loss on extinguishment of convertible notes payable, $4.2 million related to amortization of debt discount, $1.4 million related to a loss from the change in fair value of the convertible notes payable derivative liabilities, $1.1 million related to paid-in-kind interest on convertible notes payable, $0.9 million related to non-cash lease expense, $0.9 million related to depreciation and amortization and $0.3 million related to share-based compensation).
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Cash from Investing Activities
For the year ended December 31, 2021, cash flows used in investing activities were $66.0 million. Cash used primarily related to the purchase of investments totaling $317.8 million, partially offset by the sale or maturity of investments of $254.2 million.
For the year ended December 31, 2020, cash flows used in investing activities were $238.1 million. Cash used primarily related to the purchase of investments totaling $237.9 million.
Net cash used in investing activities is expected to increase substantially as we purchase additional property and equipment and continue development of our Hypertruck ERX systems and scale manufacturing operations to meet anticipated demand.
Cash from Financing Activities
For the year ended December 31, 2021, cash flows provided by financing activities were $15.9 million. Cash flows were primarily due to proceeds from the exercise of warrants of $16.3 million and proceeds from the exercise of common stock options of $0.6 million, partially offset by repayment of $0.9 million from a Paycheck Protection Program loan.
For the year ended December 31, 2020, cash flows provided by financing activities were $644.5 million. Cash flows were primarily due to net proceeds of $516.5 million from the Business Combination and PIPE, proceeds from the exercise of warrants of $124.5 million, the issuance of $3.2 million of convertible notes payable in exchange for cash, proceeds of $0.9 million from a Paycheck Protection Program loan, partially offset by the payments for financing costs of $0.5 million and finance lease obligations of $0.2 million.
Liquidity and Capital Resources
At December 31, 2021, our current assets were $386.5 million, consisting primarily of cash and cash equivalents of $258.4 million, short-term investments of $118.8 million, and prepaid expenses of $9.1 million. Our current liabilities were $15.2 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 December 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 and 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 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. 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 and servicing outstanding indebtedness. We expect to continue to incur net losses in the short term, as we continue to execute on our strategic initiatives by (i) completing the development and commercialization of the electrified drive systems for long haul “Class 8” semi-trucks, (ii) scale the Company’s operations to meet anticipated demand and (iii) hiring of 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 Part I, Item 1A. "Risk Factors."
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.
Contractual Obligations and Capital Resources
We have funded our operating activities since the Business Combination with net cash generated from the Business Combination, PIPE financing and proceeds from the exercise of stock warrants. We manage our use of cash in the operation of our business to support the execution of our primary strategic goals including the design, development and sale of hybrid and electrified powertrain systems for long haul “Class 8” semi-trucks. Since the Business Combination, we have primarily used cash for research and development activities, capital investments and general and administrative costs.
Our cash requirements beyond twelve months include:
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• Operating and Finance Leases — Refer to Note 10, Leases, of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.
• Warranties — Refer to Note 14, Warranties, of the notes to the consolidated financial statements for further information of our obligations. We expect to recognize these costs over a period up to two years.
• 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, 2021, 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”). 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. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates, and such differences could be material to our financial statements.
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 2 in the accompanying audited consolidated financial statements), 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
Revenue is comprised of sales of Hybrid eX Powertrains for long haul “Class 8” semi-trucks and specific other features and services that meet the definition of a performance obligation, including internet connectivity and data processing. We provide installation services for the Hybrid eX Powertrain onto the customers’ vehicle. The Company’s products are marketed and sold to end-user fleet customers in North America. When our contracts with customers contain multiple performance obligations and where material, the contract transaction price is allocated on a relative standalone selling price basis to each performance obligation.
We recognize revenue on Hybrid eX Powertrain sales upon delivery and acceptance of the vehicle to the customer, which is when control transfers. Contracts are reviewed for significant financing components and payments are typically received within 30 days of delivery. We do not generally recognize credit losses due to the timing of customer payment shortly after delivery. The sale of a Hybrid eX Powertrain to an end-use fleet customer consists of a completed modification to the customer vehicle and the installation services involve significant integration of the Hybrid eX Powertrain with the customer’s vehicle. Installation services are not distinct within the context of the contract and together with the sale of the Hybrid eX Powertrain represents a single performance obligation. We do not offer any sales returns. Amounts billed to customers related to shipping and handling are classified as revenue, and we have elected to recognize the cost for freight and shipping when control has transferred to the customer as a cost of revenue. Our policy is to exclude taxes collected from a customer from the transaction price of contracts.
We have limited sales history of our Hybrid eX Powertrains and therefore are required to make certain estimates and assumptions with regard to the recognition of revenue including, among other things, the value of any future performance obligations. We expect to refine our sales processes, contracts and services as our business matures. Should our estimates and assumptions change, a revision to the recognition of revenue may be required.
Inventories
Inventory is comprised of raw materials, work in process and finished goods, using the moving-average cost method. Inventory is stated at the lower of cost or net realizable value. We review our inventory to determine whether its carrying value exceeds the net amount realizable we expect to receive upon the ultimate sale of the inventory. This requires us to determine the estimated selling price of inventory less the estimated cost to convert the inventory on-hand into a finished product and other costs, which we determined includes the cost of installation and validation, to align with the transfer of control to customers in our revenue policy.
Once inventory is written-down based on a lower of cost or net realizable value analysis, that amount establishes the new carrying value of inventory if written-down at year end, and subsequent changes in facts and circumstances do not result in the
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restoration or increase in that newly established cost basis. Interim impairments are reversed and reassessed at each reporting period.
During the fourth quarter of 2021, we changed from a research and development phase to a production phase for one of our products. Certain costs incurred for components acquired prior to our determination of reaching a commercial stage were previously expensed as research and development costs, resulting in zero cost basis for those components, which affected the moving average price. However, after inventory impairments recognized on December 31, 2021, inventory values and future inventory moving average prices will not be significantly affected by those zero cost items.
At December 31, 2021, our current projected costs of production for inventory items exceeds our sales prices. We expect to reduce costs based on increased production volumes, negotiated volume discounts, economies of scale and learning curve effects. Further, as we market these and other products, we may adjust our sales prices. It is possible that our efforts to achieve these cost reductions may take longer than anticipated and result in negative margin in future periods.
Warranties
We provide limited assurance-type warranties under our contracts and do not offer extended warranties or maintenance contracts. The warranty period typically extends for the lesser of two years or 200,000 miles following transfer of control and solely relate to correction of product defects during the warranty period. We recognize the cost of the warranty upon transfer of control based on estimated and historical claims rates and fulfillment costs, which are variable. Should product failure rates and fulfillment costs differ from these estimates, material revisions to the estimated warranty liability would be required. Warranty expense is recorded as a component of cost of revenue.
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. 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. Future share-based compensation cost will increase to the extent that we grant additional share-based awards to employees and non-employees. 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 research and development and selling, general and administrative expenses.
Income Taxes
We recognize deferred taxes for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. At December 31, 2021, we had federal net operating loss carryforwards of $187.6 million and state net operating loss carryforwards of $12.5 million that expire in various years starting in 2036. The Company also has R&D credits of $0.6 million that begin to expire in 2037.
Under Section 382 of the Code, substantial changes in our ownership may result in an annual limit on the amount of net operating loss carryforwards that could be utilized in the future to offset our taxable income. Generally, this limitation may arise in the event of a cumulative change in ownership of more than 50% within a three-year period. We have completed such analysis and determined that such ownership change occurred in 2017. This will limit the usage of our 2017 and prior year net operating losses, and will cause $2.0 million of such losses to expire unused, regardless of future taxable income. No other such ownership changes have occurred through December 31, 2021. Due to this, as well as our overall profitability estimate as noted above, we have recorded a full valuation allowance related to our net operating loss carryforwards and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.
New and Recently Adopted Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies that are adopted by us as of the specified effective date. 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 issued, not yet adopted under Note 2 – Summary of Significant Accounting Policies in the notes to the 2021 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.
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