Hyliion Holdings Corp. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS References to the “Company,” "Hyliion," "we," or "us" in this report refer to Hyliion Holdings Corp. and its wholly-owned subsidiary after the Business Combination, unless expressly indicated or the context otherwise requires. 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 2021 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 status as an early stage company with a history of losses, and our expectation of incurring significant expenses and continuing losses for the foreseeable future; our ability to develop key commercial relationships with suppliers and customers; our ability to retain the services of Thomas Healy, our Chief Executive Officer; our ability to disrupt the powertrain market; the effects of our dynamic and proprietary solutions on commercial truck customers; the ability to accelerate the commercialization of the Hypertruck ERX; our ability to meet 2022 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 2021 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 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 hybrid and electrified powertrain solutions for Class 8 semi-trucks at the lowest total cost of ownership ("TCO"). Throughout our product offerings, we utilize our battery systems, control software and data analytics, combined with fully integrated electric motors and power electronics, to produce electrified powertrain systems. We currently offer two different product lines; a Hybrid system which is designed as an add-on to electric powertrain to trucks which can augment power needs, and the Hypertruck ERX which is a complete powertrain option that is fully electric drive and leverages an onboard generator to recharge the batteries as the vehicle is in operation. By reducing both GHG emissions and TCO, our environmentally conscious solutions support our customers’ pursuit of their sustainability and financial objectives. We are currently selling the Hybrid system and are developing our Hypertruck ERX electrified powertrain systems for Class 8 semi-trucks. Our Hybrid systems have been installed in low volumes on our initial customers’ commercial vehicles. Across these customer installations and over the entire Hyliion fleet, we have accumulated millions of real-world road miles on Class 8 semi-trucks. Our Hybrid system can either be installed on a new vehicle prior to entering fleet service or retrofit to an existing in-service vehicle. The Hypertruck ERX system leverages the experience and operating data from our Hybrid systems to offer a solution to replace the traditional diesel or Compressed Natural Gas ("CNG") powertrain installed in new vehicles. The Hypertruck ERX powertrain, which is a range-extender vehicle, is addressing the market needs of having a fully electric drive truck that can travel long distance between refuels and can leverage existing natural gas infrastructure. Our initial expected deliveries of our Hypertruck ERX systems to customers are designed to have their batteries recharged by a CNG generator. Our Hypertruck ERX system can offer commercial vehicle owners and operators a net carbon negative electrified powertrain option, when using Renewable Natural Gas (“RNG”). We believe CNG/RNG is the correct fuel source to begin with, but there are other fuels that will become available to address the climate change initiative, including Hydrogen. We have 11 Table of Contents showcased a multistage roadmap that starts with utilizing a CNG/RNG generator and evolves into offering Hydrogen-based solutions as well. The Hypertruck platform is designed to be fuel agnostic while the rest of the electric powertrain can remain the same. We plan to initially release the Hypertruck ERX natural gas solution, and then expect to release a Fuel Agnostic generator and a Hydrogen Fuel Cell generator for the Hypertruck platform. CNG fueled recharging is preferable today due to both the current comparable cost of fuels and existing availability of CNG refueling infrastructure. Class 8 semi-trucks 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 we believe there are established, geographically diverse and third-party accessible refueling stations available in certain areas in which we expect may be leveraged in connection with the use of our 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. Our Hybrid and Hypertruck ERX systems are designed to be able to be installed on most major Class 8 semi-trucks in the long term, which will give 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 our 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. 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 system officially launched, and our first Hypertruck ERX showcase unit was unveiled, on August 31, 2021 at the ACT Expo in Long Beach, California. Compared to previous Hyliion systems, the Hybrid system offers fleets a lighter solution that is easier to install, service and operate. The Hybrid system draws upon the real-world feedback we have 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 systems. In addition, we continually assess the potential demand impact for the Hybrid system offering in light of recent changes within the competitive landscape. We began our Hypertruck ERX roadshow in November 2021 which consists of numerous technology fleet experiences focused on demonstrating the features and benefits of the electric powertrain firsthand. The roadshow consists of Ride and Drive events 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. There have recently been shortages in the automotive industry supply chain including semiconductors as well as several other key components. 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 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 systems to certain early adopters who we expect to become 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 system in the fourth quarter of 2021. 12 Table of Contents In 2021, we announced our Hypertruck Innovation Council, which consists of some of the largest fleets who will be assisting us along the development journey and will have been among the first to experience the Hypertruck ERX through our Ride and Drive events. 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 us. Key Components of Statements of Operations Revenue We currently generate revenues from sales of Hybrid systems for 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 to 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 Other income currently consists primarily of interest income earned on our investments. 13 Table of Contents Results of Operations Comparison of Three Months Ended March 31, 2022 to Three Months Ended March 31, 2021 Our results of operations for the three months ended March 31, 2022 and 2021 on a consolidated basis are summarized as follows (in thousands, except share and per share data): Three Months Ended March 31, 2022 2021 $ Change % Change Revenues Product sales and other $ 340 $ — $ 340 N/A Total revenues 340 — 340 N/A Cost of revenues Product sales and other 2,099 — 2,099 N/A Total cost of revenues 2,099 — 2,099 N/A Gross loss (1,759) — (1,759) N/A Operating expenses Research and development (15,808) (9,332) (6,476) 69.4 % Selling, general and administrative expenses (9,824) (7,399) (2,425) 32.8 % Total operating expenses (25,632) (16,731) (8,901) 53.2 % Loss from operations (27,391) (16,731) (10,660) 63.7 % Interest income 285 169 116 68.6 % Loss on disposal of assets (2) — (2) N/A Net loss $ (27,108) $ (16,562) $ (10,546) 63.7 % Net loss per share, basic and diluted $ (0.16) $ (0.10) $ (0.06) 60.0 % Weighted-average shares outstanding, basic and diluted 173,584,573 170,249,708 3,335 2.0 % Revenue Sales increased by $0.3 million for the quarter ended March 31, 2022, driven by sales of Hybrid systems. Cost of Revenues Cost of revenues increased by $2.1 million for the quarter ended March 31, 2022, driven by sales of Hybrid systems. We expect a difference in timing between recognition of revenues and cost of revenues due to write-down of inventory to net realizable value in periods prior to sales. The increase in cost of revenues includes: • Inventory write-downs of $1.3 million attributable to inventory on hand that had a cost higher than its net realizable value; and • Warranty costs of $0.2 million for estimated costs to administer and maintain the warranty program for labor, transportation and parts, excluding any contribution from vendors. Research and Development Research and development expenses increased by $6.5 million for the quarter ended March 31, 2022 primarily due to an increase of $6.1 million primarily for the design and testing of our Hypertruck ERX system including an increase in personnel and benefits as we build out our engineering, operations and supply chain teams and associated capabilities. 14 Table of Contents Selling, General and Administrative Selling, general, and administrative expenses increased by $2.4 million for the quarter ended March 31, 2022 primarily due to: • An increase in personnel and benefits of $1.5 million as we continue to grow our sales and other functions; and • An increase of $0.9 million for legal and professional services and other. Other Income Total other income increased by $0.1 million for the quarter ended March 31, 2022 primarily due to interest income on investments. Liquidity and Capital Resources At March 31, 2022, our current assets were $371.1 million, consisting primarily of cash and cash equivalents of $227.1 million, short-term investments of $134.2 million and prepaid expenses of $8.9 million. Our current liabilities were $11.3 million primarily comprised of accounts payable, accrued expenses and operating lease liabilities. We believe the credit quality and liquidity of our investment portfolio at March 31, 2022 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 production and related costs of Hybrid systems. 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 Class 8 semi-trucks, (ii) scaling 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 II, 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. Cash Flows Net cash, cash equivalents and restricted cash provided by or used in operating activities, investing activities and financing activities for the three months ended March 31, 2022 and 2021 is summarized as follows (in thousands): Three Months Ended March 31, 2022 2021 Cash from operating activities $ (29,303) $ (10,757) Cash from investing activities (1,943) (59,817) Cash from financing activities (92) 15,587 $ (31,338) $ (54,987) Cash from Operating Activities For the three months ended March 31, 2022, cash flows used in operating activities were $29.3 million. Cash used primarily related to a net loss of $27.1 million, adjusted for changes in working capital accounts and certain non-cash expenses of $2.2 15 Table of Contents million (including $4.0 million related to accounts payable, accrued expenses and other liabilities, partially offset by $1.6 million related to share-based compensation). For the three months ended March 31, 2021, cash flows used in operating activities were $10.8 million. Cash used primarily related to net loss of $16.6 million, adjusted for changes in working capital accounts and certain non-cash expenses of $5.8 million (including $3.2 million related to accounts payable, accrued expenses and other liabilities and $1.5 million related to share-based compensation). Cash from Investing Activities For the three months ended March 31, 2022, cash flows used in investing activities were $1.9 million. Cash used primarily related to the purchase of investments totaling $59.2 million, partially offset by the sale or maturity of investments of $57.5 million. For the three months ended March 31, 2021, cash flows used in inv esting activities were $59.8 million. Cash used primarily related to the purchase of investments totaling $219.5 million, partially offset by the sale or maturity of investments of $160.0 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 three months ended March 31, 2022, cash flows used in financing activities were $0.1 million. Cash flows were primarily due to payment of taxes related to net share settlement of equity awards of $0.1 million. For the three months ended March 31, 2021, cash flows provided by financing activities were $15.6 million. Cash flows were primarily due net proceeds from the exercise of warrants of $16.3 million , partially offset by repayments of $0.9 million for a Paycheck Protection Program loan. Critical Accounting Policies and Estimates In preparing our condensed consolidated financial statements, we applied the same critical accounting policies as described in our 2021 Annual Report that affect judgments and estimates of amounts recorded for certain assets, liabilities, revenues and expenses. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A description of the market risks associated with our business is contained in the “Quantitative and Qualitative Disclosures About Market Risk” section of our 2021 Annual Report. There have been no material changes to our market risks as therein previously reported.