What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-09 compared with 2022-08-09 · 99 added, 56 removed, 150 unchanged (51% of the section changed)

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References to the “Company,” “Hyliion,” “we,” or “us” in this report refer to Hyliion Holdings Corp.

and its wholly-owned subsidiary, unless expressly indicated or the context otherwise requires.

and its wholly-owned subsidiary Hyliion Inc., 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.

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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 words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “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.

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the impact of an inflationary environment and 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.

the ability of our solutions to reduce carbon intensity and greenhouse gas emissions, the expected performance and integration of the KARNO generator and system, 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).

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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-extending electric 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 an onboard CNG generator.

Our Hypertruck ERX system can offer commercial vehicle owners and operators a net carbon negative capable 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.

The Hypertruck ERX powertrain, which functions as an electric range-extender, 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 Hypertruck ERX systems are designed to have their batteries recharged by an onboard CNG generator.

Our Hypertruck ERX system can offer commercial vehicle owners and operators a net carbon negative capable 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 showcased a multistage roadmap that starts with utilizing a CNG/RNG generator and evolves into offering hydrogen-based solutions as well.

The Hypertruck platform will be designed to be fuel agnostic while the rest of the electric powertrain can remain the same.

We plan to initially release the Hypertruck ERX CNG solution, following with the release of a Fuel Agnostic generator and a Hydrogen Fuel Cell generator for the Hypertruck platform in the future.

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 CNG solution, following with the release of a fuel agnostic capable generator (“KARNO” generator) and a hydrogen fuel cell generator for the Hypertruck platform in the future.

CNG fueled battery recharging is preferable today due to both the current comparable cost of fuels and existing availability of CNG infrastructure.

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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.

In September 2022 we acquired assets including new hydrogen and fuel agnostic capable generator technology from General Electric Company's GE Additive business .

The KARNO generator emerged out of GE’s long-running R&D investments in metal additive manufacturing across multiple industries and in areas such as generator thermal and performance design.

Initial testing indicates the KARNO generator is ex pected to comply with all current and foreseeable emissions standards, specifically from the California Air Resources Board ( “ CARB ” ) and the Environment Protection Agency ( “ EPA ” ), even when utilizing conventional fuels.

The technology is expected to achieve a meaningful efficiency improvement over today’s conventional generators and could be more efficient than most available fuel cells.

These efficiency improvements should, in turn, enable fuel cost reductions and improved vehicle range.

The technology should also provide for significant reductions in noise, vibration, moving parts and maintenance as compared to current combustion engines.

The KARNO power system is expected to be capable of operating on over 20 different fuels including hydrogen, natural gas, propane, ammonia and conventional fuels.

The technology uses heat to drive a sealed linear generator to produce electricity.

The heat is produced by reacting fuels through flameless oxidation or other heat sources including renewables.

Key Factors Affecting Operating Results

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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.

Our Hybrid system officially launched, and our first early development 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.

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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.

In November 2021, we began our Hypertruck ERX roadshow, 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 fleet 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 been ongoing shortages in the automotive industry supply chain including semiconductors as well as several other key components.

There have been ongoing shortages in the transportation 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 placed orders with Peterbilt for all chassis needed in 2022 earlier this year 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 placed orders with Peterbilt for all chassis needed in 2022 earlier this year and are securing 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.

In late 2023, we plan to first release the Hypertruck ERX powertrain, leveraging a natural gas engine as the onboard generator.

In the years following, we plan to release the Hypertruck KARNO, our fuel agnostic variant, as phase two in the Hyliion journey to a hydrogen-based future.

We will also explore other adjacent markets to leverage the KARNO technology for cost savings and emissions reductions.

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.

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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.

The Inflation Reduction Act of 2022 was signed into law in August 2022, under which the Hypertruck ERX will qualify fleets to receive a 30% tax credit up to $40,000 per vehicle adopted.

We expect this to drive further interest in and demand for the Hypertruck ERX.

Key Components of Statements of Operations

We currently generate revenues from sales of Hybrid systems for Class 8 semi-trucks.

We currently generate revenues from sales of Hybrid systems for Class 8 semi-trucks and limited quantities of Class 8 semi-trucks outfitted with the Hybrid system.

Cost of Revenue

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• depreciation for equipment used in research and development activities;

• acquired in-process research and development from asset acquisition;

• allocation of general overhead costs.

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

As a result of our acquisition of the KARNO generator technology, we plan to assume a government contract with the United States Office of Naval Research that is not expected to have a material impact on our business.

Results of Operations

Comparison of Three Months Ended June 30, 2022 to Three Months Ended June 30, 2021

Our results of operations for the three months ended June 30, 2022 (the "current quarter") and 2021 on a consolidated basis are summarized as follows (in thousands, except share and per share data):

Three Months Ended June 30,

Comparison of Three Months Ended September 30, 2022 to Three Months Ended September 30, 2021

Our results of operations for the three months ended September 30, 2022 (the “current quarter”) and 2021 on a consolidated basis are summarized as follows (in thousands, except share and per share data):

Three Months Ended September 30,

2022 2021 $ Change % Change

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Interest income 1,926 195 1,731 887.7 %

Loss on disposal of assets (133) — (133) N/A

Gain on disposal of assets 46 — 46 N/A

Net loss $ (63,387) $ (26,615) $ (36,772) 138.2 %

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Weighted-average shares outstanding, basic and diluted 174,345,022 172,987,672 1,357 0.8 %

Sales increased $0.2 million in the current quarter, driven by sales of Hybrid systems.

Sales increased $0.5 million in the current quarter, driven by sales associated with our Hybrid products.

We continue to pursue the sale of both Hybrid systems as well as complete vehicles installed with our Hybrid system.

Cost of Revenues

Cost of revenues increased $2.1 million in the current quarter, driven by sales of Hybrid systems.

We expect a difference in timi ng between recognition of revenues and cost of revenues due to write-down of inventory to net realizable value in periods prior to sales.

Cost of revenues increased $2.9 million in the current quarter, driven by costs associated with 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 $2.3 million attributable to inventory on hand that had a cost higher than its net realizable value;

• Warranty costs of $0.1 mil lion for estimated costs to administer and maintain the warranty program for labor, transportation and parts, excluding any contribution from vendors.

• Class 8 semi-truck cost of $0.2 million;

• 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 $6.7 million in the current quarter primarily due to an increase of $6.3 million for the design and testing of our Hypertruck system including an increase in personnel and benefits as we build out our engineering, operations and supply chain teams and associated capabilities.

Research and development expenses increased $34.5 million in the current quarter primarily due to:

• $28.8 million related to hydrogen and fuel agnostic capable generator technology (“KARNO”) acquired in September 2022 from General Electric Company's GE Additive business to develop and commercialize the fuel agnostic Hypertruck KARNO;

• An increase of $5.5 million for the design and testing of our Hypertruck system including an increase in expenses related to components, services and personnel as we build out our engineering, operations and supply chain teams and associated capabilities.

Selling, General and Administrative

Selling, general and administrative expenses increased $1.6 million in the current quarter primarily due to:

• An increase in personnel and benefits of $0.5 million and software costs of $0.6 million as we continue to grow our sales and other functions;

• An increase of $0.7 million for legal and professional services and other.

• An increase in personnel and benefits of $2.4 million and software costs of $0.3 million as we continue to grow our sales and other functions, including impacts from the departure of our prior Chief Financial Officer;

partially offset by

• A decrease of $0.6 million for legal and professional services and other;

• A decrease of $0.2 million for marketing and advertising.

Total other income increased $1.8 million in the current quarter primarily due to interest income on investments.

Comparison of Six Months Ended June 30, 2022 to Six Months Ended June 30, 2021

The following table summarizes our results of operations on a consolidated basis for the six months ended June 30, 2022 (the "current six months") and 2021 (in thousands, except share and per share data):

Six Months Ended June 30,

Comparison of Nine Months Ended September 30, 2022 to Nine Months Ended September 30, 2021

The following table summarizes our results of operations on a consolidated basis for the nine months ended September 30, 2022 (the “current nine months”) and 2021 (in thousands, except share and per share data):

Nine Months Ended September 30,

2022 2021 $ Change % Change

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Weighted-average shares outstanding, basic and diluted 173,945,156 171,842,664 2,102 1.2 %

Sales increased $0.5 million in the current six months, driven by sales of Hybrid systems.

Sales increased $1.0 million in the current nine months, driven by sales associated with our Hybrid products.

We continue to pursue the sale of both Hybrid systems as well as complete vehicles installed with our Hybrid system.

Cost of Revenues

Cost of revenues increased $4.2 million in the current six months, driven by sales of Hybrid systems.

We expect a difference in timing bet ween recognition of revenues and cost of revenues due to write-down of inventory to net realizable value in periods prior to sales.

Cost of revenues increased $7.2 million in the current nine months, driven by costs associated with 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 $5.5 million attributable to inventory on hand that had a cost higher than its net realizable value;

• Class 8 semi-truck cost of $0.2 million;

• Warranty costs of $0.5 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 $13.1 million in the current six months primarily due to an increase of $12.4 million for the design and testing of our Hypertruck system including an increase in personnel and benefits as we build out our engineering, operations and supply chain teams and associated capabilities.

Research and development expenses increased $47.7 million in the current nine months primarily due to:

• An increase of $17.9 million for the design and testing of our Hypertruck system including an increase in expenses related to components, services and personnel as we build out our engineering, operations and supply chain teams and associated capabilities.

Selling, General and Administrative

Selling, general, and administrative expenses increased $4.5 million in the current six months primarily due to:

• An increase in personnel and benefits of $2.0 million and software costs of $1.3 million as we continue to grow our sales and other functions;

Selling, general, and administrative expenses increased $6.1 million in the current nine months primarily due to:

• An increase in personnel and benefits of $4.4 million and software costs of $1.6 million as we continue to grow our sales and other functions, including impacts from the departure of our prior Chief Financial Officer;

• An increase of $1.0 million for legal and professional services and other;

Total other income increased $0.6 million in the current six months primarily due to interest income on investments.

partially offset by

• A decrease of $0.2 million for marketing and advertising.

Total other income increased $2.4 million in the current nine months primarily due to interest income on investments.

Liquidity and Capital Resources

At June 30, 2022, our current assets were $397.5 million, consisting primarily of cash and cash equivalents of $199.9 million, short-term investments of $188.9 million and prepaid expenses of $8.4 million.

At September 30, 2022, our current assets were $394.0 million, consisting primarily of cash and cash equivalents of $154.2 million, short-term investments of $232.9 million and prepaid expenses of $5.9 million.

Our current liabilities were $16.8 million primarily comprised of accounts payable, accrued expenses and operating lease liabilities.

We believe the credit quality and liquidity of our investment portfolio at June 30, 2022 is strong and will provide sufficient liquidity to satisfy operating requirements, working capital purposes and strategic initiatives.

We believe the credit quality and liquidity of our investment portfolio at September 30, 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.

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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 Hypertruck ERX product development costs, 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.

Our primary short-term cash needs are Hypertruck ERX product development costs and components purchased to support the stated of production, operating expenses and production and related costs of Hybrid systems.

We plan to stay asset-light and utilize third parties to perform assembly and manufacturing at scale.

Further, we plan to develop and commercialize the fuel agnostic Hypertruck KARNO with an anticipated commercial launch a few years after the Hypertruck ERX.

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.

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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.

Net cash, cash equivalents and restricted cash provided by or used in operating activities, investing activities and financing activities for the six months ended June 30, 2022 and 2021 is summarized as follows (in thousands):

Six Months Ended June 30,

Net cash, cash equivalents and restricted cash provided by or used in operating activities, investing activities and financing activities for the nine months ended September 30, 2022 and 2021 is summarized as follows (in thousands):

Nine Months Ended September 30,

Cash from operating activities $ (83,442) $ (49,822)

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Cash from Operating Activities

For the six months ended June 30, 2022, cash flows used in operating activities were $55.6 million.

Cash used primarily related to a net loss of $60.6 million, adjusted for changes in working capital accounts and certain non-cash expenses of $5.0 million (including $3.5 million related to share-based compensation and $2.2 million related to depreciation, amortization and accretion charges, partially offset by $0.8 million related to accounts payable, accrued expenses and other liabilities).

For the six months ended June 30, 2021, cash flows used in operating activities were $24.2 million.

Cash used primarily related to net loss of $39.8 million, adjusted for changes in working capital accounts and certain non-cash expenses of $15.6 million (including $3.4 million related to share-based compensation, $1.8 million related to depreciation, amortization and accretion charges, $5.8 million related to accounts payable, accrued expenses and other liabilities and $4.9 million related to prepaid expenses and other assets).

For the nine months ended September 30, 2022, cash flows used in operating activities were $83.4 million.

Cash used primarily related to a net loss of $124.0 million, adjusted for changes in working capital accounts and certain non-cash expenses of $40.5 million (including $28.8 million related to acquired in-process research and development $5.3 million related to share-based compensation, $3.1 million related to prepaid expenses and other assets, $3.0 million related to depreciation, amortization and accretion charges and $2.0 million related to accounts payable, accrued expenses and other liabilities).

For the nine months ended September 30, 2021, cash flows used in operatin g activities were $49.8 million.

Cash used primarily related to net loss of $66.4 million, adjusted for changes in working capital accounts and certain non-cash expenses of $16.6 million (including $6.9 million related to accounts payable, accrued expenses and other liabilities, $4.0 million related to share-based compensation, $3.6 million related to prepaid expenses and other assets and $2.7 million related to depreciation, amortization and accretion charges).

Cash from Investing Activities

For the six months ended June 30, 2022, cash flows used in investing activities were $2.9 million.

Cash used related to the purchase of investments of $106.8 million and property and equipment of $0.6 million, offset by the sale or maturity of investments of $104.5 million.

For the six months ended June 30, 2021, cash flows used in investing activities were $63.7 million.

For the nine months ended September 30, 2022, cash flows used in investing activities were $20.8 million.

Cash used related to the purchase of investments of $160.1 million, acquired in-process research and development of $14.4 million and property and equipment of $2.6 million, offset by the sale or maturity of investments of $156.4 million.

For the nine months ended September 30, 2021, cash flows used in investing activities were $65.6 million .

Cash used primarily related to the purchase of investments of $268.7 million and property and equipment of $2.2 million, partially offset by the sale or maturity of investments of $205.4 million.

Net cash used in investing activities is expected to increase 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 six months ended June 30, 2022, cash flows used in financing activities were $0.1 million.

For the nine months ended September 30, 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 $0.2 million.

For the six months ended June 30, 2021, cash flows provided by financing activities were $15.9 million.

Cash flows were primarily due to 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.

For the nine months ended September 30, 2021, cash flows provided by financing activities were $15.9 million.

Cash flows were primarily due to net proceeds from the exercise of warrants of $16.3 million and proceeds from exercise of common stock options of $0.6 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.

In preparing our condensed consolidated financial statements, we applied the same critical accounting policies as described in our 2021 Annual Report, supplemented with those below, that affect judgments and estimates of amounts recorded for certain assets, liabilities, revenues and expenses.

To determine whether acquisitions should be accounted for as a business combination or as an asset acquisition, we make certain judgments which include assessing whether the acquired set of activities and assets meet the definition of a business.

If the acquired set of activities and assets meets the definition of a business, assets acquired and liabilities assumed are required to be recorded at their respective fair values as of the acquisition date with the excess of the purchase price over the fair value of the acquired net assets recorded as goodwill.

If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an acquisition of assets and, therefore, any acquired in-process research and development ( “ IPR&D ” ) that does not have an alternative future use is charged to expense at the acquisition date, and no goodwill is recorded.

The judgments made in determining estimated fair values of assets acquired and liabilities assumed in a business combination or asset acquisition, as well as estimated asset lives, can materially affect our consolidated results of operations.

All assets acquired in 2022 were valued using level 3 inputs with property and equipment valued using a cost approach and IPR&D valued using an income approach based on management’s projections.

The fair values of assets, including acquired IPR&D, are determined using information available near the acquisition date based on estimates and assumptions that are deemed reasonable by management.

Significant estimates and assumptions include, but are not limited to, probability of technical success, revenue growth, future revenues and expenses and discount rate.

Revenue Recognition

When a Class 8 semi-truck outfitted with a Hybrid system is resold to a customer, judgment is required to determine if we are the principal or agent in the arrangement.

We consider factors such as, but not limited to, which entity has the primary responsibility for fulfilling the promise to provide the specified good or service, which entity has inventory risk before the specified good or service has been transferred to a customer and which entity has discretion in establishing the price for the specified good or service.

We have determined that we are the principal in transactions involving the resale of Class 8 semi-trucks outfitted with the Hybrid system.

We are in early stages of development, continue to refine our business plans and consider the resale of Class 8 semi-trucks outfitted with Hybrid systems to constitute ordinary activities from our ongoing major or central operations.

Should our business plans, estimates or assumptions change, we may record receipts from sales of Class 8 semi-trucks as non-operating income in future periods.

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-Q

Item 2. Management’s Discussion and Analysis