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 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 2022 Annual Report. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q are forward-looking statements, including, but not limited to, statements regarding our strategy, prospects, plans, objectives, future operations, future revenue and earnings, projected margins and expenses, markets for our services, potential acquisitions or strategic alliances, financial position, and liquidity and anticipated cash needs and availability. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would,” variations of such words and similar expressions or the negatives thereof are intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements represent our management’s expectations as of the date of this filing and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. We cannot guarantee the accuracy of the forward-looking statements, and you should be aware that results and events could differ materially and adversely from those contained in the forward-looking statements due to a number of risks and uncertainties including, but not limited to, those described in the section entitled “Risk Factors” included in our 2022 Annual Report on Form 10-K and in other documents we file from time to time with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) that disclose risks and uncertainties that may affect our business. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report on Form 10-Q and in other documents we file from time to time with the Commission. Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we do not undertake, and expressly disclaim any duty, to publicly update or revise these statements, whether as a result of new information, new developments, or otherwise and even if experience or future changes make it clear that any projected results expressed in this Quarterly Report on Form 10-Q or future quarterly reports, press releases or company statements will not be realized. Unless specifically indicated otherwise, the forward-looking statements in this Quarterly Report on Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions or other business combinations that have not been completed as of the date of this filing. In addition, the inclusion of any statement in this Quarterly Report on Form 10-Q does not constitute an admission by us that the events or circumstances described in such statement are material. We qualify all of our forward-looking statements by these cautionary statements. In addition, the industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors including those described in the section entitled “Risk Factors” included in our 2022 Annual Report on Form 10-K. These and other factors could cause our results to differ materially from those expressed in this Quarterly Report on Form 10-Q. Overview Our mission is to be the leading provider of electrified solutions for the commercial vehicle industry as well as other industries. Our goal is to reduce the carbon intensity and greenhouse gas (“GHG”) emissions in the transportation sector by providing electrified solutions for Class 8 vehicles that aim to reduce the cost of operation while utilizing existing fueling infrastructure and allowing for the use of a variety of fuels. Our solutions help support our customers’ pursuit of sustainability and financial goals by reducing GHG emissions and operating costs. Our current products and products under development utilize control software, data analytics, battery systems, fully integrated electric motors, and power electronics to produce our electrified powertrain systems. Hypertruck ERX System Late in 2023 we plan to begin selling the Hypertruck ERX powertrain platform (“Hypertruck ERX system”), with estimated sales in the year of 30 units. The Hypertruck ERX system is a complete electrified powertrain system leveraging an onboard CNG-fueled generator to supplement battery range to transform an OEM platform into a range-extended electric vehicle (“REEV”). The Hypertruck ERX system leverages the experience and operating data from our Hybrid system to offer a solution to replace the traditional diesel or CNG powertrain installed in new vehicles. Its onboard CNG generator functions as an electric range-extender, addressing the market need of having a fully electric drive truck that can travel long distance between refuels as there is not yet a national reliable electric recharging network for battery electric vehicles (“BEV”) do. The system’s batteries are recharged by the onboard CNG generator, which when fueled by renewable natural gas (“RNG”), can offer commercial vehicle owners a reduction in their GHG emissions and potentially a net-carbon-negative-capable electrified powertrain option. 13 Table of Contents We believe CNG/RNG is the appropriate fuel source today, as it is cleaner and less expensive than diesel and broadly available. Over time, other fuels are expected to become available to reduce emissions, including hydrogen. Therefore, we have showcased a multistage roadmap that starts with utilizing a CNG/RNG generator and evolves into offering fuel-agnostic and hydrogen-based solutions. The control software driving the Hypertruck system is designed to be adaptable to different fuel and generator types in accordance with customer and regulatory requirements, thereby reducing future capital investment and time to market. For long-haul trucking, an electric powertrain with a CNG-fueled range extender generator is preferable today to a pure BEV due to both the comparable cost of fuels and existing availability of CNG fueling infrastructure compared to electric battery charging infrastructure. Class 8 semi-trucks can currently be refueled with CNG through an existing, geographically diverse, public and truck-accessible network of natural gas refueling stations established across North America. Globally, RNG, CNG and liquified natural gas (“LNG”) are also widely used for land-based transport and trucking. We believe there is a greater opportunity for more rapid adoption of our electrified powertrain solutions compared to pure electric solutions, because of the extended range available between refueling events and due to the greater availability of refueling infrastructure compared to other electrified solutions. We plan to begin delivering trucks with the Hypertruck ERX system to customers in late 2023 and our first application will be deployed on a Class 8 Peterbilt 579 sleeper semi-truck utilizing a 12-liter generator. The Cummins 12-liter California Air Resources Board (“CARB”) certification will expire at the end of 2023. As a result, we have begun work on integrating a Cummins 15-liter generator, expected to be released in 2024, on the next variant of the Hypertruck ERX system, which also includes cost-and-weight-saving design changes. We expect the Hypertruck ERX system with the 15-liter generator to be available in late 2024 or early 2025. We expect that the 12-liter variant of the Hypertruck ERX system will be able to be sold in all states except California in 2024. We also announced during the second quarter that the next version of the Hypertruck ERX platform will be a day cab model which is expected to be ready for commercialization in 2025. We have received broad customer interest in a day cab variant due to the challenges fleets have experienced with plug-in electric day cab trucks, including cost, limited battery range, and difficulty obtaining vehicle charging infrastructure. We have heard from fleets that the additional weight of the Hypertruck ERX sleeper variant will hinder its ability to operate in heavy-haul applications. Therefore, for the day cab variant, we are exploring ways to reduce battery and tank sizes to remove weight in addition to the weight savings of moving to a day cab. Additionally, the CARB's recently-enacted Advanced Clean Fleets Regulation (“ACF”) includes earlier mandates as soon as 2027 for converting day cab trucks to cleaner alternatives including the Hypertruck ERX system. KARNO System In September 2022 we acquired assets including new hydrogen and fuel-agnostic-capable generator technology from General Electric Company's GE Additive business (“KARNO generator”). The KARNO generator emerged out of GE’s long-running research and development 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 expected to comply with emissions standards of CARB and the U.S. Environmental Protection Agency (“EPA”), even when utilizing conventional fuels. The technology is also expected to achieve a meaningful efficiency improvement over today’s conventional internal combustion engine (“ICE”) generators and could be more efficient than most available fuel cells. We expect these efficiency improvements to in turn enable fuel cost reductions and improved vehicle range while reducing operating costs. The technology should also provide for significant reductions in maintenance costs, noise and vibration compared to conventional ICE generators due to its unique design and single moving part per generator shaft. The KARNO generator is expected to be capable of operating with over 20 different fuel types including hydrogen, natural gas, propane, ammonia and conventional fossil fuels. The technology uses heat to drive a sealed linear generator to produce electricity. The heat is produced by reacting fuels through a flameless oxidation process. We are currently advancing development of the KARNO generator technology and plan for it to be the primary power source for the Hypertruck KARNO powertrain system (“Hypertruck KARNO system”) which we expect to commercialize in the coming years, with early fleet trials expected in 2026. We are currently completing assembly of an operational Hypertruck KARNO system prototype, which we expect to demonstrate with potential customers in the second half of 2023. Finally, we are pursuing commercialization of the KARNO generator for stationary power generation applications as well, particularly for electric vehicle charging, conversion of waste and flare gas to electricity, renewables matching and for primary or backup power in buildings, data centers and other applications that could benefit from a low-cost, low-emissions, micro-grid power source. We expect deployments of KARNO generator stationary units in 2024 in initial revenue generating operations. We anticipate that the KARNO generator used in the Hypertruck KARNO system and in stationary applications will be nearly identical. 14 Table of Contents Hypertruck Fuel Cell System In March 2023, we announced a new agreement with Hyzon Motors USA Inc. (“Hyzon”) to develop a fuel cell powered vehicle. This development is part of the third step in our multi-stage product roadmap towards a hydrogen future. The vehicle will use Hyliion’s electric powertrain system and Hyzon’s fuel cell technology as the generator. The powertrain will be integrated into a Peterbilt chassis and may be the predecessor of a future production truck (“Hypertruck Fuel Cell”). Completion of the prototype vehicle is expected in the fourth quarter of 2023. Hybrid System We currently offer the Hyliion Hybrid (“Hybrid”) system, which is an electrified powertrain system that augments existing Class 8 semi-trucks and aims to improve vehicle performance or reduce fuel usage, depending on application. The Hybrid system can either be installed on a new vehicle prior to entering service or retrofit onto an existing in-service vehicle. This feature gives our customers the flexibility to continue using their preferred vehicle brands and maintain their existing fleet maintenance and operations strategies. We began selling the Hybrid system in late 2021 and it has been installed on a variety of our customers’ commercial vehicles, utilizing multiple original equipment manufacturer (“OEM”) platforms. Our Hybrid system deployments are with innovative fleets in the transportation and logistics sector and include a variety of duty cycles, use cases and geographical regions. A common application is to install the Hybrid system on a compressed natural gas (“CNG”) powered truck with a conventional drivetrain. The Hybrid system aims to improve performance by giving a power boost to the CNG drivetrain when needed, along with regenerative braking and an optional fully electric auxiliary power system. Across these customer installations, and over the entire Hyliion fleet, we have accumulated millions of real-world road miles on Class 8 semi-trucks. As we continue our journey of developing and delivering electrified Class 8 semi-truck powertrain solutions, we have seen a market shift and greater demand from fleets toward fully-electrified powertrain solutions, such as the Hypertruck ERX, as opposed to hybrid solutions. We are continuing to deliver our Hybrid system at low volumes to fleets that are requesting it, however are directing development and fleet discussions toward the Hypertruck ERX powertrain portfolio. 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, supply chain disruptions, inflation and rising interest rates as well as those discussed below and referenced in Item 1A. “Risk Factors.” Successful Commercialization of Our Drivetrain Solutions We began selling our Hybrid system in the fourth quarter of 2021. Our first early development Hypertruck ERX showcase unit was unveiled on August 31, 2021 at the ACT Expo in Long Beach, California and we’ve offered potential customers the opportunity to experience its operation in demonstration events and in real-world applications hauling freight for shippers. The Hybrid system offers fleets a solution that is easy to install, service and operate. It draws upon the real-world feedback we have received from customers and the millions of miles logged with the system. In addition, we continually assess the potential demand impact for the Hybrid system offering in light of recent changes within the competitive landscape. 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 system's features and benefits, including how it enables fleet decarbonization goals while also reducing total cost of ownership. Our development timeline will continue through 2023 as we place verification trucks into extended fleet trials with potential customers, seek certification of our powertrain from regulators, and as we approach first customer deliveries late in the year. We have been tracking key development milestones on a roadmap that we first laid out in late 2021. We completed assembly of the first verification vehicles in early 2022 that we subsequently used for design validation, on-road testing, customer Ride and Drive events and fleet trials with customers. We successfully completed summer testing of the Hypertruck ERX system with rigorous operations in high temperature conditions. We also deployed verification vehicles into controlled fleet trials with customers, accompanied by Hyliion engineering personnel, where the trucks are used in standard freight hauling operations with the fleets’ customers. In late 2022 we began subjecting verification vehicles to winter testing where we observed system operation in extremely cold conditions. 15 Table of Contents Supply chain constraints in 2022 were widespread in the trucking industry, causing shortages or longer-lead times for key components needed for truck production and delays in our originally anticipated timeline. While such constraints have lessened in recent quarters, we continue to experience unexpected delays receiving critical components needed for assembly of our latest verification vehicle model, including wiring harnesses. As a result, we had fewer verification vehicles available during the second quarter than we anticipated and are requiring additional time to confirm operational reliability. Consequently, we delayed the start of extended customer fleet trials from the second quarter of 2023 to the third quarter. We have worked with Peterbilt to secure build slots for this calendar year to mitigate the risk of supply chain impacts to our Hypertruck ERX development and production schedule. We also continue to work closely with our extended supply base to ensure the delivery of components needed for the quarters ahead and are diligently seeking alternative sources of supply for components that meet our technical specifications with shorter lead times. We plan to release the Hypertruck ERX system into commercial production for delivery to customers in late 2023 leveraging a 12-liter natural gas engine as the onboard generator. At the end of the second quarter of 2023, we began assembly of the first production truck by installing our Hypertruck ERX powertrain system into a de-contented chassis from Peterbilt. Prior to delivering production trucks to customers, we plan to complete extended fleet trials with customers and finalize powertrain certifications with CARB, the EPA and the National Highway Traffic Safety Administration. Companies, including Hyliion, in the truck electrification space face a number of challenges as they develop and scale the production of new clean vehicles and as customers employ these vehicles in their fleets. We continue to assess our business model and strategic priorities to ensure we are utilizing capital as effectively as possible. Our initial plan was to quickly ramp up Hypertruck ERX powertrain production and full truck sales. However, after assessing the costs and growth in working capital that we would incur by executing this plan, we have begun to shift to more capital-efficient ways to achieve growth in customer demand over the long-term while consuming less cash in the short-term. Our new goal is to continue the installation of production powertrain systems into trucks that we began late in the second quarter of 2023 while slowing the growth rate of production and sales that we originally anticipated. At the same time, we are investing in powertrain cost and weight reduction enhancements, which customers will demand, and planning a more rapid shift to selling powertrains versus full trucks. Our new strategy was developed in light of market conditions in order to remain conservative with our existing cash and investment balances. We expect to delivery 30 Hypertruck ERX systems by the end of 2023. We plan to begin by selling the entire vehicle directly to customers but then begin shifting to become a powertrain company and to sell our solutions directly to the OEMs for them to integrate into their production facilities. OEM industry trends indicate that vehicle manufacturers will work to de-content components that their Tier 1 suppliers are providing as they work to vertically integrate. We plan to continually improve and differentiate our product offerings in an effort to offer the OEMs differentiated solutions and reduce the ability to de-content. In 2024, we plan to complete our fuel agnostic Hypertruck KARNO system integration design, on our journey to a hydrogen-based future. We will also explore other adjacent markets to leverage the KARNO generator technology for cost savings and emissions reductions including stationary power generation. Ultimately, we plan to release a fuel cell powered vehicle that also uses Hyliion’s electric powertrain system. 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 development of the KARNO generator, and for working capital purposes as we ramp up production volumes of the Hypertruck ERX system. The amount and timing of our future funding requirements, if any, will depend on many factors, including but not limited to, the pace at which we shift to selling powertrains versus trucks, the scope and results of our research and development efforts, the breadth of product offerings we plan to commercialize, as well as factors that are outside of our control. Customer Demand In 2022, we announced our Founders Program, which comprised a group of initial customers that committed to purchase the first 210 Hypertruck ERX units. Delivery of these units was expected to occur between the fourth quarter of 2023 and the end of the first quarter of 2024. Recently, we began revisiting these initial agreements with customers, which are non-binding and subject to finalization of terms, with a goal of restructuring and simplifying the Founders program. Specifically, we are seeking to improve economic terms for Hyliion, including having fleets absorb more of the component cost inflation we’ve experienced over the past year. Sales negotiations are ongoing, with the likely outcome that the first 30 production trucks will be delivered to customers by year end. 16 Table of Contents We also believe that the successful completion of testing, validation, and certification work that is ongoing will be an inflection point for orders as some customers are waiting for final development and powertrain certification before placing orders. As these milestones are achieved, we expect to continue to grow our order backlog for additional truck deliveries in 2024 and beyond. We will assess our production plans for 2024 as we receive feedback from fleet trials and initial deliveries. We continue to target leaders in the trucking industry with aggressive sustainability initiatives for inclusion in our early adopter programs. The Inflation Reduction Act of 2022 was signed into law in August 2022, under which the Hypertruck ERX system will qualify fleets to receive a 30% tax credit up to $40,000 per vehicle adopted. We expect this incentive to drive further interest in and demand for the Hypertruck ERX system. We began selling the Hybrid system in the fourth quarter of 2021 and generated $2.1 million in revenue in 2022 from selling Hybrid systems, where our powertrain technology is retrofitted onto existing trucks, and full trucks with the Hybrid system pre-installed. We recorded $576 thousand in Hybrid sales in the six months ended June 30, 2023, which included a full truck with a Hybrid system installed and other Hybrid systems. Key Components of Statements of Operations Revenue 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 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 contractors for outsourced engineering services and to consultants; • expenses related to truck components for development and test vehicles, materials, supplies and other third-party services; • depreciation for equipment used in research and development activities; • acquired in-process research and development from asset acquisition; and • allocation of general overhead costs. We expect to continue to invest in research and development activities to achieve operational and commercial goals and as we develop new platforms that incorporate our Hypertruck ERX system. 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. Factors that also affect selling, general and administrative expense include the total number of employees, costs incurred 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, insurance, investor relations activities and other administrative and professional services. Other Income (Expense) 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. 17 Table of Contents Results of Operations Comparison of Three Months Ended June 30, 2023 to Three Months Ended June 30, 2022 Our results of operations for the three months ended June 30, 2023 (the “current quarter”) and 2022 on a consolidated basis are summarized as follows (in thousands, except share and per share data): Three Months Ended June 30, 2023 2022 $ Change % Change Revenues Product sales and other $ 266 $ 172 $ 94 54.7 % Total revenues 266 172 94 54.7 % Cost of revenues Product sales and other 307 2,145 (1,838) (85.7) % Total cost of revenues 307 2,145 (1,838) (85.7) % Gross loss (41) (1,973) 1,932 (97.9) % Operating expenses Research and development 27,439 20,057 7,382 36.8 % Selling, general and administrative expenses 11,098 12,167 (1,069) (8.8) % Total operating expenses 38,537 32,224 6,313 19.6 % Loss from operations (38,578) (34,197) (4,381) 12.8 % Interest income 3,349 855 2,494 291.7 % Loss on disposal of assets (1) (133) 132 (99.2) % Other income, net 3 — 3 N/A Net loss $ (35,227) $ (33,475) $ (1,752) 5.2 % Net loss per share, basic and diluted $ (0.19) $ (0.19) $ — — % Weighted-average shares outstanding, basic and diluted 180,966,908 173,897,517 7,069 4.1 % Revenue Sales associated with our Hybrid products increased $0.1 million. While we continue to expect additional Hybrid system sales for the remainder of 2023, we anticipate reduced sales of the Hybrid product following the start of Hypertruck ERX system deliveries late in 2023. Cost of Revenues Cost of revenues associated with our Hybrid products decreased $1.8 million. 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 generally when the components are received, which may not coincide with the period in which sales of systems with those components installed are realized. The decrease in cost of revenues includes: • A decrease in inventory write-downs of $2.0 million attributable to inventory on hand that had a cost higher than its expected net realizable value as we purchased less inventory in the current quarter; partially offset by • An increase in costs associated with sales of Hybrid systems of $0.1 million. Research and Development Research and development expenses increased $7.4 million due to: • An increase of $3.7 million for the design and testing of our Hypertruck KARNO system which was acquired in September 2022; and • An increase of $3.7 million for the design and testing of our Hypertruck ERX system variants, excluding Hypertruck KARNO system, including an increase of production truck components which were expensed to Research and Development as they were received before the beginning of Hypertruck ERX system commercialization and a decrease 18 Table of Contents in expenses related to validation vehicle components, services and personnel as we approach commercialization of the Hypertruck ERX powertrain system. Selling, General and Administrative Selling, general, and administrative expenses decreased $1.1 million primarily due to: • A decrease of $1.1 million in professional services; and • A decrease of $0.7 million for insurance costs; partially offset by • An increase of $0.6 million in personnel and benefits due to workforce growth over the past year and inflation; and • An increase of $0.3 million in marketing and advertising as we exhibited our Hypertruck KARNO system. Other Income (Expense) Total other income increased $2.6 million primarily due to an increase in interest income on investments. Comparison of Six Months Ended June 30, 2023 to Six Months Ended June 30, 2022 The following table summarizes our results of operations on a consolidated basis for the six months ended June 30, 2023 (the “current six months”) and 2022 (in thousands, except share and per share data): Six Months Ended June 30, 2023 2022 $ Change % Change Revenues Product sales and other $ 576 $ 512 $ 64 N/A Total revenues 576 512 64 N/A Cost of revenues Product sales and other 998 4,244 (3,246) N/A Total cost of revenues 998 4,244 (3,246) N/A Gross loss (422) (3,732) 3,310 N/A Operating expenses Research and development 48,357 35,865 12,492 34.8 % Selling, general and administrative expenses 22,079 21,991 88 0.4 % Total operating expenses 70,436 57,856 12,580 21.7 % Loss from operations (70,858) (61,588) (9,270) 15.1 % Interest income 6,811 1,140 5,671 497.5 % (Gain) loss on disposal of assets 1 (135) 136 N/A Other expense, net (12) — (12) N/A Net loss $ (64,058) $ (60,583) $ (3,475) 5.7 % Net loss per share, basic and diluted $ (0.35) $ (0.35) $ — — % Weighted-average shares outstanding, basic and diluted 180,544,821 173,741,910 6,803 3.9 % Revenue Sales associated with our Hybrid products increased $0.1 million. While we continue to expect additional Hybrid system sales for the remainder of 2023, we anticipate reduced sales of the Hybrid product following the start of Hypertruck ERX system deliveries late in 2023. Cost of Revenues Cost of revenues associated with our Hybrid products decreased $3.2 million. 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 generally when the components are received, which may not coincide with the period in which sales of systems with those components installed are realized. The decrease in cost of revenues includes: • A decrease in inventory write-downs of $3.1 million attributable to inventory on hand that had a cost higher than its expected net realizable value as we purchased less inventory in the current six months; and 19 Table of Contents • A decrease in 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 as we sold fewer Hybrid systems in the current six months. Research and Development Research and development expenses increased $12.5 million due to: • An increase of $7.1 million for the design and testing of our Hypertruck KARNO system which was acquired in September 2022; and • An increase of $5.4 million for the design and testing of our Hypertruck ERX system variants, excluding Hypertruck KARNO system, including an increase of production truck components which were expensed to Research and Development as they were received before the beginning of Hypertruck ERX system commercialization and a decrease in expenses related to validation vehicle components, services and personnel as we approach commercialization of the Hypertruck ERX powertrain system. Selling, General and Administrative Selling, general, and administrative expenses increased $0.1 million primarily due to: • An increase of $2.3 million in personnel and benefits due to workforce growth over the past year and inflation; and • An increase of $0.3 million in marketing and advertising as we exhibited our Hypertruck KARNO system; partially offset by • A decrease of $1.4 million for insurance costs; and • A decrease of $1.1 million in professional services. Other Income (Expense) Total other income increased $5.8 million primarily due to an increase in interest income on investments. Liquidity and Capital Resources At June 30, 2023, our current assets were $249.2 million, consisting primarily of cash and cash equivalents of $48.2 million, short-term investments of $183.4 million and prepaid expenses of $15.9 million. Our current liabilities were $18.4 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, 2023 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 rate 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. We have no plans to raise additional capital in 2023 and have flexibility into 2025, although we may opportunistically raise additional capital in 2024 or later if market conditions strengthen to fund our planned development roadmap. Our primary short-term cash needs are Hypertruck ERX product development costs and components purchased to support the start of production, KARNO generator development costs, operating expenses and production and related costs of Hybrid systems. We plan to stay asset-light and utilize OEMs and third parties to perform assembly and manufacturing at scale. Finally, based on current projections of operating expenses, capital spending and working capital growth, we expect to have approximately $275 million in cash, short-term and long-term investments remaining on our balance sheet at the end of 2023. 20 Table of Contents 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 electrified drive systems for Class 8 semi-trucks and scaling the Company’s operations to meet anticipated demand. Further, we plan to develop and commercialize (i) the fuel agnostic Hypertruck KARNO system with anticipated fleet trials in 2026 and (ii) a fuel cell powered vehicle using Hyliion’s electric powertrain system. 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.” We have begun taking actions to reduce the rate of spending as we continue to advance our solutions. These actions include reducing capital spending, hiring and other expenses, renegotiating agreements with Founders program customers to improve financial terms for Hyliion, and scaling back the ramp up of truck production to reduce losses and the need for increased working capital. These actions are expected to extend the timeline that existing capital resources can fund company operations prior to reaching profitability or needing to raise additional capital. 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, the breadth of product offerings we plan to commercialize, the pace of sales and production growth, as well as factors that are outside of our control. 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 six months ended June 30, 2023 and 2022 is summarized as follows (in thousands): Six Months Ended June 30, 2023 2022 Cash from operating activities $ (63,589) $ (55,571) Cash from investing activities (7,542) (2,864) Cash from financing activities (132) (77) $ (71,263) $ (58,512) Cash from Operating Activities For the six months ended June 30, 2023, cash flows used in operating activities were $63.6 million. Cash used primarily related to a net loss of $64.1 million, adjusted for a $4.5 million change in working capital accounts and $5.0 million in certain non-cash expenses (including $2.7 million related to accounts payable, accrued expenses and other liabilities and $3.8 million related to share-based compensation, partially offset by $5.8 million related to prepaid expenses and other assets and $0.8 million related to inventory purchases). 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 a $4.1 million change in working capital accounts and $9.1 million in certain non-cash expenses (including $3.5 million related to share-based compensation, $1.6 million related to depreciation, amortization and accretion charges and $0.6 million related to prepaid expenses and other assets, partially offset by $0.8 million related to accounts payable, accrued expenses and other liabilities). Cash from Investing Activities For the six months ended June 30, 2023, cash flows used in investing activities were $7.5 million. Cash used related to the purchase of investments of $99.2 million and acquired property and equipment of $4.0 million, partially offset by the sale or maturity of investments of $95.6 million. For the six months ended June 30, 2022, cash flows used in investing activities were $2.9 million. Cash used primarily related to the purchase of investments totaling $106.8 million, partially offset by the sale or maturity of investments of $104.5 million. Cash from Financing Activities For the six months ended June 30, 2023, 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, 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. 21 Table of Contents Critical Accounting Policies and Estimates In preparing our condensed consolidated financial statements, we applied the same critical accounting policies as described in our 2022 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 2022 Annual Report. There have been no material changes to our market risks as therein previously reported.