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, this Quarterly Report on Form 10-Q, 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 and in this Quarterly Report on Form 10-Q. These and other factors could cause our results to differ materially from those expressed in this Quarterly Report on Form 10-Q. Overview Hyliion is committed to creating innovative solutions that enable clean, flexible and affordable electricity production. The Company’s primary focus is to provide distributed power generators that can operate on various fuel sources to future-proof against an ever-changing energy economy. Headquartered in Austin, Texas, and with research and development in Cincinnati, OH, Hyliion is addressing the commercial space first with a locally deployable generator that can offer prime power, peak shaving, and renewables matching. As the Company goes forward, it plans to scale its generator solution to also address household applications. This approach enables consumers to produce their own electricity while utilizing the grid as a backup source. Beyond stationary power, Hyliion will address mobile applications such as vehicles and marine. The KARNO generator is a fuel-agnostic solution, enabled by additive manufacturing, that leverages a linear heat generator architecture. The Company aims to offer innovative, yet practical solutions that contribute positively to the environment in the energy economy. Strategic Business Developments During the quarter, Hyliion offered the Hyliion Hybrid system (“Hybrid”), an electrified powertrain system that augments existing Class 8 semi-trucks to improve vehicle performance or reduce fuel usage, depending on application. The Hybrid system can be installed on new vehicles prior to entering service, or retrofit onto existing in-service vehicles, allowing customers to use their preferred vehicle brands and maintain their existing fleet maintenance and operations strategies. The Company began selling the Hybrid system in late 2021, with deployments to fleets in the transportation and logistics sector in a variety of duty cycles, use cases, and geographical regions. The Company also continued development of its Hypertruck ERX 14 Table of Contents powertrain platform (“Hypertruck ERX”), a complete electrified powertrain system leveraging an onboard compact-natural-gas-fueled generator to supplement battery range to transform an OEM platform into a range extended electric vehicle. Companies in the truck electrification space (including Hyliion) have continued to face a number of challenges and headwinds as they develop and scale the production of new clean vehicles, and as customers employ these vehicles in their fleets. For Hyliion, these challenges have included, among others, a slower-than-anticipated market transition to electric commercial truck fleets, escalating component and production costs and delays, new California Air Resources Board (“CARB”) mandates for fleet adoption of electric trucks, the need to reduce the cost and weight of the Hypertruck ERX platform, continued work by OEMs to de-content Tier 1 components that their Tier 1 suppliers are providing, and the expectation that the Company would be required to raise substantial additional capital to address and overcome these challenges. In light of these challenges to the business and other considerations, the Company’s board of directors, with the support of its expert advisors, explored a range of strategic alternatives for its electrified powertrain systems business. At the conclusion of that strategic review following the end of the quarter, the board of directors determined that discontinuing operating the electrified powertrain systems business and focusing exclusively on the development and commercialization of the Company’s fuel-agnostic KARNO generator technology would be the most effective use of the Company’s capital and in the best interests of the Company’s shareholders. Hyliion intends to retain the powertrain technology enabling the Company to explore a sale or future use of the technology and the tangible assets from the powertrain division. Tangible assets include the first 30 Hypertruck ERX production trucks which Hyliion no longer plans to recognize revenue on and the Hypertruck Fuel Cell prototype truck that Hyliion successfully completed in the third quarter of this year in collaboration with Hyzon Motors. KARNO Generator 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 aerospace engines and metal additive manufacturing across multiple industries and in areas such as generator thermal and performance design. We initially envisioned utilizing the KARNO generator as new range-extending power source for the Hypertruck powertrain system, given its ability to operate on a wide range of fuel sources, including natural gas and hydrogen. We now believe that the unique capabilities of the KARNO generator will also make it competitive in the stationary power market, competing favorably against conventional electrical generating systems and opening up potential new markets to enhance grid power availability and reliability. The KARNO generator technology, including the technology that was acquired from GE and the technology developed by Hyliion subsequent to the acquisition, is protected by numerous patents and trademarks which we believe provide Hyliion extensive and lasting protection for its intellectual property. Benefits of the KARNO Generator Versus Conventional Competitors We believe the versatility and operating characteristics of the KARNO generator make it an ideal system for a variety of conventional and emerging electrical generating applications. Key attributes of the KARNO generator distinguish it from its conventional generator counterparts, which may open new market opportunities: • Generator Efficiency : The anticipated operating efficiency of the KARNO generator results in lower cost of electricity versus conventional generating systems and, in many markets, grid power. • Low Maintenance : With only a single moving part per shaft, the simplicity of the KARNO generator is expected to reduce both periodic maintenance expenses and expected overhaul costs. • Fuel Agnostic : While many traditional generators operate on a single fuel source or require system modification to achieve fuel flexibility, the KARNO generator is truly fuel-agnostic, and can switch between fuel choices during operation. • Low Noise and Vibration : Unlike conventional generators, the KARNO generator operates without internal combustion, resulting in a significantly lower noise level of approximately 67 decibels at six feet, which is approximately equivalent to a typical conversation. • Higher Power Density : The unique architecture and features of the KARNO generator that are enabled by advances in additive manufacturing, enable the generator to achieve a high level of power density. For example, a 200kW generator occupies less than a cubic meter of volume. • Modularity : The power output of a KARNO generator can be modulated by changing the level of heat applied to the system. For larger power applications above 200kW, systems with six or more shafts can be utilized or, multiple 15 Table of Contents KARNO generators can be assembled to operate as a single unit. For megawatt applications, individual generators can be turned on or off to adjust the total power output of the system. • Fast Startup Time : It is anticipated that the KARNO generator will be able to begin generating electricity from a cold start in approximately 30 to 60 seconds. Additionally, full power can be achieved in a matter of minutes. Conversely, some generating systems, such as solid oxide fuel cells, require a warm-up period of up to 30 minutes. KARNO Generator Development Our ongoing efforts with the KARNO generator encompass activities such as its design, development and rigorous testing, along with the development of essential balance-of-plant systems including cooling and controls systems. Notably, we have reached a significant milestone by constructing the 125 kW ALPHA generator which we are currently testing in our development facility. Simultaneously, we are in the final stages of designing a 200kW BETA generator, which is poised to serve as our initial production design for initial commercial deployments. We have also showcased the KARNO generator with potential powertrain and stationary power customers. Moreover, we successfully demonstrated the KARNO generator’s capability to feed power back to the electric grid from our Cincinnati, Ohio facility, using an ALPHA KARNO generator unit. As we progress toward our anticipated initial stationary generator deployments, scheduled for late 2024, pivotal development activities are underway, including enhancements to the linear generator system and its controls, rigorous validation of essential operating parameters, including efficiency, emissions and reliability, and build-out of balance-of-plant systems and controls. These initial generator deployments, coupled with our ongoing testing and development endeavors, will play a vital role in the validation of other critical design specifications, including the generator’s projected operating life, maintenance requirements and durability. We expect to achieve efficiencies over time, leading to a reduction in the manufacturing and assembly costs associated with the KARNO generator. These efficiencies will predominantly stem from advancements in the speed and capacity of additive manufacturing machines offered by GE and other vendors. The pace of advancements in additive technology is rapid, with the output of machines we intend to acquire over the next three to four years projected to increase by nearly a factor of ten compared to machines available today. Additionally, we are actively pursuing design modifications that will enable specific components to be produced through conventional manufacturing processes. Moreover, for less critical components, we are exploring utilization of lower-cost and lightweight materials like aluminum. Lastly, we anticipate that economies of scale will play a pivotal role in reducing system component costs as manufacturing output scales up progressively. We plan to initiate the printing and assembly of the first production units of the KARNO generator at our facilities in Austin, Texas and Cincinnati, Ohio. As production volumes rise, we will also consider outsourcing the printing, manufacturing and assembly of specific components or the entire generator to third parties. We will also design and manufacture or purchase components for balance-of-plant and electrical systems for the initial production units while considering outsourcing options over time. In our initial deployment phase, we intend to collaborate closely with customers, overseeing the installation, monitoring and maintenance of KARNO generator systems. Additionally, we will consider options for integrating our products into existing sales and distribution channels and forging partnerships with established manufacturers, vendors, developers and distributors as we continue to grow and evolve. KARNO Generator Applications The U.S. electrical grid is facing a multitude of challenges as it strives to manage the escalating demand for electricity while adapting to evolving generating resources. The electrification of transportation, particularly the growing adoption of electric vehicles, is adding substantial load to the grid. Additionally, the integration of renewable energy sources such as solar and wind power introduces variability and necessitates grid modernization and storage solutions for stability. Hyliion believes that localized grid generation will become an increasing part of the solution to these challenges and that the KARNO generator can address many concerns that inhibit consumers from adopting onsite generating systems today, including cost, maintenance needs, noise, versatility and emissions. Hyliion believes that the KARNO generator is suitable for wide range of electrical power generating applications and that it can penetrate the market for these applications due to its highly differentiated characteristics versus conventional generators. Key differentiating attributes include low maintenance, lower operating costs due to efficiency, low noise and emissions, and fuel versatility. Planned initial KARNO generators that are both power dense and mobile, are expected to include an approximate three cubic meter, single four-shaft 200kW generating unit, including balance-of-plant components. Later planned developments include an over-2 megawatt system with multiple KARNO generators inside the footprint of a 20 foot shipping container. Over time, we expect larger and smaller capacity versions of the KARNO generator will be offered with power levels varying based on the number of generator shafts included or the size of component parts. Consequently, we expect the KARNO generator to initially 16 Table of Contents compete effectively in the market for power applications between 200kW to 5MW and later extending to smaller power configurations. We are currently working with potential customers for initial generator deployments. The primary purpose of these deployments is to further test and validate KARNO generator product attributes including efficiency, emissions, maintenance requirements, durability, control systems and other parameters. We expect to receive compensation for these initial deployments as we believe the generator will provide tangible benefits to customers. We also expect that early deployments will demonstrate the effectiveness of the KARNO generator in a wide range of electrical generating applications. Target markets include: • Waste Gas Power Generation: Natural gas sourced from waste sites like landfills, water treatment plants and dairy farms is a growing market as producers seek to capture sources of methane emissions that would otherwise be released into the atmosphere or flared. Also known as renewable natural gas, most sources are typically treated to remove impurities such as carbon dioxide, hydrogen sulfide and moisture before the gas can be utilized or injected into natural gas pipelines. We believe the KARNO generator will compete effectively as a power generator using waste gas sources. Its modularity, coupled with its capability to oxidize a variety of fuel sources and mixtures without the need for prior gas processing, positions it as an efficient and adaptable power generator for waste gas sources. • Flare Gas: Similarly, natural gas extracted from gas or oil wells frequently requires processing to remove natural gas liquids and impurities. At remote well sites, gas may be flared, or burned, due to insufficient pipeline capacity for transmission to consuming markets. The KARNO generator creates a new opportunity – to transform flare gas into valuable electricity, destined either for integration into the electric grid or for localized consumption. As with RNG, the KARNO generator is anticipated to use flare gas without the need for pre-treatment by a gas processing facility. • Vehicle Charging: The rapid growth of electric vehicles is increasingly straining grid capacity and reliability, both domestically and internationally. The introduction of commercial EVs, such as buses, delivery vans and large trucks is expected to intensify this challenge given their substantial power requirements during charging. Many commercial operators cite the lack of generating capacity as the primary obstacle to expanding their electric vehicle fleets. Here, the KARNO generator is a unique solution compared to conventional generators, offering a localized and versatile source of electrical power for vehicle charging. In addition to its flexibility in fuel sources, including the capacity to utilize hydrogen, and its superior environmental performance with lower emissions and noise levels compared to internal combustion generators, the KARNO generator’s ability to modulate power without efficiency loss is a pivotal advantage. Power out can be adjusted by activating or deactivating individual generators and by regulating the heat input to each generator. Finally, KARNO’s high power density allows it to be deployed as a localized power source for vehicle charging without consuming valuable parking space. • Prime Power: Most consumers prefer to use grid power over localized generator source due to its inherent advantages in terms of simplicity, convenience, scalability and cost effectiveness. For critical applications such as hospitals, data centers and refrigerated warehouses, the availability of local generators in case of a grid power failure is indispensable. The advent of the KARNO generator introduces the opportunity for certain power consumers to rethink their primary and secondary power sources. Due to its unique attributes in comparison to conventional generators, which include consistently high efficiency across all power levels, minimal maintenance requirements, and reduced level of noise and emissions, the KARNO generator stands as a potentially more cost-effective base load power source for consumers, who would then utilize the electric grid as a backup source of power. This arrangement holds particular appeal for consumers facing high grid electrical costs and low fuel costs, such as for natural gas. • Peak Shaving: “Peaking charges” also referred to as “demand charges” are fees imposed by utilities on consumers based on their highest recorded electricity usage during a billing cycle, often measured over a short interval, such as 15 minutes. These charges serve to recuperate the expenses associated with maintaining grid capacity during periods of peak demand. For consumers with substantial peak demand, such as large industrial facilities and data centers, peaking charges can significantly inflate their electric bills. Additionally, time-based electricity rates are now very common to reduce demand on the grid during peak times. Peak rates can be two to three times higher than base rates, increasing electricity charges even further for consumers. In this context, distributed generation sources like the KARNO generator can play a pivotal role in mitigating the financial impact of peaking charges and rates by supplementing grid power during peak consumption periods. • Backup Power: The market for local backup power generators is well established but also poised for growth due to reduced reliability of the power grid, a greater share of intermittent renewable sources of electricity, the frequency and severity of extreme weather events and the need for continuous power supply in critical applications. Generator emissions are a growing concern in the backup power market due to increased focus on the health impacts of harmful compounds such as nitrogen oxides (“NOx”), carbon monoxide and volatile organic compounds (“VOCs”). To address these concerns, emissions control technologies are incorporated for conventional generators and alternative sources of 17 Table of Contents fuel like natural gas are replacing diesel, which is also a source of particulate matter (“PM”) emissions if exhaust gases are untreated. The backup power market is another opportunity for the KARNO generator which is particularly attractive for its low level of emissions and low noise level while in operation. The KARNO generator is expected to reduce CO and NOx emissions by over 95% compared to diesel generators, and potentially without the need for exhaust aftertreatment. Following initial deployments, we expect to ramp up commercialization of the KARNO generator including expansion of production capacity and establishment of sales and distribution channels, potentially including market collaborations and extending our reach outside of the U.S. In the future we intend to develop KARNO generators of different sizes and configurations to capitalize on KARNO’s unique advantages and extend these advantages across a broader range of market opportunities. The Science of KARNO The KARNO generator is distinguished from conventional generating systems that rely on reciprocating internal combustion engines or gas turbines to drive a rotating shaft. In contrast, the KARNO generator harnesses the power of a heat engine to propel a linear generating system. This innovative generator derives its linear motion from temperature differences inside the engine. The generation of heat within the system occurs through flameless oxidation of fuels, like natural gas, hydrogen, or propane. This thermal energy causes helium gas enclosed within a sealed cylinder to expand, thereby propelling linear motion in a connected piston-shaft system which includes a sequence of permanent magnets situated on the shaft passing through electrical coils. Subsequently, the counter-motion generated by a piston at the opposite end of the shaft flows the helium gas to the cold side of a piston in an adjacent shaft, where excess heat is efficiently dissipated. This cyclical process continues, resulting in a continuous source of electrical power for so long as heat is supplied to the generator. Linear generators present several advantages over conventional generators, with key benefits including reduced maintenance, attributable to their simplified design with few moving parts. Additionally, they exhibit high power density and higher efficiency by circumventing the mechanical losses linked to rotating components such as bearings and gears while producing less noise and vibration. In the case of KARNO, each shaft of the generator relies on a single moving part and utilizes a pressurized helium bearing system in place of oil-based lubricants. Heat engines offer the advantages of fuel flexibility and high operating efficiency. The KARNO generator stands out for its ability to achieve exceptional efficiency by maximizing heat transfer between components and working fluids. Enabled by advances in additive manufacturing systems, parts are designed with a large number of intricate flow channels for the movement of heat, cooling water, helium and exhaust gases such that contact surface areas for heat transfer are maximized. This enables the KARNO generator to achieve exceptional levels of efficiency. The KARNO generator is expected to surpass the efficiency of conventional generating systems when employing various fuel sources and even outperform fuel cells when using hydrogen. Notably, its high efficiency remains consistent across a broad range of output power levels. In contrast, fuel cells reach peak efficiency at low power levels but experience diminishing efficiency as output increase towards full power. Internal combustion engines typically achieve peak efficiency within a limited operational output range and may suffer increased wear at low power levels. The KARNO generator offers a distinct advantage in power adjustment by modulating the rate of heat introduction, enabling seamless power adjustments without compromising the generator’s efficiency. We anticipate that the KARNO generator will achieve an electrical generating efficiency of nearly 50%, calculated by considering the usable output power in relation to the energy from the fuel source. High efficiency is expected to remain consistent across a wide range of output power levels, spanning from tens of kilowatts to multiple megawatts. In contrast, internal combustion diesel generators typically operate within an efficiency range of 25% to 40% over a similar power spectrum, while the U.S. electrical power grid is estimated to operate at an efficiency between 33% and 40%. Notably, best-in-class grid-level gas turbine powerplants can obtain efficiencies ranging between 45% to 55%. However, they incur transmission and distribution losses between 5% and 10% which the KARNO generator can circumvent by being strategically located near the point of power consumption. Conventional generators emit pollutants as a result of incomplete combustion of fuel-air mixtures, with the formation of nitrous-oxide compounds being particularly prominent. Unlike conventional generators, which often employ internal combustion engines operating at high temperatures with rapid and incomplete fuel combustion, the KARNO generator is designed for continuous fuel oxidation at lower temperatures than internal combustion engines and extended burn times. This is achieved partly through the recirculation of exhaust gases, which serves to prolong combustion duration and by pre-heating incoming air. As a result, the KARNO generator is anticipated to achieve remarkably low levels of emissions, with CO and 18 Table of Contents NOx emissions expected to be reduced by over 95% compared to best-in-class diesel engines and targeting CARB 2027 standards without the need for aftertreatment. One of the notable advantages of the KARNO generator, in comparison to traditional generating units, is the expected significant reduction in maintenance requirements and cost. Conventional generators typically incur periodic and usage-based maintenance expense that can range between 5% to 20% of their total operating cost throughout their lifespan, influenced by factors such as utilization and operating parameters. KARNO’s primary advantage arises from having only a single moving linear actuator per shaft (4 shafts per 200kW generator), which glides linearly on low friction helium bearings. This innovative design significantly mitigates efficiency losses attributed to friction, enhances the system’s operational longevity and eliminates the need for oil-based lubricants commonly found in conventional generators. Furthermore, internal combustion engines require extensive overhauls after specific operating periods which are costly, require specialized expertise, and result in prolonged downtime. Conversely, the KARNO generator is projected to require less costly and simplified maintenance service than internal combustion engines, translating into both cost savings and reduced downtime. The KARNO generator, functioning as a heat engine, derives significant advantages from its expected capability to operate across a diverse spectrum of over 20 available fuel sources and fuel mixtures. These include natural gas, propane, gasoline, jet fuel, and alternative fuels like bio-diesel, hydrogen and ammonia. Moreover, the generator can seamlessly transition between these fuels or fuel blends, requiring no physical modifications to its flameless oxidation system. This versatility enables a single generator to adapt to different use cases. For example, the generator may operate on natural gas for prime power generation when a pipeline connection is available and on waste gas near a landfill or dairy. Furthermore, as hydrogen becomes more widely available, the KARNO generator can seamlessly adapt to this cleaner fuel. As the energy landscape evolves, the KARNO generator’s fuel-agnostic nature positions it as a future-proof solution to electricity generation needs. 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 KARNO Generator Our focus in the remainder of 2023 will be on continuing development and testing of our fuel-agnostic KARNO stationary generator and deploying initial revenue-generating units with customers in 2024. We anticipate that a substantial portion of our capital resources and efforts in the near future will be focused these activities. The amount and timing of our future funding requirements, if any, will depend on many factors, including but not limited to the pace of completing initial KARNO generator design, testing and validation, the pace at which we introduce initial generator units to the market, our strategies for manufacturing KARNO generator components (whether in-house or through outsourcing to third parties), the range of product offerings we plan to bring to market and external market factors beyond our control. Wind-down of Powertrain Business We no longer expect to recognize revenue on products not related to KARNO, including the Hypertruck ERX and Hybrid. The Company is evaluating opportunities to monetize certain of the assets and technology relating to the Business, but no assurances can be provided that any such opportunities will be realized. The Company expects the wind-down to be completed by the end of the Company’s first quarter of fiscal year 2024 and will include a reduction of the Company’s workforce by approximately 175 people, or 67%, with some expected to be provided transition packages that will provide for continued services through various dates of the Company’s fiscal year 2024. 19 Table of Contents Key Components of Statements of Operations Revenue We historically generated revenues from sales of Hybrid systems for Class 8 semi-trucks and limited quantities of Class 8 semi-trucks outfitted with the Hybrid system. As a result of the strategic review and decision to discontinue the powertrain business, we do not anticipate generating future revenues until we begin commercialization of our KARNO generators. 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 KARNO stationary generator and 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 components for development and testing, 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, though we expect a reduction in research and development expenses on a go-forward basis as a result of discontinuing our powertrain business. 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. We expect a reduction in selling, general and administrative expenses on a go-forward basis as a result of discontinuing our powertrain business. 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. We plan to seek additional government contracts in the future and may reassess the classification of such contracts as revenue based on business strategy. 20 Table of Contents Results of Operations Comparison of Three Months Ended September 30, 2023 to Three Months Ended September 30, 2022 Our results of operations for the three months ended September 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 September 30, 2023 2022 $ Change % Change Revenues Product sales and other $ 96 $ 499 $ (403) (80.8) % Total revenues 96 499 (403) (80.8) % Cost of revenues Product sales and other 677 2,916 (2,239) (76.8) % Total cost of revenues 677 2,916 (2,239) (76.8) % Gross loss (581) (2,417) 1,836 (76.0) % Operating expenses Research and development 25,115 52,678 (27,563) (52.3) % Selling, general and administrative expenses 8,186 10,264 (2,078) (20.2) % Total operating expenses 33,301 62,942 (29,641) (47.1) % Loss from operations (33,882) (65,359) 31,477 (48.2) % Interest income 3,534 1,926 1,608 83.5 % Gain on disposal of assets — 46 (46) (100.0) % Other income, net 26 — 26 N/A Net loss $ (30,322) $ (63,387) $ 33,065 (52.2) % Net loss per share, basic and diluted $ (0.17) $ (0.36) $ 0.19 (52.8) % Weighted-average shares outstanding, basic and diluted 181,641,060 174,345,022 7,296 4.2 % See Part I, Item 1. “Note 2. Subsequent Events” and Part II, Item 5. for discussion of estimated charges and pro forma financial statements. Revenue Sales associated with our Hybrid products decreased $0.4 million. As a result of our strategic review and decision to discontinue our powertrain business, we do not anticipate further revenue until we begin commercialization of our KARNO generator. Cost of Revenues Cost of revenues associated with our Hybrid products decreased $2.2 million. The decrease in cost of revenues includes: • A decrease in inventory write-downs of $1.5 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; • A decrease in costs associated with sales of Hybrid systems of $0.4 million; and • A decrease in warranty costs of $0.3 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 nine months. Research and Development Research and development expenses decreased $27.6 million due to: • A decrease of $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 KARNO generator; and 21 Table of Contents • A decrease of $1.4 million for the design and testing of our Hypertruck ERX system; offset by • An increase of $2.6 million for the design and testing of our KARNO stationary generator. Selling, General and Administrative Selling, general, and administrative expenses decreased $2.1 million primarily due to: • A decrease of $1.6 million in personnel and benefits primarily due to the prior year departure of our previous Chief Financial Officer; • A decrease of $0.6 million for insurance costs; and • A decrease of $0.2 million in marketing and advertising; partially offset by • An increase of $0.2 million in professional services; Other Income Total other income increased $1.6 million primarily due to an increase in interest income on investments. Comparison of Nine Months Ended September 30, 2023 to Nine Months Ended September 30, 2022 The following table summarizes our results of operations on a consolidated basis for the nine months ended September 30, 2023 (the “current nine months”) and 2022 (in thousands, except share and per share data): Nine Months Ended September 30, 2023 2022 $ Change % Change Revenues Product sales and other $ 672 $ 1,011 $ (339) N/A Total revenues 672 1,011 (339) N/A Cost of revenues Product sales and other 1,675 7,160 (5,485) N/A Total cost of revenues 1,675 7,160 (5,485) N/A Gross loss (1,003) (6,149) 5,146 N/A Operating expenses Research and development 73,472 88,543 (15,071) (17.0) % Selling, general and administrative expenses 30,265 32,255 (1,990) (6.2) % Total operating expenses 103,737 120,798 (17,061) (14.1) % Loss from operations (104,740) (126,947) 22,207 (17.5) % Interest income 10,345 3,066 7,279 237.4 % Gain (loss) on disposal of assets 1 (89) 90 N/A Other income, net 14 — 14 N/A Net loss $ (94,380) $ (123,970) $ 29,590 (23.9) % Net loss per share, basic and diluted $ (0.52) $ (0.71) $ 0.19 (26.8) % Weighted-average shares outstanding, basic and diluted 180,914,250 173,945,156 6,969 4.0 % See Part I, Item 1. “Note 2. Subsequent Events” and Part II, Item 5. for discussion of estimated charges and pro forma financial statements. Revenue Sales associated with our Hybrid products increased $0.3 million. As a result of our strategic review and decision to discontinue our powertrain business, we do not anticipate further revenue until we begin commercialization of our KARNO generator. 22 Table of Contents Cost of Revenues Cost of revenues associated with our Hybrid products decreased $5.5 million. The decrease in cost of revenues includes: • A decrease in inventory write-downs of $4.6 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 nine months; • An decrease in costs associated with sales of Hybrid systems of $0.4 million; and • A decrease in 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 as we sold fewer Hybrid systems in the current nine months. Research and Development Research and development expenses decreased $15.1 million due to: • A decrease of $28.8 million related to KARNO technology acquired in September 2022 from General Electric Company’s GE Additive business to develop and commercialize the fuel agnostic KARNO generator; offset by • An increase of $9.3 million for the design and testing of our KARNO stationary generator; and • An increase of $4.4 million for the design and testing of our Hypertruck ERX system. Selling, General and Administrative Selling, general, and administrative expenses decreased $2.0 million primarily due to: • A decrease of $2.0 million for insurance costs; and • A decrease of $0.9 million in professional services; partially offset by • An increase of $0.9 million in personnel and benefits due to workforce growth over the past year and inflation, offset by the prior year departure of our previous Chief Financial Officer. Other Income (Expense) Total other income increased $7.4 million primarily due to an increase in interest income on investments. Liquidity and Capital Resources At September 30, 2023, our curren t assets were $194.0 million, consisting primarily of cash and cash equivalents of $28.6 million, short-term investments of $153.6 million and prepaid expenses of $11.5 million. Our current liabilities were $13.2 million primarily comprised of accounts payable, accrued expenses and operating lease liabilities. We also had $141.3 million of investments in longer-term liquid securities which we maintain to generate higher income on capital that we do not expect to spend in the next 12 months. We believe the credit quality and liquidity of our investment portfolio at September 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 and long-term assets will be sufficient to continue and execute on our business strategy and meet our capital requirements for the next twelve months. We do not expect to need to raise additional capital for the foreseeable future. Our primary short-term cash needs are costs associated with the exit of our powertrain business and KARNO generator development costs. Longer term, our capital needs will be determined by our go-to-market strategy, which may include development of our own KARNO generator manufacturing capacity or outsourcing this work to third parties or business partners. Finally, based on current projections of operating expenses, capital spending and working 23 Table of Contents capital growth, we expect to have approximately $285 million in cash, short-term and long-term investments remaining on our balance sheet at the end of 2023. We expect to continue to incur net losses in the short term, as we continue to execute on our strategic initiatives by completing the development and commercialization of the KARNO generator with anticipated initial customer deployments in late 2024. 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.” 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 our long-term plan manufacturing plan for the KARNO generator, 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 nine months ended September 30, 2023 and 2022 is summarized as follows (in thousands): Nine Months Ended September 30, 2023 2022 Cash from operating activities $ (92,427) $ (83,442) Cash from investing activities 1,561 (20,750) Cash from financing activities (2) (92) $ (90,868) $ (104,284) Cash from Operating Activities For the nine months ended September 30, 2023, cash flows used in operating activities were $92.4 million. Cash used primarily related to a net loss of $94.4 million, adjusted for a $5.3 million change in working capital accounts and $7.2 million in certain non-cash expenses (including $5.2 million related to share-based compensation, partially offset by $2.7 million related to accounts payable, accrued expenses and other liabilities and $1.2 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 a $2.3 million change in working capital accounts and $42.8 million in certain non-cash expenses (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). Cash from Investing Activities For the nine months ended September 30, 2023, cash flows provided by investing activities were $1.6 million. Cash provided related to the sale or maturity of investments of $178.6 million, partially offset by the purchase of investments of $170.2 million and acquired property and equipment of $6.8 million. For the nine months ended September 30, 2022, cash flows used in investing activities were $20.8 million. Cash used primarily related to the purchase of investments totaling $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. Cash from Financing Activities For the nine months ended September 30, 2023, cash flows used in financing activities were nil. 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. 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. 24 Table of Contents 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.