What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-01 compared with 2023-11-08 · 150 added, 217 removed, 144 unchanged (72% of the section changed)

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These and other factors could cause our results to differ materially from those expressed in this Quarterly Report on Form 10-Q.

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

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

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

Hyliion is committed to creating innovative solutions that enable clean, flexible and modular electricity production while contributing positively to the environment in the energy economy.

The KARNO generator is a fuel-agnostic power generation solution, enabled by additive manufacturing, that leverages a linear heat engine to generate electricity with significant improvements in efficiency, emissions and cost compared to conventional generators.

The Company’s primary focus is to provide distributed power generators that operate on various fuel sources to adapt to an ever-changing energy economy.

Hyliion is addressing the commercial space first with a locally deployable generator that can offer prime power, backup power, peak demand reduction, renewables matching and power generation from waste fuels such as landfill and flare gas.

In the future, the Company plans to scale up its generator solution to address larger utility-scale power needs and to develop variants for household use and mobile applications such as vehicles and marine vessels.

Additionally, the generator technology is well-suited to provide combined heat and power (“CHP”) in various stationary applications.

Market Opportunity

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.

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.

Hyliion also believes that the KARNO generator is suitable for a wide range of electrical power generating applications and can address many concerns with conventional generators that inhibit consumers from adopting onsite generating systems today, including cost versus grid power, reliability, maintenance needs, noise, inflexibility and emissions.

Additionally, the KARNO generator is expected to be able to operate using a wide range of fuel sources including carbon-free fuels such as hydrogen and ammonia.

The planned initial KARNO generator variant is both power dense and easy to deploy.

It is expected to consist of a single four-shaft 200 kW generating unit along with essential balance-of-plant components, all arranged within a space-efficient, rectangular configuration occupying approximately three cubic meters.

Later planned developments are expected to include a greater-than 2 MW 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

compete effectively in the market for power applications between 200kW to 5MW and later extending to smaller power configurations.

We expect the KARNO generator to initially compete effectively in the market for power applications between 200 kW to 5 MW and later extend to larger and 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.

These deployments will 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.

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Target markets include:

• Prime Power:

Most consumers prefer the grid versus generating power locally due to the grid’s inherent advantages of simplicity, convenience, scalability and cost effectiveness.

For critical applications such as hospitals, data centers and refrigerated warehouses, local generators are indispensable in case of a grid power failure.

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, including consistently high efficiency across 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 could 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.

• Vehicle Charging:

The rapid growth of consumer 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 in the future given their substantial power requirements during charging.

Many commercial operators cite the lack of electrical capacity access as the primary obstacle to expanding their electric vehicle fleets.

Here, we believe the KARNO generator offers a unique solution for vehicle charging.

Its flexibility in fuel sources, including the ability to use hydrogen, along with its superior environmental performance and low emissions and noise levels offer advantages over internal combustion generators.

A KARNO generator can also modulate power without efficiency loss 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 displacing a large amount of parking space.

• 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.

Also known as renewable natural gas (“RNG”), 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.

Its modularity, coupled with its capability to oxidize a variety of fuel sources and mixtures with no or limited prior gas processing, positions it as an efficient and adaptable power generator for waste gas sources.

Similarly, natural gas extracted from gas or oil wells frequently requires processing to remove natural gas liquids and impurities.

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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.

As with RNG, the KARNO generator is anticipated to use flare gas with limited need for pre-treatment at a gas processing facility.

• 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.

“Peaking charges” also referred to as “demand charges” are fees imposed by utilities on customers 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.

For customers 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 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.

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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

fuel like natural gas are replacing diesel, which is also a source of particulate matter (“PM”) emissions if exhaust gases are untreated.

To address these concerns, emissions control technologies are often incorporated for conventional generators and alternative sources of 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.

We therefore believe that KARNO presents an opportunity to provide solutions for end users that desire a lower emissions profile and in the event emissions regulations are further tightened.

We also plan to develop variants for mobile applications such as vehicles including rail (locomotives) and marine vessels.

Longer-term, we also believe KARNO can be a viable solution for on-highway applications.

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.

KARNO Generator System

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

We 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.

KARNO Generator Development

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 200 kW BETA generator, which is expected to serve as our design for initial commercial deployments.

We have also showcased KARNO integrated as an on-board generator for our Hypertruck ERX powertrain system and with potential stationary power customers.

Moreover, we successfully demonstrated the generator’s capability to feed power back to the electric grid from our Cincinnati, Ohio facility and confirmed through testing the capability of the generator’s oxidation system to be fueled using untreated natural gas from a Permian Basin well site.

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 are expected to improve over time, with the output of machines we intend to acquire over the next three to four years projected to increase

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.

The Science of KARNO

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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.

We believe the KARNO generator stands out for its ability to maximize 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.

This enables the KARNO generator to achieve high 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.

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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.

Conventional generators emit pollutants as a result of incomplete combustion of fuel-air mixtures, with the formation of NOx 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

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.

As a result, the KARNO generator is anticipated to achieve low levels of emissions, with CO and 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.

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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.

Furthermore, internal combustion engines require extensive overhauls after specific operating periods which are costly, require specialized expertise, and result in prolonged

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.

The KARNO generator, functioning as a heat engine, derives 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.

Moreover, the generator can seamlessly transition between these fuels or fuel blends, requiring few or 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.

Furthermore, as hydrogen becomes more widely available, the KARNO generator will be able to adapt to this cleaner fuel.

As the energy landscape evolves, the KARNO generator’s fuel-agnostic nature positions it as a solution to electricity generation needs.

Benefits of the KARNO Generator Versus Conventional Competitors

We believe the versatility and operating characteristics of the KARNO generator make it an effective 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 :

• Low Noise and Vibration :

• 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 200 kW generator occupies less than a cubic meter of volume, excluding the balance-of-plant.

• 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 200 kW, systems with six or more shafts can be utilized or, multiple 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.

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 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 economic uncertainties, supply chain disruptions, inflation and high interest rates as well as those discussed below and referenced in Item 1A “Risk Factors”.

Commercialization of KARNO Generator

Our focus in the first quarter of 2024 was on continuing development and testing of our fuel-agnostic KARNO stationary generator and planning for the deployment of 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.

Key Components of Statements of Operations

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.

As a result of the discontinuation of the electrified powertrain systems business and the shift to focus exclusively on the development and commercialization of the Company’s fuel-agnostic KARNO generator technology, we do not anticipate generating future revenues until we begin commercialization of our KARNO generators.

Cost of Revenue

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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:

Research and development expenses consist primarily of costs incurred for the discovery and development of our KARNO stationary generator and, prior to 2024, electrified powertrain solutions, which include:

• personnel-related expenses including salaries, benefits, travel and share-based compensation, for personnel performing research and development activities;

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• depreciation for equipment used in research and development activities;

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

• allocation of general overhead costs.

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.

We expect to continue to invest in research and development activities to achieve operational and commercial goals.

Selling, General and Administrative Expense

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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.

Exit and Termination Costs

Exit and termination costs consist of employee severance and retention payments, accelerated non-cash stock-based compensatio n expense, contract termination and other cancellation costs, non-cash charges including accelerated depreciation and amortization, and recoveries from resale of assets.

These costs are a result of the Plan approved on November 7, 2023 to wind down 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.

Since the acquisition of our KARNO generator technology, we have continued to perform as a subcontractor on a contract with the Office of Naval Research (“ONR”).

We may reassess the classification of such contracts as revenue based on business strategy.

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,

Comparison of Three Months Ended March 31, 2024 to Three Months Ended March 31, 2023

Our results of operations for the three months ended March 31, 2024 (the “current quarter”) and 2023 on a consolidated basis are summarized as follows (in thousands, except share and per share data):

Three Months Ended March 31,

2024 2023 $ Change % Change

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Selling, general and administrative expenses 6,592 10,981 (4,389) (40.0) %

Exit and termination costs 4,431 — 4,431 N/A

Total operating expenses 18,991 31,899 (12,908) (40.5) %

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Gain on disposal of assets 3 2 1 50.0 %

Other income, net 26 — 26 N/A

Other expense, net — (15) 15 (100.0) %

Net loss $ (15,592) $ (28,831) $ 13,239 (45.9) %

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Weighted-average shares outstanding, basic and diluted 178,482,894 180,118,044 (1,635) (0.9) %

See Part I, Item 1.

Subsequent Events” and Part II, Item 5.

for discussion of estimated charges and pro forma financial statements.

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;

• 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.

Revenue and Cost of Revenues

Revenue associated with our Hybrid products decreased $0.3 million and associated cost of revenues decreased $0.7 million.

As a result of our strategic review and decision to wind down our powertrain business, we do not anticipate further revenue or cost of revenues until we begin commercialization of our KARNO generator.

Research and Development

Research and development expenses decreased $13.0 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;

• A decrease of $17.5 million for the design and testing of our Hypertruck ERX system;

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Selling, general, and administrative expenses decreased $4.4 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;

• A decrease of $0.2 million in marketing and advertising;

partially offset by

• An increase of $0.2 million in professional services;

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

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.

Subsequent Events” and Part II, Item 5.

for discussion of estimated charges and pro forma financial statements.

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.

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;

• 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;

• An increase of $9.3 million for the design and testing of our KARNO stationary generator;

• 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;

• 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.

• A decrease of $3.1 million in personnel and benefits and $1.1 million in professional services as a result of the wind down of our powertrain business.

Exit and Termination Costs

Exit and termination costs increased by $4.4 million as a result of the adoption of the Plan and items discussed in Note 2 of the notes to the consolidated financial statements.

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.

At March 31, 2024, our current assets were $154.1 million, consisting primarily of cash and cash equivalents of $14.7 million, short-term investments of $126.7 million and prepaid expenses of $6.6 million.

Our current liabilities were $10.5 million primarily comprised of accounts payable, accrued expenses and operating lease liabilities.

We also had $122.5 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.

We believe the credit quality and liquidity o f our investment portfolio at March 31, 2024 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.

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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.

We do not expect to need to raise additional equity capital for the foreseeable future.

Our primary short-term cash needs are costs associated with KARNO generator development and building of our initial deployment units.

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

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.

In December 2023, we announced an authorized share repurchase program to repurchase up to $20 million of our outstanding common stock.

We repurchased $11.3 million in common stock during the three months ended March 31, 2024 and $11.4 million since the inception of the repurchase program .

Based on current projections of operating expenses, capital spending, working capital growth and share repurchases, we expect to have betwee n $220 and $230 million in cash, short-term and long-term investments remaining on our balance sheet at the end of 2024.

We expect to continue to incur net losses in the short term, as we continue to execute on our str ategic 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 adversely 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.

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,

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 including plans for financing additive printer investments, as well as factors that are outside of our control.

During the periods presented, we did not have any relat ionships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements.

Net cash, cash equivalents and restricted cash provided by or used in operating activities, investing activities and financing activities for the three months ended March 31, 2024 and 2023 is summarized as follows (in thousands):

Three Months Ended March 31,

Cash from operating activities $ (22,702) $ (33,239)

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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).

For the three months ended March 31, 2024, cash flows used in operating activities were $22.7 million.

Cash used primarily related to a net loss of $15.6 million, adjusted for a $13.1 million change in working capital accounts and $6.0 million in non-cash expenses (including $5.6 million related to accounts payable, accrued expenses and other liabilities and $7.4 million related to prepaid expenses and other current assets, partially offset by $5.6 million in assets held for sale carrying value adjustments and $1.3 million related to share-based compensation).

For the three months ended March 31, 2023, cash flows used in operating activities were $33.2 million.

Cash used primarily related to a net loss of $28.8 million, adjusted for a $7.3 million change in working capital accounts and $2.9 million in non-cash expenses (including $5.3 million related to prepaid expenses and other assets and $0.9 million related to accounts payable, accrued expenses and other liabilities, partially offset by $2.0 million related to share-based compensation and $0.6 million related to depreciation, amortization and accretion charges).

Cash from Investing Activities

For the nine months ended September 30, 2023, cash flows provided by investing activities were $1.6 million.

For the three months ended March 31, 2024, cash flows provided by investing activities were $27.9 million.

Cash provided related to the sale or maturity of investments of $53.9 million, partially offset by the purchase of investments of $23.7 million and acquired property and equipment of $2.8 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.

For the three months ended March 31, 2023, cash flows used in investing activities were $0.8 million.

Cash used related to the purchase of investments of $31.4 million and acquired property and equipment of $3.0 million, offset by the sale or maturity of investments of $33.5 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.

For the three months ended March 31, 2024, cash flows used in financing activities were $11.3 million, primarily due to treasury stock repurchases.

For the three months ended March 31, 2023, cash flows used in financing activities were $0.2 million, 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.

In preparing our condensed consolidated financial statements, we applied the same critical accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, supplemented by those described below, that affect judgments and estimates of amounts recorded for certain assets, liabilities, revenues and expenses.

Share-Based Compensation

We account for share-based payments that involve the issuance of shares of our common stock to employees and nonemployees and meet the criteria for share-based awards as share-based compensation expense based on the grant-date fair value of the award.

The Company has elected to recognize the adjustment to share-based compensation expense in the period in which forfeitures occur.

We recognize compensation expense for awards with only service conditions on a straight-line basis over the requisite service period for the entire award.

In the first quarter of 2024, we granted 2.7 million market-conditioned restricted stock units that may vest between February 13, 2025 and December 31, 2026 contingent upon achieving underlying closing stock price thresholds.

These awards were valued at $0.83 per unit using fair value hierarchy Level III inputs including an underlying share volatility of 90% and a risk-free rate of 4.35%.

If we were to utilize different assumptions including the estimate of underlying share volatility of our market-conditioned awards, share-based compensation cost could be under or overstated.

If there are any modifications or cancellations of the

underlying unvested securities, we may be required to accelerate any remaining unearned share-based compensation cost or incur incremental cost.

Share-based compensation cost affects our research and development and selling, general and administrative expenses.

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.

We are a smaller reporting company as defined in Rule 12b-2 under the Exchange Act.

As a result, pursuant to Item 305(e) of Regulation S-K, we are not required to provide the information required by this Item.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis