HYLN - NYSE

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hyliion Holdings Q2 2025 earnings release conference call. [Operator Instructions] I would now like to turn the call over to Greg Standley, Chief Accounting Officer. Greg, please go ahead.

Thank you, and good morning, everyone. Welcome to Hyliion Holdings Second Quarter 2025 Earnings Conference Call. On today's call are Thomas Healy, our Chief Executive Officer; and Jon Panzer, our Chief Financial Officer. A slide presentation accompanying this call is available on Hyliion's Investor Relations website at investors.hyliion.com. Please note that during today's call, we will be making certain forward-looking statements regarding the company's business outlook. Forward-looking statements are predictions, projections and other statements about anticipated events that are based on current expectations and assumptions, and as such are subject to risks and uncertainties. Many factors could cause actual results to differ materially from forward-looking statements made on this call. For more information on both factors that may cause the company's results to differ materially from such forward-looking statements, please refer to our presentation and press release as well as our filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on forward-looking statements and we undertake no duty to update this information unless required by applicable law. With that, I will now turn the call over to Thomas.

Hello, and thank you for joining us for Hyliion's Second Quarter 2025 earnings call. I'm joined today by our CFO, Jon Panzer. We have a number of positive updates to share with you on today's call including the resumption of deliveries as we resolve the key engineering and manufacturing challenges we highlighted earlier in the year. I'd like to begin by highlighting a major development this quarter that we believe underscores the value proposition of our KARNO Power Module and will help drive customer adoption in the years ahead. As part of the newly enacted One Big Beautiful Bill Act, a 30% investment tax credit has been established for customers deploying linear generators or fuel cells. This tax credit will apply to projects that begin construction in 2026 or later and will remain in effect for the next 10 years. This credit will apply not only to the generator itself, but also to the supporting infrastructure required for its operation. We believe this credit is significant for both Hyliion and our customers as it affirms the value that fuel-agnostic linear generators like the KARNO Power Module offer in addressing the growing need for clean distributed power generation in the U.S. Since the passage of this legislation, customer interest has increased as the credit will help offset the upfront cost of adopting our new KARNO technology. Now shifting to our product development and deployment progress. During the past quarter, we delivered our second Early Adopter unit to the U.S. Navy. In the coming weeks, we expect to complete assembly of 2 additional KARNO Power Modules. The first will be used to complete the UL certification of the KARNO system, which is an important milestone ahead of product commercialization. The second power module will be the third Early Adopter customer unit and the first one delivered to a commercial customer. The main takeaway here is that we believe we've overcome some of the key manufacturing challenges we were facing in the first half of this year, which will allow us to continue producing systems. On the manufacturing side, I'd like to provide an update on production of the Linear Electric Motor or LEM. Last quarter, we shared that we began parallel production of certain LEM components at our Austin facility in response to quality issues and delays with our contract manufacturer. Unfortunately, those issues persisted, and we made the decision this quarter to fully transition LEM production in-house. I'm pleased to report that this transition is going well. We are now successfully assembling LEMs internally at a pace that gives us confidence in our ability to meet our ongoing production needs. Our plan is to continue scaling in-house LEM production capability to support larger volumes of KARNO systems in 2026. While we continue to believe that this is a component that can eventually be outsourced for greater production efficiency, our current focus is on quality and execution to minimize the risk of further delays to LEM supply. We achieved another important technical milestone this quarter by confirming our ability to remove residual powder from the regen component of the KARNO Core. The regen is a 3D-printed metal part featuring a complex mesh structure that is critical for achieving the KARNO systems power output and efficiency. Last quarter, we mentioned the development of an enhanced powder removal method. This quarter, we've been able to confirm the effectiveness of this process. This has enabled us to upgrade the regen with a more complex mesh design that we expect will address the performance shortfall caused by our earlier simplified design that we had implemented for easier powder removal. With this improved design, we believe we now have a solution capable of achieving the power and efficiency levels we are targeting for the KARNO Power Module. Bench testing of the redesigned regen has yielded encouraging heat transfer and performance results. We are now in the process of printing the components needed to upfit a full KARNO Core to validate expected performance during full power operation. As a reminder, the regen is easily retrofitted into existing KARNO Cores, allowing us to continue production and testing with earlier versions of the regen. With the progress we have achieved so far this year, we continue to expect that we will deliver all 10 Early Adopter units in 2025. Based on our current development and build schedule, we now expect that additional KARNO unit deliveries beyond the Early Adopter units and full product commercialization will shift into 2026. This schedule recognizes the time we need to properly learn from early deployments, including validating system performance and incorporating customer feedback. Meanwhile, we continue to build an inventory of printed components for KARNO Power Modules we plan to deliver in 2026 for product commercialization and afterwards. I'd also like to provide an update on our ongoing work with the U.S. Navy. We've been running the Navy KARNO units through near-daily testing, and we continue to see strong system reliability of the production components. Importantly, the minor issues we've encountered have been primarily related to software optimization as we implement new features and from test equipment. Overall, the KARNO Power Module production hardware has been performing well in testing as against the Navy specifications. On the commercial front, we've had many notable developments. This past quarter, we were awarded a Phase II small business innovation research contract for up to $1.5 million that furthers our research and development work with the U.S. Navy for shipboard and stationary applications. Specifically, this contract focuses on the development of software required to manage and synchronize cores in a multi-megawatt KARNO system. We're particularly excited about how our Navy partnership is progressing as near-term plans are underway to install multiple KARNO Cores on a prototype Navy vessel and to deploy full KARNO Power Modules at multiple testing sites. I'm also proud to share that Hyliion's KARNO Power Module has been designated as an awardable technology by the U.S. Air Force and the Department of Defense's Chief Digital and Artificial Intelligence Office under the Military Multifuel Initiative. Achieving awardable status positions the KARNO technology to support the Air Force's needs for power technologies that can support critical operations during fuel supply disruptions. We expect that this designation will be beneficial for Hyliion as we seek other military applications for KARNO technology. This quarter, we signed a strategic MOU with Alkhorayef Industries during the Saudi-U.S. Investment Forum outlining a potential $1 billion opportunity to deploy and localize KARNO Power Modules in Saudi Arabia. This MOU is part of the $600 billion in commercial deals announced during President Trump's visit. It marks a major step towards international deployment with initial units expected in 2026. This quarter, we also signed an LOI with MMR Group, a global leader in custom electrical solutions serving commercial, industrial and utility markets. MMR has over 5,000 employees and more than $6 billion in delivered projects. The LOI outlines plans for MMR to purchase 3 KARNO Power Modules, totaling up to 600 kilowatts of stationary power with deployments expected to begin in the second half of 2026. The previously mentioned MOU and LOI are nonbinding in nature and subject to the execution of definitive agreements. To wrap up, we are very encouraged by the momentum we've built so far in 2025. We've tackled some of the toughest technical challenges in LEM production and regen depowdering and design. The introduction of a 30% tax credit through the One Big Beautiful Bill Act validates our belief that the KARNO Power Modules represents a significant advancement in the development of clean, efficient distributed power technologies and will serve as a catalyst for faster commercial deployment across a broad range of applications. We remain committed to delivering all 10 Early Adopter units this year and look forward to commercializing the KARNO System and broadening deployments in 2026. With that, I will now turn the call over to Jon for the financial update.

Thank you, Thomas, and good morning, everyone. Starting with our 2025 second quarter results, we recorded revenue of $1.5 million from research and development services related to our contracts with the Office of Naval Research. Cost of sales was $1.4 million, resulting in gross profit of $131,000. In the second quarter of 2024, we recorded no revenue or cost of sales. R&D services revenue reflects both the sale of KARNO Cores and related components to the U.S. Navy, the work we perform to test and validate these units and other development work. Operating expenses for the second quarter were $15.8 million compared to $14 million in the second quarter of 2024. The increase was related to research and development costs, which were $10.1 million compared to $8.3 million in the second quarter of 2024. This increase reflects a ramp-up in R&D work and growth in the production of additive components. SG&A expenses were $6 million, down from $6.3 million in 2024 due primarily to lower facilities, insurance and professional services expenses, partly offset by higher labor costs. In the second quarter, we recorded a credit and exit and termination costs of $346,000 due to asset sale gains related to our former Powertrain business. In the second quarter of 2024, we recorded a gain of $556,000 in exit and termination costs, also related to asset sales. We recorded $2.2 million of interest income during the second quarter, which is down from $3.1 million in the prior year quarter due to a lower level of investments this year. Our total net loss in the second quarter was $13.4 million, up from $10.9 million in the second quarter of 2024, but down from the $17.3 million we recorded in the first quarter of this year. Year-to-date, we recorded revenue of $2 million, all from R&D services and gross profit of $143,000. We recorded no revenue or gross profit in the first half of 2024. Year-to-date operating expenses were $35.5 million compared to $33 million in the first half of last year. The increase in expenses is related to higher R&D expenses this year, partly offset by lower SG&A and Powertrain exit and termination expenses compared to the first 2 quarters of last year. Net loss year-to-date is $30.7 million compared to $26.4 million last year. Turning to our cash and investment position. We spent $13.5 million during the second quarter, down from $20.9 million in the first quarter of this year. The slowdown in cash use was partly due to lower capital spending, which totaled $4.3 million in the second quarter this year compared to $7.3 million in the first quarter. Capital spending consists primarily of added printing machines and related equipment and also includes facility investments to support printer operation. Asset sales through the first half of 2025 were $800,000 compared to $3.5 million in the first half of 2024. We finished the second quarter with $185.3 million of cash and short- and long-term investments on our balance sheet. Last quarter, we provided an updated forecast of cash spending for the year, noting that tariffs with the EU were expected to increase capital spending by $2 million to $3 million and that we plan to purchase additional used printers. Although EU tariffs are now expected to be 15%, we are maintaining our forecast for total expenditures of $65 million this year as well as the expectation that our year-end balance of cash and investments will be approximately $155 million. These forecasts continue to assume that we will be able to offset cash capital spending with around $10 million of equipment financing if favorable terms are available. Our previous forecast of $10 million to $15 million in revenue for 2025 included both R&D services and sales of 200-kilowatt KARNO Modules to commercial customers. As Thomas mentioned earlier, we now expect the commercialization will extend into 2026. We are, therefore, adjusting our 2025 revenue forecast down to $5 million to $10 million to account for this shift. Next, we continue to expect to see positive gross margin for R&D services for the year. Finally, we continue to expect that the capital we have on hand today will be sufficient to carry us through the commercialization of KARNO Power Module sales. Now I'll turn the call back over to Thomas.

Q2 was a strong quarter for Hyliion with progress on multiple fronts. Our U.S. customers will now benefit from a 30% investment tax credit on future KARNO deployments and we've resumed system builds after achieving key technical milestones, including fully transitioning LEMs' production in-house and finalizing both our depowdering process and regen design. These steps, along with demonstrated reliability in Navy operations, strengthen our path toward commercialization. Our focus now is on executing the Early Adopter Program; producing and upgrading systems with the new regen; scaling, manufacturing and preparing for a 2026 commercial launch. We look forward to updating you next quarter on new deployments, partnerships and technical advancements. With that, we'll turn the call back over to the operator for Q&A.

[Operator Instructions] There are no operator-assisted questions at this time. I will now turn the call back over to Greg Standley.

Thank you. These are the questions that have come in from shareholders. Thomas, can you share more on the 30% tax credit, and how does this compare to previous ITC credits?

Absolutely. So I can't emphasize enough just the importance of this tax credit for both Hyliion and for our customers. First, it just showcases that KARNO is due to the technology that can really assist with energy resiliency and security for our nation, which is why in the new Big Beautiful Bill Act, there's been a 30% tax credit applied to linear generators and to fuel cells like the KARNO. And then as we compare this against previous ITC that we've talked about in years past, the previous ITC was planned to have things like fuel dependency. So it's only going to be applied to fuels like hydrogen or to a technology that's going to use fuels like hydrogen. It also had thresholds that end customers needed to meet where it started at a 6% credit and could raise up to a 30-plus percent credit. This new structure is much more simple. It's a flat 30% credit. It doesn't have any stipulations on what fuel can or cannot be used and is in place for the next 10 years. So we ultimately see this as a big benefit for our customers as it's going to assist with their ability to adopt the KARNO.

On product development, you spoke about LEMs and depowdering. Are there other large issues that need to be resolved prior to shipping?

Absolutely. So LEMs and regens were really the 2 large things on our radar that over the past couple of quarters, we've been addressing. As we shared on today's call, very pleased that LEMs production has been pulled in-house. That's going well. We're producing units, and that's what's really allowed us to resume production that we talked about on today's call. In terms of the regen, this past quarter, we confirmed that our depowdered strategy works. And now what we're undertaking is we did a redesign of the regen. We made the mesh more compact. We improved the performance of the part. We've done bench testing of this, and we believe that it's hitting the performance criteria that we need. And now we're in the process of manufacturing these components to be able to roll them into the KARNO Core and do full power operation. So all in all, those 2 objectives -- or these 2 initiatives are going well. We're pleased with the progress that's been made. A big shout out to our team, both from an engineering standpoint and from a production standpoint of the progress they made over this past quarter. And then to highlight, as we go ahead here -- as we highlighted on today's call, the goal of the remainder of the year is get these 10 Early Adopter units out there into customers' hands and into operation. And we're going to have continued learning and feedback from the customers as they're operating these systems. And then we've talked about how we've shifted the commercialization into 2026. This really gives us the ability to roll in any of the feedback or learnings to continue to improve the product. So right now, we've tackled the main ones that have been on our radar, and we'll continue to learn from these systems as we get more of them deployed.

On the Navy contract, can you share more on how the Navy is planning to use the KARNO? And are you pursuing other military contracts as well?

So the engagement with the military initially started with a focus of the KARNO being the power plant behind autonomous unmanned vessels. And this is still overarching goal, and this is where it began. One exciting thing is the military recently released some videos showcasing the ship that we're actually going to be going into. And so these units that we're producing now for the Navy ultimately have 2 paths ahead of them. Some will be going into that unmanned vessel. Others will be going into stationary applications at military bases to prove the performance of the technology. Now as we also highlighted, our relationship with the military is continuing to grow. This past quarter, we received another SBIR Phase II award. We also received awardable criteria by the U.S. Air Force, which this means that any branch of the government can now more -- have a more streamlined process in order to acquire the KARNO technology for their application. So we're continuing to push on areas and opportunities of where the military can be using the KARNO, and we hope to be able to share more as we go forward on other applications that we'll be moving into.

That addresses all the questions. I'll turn the call back over to Thomas for closing remarks.

Thank you all for joining this quarter's earnings call. One thing I would like to highlight is this morning, we released a video on our social media that highlights some of the feedback we've received from industry leaders who have come out to our facility and actually been able to see the KARNO in performance and see some of those benefits that we've talked about. So I strongly encourage you to go watch that video and see what others are saying about this revolutionary technology. Thank you again for joining the call, and we look forward again to sharing more updates on our next earnings call.