Hyliion Holdings Corp. Q4 FY2022 Earnings Call

Good day and thank you for standing by. Welcome to the Hyliion Holdings Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the management’s prepared remarks, there will be a question-and-answer session. I would now like to turn the conference call over to Kellen Ferris, Hyliion's Director of Investor Relations. Kellen, please go ahead.

Good morning, everyone. Welcome to Hyliion Holdings’ fourth quarter and full year 2022 earnings conference call. On the call today are Thomas Healy, our Chief Executive Officer; and Jon Panzer, our Chief Financial Officer. A slide presentation accompanies this conference call and is available on Hyliion's Investor Relations website at investors.hyliion.com. Please note that during today's call, we will make 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 the forward-looking statements on this call. For more information about factors that may cause the Company's results to differ materially from such forward-looking statements, please refer to our earnings press release as well as our filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date they are made. You are cautioned not to put undue reliance on forward-looking statements. And we undertake no duty to update this information unless required by applicable law. Now I will turn the call over to Thomas.

Good morning, everyone. And thank you for joining us today for our fourth quarter and full year 2022 earnings call. We have a lot of exciting news to share with you about the progress we've made over the past year and our plans for 2023. First, let's review the key milestones that we achieved in the fourth quarter of 2022 and for the full year. We hit another milestone on the path to commercialization of our Hypertruck ERX power train by starting winter testing. We also completed the first full year of revenue generation and achieved our latest revenue guidance for the year. We added another 10 orders for initial Hypertruck ERX production slots, bringing the total up to 210 units. In addition, we acquired the KARNO generator technology, which will give us a competitive advantage by having a high efficiency, fuel-agnostic generator. We've increased our workforce by over 50 employees during the year, including our CFO, Jon Panzer, and our Chief Strategy Officer, Cheri Lantz. We also added Jay Craig, the former CEO of Meritor, to our Board of Directors, and he recently took over the Chairman role. We also expanded our relationships with both PACCAR Peterbilt and Cummins, which will help us scale our solutions and bring them to market more quickly. We made great progress on the regulatory front as well. Our technology will be included in the Inflation Reduction Act and is expected to qualify for CARB's Advanced Clean Truck and Advanced Clean Fleet mandates, which define clean truck production and adoption requirements for OEMs and fleets. These are all significant achievements, and we are proud of what we have accomplished. Shifting back to the Hypertruck ERX powertrain milestones. As a reminder, we initially shared this commercialization timeline back in 2021, and for five consecutive quarters, we have hit every milestone on schedule since then. During the quarter, we checked another box on our commercialization roadmap by initiating winter testing, which includes putting our powertrains through its paces in Northern environments, where most battery electric vehicles really struggle due to cold weather. Because our powertrain has a CNG range extender, it can operate more reliably and over greater distances than a pure plug-in vehicle. We've been pleased with the results thus far. And while we've encountered some opportunities to strengthen components, we do not expect anything we've experienced today to adversely impact our plans to start commercial production of the powertrain later this year. Having completed summer testing and initiated winter testing, we are beginning to build the next generation of development vehicles that incorporate all past learnings. These new vehicles will continue to go through validation testing, but will also be used for expanded fleet trials throughout 2023. As we head towards the start of commercial production late in the year, I'm also pleased to share that we are on track for obtaining CARB, EPA, and NHTSA certifications in the second half of the year, which we expect to be our final milestones before delivering units to fleets. Late in 2022, we received an order from DSV for 10 Hypertruck ERX units with an option to buy 10 more. DSV is one of the largest third-party logistics companies in the world, and it's focused on expanding its U.S. business with these trucks deployed out of the Dallas region. DSV shared with us that they are seeing growing demand for their customers to offer emission-reducing solutions, such as Class 8 trucks with a Hypertruck ERX powertrain system. We are excited to work with DSV and to continue growing our customer base while we help them grow theirs. We’ve also continued to execute additional controlled fleet trials, recently completing one with Ruan, moving goods for one of their largest shippers. Ruan is not only a Hypertruck Innovation Council member, but they also placed an order for 10 production slots. Ruan is committed to climate change initiatives and has a vision to transition to more sustainable movements of freight. As we go through additional fleet trials, we expect to continue to grow our backlog of orders for production slots. Various other fleets have told us they are interested in the Hypertruck ERX powertrain, but would like to see us reach additional development milestones prior to participating in fleet trials or placing orders. We therefore believe that we will see more firm orders from customers as we approach our commercialization goal late in the year. I next want to provide an update on our Founders Program. As mentioned on our last call, we are calling our initial deployments of trucks, our Founders Program. We’ll provide white-glove service and will have a launch facility in the Dallas region to support and service these trucks, to ensure a positive customer experience. We are researching the best facility location for our needs in Dallas, and we will look to share more later in 2023 as we make progress. We also anticipate that the launch facility will be the location where we deliver new trucks to customers as they go through end-of-line certification at the Peterbilt plant in Denton, Texas. Shifting to a regulatory update. As a reminder, there are three main incentives or initiatives that we are pursuing: The Inflation Reduction Act, CARB Advanced Clean Trucks, and CARB Advanced Clean Fleets. The IRA provides a $40,000 tax credit per vehicle, and a truck with a Hypertruck ERX powertrain qualifies for the same incentive as a plug-in electric truck. ACT is a CARB mandate on OEMs to drive the production and sale of vehicles that qualify for zero-emission vehicle credits in the years ahead. According to this regulation, our Hypertruck ERX system qualifies for 75% of the ZEV credit that a plug-in electric truck or fuel cell truck will qualify for. ACF is similar to ACT, but is a mandate on the fleets to purchase zero or near-zero-emission trucks. ACF is still in the drafting stage, but as it stands today, the Hypertruck ERX product will qualify for 100% of a ZEV credit or the same value as a BEV or fuel cell truck. CARB recently proposed some changes to ACF where fleets can seek exemptions to delay compliance with the policy if either clean trucks are not available for purchase or if there are documented delays associated with the installation of on-site charging infrastructure. In a recent meeting, CARB confirmed that exemptions will not be offered to fleets if a near-zero-emission vehicle, like a truck with the Hypertruck ERX powertrain, is available to be purchased. We are pleased with how ACF is shaping up, as we believe CARB’s policy recognizes the value that our range-extending electric powertrain system plays in the transition to cleaner operating vehicles, electrification of trucking, and meeting broader sustainability goals. Shifting gears, as we kick off 2023, we are excited to announce that we are undertaking the development of a fuel cell truck under a collaboration agreement. As you know, we have showcased a three-stage development roadmap for our hypertruck powertrain that starts with a CNG engine as the range extender generator. We then replace the CNG generator with the more efficient KARNO fuel-agnostic generator, and finally transition to a fuel cell-powered truck. In 2022, we announced Cummins as our supplier for the CNG engine, and we also unveiled the KARNO as our fuel-agnostic solution. We believe that our roadmap aligns with the need to transition to electric powertrain solutions in a manner that evolves over time, along with the availability of clean fuel sources and charging infrastructure. It also leverages the ability to retain most of the same powertrain components across our vehicle platforms, including the axles, batteries, electric accessories, and most importantly, the software that controls the entire system. While we believe CNG will be the fuel most prominently used in the near-term for range extender electric vehicles, we also see the market evolving towards greater electrification based on hydrogen as a fuel source. Initial adoption of hydrogen vehicles will likely occur in a regional fashion around new fueling locations designed to support trucks. As more stations are built out and the cost of hydrogen comes down, we expect to see adoption grow and applications shift from regional to include long haul. Therefore, we are pleased to announce that Hyzon Motors is our collaboration partner in the development of this fuel cell-powered vehicle. Together, we will integrate the Hyliion electric powertrain system and Hyzon’s fuel cells into a Peterbilt chassis. Hyzon is an industry leader in the production of fuel cells, and Hyliion is an industry leader in developing electric powertrain solutions. We are excited to have our teams working together to develop a prototype hydrogen fuel cell-powered vehicle that we expect to be the predecessor of a commercial version of a truck in the future years. We expect to complete the development of this truck later this year. By advancing our product portfolio with a fuel cell solution, we are positioning Hyliion to be ready for growth in the demand for hydrogen-powered trucks in the coming years as new sources of hydrogen fueling become available at lower cost in strategic markets. We are excited about this collaboration and the opportunity to work with the Hyzon team and its fuel cell technology. More to come later this year. Before handing it over to Jon, I'd like to take a moment to acknowledge the passing of our former Chairman Ed Olkkola, who was not only our Chairman but also an initial investor in Hyliion. He passed away on December 15th, after a long-fought battle with leukemia. He was a mentor to our team, and his contributions to our success will always be remembered. I am extremely grateful for everything Ed did for me personally and for Hyliion. With his passing, Jay Craig has taken over as the Chairman of the Board, and we're excited to have him in this role. And with that, I will turn the call over to Jon.

Thank you, Thomas, and good morning, everyone. Turning to our financial results for the fourth quarter. We reported revenue of $1.1 million related to Hybrid sales, including three trucks outfitted with Hybrid systems, compared to $500,000 in the third quarter of this year and $200,000 in the fourth quarter of a year ago. Operating expenses totaled $31.6 million for the quarter, up from the $26.6 million we recorded a year ago in the fourth quarter but sequentially lower than the $34.1 million we reported in the third quarter of 2022, after excluding the $28.8 million accounting impact from the KARNO acquisition we closed in September. I want to also note that this is the first time we are recording a full quarter of normalized expenses for the KARNO operation in our financial results. R&D expenses totaled $21.8 million, up $4.4 million from 2021, but down about $2 million from the prior quarter, again after excluding the impact of the KARNO purchase accounting. SG&A expenses for the quarter were $9.7 million, up $500,000 from 2021 but down $500,000 from the third quarter, as we are starting to level out the growth in spending on overhead costs. In total, Hyliion reported a net loss of $29.4 million for the fourth quarter, which is nearly flat compared to the net loss of $29.6 million we reported in the fourth quarter of 2021. Comparing the two periods, operating expenses were about $5 million higher in 2022 than 2021 but were mostly offset by a smaller gross loss and higher interest income on our investments. Sequentially, our operating loss of $29.4 million was $5.2 million lower than the loss we reported in the third quarter of 2022, excluding KARNO accounting with improvements in all areas, including lower gross loss, lower R&D and SG&A expenses, and higher interest income. Turning now to the full year, revenue was $2.1 million on sales of Hybrid systems and full trucks. Thomas mentioned this is in line with our most recent guidance of approximately $2 million in Hybrid revenue for the year. Looking at the expense side and excluding the KARNO acquisition adjustment in all results, total full year operating expenses were $123.6 million, $30 million more than were reported in 2021 and driven mostly by higher R&D expenses, which were $81.6 million in 2022 compared to $58.3 million in 2021. The increase in R&D expense was driven by a full year of development and testing work on our Hypertruck ERX powertrain system, as well as component purchases for development trucks we built in 2022 and additional units we plan to build in 2023. Full year SG&A expenses totaled $42 million, up $6.7 million from a year ago. And net loss for 2022 was $124.6 million, compared to $96 million in 2021. I want to note that full year operating expenses of $123.6 million that I mentioned earlier were about $6 million lower than our most recent full year forecast of $130 million, primarily due to delays in R&D services and components that were pushed into 2023. We ended the quarter with total cash, short-term and long-term investments of $422 million, compared to about $455 million at the end of the third quarter, with a $33 million of cash use during the period accounted for almost entirely by our net loss in the period and also increased prepaid insurance expense. Looking forward into 2023, we expect to continue to deliver Hybrid systems and full trucks with Hybrid systems installed at about the same quarterly rate as we averaged in 2022, or about $0.5 million of revenue per quarter, as we move towards the commercial launch of the Hypertruck ERX system. We plan to start delivering production versions of the trucks with our Hypertruck ERX system in the fourth quarter of this year. Initially, we do expect these sales to be recorded at a negative gross margin due to the startup nature of our commercialization activities, including components procurement and truck assembly. Over time, we expect our cost of sales to be reduced, driving positive margins. We expect our full year 2023 operating expenses to be in the $130 million to $140 million range. This estimate reflects our continued focus on delivering the Hypertruck ERX system in late 2023 but also transitioning from largely research and development activities more towards testing and commercialization support. Also, as noted earlier, we are beginning to level off growth in SG&A expenses, a trend which we expect to continue in 2023. We plan to continue to grow our in-house engineering and development resources in 2023 while simultaneously reducing spending on outsourcing of these services. Included in our projections for 2023 spending is additional development work for our KARNO generator, the fuel cell truck collaboration program with Hyzon and other platform development projects that leverage the Hypertruck ERX system. We continue to believe that we have sufficient financial resources to fund current commercialization activities for our Hypertruck ERX powertrain as well as for initial development activities for the KARNO product and the Hyzon collaboration project. We noted last quarter that we expect to see increases in working capital for 2023, primarily as we acquire components needed for assembly of production trucks later this year. By beginning to acquire some parts in the coming months, we will reduce the risk that supply chain issues delay our planned start of truck deliveries. Finally, we expect to see an increase in capital spending for the year as we build out our Austin headquarters facility to support truck assembly work, construction of a product validation facility, and investments in the KARNO generator, including additive printers and test cells. Although it is still early in the year, we expect total cash used in the year to support our operations, capital spending, and working capital inventory build to be less than $200 million compared to $135 million that we used in 2022. With that, I will turn it back over to Thomas for closing remarks.

For our closing remarks, we have a few exciting updates and events to share with you. First, we want to highlight that we will be exhibiting at the ACT Expo in Anaheim, California in early May. We will be showcasing both our Hypertruck ERX and KARNO technology. We'll have a KARNO generator in our booth as well as the initial proof-of-concept semi-truck utilizing a KARNO generator. This will be the first time ever that the KARNO technology has been publicly displayed. At the show, you will also have the opportunity to see Hyzon’s fuel cell that we will be integrating into a hypertruck. We are excited to share our progress with the industry and connect with other leaders in the space. In early January, I participated in a panel at the World Economic Forum in Davos, where we spoke about how the grid is or is not able to support EV charging and how solutions like the KARNO generator can produce electricity locally in a distributed grid model to help ease the charging infrastructure issues. We also spoke about how range extender vehicles like the hypertruck can help avoid many of the infrastructure problems. We encourage you to watch the panel discussion on our YouTube channel as well as our recently released educational video on what size batteries are truly needed for EV trucking. Lastly, we are pleased to announce that we will be hosting an investor conference at our headquarters in Austin, Texas on June 27th. We will be showcasing our existing technology and some of the future advancements we are working on. We encourage all of our investors and interested parties to attend and learn more about our vision for the future of electrification. In conclusion, we are very pleased with the progress we have made over the past year. We have achieved significant milestones, expanded our customer base, and made important regulatory strides. With our continued focus on innovation and collaboration, we are confident in our ability to lead the industry towards a more sustainable and efficient future. Thank you for your ongoing support, and we look forward to updating you on our progress in the months ahead. With that, I will open the call to questions. Please go ahead, operator.

And your first question comes from the line of Bill Peterson from JP Morgan.

Good morning. This is Mahima Kakani on Bill Peterson. Thanks for taking my questions. Could you please tell us a little bit more about if the Hyzon collaboration could potentially change the timing between the KARNO and the fuel cell launches and/or the key markets addressed?

Sure, absolutely. First up is the Hypertruck ERX, which is our CNG range extender solution. Meanwhile, we're also developing the KARNO vehicle, which will be revealed at the ACT Expo in a couple of months. Additionally, we've announced that we'll start work on a fuel cell development vehicle. One benefit of a fuel cell solution is that it has less regulatory compliance to navigate before we can launch it, which could speed up our development timeline. However, we’re not ready to provide a timeline for bringing it to market yet, as our agreement with Hyzon focuses on this initial development vehicle. We need to validate that our powertrain can support a fuel cell just as it does with the range extender CNG and the KARNO generator. From there, we will present the solution to customers and collaborate with Hyzon to determine the best strategy and timing for a market launch. There are fewer barriers to bringing a fuel cell solution to market due to regulatory considerations and zero tailpipe emissions. Nevertheless, our primary focus is on the ERX, which is set to start production later this year.

And then, maybe as a follow-up to that is the Hyzon collaboration, let’s say that the proof of concept kind of meets expectations. Will that be the primary fuel cell strategy forward, or is it part of a larger hydrogen strategy from Hyliion?

We believe hydrogen will play a significant role as a future fuel, but the key question remains when that will happen. Currently, the cost of hydrogen is still substantially higher than diesel, and there are limited refueling stations available for hydrogen vehicles, such as semi-trucks. Therefore, we view hydrogen primarily as a localized delivery solution and anticipate interest and demand from fleets in those regions. However, for the majority of long-haul trucking across the country, we see natural gas and particularly renewable natural gas as the preferred fuel. There have been concerns and criticisms regarding our readiness for when hydrogen becomes more viable, and that’s why we are committed to our three-stage roadmap that includes fuel cell development. We aim to demonstrate that when hydrogen becomes affordable and infrastructure is developed, we will have a solution in place that builds on a powertrain we expect to have already accumulated millions of miles of proven use with the CNG range extender. This positions us as a strong competitor in the hydrogen market.

Your next question comes from the line of Andres Sheppard from Cantor Fitzgerald. Your line is open.

Thank you. Congrats on the quarter, Thomas, and thanks for taking our questions. I have a quick question focused on the numbers. As you start production in the second half of this year and considering the 210 orders, which have increased from last quarter, how should we think about gross margins? I understand you don't provide guidance on that, but should we expect those margins to potentially turn positive by the end of this year, or is it more realistic to think of 2024 as a more feasible timeline? Thank you.

Hi. This is Jon Panzer. I'll address that question. We mentioned that we plan to begin commercializing the truck later this year, with deliveries starting sometime in the fourth quarter; however, we can't specify an exact date or quantity yet. Therefore, I wouldn't expect to see positive margins in 2023. We are experiencing some inefficiencies at the start, and component costs are higher due to lower purchase volumes. We're actively working to improve these aspects through more efficient assembly, better procurement, and engineering changes to the truck. It's still early to predict exact outcomes, but aside from delivering a reliable truck, achieving positive margins is our top priority for the future. Predicting the timing of this is a bit challenging.

Understood. Thank you, Jon. That’s helpful. Maybe as a follow-up, I'm curious. Maybe Thomas, maybe this one little bit more for you is, what kind of trends have you been seeing on the supply side? Right, obviously, supply chain disruptions have been a big problem for the entire industry. Just curious what you've been seeing and maybe any thoughts for 2023? Thank you.

We are definitely noticing improvements in the challenges posed by the supply chain over the past couple of years. Suppliers have stopped extending their lead times; in fact, they are meeting or even shortening their projected lead times. Overall, it seems like the supply chain situation is improving. We hope to see pricing levels return to pre-disruption levels, and we will actively encourage our suppliers to work toward that. Additionally, as BEV vehicles start to enter the market and reach customers, we're curious about customer demand. Interestingly, fleets are facing difficulties with BEV vehicles due to charging issues, infrastructure costs, and vehicle uptime, which complicates their ability to adopt these solutions. This, in turn, has created more demand and focus on our offerings. I recall a recent conversation with a fleet that had adopted BEV vehicles. A senior executive mentioned that after their experience, the company would not consider adopting BEVs again due to the challenges they encountered, but they found our solution to be very practical. This feedback is certainly encouraging for our direction moving forward.

Thank you for that context, Thomas, it’s very helpful. I have one last question to fit in. Can you remind us about your capital needs and what your expectations are? I know you have funded through the start of production, but could you provide any additional details on this?

Yes, this is Jon again. To summarize, we ended the year with $422 million in liquid assets on our balance sheet, providing us with capital when needed. We spent approximately $135 million last year and anticipate spending less than $200 million this year. The variables include our working capital needs and the number of trucks we sell by the year's end. Therefore, we expect to have over $200 million by year-end, which positions us well. We have no plans to raise capital this year, putting us in a strong position as we enter 2024 and begin ramping up sales.

Excellent. Thank you very much. Congrats again on the quarter. I'll pass it on. Thank you.

Your next question comes from the line of Donovan Schafer from Northland Capital Markets. Your line is open.

Hey, guys. Thanks for taking the questions. I do want to start off just actually by offering my condolences around Ed's passing. I know he was an early investor in the firm. I think he even had sort of like a COO role for some stretch of time, and I think it goes back to like 2016 or something; I know he was there for a long time. So, no doubt, I'm sure that he will be missed. So I just wanted to pass.

Appreciate that. Thank you.

Turning to questions about the Hypertruck ERX ramp, you mentioned some aspects related to working capital, supply chain, and sourcing. However, we would all like clarity on what the Hypertruck ERX ramp will look like in 2024 after the initial 200 or 210 units, especially in the second, third, and fourth quarters. I understand it might be too early for specifics, but if possible, could you share any insights? If not, I'm interested in knowing when you need to start making procurement decisions and when you'll have an internal assessment in place for the number of units you plan to produce in Q2, Q3, and beyond. What are the key points this year that will prompt those decisions?

We are not ready to share volume expectations for 2024 at this time. However, we are confident and will work hard to deliver all 200 vehicles by the end of Q1 2024, which will be a significant ramp-up for the team. Regarding procurement, we have started to pre-buy some materials for these initial 200 trucks to ensure they are available in time. The supply chain timing varies by component, but generally, a six-month lead time is a reasonable estimate for when we need to place orders before delivering to customers. We are closely collaborating with Peterbilt to ensure truck availability and are optimistic about the initial 200 builds. Our relationship with Peterbilt is progressing well; recently, we accomplished our first build of a de-contented truck specifically for Hyliion. Previously, we modified trucks by removing components, but now we can source chassis and trucks directly from Peterbilt, built to our specifications, which is a major achievement. We anticipate that this relationship will continue to strengthen as we move forward.

And then, for the winter testing, given that you've already begun the winter testing, I'm sure it's not complete, or you would have said it was finished. And I'm sure that some amount of assessment has to have this full start to finish scope for an assessment. But yes, I'm curious if there are various incremental phases for the winter testing, or any just points where it allows you to give us some color or some updates on how the vehicles have been performing so far in the winter testing. And also, maybe any new insights from that versus the summer testing. I know like you talked about frustrations with the EVs. In cold weather, you consume a lot of energy with heating the cab, but with something like a natural gas generator, you get waste heat from that. So, that's why heating isn't really a problem in an internal combustion engine. So curious, comparing and contrasting winter and summer testing, benefits and just any incremental updates from what you've seen so far?

Yes, it's still ongoing. We're currently in the middle of winter testing, which we plan to continue. We've implemented some design improvements to the vehicle, and the next batch is just starting to be deployed. There are even photos of the new design already surfacing. We're excited about this progress, but testing will continue. So far, we've learned quite a bit. The idea behind testing is to push the limits until we identify weak points, and that’s exactly what we’re doing. Importantly, nothing we've discovered in our testing has required us to alter our timeline, which is a significant positive. The insights we've gained include addressing water ingress and improving connectors and sheet metal designs, though nothing has been critical. We’ve also collected valuable feedback from suppliers of components, whether they are new entrants or established companies transitioning to electrification. This collaboration has allowed us to assist them in refining their component designs. Regarding summer versus winter testing, it’s commonly recognized that winter poses challenges for electric vehicles, particularly because heating the batteries consumes a lot of energy. However, one advantage we have is the ability to utilize the natural gas generator for electricity, which mitigates the negative impacts of cold weather on performance. Our powertrain isn't affected by the cold as much as a battery electric vehicle would be. Overall, I’m very pleased with the progress in testing.

Okay. I have one more question regarding the 200 production slots originally allocated for the Founders Program associated with the Dallas launch facility. With the additional 10 units ordered by DSV, will the incremental orders be added to the initial 200, similar to the Founders Program, where they receive special treatment along with extra servicing and monitoring from the Dallas facility? I believe you alluded to this in your prepared remarks, but I wanted to clarify how we should view the incremental orders in relation to the initial 200 designated for the Founders Program.

Sure. So, we anticipate the Founders to be those initial 200, and we worked with the fleets to make sure that those vehicles were going to be coming through Dallas and using the launch facility. Coincidentally, with DSV, the area that they're going to be operating these vehicles is out of Dallas as well. So, we're going to use the launch facility to assist with their vehicles, in addition. But as we go forward, we plan to loosen that constraint of wanting to make sure the fleets are going to be coming through Dallas and really just make it a solution that's available across the country. Obviously, if a fleet is coming through Dallas, then we're going to use that launch facility. And just to put some more color there, we are still in the process of identifying where that facility is exactly going to be located, where in Dallas, we're also exploring fueling options, having fueling on site versus potentially just having a fueling station nearby that the trucks can fuel up at. So, we're on a good trajectory to have all of that complete by later this year, when we launch the vehicle, and we'll be supporting those initial ones or other fleets that are in the Dallas area out of that location.

When discussing the possibility of providing that service in new markets, the concept revolves around offering a white-glove service. This isn't just a limited initiative for the first 200 instances; rather, the goal is to ensure a flawless execution, incorporating all insights and experiences gained. It’s important to have this white-glove service available as an option in future markets, correct?

To provide more clarity on our approach, for the first 200 vehicles, we need to gather as many insights as possible to ensure the design is robust and to identify any potential failure points. We've instructed the fleet that even if the vehicle is functioning perfectly, we still want to inspect the truck to confirm it meets our expectations and that nothing is visibly amiss. We will be monitoring the data continuously. This is the agreement we have in place for those initial 200 trucks. Moving forward, our intention is to only conduct inspections during scheduled routine maintenance or if there is an issue with the vehicle. This reflects a more hands-on approach during the initial phase, whereas after the first 200, we expect the fleets to operate the vehicles like any other technology on the truck.

Your next question comes from Avi Jaroslawicz from UBS. Your line is open.

Hey. Good morning, guys. Avi on for Steve Fisher. So, Jon, I think a couple of questions on OpEx for this year. So, one is just how should we be thinking about SG&A for this year? I know it's expected to be leveling off, but does that mean, kind of flat with last year or increasing for some part of the year and then flattening out from there? And then also in terms of the R&D expenses, can you maybe bucket how much of the R&D is geared towards commercialization this year versus development of future products?

Sure. So first of all, on the SG&A, the guidance there is really just to indicate that on the SG&A side, the administrative side of the company, we are starting to kind of reach maturity and where we don't need to build a lot larger organization. And so, to your question, I don't want to split hairs here, but we just see it kind of leveling out. You might look at more fourth quarter and just say, hey, that's give or take a number like that. Of course, it grew a little bit; it looks like it grew a little bit less than 10% last year. So, that fourth quarter might be a good point to just look at. So, I don't want to overplay it because we could see opportunities to expand or grow, but we just don't see that right now. And again, it's a way of just saying, hey, we are focused on R&D, we are focused on the product versus the administrative side. And then on R&D, we are shifting over from R&D to testing and certification and then into commercialization support, the activities that Thomas was talking about in terms of just making sure we have a good product that we can support in the field. We are shifting over, starting to shift some of that R&D into the Hyzon project, certainly over to KARNO, and some other things, other products and opportunities that we will talk more about when we get to our investor conference later in the year. So, yes, it's going to start to shift. There's not a lot of value in trying to parse it out too finely. But we are definitely starting to shift and do other things and exciting things as we get to the commercialization point on the truck.

And then, Thomas, so in terms of the strategy for the fuel cells, can you explain like why the fuel cells are better to use than the KARNO generator? I know that you mentioned in terms of the regulations, no tailpipe emissions, but the KARNO generators seems like it shouldn't really be emitting a whole lot. I know we discussed some of the tech behind it. So just trying to understand the advantages of fuel cell versus the KARNO generator?

On the fuel cell front, you are correct that it produces zero tailpipe emissions and operates solely on hydrogen. In contrast, the KARNO technology offers flexibility as it can run on both natural gas and hydrogen. While using natural gas does result in some tailpipe emissions, studies show these emissions are considerably lower than those from a traditional internal combustion engine. When operating on hydrogen, the emissions are minimal, but there is still a tailpipe involved. In terms of efficiency, we anticipate that the KARNO will deliver better performance than fuel cells. In locations where infrastructure for fuel cells is already established, we anticipate some adoption of this technology. Hyzon has an existing customer base that we plan to collaborate with to showcase this solution. We expect interest in the fuel cell, but when considering over-the-road long-haul trucking, we believe fleets will lean toward the KARNO because it offers a robust, future-proof solution that can seamlessly switch between natural gas and hydrogen without issues. We're optimistic about KARNO's potential, but recognize it's still in development, which is why we're also pursuing fuel cells. A key point to mention is regarding certification; there have been questions about whether our products, including the ERX, will adhere to various government mandates such as ACF, ACT, and IRA. It seems likely that all three products will be included in these mandates. Recently, there has been notable conversation around ACF, where fleets have expressed concerns to CARB about needing exemptions from compliance, arguing that the timing for adopting these vehicles is challenging. However, CARB recently indicated that if a near-zero-emission vehicle with the necessary performance is available, they will not provide extensions for lack of infrastructure or vehicle availability. This is significant for us because it compels fleets to adopt near-zero-emission vehicles, regardless of BEV availability. We are positioned as one of those vehicles, meaning fleets can adopt our technology either in the short or long term while still earning the same credits. I wanted to cover these points to provide clarity.

And there are no further questions at this time. Mr. Thomas Healy, I turn the call back over to you for some final closing remarks.

Terrific. We appreciate everyone joining the call today. There is a lot of exciting news. We're thrilled about the announcement regarding the demo vehicle with Hyzon. We encourage anyone interested to attend the ACT Expo in early May, where we will showcase the ERX and the KARNO. Additionally, please join us for our investor conference at our headquarters on June 27th. We anticipate being able to showcase much of what we're doing during that investor meeting. Thank you all for your time, and we look forward to speaking again next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.