Hyliion Holdings Corp. Q1 FY2023 Earnings Call

Good day and thank you for standing by. Welcome to the Hyliion Holdings' First Quarter 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.

Thank you, and good morning, everyone. Welcome to Hyliion Holdings' first quarter 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 to 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.

Thank you for joining us today for our first quarter 2023 earnings call, as we have a lot of important information to share with you this morning. We will be providing updates on the Advanced Clean Transportation EXPO in Anaheim, California that we participated in last week, news of the issuance of the final Advanced Clean Fleet rule known as ACF by CARB two weeks ago, and some strategic shifts that we are making in our Hypertruck ERX commercialization plans in order to best maintain our strong cash position. I'd first like to start off with an update on our Hypertruck ERX powertrain development and commercialization work. For those of you who are new to the story, the Hypertruck ERX system is a fully electric powertrain for Class 8 semi-trucks that includes a natural gas fuel range extender to recharge the batteries as needed. When fueled with renewable natural gas, the Hypertruck ERX powertrain offers commercial vehicle owners a net carbon negative capable alternative to battery-only trucks, which have limited range and rely on expensive recharging systems that are not yet widely available. I'm pleased to report once again that we remain on schedule with plans to begin commercialization in the second half of this year. There are no new milestones to check off for the first quarter, but the product validation phase remains on track as we will begin extended fleet trials later in the second quarter. We are happy to inform you that we submitted the required material to CARB in order to obtain our dual executive order with Cummins to certify the powertrain. We expect to complete certification from CARB, the EPA, and the National Highway Safety Administration sometime in the third quarter. We have previously shared that we would start production of the Hypertruck ERX system in late 2023. But with the progress just mentioned, we now plan to begin production assembly of trucks equipped with the Hypertruck ERX powertrain in the third quarter, ahead of schedule. We have made some other great strides to assist with pulling in the start of production timing. The team has been working diligently on building out our next batch of C sample trucks, which we expect will be the final version of the powertrain design prior to starting production. These trucks are going through continued validation testing, and they will be deployed in an extended fleet trial starting this quarter. We have also recently obtained ISO 14001, which is an environmental certification, as well as ISO 9001, which is a quality process certification. These ISO standards are expected of and common across the conventional suppliers and OEMs in the space, but are often not obtained by early-stage companies or new market entrants like Hyliion. This achievement continues to build confidence and operational excellence as we move into production. Next, I'd like to provide an update on our Hypertruck ERX system commercialization plans and some strategic shifts that we are undertaking that I mentioned earlier. As I'm sure everyone on this call is well aware, the past quarter has been an exceptionally challenging time for electrification and technology companies in the public markets. Unfortunately, Hyliion stock has similarly seen a recent decline, and it's prompted us to relook at what is the best strategic path forward for the Company. One very clear advantage that Hyliion has is our balance sheet with nearly $400 million in cash. What is also clear is that the ability to raise additional capital in the stock market has become severely limited without incurring excessive dilution for existing shareholders. Consequently, we need to make sure that we utilize the cash we have in a focused manner and as wisely as possible. During our last earnings call in March, we shared that we expected to incur gross margin losses on the sale of the initial trucks that are part of our inaugural Founders Program due to startup inefficiencies that we expect to encounter as we go through assembly and delivery of the first powertrain systems. We also shared that we expect to see an increased use of cash this year compared to 2022, as we purchased production powertrain components for the Founders trucks and for additional trucks that we plan to begin building in the first half of 2024 following Founders deliveries. In total, full-year operating expenses, capital spending, gross losses on sales of powertrain systems, and working capital increases, we are expected to consume up to $200 million in cash in 2023, or said differently, about half of our current capital position. If we look back in time, electrification startup companies were encouraged and rewarded by investors for rapidly growing market share and revenue. However, today, the market is rewarding the quicker path to profitability and conservation of cash, driven by greater investor skepticism for unprofitable business models. In light of recent capital markets developments and experiences of peer companies, we are taking steps now to better align with today's market expectations. We will continue to scale and grow the Company, but we will do so with a keen eye for opportunities to reduce the rate of cash burn. The first area we are going to address is the losses we were anticipating on initial Founders deliveries, which are still subject to finalization and definitive terms. Our initial plan was to ship all 210 Founders trucks by the end of Q1 of 2024. However, as we assess the costs we incur by executing this plan, we believe there are more capital-efficient ways to achieve similar customer demand in the long-term while consuming less cash in the short-term. As we began procuring the powertrain and truck components, the costs have come in higher than we initially anticipated due to suppliers passing through their surcharges onto us. Thus, we need to pass these price increases along to our customers as well. We are working with the Founders fleet on restructuring initial truck orders as well as simplifying the agreements. We will see changes to the fleets participating in the program as we go through this process. However, we are confident that we can pull forward other fleets as replacements if needed. One other objective is to place the initial units with a greater number of customers, as this will allow more fleets to test and validate our powertrain and give them the confidence to place more orders in the near future. We are also planning to scale the ramp-up of production volume at a slower pace than we initially expressed. This will allow more time to cure components, which will reduce surcharges we are now experiencing and will give the engineering team an opportunity to implement some cost-saving measures in the system design. Our new goal is to begin installing production powertrain systems into trucks in the third quarter and to complete and sell 30 trucks before the end of the year. We will then continue to evaluate our future truck assembly and delivery plan for 2024, based on modified and simplified Founders agreements. We are also pulling back on our facility renovation that we were planning in connection with a fast buildup of our Founders program trucks. We also anticipate adjusting our rate of hiring and shifting more quickly to being a powertrain provider to the OEMs as opposed to tying up working capital assembling and selling complete trucks. All of these actions will conserve cash while allowing us to continue our path to commercialization and profitability. Shifting now to an exciting update from the ACT Expo this past week, ACT is the largest trade show that focuses on new emission-reducing technology for the transportation space. In addition to showcasing our Hypertruck ERX powertrain with over 100 ride-and-drive events, we also unveiled the Hypertruck KARNO solution. We were very pleased with the level of interest and excitement we received from OEMs, partners, and fleet customers. With respect to the KARNO solution, it was the first time we publicly showcased the generator and provided an in-depth opportunity to show how the technology works. In our booth, we had a 200 kilowatt size generator mounted onto a truck equipped with our Hypertruck electric powertrain system. I'd like to share with you some of the highlights that we discussed about KARNO. First, it is a fuel-agnostic generator that is expected to operate on over 20 different fuels. The vehicle we had in the booth is equipped to run on both hydrogen and natural gas. The generator brings forward significant efficiency improvements while also reducing emissions and will emit no carbon dioxide when fueled by hydrogen. It is also expected to have almost no routine maintenance as there is only a single moving part per shaft and no oil or other lubricants in the system. Lastly, the generator operates at about 65 decibels, which is quieter than an average conversation between two people. During our press conference at the show, we also highlighted how we will expand our business focus to also offer the KARNO generator solution for stationary power applications. With its high efficiency, low emissions, low noise, and minimal maintenance requirements, we see this as a strong solution for powering EV Chargers, buildings, hotels, data centers, and many other applications that could benefit from a scalable micro-grid. We expect to be able to produce electricity at a cost of around $0.07 per kilowatt hour, which is far lower than the cost of grid electricity in the U.S., which ranges from $0.11 to $0.22. We also expect to host ride-and-drive events with our Hypertruck KARNO system later this year and begin to establish stationary charging demonstrations in 2024. Shifting to an update on our Hypertruck fuel-cell demonstration truck, the development is well underway in partnership with Hyliion, and I am pleased to share that we are still on track to have the first vehicle complete by the end of the year. At the ACT Expo, Hyliion unveiled their new 200-kilowatt fuel cell, which is the solution that we are integrating into this demo vehicle. I have just one further update to share, which is around CARB vehicle credits. We've previously showcased that vehicles with our Hypertruck ERX system will qualify for 75% of the ZEV credits that OEMs need under the ACT ruling starting in 2024. About two weeks ago, CARB passed their latest clean truck rule called Advanced Clean Fleet or ACF, which is a direct mandate on fleets to begin adopting trucks with electrified powertrains. I am very pleased to share that vehicles with our Hypertruck ERX system will qualify for 100% of the ZEV credit under this ruling, the same as a pure battery electric or fuel-cell truck. Passage of ACF will likely produce strong tailwinds for us as fleets look to comply with this new mandate. I will now turn the call over to Jon, so that he can share more on our financial and strategic update.

Thank you, Thomas, and good morning everyone. Turning to our financial results for the first quarter, we reported revenue of $310,000 from hybrid sales, including a full truck equipped with the hybrid system compared to $340,000 of revenue in the first quarter of a year ago. Operating expenses totaled $31.9 million for the quarter, up from $25.6 million in the first quarter last year. The increase in spending is due to growth in both R&D and SG&A expenses over last year. In total, Hyliion reported a net loss of $28.8 million for the first quarter, which is up modestly from the $27.1 million loss the Company reported a year ago as lower cost of sales and higher interest income this year offset higher operating expenses. Looking sequentially, first-quarter operating expenses and net loss compared to the fourth quarter of 2022 were up only slightly, $300,000 and $600,000 respectively, as spending is beginning to level off as we approach the start of Hypertruck ERX system commercialization. We ended the quarter with total cash short-term and long-term investments of $385 million compared to $422 million at the end of 2022. We spent $37 million in the quarter compared to $30 million in the first quarter of 2022 and $33 million in the last quarter of 2022. As Thomas mentioned, we're taking actions that will help reduce cash burn and expect that these actions will significantly reduce operating expenses, capital spending, and working capital growth. Previously, we guided to total operating expenses in 2023 of $130 million to $140 million and cash consumption of less than $200 million. We now expect operating expenses to come in on the low end of that range. While we expect expenses to be reduced from the actions that Thomas noted, some of the savings will be offset by the ongoing expensing of production truck components that have been or will be received until we have completed all Hypertruck ERX research and development work. To add some additional clarity on this point, all truck components that we acquire prior to the start of powertrain commercialization are expensed to R&D. Even if those components will be used in production powertrains that are later sold. We have already started to receive some production components and will receive more in the coming months. We now expect to complete R&D work later this quarter or early in the third quarter. The implication is that operating expenses this year will be somewhat elevated due to receiving and expensing some production components ahead of the start of commercialization. Note also that these higher expenses will be completely offset by lower cost of goods sold as we sell trucks later this year and into 2024. We don't know the exact impact on operating expenses from this expensing of production components, and it could be higher than we're currently forecasting. We'll provide further guidance at the end of the second quarter. Regarding cash, as Thomas noted, we ended the first quarter with $385 million of total capital, including cash and short and long-term investments. Because of the strategic actions we're taking, we now expect our cash spending to be approximately $150 million this year, versus our previous guidance of $200 million. Factors that could drive cash spending higher or lower include the timing of truck sales in 2023 and 2024, as well as powertrain component purchases this year for deliveries in 2024. Actions that we are taking now to reduce cash burn will provide some relief from concerns about the weak stock market. Based on our current projections, we have no plans or need to raise additional capital in 2023 and into 2024. Finally, as a reminder, we are holding an investor day at our Austin headquarters on June 27 that we hope you can attend. Attendees will be able to participate in ride and drive events in both our Hypertruck ERX and Hypertruck KARNO that we showcased at the ACT Expo. We will also be exhibiting KARNO generator components and presentations from members of our Hyliion leadership team. Registration information for both the in-person event and webcast is available on our website. With that, I'll turn it back over to Thomas.

Thanks, Jon. At the ACT Expo, I was given the opportunity to give one of their keynote presentations where I shared five staggering stats around electrification. This presentation is on our YouTube channel, but I'll take a second and share the stats here with you as well. Step one was that the battery packs on a BEV truck will need to be 330% larger than you'd expect when you take into account things like battery degradation, charge limits, driver behavior, and the weight of the vehicle. The second step is the power consumption of plugging in 10 semi-trucks is equivalent to the same power draw as a Super Bowl stadium during game time. The third step is that it's expected that the cost to deploy charging infrastructure will be about one and a half times the upfront costs of the vehicles themselves. As an example, if you spend $10 million on trucks, then plan to spend about $15 million on charging infrastructure. The fourth step is that over the past 50 years, we've only seen a 3% increase in the amount of grid electricity coming from renewables such as wind, solar, and hydro. And lastly, step five is that it can take upwards of 10 years from start to finish to create a new natural gas power plant. As we stand here today, we are decommissioning power plants in the U.S. and slightly reducing our yearly national electricity production. I shared all the steps in an effort to showcase that BEV solutions are already behind the eight ball in setting up the infrastructure needed for charging. This also ties into our plans to utilize the KARNO generator as a power source for stationary applications. Or stated another way, there is a tremendous opportunity for Hyliion Technology in the future of electrification. To close out, we are excited to start the production stage of our Hypertruck ERX system next quarter, we are taking important steps to reduce spending and extend the runway that our strong balance sheet provides us today. And finally, we look forward to seeing many of you at our investor conference in Austin on June 27th. With that, we will now open the call up for questions.

Our first question comes from the line of Bill Peterson with JPMorgan. Please go ahead.

Yes, hi, Thomas and Jon, nice to see you at ACT Expo last week. I wanted to dig a little bit deeper into the feedback you're receiving. If you think about the fleet operators you were speaking with, is where most of the discussions really centered around ERX, or I mean, what was the impression of KARNO at that time? Are there still fleets interested in the hybrid program? If they're going to be looking at putting in some trucks in 2020 from beyond where do you think the discussions were most focused on?

Absolutely, it was great to see you at ACT as well. The focus from the tradeshow was on both the Hypertruck ERX and KARNO. We had two trucks participating in ride and drive events, completing over 100 experiences. There’s even a video showing one of the fleet managers who couldn’t get a ride because of the long line, highlighting the fantastic interest in the ERX. We had many great discussions with fleets interested in adopting it, ranging from medium to large and some smaller fleets. Regarding KARNO, we received numerous comments that it was the highlight of the show. Many attendees didn’t fully understand it before the event, but we successfully showcased the technology and generated excitement. However, it’s important to note that KARNO is still a few years away from being commercialized in a vehicle. As we mentioned earlier, we will begin with initial stationary demonstrations next year in 2024 before integrating it into vehicles. Meanwhile, the sales team is actively working with fleets to adopt the Hypertruck ERX, the natural gas range extender. Overall, the interest from the show was fantastic.

Our next question will come from the line of Andres Sheppard with Cantor Fitzgerald. Please go ahead.

Good morning and thanks for taking our question. By the way, hopefully, we didn't interrupt Bill's. I don't know if you have any other question. But I want to touch on the Hypertruck ERX and the deliveries. Thomas, you have mentioned on the call today. I think in the past the expectation was to deliver those 210 orders by Q1 of '24. Now, it looks like we are targeting 30 deliveries in '23. I guess my first question is twofold. Is that 30 deliveries for this year? Is that distributed amongst Q3 and Q4? Or is that going to be predominantly Q4? I'm just trying to understand. Again, since the production timeline was moved up. And then I guess, sorry, the second part of the question is any color on what '24 might look like? Thanks.

Sure. Let's start with Q3. As you noted, we were able to speed up our truck installation schedule, which will begin in Q3. However, reintegrating those units back into fleets will likely occur in Q4, so for revenue projections, focus on Q4. Our aim is to deliver 30 of the Founders trucks by the end of this year. Regarding your second question about 2024, we need to return to discussions with the Founders program fleets and other interested fleets that have been waiting. We had previously filled all the build slots in the Founders program, so we need to re-engage those fleets. The key takeaway from this call is that while we are starting production slightly earlier, our growth plans for production will be more gradual. This is primarily due to our intention to be prudent with our capital, so we aim to avoid shipping units at a loss. This approach will help us conserve cash, allow our engineering team to implement product improvements, and give suppliers time to deliver components without high surcharges. As we establish a profitable system, we will then increase production volume. Additionally, the initial units we ship will go to more fleets than we initially planned, which we hope will lead to larger orders as they become familiar with the technology and are ready to receive vehicles as we achieve profitability. The overall goal is to optimize cash and minimize loss-making shipments while moving toward profitability.

And so, is it still fair for us analysts to assume the 210 orders will be delivered by the end of '24? Just trying to get remodeling purposes trying to better understand that.

Yes, our goal is to scale into the hundreds of units as we approach 2024. We are still planning on increasing volumes, but we are not ready to disclose specific numbers for what 2024 will entail.

And sorry, one last follow-up from us. In the past, you had disclosed some tentative, I guess ASPs for the ERX, I think in the high 300,000. Any sense of what gross margins may look like either in Q4 '23 or '24? Again, I know you're not disclosing any specific numbers, but how should we be thinking about those?

Yes, so I'll take the first part and then have Jon take the second there. So in terms of the pricing, as you mentioned, we had previously shared MSRP or pricing on the Hypertruck ERX would be in the high 300,000 after we took into account the IRA benefit of $40,000. So, we're still looking at being in that same ballpark, but it's going to be in the higher 3x or closer to 4x as we go into production here. And then Jon, you want to take the profitability question?

Yes, and if you listen to what Thomas had mentioned on the call, the actions that we're taking now are helping us get closer to not having a negative gross margin. And we noted last quarter that we did expect the first trucks to be sold at a slight loss just due to startup and logistics and so on. So, these actions will help. And maybe if I can just put a little bit of clarity on this we've been seeing some companies that are selling full trucks selling them at negative hundreds of percent. And we're not talking anything like that. We're talking excluding overhead, which is a little bit of a wild card at low volume. We're talking about minus 10%, plus or minus. So, it's not a big number and it's something we think we can close do the actions that we talk through. So, initially, we're still probably a little under upside down, but this puts us in a better position and we expect to get, be able to reach that positive gross margin more quickly this way.

Your next question comes from the line of Steven Fisher with UBS. Please go ahead.

Just to follow up on that last point there, and I know a lot is in flux and things are changing all the time, but would you envision that somewhere within those first 210 units or so there will be positive gross margins, or is it still likely sometime after that first batch?

Yes, I think it's still a little early to tell, as Thomas mentioned, we're expecting to ramp up production as the beginning of 2024. Again, we're seeing great interest from fleets. It's just really all about what's the best startup strategy that maximizes the use of our cash and minimizes the potential for margin loss. So, volume will help, time will help, chances to get some of these design changes in will help. So, we're just starting off a better foot here and will help us ramp up.

And then just in terms of the cash burn, and it looks like at the burn you had in this quarter, it would leave you with about 10 quarters worth of cash, and then they took out 50 million of burn from this year. So are the broader plans that you have to slow that pace of burn extending that that 10 quarters by years or by quarters? And then, what would you have to see in order to kind of curtail spending further and would sort of the KARNO be the obvious place to turn back being able to do something further?

Yes, let me address cash. So, it's a great question, Steven. If you look at where we ended last year, we had $422 million, our outlook this year being around $150,000, that leaves us somewhere around $275,000, which puts us in a position that we're not needing to raise any money this year, gives us the flexibility not to raise money next year and in 2025. The unknown is, of course, what we're going to spend after this year. We haven't given an exact forecast. But we are an asset light company, we don't expect to need a lot of capital spending, we're doing, what we're doing now to reduce working capital as we build up. Let me comment on expenses a little bit. We've been, I mentioned, I think, at the end of last quarter, we're leveling off the growth and spending; if you look at us this quarter compared to the fourth quarter that it really is leveling off. And that leveling is really driven by the powertrain side of it as we finish up R&D and move on to commercialization. KARNO is not a big part of our organization yet, but I will say it is growing, and we intend to grow it more. So we're certainly not going to back off in any way on KARNO, just given all the interest and opportunity with that product. So if you're thinking forward-looking, we haven't put a number on it, but we wouldn't expect cash to likely grow; this year is probably a target that we work around plus or minus might be a little bit lower, might be a little higher. But the balance that we have now gives us a lot of runway to be able to get to the point that we're generating gross margins. And also, Thomas mentioned, starting KARNO stationary demonstrations next year that gives us a good launch pad for getting that product to the point where it can be generating gross margins too. So I think I would just put a point to it by saying, hey, these actions that we're taking give us a lot of time, such that we're not really at the near-term mercy of the markets if we needed to raise cash.

Your next question comes from the line of Luke Horton with Northland Securities. Please go ahead.

I'm on for Donovan Schafer. We had a couple of overlapping calls and had to do a little divide and conquer. But just wanted to touch on revenue recognition with the first 30 trucks and going forward as well. Will these be clean sales and title transfers? Or will there be some kind of financing or deposit or any other arrangement where it's not just a matter of multiplying units by that high 300,000 ASP to get the revenue number?

Our plan would be for these to be straight sales to the fleets such that they can recognize, for example, the IRA credit. And we could also recognize the cash from those sales. So the expectation is we're trying to get them to be pure sales versus any kind of financing arrangements from Hyliion. That's certainly not our intent.

And then just touching on the winter testing, were there any key takeaways from the completion of this? And have you guys closed out all phases of this winter testing?

Yes, so winter testing went well, we've checked the boxes on what we needed to do through the cold months, which included putting tracking some thermal chambers that were bringing it down to like negative 40 degrees. So, pretty robust testing, we're pleased with how it went. Obviously, there were learnings that did come out of it, some design changes, modifications that we wanted to make, and we'll roll those into the product. But overall, we're pleased with how the testing went and don't see it changing our commercialization plan. Actually, as we shared on the call, if anything, we're pulling up the commercialization plan of getting into production. So all went well, there, obviously, as we continue to build the last batch of systems here, before we go into start a production that will continue to test those and look for areas to optimize. And that does lead into some of the cost savings opportunities I mentioned. We found through testing and validation. Some things are over-engineered or designed to be more robust than they need to be. So, we can scale some things back in order to still be able to hit all the requirements of the industry still have a strong product that meets the life requirements. But he's an over-engineered, and then that'll help us pull some costs out as well. And that leads into some of the cost-saving efforts we mentioned.

And this last one here on the regulatory landscape, so any updates or pending determinations that could impact you guys coming out of the Treasury Department on the IRA bill or anything similar along those lines? Were there rulemakings or guidelines in process that could have a positive or negative impact?

Yes, so I think right now, at least from what we're seeing, it’s positive impact. So, IRA is a $40,000 tax benefit. ACT, which is the mandate that CARB put on the OEMs, we're going to qualify for 75% of ZEV credits that a normal BEV or fuel-cell truck will qualify for that we announced probably close to a year ago. The announcement just recently, from a couple of weeks ago was that ACF, which is now the mandate put directly on the fleets telling them how many of the vehicles they buy need to be electric, we're actually going to qualify for 100% of the BEV credits that a conventional BEV or fuel-cell truck will qualify for. So I actually think there's going to be a great tailwind for us to move fleets are now going to be mandated that the trucks they buy need to be certain percentages, going into car-following states are going to need to be credit-generating vehicles and will be just as good as a BEV and a fuel-cell truck. So I think it's a big positive what we're seeing from a regulatory standpoint.

And apologies, Bill Peterson's line was cut off. We'll now take your follow-up question. Please go ahead.

Thanks for letting me ask another question. Wanted to come back to the fuel-cell program, and I think we mentioned integrating a fuel-cell later this year, early next year. If we took your time frame of ERX where you started in the second half of '21 and carrying that through the second half of 2003, something like a 2 to 2.5 year timeframe. Is that the right way to think about that program? In other words, from a starting point to an endpoint or are there areas that would basically be already done because you've done the work on the ERX program and you're primarily just changing up the power source?

We are definitely on the same page, Bill. We are applying all the testing and validation insights gained from the Hypertruck ERX development to both the Hypertruck KARNO and the Hypertruck fuel-cell. For instance, when we move forward with the fuel-cell commercialization, less validation is required for the powertrain. Additionally, Hyzon is conducting their own validation for the fuel-cell. This means we are merging two components rather than creating an entirely new product; although there will still be testing and validation, the timeline will be quicker. A key advantage of the fuel-cell truck is that it doesn't need to go through the standard CARB and EPA processes that the Hypertruck ERX is undergoing. As I mentioned earlier, we have submitted all necessary documentation to CARB as part of a dual executive order process in collaboration with Cummins. Everything has been submitted, and we are on track to receive certification in the third quarter. This is a step we can skip entirely with fuel-cell development.

Our next question will come from the line of Mark Delaney with Goldman Sachs. Please go ahead.

Good morning, everyone. You have Will O'Brien on the line speaking on behalf of Mark Delaney. Thanks for taking our question. So the first question is, or the first congratulations on pulling for the timeline for the Hypertruck ERX powertrain system. But could you provide some additional color on what are some key things that need to be done to make sure that we get to that launch in the third quarter?

Sure. So, first thing is we are building out our final batch of development vehicles. We have the initial ones already built. We are building on more right now. And those are the trucks that will go through extended fleet trials, and those will be happening starting this quarter in Q2, and we will carry those forward even through the start of production; we will be doing the fleet trials. So, we will be deploying those and that will allow us to get more customer interest. And then I think the big milestone that we need to go through is just getting CARB EPA certification that I mentioned earlier, and the gating item I foresee is really the CARB certification, and the big milestone there was submitting everything we needed to in partnership with Cummins to CARB and that happened in the first quarter. So, we think we are on track and in good shape for Q3 launch.

Thank you for the additional color there. And my second question for you at the floor is just how far along are you all with negotiating terms with the Founders customers and what has that response been? And additionally, are there any customers who are lowering purchasing plans at all? Thank you.

Sure. So we are still at the early stages of those discussions. We just recently kind of got all the final pricing of what component costs are going to be for building out the systems. And as we mentioned on the call, it has come in higher. So we are going to look to pass through some of those incremental charges onto the fleet. That is a customary thing to do in this industry. Usually, if you go buy a brand new truck from an OEM, there is usually a line item on your invoice that says surcharges. So, we don't suspect that that's going to be a surprise having those sort of discussions with fleets, but with that being said, these fleets, those initial orders together about a year ago now. So, there are going to be changes to the fleets that are in that mix, and then we are going to also look to pull in additional fleets. So, when we set up the Founders program, it was structured with I believe 11 fleets. And so, we're going to look to add more into that so that we can place these initial units with more fleets, a wider variety, and then look to build the backlog even further. So, as we go into higher volumes of production, we have greater commitments from a wider variety of fleets as well.

Your next question will come from Jeff Kauffman with Vertical Research Partners. Please go ahead.

Thank you very much. Nice to see you at the ACT expo as well. Just two short questions. When we speak to fleets about EV infrastructure, it's a big issue, fuel-cell infrastructure is a big issue. Are there additional infrastructure requirements that you're going to need geographically as these ERX units start to be run publicly? And then I guess secondarily following up on that, thank you for the info on the ACF and ACT availability. Are the majority of the sales you're talking to in California? Do you need other states to adopt MOU on the CARB mandates to incentivize the sales there? Or are you looking pretty much nationwide at this point on the IRA credit?

Let me address your question by breaking it down into a few points. It was great to see you at the ACT Expo, and I apologize for having to cut our conversation short. Regarding the ERX and its infrastructure needs, there are approximately 700 public charging stations in the U.S., which is sufficient for starting off with vehicles that can travel up to a thousand miles. We’re in a good position there. The primary goal is to deploy these units and utilize the existing infrastructure. A common insight we gathered at ACT Expo is that there is growing concern about battery electric vehicle infrastructure and hydrogen fuel-cell infrastructure. I mentioned in my keynote that plugging in just 10 trucks uses as much power as an entire Super Bowl stadium during a game, which poses challenges for fleets. Additionally, quotes from utility companies can be 1.5 times the cost of the trucks, meaning that if a fleet plans to acquire 50 trucks, they may need to invest between $30 million and $40 million in charging infrastructure. This typically discourages fleets from pursuing these opportunities. Therefore, we believe having robust infrastructure is a key advantage of the Hypertruck ERX. Now, regarding the second part of your inquiry about ACF ACT credits, California has already adopted those standards. You are correct that additional states are also indicating they will follow similar mandates to what CARB is implementing. While there may be some variations in timing or specific adjustments, they are generally aligned with CARB’s approach. I believe 14 states, along with Washington D.C., have confirmed they will adhere to a similar structure as CARB. Looking ahead, we expect this to provide significant momentum for encouraging fleets to adopt our solution.

Your next question will come from the line of Noel Parks with Tuohy Brothers Investment Research. Please go ahead.

Just a couple of things. I was wondering as you've done a little bit of adjusting to, which fleets will see units, you've broadened the set that we see that the chance to demo them out. Do you anticipate any fresh competitive pressure from other OEMs? On just general time to delivery or other customers still pretty firmly focused in to the technology first manner that they're most concerned about performance and not as concerned about timing for instance?

I believe fleets are worried about both aspects. They are eager to adopt new electrified solutions. The ACT Expo demonstrated the competitive pressure in the market, with all the key players showcasing their offerings. However, we did not observe anyone presenting a solution comparable to our Hypertruck ERX. There were numerous discussions about battery electric vehicles (BEV) and fuel-cell trucks, but the concerns around infrastructure are significant for fleets considering these options. As fleets explore BEVs and fuel cells, they may find some suitable applications, but they'll likely view the Hypertruck ERX as a more prudent nationwide solution. For example, at the ACT Expo, many BEV solutions were showcased, but they required diesel generators to charge the vehicles, leaving those trucks idling in the parking lot on diesel power. This highlights a recurring issue, as we've heard fleets needing diesel generators to charge their electric vehicles. This situation illustrates the challenges that will accompany EV adoption.

That is surprising. Hold that counter to the decarbonization spirit.

Thankfully, it hasn't been major tariffs. I mean, we've done some changes over the past couple of years to optimize where weight is distributed on the vehicle. We've done things to improve the rugged ability of our paintings back on wiring harnesses and making sure they can really withstand the harsh conditions on the road. We've done improvements to cooling loops and systems. And I think everything, it wasn't like we had to take a pause and say, hey, we need to go back to the drawing board and rethink things, right? Everything has been kind of going down the right path, just making optimizations to make sure this product is going to be robust and reliable. Some of the changes that will make in order to improve some cost downs, we see that there's opportunities in kind of the structural design, sheet metal design of some systems. We see that our cooling system provides it's over. It provides more cooling, more robust than what's needed. So we'll look to skinny that down. There's optimization in mounting and things like that. So that will not only pull cost out, but it will pull weight out as a vehicle as well. So those will be some of the things we look to optimize as we continue to go forward.

We have no further questions at this time. I'll turn the call back over to Thomas for closing remarks.

Well, thank you everyone for joining our Q1 2023 earnings call. A lot of exciting developments, I think the ACT Expo was a great showing for the organization, both with the Hypertruck ERX and the KARNO. So appreciate you joining the call and we look forward to chatting again next quarter.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.