NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except as separately indicated)
Note 1. Description of Organization and Business Operations and Basis of Presentation
Overview
Hyliion Holdings Corp. and its wholly-owned subsidiary design and develop hybrid and electrified powertrain systems for long haul “Class 8” semi-trucks which modify semi-tractors into hybrid and fully electric range extender vehicles, respectively. The Company’s hybrid powertrain system "Hybrid eX" utilizes intelligent electric drive axles with advanced algorithms and battery technology to optimize vehicle performance, enabling fleets to access an easy, efficient way to decrease fuel expenses, lower emissions and/or improve vehicle performance. The Company’s fully electric range extender systems utilize an intelligent electric powertrain with advanced algorithms to optimize emissions performance and efficiency with no new infrastructure required. The Hypertruck ERX system enables fleets to reduce the cost of ownership while providing the ability to deliver net-negative carbon emissions and operate fully electric when needed. The Company recently launched its commercial Hybrid eX and the Hypertruck ERX system is in the prototype phase.
Basis of Presentation and Principles of Consolidation
On October 1, 2020 (the “Closing Date”), Tortoise Acquisition Corp (“TortoiseCorp”) entered into a business combination agreement (the “Business Combination”) with each of the shareholders of Hyliion Inc. (“Legacy Hyliion”). Pursuant to the Business Combination, TortoiseCorp acquired all of the issued and outstanding shares of common stock from the Legacy Hyliion shareholders. In connection with the closing of the transaction, Tortoise Corp. changed its name to Hyliion Holdings Corp. For more information on this transaction see Note 3.
On the Closing Date, and in connection with the closing of the Business Combination, TortoiseCorp changed its name to Hyliion Holdings Corp. (the “Company” or “Hyliion”) and the Company’s common stock began trading on the New York Stock Exchange under the ticker symbol HYLN. Legacy Hyliion was deemed the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in Accounting Standards Codification (“ASC”) 805. The determination was primarily based on Legacy Hyliion’s shareholders prior to the Business Combination having a majority of the voting interests in the combined company, Legacy Hyliion’s board of directors comprising a majority of the board of directors of the combined company, Legacy Hyliion’s existing shareholders’ control over decisions regarding the election and removal of directors and officers of the combined company’s board of directors, and Legacy Hyliion’s senior management comprising the senior management of the combined company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy Hyliion issuing stock for the net assets of TortoiseCorp, accompanied by a recapitalization. The net assets of TortoiseCorp are stated at historical cost, with no goodwill or other intangible assets recorded.
While TortoiseCorp was the legal acquirer in the Business Combination, because Legacy Hyliion was deemed the accounting acquirer, the historical financial statements of Legacy Hyliion became the historical financial statements of the combined company, upon the consummation of the Business Combination. As a result, the financial statements included in this report reflect (i) the historical operating results of Legacy Hyliion prior to the Business Combination; (ii) the combined results of TortoiseCorp and Legacy Hyliion following the closing of the Business Combination; (iii) the assets and liabilities of Legacy Hyliion at their historical cost; and (iv) the Company’s equity structure for all periods presented.
In accordance with guidance applicable to these circumstances, the equity structure has been restated in all comparative periods up to the Closing Date, to reflect the number of shares of the Company’s common stock, $0.0001 par value per share, issued to Legacy Hyliion shareholders and Legacy Hyliion convertible noteholders in connection with the recapitalization transaction. As such, the shares and corresponding capital amounts and earnings per share related to Legacy Hyliion redeemable convertible preferred stock and Legacy Hyliion common stock prior to the Business Combination have been retroactively restated as shares reflecting the exchange ratio established in the Business Combination.
The accompanying consolidated financial statements include the accounts of Hyliion Holdings Corp. and its wholly-owned subsidiary. Intercompany transactions and balances have been eliminated upon consolidation. The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the rules and regulations of the Unites States Securities and Exchange Commission (“SEC”). Any reference in these footnotes to the applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). Certain prior period balances have been reclassified to conform to the current period presentation in the consolidated financial statements and the accompanying notes.
Liquidity
These consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business. The Company is an early-stage growth company and has generated negative cash flows from operating activities since inception.
On October 1, 2020, the Company consummated the Business Combination and raised net proceeds of $516.5 million net of transaction costs and expenses. At December 31, 2020, all outstanding warrants were either exercised or redeemed, with gross proceeds of $140.8 million raised, of which $16.3 million was collected during the first quarter of 2021 (see Note 8). At December 31, 2021, the Company had a cash and cash equivalents balance of $258.4 million and total investments of $299.0 million. Based on this, the Company has sufficient funds to continue to execute its business strategy for the next twelve months.
Note 2. Summary of Significant Accounting Policies
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups Act (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement under the Securities Act of 1933, as amended (the “Securities Act”) declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company elected not to opt out of such extended transition period. As of June 30, 2021, the last business day of our most recently completed second fiscal quarter, the market value of our common stock that was held by non-affiliates was greater than $700 million. As a result, we became a large accelerated filer and no longer qualified as an emerging growth company on December 31, 2021, the end of our current fiscal year. Accordingly, we no longer qualify for the provisions of the JOBS Act that allow companies to adopt new or revised accounting standards when required by private company accounting standards. We have not previously elected to defer adoption of any new or revised accounting standards under the provisions of the JOBS Act.
Use of Estimates and Uncertainty of the Coronavirus Pandemic
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of expenses during the reporting period. The Company’s most significant estimates and judgments involve revenue recognition, inventory, warranties, income taxes valuation of share-based compensation, including the fair value of common stock prior to the Business Combination. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates, and such differences could be material to the Company’s consolidated financial statements.
On January 30, 2020, the World Health Organization declared the coronavirus outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared the coronavirus outbreak a pandemic. In mid-March 2020, U.S. State Governors, local officials and leaders outside of the U.S. began ordering various “shelter-in-place” orders, which have had various impacts on the U.S. and global economies. This has required greater use of estimates and assumptions in the preparation of the consolidated financial statements.
As the coronavirus pandemic continues to evolve, the Company believes the extent of the impact to its businesses, operating results, cash flows, liquidity and financial condition will be primarily driven by the severity and duration of the coronavirus pandemic, the pandemic’s impact on the U.S. and global economies and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. Those primary drivers are beyond the Company’s knowledge and control, and as a result, at this time the Company is unable to predict the cumulative impact, both in terms of severity and duration, that the coronavirus pandemic will have on its business, operating results, cash flows and financial condition, but it could be material if the current circumstances continue to exist for a prolonged period. Although the Company has made its best estimates based upon current information, actual results could materially differ from the estimates and assumptions developed by management. If so, the Company may be subject to future impairment charges as well as changes to recorded reserves and valuations.
Segment Information
ASC 280, Segment Reporting, defines operating segments as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision-maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company operates as a single operating segment. The Company’s CODM is the chief executive officer, who has ultimate responsibility for the operating performance of the Company and the allocation of
resources. The CODM uses cash flows as the primary measure to manage the business and does not segment the business for internal reporting or decision making.
Concentration of Supplier Risk
The Company is dependent on certain suppliers, the majority of which are single source suppliers, and the inability of these suppliers to deliver necessary components of the Company’s products in a timely manner at prices, quality levels and volumes that are acceptable, or the Company’s inability to efficiently manage these components from these suppliers, could have a material adverse effect on the Company’s business, prospects, financial condition and operating results.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity date of 90 days or less at the time of purchase to be cash and cash equivalents only if in checking, savings or money market accounts. Cash and cash equivalents include cash held in banks and money market accounts. Cash equivalents are carried at cost, which approximates fair value. The Company maintains cash in excess of federally insured limits at financial institutions. The Company makes such deposits with entities it believes are of high credit quality and has not incurred any losses related to these balances to date. Management believes its credit risk, with respect to the financial institutions to be minimal.
Restricted Cash
On July 2, 2021, the Company provided its corporate headquarters lessor with a letter of credit for $0.7 million to secure the performance of lease obligations. The Company made a restricted cash deposit for its obligation to pay any draws on the letter of credit by the lessor. Total cash and cash equivalents and restricted cash as presented in the consolidated statements of cash flows are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
Cash and cash equivalents | $ | 258,445 | | | $ | 389,705 | | | $ | 6,285 | | | $ | 1,097 | |
Restricted cash included in other non-current assets | 665 | | | — | | | — | | | — | |
Total presented in the consolidated statements of cash flows | $ | 259,110 | | | $ | 389,705 | | | $ | 6,285 | | | $ | 1,097 | |
Accounts Receivable
Accounts receivable are stated at a gross invoice amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts is maintained at a level considered adequate to provide for potential account losses on the balance based on management’s evaluation of the anticipated impact of current economic conditions, changes in the character and size of the balance, past and expected future loss experience, among other pertinent factors. At December 31, 2021 and 2020, accounts receivable included amounts receivable from customers of $45.0 thousand and nil, respectively. At December 31, 2021 and 2020, there was no allowance for doubtful accounts required based on management’s evaluation.
Investments
The Company’s investments consist of corporate bonds, U.S. treasury and agency securities, state and local municipal bonds and commercial paper, all of which are classified as held-to-maturity, with a maturity date of 36-months or less at the time of purchase. Management determines the appropriate classification of investments at the time of purchase and re-evaluates such designation as of each balance sheet date. Investments are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Interest on securities classified as held-to-maturity is included in interest income.
The Company uses the specific identification method to determine the cost basis of securities sold.
Investments are impaired when a decline in fair value is judged to be other-than-temporary. The Company evaluates an investment for impairment by considering the length of time and extent to which market value has been less than cost or amortized cost, the financial condition and near-term prospects of the issuer as well as specific events or circumstances that may influence the operations of the issuer and the Company’s intent to sell the security or the likelihood that it will be required to sell the security before recovery of the entire amortized cost. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to other income (expense) and a new cost basis in the investment is established.
Fair Value Measurements
ASC 820, Fair Value Measurements, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-
based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level I: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company can access at the measurement date.
Level II: Significant other observable inputs other than level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level III: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company believes its valuation methods are appropriate and consistent with other market participants, however the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The Company’s financial instruments consist of cash and cash equivalents and restricted cash, accounts receivable, investments, accounts payable and accrued expenses. The carrying value of cash and cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses approximates fair value because of the short-term nature of those instruments. The fair value of investments are based on quoted prices for identical or similar instruments in markets that are not active. As a result, investments are classified within Level II of the fair value hierarchy.
Inventories
Inventory is comprised of raw materials, work in process and finished goods, using the moving-average cost method. Inventory is stated at the lower of cost or net realizable value. We review our inventory to determine whether its carrying value exceeds the net amount realizable we expect to receive upon the ultimate sale of the inventory. This requires us to determine the estimated selling price of inventory less the estimated cost to convert the inventory on-hand into a finished product and other costs, which we determined includes the cost of installation and validation, to align with the transfer of control to customers in our revenue policy.
Once inventory is written-down based on a lower of cost or net realizable value analysis, that amount establishes the new carrying value of inventory if written-down at year end, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Interim impairments are reversed and reassessed at each reporting period.
During the fourth quarter of 2021, we changed from a research and development phase to a production phase for one of our products. Certain costs incurred for components acquired prior to our determination of reaching a commercial stage were previously expensed as research and development costs, resulting in zero cost basis for those components, which affected the moving average price. However, after inventory impairments recognized on December 31, 2021, inventory values and future inventory moving average prices will not be significantly affected by those zero cost items.
At December 31, 2021, our current projected costs of production for inventory items exceeds our sales prices. We expect to reduce costs based on increased production volumes, negotiated volume discounts, economies of scale and learning curve effects. Further, as we market these and other products, we may adjust our sales prices. It is possible that our efforts to achieve these cost reductions may take longer than anticipated and result in negative margin in future periods.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets include prepaid insurance, rent, supplies and amounts owed to the Company from the Company’s transfer agent (see Note 8) which are expected to be recognized, received or realized within the next 12 months.
Property and Equipment, Net
Property and equipment, net is stated at cost less accumulated depreciation, or if acquired in a business combination, at fair value at the date of acquisition. Depreciation is calculated using the straight-line method, based upon the following estimated useful lives:
| | | | | |
Production machinery and equipment | 2 to 7 years |
Vehicles | 3 to 7 years |
Leasehold improvements | shorter of lease term or 7 years |
Demo fleet systems | 2 to 3 years |
Furniture and fixtures | 3 years |
Computers and related equipment | 3 to 7 years |
Major renewals and improvements are capitalized, while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed as incurred. When property and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is recorded in the consolidated statement of operations as a component of other income (expense).
Intangible Assets, Net
Intangible assets consist of developed technology and a non-compete agreement and are amortized over their estimated useful life which range from three to six years.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment and intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that an asset group’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analysis in accordance with ASC 360-10, Impairment or Disposal of Long-Lived Assets, which requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset group is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value.
Revenue
The Company follows the five steps to recognize revenue from contracts with customers under ASC 606, Revenue from Contracts with Customers, which are:
•Step 1: Identify the contract(s) with a customer
•Step 2: Identify the performance obligations in the contract
•Step 3: Determine the transaction price
•Step 4: Allocate the transaction price to the performance obligations in the contract
•Step 5: Recognize revenue when (or as) a performance obligation is satisfied
Revenue is comprised of sales of Hybrid eX Powertrains for long haul “Class 8” semi-trucks and specific other features and services that meet the definition of a performance obligation, including internet connectivity and data processing. We provide installation services for the Hybrid eX Powertrain onto the customers’ vehicle. The Company’s products are marketed and sold to end-user fleet customers in North America. When our contracts with customers contain multiple performance obligations and where material, the contract transaction price is allocated on a relative standalone selling price basis to each performance obligation. There is no meaningful basis on which to disaggregate revenue in the current year.
We recognize revenue on Hybrid eX Powertrain sales upon delivery and acceptance of the vehicle to the customer, which is when control transfers. Contracts are reviewed for significant financing components and payments are typically received within 30 days of delivery. We do not generally recognize credit losses due to the timing of customer payment shortly after delivery. The sale of a Hybrid eX Powertrain to an end-use fleet customer consists of a completed modification to the customer vehicle and the installation services involve significant integration of the Hybrid eX Powertrain with the customer’s vehicle. Installation services are not distinct within the context of the contract and together with the sale of the Hybrid eX Powertrain represents a single performance obligation. We do not offer any sales returns. Amounts billed to customers related to shipping and handling are classified as revenue, and we have elected to recognize the cost for freight and shipping when control has transferred to the customer as a cost of revenue. Our policy is to exclude taxes collected from a customer from the transaction price of contracts.
Leases
Lessee: We determine if an arrangement is a lease at inception of the contract. Operating leases are included in operating lease right-of-use (“ROU”) assets, current portion of operating lease liabilities, and operating lease liabilities, net of current portion in the accompanying consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of
long-term debt, and long-term debt, net of current portion in the accompanying consolidated balance sheets. We have lease agreements with lease and non-lease components, and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component.
ROU assets represent the Company’s right to use underlying assets for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The discount rate used to calculate the present value for lease payments is the Company’s incremental borrowing rate, which is determined based on information available at lease commencement and is equal to the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The Company uses the implicit rate when readily determinable.
The Company has entered into operating leases for corporate offices having initial lease terms of one to eight years. The Company has entered into finance leases primarily for vehicles and equipment, having initial terms of three years.
The Company’s real estate leases may include one or more options to renew, with the renewal extending the lease term for an additional one to five years. The exercise of lease renewal option is at the Company’s sole discretion. In general, the Company does not consider renewal options to be reasonably likely to be exercised, therefore renewal options are generally not recognized as part of the ROU assets and lease liabilities. Lease costs for lease payments are recognized on a straight-line basis over the lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. The Company does not record operating leases with an initial term of twelve months or less (“short-term leases”) in the consolidated balance sheets.
The Company’s vehicle and equipment leases may include transfer rights or options to purchase at the end of the lease that the Company is reasonably certain to exercise. Interest expense is recognized using the effective interest rate method, and the ROU asset is amortized over the useful life of the underlying asset.
Lessor: The Company also enters into arrangements whereby space within the real estate is subleased. At the lease commencement date these subleases are recognized as operating leases. Operating leases are recognized on a straight-line basis over the lease term.
The Company has entered into various trial and evaluation agreements that contain an operating lease component that is within the scope of ASC 842, Leases (“ASC 842”). These agreements also contain non-lease components related to certain stand-ready services where control transfers over time over the same period and based on the same pattern as the lease component. Because the Company has determined the lease component is the most predominant component of the arrangement and the timing and pattern of transfer for the lease and non-lease components associated with the lease component are the same, the Company has decided to elect the practical expedient not to separate the lease and non-lease component and accounts for the entire arrangement under ASC 842.
The trial and evaluation agreements contain only variable payments not based on an index or rate as a result of refund provisions within those contracts. The Company records accounts receivable when the Company meets the criteria within the trial and evaluation agreements to invoice the lessee. In accordance with ASC 842, the Company recognizes variable lease payments as profit or loss in the period in which the changes in facts and circumstances on which the variable lease payments are based occur, which will generally be the end of the trial period when the customer refund rights lapse. During the years ended December 31, 2021, 2020 and 2019, the Company did not recognize any lease income related to these trial and evaluation agreements either because the Company has not received any consideration from the lease contracts, or the uncertainty related to the consideration received has not been resolved.
Warranties
We provide limited assurance-type warranties under our contracts and do not offer extended warranties or maintenance contracts. The warranty period typically extends for the lesser of two years or 200,000 miles following transfer of control and solely relate to correction of product defects during the warranty period. We recognize the cost of the warranty upon transfer of control based on estimated and historical claims rates and fulfillment costs, which are variable. Should product failure rates and fulfillment costs differ from these estimates, material revisions to the estimated warranty liability would be required. Warranty expense is recorded as a component of cost of revenue.
Marketing, Promotional and Advertising Costs
Marketing, promotional and advertising costs are expensed as incurred and are included as an element of selling, general and administrative expense in the consolidated statement of operations. Marketing, promotional and advertising costs were $1.6 million, $0.3 million and nominal for the years ended December 31, 2021, 2020 and 2019, respectively.
Research and Development Expense
Research and development costs did not meet the requirements to be recognized as an asset as the associated future benefits were at best uncertain and there was no alternative future use at the time the costs were incurred. Research and development costs include, but are not limited to, outsourced engineering services, allocated facilities costs, depreciation on equipment utilized in research and development activities, internal engineering and development expenses, materials, internally-developed software and employee related expenses (including salaries, benefits, travel, and share-based compensation) related to development of the Company’s products and services.
Share-Based Compensation
The Company accounts for share-based compensation in accordance with ASC 718, Compensation – Stock Compensation, under which shared based payments that involve the issuance of common stock to employees and nonemployees and meet the criteria for equity-classified awards are recognized in the financial statements as share-based compensation expense based on the fair value on the date of grant. The Company issues stock option awards and restricted stock awards to employees and nonemployees, utilizing new shares. The Company has elected to recognize the adjustment to share-based compensation expense in the period in which forfeitures occur. We recognize compensation expense for awards with only service conditions on a straight-line basis over the requisite service period for the entire award.
If factors change, and we utilize different assumptions including the probability of achieving performance conditions, share-based compensation cost on future award grants may differ significantly from share-based compensation cost recognized on past award grants. Future share-based compensation cost will increase to the extent that we grant additional share-based awards to employees and non-employees. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate any remaining unearned share-based compensation cost or incur incremental cost. Share-based compensation cost affects our research and development and selling, general and administrative expenses.
The Company utilized the Black-Scholes model to determine the fair value of the stock option awards issued prior to the year ended December 31, 2021, which required the input of subjective assumptions. These assumptions include estimating (a) the length of time grantees will retain their vested stock options before exercising them for employees and the contractual term of the option for nonemployees (“expected term”), (b) the volatility of the Company’s common stock price over the expected term, (c) expected dividends, and (d) the fair value of a share of common stock prior to the Business Combination. After the closing of the Business Combination, the Company’s board of directors determined the fair value of each share of common stock underlying stock-based awards based on the closing price of the Company’s common stock as reported by the NYSE on the date of grant.
The assumptions used in the Black-Scholes model are management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment (see Note 9). As a result, if other assumptions had been used, the recorded share-based compensation expense could have been materially different from that depicted in the financial statements.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, under which deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Due to the Company’s history of losses since inception, the net deferred tax assets have been fully offset by a valuation allowance at December 31, 2021 and 2020. Uncertain tax positions taken or expected to be taken in a tax return are accounted for using the more likely than not threshold for financial statement recognition and measurement. For the years ended December 31, 2021 and 2020, there were no uncertain tax positions taken or expected to be taken in the Company’s tax returns.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted ASU 2019-12 on January 1, 2021 and there was no impact to the Company as a result of the adoption.
Net (Loss) Income Per Share
Basic (loss) income per share (“EPS”) is computed by dividing net loss (the numerator) by the weighted average number of common shares outstanding for the period (the denominator). Diluted EPS attributable to common shareholders is computed by adjusting net loss by the weighted average number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include shares issuable upon exercise of stock options and vesting of restricted stock awards (see Note 9). The number of potential common shares outstanding are calculated using the treasury stock or if-converted method.
Recent Accounting Pronouncements Issued
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which, together with subsequent amendments, amends the requirement on the measurement and recognition of expected credit losses for financial assets held to replace the incurred loss model for financial assets measured at amortized cost and require entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. We adopted ASU 2016-13 during the year ended December 31, 2021 and there was no material impact on the consolidated financial statements.
Note 3. Reverse Recapitalization
On October 1, 2020, Legacy Hyliion and TortoiseCorp consummated the merger contemplated by the Business Combination, with Legacy Hyliion surviving the merger as a wholly-owned subsidiary of TortoiseCorp.
Upon the closing of the Business Combination, TortoiseCorp’s certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares of capital stock to 260,000,000 shares, of which 250,000,000 shares were designated common stock, $.0001 par value per share, and of which 10,000,000 shares were designated preferred stock, $0.0001 par value per share.
Immediately prior to the closing of the Business Combination, each
•issued and outstanding share of Legacy Hyliion’s redeemable, convertible preferred stock, was converted into shares of Legacy Hyliion common stock based on a one-to-one ratio (see Note 8). The Business Combination was accounted for with a retrospective application of the Business Combination that results in 34,799,813 shares of redeemable, convertible preferred stock converting into the same number of shares of Legacy Hyliion common stock.
•convertible note payable, plus accrued paid-in-kind interest, was converted into an aggregate 2,336,235 shares of Legacy Hyliion common stock at the predetermined discount (see Note 4).
Upon the consummation of the Business Combination, each share of Legacy Hyliion common stock issued and outstanding was cancelled and converted into the right to receive 1.45720232 shares (the “Exchange Ratio”) of the Company’s common stock (the “Per Share Merger Consideration”).
Additionally, Legacy Hyliion issued 1,000,000 shares of Legacy Hyliion common stock with an estimated grant date fair value of $10.00 per share to one of the convertible noteholders in connection with the commercial matters agreement (“Commercial Matters Agreement”) that was entered into in June 2020, that was not subject to the Exchange Ratio (see Note 4).
Outstanding stock options, whether vested or unvested, to purchase shares of Legacy Hyliion common stock granted under the 2016 Plan (“Legacy Options”) (see Note 9) converted into stock options for shares of the Company’s common stock upon the same terms and conditions that were in effect with respect to such stock options immediately prior to the Business Combination, after giving effect to the Exchange Ratio.
Outstanding warrants to purchase shares of TortoiseCorp Class A common stock remained outstanding at the Closing Date. The warrants became exercisable 30 days after the completion of the Business Combination and expired five years after the completion of the Business Combination or earlier upon redemption or liquidation. On November 30, 2020, the Company issued a notice of redemption to the warrant holders and on December 31, 2020, it redeemed all outstanding public warrants. See Note 8 for more information.
In connection with the Business Combination,
•certain TortoiseCorp shareholders exercised their right to redeem certain of their outstanding shares for cash, resulting in the redemption of 3,308 shares of TortoiseCorp common stock for gross redemption payments of less than $0.1 million.
•a number of investors purchased from the Company an aggregate of 30,750,000 shares of common stock (the “PIPE Shares”), for a purchase price of $10.00 per share and an aggregate purchase price of $307.5 million pursuant to separate subscription agreements entered into effective June 18, 2020 (the “PIPE”). The PIPE investment closed simultaneously with the consummation of the Business Combination.
•an investor purchased 1,750,000 TortoiseCorp units (consisting of one share of common stock and one half of one warrant, the “Forward Purchase Units”), consisting of 1,750,000 shares of common stock (“Forward Purchase Shares”) and warrants to purchase 875,000 shares of common stock (“Forward Purchase Warrants”) for an aggregate purchase price of $17.5 million pursuant to a forward purchase agreement entered into effective February 6, 2019, as amended by the First Amendment to Amended and Restated Forward Purchase Agreement, dated June 18, 2020.
The Business Combination was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, TortoiseCorp was treated as the “acquired” company for financial reporting purposes. See Note 1 for further details.
Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy Hyliion issuing stock for the net assets of TortoiseCorp, accompanied by a recapitalization. The net assets of TortoiseCorp are stated at historical cost, with no goodwill or intangible assets recorded.
Prior to the Business Combination, Legacy Hyliion and TortoiseCorp filed separate standalone federal, state and local income tax returns. As a result of the Business Combination Legacy Hyliion will file a consolidated income tax return. Although, for legal purposes, TortoiseCorp acquired Legacy Hyliion, and the transaction represents a reverse acquisition for federal income tax purposes. TortoiseCorp will be the parent of the consolidated group with Legacy Hyliion a subsidiary, but in the year of the closing of the Business Combination, Legacy Hyliion will file a full year tax return with TortoiseCorp joining in the return the day after the Closing Date.
The following table reconciles the elements of the Business Combination to the consolidated statements of cash flows and the consolidated statements of changes in stockholders’ equity as of and for the year ended December 31, 2020:
| | | | | |
Cash - TortoiseCorp’s trust and cash (net of redemption) | $ | 236,484 | |
Cash - PIPE | 307,500 | |
Cash - forward purchase units | 17,500 | |
Less: transaction costs and advisory fees paid | (45,030) | |
Net Business Combination and PIPE financing | $ | 516,454 | |
The number of shares of common stock issued immediately following the consummation of the Business Combination were:
| | | | | |
Common stock, outstanding prior to Business Combination | 23,300,917 | |
Less: redemption of TortoiseCorp shares | (3,308) | |
Common stock of TortoiseCorp | 23,297,609 | |
TortoiseCorp founder shares | 5,825,230 | |
Shares issued in PIPE | 30,750,000 | |
Shares issued in connection with forward purchase agreement | 1,750,000 | |
Business Combination, PIPE, and forward purchase agreement financing shares | 61,622,839 | |
Legacy Hyliion shares(1) | 92,278,990 | |
Total shares of common stock immediately after Business Combination | 153,901,829 | |
Hyliion Holdings Corp. exercise of warrants | 15,414,592 | |
Total shares of common stock at December 31, 2020 | 169,316,421 | |
(1)The number of Legacy Hyliion shares was determined as follows:
| | | | | | | | | | | |
| Legacy Hyliion shares | | Legacy Hyliion shares, effected for Exchange Ratio |
Balance at December 31, 2018 | 24,453,750 | | | 35,634,061 | |
Recapitalization applied to Series A outstanding at December 31, 2018 | 34,799,813 | | | 50,710,369 | |
Exercise of common stock options - 2019 | 286,874 | | | 418,033 | |
Exercise of common stock options - 2020 (pre-Closing) | 763,216 | | | 1,112,160 | |
Conversion of convertible notes payable to common stock(2) | 2,336,235 | | | 4,404,367 | |
| | | 92,278,990 | |
(2)The number of shares issued for the conversion of convertible notes payable to common stock is calculated by applying the Exchange Ratio to the Legacy Hyliion shares issued at the time of conversion and adding 1,000,000 shares issued in connection with the Commercial Matters Agreement. All fractions were rounded down.
Lock-Up Arrangements
Certain former stockholders of Legacy Hyliion and TortoiseCorp have agreed to lock-up restrictions regarding the future transfer shares of common stock. Such shares were not able to be transferred or otherwise disposed of for a period of six months through April 1, 2021, subject to certain exceptions.
Transaction costs
Transaction costs incurred in connection with the Business Combination totaled approximately $45.0 million which were charged to additional paid-in capital for the year ended December 31, 2020.
Note 4. Debt
The carrying value of debt at December 31, 2021 and 2020, is summarized as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Paycheck Protection Program loan | $ | — | | | $ | 908 | |
Finance lease obligations | — | | | 49 | |
| — | | | 957 | |
Less current portion | — | | | (49) | |
Debt, net of current portion | $ | — | | | $ | 908 | |
During the year ended December 31, 2018, the Company issued a convertible note payable in exchange for cash totaling $5.0 million (the “2018 Note”). The 2018 Note bore interest at 6% per annum and matured in September 2020 (two years subsequent to its issuance date). The 2018 Note included the following embedded features:
(a)Automatic conversion upon the next equity financing of at least $5.0 million in proceeds. The conversion price was dependent upon the pre-money valuation of the Company in connection with the next equity financing, with the conversion price set at a 35% discount on the next equity financing price if the pre-money valuation was $100.0 million or less, or 35% multiplied by the quotient of $100.0 million divided by the pre-money valuation if it was greater than $100.0 million.
(b)Optional conversion upon a change in control. In the event of a change in control, the holder could elect to convert the 2018 Note into shares of common stock at a conversion price equal to (i) the product of the change in control purchase price multiplied by 65%, divided by (ii) the total number of outstanding shares of capital stock of the Company (on a fully-diluted basis).
(c)Optional redemption upon a change in control. In the event of a change in control, the holder could elect to request payment of all outstanding principal (with no penalty) and unpaid accrued interest.
(d)Automatic or optional redemption upon an event of default. Upon the occurrence of an event of default, the 2018 Note would either automatically become due and payable or could become due and payable at the holder’s option (based on the nature of the event of default). Upon such acceleration, all outstanding principal (with no penalty) and unpaid accrued interest would become payable.
(e)Additional interest of 3% (or a total of 9%) upon an event of default.
In addition to the above embedded features, the Company agreed that the holder of the 2018 Note would be the Company’s preferred supplier for certain components or products that the holder sells. See Note 16 for further details on this agreement.
The Company assessed the embedded features within the 2018 Note and determined that the automatic conversion feature upon next equity financing and optional conversion feature upon change in control (share-settled redemption features) and the additional interest feature met the definition of a derivative and were not clearly and closely related to the host contract and required separate accounting.
At issuance, the Company estimated the fair value of the automatic and optional conversion features to be approximately $1.8 million. At issuance, the Company concluded the fair value of the additional interest feature was de minimis.
Between February and July 2019, the Company issued a series of convertible notes payable in exchange for cash totaling $13.6 million (the “Initial 2019 Notes”). The Initial 2019 Notes bored interest at 6% per annum and matured two to five years after their respective issuance dates. The Initial 2019 Notes were only prepayable with the consent of the holders. One of the Initial 2019 Notes (totaling $1.8 million) was secured by substantially all of the assets of the Company, subordinate to the first priority, senior secured interest held by a note holder of a convertible note issued in January 2020. The holder of this note had first priority secured interest in these assets.
The Initial 2019 Notes included the following embedded features:
(a)Automatic or optional (for one of the Initial 2019 Notes) conversion upon the next equity financing of at least $15.0 million in proceeds (the “Next Equity Financing”). The conversion price was dependent upon the pre-money valuation of the Company in connection with the next equity financing, with the conversion price set at a 25% discount on the next equity
financing price if the pre-money valuation was $100.0 million or less, or 25% multiplied by the quotient of $100.0 million divided by the pre-money valuation if it was greater than $100.0 million.
(b)Optional conversion (for one of the Initial 2019 Notes) upon a subsequent equity financing if the holder did not elect to convert upon the Next Equity Financing, at the price that was set by the subsequent equity financing (no discount).
(c)Optional conversion upon a change in control. In the event of a change in control, the holder could elect to convert the Initial 2019 Notes into shares of common stock at a conversion price equal to (i) the product of the change in control purchase price multiplied by 75%, divided by (ii) the total number of outstanding shares of capital stock of the Company (on a fully-diluted basis).
(d)Optional redemption upon a change in control. In the event of a change in control, the holder could elect to request payment of all outstanding principal (with no penalty) and unpaid accrued interest.
(e)Automatic or optional redemption upon an event of default. Upon the occurrence of an event of default, the Initial 2019 Notes would either automatically become due and payable or could become due and payable at the holder’s option (based on the nature of the event of default). Upon such acceleration, all outstanding principal (with no penalty) and unpaid accrued interest would become payable.
(f)Additional interest of 3% (or a total of 9%) upon an event of default.
In addition, the Company had the right to modify one of the Initial 2019 Notes (totaling $1.8 million) in the event the holder did not convert upon next equity financing to adjust the interest rate to 4% per annum.
The Company assessed the embedded features within the Initial 2019 Notes and determined that the automatic or optional conversion feature upon next equity financing and the optional conversion feature upon change in control (share-settled redemption features), the additional interest feature and the interest rate adjustment feature met the definition of a derivative and were not clearly and closely related to the host contract and required separate accounting.
At issuance, the Company estimated the fair value of the automatic and optional conversion features to be approximately $6.0 million. At issuance, the Company concluded the fair value of the additional interest feature and the interest rate adjustment feature was de minimis.
In December 2019, the Company issued a convertible note payable in exchange for cash totaling $3.2 million (the “December 2019 Note”). The December 2019 Note bore interest at 6% per annum and matured in December 2020 (one year subsequent to its issuance date). The December 2019 Note was only prepayable with the consent of the holder. The December 2019 Note was secured by substantially all of the assets of the Company, subordinate to the security interest held by one of the Initial 2019 Note holders. The December 2019 Note included the following embedded features:
(a)Automatic conversion upon the next equity financing of at least $35.0 million in proceeds. The conversion price would be based on the next equity financing per share price, with a 50% discount.
(b)Optional conversion upon the next equity financing of at least $15.0 million in proceeds. The conversion price would be based on the next equity financing per share price, with a 50% discount.
(c)Automatic conversion upon a subsequent equity financing of at least $35.0 million if the holder did not elect to convert upon any previous equity financing, at the price that was set by the subsequent equity financing (no discount).
(d)Optional conversion upon a change in control. In the event of a change in control, the holder could elect to convert the December 2019 Note into shares of common stock at a conversion price equal to (i) the product of the change in control purchase price multiplied by 50%, divided by (ii) the total number of outstanding shares of capital stock of the Company (on a fully-diluted basis).
(e)Optional redemption upon a change in control. In the event of a change in control, the holder could elect to request payment of all outstanding principal (with no penalty) and unpaid accrued interest.
(f)Automatic or optional redemption upon an event of default. Upon the occurrence of an event of default, the December 2019 Note would either automatically become due and payable or could become due and payable at the holder’s option (based on the nature of the event of default). Upon such acceleration, all outstanding principal (with no penalty) and unpaid accrued interest would become payable.
(g)Additional interest of 3% (or a total of 9%) upon an event of default.
In addition, in the event the holder did not convert upon an equity financing, the maturity date of the December 2019 Note would automatically extend by one year. In such situation, the holder also had the right to extend the maturity date for an additional two years beyond the modified maturity date.
The Company assessed the embedded features within the December 2019 Note and determined that the automatic and optional conversion features upon next equity financing (share-settled redemption features), the additional interest feature and the term extension feature met the definition of a derivative and were not clearly and closely related to the host contract and required separate accounting. The Company also concluded that the conversion features did not represent beneficial conversion features.
At issuance and at December 2019, the Company estimated the fair value of the automatic and optional conversion features to be approximately $1.4 million. At issuance, the Company concluded the fair value of the additional interest and term extension features was de minimis.
During January 2020, the Company issued a convertible note payable in exchange for cash totaling $3.2 million (the “January 2020 Note”). The January 2020 Note bore interest at 6% per annum and matured in January 2025 (five years subsequent to its issuance date). The January 2020 Note was only prepayable with the consent of the holder. The January 2020 Note was secured by a first priority, senior secured interest in substantially all of the assets of the Company. The January 2020 Note included the following embedded features:
(a)Optional conversion upon the next equity financing of at least $15.0 million in proceeds. The conversion price would be based on the next equity financing per share price, with a 50% discount.
(b)Optional conversion upon a subsequent equity financing of at least $15.0 million if the holder did not elect to convert upon the next equity financing, at the price that was set by the subsequent equity financing (no discount).
(c)Optional conversion upon a change in control. In the event of a change in control, the holder could elect to convert the January 2020 Note into shares of common stock at a conversion price equal to (i) the product of the change in control purchase price multiplied by 50%, divided by (ii) the total number of outstanding shares of capital stock of the Company (on a fully-diluted basis).
(d)Optional redemption upon a change in control. In the event of a change in control, the holder could elect to request payment of all outstanding principal (with no penalty) and unpaid accrued interest.
(e)Optional redemption upon the Company obtaining at least $10.0 million in commercial debt which would result in the January 2020 Note having the same priority or being treated as subordinate to the commercial debt. In such scenario, the holder could elect to request payment of all outstanding principal (with no penalty) and unpaid accrued interest.
(f)Automatic or optional redemption upon an event of default. Upon the occurrence of an event of default, the January 2020 Note would either automatically become due and payable or could become due and payable at the holder’s option (based on the nature of the event of default). Upon such acceleration, all outstanding principal (with no penalty) and unpaid accrued interest would become payable.
(g)Additional interest of 3% (or a total of 9%) upon an event of default.
In addition, in the event the holder did not convert upon an equity financing or change in control event, the noteholder could extend the maturity date of the January 2020 Note by five years beyond the original maturity date.
In addition, in the event the holder does not convert upon an equity financing, the interest rate on the January 2020 Note would automatically be adjusted to a rate of 4% per annum.
The Company assessed the embedded features within the January 2020 Note and determined that the automatic and optional conversion features upon next equity financing (share-settled redemption features), the additional interest feature and the term extension feature met the definition of a derivative and were not clearly and closely related to the host contract and required separate accounting. The Company also concluded that the conversion features did not represent beneficial conversion features.
At issuance, the Company estimated the fair value of the automatic and optional conversion features to be approximately $2.7 million. At issuance, the Company has concluded the fair value of the additional interest and term extension features was de minimis.
The terms of the convertible notes payable included certain restrictive covenants related to the Company’s ability to enter into certain transactions or agreements, pay dividends, or take other similar corporate actions.
During June 2020, the holders of the convertible notes executed amendments (the “Note Amendments”) to their respective convertible notes clarifying the planned Business Combination would qualify as a next financing, as defined in the respective convertible notes. The convertible notes would either automatically convert or convert at the holder’s option (the election of which was evidenced by entering into the Note Amendments) in connection with such next financing (in this case the Business Combination). The convertible notes would convert into shares of common stock at a conversion price equal to (i) the valuation of the Company established in connection with such next financing, divided by (ii) the total number of shares of capital stock of the Company (on a fully diluted and as-converted basis), as established in the original respective convertible notes. This conversion price would then be discounted based on the negotiated conversion discounts that were established in the
noteholders’ original convertible notes. The amended terms of the Note Amendments were determined to be clarifications of the existing terms and did not result in substantially different terms. Accordingly, the Note Amendments were accounted for as modifications.
In connection with the reverse recapitalization discussed in Note 3, immediately prior to the closing of the Business Combination, the convertible notes, plus accrued paid-in-kind interest, totaling $26.8 million were converted into an aggregate of 2,336,235 shares of Legacy Hyliion common stock, which were then exchanged for an aggregate of 3,404,367 shares of the Company’s common stock on the Closing Date. In addition, the Company issued 1,000,000 shares of Legacy Hyliion common stock to a noteholder of the 2018 Note, Initial 2019 Notes, and January 2020 Note, with a grant date fair value of $10.00 per share in accordance with the Commercial Matters Agreement.
In connection with this conversion of the convertible notes, the Company recorded a loss on extinguishment of $10.2 million included within other income (expense) on the accompanying consolidated statements of operations.
Term Loan
During August 2020, the Company issued a term loan (the “Term Loan”) with a principal balance totaling $10.1 million that matured on the earlier of (i) December 15, 2020, (ii) the termination of the Business Combination or, (iii) the consummation of the Business Combination as provided in the Business Combination. In connection with the Term Loan, the Company paid $0.5 million of financing costs. The Term Loan bore interest at a rate equal to 6.5% plus the greater of (a) the Federal Funds rate plus 0.5%, (b) LIBOR Rate for a one-month interest period plus 1.0%, and (c) Prime Rate in effect on such day. While outstanding in 2020, the Term Loan bore interest at 8.5% per annum. The Term Loan plus accrued interest was repaid in full in October 2020.
Payroll Protection Program Loan
During May 2020, the Company received loan proceeds in the amount of $0.9 million under the Payroll Protection Program (the “PPP”). The PPP was established as part of Coronavirus Aid, Relief, and Economic Security Act and provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the business, subject to certain limitations. The loans and accrued interest were forgivable after eight weeks so long as the borrower used the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and so long as the borrower maintained its pre-funding employment and wage levels. Although the Company used the PPP loan proceeds for purposes consistent with the provisions of the PPP and such usage met the criteria established for forgiveness of the loan, the Company repaid the balance of the PPP loan plus accrued interest during the three months ended March 31, 2021.
Finance Lease Obligations
The Company’s debt arising from finance lease obligations primarily relates to vehicles and equipment. See Note 10 for future maturities of finance lease obligations.
Note 5. Investments
The amortized cost, unrealized gains and losses, and fair value, and maturities of our held-to-maturity investments at December 31, 2021 and 2020 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of December 31, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Commercial paper | $ | 73,908 | | | $ | 2 | | | $ | (31) | | | $ | 73,879 | |
U.S. government agency bonds | 4,450 | | | — | | | (7) | | | 4,443 | |
State and municipal bonds | 17,797 | | | — | | | (115) | | | 17,682 | |
Corporate bonds and notes | 202,849 | | | 3 | | | (953) | | | 201,899 | |
Total held-to-maturity investments | $ | 299,004 | | | $ | 5 | | | $ | (1,106) | | | $ | 297,903 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of December 31, 2020 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
U.S. treasury bills | $ | 149,996 | | | $ | — | | | $ | (1) | | | $ | 149,995 | |
Commercial paper | 37,963 | | | — | | | (15) | | | 37,948 | |
Corporate bonds and notes | 49,892 | | | — | | | (63) | | | 49,829 | |
Total held-to-maturity investments | $ | 237,851 | | | $ | — | | | $ | (79) | | | $ | 237,772 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less | $ | 118,787 | | | $ | 118,714 | | | $ | 201,881 | | | $ | 201,864 | |
Due after one year through five years | 180,217 | | | 179,189 | | | 35,970 | | | 35,908 | |
Total held-to-maturity securities | $ | 299,004 | | | $ | 297,903 | | | $ | 237,851 | | | $ | 237,772 | |
Note 6. Fair Value Measurements
The fair value measurements of the Company's assets at December 31, 2021 and 2020 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of December 31, 2021 |
| Level I | | Level II | | Level III | | Total |
Cash and cash equivalents | $ | 258,445 | | | $ | — | | | $ | — | | | $ | 258,445 | |
Restricted cash | 665 | | | — | | | — | | | 665 | |
Held-to-maturity investments: | | | | | | | |
Commercial paper | — | | | 73,879 | | | — | | | 73,879 | |
U.S. government agency bonds | — | | | 4,443 | | | — | | | 4,443 | |
State and municipal bonds | — | | | 17,682 | | | — | | | 17,682 | |
Corporate bonds and notes | — | | | 201,899 | | | — | | | 201,899 | |
Total assets | $ | 259,110 | | | $ | 297,903 | | | $ | — | | | $ | 557,013 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements as of December 31, 2020 |
| Level I | | Level II | | Level III | | Total |
Cash and cash equivalents | $ | 389,705 | | | $ | — | | | $ | — | | | $ | 389,705 | |
| | | | | | | |
Held-to-maturity investments: | | | | | | | |
U.S. treasury bills | — | | | 149,995 | | | — | | | 149,995 | |
Commercial paper | — | | | 37,948 | | | — | | | 37,948 | |
Corporate bonds and notes | — | | | 49,829 | | | — | | | 49,829 | |
Total assets | $ | 389,705 | | | $ | 237,772 | | | $ | — | | | $ | 627,477 | |
The rollforward of the Company’s Level 3 instruments at December 31, 2020 is summarized as follows*:
| | | | | |
Balance at December 31, 2019 | $ | 8,351 | |
Issuance of convertible note payable derivative liability | 2,656 | |
Fair value adjustments | 1,358 | |
Settlement of convertible notes payable derivative liabilities | (12,365) | |
Balance at December 31, 2020 | $ | — | |
* There were no Level 3 instruments outstanding during the year ended December 31, 2021.
Note 7. Inventory
The carrying value of our inventory at December 31, 2021 and 2020 is summarized as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Raw materials | $ | — | | | $ | 132 | |
Work in process | 4 | | | — | |
Finished goods | 110 | | | — | |
Total | $ | 114 | | | $ | 132 | |
We write-down inventory for any excess or obsolete inventories or when we believe that the net realizable value of inventories is less than the carrying value. During the year ended December 31, 2021, we recorded write-downs of $2.3 million, included in cost of revenues. During the years ended December 31, 2020 and 2019, we were in a research and development phase, and did not record substantial inventory amounts or cost of sales and related adjustments.
Note 8. Capital Structure
As discussed in Note 1 and Note 3, on October 1, 2020, the Company consummated the Business Combination, which has been accounted for as a reverse recapitalization. Pursuant to the Certificate of Incorporation as amended on October 1, 2020 and as a result of the reverse recapitalization, the Company has retrospectively adjusted the Legacy Hyliion preferred shares and Legacy Hyliion common shares issued and outstanding prior to October 1, 2020 to give effect to the Exchange Ratio used to determine the number of shares of common stock of the combined entity into which they were converted.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001 per share. The Company’s board of directors is authorized to fix the voting rights, if any, designations, powers, preferences, the relative, participating, option or other special rights and any qualifications, limitations and restrictions thereof, applicable to the shares of each series. At December 31, 2021 and 2020, there were no shares of preferred stock issued and outstanding.
Common Stock
At December 31, 2021, the following shares of common stock were reserved for future issuance:
| | | | | |
Stock options issued and outstanding | 3,157,889 | |
Authorized for future grant under 2020 Equity Incentive Plan | 8,572,929 | |
| 11,730,818 | |
Warrants
Public Warrants: On March 4, 2019, TortoiseCorp completed an initial public offering that included warrants for shares of common stock (the “Public Warrants”). Each Public Warrant entitled the holder to the right to purchase one share of common stock at an exercise price of $11.50 per share. No fractional shares were issued upon exercise of the Public Warrants. The Company could elect to redeem the Public Warrants, in whole and not in part, at a price of $0.01 per Public Warrant if (i) 30 days’ prior written notice of redemption is provided to the holders, and (ii) the last reported sale price of the Company’s common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30-trading day period ending on the third business day prior to the date on which the Company sends the notice of redemption to the warrant holders. Upon issuance of a redemption notice by the Company, the warrant holders had a period of 30 days to exercise for cash, or on a cashless basis. On the Closing Date, there were 11,650,458 Public Warrants issued and outstanding.
Private Placement Warrants: Simultaneous with TortoiseCorp’s initial public offering in March 2019, Tortoise Borrower purchased warrants at a purchase price of $1.00 per warrant in a private placement (the “Private Placement Warrants”). The Private Placement Warrants could not be redeemed by the Company so long as the Private Placement Warrants are held by the initial purchasers, or such purchasers’ permitted transferees. The Private Placement Warrants had terms and provisions identical to those of the Public Warrants, including as to exercise price, exercisability and exercise period, except if the Private Placement Warrants were held by someone other than the initial purchasers’ permitted transferees, then the Private Placement Warrants were redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. On the Closing Date, there were 6,660,183 Private Warrants issued and outstanding.
Forward Purchase Warrants: Simultaneous with the consummation of the Business Combination in October 2020, 875,000 Forward Purchase Warrants to purchase shares of common stock were issued in connection with the forward purchase
agreement (See Note 3). The Forward Purchase Warrants had terms and provisions identical to those of the Public Warrants, including as to exercise price, exercisability and exercise period, except that the Forward Purchase Warrants are subject to transfer restrictions and certain registration rights.
On November 30, 2020, the Company issued a notice of redemption of all its outstanding Public Warrants and Forward Purchase Warrants which was completed in December 2020. However, the Private Warrants held by the initial holders thereof or permitted transferees of the initial holders were not subject to this redemption. As of December 31, 2020, all outstanding Public Warrants and Forward Purchase Warrants were either exercised or redeemed by the holder. As of December 31, 2020, the Company’s transfer agent received gross proceeds of $140.8 million corresponding to the exercise of 15,786,127 warrants. However, due to the timing of the receipt of the warrant exercise and the cash, the Company’s transfer agent issued 15,414,592 shares of common stock as of December 31, 2020. The remaining 371,535 shares of common stock were issued in January 2021. Additionally, as of December 31, 2020, the Company’s transfer agent had not yet remitted $12.0 million of the gross proceeds associated with the shares of issued common stock to the Company and is included within prepaid expenses and other current assets on the accompanying consolidated balance sheets as of December 31, 2020. There were 281,065 warrants not exercised by the end of the redemption period that were redeemed for a price of $0.01 per warrant, and subsequently cancelled by the Company. The Company made the redemption payment on these cancelled warrants in January 2021. Certain holders of the warrants elected a cashless exercise, resulting in the forfeiture of 3,118,445 shares.
Note 9. Share-Based Compensation
2016 Equity Incentive Plan
For periods prior to the reverse recapitalization (See Note 3), the Hyliion Inc. 2016 Equity Incentive Plan (the “2016 Plan”), as amended in August 2017 and approved by the board of directors (the “Board”), permitted the granting of various awards including stock options (including both nonqualified options and incentive options), stock appreciation rights (“SARs”), stock awards, phantom stock units, performance awards and other share-based awards to employees, outside directors and consultants and advisors of the Company. Only stock options have been awarded to employees, consultants and advisors under the 2016 Plan.
Legacy Options converted into an option to purchase a number of shares of common stock equal to the product of the number of shares of Legacy Hyliion common stock and the Exchange Ratio at an exercise price per share equal to the exercise price of the Legacy Option divided by the Exchange Ratio. Each exchanged option is governed by the same terms and conditions applicable to the Legacy Option prior to the Business Combination. No further grants can be made under the 2016 Plan.
The option exercise price for all grantees equals the stock’s estimated fair value on the date of the grant, after giving effect to the Exchange Ratio. The Board determined the fair value of common stock at the time of grant by considering a number of objective and subjective factors, including independent third-party valuations of the Company’s common stock, operating and financial performance, the lack of liquidity of capital stock, and general and industry-specific economic outlook, amongst other factors. The Company believes the fair value of the stock options granted to nonemployees was more readily determinable than the fair value of the services received.
The fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model in order to measure the compensation cost associated with the award. This model incorporates certain assumptions for inputs including an expected volatility in the market value of the underlying common stock, expected term, a risk-free interest rate, and the expected dividend yield of the underlying common stock. The following assumptions were used for options issued in the following periods*:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
Expected volatility | 70.0% | | 70.0% |
Expected term | 6.1 years | | 6.1 - 10 years |
Risk-free interest rate | 1.7% | | 1.4 - 3% |
Expected dividend yield | 0.0% | | 0.0% |
* There were no options issued during the year ended December 31, 2021.•Expected volatility: The expected volatility was determined by examining the historical volatility of a group of industry peers, as the Company did not have any trading history for the Company’s common stock.
•Expected term: For employees, the expected term is determined using the “simplified” method, as prescribed by the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, to estimate on a formula basis the expected term of the Company’s employee stock options which are considered to have “plain vanilla” characteristics. For nonemployees, the expected term represents the contractual term of the option.
•Risk-free interest rate: The risk-free interest rate was based upon quoted market yields for the United States Treasury instruments with terms that were consistent with the expected term of the Company’s stock options.
•Expected dividend yield: The expected dividend yield was based on the Company’s history and management’s current expectation regarding future dividends.
Employee and nonemployee stock options generally vest over four years, with a maximum term of ten years from the date of grant. These awards become available to the recipient upon the satisfaction of a vesting condition based on a period of service.
Activity in the 2016 Plan for the years ended December 31, 2021, 2020 and 2019 is summarized as follows:
| | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted Average Exercise Price (in Dollars) | | Weighted Average Remaining Contractual Term |
Outstanding at December 31, 2018 | 5,508,031 | | | $ | 0.11 | | | 8.7 years |
Granted | 3,213,131 | | | $ | 0.16 | | | |
Exercised | (418,033) | | | $ | 0.14 | | | |
Forfeited | (1,715,847) | | | $ | 0.13 | | | |
Outstanding at December 31, 2019 | 6,587,282 | | | $ | 0.13 | | | 8.2 years |
Granted | 2,797,828 | | | $ | 0.23 | | | |
Exercised | (1,112,960) | | | $ | 0.11 | | | |
Forfeited | (1,289,653) | | | $ | 0.19 | | | |
Outstanding at December 31, 2020 | 6,982,497 | | | $ | 0.16 | | | 7.8 years |
| | | | | |
Exercised | (3,558,201) | | | $ | 0.17 | | | |
Forfeited | (266,407) | | | $ | 0.18 | | | |
Outstanding at December 31, 2021 | 3,157,889 | | | $ | 0.16 | | | 6.6 years |
| | | | | |
Exercisable at December 31, 2021 | 1,793,912 | | | $ | 0.12 | | | 5.8 years |
At December 31, 2021, the options outstanding and exercisable had an intrinsic value of $19.1 million and $10.9 million, respectively. There were no options with an exercise price greater than the market price on December 31, 2021 to exclude from the intrinsic value computation. The intrinsic value of options exercised during the years ended December 31, 2021, 2020 and 2019 was $42.8 million, $18.4 million and $0.1 million, respectively.
Share-based compensation expense under the 2016 Plan for the years ended December 31, 2021, 2020 and 2019 was $0.1 million, $0.3 million and $0.1 million, respectively. There was $0.2 million of unrecognized compensation expense related the 2016 Plan at December 31, 2021 which is expected to be recognized over the remaining vesting periods, with a weighted-average period of 1.8 years.
2020 Equity Incentive Plan
On October 1, 2020, the Company’s shareholders approved a new long-term incentive award plan (the “2020 Plan”) in connection with the Business Combination. The 2020 Plan is administered by the Board and the compensation committee. The selection of participants, allotment of shares, determination of price and other conditions are approved by the Board and the compensation committee at its sole discretion in order to attract and retain personnel instrumental to the success of the Company. Under the 2020 Plan, the Company may grant an aggregate of 12,200,000 shares of common stock in the form of nonstatutory stock options, incentive stock options, SARs, restricted stock awards, performance awards and other awards. No awards were granted under the 2020 Plan prior to the year ended December 31, 2021, and no stock options have been granted under the 2020 Plan.
Employee and nonemployee RSUs for which a grant date has been established generally vest over three to four years from the date of grant. These awards become available to the recipient upon the satisfaction of a vesting condition based on a period of service, and performance conditions for certain awards.
Activity in the 2020 Plan for the years ended December 31, 2021, 2020 and 2019 is summarized as follows:
| | | | | | | | | | | |
| Number of Units | | Weighted Average Grant Date Fair Value (in Dollars) |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Nonvested at December 31, 2020 | — | | | $ | — | |
Granted1 | 1,858,236 | | | $ | 11.24 | |
Vested | (176,449) | | | $ | 12.64 | |
Forfeited2 | (124,993) | | | $ | 12.09 | |
Nonvested at December 31, 20213 | 1,556,794 | | | $ | 11.01 | |
1 Excludes 1,985,914 shares issued where no accounting grant date has been established.
2 Excludes 75,000 shares issued and forfeited where no accounting grant date has been established.
3 Excludes 1,910,914 shares issued and nonvested where no accounting grant date has been established.
Share-based compensation expense under the 2020 Plan for the years ended December 31, 2021, 2020 and 2019 was $4.8 million, nil and nil, respectively. The fair value of RSUs that vested during the years ended December 31, 2021, 2020 and 2019 was $1.6 million, nil, and nil, respectively. There was $10.7 million of unrecognized compensation expense related to the 2020 Plan at December 31, 2021 which is expected to be recognized over the remaining vesting periods, subject to forfeitures, with a weighted-average period of 2.6 years.
Note 10. Leases
The Company enters into operating and finance leases for its corporate office, temporary office, vehicles and equipment. In addition, the Company enters into arrangements whereby portions of the leased premises are subleased to third parties and are classified as operating leases. In December 2021, the Company amended the lease for its corporate office. This amendment increased the amount of space under the original lease, adjusted the monthly lease payments, and decreased the term of the lease through 2027. The Company accounted for this extension as a lease modification and recorded a decrease to the operating lease ROU asset and lease liability. The lease amendment includes the option to extend the term for up to two consecutive terms of five years, which is not reasonably certain to be exercised at the modification date.
The following table provides a summary of the components of lease income, costs and rent, which are included within research and development and selling, general and administrative expense:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Operating lease costs: | | | | | |
Operating lease cost | $ | 1,386 | | | $ | 1,389 | | | $ | 1,908 | |
Short-term lease cost | 456 | | | 42 | | | 4 | |
Variable lease cost | 469 | | | (14) | | | (140) | |
Sublessor income | (38) | | | (326) | | | (421) | |
Total operating lease costs | $ | 2,273 | | | $ | 1,091 | | | $ | 1,351 | |
| | | | | |
Finance lease costs: | | | | | |
Amortization of right-of-use assets | $ | 74 | | | $ | 112 | | | $ | 112 | |
Interest on lease liabilities | 1 | | | 21 | | | 50 | |
Total finance lease costs | $ | 75 | | | $ | 133 | | | $ | 162 | |
Finance lease ROU assets were nil and $0.3 million at December 31, 2021 and 2020 and accumulated amortization was nil and $0.1 million as of December 31, 2021 and 2020, respectively.
The following table provides the weighted-average lease terms and discount rates used for the Company’s operating and finance leases:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Weighted-average remaining lease term: | | | |
Operating leases | 5.3 years | | 5.0 years |
Finance leases | 0.0 years | | 0.3 years |
| | | |
Weighted-average discount rate: | | | |
Operating leases | 7.1 | % | | 9.9 | % |
Finance leases | — | % | | 14.2 | % |
The following table provides a summary of lease liability maturities for the next five years and thereafter at December 31, 2021:
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2022 | $ | 657 | | | $ | — | |
2023 | 2,198 | | | — | |
2024 | 2,263 | | | — | |
2025 | 2,331 | | | — | |
2026 | 2,402 | | | — | |
Thereafter | 822 | | | — | |
Total minimum lease payments | 10,673 | | | — | |
Less: imputed interest | (2,029) | | | — | |
Total lease obligations | $ | 8,644 | | | $ | — | |
Note 11. Property and Equipment, Net
Property and equipment, net at December 31, 2021 and 2020 is summarized as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Production machinery and equipment | $ | 1,717 | | | $ | 1,751 | |
Vehicles | 720 | | | 712 | |
Leasehold improvements | 1,077 | | | 749 | |
Demo fleet systems | — | | | 263 | |
Office furniture and fixtures | 155 | | | 64 | |
Computers and related equipment | 1,219 | | | 195 | |
| 4,888 | | | 3,734 | |
Less: accumulated depreciation | (2,653) | | | (2,563) | |
Total property and equipment, net | $ | 2,235 | | | $ | 1,171 | |
Depreciation expense for the years ended December 31, 2021, 2020 and 2019 totaled approximately $0.8 million, $0.8 million and $0.9 million respectively. For the year ended December 31, 2021, $0.1 million and $0.7 million was included in selling, general and administrative expenses and research and development expenses, respectively, in the consolidated statements of operations. For the year ended December 31, 2020, $0.1 million and $0.7 million was included in selling, general and administrative expenses and research and development expenses, respectively, in the consolidated statements of operations. For the year ended December 31, 2019, 0.1 million and $0.8 million was included in selling, general and administrative expenses and research and development expenses, respectively, in the consolidated statements of operations. For the years ended December 31, 2021, 2020 and 2019, there was nil depreciation expense included in cost of revenues.
Note 12. Intangible Assets, Net
The gross carrying amount and accumulated amortization of separately identifiable intangible assets at December 31, 2021 and 2020 is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 |
Intangible Asset | | Useful Life | | Weighted Average Remaining Life | | Gross Carrying Value | | Accumulated Amortization | | Net |
Developed technology | | 6 years | | 2.4 years | | $ | 578 | | | $ | (343) | | | $ | 235 | |
Non-compete | | 3 years | | 0.0 years | | 5 | | | (5) | | | — | |
| | | | | | $ | 583 | | | $ | (348) | | | $ | 235 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2020 |
Intangible Asset | | Useful Life | | Weighted Average Remaining Life | | Gross Carrying Value | | Accumulated Amortization | | Net |
Developed technology | | 6 years | | 3.4 years | | $ | 578 | | | $ | (247) | | | $ | 331 | |
Non-compete | | 3 years | | 0.4 years | | 5 | | | (4) | | | 1 | |
| | | | | | $ | 583 | | | $ | (251) | | | $ | 332 | |
Total amortization expense for the years ended December 31, 2021, 2020 and 2019 was $0.1 million, $0.1 million and $0.1 million, respectively, and is included within selling, general and administrative expenses in the consolidated statements of operations.
Total future amortization expense for finite-lived intangible assets at December 31, 2021 is summarized as follows:
| | | | | |
2022 | $ | 97 | |
2023 | 97 | |
2024 | 41 | |
2025 | — | |
| $ | 235 | |
Note 13. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities at December 31, 2021 and 2020 are summarized as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Accrued professional services and other | $ | 3,681 | | | $ | 1,032 | |
Accrued compensation and related benefits | 3,460 | | | 615 | |
Accrued liability for warrants exercised but not settled | — | | | 4,282 | |
Other accrued liabilities | 618 | | | 209 | |
| $ | 7,759 | | | $ | 6,138 | |
Note 14. Warranties
The change in warranty liability for the years ended December 31, 2021 and 2020 is summarized as follows:
| | | | | | | | | | | |
| Year ended December 31, |
| 2021 | | 2020 |
Balance at beginning of period | $ | — | | | $ | — | |
Accrual for warranties issued | 44 | | | — | |
Warranty charges | — | | | — | |
Balance at end of period | $ | 44 | | | $ | — | |
Note 15. Income Taxes
The income tax provision for the years ended December 31, 2021, 2020 and 2019 is summarized as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Current tax expense: | | | | | |
Federal | $ | — | | | $ | — | | | $ | — | |
State | — | | | — | | | — | |
Total current tax expense | $ | — | | | $ | — | | | $ | — | |
| | | | | |
Deferred tax (benefit) expense: | | | | | |
Federal | $ | (24,138) | | | $ | (8,952) | | | $ | (2,788) | |
State | 67 | | | (291) | | | — | |
Valuation allowance | 24,071 | | | 9,243 | | | 2,788 | |
Total deferred tax expense | $ | — | | | $ | — | | | $ | — | |
The components of deferred taxes at December 31, 2021 and 2020 are summarized as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Deferred tax assets: | | | |
Federal net operating loss carryforwards | $ | 39,399 | | | $ | 17,265 | |
State net operating loss carryforwards | 984 | | | 984 | |
Operating lease obligation | 1,815 | | | 1,009 | |
R&D tax credit | 693 | | | 481 | |
Other | 1,908 | | | 224 | |
Property and equipment, net | 13 | | | 29 | |
Total deferred tax assets | 44,812 | | | 19,992 | |
Less: valuation allowance | (43,139) | | | (19,068) | |
Deferred tax assets, net of valuation allowance | $ | 1,673 | | | $ | 924 | |
| | | |
Deferred tax liabilities: | | | |
Operating lease right of use asset, net | 1,624 | | | 854 | |
Intangible assets, net | 49 | | | 70 | |
Total deferred tax liabilities | 1,673 | | | 924 | |
| | | |
Net deferred tax assets | $ | — | | | $ | — | |
The reconciliation of taxes at the federal statutory rate to the Company’s provision for income taxes for the years ended December 31, 2021, 2020 and 2019 is summarized as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Provision at statutory rate of 21% | $ | (20,170) | | | $ | 68,069 | | | $ | (2,964) | |
Non-deductible convertible debt interest expense | — | | | 227 | | | 152 | |
Non-deductible gain related to warrant conversions | — | | | (76,293) | | | — | |
State tax expense | — | | | (158) | | | — | |
Stock options | (3,458) | | | 54 | | | 15 | |
Transaction costs | — | | | (2,947) | | | — | |
Shares issued in connection with a Commercial Matters Agreement | — | | | 2,100 | | | — | |
Other | (231) | | | (102) | | | 9 | |
R&D tax credit | (212) | | | (193) | | | — | |
Change in valuation allowance | 24,071 | | | 9,243 | | | 2,788 | |
| $ | — | | | $ | — | | | $ | — | |
In assessing the realizability of deferred tax assets, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences at December 31, 2021.
The Company had federal net operating loss carryforwards of $187.6 million and $82.2 million at December 31, 2021 and 2020, respectively. At December 31, 2021, $10.5 million of this amount will begin to expire in 2036 and the remaining $177.1 million have an indefinite carryforward period. The Company had state net operating loss carryforwards of $12.5 million and $12.5 million at December 31, 2021 and 2020, respectively, that will begin to expire beginning in 2036 and research and development credits of $0.6 million that will begin to expire in 2037. The Company's ability to utilize a portion of net operating loss carryforwards and credits to offset future taxable income, and tax, respectively, is subject to certain limitations under section 382 of the Internal Revenue Code upon changes in equity ownership of the Company. Due to such limitation, $2.0 million of the Company’s net operating loss and less than $0.1 million of the Company’s R&D credits will expire unused, regardless of taxable income in future years.
The Company files a United States federal income tax return, as well as income tax returns in various states. The tax returns for years 2017 and thereafter remain open for examination.
Note 16. Commitments and Contingencies
Economic Incentive Agreement
During the year ended December 31, 2018, the Company entered into an agreement with the Cedar Park Economic Development Corporation ("EDC"), whereby the Company will receive grants from the EDC contingent upon the Company fulfilling and maintaining certain corporate office lease and employment requirements. The specified requirements must be met on or before specific measurement dates and maintained throughout the term of the agreement, which expires effective December 31, 2024.
As the terms of the EDC grant agreement require the Company to meet and maintain all of the performance requirements throughout the term of the agreement, the Company has not substantially met all the conditions for the grant funding received. Should the Company fail to meet and maintain any performance requirements, all amounts received from the EDC are subject to refund. Accordingly, total grant funding of $0.6 million recorded as part of other liabilities as of December 31, 2021 will continue to be reflected as an other non-current liability until all related performance requirements have been met through the end of the agreement on December 31, 2024.
Under the agreement, the EDC has the right to file a security interest to all assets of the Company. This security interest is subordinate to the holders of the convertible notes payable with security interests.
Legal Proceedings
The Company is periodically involved in legal proceedings, legal actions and claims arising in the normal course of business, including proceedings relating to product liability, intellectual property, safety and health, employment and other matters. Management believes that the outcome of such legal proceedings, legal actions and claims will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.
Note 17. Net (Loss) Income Per Share
As a result of the reverse recapitalization (see Note 3), the Company has retroactively adjusted the weighted average shares outstanding prior to October 1, 2020 to give effect to the Exchange Ratio used to determine the number of shares of common stock into which they were converted.
The computation of basic and diluted net (loss) income per share for the years ended December 31, 2021, 2020 and 2019 is summarized as follows (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Numerator: | | | | | |
Net (loss) income attributable to common stockholders | $ | (96,048) | | | $ | 324,117 | | | $ | (14,113) | |
| | | | | |
Denominator: | | | | | |
Weighted average shares outstanding, basic | 172,216,477 | | | 104,324,059 | | | 86,643,714 | |
Weighted average shares outstanding, diluted | 172,216,477 | | | 112,570,960 | | | 86,643,714 | |
| | | | | |
Net (loss) income per share, basic | $ | (0.56) | | | $ | 3.11 | | | $ | (0.16) | |
Net loss per share, diluted | $ | (0.56) | | | $ | (0.35) | | | $ | (0.16) | |
Potential common shares excluded from the computation of diluted net (loss) income per share because including them would have had an anti-dilutive effect for the years ended December 31, 2021, 2020 and 2019 are summarized as follows: