10-Q: Hyliion Q2 2025: KARNO Module Progress Amid Losses

Hyliion Holdings Corp. reported increased net losses in Q2 2025 as it ramps up R&D for its KARNO Power Module and transitions from its powertrain business, securing new government contracts.

Summary

• Net loss increased to $13.4 million for the three months ended June 30, 2025, up from $10.9 million in the prior year period.
• Total revenues from research and development services were $1.5 million for the three months ended June 30, 2025, compared to no revenue in the prior year period.
• Research and development expenses rose by 22.0% to $10.1 million in Q2 2025, reflecting increased investment in the KARNO Power Module.
• The company is winding down its powertrain business, with completion expected by the fourth quarter of fiscal year 2025, and focusing entirely on the KARNO Power Module.
• Hyliion secured new U.S. government R&D contracts, including up to $16.0 million from the Office of Naval Research (ONR) through September 2026, and an additional $1.5 million Phase II ONR contract through July 2026.
• Initial KARNO Power Module deployments to early adopter customers were delayed earlier in 2025 due to design and production issues with a key component (regenerator) and linear electric motors, but production has since increased.
• The company maintains a strong liquidity position with $15.6 million in cash and cash equivalents and $169.7 million in total investments as of June 30, 2025.

Sentiment

Score: 4

Explanation: While the company is making strategic progress with its KARNO Power Module and securing government contracts, the financial results show increasing losses and a decline in overall assets and equity. The reported delays in product deployment, though addressed, highlight execution risks. The long-term potential of the KARNO technology is positive, but current financials and operational challenges warrant a cautious outlook.

Positives

• Initiated revenue generation from R&D services, totaling $1.5 million for the three months ended June 30, 2025, compared to zero in the prior year.
• Secured significant U.S. government contracts, including a $16.0 million agreement and a $1.5 million Phase II agreement with the Office of Naval Research (ONR) for KARNO Power Module research and suitability assessment.
• Successfully delivered two of the ten early adopter KARNO Power Module customer units planned for 2025, which are currently undergoing testing with positive mechanical performance.
• Maintains a strong liquidity position with $15.6 million in cash and cash equivalents and $169.7 million in total investments as of June 30, 2025, providing sufficient funds for the next twelve months.
• Reduced net cash used in operating activities to $24.0 million for the six months ended June 30, 2025, an improvement from $33.4 million in the prior year period.
• The KARNO Power Module technology offers high anticipated electrical generating efficiency of up to 50%, ultra-low emissions (95%+ reduction in NOx and CO vs. diesel), low maintenance, fuel-agnostic capabilities (over 20 fuel sources), low noise (approximately 67 decibels at six feet), high power density, and modularity.
• Successfully redesigned the critical "regenerator" component, with bench testing indicating improved performance, and insourced linear electric motor production to accelerate ramp-up and control quality.

Negatives

• Net loss increased by 23.6% to $13.4 million for the three months ended June 30, 2025, compared to $10.9 million for the same period in 2024.
• Net loss per share increased to $(0.08) for the three months ended June 30, 2025, up from $(0.06) in the prior year.
• Research and development expenses increased significantly by 22.0% to $10.1 million for the three months ended June 30, 2025, indicating continued high burn rate for product development.
• Interest income decreased by 29.4% to $2.2 million for the three months ended June 30, 2025, primarily due to a decline in the investment balance.
• Total assets decreased to $229.2 million at June 30, 2025, from $263.0 million at December 31, 2024, driven by a reduction in short-term and long-term investments.
• Experienced delays in early deployment customer unit deliveries and validation of generator design parameters earlier in 2025 due to design and production problems with a key printed component (regenerator) and linear electric motors.
• The company expects to continue incurring net losses in the short term as it focuses on KARNO Power Module development and commercialization.

Risks

• Dependence on certain suppliers, many of which are single-source, poses a risk if they cannot deliver necessary components in a timely manner or at acceptable prices, quality levels, and volumes.
• Increased uncertainty regarding the timing of the disposition of assets previously recorded as held for sale, driven by deteriorating market conditions in the electric vehicle industry.
• Potential material adverse effects on business, financial condition, and operating results due to economic uncertainties, supply chain disruptions, inflation, and high interest rates.
• Changes in U.S. tariff policies may materially and adversely affect the business, potentially increasing costs of imported parts (e.g., components for additive printing machines from Germany, R&D and production components from China) which may not be able to be passed on to customers.
• Risk of reduced investment earnings if yields on investments deemed to be low risk remain low or decline further due to unpredictable market developments, or if such developments create liquidity challenges for the investment portfolio.
• Future funding requirements are uncertain and depend on many factors, including the pace of completing initial KARNO Power Module testing and validation, investment in KARNO Core additive printing capacity, plans for manufacturing KARNO Power Module components, the range of product offerings, and external market factors beyond the company's control.

Future Outlook

The company expects to continue incurring net losses in the short term as it focuses on completing the development and commercialization of the KARNO Power Module, with initial customer deployments anticipated throughout 2025. Future capital needs will depend on the pace of testing and validation, investment in additive printing capacity, manufacturing plans (in-house or outsourcing), and sales growth. The company anticipates entering into additional R&D agreements with third parties based on current and prospective customer interest.

Management Comments

• "Hyliion is committed to creating innovative solutions that enable clean, efficient, and flexible electricity production while contributing positively to the environment in the energy economy."
• "We believe that the unique capabilities of the KARNO Power Module will make it competitive in the market for distributed power systems, competing favorably against conventional generating systems and new alternative power systems such as fuel cells and other linear generators."
• "We anticipate that the KARNO Power Module will achieve an electrical generating efficiency of up to 50%, calculated by considering the usable DC output power in relation to the energy from the fuel source."
• "The KARNO Power Module is anticipated to achieve ultra-low levels of emissions, with NOx and CO emissions expected to be reduced by over 95% compared to best-in-class diesel engines and targeting California's Air Resources Board (CARB) 2027 standards without the need for aftertreatment."
• "We expect to deliver additional KARNO Cores and Power Modules during 2025 and will expand testing to include long duration operation, simulation of ship motion and the ability of the system to operate in extreme temperature environments."
• "Based on current projections of operating expenses, capital spending, working capital growth and historical share repurchases, we expect to have approximately $155 million in cash, short-term and long-term investments remaining on our balance sheet at the end of 2025."

Industry Context

The filing highlights Hyliion's strategic pivot to the KARNO Power Module, positioning it within the rapidly expanding distributed power generation market. This market is driven by increasing global electricity demand, the challenges of aging centralized grid infrastructure, and the growing need for resilient, clean, and localized power solutions, particularly for sectors like data centers, electric vehicle charging, and defense. The KARNO module's claimed advantages in fuel flexibility, high efficiency, and ultra-low emissions aim to differentiate it from conventional generators, fuel cells, and other linear generators, addressing critical industry pain points such as high operating costs, environmental impact, and maintenance complexity. The company's focus on securing U.S. government R&D contracts also aligns with broader industry trends where defense organizations are actively seeking advanced, adaptable energy solutions for diverse operational profiles.

Comparison to Industry Standards

• **Efficiency**: The KARNO Power Module is expected to achieve an electrical generating efficiency of up to 50%, which is stated to surpass many conventional generating systems. In comparison, internal combustion diesel generators typically operate within an efficiency range of 25% to 40% over a similar power spectrum. The U.S. electrical power grid is estimated to operate at an efficiency between 33% and 40%. While best-in-class grid-level gas turbine powerplants can obtain efficiencies above 50%, they often incur 5% to 10% transmission and distribution losses, which the KARNO Power Module aims to circumvent by being strategically located near the point of power consumption.
• **Emissions**: The KARNO Power Module is anticipated to achieve ultra-low levels of emissions, with NOx and CO emissions expected to be reduced by over 95% compared to best-in-class diesel engines, targeting California's Air Resources Board (CARB) 2027 standards without the need for aftertreatment. This represents a significant improvement over conventional generators that produce pollutants due to incomplete combustion.
• **Maintenance**: Conventional generators typically incur periodic and usage-based maintenance expenses ranging from 5% to 20% of their total operating cost throughout their lifespan. The KARNO Power Module, with only a single moving linear actuator per shaft (four shafts per 200 kW KARNO Core) and utilizing low-friction helium bearings, is expected to significantly reduce maintenance requirements and costs, enhancing operational longevity and eliminating the need for oil-based lubricants.
• **Fuel Flexibility**: Unlike many traditional generators that operate on a single fuel source or require system modification for fuel flexibility, the KARNO Power Module is designed to be truly fuel-agnostic, capable of operating on over 20 diverse fuel sources and fuel mixtures (including natural gas, propane, gasoline, jet fuel, biodiesel, hydrogen, and ammonia) and transitioning between them during operation with few or no modifications.
• **Noise and Vibration**: The KARNO Power Module operates without internal combustion, resulting in a significantly lower noise level of approximately 67 decibels at six feet, which is a distinct advantage compared to conventional generators.

Legal Proceedings

• The company is periodically involved in legal proceedings, legal actions, and claims arising in the normal course of business, including matters related to product liability, intellectual property, safety and health, and employment. However, no material legal proceedings are currently ongoing.

Stakeholder Impact

• **Shareholders**: Experienced increased net losses and a decrease in total stockholders' equity, potentially impacting share value. The share repurchase program is paused, limiting potential support for the stock price.
• **Employees**: Personnel costs increased, but the wind-down of the powertrain business implies some workforce restructuring or reallocation.
• **Customers**: Early adopter customers for the KARNO Power Module experienced delays, but initial units are now being delivered and tested. New government contracts indicate growing customer interest and validation of the technology.
• **Suppliers**: The company's dependence on single-source suppliers and potential impacts from tariffs could affect supply chain stability and costs.
• **Creditors**: The company's strong liquidity position with significant cash and investments suggests a low immediate risk for creditors, despite ongoing net losses.

Next Steps

• Complete wind-down activities for the powertrain business by the fourth quarter of fiscal year 2025.
• Continue development and testing of the KARNO Power Module.
• Deploy initial KARNO Power Module units with customers throughout 2025.
• Expand testing of KARNO Power Modules to include long duration operation, simulation of ship motion, and extreme temperature environments.
• Deliver additional KARNO Cores and Power Modules during 2025 under the ONR contract.
• Explore and enter into additional R&D agreements with third parties based on interest from current and prospective customers.
• Continue to invest in KARNO Core additive printing capacity.
• Determine long-term manufacturing plans for the KARNO Power Module, including whether to manufacture in-house or outsource to third parties or business partners.
• Advance the development of a larger 2 MW KARNO system and future variants for industrial waste heat, household use, and e-mobility applications.

Key Dates

Recommendation

The company is in a critical transition phase, winding down its legacy business and investing heavily in the commercialization of its new KARNO Power Module technology. While the technology shows promising attributes (high efficiency, low emissions, fuel flexibility) and has secured significant government R&D contracts, the financial results indicate increasing net losses and a decline in overall assets and equity. The reported delays in product deployment, though being addressed, highlight execution risks. A "hold" recommendation is appropriate as the investment thesis hinges on the successful commercialization and market adoption of the KARNO Power Module, which is still in its early stages. Investors should await further clarity on production ramp-up, customer adoption, and a clear path to profitability before making a more definitive investment decision.

Keywords

Hyliion, KARNO Power Module, Energy Generation, Distributed Power, Fuel-Agnostic, Linear Generator, Electric Vehicles, EV Charging, Microgrids, Data Centers, Defense, Biogas, Oil & Gas, Waste Heat, Renewable Energy, Clean Energy, R&D Services, Financial Results, Net Loss, Research and Development, Supply Chain, Tariffs, SEC Filing