Aurora Innovation, Inc. (AUR) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the financial condition and results of operations of Aurora should be read together with Aurora’s Consolidated Financial Statements, included elsewhere in this Annual Report. The following discussion contains forward-looking statements that reflect future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside of Aurora’s control and actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future results to differ materially from those projected in the forward-looking statements include, but are not limited to, those discussed in “Part I, Item 1A. Risk Factors” of this Annual Report and under the heading “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report.

Percentage amounts included in this Annual Report have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this Annual Report may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements included elsewhere in this Annual Report. Certain other amounts that appear in this Annual Report may not sum due to rounding.

Unless otherwise indicated or the context otherwise requires, references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section to “Aurora,” “we,” “us,” “our” and other similar terms refer to Legacy Aurora prior to the Merger and to Aurora and its consolidated subsidiaries after giving effect to the Merger.

Aurora’s Business

Aurora is developing the Aurora Driver based on what it believes to be the most advanced and scalable suite of self-driving hardware, software, and data services in the world to fundamentally transform the global transportation market. The Aurora Driver is designed as a platform to adapt and interoperate amongst vehicle types and applications. To date, it has been successfully integrated into numerous different vehicle platforms: from passenger vehicles to light commercial vehicles to Class 8 trucks. By creating one driver system for multiple vehicle types and use cases, Aurora’s capabilities in one market reinforce and strengthen its competitive advantages in others. For example, highway driving capabilities developed for trucking will carry to highway segments driven by passenger vehicles in ride hailing applications. We believe this approach will enable us to target and transform multiple massive markets, including trucking, passenger mobility, and local goods delivery market.

We expect that the Aurora Driver will ultimately be commercialized in a Driver as a Service (“DaaS”) business model, in which we will supply self-driving technology. We do not intend to own nor operate a large number of vehicles ourselves. Throughout commercialization, we expect to earn revenue on a fee per mile basis. We intend to partner with OEMs, fleet operators, and other third parties to commercialize and support Aurora-powered vehicles. We expect that these strategic partners will support activities such as vehicle manufacturing, financing and leasing, service and maintenance, parts replacement, facility ownership and operation, and other commercial and operational services as needed. We expect this DaaS model to enable an asset-light and high margin revenue stream for Aurora, while allowing us to scale more rapidly through partnerships. During the start of commercialization, though, we expect to briefly operate our own logistics and mobility services, where we own and operate a small fleet of vehicles equipped with our Aurora Driver. This level of control is useful during early commercialization as we will define operational processes and playbooks for our partners.

We plan to first launch Aurora Horizon, our driverless trucking subscription service, as we believe that is where we can make the largest impact the fastest, given the massive industry demand, attractive unit economics, and the ability to deploy on high volume highway-focused routes. Future success will be dependent on our ability to execute against our product roadmap to launch Aurora Horizon. From there, we plan to leverage the extensibility of the Aurora Driver to deploy and scale into the passenger mobility market with Aurora Connect, our driverless ride hailing subscription service, and in the longer-term the local goods delivery market.

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Significant Events and Transactions

The Merger

On November 3, 2021, the Company consummated a business combination with Legacy Aurora pursuant to the terms of the Merger Agreement.

The Merger was accounted for as a reverse recapitalization. Under this method of accounting, Legacy Aurora was treated as the acquirer while the Company was treated as the acquired company for financial statement reporting purposes. The Merger provided an increase in cash and cash equivalents of $1,134 million including $1,000 million in proceeds from the private investment in public equity (“PIPE”) transaction that was consummated with the Merger. Transaction costs incurred by both parties to the Merger totaled $88 million.

As a result of the Merger, we became the successor to a SEC-registered and Nasdaq-listed company which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees.

ATG Business Combination

On January 19, 2021, Aurora acquired 100% of the voting interests of ATG, the self-driving technology division of Uber. The acquisition date fair value of the consideration transferred was $1,916 million, which consisted of both preferred and common stock issued to the shareholders of ATG. Aurora accounted for the acquisition as a business combination and recognized the assets acquired and liabilities assumed at fair value on the date of acquisition. The excess of purchase consideration over the fair value of the assets acquired was recorded as goodwill.

Global Economic Conditions

The COVID-19 pandemic that began in late 2019 introduced significant volatility to the global economy, disrupted supply chains and had a widespread adverse effect on the financial markets. Additionally, changes in economic conditions, supply chain constraints, logistics challenges, labor shortages, the conflict in Ukraine, and steps taken by governments and central banks, particularly in response to the COVID-19 pandemic as well as other stimulus and spending programs, have led to higher inflation, which has led to an increase in costs and has caused changes in fiscal and monetary policy, including increased interest rates. Our operating results could be materially impacted by these changes and other changes in the overall macroeconomic environment and other economic factors.

Worldwide economic conditions remain uncertain, particularly due to the effects of the COVID-19 pandemic and increased inflation. The general economic and capital market conditions both in the U.S. and worldwide, have been volatile in the past. The capital and credit markets may not be available to support future capital raising activity on favorable terms. If economic conditions decline, our future cost of equity or debt capital and access to the capital markets could be adversely affected.

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Results of Operations

Comparison of the Twelve Months Ended December 31, 2022 to the Twelve Months Ended December 31, 2021

(1) Not meaningful.

Collaboration revenue

Collaboration revenue decreased by $14 million, or 17%, to $68 million in the twelve months ended December 31, 2022 from $82 million in the twelve months ended December 31, 2021 due to lower hours incurred under the collaboration project plan with Toyota Motor Corporation. Through December 31, 2022, the Company has recognized all $150 million of collaboration revenue provided under the collaboration project plan.

Operating expenses

Research and development decreased by $20 million, or 3%, to $677 million in the twelve months ended December 31, 2022 from $697 million in the twelve months ended December 31, 2021, primarily driven by a decrease in stock-based compensation and severance expense, partially offset by an increase in payroll costs and hardware developments costs.

Selling, general and administrative increased by $13 million, or 11%, to $129 million in the twelve months ended December 31, 2022 from $116 million in the twelve months ended December 31, 2021, primarily driven by an increase in payroll, stock-based compensation and insurance costs, partially offset by a decrease in professional services costs.

The Company recognized a goodwill impairment of $1,114 million during the twelve months ended December 31, 2022 as a result of goodwill impairment assessments performed due to significant declines in the market price of the Company’s Class A common stock and its market capitalization during the second and fourth quarters.

Other income (expense)

The change in fair value of derivative liabilities resulted in a gain of $114 million in the twelve months ended December 31, 2022 from a loss of $20 million in the twelve months ended December 31, 2021 primarily due to the change in the market price for the underlying instrument.

Other income, net was $15 million in the twelve months ended December 31, 2022, primarily due to interest income earned on short-term investments. Other expense, net was $9 million in the twelve months ended December 31, 2021, primarily due to transaction costs and losses on the disposal of IT equipment.

Income tax benefit

An income tax benefit was recognized in the twelve months ended December 31, 2021 due to the release of a deferred tax asset valuation allowance as a result of deferred tax liabilities incurred from the acquisition of OURS Technology, Inc.

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Comparison of the Twelve Months Ended December 31, 2021 to the Twelve Months Ended December 31, 2020

(1) Not meaningful.

Collaboration revenue

Collaboration revenue increased by $82 million in the twelve months ended December 31, 2021 due to hours incurred under the collaboration project plan with Toyota Motor Corporation.

Operating expenses

Research and development increased by $518 million, or 289%, to $697 million in the twelve months ended December 31, 2021 from $179 million in the twelve months ended December 31, 2020, primarily driven by an increase in payroll costs, stock-based compensation and other software and hardware developments costs.

Selling, general and administrative increased by $77 million, or 197%, to $116 million in the twelve months ended December 31, 2021 from $39 million in the twelve months ended December 31, 2020, primarily driven by an increase in payroll and professional services costs.

Other income (expense), net

The change in fair value of derivative liabilities resulted in a loss of $20 million in the twelve months ended December 31, 2021 primarily due to the change in the market price for the underlying instrument.

Other expense, net was $9 million in the twelve months ended December 31, 2021, primarily due to transaction costs and losses on the disposal of IT equipment. Other income, net was $4 million in the twelve months ended December 31, 2020, primarily related to interest income earned on short-term investments.

Income tax benefit

An income tax benefit was recognized in the twelve months ended December 31, 2021 due to the release of a deferred tax asset valuation allowance as a result of deferred tax liabilities incurred from the acquisition of OURS Technology, Inc.

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Liquidity and Capital Resources

As of December 31, 2022, our principal sources of liquidity were $262 million of cash and cash equivalents and $839 million of short-term investments, exclusive of restricted cash of $15 million. Cash and cash equivalents primarily consist of money market funds and U.S. Treasury securities. Short-term investments consist of U.S. Treasury securities.

We have incurred negative cash flows from operating activities and significant losses from operations in the past. We expect to continue to incur operating losses and that we will need to opportunistically raise additional capital to support the continued development and commercialization of the Aurora Driver. We believe our cash on hand and short-term investments will be sufficient to meet our working capital and capital expenditure requirements for a period of at least twelve months from the date of this Annual Report.

Cash Flows

Cash flows for the periods were as follows (in millions):

Cash Flows Used in Operating Activities

Net cash used in operating activities was $508 million for the twelve months ended December 31, 2022, a decrease of $56 million from $564 million for the twelve months ended December 31, 2021. The change in operating cash flows was primarily due to an increase of cash received under the collaboration project plan with Toyota Motor Corporation and a decrease of professional expenses and other expenses paid in connection with the acquisition of ATG which did not recur during the most recent period partially offset by increased incentive compensation payments.

Net cash used in operating activities for the twelve months ended December 31, 2021 increased $372 million from $192 million for the twelve months ended December 31, 2020 primarily due to increased payroll costs due to an increased headcount resulting from acquisitions.

Cash Flows (Used in) Provided by Investing Activities

Net cash used in investing activities increased by $1,102 million in the twelve months ended December 31, 2022 from the twelve months ended December 31, 2021, primarily due to the net purchases of short-term investments of $837 million, and the comparative period including $294 million in net cash acquired through the acquisitions of businesses.

Net cash provided by investing activities for the twelve months ended December 31, 2021 decreased by $93 million from $343 million for the twelve months ended December 31, 2020 primarily due net maturities of short-term investments in the comparative period, partially offset by net cash acquired through the acquisitions of businesses.

Cash used for purchases of property and equipment were $15 million, $48 million and $7 million in the twelve months ended December 31, 2022, 2021 and 2020, respectively.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities in the twelve months ended December 31, 2021 included net proceeds from the Merger of $1,134 million and net proceeds from the issuance of Series U-2 preferred stock of $398 million.

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Contractual Obligations, Commitments and Contingencies

Aurora may be party to various claims within the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. We assess the need to record a liability for litigation and other loss contingencies, with reserve estimates recorded if we determine that a loss related to the matter is both probable and reasonably estimable. No material losses were recorded in the twelve months ended December 31, 2022, 2021 and 2020.

The Company has entered into a contract for cloud hosting services under which non-cancelable future minimum payments as of December 31, 2022 are: $61 million for 2023, $61 million for 2024, $64 million for 2025, and $38 million for 2026. Commitments under operating lease contracts are detailed within Note 10 – Leases to our consolidated financial statements included elsewhere in this Annual Report.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. Preparation of the financial statements requires our management to make judgments, estimates and assumptions that impact the reported amount of revenue and operating and other expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on our consolidated financial statements. Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report.

Business Combinations

We allocate the fair value of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the net assets acquired is recorded as goodwill. Such fair values require significant estimates and assumptions, especially with respect to the valuation of acquired intangible assets. Significant estimates and assumptions utilized in the valuation of certain intangible assets include, but are not limited to, estimated replacement cost, profit margin, opportunity cost, useful lives, and discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Measurement period adjustments are reflected at the time identified, up through the conclusion of the measurement period, which is the time at which all necessary information is received, and is not to exceed one year from the acquisition date.

Valuation of Goodwill

Goodwill represents the excess purchase consideration of acquired businesses over the estimated fair value of the net assets acquired. Goodwill is not amortized but is evaluated for impairment annually on December 31, or whenever events or circumstances indicate that the carrying amount may not be recoverable. If the carrying amount of goodwill exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of goodwill over its implied fair value.

During the second and fourth quarters of 2022, the market price of the Company’s Class A common stock and its market capitalization declined significantly. As a result, the Company determined that triggering events had occurred and goodwill impairment assessments were performed.

The Company utilized a market approach valuation method utilizing the observable market price of the Company’s Class A common stock as it represented the best evidence of the fair value of its reporting unit. Based on the results of the goodwill impairment assessment, the Company recognized a $1,114 million goodwill impairment during the twelve months ended December 31, 2022.

Valuation of Derivative Liabilities

The Company accounts for shares held by Reinvent Sponsor Y LLC (the “Sponsor”) not forfeited under the terms of the Merger Agreement and subject to price based vesting terms (the “Earnout Shares”) as a derivative liabilities. The liability is measured at fair value on a recurring basis utilizing a Monte Carlo simulation analysis with any changes in fair value reflected in the statement of operations until the vesting conditions are met or the shares expire.

The Monte Carlo simulation analysis is dependent upon management estimates and assumptions, primarily related to expected volatility and risk-free interest rates. The expected volatility is determined based on the historical equity volatility of comparable companies over a period that matches the expected term of the instrument. The risk-free interest rate is based on relevant U.S. treasury rates for a period that matches the expected term of the instrument.

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Recently Adopted and Issued Accounting Pronouncements

See Note 2 – Summary of Significant Accounting Policies to the consolidated financial statements included elsewhere in this Annual Report for recently adopted accounting pronouncements.

Emerging Growth Company Status

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, and have elected to take advantage of the benefits of this extended transition period. This may make it difficult to compare our financial results with the financial results of other public companies that are either not emerging growth companies or emerging growth companies that have chosen not to take advantage of the extended transition period.